SOLUTIONS MANUAL For Advanced Accounting 4e Robert Halsey Patrick Hopkins. by StudyGuide

Advanced Accounting 4e Robert Halsey Patrick Hopkins (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) All Chapters Solutions Manual Supplement files download link at the end of this file. Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 1— Accounting for Intercorporate Investments 1.

a. If the investor acquired 100% of the investee at book value, the Equity Investment account is equal to the Stockholders’ Equity of the investee company. It, therefore, includes the assets and liabilities of the investee company in one account. The investor’s balance sheet, therefore, includes the Stockholders’ Equity of the investee company, and, implicitly, its assets and liabilities. In the consolidation process, the balance sheets of the investor and investee company are brought together. Consolidated Stockholders’ Equity will be the same as that which the investor currently reports; only total assets and total liabilities will change. b. If the investor owns 100% of the investee, the equity income that the investor reports is equal to the net income of the investee, thus implicitly including its revenues and expenses. Replacing the equity income with the revenues and expenses of the investee company in the consolidation process will yield the same net income.

FASB ASC 323-10 provides the following guidance with respect to the accounting for receipt of dividends using the equity method: The equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial decisions of the investee. The investor then has a degree of responsibility for the return on its investment, and it is appropriate to include in the results of operations of the investor its share of the earnings or losses of the investee. (¶323-10-05-5) The equity method is an appropriate means of recognizing increases or decreases measured by generally accepted accounting principles (GAAP) in the economic resources underlying the investments. Furthermore, the equity method of accounting more closely meets the objectives of accrual accounting than does the cost method because the investor recognizes its share of the earnings and losses of the investee in the periods in which they are reflected in the accounts of the investee. (¶323-10-05-4) Under the equity method, an investor shall recognize its share of the earnings or losses of an investee in the periods for which they are reported by the investee in its financial statements rather than in the period in which an investee declares a dividend (¶323-1035-4).

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The recognition of equity income does not mean that cash has been received. In fact, dividends paid by the investee to the investor are typically a small percentage of its reported net income. The projection of future net income that includes equity income as a significant component might not, therefore, imply significant generation of cash.

The accounting for CBS’ investment in Westwood One depends on the degree of influence or control it can exert over that company. A classification of “no influence” does not appear appropriate since CBS owns 18% of the outstanding common stock and also manages Westwood under a management agreement. CBS also does not appear to control Westwood. It only has one seat on the board of directors. Although we are not provided with the number of seats on the board of directors, control of one seat does not likely relate to control the board. A classification of “significant influence” seems most appropriate given the facts, and this classification warrants accounting for the investment using the equity method of accounting.

a. An investor may write down the carrying amount of its Equity Investment if the fair value of that investment has declined below its carrying value and that decline is deemed to be other than temporary. b. There is considerable judgment in determining whether a decline in fair value is other than temporary. The write-down amounts to a prediction that the future fair value of the investment will not rise above the current carrying amount. If a company deems the decline to be temporary, it does not write down the investment, and a loss is not recognized in its income statement. If the decline is deemed to be other than temporary, the investment is written down and a loss is reported. Companies can use this flexibility to decide whether to recognize a loss in the current year or to postpone it to a future year.

Under the equity method, an investor recognizes its share of the earnings or losses of an investee in the periods for which they are reported by the investee in its financial statements. FASB ASC 323-10-35-7 states that “Intra-entity profits and losses shall be eliminated until realized by the investor or investee as if the investee were consolidated.” These intercompany items are eliminated to avoid double counting and prematurely recognizing income.

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FASB ASC 323-10-15 requires the use of the equity method of accounting for an investor whose investment in voting stock gives it the ability to exercise significant influence over operating and financial policies of an investee. Section 15-6 states that “Ability to exercise significant influence over operating and financial policies of an investee may be indicated in several ways, including the following: Representation on the board of directors, Participation in policy-making processes, Material intra-entity transactions, change of managerial personnel, Technological dependency, and Extent of ownership by an investor in relation to the concentration of other shareholdings (but substantial or majority ownership of the voting stock of an investee by another investor does not necessarily preclude the ability to exercise significant influence by the investor)” (emphasis added). It is clear, in this case, that the investee is critically dependent upon the technology licensed to it by the investor. The investor should, therefore, account for its investment using the equity method.

Even though the investor owns 30% of the investee, it should not use the equity method as it cannot exert significant influence over the investee. Further, since the investee is not a public company (all of the remaining stock is privately held), the investor should use the cost method to account for this investment as the fair value method presumes a publicly traded stock with sufficient liquidity to reasonably determine a fair value.

a. The losses did not affect Enron’s income statement. Since the investees were insolvent, Enron’s Equity Investment was reduced to zero (it had not made any loans or other advances to the investee companies). As a result, Enron discontinued reporting for these Equity Investments using the equity method and, therefore, did not recognize its proportionate share of investee losses. b. “… only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended” means that the investee has recouped all of the losses that have been reported. Since the investor ceases to account for its Equity Investment using the equity method once the balance reaches zero (assuming that it has not guaranteed the debts of the investee company), this generally implies that the investee’s Stockholders’ Equity is below zero (i.e., a deficit). The investor resumes its accounting for the Equity investment using the equity method once the investee’s Stockholders’ Equity is positive. It is at that point when the investee company has recouped all of its prior losses (assuming that the investee company has not raised additional equity capital).

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10.

FASB ASC 323 provides the following list of required disclosures for equity method investments: a. (1) the name of each investee and percentage of ownership of common stock, (2) the accounting policies of the investor with respect to investments in common stock, and (3) the difference, if any, between the amount at which an investment is carried and the amount of underlying equity in net assets and the accounting treatment of the difference. b. For those investments in common stock for which a quoted market price is available, the aggregate value of each identified investment based on the quoted market price usually should be disclosed. This disclosure is not required for investments in common stock of subsidiaries. c. When investments in common stock of corporate joint ventures or other investments accounted for under the equity method are, in the aggregate, material in relation to the financial position or results of operations of an investor, it may be necessary for summarized information as to assets, liabilities, and results of operations of the investees to be presented in the notes or in separate statements, either individually or in groups, as appropriate. d. Conversion of outstanding convertible securities, exercise of outstanding options and warrants and other contingent issuances of an investee may have a significant effect on an investor's share of reported earnings or losses. Accordingly, material effects of possible conversions, exercises or contingent issuances should be disclosed in notes to the financial statements of an investor.

11.

Answer: d The fact that the investor has a 20% voting interest, representation on the investee’s board of directors, participates in the investee’s policy making process and has material business transactions with the investee all suggest that the investor has “significant influence” over the investee. In the case of significant influence, the investor must use the equity method of accounting for the investee. Under the equity method, the investee recognizes as income a proportionate share of the net income recognized by the investee.

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12.

Answer: b The indicators of significant influence include: investor representation on the board of directors of the investee, investor participation in policy making processes of the investee, the extent of ownership of investee voting shares by the investor in relation to the concentration of other shareholdings, material intercompany transactions between the investor and the investee, interchange of managerial personnel between the investor and the investee, and technological dependency of the investee on the investor. Indications that an investor does not have significant influence includes the investor surrendering significant rights in the investee, a concentrated group of owners of the investee who do not consider the views of the investor and a lack of representation on the investee’s board of directors.

13.

Answer: a Application of the equity method of investment accounting results in an increase in the investment account for positive net income (i.e., a decrease of net losses) and a decrease in the investment account for dividends. The company paying dividends decreases retained earnings for dividends. A company applying the fair value method or the cost-based approach will recognize as income dividends received.

14.

Answer: b When an investor can exert significant influence over an investee, the investor must use the equity method for the Equity Investment. Under the equity method, the investee recognizes as income a proportionate share of the net income recognized by the investee. In addition, if the investor paid an amount different from a proportionate share of the book value of the investee and/or if the fair values of the individual investee net assets differ from their book values, then the investor might also have to adjust equity income for the amortization of the excess. In this case, the proportionate share of the investee book value (i.e., $2,000,000 x 30%) equals the amount paid for the 30% interest (i.e., $600,000), and all individual net assets had appraised fair values that equaled their reported book values. Thus, the Equity Investment carrying value at December 31, 2019 is determined as follows: Initial Equity Investment balance at 12/31/2018 2018 share of investee net income (30% x $120,000) 2018 share of investee dividends (30% x $50,000) 2019 share of investee net income (30% x $120,000) 2019 share of investee dividends (30% x $50,000) Equity Investment balance at 12/31/2019

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$ 600,000 36,000 (15,000) 36,000 (15,000) $ 642,000

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15.

Answer: c The fair value method is used for reporting noncontrolling investments in equity securities that (1) do not convey to the holder of the securities “significant influence” over the investee and (2) have a readily determinable fair value. Under the fair value method, the investment is reported by the investor at the fair value of the investment on the reporting date. (Assuming the investment is not considered impaired. There is no evidence of impairment in the present problem.) Thus, at December 31, 2019, the investment is reported at $288,000 (i.e., $16 x 18,000 shares on December 31, 2019). (The following is not addressed in the problem. We are providing this discussion for completeness. Noncontrolling investments in equity securities that do not have a readily determinable fair value and also do not convey to the holder of the securities “significant influence” over the investee are reported in the balance sheet at the original cost of the investment.)

16.

Answer: b The equity method is used for reporting noncontrolling investments in equity securities that convey to the holder of the securities “significant influence” over the investee. Under the equity method, the investment is reported by the investor at the original cost of the investment and then is adjusted for the investor’s ownership percentage of all of the items that change the stockholders’ equity of the investee. (Most textbook problems in intermediate accounting and advanced accounting assume that the only changes to the stockholders’ equity of the subsidiary are net income and dividends.) In addition, any unrecorded net assets implicit in the investment are amortized. In this case, the AAP is zero because the fair value of the consideration equals the book value of the proportionate share of the investee’s net assets, and fair values of the individual identifiable net assets approximate book values. The December 31, 2019 balance is determined as follows: Beginning Investment ($12 x 18,000 shares) Plus: p% x NI (20% x $50,000) Less: p% x Dividends (20% x $15,000) Ending Investment

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$ 216,000 10,000 (3,000) $ 223,000

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17.

Answer: b A cost-based approach is used for reporting noncontrolling investments in equity securities that (1) do not convey to the holder of the securities “significant influence” over the investee and (2) do not have a readily determinable fair value. Under the costbased approach, the investment is reported by the investor at the original cost of the investment. (Assuming the investment is not considered impaired. There is no evidence of impairment in the present problem.) Thus, at December 31, 2019, the investment is reported at $352,000 (i.e., $11 x 32,000 shares purchased on January 1, 2019.). (The following is not addressed in the problem. We are providing this discussion for completeness. Noncontrolling investments in equity securities are reported in the balance sheet at fair value if they have a readily determinable fair value and also do not convey to the holder of the securities “significant influence” over the investee. The change in fair value is reported in net income.)

18.

Answer: c The equity method is used for reporting noncontrolling investments in equity securities that convey to the holder of the securities “significant influence” over the investee. Under the equity method, the investment is reported by the investor at the original cost of the investment and then is adjusted for the investor’s ownership percentage of all of the items that change the stockholders’ equity of the investee. (Most textbook problems in intermediate accounting and advanced accounting assume that the only changes to the stockholders’ equity of the subsidiary are net income and dividends.) In addition, any acquisition premium implicit in the investment is amortized if the asset net assets causing the premium are amortizable (e.g., property and equipment). In this case, the 24% AAP is equal to $88,000 ($352,000 fair value of consideration paid for 24% [see answer to #17] less 24% x book value of net assets (i.e., $264,000 = 24% x $1,100,000). The only depreciable asset in the 24% AAP is the customer list, which has $21,600 of AAP assigned to it (i.e., 24% x $90,000). This results in 24% AAP amortization of $4,320 per year (i.e., $21,600/5). The December 31, 2019 equity-method investment balance is determined as follows: Beginning Investment ($11 x 32,000 shares) Plus: p% x NI (24% x $120,000) Less: p% x Dividends (24% x $40,000) Less: p% AAP amortization Ending Investment

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$ 352,000 28,800 (9,600) (4,320) $ 366,880

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19.

Correct: b When an investor company has significant influence over an investee company, the investor must use the equity method. Under the equity method, the investor will recognize as part of its net income a proportionate share of the net income of the investor. The income recognized by the investor must be reduced for a proportionate share of the gross profit for intercompany transactions that occurred during the current period, but that will not be part of a transaction with an unaffiliated party until a future period. In this case, at the end of the period, the investee is still holding $20,000 of inventory it purchased from the investor. Given that the gross profit percentage is 40%, this means $8,000 of the inventory balance is intercompany profits. The investor must defer its proportionate share of this amount, so $2,400 will be deducted from the equity method income recognized by the investor. This means equity method income is equal to $9,600 (i.e., (30% x $40,000) - $2,400 = $9,600).

20.

Correct: a When an investor company has significant influence over an investee company, the investor must use the equity method. Under the equity method, the investor will recognize as part of its net income a proportionate share of the net income of the investor. The income recognized by the investor must be reduced for a proportionate share of the gross profit for intercompany transactions that occurred during the current period, but that will not be part of a transaction with an unaffiliated party until a future period. In addition, income of the current period will be increased by any gross profit from prior period intercompany transactions that are realized in the current period via transactions with unaffiliated parties. In this case, at the end of the period, the investee is still holding $40,000 of inventory it purchased from the investor. Given that the gross profit percentage is 25%, this means $10,000 of the ending inventory balance is intercompany profits. In addition, at the beginning of the period, the investee held $30,000 of inventory it purchased from the investor. Given that the gross profit percentage is 25%, this means $7,500 of the beginning inventory balance is intercompany profits. The investor must defer its proportionate share of the ending profits in inventory and recognize in the current year its proportionate share of the beginning profits in inventory; thus, $3,000 (i.e., 30% x $10,000) will be deducted from the equity method income recognized by the investor and $2,250 (i.e., 30% x $7,500) will be added to the equity method income recognized by the investor. This means equity method income is equal to $17,250 (i.e., (30% x $60,000) - $3,000 + $2,250 = $17,250).

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21.

Correct: b When an investor company has significant influence over an investee company, the investor must use the equity method. Under the equity method, the investor will recognize as part of its net income a proportionate share of the net income of the investor. The income recognized by the investor must be reduced for a proportionate share of the gross profit for intercompany transactions that occurred during the current period, but that will not be part of a transaction with an unaffiliated party until a future period. In addition, income of the current period will be increased by any gross profit from prior period intercompany transactions that are realized in the current period via transactions with unaffiliated parties. The investment account will be reduced by the dividends received from the investee. The investment account at December 31, 2019 is computed as follows:

+ + + -

22.

Beginning balance at January 1, 2018 30% x NI of Investee during 2018 (30% x $50,000) 30% of 2018 profit deferred to 2019 (30% x (25% x $30,000)) 2018 dividends received (30% x $10,000) 30% x NI of Investee during 2019 (30% x $60,000) 30% of 2019 profit deferred to 2020 (30% x (25% x $40,000)) 30% of profit from 2018 recognized in 2019 (30% x (25% x $30,000)) 2019 dividends received (30% x $15,000) Ending balance at December 31, 2019

$525,000 15,000 (2,250) (3,000) 18,000 (3,000) 2,250 (4,500) $547,500

Answer: d When an investor company has significant influence over and investee, it must use the equity method of accounting. When the investor ceases to have significant influence, it must determine if the investee company’s common stock has a readily determinable fair value. If it does not have a readily determinable fair value, the investor must use a costbased approach to account for the remaining Equity Investment. If it does have a readily determinable fair value, the investor must use the fair value method to account for the remaining Equity Investment. In this case, the investee has a readily determinable fair value, so the investment must be carried at its current fair value. Based on the information, the best proxy for the current fair value of the remaining 10% investment is the selling price of the 10% interest sold to an unaffiliated party.

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23.

a. The investor reports equity income equal to its proportionate share of the net income of the investee company: $400,000 x 30% = $120,000. b. The balance of the Equity Investment account at the end of the year is $560,000 ($500,000 + $120,000 - $60,000). c. The fair value of the investee company is not reflected in the financial statements of the investor company. Under the equity method, the Equity Investment account is reported after adjusting for equity income and dividends. Changes in the fair value of the investee company do not affect this reported amount (unless the fair value declines below the carrying amount of the Equity Investment and the decline is deemed to be other than temporary). The fair value should be disclosed in the notes to the financial statements.

24.

FASB ASC 323-10-35-18 requires equity method investors to “record its proportionate share of the investee’s equity adjustments for other comprehensive income … as increases or decreases to the investment account with corresponding adjustments in equity.” Thus, the investee’s net income will affect the equity method income recognized as part of the investor’s net income, and the investee’s portion of other comprehensive income (OCI) items will directly affect the investor’s OCI items (i.e., not net income). Both the net income and OCI components (i.e., total comprehensive income) will affect the Equity Investment account. a. $600,000 x 40% = $240,000 b. $750,000 + (40% x $700,000) – $80,000 = $950,000

25.

a. Equity investment

120,000 Cash

120,000

(to record the purchase of the Equity Investment)

b. Equity investment

20,000 Equity income

20,000

(to record equity income)

c. Cash

12,000 Equity investment

12,000

(to record receipt of the cash dividend)

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d. Cash

150,000 Equity investment* Gain on sale

128,000 22,000

(to record the sale of the Equity Investment) * Equity Investment balance on date of sale = $120,000 + $20,000 - $12,000 = $128,000

26.

a. The gross profit remaining in ending inventory = $40,000 x 15% = $6,000. Equity income = ($100,000 - $6,000) x 30% = $28,200 b. Beginning Equity Investment Equity income Dividends Ending Equity Investment

$400,000 28,200 (18,000) $410,200

c. Equity income = ($150,000 + $6,000) x 30% = $46,800

27. a. Equity investment Equity Income (recognize 25% of net income = 25% x $400,000)

100,000 100,000

Equity Income Equity investment (Defer profits in ending inventory = 25% x 30% x $120,000)

9,000

Cash

25,000

9,000

Equity investment (record receipt of dividends)

25,000

b. Ending investment = $1,000,000 + $100,000 - $9,000 - $25,000 = $1,066,000 c. Equity income in following year = (25% x $450,000) + $9,000 = $121,500

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28.

a. The change in the IMFT investment account was an increase of $656 million. Because IMFT is a research venture, it is currently incurring costs. Intel’s share of these costs is $415 million. Thus, in order for this negative income activity to reconcile with a $656 million increase in the investment account, it suggests that Intel made a capital contribution of $1,071 million (i.e., $656 million + $415 million). b. Intel owns 49% of IMFT. If Intel’s share of the costs is $415 million, then the total costs incurred by IMFT is $847 million (i.e., $415 million / 49%).

29.

a. Based solely on the book value of net assets of the investees, the equity method balance is equal to 24.9% x $20,171 million = $5,023 million. b. Based solely on the reported net income of the investees, the equity method income is equal to 24.9% x $1,800 million = $448 million. c. The ownership percentage changed from 23.2% to 24.9%. It's likely ADM made incremental investments in unconsolidated affiliates that is greater than the amount of dividends received from these affiliates.

30.

a. The balance of the Equity Investment in Pop decreased by $1.9 million (i.e., $96.8 million - $98.7 million) during the year ended March 31, 2017. The things that change Equity Investment are an investee’s reported income and dividends, capital contributions to the investee and/or disposal of ownership in the investee. According to Lionsgate’s disclosure, its share of Pop’s net losses equals $6.9 million. In addition, Lionsgate contributed $5.0 million to Pop. These two items reconcile to the $1.9 million decrease in the account, so there was no other activity in the account, including dividends. Thus, the amount of dividends declared and paid by Pop equals $0. b. If dividends for the year ended March 31, 2017 equals $0, then the change in the Equity investment account will be comprised of Lionsgate’s share of the net loss of Pop and Lionsgate’s capital contributions to Pop. The March 31, 2016 balance equals $98.7 million. After backing out the $8.8 million capital contribution and the $1.8 million share of Pop’s net loss, the March 31, 2015 balance equals $91.7 million.

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31. Equity investment

145,000

Cash (to record the purchase of the Equity investment) Equity investment

145,000

25,000

Equity income (to record equity income) Cash

25,000

20,000

Equity investment (to record receipt of the cash dividend) Equity income

20,000

2,000

Equity investment (to record the amortization of the patent asset) Cash Equity investment* Gain on sale (to record the sale of the Equity investment)

2,000

180,000 148,000 32,000

*The Equity Investment balance on the date of sale is ($145,000 + $25,000 - $20,000 - $2,000 = $148,000)

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32.

a. If an investor holds an equity interest that does not convey control or significant influence over and investee, then the investor is required to use the fair value method to account for the Equity Investment if the investment securities have a readily determinable fair value. Upon acquiring an additional equity stake in the investee that increases the level of ownership to significant influence over the investee, then the investor must begin using the equity method to account for the Equity Investment. However, immediately before accounting for the investment under the equity method, the investor must mark the preexisting equity holding to fair value. Based on the March 1, 2019 transaction, the implied fair value of the entire investee entity is $4,500,000 (i.e., $765,000 / 17%). This suggests the original 8% investment has a fair value of $360,000, and the investor should recognize a $20,000 (i.e., $360,000 - $340,000) holding gain to write up the securities. Here are the journal entries for the facts in the problem: Equity investment 20,000 Unrealized holding gain (to mark the preexisting holding of equity securities to fair value.)

20,000

Equity investment Cash (to record the acquisition of additional equity securities)

765,000

b. If the equity securities did not have a readily determinable fair value, then the investor would have used a cost-based approach to account for the securities. Absent an other-than-temporary impairment, the Equity Investment account would have remained at the original cost up until the purchase of additional securities. If the transaction to purchase the additional interest is considered an observable price change in orderly transaction, then the original investment would have been marked up to fair value on the date the additional securities are obtained. In this case the amount of gain/loss that needs to be recognized is based on the implied fair value of the original 8% investment. Based on the March 1, 2019 transaction, the implied fair value of the entire investee entity is $4,500,000 (i.e., $765,000 / 17%). This suggests the original 8% investment has a fair value of $360,000, and the investor should recognize a $40,000 holding gain (i.e., $360,000 - $320,000) to write up the securities. Here are the journal entries for the facts in the problem: Equity investment 40,000 Unrealized holding gain (to mark the preexisting holding of equity securities to fair value.)

40,000

Equity investment Cash (to record the acquisition of additional equity securities)

765,000

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765,000

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c. If the equity securities did not have a readily determinable fair value, then the investor would have used a cost-based approach to account for the securities. Absent an other-than-temporary impairment, the Equity Investment account would have remained at the original cost up until the purchase of additional securities. If the transaction to purchase the additional interest is not considered an observable price change in orderly transaction, then the original investment would have remained at original cost, even after the additional securities are purchased. In this case, the only entry necessary is for the purchase of additional securities. Here are the journal entries for the facts in the problem: Equity investment Cash (to record the acquisition of additional equity securities) 33.

765,000 765,000

a. The equity investment is 59.72% ($5,336 / [$36,339 - $27,404]) of investee net assets. The summarized balance sheet information is based on the investee’s historical-cost-based accounting records. Equity Investments are usually purchased for a premium over the investee’s book value and this premium is either amortized (e.g., based on depreciable assets) or remains in the account (e.g., based on nondepreciable assets, like land, or indefinitely lived intangible assets, like goodwill). b. No, the liabilities are not reported on DowDuPont’s balance sheet, only the balance of the Equity Investment which represents DowDuPont’s proportionate ownership in the investees’ Stockholders’ Equity. Although DowDuPont most likely does not have legal obligation for the debts of its investee companies, were they to encounter financial difficulties, DowDuPont might have to invest additional equity capital into those businesses in order to keep them solvent. Why? Because DowDuPont uses these Equity Investments as a significant component of its business model (they represent 3% of total assets and 52% of net income). If DowDuPont allows one of these investee companies to fail, it might find that the market will no longer finance future investments of this kind. It may have a real obligation for these investees even though it may have no legal obligation.

34.

a. Equity investment of $64 million = $128 million total equity x 50%. b. The decrease in the investment account is most likely caused by losses sustained by the venture. We know this because the venture has retained earnings (i.e., accumulated losses) equal to $(12).

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35.

The percentage disclosures suggest that most of the ventures are 50% owned. We can also try to infer the ownership percentages based on the disclosed financial data. And, the Equity Investment is 58% ($1,156 / $1,991) of the Stockholders’ Equity of the investee companies. Of course, as a practical matter, the actual percentage ownership is likely closer to just below 50%. Because the investees are not consolidated, then we know Cummins does not control them. The summarized balance sheet information is based on the investee’s historical-cost-based accounting records. Equity Investments are usually purchased for a premium over the investee’s book value and this premium is either amortized (e.g., based on depreciable assets) or remains in the account (e.g., based on non-depreciable assets, like land, or indefinitely lived intangible assets, like goodwill). (As an aside, this is typically the amount of information that companies provide in their Equity Investments footnotes).

36.

a. Based on the balance sheet, the average ownership interest of equity method affiliates is 29% (¥2,845,422 million / ¥9,955,614 million) b. Based on the income statement, the average ownership interest of equity method affiliates is 33% (¥362,060 million / ¥1,099,080 million) c. There are three primary reasons the balance-sheet-based and income-statementbased inferred ownership amounts won’t equal. First, the computations are based on aggregate financial statement information across 54 different equity method affiliates. The relative amounts recognized across these companies income statements and balance sheets will be proportionally different. In addition, the financial statement data presented for the affiliated companies is based on reported (historical-cost-based) amounts. The equity investment accounts will often include premiums to these reported amounts that are not included in the affiliates’ reported book values. In addition, the equity method information will include deferral of profits to the periods in which they are recognized via transactions with unaffiliated parties. d. Beginning balance (3/31/2016) Equity income Dividends Plug Ending balance (3/31/2017)

2,631,389 362,060 (180,326) 32,299 2,845,422

The ¥32,299 reconciling item is a net investment in the affiliates. Given that there are the same number of affiliates on March 31, 2016 and 2017, this is likely not the purchase of a new affiliate. Instead, it appears to be the purchase of an additional ownership stake in an existing investment, or a capital contribution.

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Advanced Accounting, 4th Edition

37.

a. The displayed amount of deferred licensing income is only for Lionsgate’s 31.15% interest in EPIX. The 100% amount of 2017 deferred profit is $39.81 million (i.e., $12.4 million / 31.15%) and the 100% amount of recognized (i.e., previously deferred) profit is $22.47 million (i.e., $7.0 million / 31.15%). Thus the total EPIX income without the deferred or recognized (i.e., previously deferred) profit is $99.36 million (i.e., $116.7 million - $39.81 million + $22.47 million) b. The eliminations of licensing profits (12.4, 7.3, 10.2) has a higher variance than the subsequent realizations (7.0, 7.7, 7.6). This pattern implies that the life of the licenses is longer than the next fiscal year. (If each license was no more than a year in length, then the full amount of the eliminated profit would be realized in the following year.) The fact that the licenses are multi-year and that they are recorded in EPIX’s inventory means that the realization of licenses will be much smoother than the initial sale activity. This is much the same way that capitalization and depreciation of fixed assets smooths out the higher variance capital expenditures cycles at companies.

38.

a. General Mills accounts for the investments in its joint ventures using the equity method. Consolidation is not appropriate because General Mills does not control these entities (General Mills does not have >50% equity interest). Also, the fair value method is inappropriate because General Mills is able to exert “significant influence” in the management of these businesses (Companies may take an irrevocable option to value each individual equity investment at fair value under ASC 825-10-25.). Under the equity method, these investments are reflected on General Mills’ balance sheet at adjusted cost (i.e., beginning balance plus proportionate share of investee company’s earnings less any dividends received). General Mills reports its proportionate share of investee company earnings as income. Under the equity method of accounting, dividends are not income. Instead, they are treated as a return of the investment. b. The $505.3 million investment balance on General Mills’ balance sheet represents the net equity of its joint ventures. General Mills’ proportionate share of the assets of the joint ventures, as well as its proportionate share of the joint ventures’ liabilities, is not reflected on its balance sheet, only the net equity. As a result, General Mills’ balance sheet does not reflect the actual investment and liabilities required to conduct these operations. For example, the total joint venture assets of $1,708.6 million less the investment balance of $505.3 million equal $1,203.3 million and these are not recorded on General Mills’ balance sheet. Similarly, the liabilities of $1,524.8 million are also excluded. This is the primary criticism of equity method accounting.

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c. Although General Mills may not have legal liability for the obligations of its joint ventures, it might have an implicit obligation to stand behind the entities that it has created (which includes their financing). That is, General Mills would be hardpressed to walk away from one of these entities should it fail to pay its debts. d. Equity method accounting presents at least two challenges for analysis purposes. (i) Equity method accounting obscures the actual assets and liabilities of the investee company on the books of the investor company. (ii) The equity investments are reported at adjusted cost. As a result, unrealized gains (say, from fair value appreciation) are not reflected on the balance sheet or in the income statement.

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Advanced Accounting, 4th Edition

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 2— Introduction to Business Combinations and the Consolidation Process 1.

The Scope section of FASB ASC 805-10-15 specifically excludes joint ventures from the provisions of the standard. As a result, joint ventures are not required to be consolidated and should be accounted for using the equity method.

FASB ASC 805-10-65-1: “The acquirer’s application of the recognition principle and conditions may result in recognizing some assets and liabilities that the acquiree had not previously recognized as assets and liabilities in its financial statements. For example, the acquirer recognizes the acquired identifiable intangible assets, such as a brand name, a patent, or a customer relationship, that the acquiree did not recognize as assets in its financial statements because it developed them internally and charged the related costs to expense.”

FASB ASC 805-30-30-8 provides the following guidance relating to the transfer of assets other than cash and stock: “The consideration transferred may include assets or liabilities of the acquirer that have carrying amounts that differ from their fair values at the acquisition date (for example, nonmonetary assets or a business of the acquirer). If so, the acquirer shall remeasure the transferred assets or liabilities to their fair values as of the acquisition date and recognize the resulting gains or losses, if any, in earnings. However, sometimes the transferred assets or liabilities remain within the combined entity after the business combination (for example, because the assets or liabilities were transferred to the acquiree rather than to its former owners), and the acquirer therefore retains control of them. In that situation, the acquirer shall measure those assets and liabilities at their carrying amounts immediately before the acquisition date and shall not recognize a gain or loss in earnings on assets or liabilities it controls both before and after the business combination.” Bottom line – if the asset will not remain with the consolidated group following the acquisition, the acquirer can write up the asset before transfer and record the resulting gain in income. And, if the asset remains with the consolidated entity post-acquisition, it cannot be written up and no gain is recognized.

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FASB ASC 805-20-25-12 allows the acquirer to determine if the operating leases are “favorable or unfavorable” compared with the market terms of similar leases at the acquisition date. The acquirer shall recognize an intangible asset if the terms of an operating lease are favorable relative to market terms and a liability if the terms are unfavorable relative to market terms. FASB ASC 805-20-25-13 also provides for the recognition of an intangible asset relating to operating leases, even if their terms are not deemed to be favorable, if the leases provide entry into a market or other future economic benefits that qualify as identifiable intangible assets, for example, as a customer relationship.

FASB ASC 805-20-55-6 provides the following guidance: “The acquirer subsumes into goodwill the value of an acquired intangible asset that is not identifiable as of the acquisition date. For example, an acquirer may attribute value to the existence of an assembled workforce, which is an existing collection of employees that permits the acquirer to continue to operate an acquired business from the acquisition date. An assembled workforce does not represent the intellectual capital of the skilled workforce―the (often specialized) knowledge and experience that employees of an acquiree bring to their jobs. Because the assembled workforce is not an identifiable asset to be recognized separately from goodwill, any value attributed to it is subsumed into goodwill.”

FASB ASC 805-20-55-7 provides the following guidance: “The acquirer also subsumes into goodwill any value attributed to items that do not qualify as assets at the acquisition date. For example, the acquirer might attribute value to potential contracts the acquiree is negotiating with prospective new customers at the acquisition date. Because those potential contracts are not themselves assets at the acquisition date, the acquirer does not recognize them separately from goodwill. ”

FASB ASC 805-20-55-25 provides the following guidance: The agreement, whether cancelable or not, meets the contractual-legal criterion. Additionally, because the Subsidiary establishes its relationship with Customer through a contract, not only the agreement itself but also the subsidiary’s relationship with the Customer meets the contractual-legal criterion.

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Advanced Accounting, 4th Edition

FASB ASC 805-20-55-22 provides the following guidance: “An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual-legal criterion even if the purchase or sales orders are cancelable.” Regardless of whether or not they are cancelable, the purchase orders from 60 percent of the Subsidiary’s customers meet the contractual-legal criterion. Additionally, because the Subsidiary has established its relationship with 60 percent of its customers through contracts, not only the purchase orders but also the Subsidiary’s customer relationships meet the contractual-legal criterion. Because the subsidiary has a practice of establishing contracts with the remaining 40 percent of its customers, its relationship with those customers also arises through contractual rights and therefore meets the contractual-legal criterion even though the Subsidiary does not have contracts with those customers as of the acquisition date.

FASB ASC 805-20-55-23 provides the following guidance: “If an entity establishes relationships with its customers through contracts, those customer relationships arise from contractual rights. Therefore, customer contracts and the related customer relationships acquired in a business combination meet the contractual-legal criterion….” Because the Subsidiary establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual-legal criterion, and can be identified as an intangible asset in the acquisition.

10.

FASB ASC 805-10-55-35 provides the following guidance (the acquired company is referenced as the “Target”): “In this Example, Target entered into the employment agreement before the negotiations of the combination began, and the purpose of the agreement was to obtain the services of the chief executive officer. Thus, there is no evidence that the agreement was arranged primarily to provide benefits to Acquirer or the combined entity. Therefore, the liability to pay $5 million is included in the application of the acquisition method.”

11.

FASB ASC 805-10-55-36 provides the following guidance (the acquired company is referenced as the “Target”): “In other circumstances, Target might enter into a similar agreement with the chief executive officer at the suggestion of Acquirer during the negotiations for the business combination. If so, the primary purpose of the agreement might be to provide severance pay to the chief executive officer, and the agreement may primarily benefit Acquirer or the combined entity rather than Target or its former owners. In that situation, Acquirer accounts for the liability to pay the chief executive officer in its post-combination financial statements separately from application of the acquisition method.”

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12.

Yes, the investor has gained effective control of the investee company by virtue of its control of the Board of Directors. Even though it owns less than 50% of the outstanding voting stock, the license agreement gives it control of the investee company and, as a result, the investee must be consolidated with the investor.

13.

The acquisition should be accounted for as a business combination, thus requiring consolidation. It is not necessary for the business to have outputs (i.e., products and sales). FASB ASC 805-10-55-4 defines a business as follows: “A business consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business.”

14.

a. Assets and liabilities can be valued using any reasonable approach. Some common approaches to the tangible assets and liabilities in this example include the following: Accounts receivable:

Net realizable value (the amount we expect to collect)

Inventories:

Estimated selling price less cost to complete (if work-inprocess) and less selling costs and a reasonable profit margin on the sale. Raw materials are valued at replacement cost.

PPE:

Current replacement costs if continued to be used in the business or at selling price less cost to sell if to be sold.

Current liabilities:

Book value

Long-term liabilities:

Present value (i.e., discounted expected cash outflows)

b. Before any portion of the purchase price can be allocated to the Goodwill asset, you must first ask if you are acquiring any intangible assets that are not recorded on the acquiree’s balance sheet. A complete listing is in Exhibit 2.12. FASB ASC 805 requires us to make a positive assessment whether any of these intangible assets were valued by us in arriving at our purchase price for the acquiree and, if so, we must assign that value to the intangible assets acquired before any of the purchase price can be assigned to the Goodwill asset. c. Intangible assets are typically valued at the present value of expected future cash flows. We must, first, project the cash flows to be derived from the intangible asset. Then, we need to discount those expected cash flows using an appropriate discount rate. This is a very subjective process, as both the estimate of future cash flows and the choice of the appropriate discount rate are difficult. We must make a reasonable attempt, however, to value these intangible assets using a reasonable and supportable methodology. ©Cambridge Business Publishers, 2020 2-4

Advanced Accounting, 4th Edition

15. Intangible Asset Category

16.

Examples

Contract-based:

Lease agreements, franchise agreements, licensing agreements, construction contracts, employment contracts, and mineral rights

Marketing-related:

Brand names, trademarks, and Internet domain names

Customer-related:

Customer contracts, relationships, and orders

Technology-based:

Patent rights, computer software, and trade secrets

Artistic-related:

Television programs, motion pictures and videos, recordings, books, photographs, and advertising jingles

An indemnification asset represents the agreement by the seller to guarantee that the acquirer will not suffer a loss as a result of the outcome of a contingency related to all or part of a specific asset or liability. For example, the seller may indemnify the purchaser against losses above a specified amount on a liability arising from a particular contingency, such as a pending lawsuit. The acquirer recognizes an indemnification asset at the same time that it recognizes the indemnified item (the contingent liability, for example). In addition, both the indemnification asset and the related liability are revalued subsequent to the acquisition (FASB ASC 805-20-25-27 through 25-28 and FASB ASC 805-20-35-4).

17.

FAASB ASC 805-20-55-20 identifies a number of customer-related intangible assets, including the following: a. Customer lists—a customer list acquired in a business combination normally meets the separability criterion. b. Order backlog—an order or production backlog acquired in a business combination meets the contractual-legal criterion even if the purchase or sales orders are cancelable. c. Customer relationship—If an entity has relationships with its customers through sales orders, they meet the contractual-legal criterion. Customer relationships also may arise through means other than contracts, such as through regular contact by sales or service representatives.

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18.

a. Restructuring plans typically include the termination of employees as departments are merged, the divestiture of lines of businesses with related plant closing costs, the relocation and training of employees, and the write-off of assets such as Goodwill on the acquiree’s balance sheet that relate to previous acquisitions that will no longer play a part in the consolidated company. b. FASB ASC 805-20-25-2 provides the following guidance relating to planned restructuring activities: “To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements, at the acquisition date. For example, costs the acquirer expects but is not obligated to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognize those costs as part of applying the acquisition method. Instead, the acquirer recognizes those costs in its post-combination financial statements in accordance with other applicable generally accepted accounting principles (GAAP).”

19.

If financial statements are issued before the final allocations of the purchase can be made, FASB ASC 805-10-55-16 allows us to use “provisional amounts,” that is, estimates of those values. When the allocation adjustments are made, we prospectively adjust those amounts, provided that the final measurement of all assets and liabilities is completed within one year from the acquisition date. Also, during the measurement period, the acquirer can recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.

20. A

a. No, a contingent liability for the employee litigation is not recognized at fair value on the acquisition date because your attorney has determined that an unfavorable outcome is reasonably possible, but not probable (ASC 450-20-25-2). Therefore, your company would recognize a liability in the post-combination period when the recognition and measurement criteria in ASC 450 are met. b. The indemnification by the acquiree becomes an “indemnification asset” for the purchaser and can be recognized as such on the consolidated balance sheet at the same amount. Net assets acquired are, therefore, unaffected. Until the lawsuit is settled or finally adjudicated, the contingent liability and the indemnification asset must both be revalued at each balance sheet date and the change in value reflected in income (see question 16). Since the asset and liability are offsetting, however, their revaluation will have offsetting amounts in the income statement, leaving net income unaffected.

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Advanced Accounting, 4th Edition

21. A

a. Equity investment Common Stock APIC Contingent earnings liability

17,500,000 800,000 15,200,000 1,500,000

(to record the acquisition)

b. Expense related to contingent earnings liability Contingent earnings liability

600,000 600,000

(to record the increase in the expected value of the contingent earnings liability)

c. Expense related to contingent earnings liability Contingent earnings liability Cash

1,900,000 2,100,000 4,000,000

(to record payment of the contingent earnings liability)

22. B Purchase price Less: Fair value of assets acquired Deferred tax liability Goodwill 23.

$5,000,000 4,800,000 (168,000)

4,632,000 $368,000

($800,000 x 21%)

According to paragraph 14 of the 1979 AICPA Issues Paper, proponents of pushdown accounting view the change in control transaction as essentially the same as if the new owners had purchased the net assets of an existing business and established a new entity to continue that business. They believe that reporting on a new basis in the separate financial statements of the continuing entity would provide information that is more relevant to financial statement users. The change in control transaction is the same as if the new owners purchased the net assets of an existing business and established a new entity to continue the business. Opponents of pushdown accounting believe that a change in ownership of an entity does not establish a new accounting basis in its financial statements under the historical cost accounting framework. Since the reporting entity did not acquire assets or assume liabilities as a result of the transaction, the recognition of a new accounting basis based on a change in ownership, rather than on a transaction on the part of the entity, is undesirable under a ”historical cost framework.” (Of course, financial accounting principles reflect a mixed-attribute measurement model, so any justification based on a historical cost justification would need to describe how that information basis provides superior information to users of financial statements.) Opponents of pushdown accounting also note that a new basis of continued

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accounting would be detrimental to interests of holders of existing debt and non-voting capital stock who depend on comparable financial statements for information about their investments and do not have access to other financial information. Push down accounting would affect the ability of the entity to comply with debt covenants required by outstanding debt and would materially alter the relationships in the entity's financial statements. 24.

Answer: b In a (basket) net asset acquisition that does not constitute a business, as that term is defined in FASB ASC 805 (“Business Combinations”), the total consideration paid for the net assets is allocated to the individual net asset accounts on the basis of proportional fair value, as follows:

Production equipment Factory Licenses Total

25.

Fair Value 500 800 700 2,000

%FV 25% 40% 35% 100%

Allocated 515.0 824.0 721.0 2,060.0

Answer: a Goodwill is only recorded when the acquired net assets (or legal entity) constitutes a business, as that term is defined in FASB ASC 805 (“Business Combinations”).

26.

Answer: c When acquired net assets (or a legal entity) constitute a business, as that term is defined in FASB ASC 805 (“Business Combinations”), the individual identifiable acquired net assets are reported at fair value on the acquisition date.

27.

Answer: d When acquired net assets (or a legal entity) constitute a business, as that term is defined in FASB ASC 805 (“Business Combinations”), the amount of recognized goodwill is equal to the fair value of the entire acquired business (i.e., $2,180 consideration transferred) less the fair value of the identifiable net assets (i.e., $2,000, see above solution to #11). This results in $180 of goodwill recognized on the acquisition date.

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Advanced Accounting, 4th Edition

28.

Answer: d Given that fair value of net assets approximates the book value of net assets and there is no goodwill recognized, this means that the book value of net assets of the subsidiary approximates the overall value of the consideration transferred for the company (i.e., $280,000). Given that the parent company transferred 10,000 shares, this means that the per share value for the parent company stock is $28/share (i.e., $280,000/10,000).

29.

Answer: b Given that fair value of net assets approximates the book value of net assets and there is no goodwill recognized, this means that the book value of net assets of the subsidiary approximates the overall value of the consideration transferred for the company (i.e., $280,000). This means that the investment account equals $280,000 on the acquisition date.

30.

Answer: b Goodwill is equal to the difference between the value of the acquired entity as a whole minus the fair value of the acquiree’s individual net assets. In this case, the fair value of the acquiree entity is the value of the stock transferred as consideration (i.e., $27 x 22,500 shares = $607,500). The fair value of the individual net assets is $424,200, which means the goodwill is $183,300 (i.e., $607,500 – 424,200).

31.

Answer: d The amount recorded for the investment account is the value of the consideration transferred in exchange for the investee’s common stock (i.e., $27 x 22,500 shares = $607,500).

32.

Answer: c A business is “An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.” It is not necessary that the investee company currently produce products or generate a positive return. All that is necessary is that it a. has begun planned principal activities, b. has employees, intellectual property, and other inputs and processes that could be applied to those inputs, c. is pursuing a plan to produce outputs, and d. will be able to obtain access to customers that will purchase the outputs.

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33.

Answer: a Company A has a controlling financial interest in both Companies B (85%) and C (85% x 65% = 55.25%). Therefore B and C should be consolidated with A.

34.

Answer: b By holding 14,560 shares, former company B shareholders will own 56% (i.e., 14,560 / (11,440 + 14,560) of the common stock after the transaction, suggesting they control the company and can elect controlling Board within the next two years.

35.

Answer: c Direct fees have no effect on recording the business combination; these costs are simply expensed as part of operating expenses for the period in which they are incurred. The entry is as follows: Expenses

200,000 Payables or cash (for direct acquisition costs)

200,000

Costs of registering and issuing securities are deducted from contributed capital; thus, they have no effect on the investment account. The fair value of the common stock that is issued (i.e., $8,000,000 = 800,000 shares x $10.00/share) will equal the amount of the net assets that will be recognized in a business combination. The entry is as follows: Investment in Investee Common Stock ($1 par) APIC Payables or cash (for registration costs) 36.

8,000,000 800,000 7,100,000 100,000

Answer: a A controlling investment in an investee company’s common stock is accounted for in an equity investment account on the pre-consolidation books of the investor company. Thus, there is no separate pre-consolidation recognition of goodwill. The process of consolidation will eliminate the investment account and replace it with the fair value of the net assets of the subsidiary in the post-consolidation financial statements.

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Advanced Accounting, 4th Edition

37.

Answer: b The amount of goodwill implicit in an acquisition-date controlling investment in a subsidiary is equal to the fair value of the entire subsidiary (i.e., $1,000,000) minus the fair value of the identifiable net assets (FVINA). According to the facts, the book value of the identifiable net assets is equal to $700,000. The only identifiable difference between fair value and book value is $250,000 related to property and equipment. Thus, the FVINA is equal to $950,000 (i.e., $700,000 + $250,000). Therefore, goodwill is equal to $50,000 (i.e., $1,000,000 - $950,000).

38.

Answer: a In the case where (1) the fair value of the identifiable net assets of a subsidiary equals the book value of identifiable net assets of the subsidiary, and there is no recorded goodwill or bargain acquisition gain, then the investment account will equal the book value of net assets of the subsidiary (i.e., which also equals the stockholders’ equity of the subsidiary). Net assets equals $180,000 (i.e., CS, $20,000 + APIC, $140,000 + RE, $20,000).

39.

Answer: b In the absence of profits (losses) on intercompany transactions, the investment account at any point in time can be computed by taking p% of the book value of net assets (BVNA) of the subsidiary and adding the unamortized p% acquisition accounting premium (AAP). In this problem, p% = 100%. On the acquisition date, the unamortized AAP is equal to the following (note that the amounts are expressed in debits and credits):

Receivables & Inventories Land Property & Equipment Goodwill Liabilities Total AAP

AAP Dr (Cr) 10,000 (5,000) 20,000 25,000 7,000 57,000

100% BVNA(S) + 100% AAP = $180,000 + $57,000 = $237,000 40.

Answer: d Consolidated financial statements must be prepared by a company that has a “controlling financial interest” in other entities. In this case, Sun also prepares standalone financial statements (perhaps for a bank or other creditor). There is no evidence that Sun has a controlling financial interest in another entity.

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41.

Answer: d Assuming no intercompany payables/receivables, on the acquisition date, there are only two consolidating journal entries required: [E] and [A]. The [E] entry eliminates the book value of net assets of the subsidiary (i.e., which equals reported stockholders’ equity) from the investment account. Stockholders’ equity of the investee equals $550,000 (i.e., CS $120,000 + APIC $150,000 + RE $280,000). This means the [A] credit to the investment account must have been $320,000 (i.e., $870,000 - $550,000).

42. B

Answer: c Generally speaking, in a nontaxable transaction, the pre-acquisition tax bases of the subsidiary’s net assets carry forward to the post-acquisition tax books. This can result in deferred taxes if the recognized fair values have temporary differences from the carried forward tax bases. In this case, the only asset that has a different tax basis from its newly recognized fair value is noncurrent assets with a fair value that is $30,000 greater than its previous book value and tax basis. The deferred tax liability on this $30,000 temporary difference is $6,000 (i.e., 20% x $30,000). Therefore, including the deferred tax, the fair value of the identifiable net assets (FVINA) for the subsidiary is equal to $104,000 (i.e., BVINA $80,000 + noncurrent asset AAP $30,000 – deferred tax liability AAP $6,000). Goodwill is equal to the fair value of the entire subsidiary minus the FVINA, which equals $56,000 (i.e., FV subsidiary $160,000 – FVINA $104,000).

43. B

Answer: d Generally speaking, in a taxable transaction, the post-acquisition tax bases of the subsidiary’s net assets are equal to the fair value of the net assets of the subsidiary. Given no difference in financial versus tax bases, this means that there are no deferred taxes recognized pursuant to the acquisition. In this problem, the only asset that has a different tax basis from its newly recognized fair value is noncurrent assets with a fair value that is $30,000 greater than its previous book value and tax basis. Therefore, the fair value of the identifiable net assets (FVINA) for the subsidiary is equal to $110,000 (i.e., BVINA $80,000 + noncurrent asset AAP $30,000). Goodwill is equal to the fair value of the entire subsidiary minus the FVINA, which equals $50,000 (i.e., FV subsidiary $160,000 – FVINA $110,000).

44.

Answer: b After a change of control event, the acquiree has the option to apply pushdown accounting in its separate pre-consolidation financial statements. This election is irrevocable and has no impact on the requirement that the parent company prepare consolidation financial statements that incorporate all entities the parent controls. The pushdown process results in the subsidiary recording the effects of the AAP on its preconsolidation books. This will result in a subsidiary’s pre-consolidation individual net assets being reported at fair value, consistent with FASB ASC 805.

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Advanced Accounting, 4th Edition

45.

a. The cost is allocated to the acquired net assets based on relative fair values:

Production equipment Factory Land Patents

Book Value 300 1,500 100 1,900

Fair Value 240 1,200 600 360 2,400

%FV 10.0% 50.0% 25.0% 15.0% 100.0%

Allocated Cost 230 1,150 575 345 2,300

This results in the following journal entry: Production equipment Factory Land Patents

230 1,150 575 345

Cash (to record purchase of the assets and assumption of the liabilities that does not qualify as a business)

2,300

b. Production equipment Factory Land Patents Goodwill Expenses (transaction costs)

240 1,200 600 360 50 50

Cash Contingent consideration liability (to record purchase of the assets and assumption of the liabilities that qualifies as a business)

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2,300 200

©Cambridge Business Publishers, 2020 2-13

46.

a. Cash Accounts receivable Inventories PPE, net

1,680 3,360 6,720 16,800

Accounts payable Accrued liabilities Long-term liabilities Cash (to record purchase of the assets and assumption of the liabilities that constitute a business)

3,360 5,040 6,720 13,440

b. Equity investment

13,440

Cash (to record the acquisition of the investee’s common stock) 47.

13,440

a. Cash Accounts receivable Inventories PPE, net Customer List

1,680 3,360 6,720 23,520 5,040

Accounts payable Accrued liabilities Long-term liabilities Cash (to record purchase of the assets and assumption of the liabilities of a business)

3,360 5,040 6,720 25,200

b. Equity investment Cash (to record purchase of the assets and assumption of the liabilities of a business)

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25,200 25,200

Advanced Accounting, 4th Edition

48.

In both parts of this problem, the value of the common stock issued by the investor company is the same: $399,000 (i.e., 11,400 shares x $35/share). On the investor’s books, this is split between “Common stock ($1 par)” for $11,400 and “Additional paidin capital” for $387,600. The difference between parts a and b is whether (a) the investor recognizes the investee’s individual net assets at fair value or (b) an investment account. When the investor recognizes the individual net assets in part a, it will also recognize goodwill implicit in the acquisition. The goodwill is equal to $27,000 (i.e., FV of investee, $399,000 – FV of the identifiable net asset of the investee, $372,000). In part b, we only recognize the investment account in the pre-consolidation financial statements of the acquirer; thus, the goodwill is inside the investment account and only becomes part of the investor’s financial statements after consolidation. a. The journal entry to record the acquisition of the net assets follows: Receivables & Inventories Land Property & Equipment Trademarks & Patents Goodwill Liabilities Common Stock ($1 par) APIC

54,000 180,000 156,000 96,000 27,000 114,000 11,400 387,600

The effects of this entry are reflected in the FV Investee column in the following worksheet: (BV)

(FV)

Dr. (Cr) Receivables & Inventories Land Property & Equipment Trademarks & Patents Investment in Investee Goodwill Total Assets

Investor

Investee

Post-Acqu.

$ 120,000 240,000 270,000

$ 54,000 180,000 156,000 96,000

$ 630,000

27,000 $ 513,000

$ 174,000 420,000 426,000 96,000 0 27,000 $ 1,143,000

Liabilities Common Stock ($1 par) APIC Retained Earnings Total Liabilities & Equity

$180,000 24,000 336,000 90,000 $630,000

$114,000 11,400 387,600 $ 513,000

$ 294,000 35,400 723,600 90,000 $ 1,143,000

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b. The journal entry to record the acquisition of the common stock of the investee follows: Investment in Investee Common Stock ($1 par) APIC

Dr. (Cr) Receivables & Inventories Land Property & Equipment Trademarks & Patents Investment in Investee Goodwill

399,000 11,400 387,600 (BV) Investor

Post-Acqu.*

$120,000 240,000 270,000

$ 399,000 $ 630,000

Liabilities Common Stock ($1 par) APIC Retained Earnings Total Liabilities & Equity

(FV) Investee

$180,000 24,000 336,000 90,000 $630,000

399,000 11,400 387,600 $ 399,000

$ 120,000 240,000 270,000 0 399,000 0 $ 1,029,000 $ 180,000 35,400 723,600 90,000 $ 1,029,000

* = Pre-consolidation

49. Purchase price Fair value of tangible & intangible assets acquired Fair value of liabilities assumed Goodwill 50.

$ 103,136 $ 61,896 (31,165)

30,731 $ 72,405

a. Goodwill = $20 million - $7 million - $4 million - $5 million = $4 million. The acquisition costs are expensed under GAAP (FASB ASC 805-10-25-23). b. Goodwill is not amortized like other intangible assets. Instead, it remains on the balance sheet until management deems it to be impaired, at which time it is written down. c. Allocating more of the purchase price to goodwill reduces the allocation to assets that are depreciated or amortized and, therefore, reduces the depreciation and/or amortization expense hitting their income statements subsequent to the acquisition.

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Advanced Accounting, 4th Edition

51.

a. The amounts relating to working capital, inventories and PPE assets are the fair values of those assets on the acquisition date. These amounts reflect the book values of those assets on DuPont’s balance sheet plus the AAP, the difference between fair value and book value. These are the amounts that will appear on the consolidated balance sheet relating to DuPont, and the reported amounts will be the sum of these values plus the book value of these assets on Dow’s balance sheet on the acquisition date. b. In-process research and development (IPRD) assets relate to the acquisition-date value of research projects currently in process and during their developmental stages (i.e., before the research projects have reached technological feasibility). Under current GAAP, investors value and recognize IPRD assets acquired in a business combination at their fair values just like any other assets acquired (FASB ASC 350-30-30-1). After initial recognition, tangible net assets used to support research and development activities (e.g., R&D building and associated equipment) are accounted for in accordance with their nature (i.e., they are depreciated/amortized). Intangible research and development assets, on the other hand, should be considered indefinite-lived (i.e., not amortized) until the associated research and development activities are either completed (then, the intangible assets are amortized over the life of the related patent or copyright) or abandoned (in which case they are written off in the year of abandonment). Acquired intangible IPRD assets are included in the annual goodwill impairment tests (FASB ASC 350-2035-15). c. The value assigned to Goodwill is not computed directly. Instead, it is computed as a residual amount (i.e., the amount left over after all other assets and liabilities have been identified and valued). d. Because of the complexity inherent in business combinations, it is not uncommon for the accounting to take some time to complete. FASB ASC 805-10-25-13 through 25-19 permits companies to use “provisional” amounts, and to retrospectively adjust those amounts when better information becomes available, provided that the final measurement of all assets and liabilities is completed within one year from the acquisition date. Also, during the measurement period, the investor can recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The adjustments are recognized prospectively (i.e., not retroactively), with the incremental adjustment fully recognized in the period in which the measurement was changed. Therefore, if the measurements were revised during the quarter ended December 31, 2017, the adjustment will be fully reflected in DowDuPont’s quarterly financial statements for the three months ended December 31, 2017.

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52.

a. The arguments in favor of Company A as the acquirer are the following: i.

It issued the stock.

ii. Its CEO will become CEO of the combined company. The arguments in favor of Company B as the acquirer are the following: i.

Its Chairman will become Chairman of the combined company.

ii. Its CFO will become CFO of the combined company. On balance, it would appear that Company A is the acquirer. Its CEO will be the chief executive of the combined entity, and, in three years, Company A’s Chairman will become the new Company Chairman as well. During the interim, neither company can control the strategic direction of the combined company since each elects onehalf of the Board of Directors. b. The allocation of the purchase price is quite different for the two potential acquirers:

Purchase Price Identifiable tangible net assets Identifiable intangible assets Goodwill

If Company A is deemed to be the Accounting Acquirer $ 12.0 billion (2.5 billion) (5.0 billion) $ 4.5 billion

If Company B is deemed to be the Accounting Acquirer $ 12.0 billion (6.0 billion) (3.0 billion) $ 3.0 billion

If Company B is the accounting acquirer and Company A is the subsidiary, more of the purchase price will be allocated to the fair value of total identifiable tangible and intangible net assets (i.e., $9.0 billion). Both of these categories are usually depreciated or amortized (e.g., except for land and some indefinite-lived intangible assets). As a result, more of the purchase cost will likely hit the consolidated income statement (Goodwill is not amortized, and becomes an expense only if impaired). Also, if Company B is the acquirer, less Goodwill asset will be recognized. The determination of an acquirer is often not a difficult issue. But, when it is, it can be a significant one. continued

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Advanced Accounting, 4th Edition

b. continued This analysis is made solely from a financial perspective. There are other significant implications of the choice of the acquirer, including •

The acquirer may get to name the combined company with its name or using its name first.

•

The image of the combined company in the market place may be different depending on which company is viewed as the acquirer.

•

The acquirer’s philosophies and modes of operation may dominate the combined company.

•

The acquirer may get the choice of the home office.

•

The acquirer’s employees may feel a sense of superiority. Conversely, the acquiree’s employees may feel like they’ve been taken over. This can cause real morale problems if not handled well.

53. a. Equity investment Common stock Additional paid-in capital

200,000 40,000 160,000

(to record the acquisition)

b. [E]

Common stock Retained earnings Equity investment

40,000 100,000 140,000

(to eliminate the Stockholders’ Equity of the subsidiary on the acquisition date)

[A]

PPE (net)

60,000 Equity investment

60,000

(to record the [A] assets purchased on the acquisition date)

Solutions Manual, Chapter 2

©Cambridge Business Publishers, 2020 2-19

54.

a. Equity investment Cash

300,000 300,000

(to record the acquisition)

b. [E]

Common stock Retained earnings Equity investment

100,000 60,000 160,000

(to eliminate the Stockholders’ Equity of the subsidiary on the acquisition date)

[A]

Patent Goodwill

120,000 20,000 Equity investment

140,000

(to record the [A] assets purchased on the acquisition date)

55.

a. Balance of Equity Investment account: Purchase price Cumulative net income of subsidiary Cumulative dividends received from subsidiary Balance of Equity Investment account

300,000 250,000 (100,000) 450,000

b. The Equity Investment account is comprised of the amortized acquisition-date fair values of the net assets of the subsidiary ($230,000, which happen to equal the book values) and the carrying amount of the Goodwill asset ($70,000). It doesn’t matter how long management believes goodwill will last; it is not amortized. 56.

a. No, this is the fair value of these assets. The [A] consolidation journal entry records the difference between the fair value and the book value of these assets on the acquiree’s acquisition-date balance sheet. b. [A]

Goodwill Currently marketed products intangible In-process research and development intangible Contract-based arrangements intangible Equity Investment

11,422.4 21,995.0 730.0 42.2 34,189.6

(to record the intangible assets)

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Advanced Accounting, 4th Edition

c. The identifiable net asset values reported on June 3, 2016 were based on the best estimates management could identify as of that date. Companies have a period of one year after the acquisition date to reduce the measurement error in those estimates. Despite the fact these measurements are adjusted after the acquisition date, the measurements are supposed to be based on the conditions that existed on the acquisition date. In this case, the largest adjustments decreased inventories, currently marketed products intangible, and in process research and development, with a corresponding adjustment to deferred taxes because of the adjustments in asset values. Because goodwill is simply a residual calculated as the difference between the fair value of consideration transferred and the fair value of identifiable net assets acquired, goodwill is going to change as the overall estimated value of identifiable net assets changes. In this case, goodwill increased by more than $5 billion because the fair value of net assets decreased by more than $5 billion. 57.A

a. •

The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach, through which fair value is estimated based upon the asset’s probability adjusted future net cash flows, which reflects the stage of development of the project and the associated probability of successful completion. The net cash flows were then discounted to present value using a discount rate of 11.5%.

•

The fair value of the contingent consideration was determined utilizing a probability-weighted estimated cash flow stream using an appropriate discount rate dependent on the nature and timing of the milestone payment.

b. The income approach (sometimes referred to as discounted cash flow or DCF approach) involves both the projection of cash flows and the choice of an appropriate discount rate. In its assignment of fair values to the assets acquired and the liabilities assumed in the Afferent acquisition, it appears that the fair values were likely determined using an income approach. This is not uncommon for intangible assets. Remember this next time you look at a fair value assignment table for business combinations. c. The total possible contingent payments for achievement of "clinical development and commercial milestones" related to the Afferent acquisition are $750 million. The acquisition-date fair value of these potential future payments is $223 million. The Afferent transaction includes these contingent (future) payments instead of cash consideration because there was a difference in belief between Merck and the selling shareholders of Afferent about the value of the IPRD. A common way for these negotiation-related disagreements to be settled is to include contingent consideration instead of cash or stock.

Solutions Manual, Chapter 2

©Cambridge Business Publishers, 2020 2-21

d. Contingent consideration liability Loss on acquisition contingency Cash

223 527 750

(to record settlement of acquisition contingency)

58.

a. Goodwill is equal to the difference between the fair value of an acquiree company and the fair value of the acquiree’s identifiable net assets. In this case, the fair value of the acquiree company is $1,200,000 and the fair value of the acquiree’s identifiable net assets is $1,000,000 (i.e., CS of $100,000 + APIC of $200,000 + RE of $300,000 + P&E AAP of $150,000 + Licenses AAP of $250,000). Therefore, goodwill is equal to $200,000. b. Property & Equipment, net 150,000 Licenses 250,000 Goodwill 200,000 Pushdown equity 600,000 (entry required to record the effects of the AAP on the subsidiary’s books) Retained earnings 300,000 Pushdown equity 300,000 (entry required to eliminated retained earnings and establish pushdown-type contributed capital) c. [E] Common stock APIC Pushdown equity Equity investment

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100,000 200,000 900,000 1,200,000

Advanced Accounting, 4th Edition

d. Parent Assets: Cash & receivables Inventory Property & Equipment, net Equity investment Licenses Goodwill Liabilities and stockholders' equity: Current liabilities Other liabilities Note payable Common stock APIC Retained earnings Pushdown equity

Consolidated

800,000 600,000

100,000 200,000

900,000 800,000

2,300,000 1,200,000

925,000

3,225,000 0

4,900,000

275,000 200,000 1,700,000

275,000 200,000 5,400,000

400,000 300,000 1,670,000 1,430,000 1,100,000

150,000 350,000 100,000 [E] 100,000 200,000 [E] 200,000 900,000 [E] 900,000 1,700,000 1,200,000

550,000 300,000 350,000 1,670,000 1,430,000 1,100,000

4,900,000

Solutions Manual, Chapter 2

Subsidiary

Consolidation Entries Dr Cr

[E] 1,200,000

1,200,000

5,400,000

©Cambridge Business Publishers, 2020 2-23

59.

a. 30,000 shares x $20 market price per share = $600,000 b. [E]

Common stock APIC Retained earnings Equity investment

120,000 180,000 300,000 600,000

(to eliminate the stockholders’ equity of the subsidiary on the acquisition date)

c. Parent

Subsidiary

Consolidated

Assets Cash

$200,000

$100,000

$300,000

Accounts receivable

300,000

200,000

500,000

Inventory

500,000

400,000

Equity investment

600,000

1,000,000

600,000

1,600,000

$2,600,000

$1,300,000

$3,300,000

Accounts payable

$100,000

$200,000

Accrued liabilities

200,000

400,000

Long-term liabilities

800,000

400,000

Common stock

300,000

120,000 [E]

120,000

300,000

APIC

500,000

180,000 [E]

180,000

500,000

Retained earnings

700,000

300,000 [E]

300,000

700,000

PPE, net

900,000 [E]

600,000

Liabilities and Equity

$2,600,000

©Cambridge Business Publishers, 2020 2-24

$1,300,000

1,200,000

600,000

$3,300,000

Advanced Accounting, 4th Edition

60.

a. 80,000 shares x $10 market price per share = $800,000 b. [E]

Common stock APIC Retained earnings Equity investment

100,000 150,000 300,000 550,000

(to eliminate the Stockholders’ Equity of the subsidiary on the acquisition date)

[A]

Patent Goodwill

150,000 100,000 Equity investment

250,000

(to record the [A] assets purchased on the acquisition date)

c. Parent

Subsidiary

$1,000,000 1,200,000 1,600,000 800,000

$160,000 240,000 300,000

Consolidated

[E]

550,000

$1,160,000 1,440,000 1,900,000 0

[A]

250,000

Assets: Cash Accounts receivable Inventory Equity investment PPE, net

3,000,000

800,000

$7,600,000 $1,500,000

3,800,000 150,000 100,000 $8,550,000

$600,000 $150,000 1,000,000 200,000 2,000,000 600,000 800,000 100,000 1,400,000 150,000 1,800,000 300,000 $7,600,000 $1,500,000

$750,000 1,200,000 2,600,000 800,000 1,400,000 1,800,000 $8,550,000

Patent

[A]

150,000

Goodwill

[A]

100,000

Liabilities and Equity: Accounts payable Accrued liabilities Long-term liabilities Common stock APIC Retained earnings

[E]

100,000

[E]

150,000

[E]

300,000 800,000

800,000

d. We recognized the Patent and Goodwill assets. Previously, these assets were embedded in the Equity Investment account on the Parent’s balance sheet. In the consolidation process, they are explicitly recognized.

Solutions Manual, Chapter 2

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61.

a. The following acquisition date consolidated balance sheet can be used to answer questions a1-a7. Parent

Subsidiary

Consolidated

Assets: Cash

$700,000

$200,000

$900,000

Accounts receivable

300,000

400,000

700,000

Inventory

450,000

500,000

950,000

1,920,000

[E]

1,150,000

[A]

770,000

1,500,000

900,000

[A]

License Agreement

Customer List

Goodwill

$4,870,000

$2,000,000

$5,720,000

Accounts payable

$150,000

$100,000

$250,000

Accrued liabilities

180,000

200,000

380,000

Long-term liabilities

1,000,000

550,000

1,550,000

Equity investment

PPE, net

400,000

2,800,000

[A]

200,000

[A]

100,000

[A]

70,000

Liabilities and equity:

Common stock

140,000

100,000

[E]

100,000

140,000

APIC

2,000,000

150,000

[E]

150,000

2,000,000

Retained earnings

1,400,000

900,000

[E]

900,000

1,400,000

$4,870,000

$2,000,000

1,920,000

$5,720,000

b. We will report the License Agreement ($200,000), Customer List ($100,000), and Goodwill ($70,000). Previously, these assets were embedded in the Equity investment account on the Parent’s balance sheet. In the consolidation process, they are explicitly recognized.

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Advanced Accounting, 4th Edition

62.

a. Equity investment Common stock APIC

1,500,000 50,000 1,450,000

(to record the acquisition)

b. [E]

Common stock APIC Retained earnings Equity investment

100,000 200,000 600,000 900,000

(to eliminate the stockholders’ equity of the subsidiary as of the acquisition date)

[A]

120,000 300,000 60,000 120,000

Trademark Video library Patented technology Goodwill Equity investment

600,000

(to record the Trademark, Video Library, Patented Technology, and Goodwill {a} assets)

c. Parent

Subsidiary

Consolidated

Assets: Cash

$250,000

$120,000

$370,000

Accounts receivable

200,000

300,000

500,000

Inventory

300,000

400,000

700,000

Equity investment

1,500,000

PPE, net

2,000,000

[E]

900,000

[A]

600,000

800,000

0 2,800,000

Trademark

[A]

120,000

Video Library

[A]

300,000

Patented Technology

[A]

60,000

Goodwill

[A]

120,000

$4,250,000

$1,620,000

$4,970,000

Accounts payable

$200,000

$80,000

$280,000

Accrued liabilities

250,000

140,000

390,000

Long-term liabilities

1,800,000

500,000

2,300,000

400,000

100,000

[E]

100,000

Liabilities and equity:

Common stock APIC Retained earnings

Solutions Manual, Chapter 2

400,000

600,000

200,000

[E]

200,000

1,000,000

600,000

[E]

600,000

1,000,000

600,000

$4,250,000

$1,620,000

$1,500,000

$4,970,000

©Cambridge Business Publishers, 2020 2-27

d. We recognized four intangible assets in the consolidation process: the Trademark, the Video Library, Patented Technology and Goodwill. Previously, these assets were embedded in the Equity investment account on the Parent’s balance sheet. In the consolidation process, they are explicitly recognized. 63.B

a. Equity investment Common stock APIC (to record the Equity investment and issuance of shares)

1,500,000 120,000 1,380,000

b. Parent

Subsidiary

Consolidated

Assets: Cash

$200,000

$80,000

Accounts receivable

300,000

120,000

420,000

Inventory

700,000

600,000

1,300,000

Equity investment PPE, net

$280,000

1,500,000 2,000,000

[E]

880,000

[A]

620,000

1,000,000 [A]

100,000

3,100,000

Customer List

[A]

160,000

Brand Name

[A]

240,000

Goodwill

[A]

220,000

$4,700,000

$1,800,000

$5,720,000

Accounts payable

$150,000

$120,000

$270,000

Accrued liabilities

250,000

200,000

450,000

Long-term liabilities

1,600,000

600,000

Liabilities and equity:

2,200,000

Deferred income tax liability Common stock

[A]

100,000

500,000

80,000 [E]

80,000

500,000

APIC

1,000,000

200,000 [E]

200,000

1,000,000

Retained earnings

1,200,000

600,000 [E]

600,000

1,200,000

1,600,000

$5,720,000

$4,700,000

$1,800,000

Notes: 1. A deferred tax liability of $100,000 is established for the book-tax difference of $100,000 related to the PPE assets, $160,000 for the customer list, and $240,000 for the brand name asset (i.e., $500,000 total book-tax difference) multiplied by the tax rate of 20%. continued

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Advanced Accounting, 4th Edition

b. continued Notes continued: 2. Goodwill is computed as follows: Value of consideration Less: Fair value of identifiable net assets Deferred income tax liability Goodwill 64.

$1,500,000

$1,380,000 (100,000)

1,280,000 $ 220,000

a. Gilead need to demonstrate that Kite was a business. The FASB is careful to note that an integrated set of activities and assets requires only two essential elements: at least one input and at least one substantive process. The factors that provide evidence that a process is “substantive” depend on whether the group of net assets has produced outputs. If the group of net assets has not yet produced outputs, then a substantive process would include an organized workforce of employees with the knowledge and experience to perform or apply an acquired process that is critical to the ability to develop or convert an input into outputs. If the acquired group of net assets has already produced outputs, then a substantive process would include an organized workforce that can continue to produce that output or a process that significantly contributes to producing outputs, but that cannot be replaced without significant cost (i.e., these costs can be in terms of monetary outlay or delay in the ability to continue to produce outputs). With respect to outputs, it is important to note that the business definition is focused on whether a group of net assets is “. . . capable of being conducted and managed for the purpose of providing a return.” Thus, the fact that the group of net assets, prior to acquisition, had little or no outputs does not preclude its being considered a business. Generally speaking, an output is the result of processes applied to inputs, and is the factor that generates revenues from the acquired group of net assets. b. Kite only had assets: cash, identifiable intangible assets, deferred income taxes, goodwill and “other assets acquired (liabilities assumed), net” of only $81 million. One usually thinks of a business of having operations that support significant assetbased and liability-based working capital accounts.

Solutions Manual, Chapter 2

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c. First, any acquisition costs would be capitalized and allocated to the basket of fixed assets acquired (i.e., based on relative fair values). Second, the IPR&D would be expensed immediately instead of being capitalized. d. If the technology was proven and patented, then Yescarta would be separately recognized as an intellectual property asset and amortized over its expected (economic) useful life. 65.

a. Because of the complexity inherent in business combinations, it is not uncommon for the accounting to take some time to complete. FASB ASC 805-10-25-13 through 25-19 permits companies to use “provisional” amounts, and to retrospectively adjust those amounts when better information becomes available, provided that the final measurement of all assets and liabilities is completed within one year from the acquisition date. Also, during the measurement period, the investor can recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. Beginning in 2015, the adjustments are recognized prospectively (i.e., no longer retroactively), with the incremental adjustment fully recognized in the period in which the measurement was changed. b. In $millions Equity investment SG&A Expenses

3,200.5 76.6 Cash

3,277.1

Note that the $5,100.0 purchase price included in the first sentence of the footnote assumes that the debt held by Bally was issued by Scientific Games because the debt was refinanced as part of the acquisition. Debt refinancing is not uncommon in business combinations, but ASC 805 precludes the assumption or refinancing of acquired debt to be included in the purchase price. Therefore, the $3,200.5 investment account includes the refinanced debt (i.e., $5,100 ‒ $1,899.5* = $3,200.5). *(approximately $1.9 billion in debt)

c. The value assigned to Goodwill is not computed directly. Instead, it is computed as a residual amount (i.e., the amount left over after all other assets and liabilities have been identified and valued).

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Advanced Accounting, 4th Edition

d. Scientific Games assigned a total fair value of $1,575.3 million to amortizable intangible assets (i.e., $1,800.3 - $225.0). FASB ASC 805-20-30-1 requires that, as of the acquisition date, “The acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values,” and FASB ASC 820-10-20 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Companies can estimate these fair values using a “market approach,” an “income approach,” or a “cost approach.” Each of these approaches requires significant estimates. The estimated fair values of acquired finite and indefinite-lived trade names and finite-lived internally-developed intellectual property ("IP") was determined using the royalty savings method, which is a risk-adjusted discounted cash flow approach. Finite-lived intangible assets valued using the royalty savings method include gaming content and operating system software, casino management systems and game server software (all included within software above), certain product trade names and game cabinet design IP (included in core technology and content above). The royalty savings method values an intangible asset by estimating the royalties saved through ownership of the asset. The royalty savings method requires identifying the future revenue that would be impacted by the trade name or IP asset (or royaltyfree rights to the assets), multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in such valuation was based on a consideration of market rates for similar categories of assets…. The estimated fair values of the acquired PTG IP and Utility products IP (both included in core technology and content above) and customer relationships were determined using the excess earnings method, which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets. The contribution to the cash flows that are made by other assets - such as fixed assets, working capital, workforce and other intangible assets, including trade names and game content and design IP was estimated through contributory asset capital charges. The value of the acquired customer relationship asset is the present value of the attributed post-tax cash flows, net of the post-tax return on fair value attributed to the other assets…

Solutions Manual, Chapter 2

©Cambridge Business Publishers, 2020 2-31

e. Trade names Brand names Core technology and content Customer relationships Long-term licenses Total Amortization

FV 225.0 90.7

Life Indefinite 9.20

734.7 726.0 23.9

7.20 15.10 3.00

Amort $

9.9

102.0 48.1 8.0 $168.0

f. Bally’s performance is included in Scientific Games’ revenues and expenses for the period after the November 21, 2014 acquisition date. According to the disclosure, the revenues and loss for the period November 21, 2014 through December 31, 2014 are as follows:

Revenue Loss from continuing operations

From November 21, 2014 through December 31, 2014 $ 151.6 $ (21.1)

g. Assuming no intercompany transactions, Scientific Games indicates that “Revenue from Consolidated Statements of Operations” is $1,786.4. This amount includes the $151.6 of Bally revenue from November 21, 2014 through December 31, 2014 (see answer to f, above). In that same disclosure, Scientific Games also provides unaudited pro-forma consolidated revenue “as if” Bally was included in Scientific Games income statement for the entire year. As part of that disclosure, Scientific Games also reports that Bally had $1,159.5 of revenue for the period January 1, 2014 through November 20, 2014. Thus, Bally’s revenue for the twelve months ending December 31, 2014 would have been approximately $1,311.1 (i.e., $1,159.5 + $151.6). h. Scientific Games credits the Equity Investment account for its book value of $3,200.5 million to remove that account from the consolidated balance sheet. The offsetting debits and credits will remove the beginning-of-year stockholders’ equity of Bally and recognizes, as reported assets and liabilities on the consolidated balance sheet, the excess of the fair value of the acquired assets and liabilities assumed in excess of their respective book values.

©Cambridge Business Publishers, 2020 2-32

Advanced Accounting, 4th Edition

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 3— Consolidated Financial Statements Subsequent to the Date of Acquisition 1.

If the parent uses the equity method of accounting, it recognizes the Equity Income of the subsidiary, less the depreciation and amortization of the [A] AAP net assets, in the Equity Income account on its income statement. In the consolidation process, this Equity Income account is eliminated and replaced with the revenues and expenses to which it relates. Net income is unaffected because we are replacing the subsidiary’s net income (reported in Equity Income) with its revenues and expenses.

The parent and the subsidiary it controls are viewed as one entity under GAAP. Therefore, only payments of dividends outside of the controlled group affect consolidated Retained Earnings. Another way of looking at it is this: consolidated Retained Earnings represent the cumulative earnings that are available for dividends to the parent’s stockholders. The payment of cash from the subsidiary to its parent only transfers cash from one company to another. That cash is still available to pay dividends up to the remaining balance in consolidated Retained Earnings.

Under the cost method, the parent company, in computation of its pre-consolidation net income, does not include its proportional share of the subsidiary’s net income or the AAP amortization. Instead, the parent company, in computation of its pre-consolidation net income, includes its proportional share of the subsidiary’s dividends. Thus, to convert the parent company’s pre-consolidation net income from cost to equity method, the parent company would deduct the dividends received from the subsidiary, add its proportionate share of the subsidiary’s net income and deduct the proportionate share of the AAP amortization. The relation between the resulting parent company equity method pre-consolidation net income and consolidated net income is that they are the same.

Solutions Manual, Chapter 3

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Under the cost method, the parent company, in computation of its pre-consolidation retained earnings, accumulates net income that does not include the parent’s proportional share of the subsidiary’s net income or the AAP amortization. Instead, the parent company, in computation of its pre-consolidation retained earnings, accumulates net income that includes its proportional share of the subsidiary’s dividends. Thus, to convert the parent company’s pre-consolidation retained earnings from cost to equity method, the parent company would deduct the accumulated dividends (since acquisition) received from the subsidiary, add its accumulated proportionate share of the subsidiary’s net income (since acquisition) and deduct the proportionate share of the accumulated AAP amortization (since acquisition). These three adjustments net to the same amount as adding its proportionate share of the change in retained earnings (i.e., net income minus dividends) of the subsidiary since acquisition and deducting its proportionate share of the accumulated AAP amortization (since acquisition). The relation between the resulting parent company equity method pre-consolidation retained earnings and consolidated retained earnings is that they are the same.

The Equity Investment account appears on the balance sheet of the parent and represents the proportion of the Stockholders’ Equity of the subsidiary that it owns. In the consolidation process, we eliminate the Equity Investment account and replace it with the assets and liabilities of the subsidiary to which it relates. Since assets = liabilities + equity (equity = assets – liabilities), the dollar amount of the Equity Investment account must equal the subsidiary’s assets less its liabilities (i.e., net assets). Although total assets and total liabilities change, consolidated Stockholders’ Equity remains unchanged in the consolidation process.

The Equity Investment account on the parent’s balance sheet includes all of the assets it purchased less the liabilities it assumed in the acquisition (less any subsequent depreciation and amortization of the AAP). In the consolidation process, those unrecorded net assets and liabilities, that were previously included in the Equity Investment account, are broken out separately on the consolidated balance sheet.

The consolidated statement of cash flows reports the cash inflows and outflows between the consolidated entity and outside parties. Intercompany transfers of cash do not generate or use cash on a consolidated basis. The consolidation process eliminates intercompany transactions. As a result, the consolidated statement of cash flows should be prepared from the consolidated income statement and comparative consolidated balance sheets.

©Cambridge Business Publishers, 2020 3-2

Advanced Accounting, 4th Edition

Goodwill is a residual asset, which means that it is the amount left over after we have first allocated the purchase price to all other assets (tangible and intangible) purchased and liabilities assumed. The FASB ASC Glossary defines goodwill as “an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.” Goodwill is not valued directly as are all other assets and liabilities that are acquired in an acquisition. Instead, the value of Goodwill is inferred from the total consideration given to the acquiree less the fair value of the net tangible and intangible assets (other than Goodwill) that are acquired.

In the absence of a market price for the subsidiary’s shares, the parent can use any reasonable basis for determining the value of the subsidiary, including discounted cash flows (DCF) and a multiple of earnings (ASC 350-20-35-22 through 35-24).

10.

There are a number of situations that would require impairment testing in between annual reviews (FASB ASC 350-20-35-30): a. A significant adverse change in legal factors or an adverse action or assessment by a regulator, b. A significant adverse change in the business climate or unanticipated competition, c. A loss of key personnel, d. An expectation that the investee company will be sold, and e. Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

11.

FASB ASC 805-10-50-2 requires the following general disclosures in the footnotes in the year of acquisition and for each year in which comparative information is provided (the subsequent two years): a. The name and a description of the acquiree. b. The acquisition date. c. The percentage of voting equity interests acquired. d. The primary reasons for the business combination and a description of how the acquirer obtained control of the acquire.

Solutions Manual, Chapter 3

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e. For transactions that are recognized separately from the acquisition of assets and assumptions of liabilities in the business combination (see paragraph 805-10-25-20), all of the following: 1. A description of each transaction 2. How the acquirer accounted for each transaction 3. The amounts recognized for each transaction and the line item in the financial statements in which each amount is recognized 4. If the transaction is the effective settlement of a preexisting relationship, the method used to determine the settlement amount. f. The disclosure of separately recognized transactions required in (e) shall include the amount of acquisition-related costs, the amount recognized as an expense, and the line item or items in the income statement in which those expenses are recognized. The amount of any issuance costs not recognized as an expense and how they were recognized also shall be disclosed. g. In a business combination achieved in stages, both of the following: 1. The acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately before the acquisition date 2. The amount of any gain or loss recognized as a result of remeasuring to fair value the equity interest in the acquiree held by the acquirer before the business combination (see paragraph 805-10-25-10) and the line item in the income statement in which that gain or loss is recognized h. If the acquirer is a public business entity, all of the following: 1. The amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period 2. The revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period (supplemental pro forma information) 3. If comparative financial statements are presented, the revenue and earnings of the combined entity for the comparable prior reporting period as though the acquisition date for all business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period (supplemental pro forma information). If disclosure of any of the information required by (h) is impracticable, the acquirer shall disclose that fact and explain why the disclosure is impracticable. In this context, the term impracticable has the same meaning as in paragraph 250-10-45-9. ©Cambridge Business Publishers, 2020 3-4

Advanced Accounting, 4th Edition

12.

Following are some of the limitations of consolidated financial statements: a. Consolidated income does not imply that the parent company has received any or all of the subsidiaries’ net income as cash. b. Unguaranteed debts of a subsidiary are not obligations of the consolidated group. c. Consolidated balance sheets and income statements are a mix of the various subsidiaries, often from different industries. d. Segment disclosures on individual subsidiaries are affected by intercorporate transfer pricing policies. e. Segment disclosures are often too summarized for effective analysis.

13.

The following guidance is provided in the FASB ASC 350-30-55-2 through 55-20: a. The customer list would be amortized over 18 months, management’s best estimate of its useful life, following the pattern in which the expected benefits will be consumed or otherwise used up. b. The patent would be amortized over its five-year useful life to the reporting entity following the pattern in which the expected benefits will be consumed or otherwise used up. The amount to be amortized is 40 percent of the patent’s fair value at the acquisition date (residual value is 60 percent). c. The copyright would be amortized over its 30-year estimated useful life following the pattern in which the expected benefits will be consumed or otherwise used. d. The broadcast license would be deemed to have an indefinite useful life because cash flows are expected to continue indefinitely. Therefore, the license would not be amortized until its useful life is deemed to be no longer indefinite. The license would be tested for impairment annually. e. The trademark would be deemed to have an indefinite useful life because it is expected to contribute to cash flows indefinitely. Therefore, the trademark would not be amortized until its useful life is no longer indefinite. The trademark would be tested for impairment at least annually.

14.

The following guidance is provided in FASB ASC 350-30-35-1 through 35-20: as a result of the projected decrease in future cash flows, since the company determines that the estimated fair value of the trademark ($10 million) is less than its carrying amount ($30 million), an impairment loss of $20 million should recognized. The amount not written off ($10 million) will continue to not be amortized because it is still deemed to have an indefinite useful life. The remaining balance of the trademark will, however, continue to be tested for impairment.

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©Cambridge Business Publishers, 2020 3-5

15.

Following are provisions of FASB ASC 805-20-25-2 and FASB Concept Statement #6 relating to restructuring activities. a. Typical restructuring activities include the costs of a plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees. b. A liability is defined in FASB Concepts Statement No. 6, Elements of Financial Statements as, “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” FASB ASC 805-20-252 provides the following guidance with respect to the accounting for restructuring costs: “costs the acquirer expects but is not obligated to incur in the future to affect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognize those costs as part of applying the acquisition method. Instead, the acquirer recognizes those costs in its postcombination financial statements in accordance with other applicable generally accepted accounting principles (GAAP).” (emphasis added) Bottom line, unless the subsidiary has already adopted a plan and is obligated for its completion (in which case the expense would have already been recognized in its financial statements), the restructuring liability and related expense should not be recognized at acquisition. Instead, those costs should be recognized in the future when the restructuring plan is adopted.

16.

Answer: b Each statement is true, except for b. For passive noncontrolling marketable equity investments with readily determinable fair values, the investor must measure the investments at fair value at each balance sheet date and report the change in fair value as part of net income. This question reviews a wide variety of concepts that should have been covered in previous courses and that integrate with topics in this textbook. (Note that in early 2016, the FASB eliminated the separate trading and available for sale categories for passive investments in equity securities. Instead, all changes in fair value for passive equity investments (that have readily determinable fair values) are immediately reflected in net income. These rules took effect for public business entities for fiscal years beginning after December 15, 2017 (e.g., in 2018 for a calendar-year public company), and for all other entities (e.g., private companies) for fiscal years beginning after December 15, 2018.)

17.

Answer: d Each statement is true, except for d. The fair value option is available for all equity investments, except for controlling investments in subsidiaries.

©Cambridge Business Publishers, 2020 3-6

Advanced Accounting, 4th Edition

18.

Answer: d Under the equity method, when there are no intercompany profits between affiliated companies, the pre-consolidation investment at any point in time can be determined via the following equation: Investment in Subsidiary = p% x stockholders equity of S + unamortized p% AAP Given that this is a 100% investment and there is no AAP or fair value-book value differences for the net assets of the subsidiary on the acquisition date, then, on any date, the pre-consolidation investment account will equal the stockholders’ equity of the Subsidiary on that date. SE(S) on 12/31/19 = $600,000

19.

Answer: b Under the equity method, when there are no intercompany profits between affiliated companies, the pre-consolidation income from investee for any given year can be determined via the following equation: Income from Subsidiary = p% x NI(S) - p% AAP for the period Given that this is a 100% investment and there is no AAP or fair value-book value differences for the net assets of the subsidiary, then, for any period after the acquisition, the Income from Subsidiary account will equal the net income of the Subsidiary for that period. NI(S) for the year ended 12/31/19 = $95,000

20.

Answer: b Under the cost method, the pre-consolidation investment at any point in time will equal the investment on the acquisition date. Given that there is no AAP or fair value-book value differences, the investment account equals p% x the stockholders equity on the acquisition date. In this problem, we are given the stockholder equity at 12/31/17. We need to back out the changes in stockholders equity during 2017 to back into the stockholders equity on 1/1/17(i.e., SE(S)12/31/17 – NI(S)2017 + Div(S)2017 = SE(S)1/1/17). Thus, the pre-consolidation investment account on 1/1/17 equals $450,000 (i.e., $500,000 $75,000 + $25,000), which is also the balance under the cost method on December 31, 2019.

21.

Answer: a Under the cost method, the pre-consolidation income from investee is equal to the dividends received from the investee (i.e., $40,000 for the year ended 12/31/19).

Solutions Manual, Chapter 3

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22.

Answer: b Under the equity method, when there are no intercompany profits between affiliated companies, the pre-consolidation investment at any point in time can be determined via the following equation: Investment in Subsidiary = p% x stockholders equity of S + unamortized p% AAP In this case, the acquisition-date AAP was equal to $331,250 (i.e., $112,500 + $218,750). The $112,500 is amortized over 6 years, which means it is amortized at a rate of $18,750/year. After three years, it has an unamortized balance of $56,250. The $218,750 represents goodwill, which is not amortized. Thus, the pre-consolidation balance in the investment account can be calculated as follows: Investment in Subsidiary12/31/19 = (100% x 600,000) of S + ($56,250 + $218,750) = $875,000

23.

Answer: c Under the equity method, when there are no intercompany profits between affiliated companies, the pre-consolidation income from investee for any given year can be determined via the following equation: Income from Subsidiary = p% x NI(S) - p% AAP for the period In this case, the acquisition-date AAP was equal to $331,250 (i.e., $112,500 + $218,750). The $112,500 is amortized over 6 years, which means it is amortized at a rate of $18,750/year. After three years, it has an unamortized balance of $56,250. The $218,750 represents goodwill, which is not amortized. Thus, the pre-consolidation amount in the income from investee account can be calculated as follows: Income from Subsidiary2019 = p% x NI(S) ‒ p% AAP for the period = (100% x $95,000) ‒ $18,750 = $76,250

©Cambridge Business Publishers, 2020 3-8

Advanced Accounting, 4th Edition

24.

Answer: b Under the cost method, the parent does not adjust its pre-consolidation equity investment account after the acquisition date. In addition, the parent company does not recognize the equity-method income statement effects in its pre-consolidation income statements. Because retained earnings is the place where income statement effects accumulate over time, this means that the parent company’s pre-consolidation retained earnings will move further away from the amount of the consolidated beginning balance of retained earnings. (Recall that, under the equity method, the parent’s reconsolidation net income and stockholders’ equity is the same as consolidated income attributable to the controlling interest and consolidated retained earnings. As we describe in the text, when the parent company uses the cost method, the way to arrive at the correct consolidated beginning balance of retained earnings is to make the following adjustment to beginning retained earnings and to the investment account: [ADJ] = (p% x Change in subsidiary RE since acquisition thru BOY) – accum p% AAP amort. thru BOY In this case, p% = 100%, so the amount of the [ADJ] is computed as follows: [ADJ] = ($345,000 – $250,000) – ($18,750 + $18,750) = $95,000 – $37,500 = $57,500

25.

Answer: d When the parent company uses the cost method, the income from investee will equal p% x investee dividends. In this case, p% = 100%. The [C] will eliminate the income from investee, and the dividends declared by the investee equals $40,000 during 2019.

26.

Answer: a Goodwill = FV entire subsidiary – FV Identifiable net assets of the subsidiary When an investor purchases 100% of a subsidiary in a single transaction, the purchase price is presumed to represent the FV of the entire subsidiary (i.e., $5,920,000 in this case). We can determine the FV of the identifiable net assets (FVINA) by taking the reported book value of the net assets (BVNA) of the subsidiary and adding any fair-value book value differences. In this case, the FVINA(S) equals $4,160,000 (i.e., $3,040,000 + $1,120,000). Thus the goodwill equals $1,760,000 (i.e., $5,920,000 - $4,160,000).

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-9

Note: For questions 27-30, the following is the implied consolidation spreadsheet based on the facts in the problem. Note that this competed spreadsheet was not required. However, this worksheet could be used as an effective tool in discussing the various subparts of the multiple choice problems. Income Statement Revenues Income from Investee Expenses Consol. Net Income NCI

Investor $2,232,000 141,600 (1,800,000) 573,600

Investee $307,200 0 (156,000) 151,200

$573,600

$151,200

$720,000 573,600 (60,000) $1,233,600

$36,000 151,200 (36,000) $151,200

$283,200

All Other Assets Total Assets

4,598,400 $4,881,600

384,000 $384,000

Liabilities Common Stock & APIC Retained Earnings Total Liabilities and Equity

$2,880,000 768,000 1,233,600 $4,881,600

$148,800 84,000 151,200 $384,000

Net Income Retained Earnings Statement Retained Earnings, January 1 Net Income Dividends declared Retained Earnings, December 31 Balance Sheet Investment in Investee

©Cambridge Business Publishers, 2020 3-10

Dr [C] [D]

141,600 9,600

Consol 2,539,200 (1,965,600) 573,600 573,600

[E]

[A]

[E]

36,000

57,600

[C]

36,000

[C] [E] [A] [D]

105,600 120,000 57,600 9,600

84,000 328,800

328,800

720,000 573,600 (60,000) 1,233,600

5,030,400 5,030,400 3,028,800 768,000 1,233,600 5,030,400

Advanced Accounting, 4th Edition

27.

Answer: c Given that there are no intercompany transactions between the investor and the investee, the amount of consolidated expenses will equal the parent’s expenses plus the subsidiary expenses, adjusted of any acquisition accounting premium (AAP) amortization. Although we are not given the AAP amortization, we can infer the amount by comparing the Income from Investee account to the Net income of the investee. Because p% = 100%, any difference is equal to the AAP amortization. In this case, AAP amortization during the year ended December 31, 2019 equals $9,600 (i.e., $151,200 $141,600). Thus, consolidated expenses can be determined as follows: Consolidated expenses = Expenses (P) + Expenses (S) + AAP Amortization = $1,800,000 + $156,000 + $9,600 = $1,965,600

28.

Answer: b Given that there are no intercompany transactions between the investor and the investee (or related intercompany profits) and the parent uses the equity method, then the reported pre-consolidation net income of the parent company equals consolidated net income (i.e., $573,600).

29.

Answer: c Given that the parent uses the equity method, then the reported pre-consolidation retained earnings of the parent company equals consolidated retained earnings (i.e., $1,233,600).

30.

Answer: a Given that there are no intercompany transactions or related balances, then the amount of consolidated totals assets will equal the Parent’s total assets after deducting the investment account plus the subsidiary’s total assets plus the unamortized AAP implicit in the investment account at the end of the year. We will compute each of these items separately: •

Parent’s total assets after deducting the investment account = $4,881,600 – $283,200 = $4,598,400

•

Subsidiary’s total assets = $384,000

•

Unamortized AAP at December 31, 2019 = Investment12/31/2019 – SE(S)12/31/2019 = $283,200 – ($84,000 + $151,200) = $48,000

Adding these components together yields consolidated total assets equal to $5,030,400 (i.e., $4,598,400 + $384,000 + $48,000).

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31. – =

Total value of the consideration given Fair value of the tangible and intangible assets Goodwill

$2,100,000 1,614,000 $ 486,000

The Goodwill asset is not amortized since it is deemed to have an indefinite life. Instead, it is tested at least annually for impairment and written down if found to be impaired. 32.

a. The amount of goodwill in this acquisition is computed as follows: – =

Total value of the consideration given Fair value of the tangible and intangible assets Goodwill

$3,040,000 1,752,000 $1,288,000

The Goodwill asset is not amortized since it is deemed to have an indefinite life. Instead, it is tested at least annually for impairment and written down if found to be impaired. b. The total value of the consideration increases by $176,000. Since the fair value of the net tangible and intangible assets is unchanged, the amount assigned to the Goodwill asset increases by $176,000. c. The goodwill computation is as follows: – =

Total value of the consideration given Fair value of the tangible and intangible assets Goodwill

$3,040,000 3,512,000 $(472,000)

This is a bargain purchase. Assuming a cash purchase for all of the outstanding voting shares of the acquiree, the acquisition would be recorded as follows: Equity investment Cash Gain on bargain purchase

3,512,000 3,040,000 472,000

(to record the acquisition and bargain purchase)

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Advanced Accounting, 4th Edition

33.

$ 4,500,000 4,300,000 200,000 480,000 $ (280,000)

The goodwill is found to be impaired. c. Goodwill must be written down to its implied value of $200,000 with the following journal entry: Equity income from S Equity investment

280,000 280,000

(to write down the book value of goodwill)

Goodwill will now be reported on the consolidated balance sheet at $200,000, and a loss on the write-down of goodwill will be reported in the consolidated income statement. The goodwill asset cannot be subsequently written up should the fair value of the subsidiary improve. 34.

Solutions Manual, Chapter 3

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b. After adoption of ASC 2017-04, Goodwill is assumed to be impaired when the carrying value of a reporting unit exceeds to fair value of that reporting unit. In addition, the amount by which the carrying value of the (entire) reporting unit exceeds the fair value of the (entire) reporting unit will be completely attributable to impaired goodwill. (If the amount by which the carrying value of the reporting unit exceeds the fair value of the reporting unit is greater than the goodwill balance, then the impairment is limited by the goodwill balance. That is, when this occurs, goodwill is written down to a zero balance with no further impairment recognized as a result of the goodwill impairment test.) In this exercise, the fair value of the Equity Investment (i.e., the reporting unit) is $4,500,000, which is below its carrying amount of $5,020,000. Thus, Goodwill is impaired. This difference of $520,000 is greater than the Goodwill balance of $480,000. Therefore, the amount of the Goodwill impairment is limited to the Goodwill balance of $480,000. c. Goodwill must be written down to its implied value of $0 with the following journal entry: Equity income from S Equity investment

480,000 480,000

(to write down the book value of goodwill)

$ 2,750,000 2,500,000 250,000 150,000 $ 0*

* Because implied fair value of Goodwill is greater than the carrying value of Goodwill.

d. Given no Goodwill impairment exists, no journal entry is necessary. ©Cambridge Business Publishers, 2020 3-14

Advanced Accounting, 4th Edition

36.

a. Goodwill impairment testing must be conducted annually, and on approximately the same date each year. Companies can either elect to proceed directly to the quantitative impairment test, or avail themselves of the opportunity to conduct a qualitative impairment test. If a company elects to conduct a qualitative impairment test, then the company must conduct a quantitative impairment test if the relevant events and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. b. After adoption of ASC 2017-04, Goodwill is assumed to be impaired when the carrying value of a reporting unit exceeds to fair value of that reporting unit. In addition, the amount by which the carrying value of the (entire) reporting unit exceeds the fair value of the (entire) reporting unit will be completely attributable to impaired goodwill. (If the amount by which the carrying value of the reporting unit exceeds the fair value of the reporting unit is greater than the goodwill balance, then the impairment is limited by the goodwill balance. That is, when this occurs, goodwill is written down to a zero balance with no further impairment recognized as a result of the goodwill impairment test.) In this exercise, the fair value of the Equity Investment (i.e., the reporting unit) is $2,750,000, which is below its carrying amount of $2,950,000. Thus, Goodwill is impaired. This difference of $200,000 is greater than the Goodwill balance of $150,000. Therefore, the amount of the Goodwill impairment is limited to the Goodwill balance of $150,000. c. Goodwill must be written down to its implied value of $0 with the following journal entry: Equity income from S Equity investment

150,000 150,000

(to write down the book value of goodwill)

The loss on the write-down of goodwill will be reported in the consolidated income statement. After impairment, Goodwill cannot be subsequently written up if the fair value of the subsidiary increases. d. If the fair value of the subsidiary is $2,810,000, then the reporting unit is impaired because the carrying value of reporting unit of $2,950,000 is still below the fair value. The difference between the fair value and the carrying value (i.e., $2,810,000 - $2,950,000 = $(140,000)) is the amount of the impairment because it is less than the Goodwill balance. Goodwill must be written down to its implied value of $10,000 with the following journal entry: Equity income from S Equity investment

140,000 140,000

(to write down the book value of goodwill)

©Cambridge Business Publishers, 2020 3-15

37.

a. The allocation of the purchase price to the restructuring liability reduced the dollar amount of net identifiable assets recognized and, as a result, increased the dollar amount of goodwill recognized by $41.2 million. b. The restructuring liability was accrued by Elan (the target company) prior to the acquisition. As a result, the associated expense was reflected in Elan’s income statement before the acquisition. c. As Perrigo makes payments under the restructuring plan, the debit will be to the restructuring liability that it recognized in the acquisition, not to an expense account. As a result, Perrigo’s post-acquisition pretax profit will be $41.2 million higher.

38.

Working capital—Normal accounting for collection of receivables, payment of payables, etc. Inventories—Normal accounting for removal of inventories and recognition of cost of goods sold. Property, plant and equipment – Depreciation over useful life. Identifiable intangible assets—Amortization over useful life. In-process research & development—Write off if abandoned, amortize over useful life when completed if not abandoned. Other noncurrent assets—Depreciate/amortize over useful life and test for impairment annually. Long-term debt—Amortize (increase) the carrying amount with the offsetting debit to expense. Benefit obligations—Amortize (increase) the carrying amount with the offsetting debit to expense. Net tax accounts—Record reduction of the liability as taxes are paid as is customary for deferred tax liabilities. Other noncurrent liabilities—Reduce when paid. Goodwill—No amortization. Test annually for impairment.

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Advanced Accounting, 4th Edition

39.

a. The $4.609 billion balance in the PPE account is the book value on Grupo Modelo’s balance sheet on the date of the acquisition. The addition of $0.99 billion reflects the AAP and the $4.708 billion is the fair value of the PPE assets on the date of acquisition. b. The Goodwill account represents the Goodwill asset on Grupo Modelo’s balance sheet on the date of the acquisition. AB InBev does not recognize the previously, existing goodwill asset. Instead, it only recognizes goodwill that is implicit in the assignment of the purchase price in the acquisition of Anheuser-Busch. c. This is the amount of incremental Goodwill recognized after zeroing out the old Goodwill (i.e., discussed in part (b)) on Grupo Modelo’s pre-acquisition balance sheet and considering the acquisition-date fair values of the identifiable net assets. d. This most likely relates to internally developed brands controlled by Grupo Modelo. e. The increase in Deferred Tax Liabilities reflects the expected taxes that will be paid on the higher value of the net assets acquired.

40.

a. Sales = $6,000,000 + $1,500,000 = $7,500,000 b. Equity income = $0 c. Operating expenses = $1,000,000 + $400,000 + $30,000 = $1,430,000 d. Accounts receivable = $1,000,000 + $348,000 = $1,348,000 e. Equity investment = $0 f. PPE, net = $4,800,000 + $824,000 + $330,000 ‒ $30,000 = $5,924,000 g. Goodwill = $400,000 h. Common stock = $640,000 i.

Retained earnings = $2,640,000

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-17

41.

a. Cost of goods sold = $2,000,000 + $500,000 = $2,500,000 b. Equity income = $0 c. Operating expenses = $450,000 + $200,000 + $50,000 = $700,000 d. Cash = $700,000 + $100,000 = $800,000 e. Equity investment = $0 f. PPE, net = $3,000,000 + $800,000 = $3,800,000 g. Patent = $350,000 h. Goodwill = $300,000

42.

Common stock = $500,000

Retained earnings = $3,000,000

a. Sales = $3,000,000 + $800,000 = $3,800,000 b. Equity income = $0 c. Operating expenses = $1,000,000 + $150,000 + $40,000 = $1,190,000 d. Inventories = $800,000 + $280,000 = $1,080,000 e. Equity Investment = $0 f. PPE, net = $3,000,000 + $600,000 + $70,000 ‒ $10,000 = $3,360,000 g. Patent = $150,000 ‒ $30,000 = $120,000 h. Common Stock = $400,000 i.

Retained Earnings = $2,010,000

©Cambridge Business Publishers, 2020 3-18

Advanced Accounting, 4th Edition

43.

a. Sales = $5,000,000 + $1,200,000 = $6,200,000 b. Investment income = $0 c. Operating expenses = $1,500,000 + $400,000 + $25,000 = $1,925,000 d. Inventories = $1,600,000 + $500,000 = $2,100,000 e. Equity Investment = $0 f. PPE, net = $3,000,000 + $900,000 + $225,000 ‒ $25,000 = $4,100,000 g. Goodwill = $400,000 h. Common Stock = $500,000 i.

44.

Retained Earnings = $1,840,000 + ($660,000 ‒ $280,000) – (2 x $25,000) = $2,170,000

a. Sales = $2,400,000 + $900,000 = $3,300,000 b. Investment income = $0 c. Operating expenses = $600,000 + $250,000 + $50,000 = $900,000 d. Inventories = $2,400,000 + $500,000 = $2,900,000 e. Equity Investment = $0 f. PPE, net = $4,000,000 + $1,000,000 + $300,000 ‒ $50,000 = $5,250,000 g. Goodwill = $250,000 h. Common Stock = $500,000 i.

45.

Retained Earnings = $1,800,000 + ($550,000 ‒ $80,000) – (3 x $50,000) = $2,120,000

a. Sales = $3,500,000 + $1,600,000 = $5,100,000 b. Investment income = $0 c. Operating expenses = $1,000,000 + $600,000 + $75,000 = $1,675,000 d. Inventories = $1,400,000 + $500,000 = $1,900,000 e. Equity Investment = $0 f. PPE, net = $4,500,000 + $900,000 + $325,000 ‒ $25,000 = $5,700,000

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-19

g. Patent = $100,000 h. Goodwill = $200,000

46.

Common Stock = $1,000,000

Retained Earnings = $2,300,000 + ($800,000 ‒ $360,000) – (4 x $75,000) = $2,440,000

a. Equity investment Common stock APIC

600,000 30,000 570,000

(to record the acquisition)

b. Beginning Equity Investment Equity income Dividends Ending Equity Investment

$600,000 180,000 (50,000) $730,000

c. [C]

[E]

Equity income (P) Dividends (S) Equity investment (P) (to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)

180,000

Common stock (S) @ BOY APIC (S) @ BOY Retained earnings (S) @ BOY Equity Investment (P) @ BOY (to eliminate the portion of the investment account related to the book value of the subsidiary's Stockholders' Equity @ BOY)

200,000 300,000 100,000

[A]

No Accounting Acquisition Premium

[D]

No (AAP) in problem

[I]

No intercompany items in problem

©Cambridge Business Publishers, 2020 3-20

50,000 130,000

600,000

Advanced Accounting, 4th Edition

46.

d. Income Statement

Parent

Subsidiary

Sales

3,000,000

1,740,000

4,740,000

Cost of goods sold

(1,600,000)

(960,000)

(2,560,000)

Gross profit

1,400,000

780,000

2,180,000

Equity income

180,000

Operating expenses Net income

[C]

Consolidated

180,000

(1,200,000)

(600,000)

(1,800,000)

380,000

180,000

380,000

1,000,000

100,000

Statement of RE: Beginning retained earnings

[E]

100,000

1,000,000

Net income

380,000

180,000

Dividends

(140,000)

(50,000)

380,000

Ending retained earnings

1,240,000

230,000

1,240,000

Cash

240,000

100,000

340,000

Accounts receivable

400,000

360,000

760,000

Inventory

620,000

430,000

1,050,000

Equity investment

730,000

50,000

[C]

(140,000)

Balance sheet: Assets

PPE, net

1,700,000

130,000

[C]

600,000

[E]

840,000

2,540,000

Patent

Goodwill

0 3,690,000

1,730,000

4,690,000

Accounts payable

250,000

160,000

410,000

Accrued liabilities

300,000

240,000

540,000

600,000

500,000

200,000

[E]

200,000

500,000

APIC

1,400,000

300,000

[E]

300,000

1,400,000

Retained earnings

1,240,000

230,000

3,690,000

1,730,000

Liabilities and SE

Long-term liabilities Common stock

Solutions Manual, Chapter 3

1,240,000 780,000

780,000

4,690,000

©Cambridge Business Publishers, 2020 3-21

47.

a. Equity investment Common stock APIC

1,000,000 20,000 980,000

(to record the acquisition)

b. [ADJ] BOY Equity Investment Beginning retained earnings (P) (to correct beginning retained earnings of the parent for cost method accounting for all period prior to the beginning of the current period. The acquisition occurred at the beginning of the current period, so it is not necessary in this problem.) [C]

[E]

0 0

Investment income (P) Dividends (S) (to eliminate all investment accounting recorded by the parent during the year)

60,000

160,000 200,000 640,000

[A]

No Accounting Acquisition Premium

[D]

(AAP) in problem

[I]

No intercompany items in problem

©Cambridge Business Publishers, 2020 3-22

60,000

1,000,000

Advanced Accounting, 4th Edition

47.

c. Income Statement

Parent

Subsidiary

Sales

3,400,000

1,600,000

5,000,000

Cost of goods sold

(1,560,000)

(900,000)

(2,460,000)

Gross profit

1,840,000

700,000

2,540,000

Consolidated

Investment income

60,000

Operating expenses

(1,300,000)

(500,000)

(1,800,000)

600,000

200,000

740,000

Beginning retained earnings

900,000

640,000

Net income

600,000

200,000

Dividends

(250,000)

(60,000)

Ending retained earnings

1,250,000

780,000

1,390,000

Cash

350,000

200,000

550,000

Accounts receivable

550,000

500,000

1,050,000

Inventory

700,000

660,000

1,360,000

Net income

[C]

60,000

Statement of RE: [E]

640,000

900,000 740,000 60,000

[C]

(250,000)

Balance sheet: Assets

Equity investment

1,000,000

PPE, net

1,200,000

1,000,000

900,000

[E]

2,100,000

Patent

Goodwill

0 3,800,000

2,260,000

5,060,000

Accounts payable

200,000

120,000

320,000

Accrued liabilities

650,000

300,000

950,000

Liabilities and SE

Long-term liabilities

700,000

600,000

160,000

[E]

160,000

600,000

APIC

1,100,000

200,000

[E]

200,000

1,100,000

Retained earnings

1,250,000

780,000

3,800,000

2,260,000

Common stock

700,000

1,390,000 1,060,000

1,060,000

5,060,000

d. It is zero because the [ADJ] entry corrects the beginning retained earnings of the parent for all accumulated years of cost method accounting for periods prior to the current one. Because the acquisition occurred at the beginning of the current year, there are prior periods prior to the beginning of the current one.

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-23

48.

a. Equity investment Common stock APIC (to record the acquisition)

1,770,000 59,000 1,711,000

b. Subsidiary net income Depreciation / amortization Equity income

$200,000 (50,000) $150,000

Beginning Equity Investment Equity Income Dividends Ending Equity Investment

$1,770,000 150,000 (60,000) $1,860,000

d. [C] Equity income (P) Dividends (S) Equity Investment (P)

150,000 60,000 90,000

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)

[E] Common stock (S) @ BOY APIC (S) @ BOY Retained earnings (S) @ BOY Equity investment (P) @ BOY

150,000 200,000 800,000 1,150,000

(to eliminate the portion of the investment account related to the book value of the subsidiary's Stockholders' Equity @ BOY)

[A] PPE, net (S) @ BOY Patent (S) @ BOY Goodwill (S) @ BOY Equity investment (P) @ BOY

120,000 320,000 180,000 620,000

(to assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts)

[D] Operating expenses (S) PPE, net (S) Patent (S)

50,000 10,000 40,000

(depreciates/amortizes AAP so that income statement includes the activity and the balance sheet accounts include ending balances in appropriate accounts)

[I]

No intercompany items in problem

©Cambridge Business Publishers, 2020 3-24

Advanced Accounting, 4th Edition

48.

e. Consolidation Entries Parent

Subsidiary

Consolidated

5,500,000

1,600,000

7,100,000

Income statement Sales Cost of goods sold

(3,800,000)

(950,000)

(4,750,000)

Gross profit

1,700,000

650,000

2,350,000

Equity income

150,000

Operating expenses Net income

[C]

150,000

[D]

50,000

(1,500,000)

(1,000,000)

(450,000)

850,000

200,000

2,800,000

800,000

850,000

200,000

850,000 (160,000)

850,000

Statement of retained earnings Beginning retained earnings Net income

[E]

2,800,000

800,000

Dividends

(160,000)

(60,000)

Ending retained earnings

3,490,000

940,000

[C]

60,000

300,000

120,000

420,000

3,490,000

Balance sheet Assets Cash Accounts receivable

700,000

360,000

1,060,000

Inventory

940,000

600,000

1,540,000

Equity investment

1,860,000

[C]

90,000

[E] 1,150,000 [A] 620,000 [A]

120,000

[D]

10,000

4,430,000

Patent

[A]

320,000

[D]

40,000

280,000

Goodwill

[A]

180,000

PPE, net

3,400,000

920,000

180,000

7,200,000

2,000,000

7,910,000

Accounts payable

220,000

100,000

320,000

Accrued liabilities

340,000

180,000

520,000

Long-term liabilities

450,000

430,000

880,000

Common stock

600,000

150,000

Liabilities and SE

APIC

2,100,000

200,000

Retained earnings

3,490,000

940,000

7,200,000

2,000,000

[E] [E]

150,000

600,000

200,000

2,100,000 3,490,000

1,970,000

7,910,000

f. We recognized the additional PPE assets, the Patent asset, and the Goodwill asset in the consolidation process. These assets were included in the Equity Investment account on the parent’s balance sheet and are now reported explicitly on the consolidated balance sheet.

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-25

49.

a. Equity investment Common stock APIC

2,850,000 47,500 2,802,500

(to record the acquisition)

b. Subsidiary net income Depreciation / amortization

$300,000 (85,000) $215,000

Beginning Equity Investment Equity Income Dividends Ending Equity Investment

$2,850,000 215,000 (45,000) $3,020,000

d. ‒ = *

Total value of the consideration given Fair value of the tangible and intangible assets* Goodwill BOY Book value of subsidiary net assets PPE asset License asset Customer List asset Fair value of net assets acquired

©Cambridge Business Publishers, 2020 3-26

$2,850,000 2,610,000 $240,000

$1,800,000 320,000 210,000 280,000 $2,610,000

Advanced Accounting, 4th Edition

49.

e. The consolidation spreadsheet yields the amounts for the requested balance sheet accounts: Income Statement

Parent

Subsidiary

Consolidated

Sales

7,000,000

2,000,000

9,000,000

Cost of goods sold

(4,515,000)

(1,200,000)

(5,715,000)

Gross profit

2,485,000

800,000

3,285,000

Equity income

215,000

[C]

215,000

[D]

85,000

(2,085,000)

Operating expenses

(1,500,000)

(500,000)

Net income

1,200,000

300,000

Beginning retained earnings

3,600,000

1,245,000

Net income

1,200,000

300,000

Dividends

(200,000)

(45,000)

Ending retained earnings

4,600,000

1,500,000

4,600,000

Cash

580,000

520,000

1,100,000

Accounts receivable

900,000

450,000

1,350,000

Inventory

1,400,000

530,000

1,930,000

Equity investment

3,020,000

1,200,000

Statement of RE: [E]

1,245,000

3,600,000 1,200,000 45,000

[C]

(200,000)

Balance sheet: Assets

PPE, net

5,000,000

1,500,000

170,000

[C]

1,800,000

[E]

1,050,000

[A]

320,000

20,000

[D]

6,800,000

License

[A]

210,000

30,000

[D]

180,000

Customer list

[A]

280,000

35,000

[D]

245,000

Goodwill

[A]

240,000

10,900,000

3,000,000

11,845,000

Accounts payable

500,000

165,000

665,000

Accrued liabilities

700,000

220,000

920,000

Long-term liabilities

1,200,000

560,000

1,760,000

Liabilities and SE

Common stock

800,000

200,000

[E]

200,000

800,000

APIC

3,100,000

355,000

[E]

355,000

3,100,000

Retained earnings

4,600,000

1,500,000

4,600,000

10,900,000

3,000,000

3,150,000

11,845,000

f. The intangible assets reported on the year-end consolidated balance sheet include the License ($180,000 with one year of amortization), the Customer List ($245,000 with one year of amortization) and Goodwill ($240,000).

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-27

50.

a. The balance of the Equity Investment at the beginning of the year equals the stockholders’ equity of the subsidiary plus the undepreciated and unamortized balances of the [A] assets. Since the [A] assets with a useful life have now been depreciated or amortized for two years, the beginning balance of the Equity Investment account is as follows: BOY Stockholders’ Equity PPE, net Patent License Goodwill

$1,028,000 200,000 180,000 128,000 180,000 $1,716,000

($190,000+$158,000+$680,000) ($240,000 – 2 x $20,000) ($240,000 – 2 x $30,000) ($160,000 – 2 x $16,000)

b. Subsidiary net income Depreciation / amortization

$186,000 (66,000) $120,000

Beginning Equity investment Equity Income Dividends Ending Equity Investment

$1,716,000 120,000 (36,000) $1,800,000

d. [C]

Equity income (P) Dividends (S) Equity investment (P)

120,000 36,000 84,000

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)

[E]

Common stock (S) @ BOY APIC (S) @ BOY Retained earnings (S) @ BOY Equity investment (P) @ BOY

190,000 158,000 680,000 1,028,000

(to eliminate the portion of the investment account related to the book value of the subsidiary's Stockholders' Equity @ BOY)

[A]

PPE, net (S) @ BOY Patent (S) @ BOY License (S) @ BOY Goodwill (S) @ BOY Equity investment (P) @ BOY

200,000 180,000 128,000 180,000 688,000

(to assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts) continued

©Cambridge Business Publishers, 2020 3-28

Advanced Accounting, 4th Edition

50.

d. continued [D] Operating expenses (depreciation and amort.) PPE, net Patent License

66,000 20,000 30,000 16,000

(to record depreciation and amortization expense for the [A] assets)

[I]

No intercompany transactions

e. Consolidating Entries Dr Cr

Parent

Subsidiary

Income statement Sales Cost of goods sold Gross profit Equity income Operating expenses Net income

4,800,000 (3,500,000) 1,300,000 120,000 (720,000) 700,000

1,300,000 (774,000) 526,000

Statement of retained earnings: Beginning retained earnings Net income Dividends Ending retained earnings

1,600,000 700,000 (360,000) 1,940,000

680,000 186,000 (36,000) 830,000

Balance sheet Assets Cash Accounts receivable Inventory Equity investment

720,000 1,130,000 1,450,000 1,800,000

330,000 280,000 500,000

2,900,000

780,000

8,000,000

1,890,000

3,860,000 150,000 112,000 180,000 8,712,000

760,000 840,000 2,150,000 610,000 1,700,000 1,940,000 8,000,000

122,000 160,000 430,000 190,000 158,000 830,000 1,890,000

882,000 1,000,000 2,580,000 610,000 1,700,000 1,940,000 8,712,000

PPE, net Patent License Goodwill Liabilities and equity Accounts payable Accrued liabilities Long-term liabilities Common stock APIC Retained earnings

Solutions Manual, Chapter 3

(340,000) 186,000

[C] [D]

120,000 66,000

[E]

680,000

6,100,000 (4,274,000) 1,826,000 0 (1,126,000) 700,000

[C]

[A] [A] [A] [A]

[E] [E]

200,000 180,000 128,000 180,000

[C] [E] [A] [D] [D] [D]

36,000

84,000 1,028,000 688,000 20,000 30,000 16,000

190,000 158,000 1,902,000

Consolidated

1,902,000

1,600,000 700,000 (360,000) 1,940,000

1,050,000 1,410,000 1,950,000 0

©Cambridge Business Publishers, 2020 3-29

51.

a. Subsidiary net income Depreciation / amortization

$95,000 (25,000) $70,000

Beginning Equity Investment Equity Income Dividends Ending Equity Investment

$550,000* 70,000 (20,000) $600,000

BOY stockholders’ equity PPE, net Customer list Goodwill

c. 1. PPE, net

$280,000 40,000 30,000 200,000 $550,000

($25,000 + $130,000 + $125,000) ($80,000 – 4 x $10,000) ($90,000 – 4 x $15,000)

= $2,300,000 + $225,000 + $40,000 - $10,000 = $2,555,000

2. Customer list

= $30,000 - $15,000 = $15,000

3. Retained earnings

= $1,300,000 (under equity method, same as parent’s)

d. Consolidated net income will always equal the net income of the parent so long as the parent employs the equity method to account for its Equity Investment. e. The subsidiary’s stockholders’ equity is not held by a party outside of the economic entity represented in the consolidated financial statements and, as a result, should not be included in the consolidated stockholders’ equity. f. [C]

Equity income (P) Dividends (S) Equity investment (P)

70,000 20,000 50,000

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)

[E]

Common stock (S) @ BOY APIC (S) @ BOY Retained earnings (S) @ BOY Equity investment (P) @ BOY

25,000 130,000 125,000 280,000

(to eliminate the portion of the investment account related to the book value of the subsidiary's stockholders' equity @ BOY) continued

©Cambridge Business Publishers, 2020 3-30

Advanced Accounting, 4th Edition

51.

f. continued [A]

PPE, net (S) @ BOY Customer List (S) @ BOY Goodwill (S) @ BOY Equity investment (P) @ BOY

40,000 30,000 200,000 270,000

(to assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts)

[D]

Operating expenses (depreciation and amort)

25,000

PPE, net Customer list

10,000 15,000

(to record depreciation and amortization expense for the [A] assets)

[I] 52.

No intercompany transactions Under the cost method (and 100% ownership), it equals the dividends of the subsidiary

b. Under the cost method, it is the original purchase price for the subsidiary. c. Parent Net Income (cost method) Deduct: p% of subsidiary dividends Add: p% of subsidiary net income Deduct: p% AAP amortization for year Parent Net Income (equity method = consolidated)

$1,700,000 (100,000) 260,000 (50,000) $1,810,000

Investment balance (cost) Deduct: AAP on acquisition date Deduct: Common stock (S) on acquisition date Deduct: APIC (S) on acquisition date Retained earnings (S) on acquisition date

$1,760,000 (1,100,000) (110,000) (150,000) $400,000

e. The subsidiary’s stockholders’ equity is not held by a party outside of the economic entity represented in the consolidated financial statements and, as a result, should not be included in the consolidated stockholders’ equity.

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-31

52.

f. [ADJ]

[C]

[E]

[A]

BOY Equity Investment Beginning retained Earnings (P)

240,000

Investment income Dividends

100,000

BOY Common stock (S) BOY APIC (S) Beginning retained earnings (S) Equity investment

110,000 150,000 840,000

PPE Patent Goodwill

260,000 240,000 400,000

240,000

100,000

1,100,000

Equity Investment [D]

53.

900,000

Operating expenses PPE Patent

50,000 20,000 30,000

a. The balance at the beginning of the year of the Equity Investment account equals the Stockholders’ Equity of the subsidiary plus the undepreciated and unamortized balances of the [A] assets. Since the [A] assets with a useful life have now been depreciated or amortized for three years, the beginning balance of the Equity Investment account is as follows: BOY Stockholders’ Equity PPE, net Customer List Royalty Agreement Database Goodwill

$1,288,000 75,000 200,000 180,000 120,000 500,000 $2,363,000

($150,000 +$510,000 +$628,000) ($120,000 – 3 x $15,000) ($320,000 – 3 x $40,000) ($240,000 – 3 x $20,000) ($300,000 – 3 x $60,000)

b. Subsidiary net income Depreciation / amortization

©Cambridge Business Publishers, 2020 3-32

$315,000 (135,000) $180,000

Advanced Accounting, 4th Edition

53.

c. Beginning Equity Investment Equity Income Dividends Ending Equity Investment

$2,363,000 180,000 (43,000) $2,500,000

d. [C]

Equity income (P) Dividends (S) Equity investment (P)

180,000 43,000 137,000

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)

[E]

Common stock (S) @ BOY APIC (S) @ BOY Retained earnings (S) @ BOY Equity investment (P) @ BOY

150,000 510,000 628,000 1,288,000

(to eliminate the portion of the investment account related to the book value of the subsidiary's stockholders' equity @ BOY)

[A]

PPE, net (S) @ BOY Customer List (S) @ BOY Royalty agreement (S) @ BOY Database (S) @ BOY Goodwill (S) @ BOY Equity investment (P) @ BOY

75,000 200,000 180,000 120,000 500,000 1,075,000

(to assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts)

[D]

Operating expenses (depreciation and amort)

135,000

PPE, net Customer list Royalty Agreement Database

15,000 40,000 20,000 60,000

(to record depreciation and amortization expense for the [A] assets)

[I]

No intercompany transactions

Solutions Manual, Chapter 3

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53.

e. Elimination Entries Income Statement

Parent

Subsidiary

Consolidated

Sales

4,200,000

2,405,000

6,605,000

Cost of goods sold

(3,000,000)

(1,190,000)

(4,190,000)

Gross profit

1,200,000

1,215,000

Equity income

180,000

Operating expenses

(780,000)

(900,000)

Net income

600,000

315,000

1,800,000

628,000

Net income

600,000

315,000

Dividends

(150,000)

(43,000)

Ending retained earnings

2,250,000

900,000

Cash

320,000

510,000

830,000

Accounts receivable

620,000

460,000

1,080,000

Inventory

760,000

594,000

1,354,000

2,415,000 [C]

180,000

[D]

135,000

(1,815,000) 600,000

Statement of RE: Beginning retained earnings

[E]

628,000

1,800,000 600,000 43,000

[C]

(150,000) 2,250,000

Balance sheet: Assets

Equity investment

PPE, net

2,500,000

3,200,000

137,000

1,096,000

[C]

1,288,000

[E]

1,075,000

[A]

75,000

15,000

[D]

4,356,000

Customer list

[A]

200,000

40,000

[D]

160,000

Royalty agreement

[A]

180,000

20,000

[D]

160,000

Database

[A]

120,000

60,000

[D]

60,000

Goodwill

[A]

500,000

7,400,000

2,660,000

8,500,000

Accounts payable

610,000

190,000

800,000

Accrued liabilities

700,000

246,000

946,000

Long-term liabilities

1,000,000

664,000

1,664,000

Liabilities and SE

Common stock

940,000

150,000

[E]

150,000

940,000

APIC

1,900,000

510,000

[E]

510,000

1,900,000

Retained earnings

2,250,000

900,000

7,400,000

2,660,000

©Cambridge Business Publishers, 2020 3-34

2,250,000 2,678,000

2,678,000

8,500,000

Advanced Accounting, 4th Edition

53.

f. The fair value of the subsidiary ($2.3 million) is less than the book value of the Equity Investment account ($2.5 million). Goodwill is, therefore, impaired. After adoption of ASU 2017-04, the amount of the impairment is the difference between these two amounts (i.e., $200,000), provided the difference is not greater than the Goodwill balance (i.e., $500,000). The fair value of the identifiable net assets (other than Goodwill) provided in the problem is irrelevant. The goodwill asset is found to be impaired. Goodwill must be written down by $200,000 with the following journal entry: Equity income from S Equity investment

200,000 200,000

(to write down the book value of goodwill)

Goodwill will now be reported on the consolidated balance sheet at $300,000, and a loss on the write-down of goodwill will be reported in the consolidated income statement. The goodwill asset cannot be subsequently written up should the fair value of the subsidiary improve. g. Our consolidated income statement and balance sheet, reflecting the entry for goodwill impairment, are as follows: Income Statement

Consolidated

Sales

6,605,000

Cost of goods sold

(4,190,000)

Gross profit

2,415,000

Operating expenses

(1,815,000)

Goodwill impairment loss

(200,000)

Net income

400,000

Statement of RE: Beginning retained earnings

1,800,000

Net income

400,000

Dividends

(150,000)

Ending retained earnings

2,050,000

continued

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53.

g. continued Balance sheet:

Consolidated

Assets Cash

830,000

Accounts receivable

1,080,000

Inventory

1,354,000

PPE, net

4,356,000

Customer list

160,000

Royalty agreement

160,000

Database

60,000

Goodwill

300,000 8,300,000

Liabilities and SE Accounts payable

800,000

Accrued liabilities

946,000

Long-term liabilities

1,664,000

Common stock

940,000

APIC

1,900,000

Retained earnings

2,050,000 8,300,000

54.

a. The balance at the beginning of the year of the Equity Investment account equals the stockholders’ equity of the subsidiary plus the undepreciated and unamortized balances of the [A] assets. Since the [A] assets with a useful life have now been depreciated or amortized for four years, the beginning balance of the Equity Investment account is as follows: BOY Stockholders’ Equity Patent Goodwill

$1,914,000 ($200,000 + $250,000 + $1,464,000) 120,000 ($400,000 – 4 x $60,000) 500,000 $2,534,000

Subsidiary net income Depreciation / amortization

$400,000 (60,000) $340,000

©Cambridge Business Publishers, 2020 3-36

Advanced Accounting, 4th Edition

54.

c. Beginning Equity Investment Equity Income Dividends Ending Equity Investment

$2,534,000 340,000 (64,000) $2,810,000

d. [C]

Equity income (P) Dividends (S) Equity Investment (P)

340,000 64,000 276,000

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)

[E]

Common stock (S) @ BOY APIC (S) @ BOY Retained earnings (S) @ BOY Equity investment (P) @ BOY

200,000 250,000 1,464,000 1,914,000

(to eliminate the portion of the investment account related to the book value of the subsidiary's stockholders' equity @ BOY)

[A]

Patent (S) @ BOY Goodwill (S) @ BOY Equity Investment (P) @ BOY

120,000 500,000 620,000

(to assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts)

[D]

Operating expenses (amortization) Patent

60,000 60,000

(to record depreciation and amortization expense for the [A] assets)

[I]

No intercompany transactions

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©Cambridge Business Publishers, 2020 3-37

54.

e. Elimination Entries Income Statement

Parent

Subsidiary

Consolidated

Sales

6,000,000

3,000,000

9,000,000

Cost of goods sold

(4,700,000)

(1,800,000)

(6,500,000)

Gross profit

1,300,000

1,200,000

Equity income

340,000

Operating expenses

(980,000)

(800,000)

Net income

660,000

400,000

2,990,000

1,464,000

Net income

660,000

400,000

Dividends

(250,000)

(64,000)

Ending retained earnings

3,400,000

1,800,000

2,500,000 [C]

340,000

[D]

60,000

(1,840,000) 660,000

Statement of RE: Beginning retained earnings

[E]

1,464,000

2,990,000 660,000 64,000

[C]

(250,000) 3,400,000

Balance sheet: Assets Cash

550,000

300,000

850,000

Accounts receivable

1,100,000

800,000

1,900,000

Inventory

1,600,000

900,000

2,500,000

Equity investment

2,810,000

PPE, net

4,540,000

276,000

[C]

1,914,000

[E]

620,000

[A]

1,700,000

6,240,000

Patent

[A]

120,000

Goodwill

[A]

500,000

60,000

[D]

60,000 500,000

10,600,000

3,700,000

12,050,000

Accounts payable

980,000

200,000

1,180,000

Accrued liabilities

1,150,000

300,000

1,450,000

Long-term liabilities

3,000,000

950,000

3,950,000

570,000

200,000

[E]

200,000

570,000

APIC

1,500,000

250,000

[E]

250,000

1,500,000

Retained earnings

3,400,000

1,800,000

10,600,000

3,700,000

Liabilities and SE

Common stock

©Cambridge Business Publishers, 2020 3-38

3,400,000 2,934,000

2,934,000

12,050,000

Advanced Accounting, 4th Edition

54.

f. The fair value of the subsidiary ($2.5 million) is less than the book value of the Equity Investment account ($2,810,000). Goodwill is, therefore, impaired. After adoption of ASU 2017-04, the amount of the impairment is the difference between these two amounts (i.e., $310,000), provided the difference is not greater than the Goodwill balance (i.e., $500,000). The fair value of the identifiable net assets (other than Goodwill) provided in the problem is irrelevant. The goodwill asset is found to be impaired. Goodwill must be written down by $310,000 with the following journal entry: Equity income from S 310,000 Equity investment

310,000

(to write down the book value of goodwill) Goodwill will now be reported on the consolidated balance sheet at $190,000, and a loss on the write-down of goodwill will be reported in the consolidated income statement. The goodwill asset cannot be subsequently written up should the fair value of the subsidiary improve. g. Our consolidated income statement and balance sheet, reflecting the entry for Goodwill impairment, are as follows:

Sales Cost of goods sold Gross profit Operating expenses Goodwill impairment loss Net income

Consolidated 9,000,000 (6,500,000) 2,500,000 (1,840,000) (310,000) 350,000

Statement of retained earnings: Beginning retained earnings Net income Dividends Ending retained earnings

2,990,000 350,000 (250,000) 3,090,000

continued

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54.

g. continued Balance sheet: Assets Cash Accounts receivable Inventory Property, plant and equipment (PPE), net Patent Goodwill

850,000 1,900,000 2,500,000 6,240,000 60,000 190,000 11,740,000

Liabilities and stockholders' equity Accounts payable Accrued liabilities Long-term liabilities Common stock APIC Retained earnings

55.

Consolidated

1,180,000 1,450,000 3,950,000 570,000 1,500,000 3,090,000 11,740,000

a. The balance at the beginning of the year of the Equity Investment account equals the stockholders’ equity of the subsidiary plus the unamortized balance of the customer list. Since the customer list has been amortized for four years, the beginning balance of the Equity Investment account is as follows: BOY stockholders’ equity Licenses Goodwill

$ 860,000 ($80,000+$100,000+$680,000) 200,000 ($400,000 – 4 x $50,000) 250,000 $1,310,000

b. Subsidiary net loss Depreciation / amortization

©Cambridge Business Publishers, 2020 3-40

(180,000) (50,000) (230,000)

Advanced Accounting, 4th Edition

55.

Beginning Equity investment Equity Income Dividends Ending Equity Investment

$1,310,000 (230,000) 0 $1,080,000

d. [C]

Equity investment (P) Equity income (P)

230,000 230,000

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account. Note: debit and credit are reversed since the subsidiary reports a loss.)

[E]

Common stock (S) @ BOY APIC (S) @ BOY Retained earnings (S) @ BOY Equity investment (P) @ BOY

80,000 100,000 680,000 860,000

(to eliminate the portion of the investment account related to the book value of the subsidiary's stockholders' equity @ BOY)

[A]

Licenses (S) @ BOY Goodwill (S) @ BOY Equity investment (P) @ BOY

200,000 250,000 450,000

(to assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts)

[D]

Operating expenses (amortization) Licenses

50,000 50,000

(to record depreciation and amortization expense for the [A] assets)

[I]

No intercompany transactions

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-41

55.

e. Elimination Entries Income Statement

Parent

Subsidiary

Consolidated

Sales

3,100,000

1,200,000

4,300,000

Cost of goods sold

(2,200,000)

(740,000)

(2,940,000)

Gross profit

900,000

460,000

Equity income (loss)

(230,000)

Operating expenses

(500,000)

(640,000)

Net income (loss)

170,000

(180,000)

1,370,000

680,000

Net income

170,000

(180,000)

170,000

Dividends

(40,000)

Ending retained earnings

1,500,000

500,000

1,500,000

1,360,000 230,000 [D]

[C]

50,000

0 (1,190,000) 170,000

Statement of RE: Beginning retained earnings

[E]

680,000

1,370,000

Balance sheet: Assets Cash

700,000

20,000

720,000

Accounts receivable

820,000

260,000

1,080,000

Inventory

1,200,000

340,000

1,540,000

Equity investment

1,080,000

PPE, net

2,600,000

[C]

230,000

860,000

[E]

450,000

[A]

680,000

3,280,000

Licenses

[A]

200,000

Goodwill

[A]

250,000

50,000

[D]

150,000 250,000

6,400,000

1,300,000

7,020,000

460,000

100,000

560,000

Accrued liabilities

550,000

120,000

670,000

Long-term liabilities

2,000,000

400,000

2,400,000

430,000

80,000

[E]

80,000

430,000

APIC

1,460,000

100,000

[E]

100,000

1,460,000

Retained earnings

1,500,000

500,000

6,400,000

1,300,000

Liabilities and SE Accounts payable

Common stock

©Cambridge Business Publishers, 2020 3-42

1,500,000 1,590,000

1,590,000

7,020,000

Advanced Accounting, 4th Edition

56.

a. If the parent uses the cost method, the parent’s pre-consolidation investment income of $50,000 is equal to the dividends declared by the subsidiary. b. If the parent uses the cost method, the parent’s December 31, 2019 preconsolidation Equity Investment balance of $1,760,000 is equal to the investment on the acquisition date (it does not change). c. Investment balance (cost) Deduct: AAP on acquisition date Deduct: Common stock (S) on acquisition date Deduct: APIC (S) on acquisition date Retained earnings (S) on acquisition date

1,760,000 (1,005,000) (110,000) (140,000) 505,000

d. The Equity Investment, using the equity method, would be equal to the book value of the subsidiary’s stockholders’ equity plus the unamortized balance of the AAP: EOY Book value of subsidiary’s Stockholders’ Equity EOY Unamortized balance of the AAP EOY Equity investment (using equity method)

1,250,000 845,000 2,095,000

e. The [ADJ] consolidation journal entry increases the parent’s beginning retained earnings to the balance that would have been reported if the parent used the equity method. The amount of the adjustment is equal to the change in the subsidiary’s retained earnings from the date of acquisition to the beginning of the year of consolidation, adjusted for the cumulative AAP amortization that would have been recognized through the BOY. [ADJ] = ($850,000 - $505,000) – (3 x 40,000) = 225,000 [ADJ] BOY Equity investment Beginning retained Earnings (parent)

225,000 225,000

(to adjust the parent’s Retained Earnings to its proper balance under equity method)

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-43

56.

f. [C]

Investment income (P) Dividends (S)

50,000 50,000

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account. Note: no equity income since the parent uses the cost method.)

[E]

Common stock (S) @ BOY APIC (S) @ BOY Retained earnings (S) @ BOY Equity investment (P) @ BOY

110,000 140,000 850,000 1,100,000

(to eliminate the portion of the investment account related to the book value of the subsidiary's stockholders' equity @ BOY)

[A]

PPE (S) @ BOY Patent (S) @ BOY Goodwill (S) @ BOY Equity investment (P) @ BOY

135,000 300,000 450,000 885,000

(to assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts)

[D]

Operating expenses (amortization) PPE (S) Patent (S)

40,000 15,000 25,000

(to record depreciation and amortization expense for the [A] assets)

[I]

No intercompany transactions

©Cambridge Business Publishers, 2020 3-44

Advanced Accounting, 4th Edition

56.

g. Elimination Entries Income Statement

Parent

Subsidiary

Consolidated

Sales

7,500,000

1,600,000

9,100,000

Cost of goods sold

(5,400,000)

(950,000)

(6,350,000)

Gross profit

2,100,000

650,000

2,750,000

Investment income

50,000

Operating expenses

(1,450,000)

(450,000)

700,000

200,000

2,230,000

850,000

Net income

700,000

200,000

Dividends

(230,000)

(50,000)

Ending retained earnings

2,700,000

1,000,000

3,035,000

Net income

[C]

50,000

[D]

40,000

(1,940,000) 810,000

Statement of RE: Beginning retained earnings

[E]

850,000

225,000

[ADJ]

2,455,000 810,000

50,000

[C]

(230,000)

Balance sheet: Assets Cash

740,000

420,000

1,160,000

Accounts receivable

1,200,000

380,000

1,580,000

Inventory

1,900,000

490,000

2,390,000

Equity investment

1,760,000

PPE, net

4,000,000

[ADJ] 910,000

225,000

1,100,000

[E]

885,000

[A]

135,000

15,000

[D]

5,030,000

Patent

[A]

300,000

25,000

[D]

275,000

Goodwill

[A]

450,000

9,600,000

2,200,000

10,885,000

900,000

140,000

1,040,000

Accrued liabilities

500,000

260,000

760,000

Long-term liabilities

2,600,000

550,000

3,150,000

700,000

110,000

[E]

110,000

700,000

APIC

2,200,000

140,000

[E]

140,000

2,200,000

Retained earnings

2,700,000

1,000,000

9,600,000

2,200,000

Liabilities and SE Accounts payable

Common stock

Solutions Manual, Chapter 3

3,035,000 2,300,000

2,300,000

10,885,000

©Cambridge Business Publishers, 2020 3-45

57.

a. If the parent uses the cost method, the parent’s pre-consolidation investment income of $40,000 is equal to the dividends declared by the subsidiary. b. If the parent uses the cost method, the parent’s December 31, 2019 preconsolidation Equity Investment balance of $1,760,000 is equal to the investment on the acquisition date (it does not change). c. Investment balance (cost) Deduct: AAP on acquisition date Deduct: Common stock (S) on acquisition date Deduct: APIC (S) on acquisition date Retained earnings (S) on acquisition date

1,760,000 900,000 150,000 200,000 510,000

1,350,000 580,000 1,930,000

e. The [ADJ] consolidation journal entry increases the parent’s beginning retained earnings to the balance that would have been reported if the parent used the equity method. The amount of the adjustment is equal to the change in the subsidiary’s retained earnings from the date of acquisition to the beginning of the year of consolidation, adjusted for the cumulative AAP amortization that would have been recognized through the BOY. [ADJ] = ($840,000 - $510,000) – (3 x 80,000) = 90,000 [ADJ] BOY Equity investment Beginning retained Earnings (parent)

90,000 90,000

(to adjust the parent’s Retained Earnings to its proper balance under equity method)

©Cambridge Business Publishers, 2020 3-46

Advanced Accounting, 4th Edition

57.

f. [C]

Investment income (P) Dividends (S)

40,000 40,000

(to eliminate all changes in the Equity Investment account, leaving only beginning balance in the account. Note: no equity income since the parent uses the cost method.)

[E]

Common stock (S) @ BOY APIC (S) @ BOY Retained earnings (S) @ BOY Equity investment (P) @ BOY

150,000 200,000 840,000 1,190,000

(to eliminate the portion of the investment account related to the book value of the subsidiary's stockholders' equity @ BOY)

[A]

PPE (S) @ BOY Licenses (S) @ BOY Customer list (S) @ BOY Goodwill (S) @ BOY Equity investment (P) @ BOY

105,000 150,000 15,000 390,000 660,000

(to assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts)

[D]

Operating expenses (amortization) PPE (S) Licenses (S) Customer list (S)

80,000 15,000 50,000 15,000

(to record depreciation and amortization expense for the [A] assets)

[I]

No intercompany transactions

Solutions Manual, Chapter 3

©Cambridge Business Publishers, 2020 3-47

57.

g. Elimination Entries Income Statement

Parent

Subsidiary

Consolidated

Sales

7,500,000

1,600,000

9,100,000

Cost of goods sold

(5,400,000)

(950,000)

(6,350,000)

Gross profit

2,100,000

650,000

2,750,000

Investment income

40,000

[C]

40,000

Operating expenses

(1,140,000)

(450,000)

[D]

80,000

(1,670,000)

Net income

1,000,000

200,000

Beginning retained earnings

3,240,000

840,000

Net income

1,000,000

200,000

Dividends

(240,000)

(40,000)

Ending retained earnings

4,000,000

1,000,000

4,170,000

Cash

1,240,000

300,000

1,540,000

Accounts receivable

1,400,000

360,000

1,760,000

Inventory

2,000,000

540,000

2,540,000

Equity investment

1,760,000

1,080,000

Statement of RE: [E]

840,000

90,000

[ADJ]

3,330,000 1,080,000

40,000

[C]

(240,000)

Balance sheet: Assets

PPE, net

3,600,000

[ADJ]

900,000

Licenses

1,190,000

[E]

660,000

[A]

105,000

15,000

[D]

4,590,000

[A]

150,000

50,000

[D]

100,000

15,000

Customer list Goodwill

90,000

[A]

390,000

0 390,000

10,000,000

2,100,000

10,920,000

Accounts payable

700,000

100,000

800,000

Accrued liabilities

520,000

200,000

720,000

Long-term liabilities

2,080,000

450,000

2,530,000

700,000

150,000

[E]

150,000

700,000

[E]

200,000

2,000,000

Liabilities and SE

Common stock APIC

2,000,000

200,000

Retained earnings

4,000,000

1,000,000

10,000,000

2,100,000

©Cambridge Business Publishers, 2020 3-48

4,170,000 2,060,000

2,060,000

10,920,000

Advanced Accounting, 4th Edition

58.B

a. [C]

Equity income Dividends Equity investment

200,000 30,000 170,000

(to eliminate equity income and intercompany dividends)

[E]

Common stock APIC Retained earnings Equity investment

80,000 120,000 575,000 775,000

(to eliminate subsidiary stockholders' equity)

b. Elimination Entries Income Statement

Parent

Subsidiary

Consolidated

Sales

5,500,000

1,200,000

6,700,000

Cost of goods sold

(2,850,000)

(700,000)

(3,550,000)

Gross profit

2,650,000

500,000

Equity income

200,000

3,150,000 [C]

200,000

Operating expenses

(1,600,000)

(300,000)

(1,900,000)

Net income

1,250,000

200,000

1,250,000

Beginning retained earnings

1,210,000

575,000

Net income

1,250,000

200,000

Dividends

(310,000)

(30,000)

Ending retained earnings

2,150,000

745,000

2,150,000

Statement of RE: [E]

575,000

1,210,000 1,250,000 30,000

[C]

(310,000)

Balance sheet: Assets Cash

905,000

280,000

1,185,000

Accounts receivable

1,100,000

260,000

1,360,000

Inventory

1,600,000

300,000

1,900,000

Equity investment PPE, net

945,000

170,000

[C]

775,000

[E]

3,200,000

810,000

4,010,000

7,750,000

1,650,000

8,455,000

Accounts payable

720,000

205,000

925,000

Accrued liabilities

900,000

100,000

1,000,000

Long-term liabilities

1,500,000

400,000

Common stock

1,400,000

80,000

[E]

80,000

1,400,000

APIC

1,080,000

120,000

[E]

120,000

1,080,000

Retained earnings

2,150,000

745,000

7,750,000

1,650,000

Liabilities and SE

Solutions Manual, Chapter 3

1,900,000

2,150,000 975,000

975,000

8,455,000

©Cambridge Business Publishers, 2020 3-49

59.B

a. [ADJ]

[C]

BOY Equity Investment Beginning retained Earnings (P)

740,000

Investment income Dividends

50,000

740,000

50,000

(to eliminate equity income and intercompany dividends)

[E]

Common stock APIC Retained earnings Equity investment

240,000 300,000 950,000 1,490,000

(to eliminate subsidiary Stockholders' Equity)

b. Elimination Entries Dr Cr

Income Statement Sales Cost of goods sold Gross profit Investment income Operating expenses Net income

Parent 4,000,000 (2,600,000) 1,400,000 50,000 (750,000) 700,000

Subsidiary 1,800,000 (1,100,000) 700,000

Statement of RE: Beginning retained earnings Net income Dividends Ending retained earnings

1,730,000 700,000 (130,000) 2,300,000

950,000 200,000 (50,000) 1,100,000

400,000 750,000 800,000 750,000 2,300,000 5,000,000

300,000 680,000 920,000 1,100,000 3,000,000

700,000 1,430,000 1,720,000 0 3,400,000 7,250,000

280,000 320,000 500,000 1,600,000 2,300,000 5,000,000

200,000 360,000 800,000 240,000 300,000 1,100,000 3,000,000

480,000 680,000 800,000 500,000 1,600,000 3,190,000 7,250,000

Balance sheet: Assets Cash Accounts receivable Inventory Equity investment PPE, net Liabilities and SE Accounts payable Accrued liabilities Long-term liabilities Common stock APIC Retained earnings

©Cambridge Business Publishers, 2020 3-50

[C]

50,000

[E]

950,000

Consolidated 5,800,000 (3,700,000) 2,100,000 0 (1,250,000) 850,000

(500,000) 200,000

[ADJ]

[E] [E]

740,000

[ADJ]

50,000

[C]

1,490,000

240,000 300,000 2,280,000

2,280,000

[E]

2,470,000 850,000 (130,000) 3,190,000

Advanced Accounting, 4th Edition

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 4— Consolidated Financial Statements and Intercompany Transactions 1.

For any sale, the seller’s sale price of the asset becomes the buyer’s purchase cost. In the sale process, the asset sold is written up or down in value from its original cost to its market value at the time of sale, and that write-up or down in the carrying amount of the asset is reflected in the income statement as profit or loss (i.e., gross profit or loss on inventory sales and gain or loss on sales of land and depreciable assets). Since companies within a controlled group are viewed as one entity under GAAP, the sale is not recognized until the asset is sold outside of the controlled group. It is only then that profit or loss has been earned by the controlled group and can be recognized in the income statement.

FASB ASC 810-10-45-1 states the following: “In the preparation of consolidated financial statements, intra-entity balances and transactions shall be eliminated. This includes intra-entity open account balances, security holdings, sales and purchases, interest, dividends, and so forth. As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, such statements shall not include gain or loss on transactions among the entities in the consolidated group. Accordingly, any intra-entity profit or loss on assets remaining within the consolidated group shall be eliminated.”

We need only defer the deferred intercompany profit on the inventories that have not been resold during the period. The amount of deferred profit to be deferred, then, is equal to the dollar amount of the deferred profit on the intercompany sale multiplied by the percentage of inventories that are unsold at the end of the period: $ Profit to defer

Solutions Manual, Chapter 4

$ Total deferred profit

% unsold inventories

©Cambridge Business Publishers, 2020 4-1

Inventories that remain at the end of the accounting period are typically resold in the following period, while land and depreciable assets are typically held for longer periods of time. The deferral and recognition sequence for inventories usually involves the recognition of the deferred profit from the prior period and the deferral of the profit on current period sales. For land and depreciable assets, the profit is deferred in the period of intercompany sale and must be deferred as well in future periods for as long as the asset is held within the controlled group. For depreciable assets the deferred gain or loss is gradually recognized during the useful life of the asset, while the deferred gain or loss for land and inventory is recognized when the asset is transferred to nonaffiliated entity.

In the case of wholly owned subsidiaries, there is no difference in the elimination process for upstream versus downstream transactions. This is because all deferred profit must be removed from the combined financial statements, regardless of the direction of the transaction (the upstream-downstream distinction becomes extremely important in Chapter 5, however, where we introduce the concept of non-wholly owned subsidiaries and the resulting non-controlling interest reported in consolidated financial statements).

The net effect of these two entries is this: Sales

xxx Cost of goods sold Inventories

xxx xxx

These two entries reverse the effects of the inventory sale. Sales and Cost of Goods Sold for the intercompany sale are eliminated and the write-up of inventories as a result of the sale is reversed. 7.

In the period of sale, the gain is reversed and the Land account is reduced to its pre-sale balance. In subsequent periods, and while the land is held within the controlled group, we must reduce Retained Earnings to remove the gain from the land sale that remains in that account from the prior period.

The first line of the entry reverses the Gain on sale so that the profit is not included in the consolidated income statement. Then, the Equipment account and its related accumulated depreciation are restored to their pre-sale amounts.

The depreciation reported by the purchaser will be different from that which the seller would have reported had the sale not occurred. This entry adjusts the reported Depreciation expense (and the related Accumulated depreciation) in the consolidated income statement to the correct pre-sale amount.

©Cambridge Business Publishers, 2020 4-2

Advanced Accounting, 4th Edition

10.

The [ADJ] entry provides a “catch-up” adjustment to update the parent’s beginning of year retained earnings so that it reflects the consolidated beginning of year balance. The offsetting account is the investment account, which will be eliminated via the consolidation process. Because the investment is ultimately eliminated, the primary purpose is to make the parent’s beginning retained earnings account appear to be “as if equity method,” which is the same as “as if consolidated.”

11.

The [C] entry reverses the changes caused in the parent’s financial statements by accounting for the equity investment. In the case of the equity method, this is related to equity-method investment income and dividends. In the case of the cost method, this is just the dividends.

12.

Answer: b All of the statements are false except for answer d.

13.

Answer: c When the intercompany inventory is sold to an unaffiliated party in 2019, the recorded revenues is correctly stated in the consolidated financial statements without any need for a consolidating entry. In contrast, cost of goods sold is dependent on the stated inventory levels at the beginning of the year and the end of the year. This is illustrated by the following identity: Beginning inventory + Purchases - Ending inventory = Cost of goods sold Thus, in this case, the 2019 cost of goods sold would be too high without an adjustment removing the profits that were in beginning inventory.

14.

Answer: a The full amount of the intercompany sale that took place during 2019 must be eliminated from revenues in preparation of the consolidated financial statements. Thus, consolidated revenues equal $3,900,000 (i.e., $2,800,000 + $1,600,000 - $500,000).

15.

Answer: c Given that there are no intercompany sales in either beginning or ending inventories, gross profit is unaffected by the intercompany sales. Consolidated gross profit equals $1,400,000 (i.e., $840,000 + $560,000).

Solutions Manual, Chapter 4

©Cambridge Business Publishers, 2020 4-3

16.

Answer: b The full amount of the intercompany sale that took place during 2019 must be eliminated from revenues in preparation of the consolidated financial statements. Thus, consolidated revenues equal $4,600,000 (i.e., $3,000,000 + $2,000,000 - $400,000).

17.

Answer: c Gross profit is affected for profits included in inventories purchased from affiliated companies and that are included in beginning and/or ending inventories. Intercompany profits in beginning inventory increase the gross profit of the period in which they are sold. Intercompany profits in ending inventory decrease the gross profit of the period. In this case, there is only intercompany profit in ending inventory. The intercompany sales were from the parent to the subsidiary; thus, the parent’s gross profit rate is relevant. The parent’s gross profit rate is 25% (i.e., $750,000 / $3,000,000). Therefore, there is $30,000 (i.e., 25% x $120,000) of intercompany profit in the subsidiary’s ending inventory. This means that consolidated gross profit is $30,000 lower than the unadjusted amount. Consolidated gross profit equals $1,420,000 (i.e., $750,000 + $700,000 - $30,000).

18.

Answer: a Under the equity method, all intercompany profits (both upstream and downstream) are eliminated in the determination of the pre-consolidation “income from subsidiary” and the “investment in subsidiary” accounts. For downstream sales, the relevant profit margin is the profit earned by the parent on the intercompany sales to the subsidiary. In this case, the profit margin on downstream sales is 30% (i.e., $1,200,000 / $4,000,000). The intercompany inventories still held by the subsidiary equals $125,000 (i.e., 25% x $500,000). The profit that must be deferred equals $37,500 (i.e., 30% x $125,000). Therefore, the “income from subsidiary” recognized by the parent under the equity method should be $356,500 (i.e., $394,000 - $37,500).

19.

Answer: c Under the equity method, all intercompany profits (both upstream and downstream) are eliminated in the determination of the pre-consolidation “income from subsidiary” and the “investment in subsidiary” accounts. For upstream sales, the relevant profit margin is the profit earned by the subsidiary on the intercompany sales to the parent. In this case, the profit margin on upstream sales is 40% (i.e., $1,000,000 / $2,500,000). The intercompany inventories still held by the parent equal $100,000 (i.e., 25% x $400,000). The profit that must be deferred equals $40,000 (i.e., 40% x $100,000). Therefore, the “income from subsidiary” recognized by the parent under the equity method should be $354,000 (i.e., $394,000 - $40,000).

©Cambridge Business Publishers, 2020 4-4

Advanced Accounting, 4th Edition

20.

Answer: b Under the cost method of pre-consolidation investment bookkeeping, the parent recognizes the dividends received from the subsidiary as investment income. Intercompany transactions are not eliminated in the pre-consolidation books of the parent company. The intercompany transactions will be eliminated during the consolidation process. Therefore, the “income from subsidiary” recognized by the parent under the cost method should be $200,000.

21.

Answer: d For a 100% owned subsidiary when there is no acquisition accounting premium, consolidated net income can be determined based on the following incremental components: Parent’s “stand alone” net income + Subsidiary’s “stand alone” net income + Profit deferred in prior year’s on inventory sold in the current year to non-affiliate - Profit deferred in current year on inventory retained in affiliated group at end of period = Consolidated net income This results in the following:

+ + = 22.

$300,000 $120,000 $3,750 $2,500 $421,250

(i.e., 25% x $15,000) (i.e., 25% x $10,000)

Answer: c Intercompany sales among an affiliated group are 100% eliminated in the determination of consolidated revenues. We can infer the amount eliminated by adding the preconsolidation parent and subsidiary revenues and subtracting consolidated revenues: $4,200,000 + $2,850,000 - $6,150,000 = $900,000

23.

Answer: a We can determine the amount of intercompany profit in the ending inventories of the affiliated companies by adding the pre-consolidation ending inventories of the parent and subsidiary and then subtracting the consolidated ending inventory: $195,000 + $135,000 -$298,500 = $31,500

Solutions Manual, Chapter 4

©Cambridge Business Publishers, 2020 4-5

24.

Answer: b This problem uses the answers to the preceding two multiple choice questions as inputs to the answer. The correct solution can be inferred via comparison of pre-consolidation cost of goods sold (CGS) for the parent and the subsidiary versus consolidated cost of goods sold. The net consolidation adjustment of CGS is equal to a decrease of CGS equal to $889,500 (i.e., $2,730,000 + $1,710,000 - $3,550,500). Using the following CGS identity, beginning inventory is the only unknown: Consolidation adjustment Beginning inventory + Purchases - Ending inventory = Cost of goods sold

? $900,000 (MC#22: $4,200,000 + $2,850,000 - $6,150,000) $31,500 (MC#23: $195,000 + $135,000 -$298,500) $889,500 (i.e., $2,730,000 + $1,710,000 - $3,550,500)

Thus, we know that the adjustment for the recognition of deferred intercompany profits in beginning inventory (i.e., for intercompany items sold in the current period) must have been $21,000. 25.

Answer: d All intercompany payables and receivables among an affiliated group are 100% eliminated in the determination of consolidated balances. We can infer the amount eliminated by adding the pre-consolidation parent and subsidiary accounts payable and subtracting consolidated accounts payable: $120,000 + $82,500 - $154,500 = $48,000

26.

Answer: d Under the equity method, 100% of the profit on the intercompany sale of land would have been removed from the investment account in the year of the transaction (i.e., 2018). In 2019, in order to prepare the consolidated financial statements, the parent company will need to remove the deferred gain from the investment account because the investment account is always adjusted to zero in the consolidated financial statements. This entry will also remove the gain from the land account because the gain was not actually removed from the land account. The adjustment in 2019 would be as follows: [I] consolidation entry in the years after intercompany sale

©Cambridge Business Publishers, 2020 4-6

[Igain] Equity investment Land

130,000 130,000

(to defer the gain on sale and to restate the Land account to its pre-sale reported amount)

Advanced Accounting, 4th Edition

27.

Answer: b When affiliated companies transfer depreciable noncurrent assets, the resulting consolidated financial statements are prepared to look like the intercompany transaction never happened. In this case, the original cost of the equipment was $300,000 to the parent and it was depreciated assuming a 10-year useful life. This means the parent company was recognizing $30,000 per year in depreciation expense prior to the intercompany transfer. If we assume the intercompany transfer never occurred, then the parent would have recognized an additional year of depreciation and the accumulated depreciation account at December 31, 2019 would have equaled $120,000 (i.e., $90,000 + $30,000). Thus, the net equipment balance would be $180,000 (i.e., $300,000 - $120,000), which is the amount that should be reported in the consolidated financial statements.

28.

Answer: d The equipment had a carrying value on the parent’s books equal to $175,000 (i.e., $210,000 - $35,000). The parent sold the equipment to the subsidiary; thus, during 2019, the parent recorded in its pre-consolidation income statement a $(55,000) loss on the intercompany equipment transfer. On December 31, 2019, the equipment will have a carrying value of $120,000 on the subsidiary’s pre-consolidation balance sheet, with no accumulated depreciation. The consolidating journal entry will need to remove the loss and reestablish the pre-intercompany-transfer balances. The consolidating entry is as follows: [I] [Igain] Equipment 90,000 consolidation entry Accum. Deprec. 35,000 in the year of Loss on Equip. Sale 55,000 (to defer the loss on sale and to restate the equip intercompany sale and A.D. to pre-I-C-sale reported amount)

29.

a. If the parent uses the equity method to account for its Equity Investment, the amount of Income (loss) from subsidiary it will report this year is equal to the following (the subsidiary is wholly owned and there is no AAP, hence no amortization): Net income of subsidiary + 2018 deferred profit ($60,000x30%x12%) - 2019 deferred profit ($80,000x35%x15%) Income (loss) from subsidiary 2019

[Icogs]

Solutions Manual, Chapter 4

$600,000 2,160 (4,200) $597,960

Equity investment @ BOY Cost of goods sold

2,160 2,160

(Reverses prior year profit elimination from investment in subsidiary and recognizes deferred profit from inventories in current period ©Cambridge Business Publishers, 2020 4-7

($60,000 x 30% x 12%))

Sales [Isales]

80,000 Cost of goods sold

80,000

(Eliminates current period intercompany Sales and Cost of Goods Sold)

[Icogs]

Cost of goods sold Inventory

[Ipay]

Accounts payable Accounts receivable

4,200 4,200

(Defer current period deferred profit on intercompany sale of inventories ($80,000 x 35% x 15%))

30,000 30,000

(Eliminates intercompany receivable and payable)

30.

a. If the parent uses the equity method to account for its Equity Investment, the amount of Income (loss) from subsidiary it will report this year is equal to the following (the subsidiary is wholly owned and there is no AAP, hence no amortization): Net income of subsidiary + 2018 deferred profit - 2019 deferred profit Income (loss) from subsidiary 2019

$400,000 20,000 (18,000) $402,000

b. [Icogs]

Equity investment @ BOY Cost of goods sold

20,000 20,000

(Reverses prior year profit elimination from investment in subsidiary and recognizes deferred profit from inventories in current period)

Sales [Isales]

50,000 Cost of goods sold

50,000

(Eliminates current period intercompany Sales and Cost of Goods Sold)

[Icogs]

Cost of goods sold Inventory

[Ipay]

Accounts payable Accounts receivable

18,000 18,000

(Defer current period deferred profit on intercompany sale of inventories)

20,000 20,000

(Eliminates intercompany receivable and payable)

©Cambridge Business Publishers, 2020 4-8

Advanced Accounting, 4th Edition

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31.

a. If the parent uses the cost method to account for its Equity Investment, the amount of Income (loss) from subsidiary it will report this year is equal to the subsidiary’s dividends for the year. Dividends from the subsidiary in 2019 were equal to $540,000. b. Equity investment @ BOY Cost of goods sold

[Icogs]

5,670 5,670

(Reverses prior year profit elimination from investment in subsidiary and recognizes deferred profit from inventories in current period)

Sales [Isales]

135,000 Cost of goods sold

135,000

(Eliminates current period intercompany Sales and Cost of Goods Sold)

Cost of goods sold [Icogs]

8,100 Inventory

8,100

(Defer current period deferred profit on intercompany sale of inventories)

Accounts payable [Ipay]

45,000 Accounts receivable

45,000

(Eliminates intercompany receivable and payable)

32. a.

Gain on sale

40,000

Land [Igain] (to defer the gain on sale and to restate the Land account to its pre-sale reported amount)

Equity investment @BOY Land [Igain] (Reverses prior year profit elimination from investment in subsidiary and to restate the Land account to its pre-sale reported amount) Cash

40,000

40,000 40,000

420,000

Land Gain on sale (to record the sale of land to an unaffiliated company) [Igain] Equity investment @BOY Gain on sale (Reverses prior year profit elimination from investment in subsidiary and shifts the profit into the year of sale to unaffiliated party)

Solutions Manual, Chapter 4

400,000 20,000

40,000 40,000

©Cambridge Business Publishers, 2020 4-9

d. The consolidated income statement will report a Gain on Sale of $60,000, the difference between the sale price of the land ($420,000) and its original cost ($360,000). This is the result of the recognition of the gain on sale of $20,000 by the parent and the recognition of the deferred profit of $40,000. e. The [I] entries are identical under the cost method. 33. Gain on sale

a. [Igain]

[Igain]

Land (to defer the gain on sale and to restate the Land account to its pre-sale reported amount) Equity investment @BOY

30,000 30,000

30,000

Land (Reverses prior year profit elimination from investment in subsidiary and to restate the Land account to its presale reported amount) Cash

30,000

170,000

130,000 40,000

30,000 30,000

d. The subsidiary will report a Gain on Sale of $40,000 ($170,000 - $130,000). In addition, the [I] consolidation journal entry in part c recognizes an additional $30,000 of Gain on Sale. The total Gain on Sale of $70,000 ($40,000 + $30,000) represents the difference between the ultimate sale price of the land ($170,000) and its original cost ($100,000). e. The [I] entries are identical under the cost method.

©Cambridge Business Publishers, 2020 4-10

Advanced Accounting, 4th Edition

34.

a. Depreciation expense (subsidiary) = $180,000 / 12 = $15,000 per year. Depreciation expense (parent) = $132,000 / 8 = $16,500 per year. b. Net book value on date of sale = $180,000 – (4 x $15,000) = $120,000 Gain on sale = $132,000 - $120,000 = $12,000 c. The Equipment (cost) write-down during the sale = $180,000 - $132,000 = $48,000. Given the Accumulated Depreciation of $60,000 (4 x $15,000) and the Gain on Sale of $12,000 (part b), the [I] consolidation journal entries in 2017: [Igain]

Gain on sale of equipment 12,000 Equipment 48,000 Accumulated depreciation 60,000 (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry)

[Idep]

Accumulated depreciation 1,500 Depreciation expense 1,500 (to eliminate the excess depreciation expense recorded by the parent, and to adjust accumulated depreciation from the BOY amount to the EOY amount)

d. The excess depreciation expense is $1,500 ($16,500 - $15,000) per year. By the beginning of 2019, the Gain on Sale has been reduced by $3,000 (2 x $1,500). So, the investment must be reduced by only $9,000 ($12,000 - $3,000) of the deferred Gain on Sale. Likewise, only $57,000 ($60,000 – 2 x $1,500) of the Accumulated Depreciation must be adjusted. The resulting [Igain] and [Idep] holding period consolidation journal entries are, [Igain]

Equity investment @BOY Equipment

9,000 48,000

Accumulated depreciation 57,000 (Reverses prior year unconfirmed profit elimination from investment, and restates Equipment and Accumulated Depreciation as if intercompany transaction never occurred) [Idep]

Accumulated depreciation Depreciation expense

1,500 1,500

(to reverse the excess depreciation expense for the period) continued

Solutions Manual, Chapter 4

©Cambridge Business Publishers, 2020 4-11

The [Igain] entry reverses prior year unconfirmed profit elimination from investment, adjusts the Equipment (at cost) to its pre-sale amount, and adjusts the Accumulated Depreciation for the difference between the balance that the subsidiary would have reported had the sale not taken place and the amount that the parent currently reports. The [Idep] entry reduces the current period depreciation expense, reported by the parent at $16,500, to the amount that the subsidiary would have reported ($15,000) had the sale not taken place. e. We will need to make the [Igain] and [Idep] consolidation journal entries for the remaining useful life of the equipment. At the end of its 12-year useful life, the equipment will be fully depreciated. At that point, the Gain on Sale reported by the subsidiary ($12,000) will have been completely offset by the additional depreciation expense reported by the parent ($12,000 = 8 x $1,500 per year). The cumulative consolidated net income will be the same as the combined entity would have reported had the sale not taken place. However, even after the equipment is fully depreciated, the [I] consolidation journal entry will continue to “gross up” the equipment and accumulated depreciation to the pre-intercompany sale levels until the equipment is retired or disposed. 35.

a. Depreciation expense (parent) = $184,000 / 10 = $18,400 per year. Depreciation expense (subsidiary) = $162,000 / 6 = $27,000 per year. b. Net book value on date of sale = $184,000 – (4 x $18,400) = $110,400 Gain on sale = $162,000 - $110,400 = $51,600 c. The Equipment (cost) write-down during the sale = $184,000 - $162,000 = $22,000. Given the Accumulated Depreciation of $73,600 (3 x $18,400) and the Gain on Sale of $51,600 (part b), the [I] consolidation journal entries in 2016: [Igain]

[Idep]

Gain on sale of equipment 51,600 Equipment 22,000 Accumulated depreciation 73,600 (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) Accumulated depreciation 8,600 Depreciation expense 8,600 (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount)

©Cambridge Business Publishers, 2020 4-12

Advanced Accounting, 4th Edition

d. The excess depreciation expense is $8,600 ($27,000 - $18,400) per year. By the beginning of 2019, the Gain on Sale has been reduced by $25,800 (3 x $8,600). So, the investment must be reduced by only $25,800 ($51,600 - $25,800) of the deferred Gain on Sale. Likewise, only $47,800 ($73,600 – 3 x $8,600) of the Accumulated Depreciation must be adjusted. The resulting [Igain] and [Idep] holding period consolidation journal entries are, [Igain]

Equity investment @BOY Equipment Accumulated depreciation

25,800 22,000 47,800

(Reverses prior year unconfirmed profit elimination from investment, and restates Equipment and Accumulated Depreciation as if intercompany transaction never occurred)

[Idep]

Accumulated depreciation Depreciation expense

8,600 8,600

(to reverse the excess depreciation expense for the period)

The [Igain] entry reverses prior year unconfirmed profit elimination from investment, adjusts the Equipment (at cost) to its pre-sale amount, and adjusts the Accumulated Depreciation for the difference between the balance that the subsidiary would have reported had the sale not taken place and the amount that the parent currently reports. The [Idep] entry reduces the current period depreciation expense, reported by the parent at $27,000, to the amount that the subsidiary would have reported ($18,400) had the sale not taken place. e. We will need to make the [Igain] and [Idep] consolidation journal entries for the remaining useful life of the equipment. At the end of its 10-year useful life, the equipment will be fully depreciated. At that point, the Gain on Sale reported by the subsidiary ($51,600) will have been completely offset by the additional depreciation expense reported by the parent ($51,600 = 6 x $8,600 per year). The cumulative consolidated net income will be the same as the combined entity would have reported had the sale not taken place. However, even after the equipment is fully depreciated, the [I] consolidation journal entry will continue to “gross up” the equipment and accumulated depreciation to the pre-intercompany sale levels until the equipment is retired or disposed.

Solutions Manual, Chapter 4

©Cambridge Business Publishers, 2020 4-13

36.

a. Depreciation expense (parent) = $120,000 / 12 = $10,000 per year. Depreciation expense (subsidiary) = $100,000 / 8 = $12,500 per year. b. Net book value on date of sale = $120,000 – (4 x $10,000) = $80,000 Gain on sale = $100,000 - $80,000 = $20,000 c. The Equipment (cost) write-down during the sale = $120,000 - $100,000 = $20,000. Given the Accumulated Depreciation of $40,000 (4 x $10,000) and the Gain on Sale of $20,000 (part b), the [I] consolidation journal entries in 2016: [Igain]

[Idep]

Gain on sale of equipment 20,000 Equipment 20,000 Accumulated depreciation 40,000 (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) Accumulated depreciation 2,500 Depreciation expense 2,500 (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount)

d. The excess depreciation expense is $2,500 ($12,500 - $10,000) per year. By the beginning of 2019, the Gain on Sale has been reduced by $7,500 (3 x $2,500). So, the retained earnings of the parent must be reduced by only $12,500 ($20,000 - $7,500) of the deferred Gain on Sale. The amount of effect on Retained Earnings for the year ended December 31, 2019 [ADJ] Retained earnings (P) @ BOY

12,500

Equity Investment @ BOY

12,500

e. The resulting [Igain] and [Idep] holding period consolidation journal entries are, [Igain]

Equity Investment @BOY Equipment Accumulated depreciation

12,500 20,000 32,500

(Reverses prior year unconfirmed profit elimination from investment, and restates Equipment and Accumulated Depreciation as if intercompany transaction never occurred)

[Idep]

Accumulated depreciation Depreciation expense

2,500 2,500

(to reverse the excess depreciation expense for the period) continued ©Cambridge Business Publishers, 2020 4-14

Advanced Accounting, 4th Edition

The [Igain] entry reverses prior year unconfirmed profit elimination from investment, adjusts the Equipment (at cost) to its pre-sale amount, and adjusts the Accumulated Depreciation for the difference between the balance that the subsidiary would have reported had the sale not taken place and the amount that the parent currently reports. The [Idep] entry reduces the current period depreciation expense, reported by the subsidiary at $12,500, to the amount that the parent would have reported ($10,000) had the sale not taken place. f. We will need to make the [Igain] and [Idep] consolidation journal entries for the remaining useful life of the equipment. At the end of its 12-year useful life, the equipment will be fully depreciated. At that point, the Gain on Sale reported by the parent ($20,000) will have been completely offset by the additional depreciation expense reported by the subsidiary ($20,000 = 8 x $2,500 per year). The cumulative consolidated net income will be the same as the combined entity would have reported had the sale not taken place. However, even after the equipment is fully depreciated, the [I] consolidation journal entry will continue to “gross up” the equipment and accumulated depreciation to the pre-intercompany sale levels until the equipment is retired, disposed of or sold to an unaffiliated third party. 37.

a. The statement “Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis” means that the parent Caterpillar, Inc., and all of its subsidiaries other than Financial Products are consolidated in the heading Machinery, Energy & Transportation. The Financial Products subsidiary is reported separately and is represented on the Machinery, Energy &Transportation consolidated balance sheet (the balance sheet is not presented with the problem) as an Equity Investment in the same manner in which we have represented the subsidiary on the parent’s balance sheet in the text. b. This adjustment eliminates the intercompany sale of financial products from Financial Products to Machinery, Energy & Transportation. c. If the sale of products or services was made on account, we will expect to see eliminations for intercompany receivables and payables. d. The statement “Elimination of Financial Products' profit due to equity method of accounting” represents our elimination of Equity Income in the consolidation process. Both the Equity Investment and the related Equity Income will be eliminated from the consolidated balance sheet and income statement, respectively, and will be replaced by the revenues, expenses, assets and liabilities to which they relate. The consolidating adjustment discussed in footnote #6 is part of Caterpillar’s [C] entry.

Solutions Manual, Chapter 4

©Cambridge Business Publishers, 2020 4-15

38.

a. The $1,811 thousand elimination relates to sales of products and/or services from the Financial Services Operations entity to the Motorcycles and Related Products Operations. These intercompany revenues must be eliminated in the consolidation process. b. If the sale of products or services were made on account, we would expect to see eliminations for intercompany receivables and payables.

39. a. Income (loss) from subsidiary Subsidiary net income Recognition of prior year deferral of gross profit Deferral of current year gross profit Depreciation of [A] asset Income (loss) from subsidiary

132,000 14,400 (24,000) (42,000) 80,400

b. Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP BOY Deferred profit Income (loss) from subsidiary Dividends Equity investment *BOY AAP assets:

486,000 60,000 84,000 474,000 * (14,400) 80,400 (18,000) 1,152,000 dep/amort

PPE, net @ BOY

120,000

-3x

6,000

102,000

Customer list @ BOY

210,000

-3x

21,000

147,000

Royalty Agreement @ BOY

150,000

-3x

15,000

105,000

Goodwill

120,000

BOY AAP assets

600,000

©Cambridge Business Publishers, 2020 4-16

42,000

474,000

Advanced Accounting, 4th Edition

39.

c. [C]

[E]

[A]

[D]

[Icogs]

Income (loss) from subsidiary Dividends Equity investment

80,400

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

60,000 84,000 486,000

PPE, net @ BOY Customer List @ BOY Royalty Agreement @ BOY Goodwill Equity Investment - @BOY

102,000 147,000 105,000 120,000

Operating expenses PPE, net @ BOY Customer list @ BOY Royalty agreement @ BOY

42,000

Equity investment Cost of goods sold

14,400

[Isales] Sales

18,000 62,400

630,000

474,000

6,000 21,000 15,000

14,400 81,600

Cost of goods sold [Icogs]

[Ipay]

81,600

Cost of goods sold Inventory

24,000

Accounts payable Accounts receivable

32,400

Solutions Manual, Chapter 4

24,000

32,400

©Cambridge Business Publishers, 2020 4-17

39.

d. Elimination Entries

Income Statement:

Parent

Subsidiary

Sales

5,160,000

939,600

[Isales]

81,600

Cost of goods sold

(3,600,000)

(564,000)

[Icogs]

24,000

Gross profit

Consolidated 6,018,000

14,400

[Icogs]

81,600

[Isales]

(4,092,000)

1,560,000

375,600

1,926,000

Income (loss) from Sub

80,400

[C]

80,400

Operating expenses

(996,000)

(243,600)

[D]

42,000

(1,281,600)

Net income

644,400

132,000

644,400

Statement of RE: BOY retained earnings

2,619,600

486,000

Net income

644,400

132,000

[E]

486,000

2,619,600

Dividends

(144,000)

(18,000)

EOY retained earnings

3,120,000

600,000

3,120,000

756,000

300,000

1,056,000

644,400 18,000

[C]

(144,000)

Balance Sheet: Assets Cash Accounts receivable

672,000

228,000

32,400

[Ipay]

867,600

Inventory

1,020,000

276,000

24,000

[Icogs]

1,272,000

PPE, net

4,800,000

516,000

[A]

102,000

6,000

[D]

5,412,000

Customer list

[A]

147,000

21,000

[D]

126,000

Royalty agreement

[A]

105,000

15,000

[D]

Goodwill

[A]

120,000

Equity investment

1,152,000

[Icogs]

14,400

90,000 120,000

62,400

[C]

630,000

[E]

474,000

[A]

8,400,000

1,320,000

8,943,600

360,000

110,400

Other current liabilities

480,000

152,400

632,400

Long-term liabilities

3,000,000

313,200

3,313,200

Common stock

816,000

60,000

[E]

60,000

816,000

APIC

624,000

84,000

[E]

84,000

624,000

3,120,000

600,000

8,400,000

1,320,000

Liabilities & SE Accounts payable

Retained earnings

©Cambridge Business Publishers, 2020 4-18

[Ipay]

32,400

438,000

3,120,000 1,378,800

1,378,800

8,943,600

Advanced Accounting, 4th Edition

40. a.

Income (loss) from subsidiary Subsidiary net income Recognition of prior year deferral of gross profit Deferral of current year gross profit Depreciation of [A] asset Income (loss) from subsidiary

216,000 21,600 (36,000) (42,000) 159,600

Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP BOY deferred profit Income (loss) from subsidiary Dividends Equity investment

180,000 120,000 156,000 126,000 * (21,600) 159,600 (36,000) 684,000

*BOY AAP assets:

dep/amort

Patent @ BOY

210,000

BOY AAP assets

210,000

Solutions Manual, Chapter 4

-2x

42,000 42,000

126,000 126,000

©Cambridge Business Publishers, 2020 4-19

40.

c. [C]

[E]

[A]

Income (loss) from subsidiary Dividends Equity investment

159,600

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

120,000 156,000 180,000

Patent @ BOY

36,000 123,600

456,000

126,000 Equity Investment - @BOY

[D]

[Icogs]

[Isales]

126,000

Operating expenses Patent @ BOY

42,000

Equity Investment @BOY Cost of goods sold

21,600

Sales

120,000

42,000

21,600

Cost of goods sold [Icogs]

[Ipay]

120,000

Cost of goods sold Inventory

36,000

Accounts payable Accounts receivable

48,000

©Cambridge Business Publishers, 2020 4-20

36,000

48,000

Advanced Accounting, 4th Edition

40.

Elimination Entries Income Statement:

Parent

Sales

9,840,000

1,800,000

[Isales]

120,000

Cost of goods sold

(6,840,000)

(1,104,000)

[Icogs]

36,000

Gross profit

Subsidiary

Consolidated 11,520,000

21,600

[Icogs]

120,000

[Isales]

(7,838,400)

3,000,000

696,000

Income (loss) from Sub

159,600

[C]

159,600

3,681,600 0

Operating expenses

(1,719,600)

(480,000)

[D]

42,000

(2,241,600)

Net income

1,440,000

216,000

BOY retained earnings

2,280,000

180,000

Net income

1,440,000

216,000

Dividends

(600,000)

(36,000)

EOY retained earnings

3,120,000

360,000

1,440,000

Statement of RE: [E]

180,000

2,280,000 1,440,000 36,000

[C]

(600,000) 3,120,000

Balance Sheet: Assets Cash

660,000

360,000

Accounts receivable

1,320,000

228,000

48,000

[Ipay]

1,500,000

Inventory

1,500,000

420,000

36,000

[Icogs]

1,884,000

Building, net

4,800,000

912,000

684,000

Patent Equity investment

1,020,000

5,712,000 [A] [Icogs]

126,000 21,600

42,000

[D]

84,000

123,600

[C]

456,000

[E]

126,000

[A]

8,964,000

1,920,000

10,200,000

732,000

252,000

Other current liabilities

912,000

312,000

1,224,000

Long-term liabilities

2,400,000

720,000

3,120,000

600,000

120,000

[E]

120,000

600,000

APIC

1,200,000

156,000

[E]

156,000

1,200,000

Retained earnings

3,120,000

360,000

8,964,000

1,920,000

Liabilities & SE Accounts payable

Common stock

Solutions Manual, Chapter 4

[Ipay]

48,000

936,000

3,120,000 1,009,200

1,009,200

10,200,000

©Cambridge Business Publishers, 2020 4-21

41. a.

Income (loss) from subsidiary Subsidiary net income Recognition of prior year deferral of gross profit Deferral of current year gross profit Depreciation of [A] asset Income (loss) from subsidiary

b. Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP BOY deferred profit Income (loss) from subsidiary Dividends Equity investment *BOY AAP assets:

532,000 70,000 112,000 392,000 * (32,200) 79,800 (42,000) 1,111,600

dep/amort

Patent @ BOY

420,000

Goodwill

140,000

BOY AAP assets

560,000

©Cambridge Business Publishers, 2020 4-22

140,000 32,200 (50,400) (42,000) 79,800

-4x

42,000 42,000

252,000

140,000 392,000

Advanced Accounting, 4th Edition

41.

c. [C]

[E]

[A]

Income (loss) from subsidiary Dividends Equity investment

79,800 42,000 37,800

Common stock (S) - @BOY 70,000 APIC (S) - @BOY 112,000 Retained earnings (S) @BOY 532,000 Equity investment - @BOY Patent @ BOY Goodwill

252,000 140,000 Equity investment - @BOY

[D]

[Icogs]

392,000

Operating expenses Patent @ BOY

42,000

Equity investment @BOY Cost of goods sold

32,200

[Isales] Sales

42,000

32,200 175,000

Cost of goods sold [Icogs]

[Ipay]

175,000

Cost of goods sold Inventory

50,400

Accounts payable Accounts receivable

70,000

Solutions Manual, Chapter 4

714,000

50,400

70,000

©Cambridge Business Publishers, 2020 4-23

41.

d. Elimination Entries

Income Statement:

Parent

Subsidiary

Sales

5,600,000

1,050,000

[Isales]

175,000

Cost of goods sold

(4,200,000)

(630,000)

[Icogs]

50,400

Gross profit

1,400,000

Consolidated 6,475,000

32,200

[Icogs]

175,000

[Isales]

420,000

(4,673,200) 1,801,800

Income (loss) from Sub

79,800

[C]

79,800

Operating expenses

(980,000)

(280,000)

[D]

42,000

(1,302,000)

Net income

499,800

140,000

2,874,200

532,000

Net income

499,800

140,000

Dividends

(168,000)

(42,000)

EOY retained earnings

3,206,000

630,000

1,008,000

280,000

896,000

210,000

70,000

[Ipay]

1,036,000

Inventory

1,358,000

322,000

50,400

[Icogs]

1,629,600

Building, net

5,040,000

588,000

499,800

Statement of RE: BOY retained earnings

[E]

532,000

2,874,200 499,800 42,000

[C]

(168,000) 3,206,000

Balance Sheet: Assets Cash Accounts receivable

1,288,000

5,628,000

Patent

[A]

252,000

Goodwill

[A]

140,000

[Icogs]

32,200

Equity investment

1,111,600

9,413,600

42,000

[D]

210,000 140,000

37,800

[C]

714,000

[E]

392,000

[A]

1,400,000

9,931,600

Liabilities & SE: Accounts payable

383,600

98,000

Other current liabilities

504,000

140,000

644,000

Long-term liabilities

3,360,000

350,000

3,710,000

Common stock

1,120,000

70,000

[E]

70,000

[E]

112,000

APIC Retained earnings

840,000

112,000

3,206,000

630,000

9,413,600

1,400,000

©Cambridge Business Publishers, 2020 4-24

[Ipay]

70,000

411,600

1,120,000 840,000 3,206,000

1,555,400

9,931,600

Advanced Accounting, 4th Edition

42. a.

Income (loss) from subsidiary Subsidiary net income Recognition of prior year deferral of gross profit Deferral of current year gross profit Depreciation of [A] asset Income (loss) from subsidiary

460,000 72,000 96,000 281,600 * (14,400) 83,200 (20,000) 958,400

dep/amort

PPE, net

128,000

-4x

8,000

96,000

Customer list

64,000

-4x

6,400

38,400

Royalty agreement

152,000

-4x

15,200

91,200

Goodwill

56,000

BOY AAP assets

400,000

Solutions Manual, Chapter 4

120,000 14,400 (21,600) (29,600) 83,200

29,600

281,600

©Cambridge Business Publishers, 2020 4-25

42.

c. [C]

[E]

[A]

Income (loss) from subsidiary Dividends Equity investment

83,200

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

72,000 96,000 460,000

PPE, net Customer list Royalty agreement Goodwill

96,000 38,400 91,200 56,000

20,000 63,200

628,000

Equity investment - @BOY [D]

Operating expenses

281,600 29,600

PPE, net Customer list Royalty agreement [Icogs]

Equity investment @BOY Cost of goods sold

[Isales] Sales

8,000 6,400 15,200 14,400 14,400 76,800

Cost of goods sold [Icogs]

Cost of goods sold

76,800 21,600

Inventory [Ipay]

Accounts payable

30,400 Accounts receivable

©Cambridge Business Publishers, 2020 4-26

21,600

30,400

Advanced Accounting, 4th Edition

42.

d. Elimination Entries

Income Statement:

Parent

Subsidiary

Sales

5,280,000

1,040,000

[Isales]

76,800

Cost of goods sold

(3,760,000)

(640,000)

[Icogs]

21,600

Gross profit

1,520,000

Consolidated 6,243,200

14,400

[Icogs]

76,800

[Isales]

400,000

(4,330,400) 1,912,800

Income (loss) from Sub

83,200

[C]

83,200

Operating expenses

(987,200)

(280,000)

[D]

29,600

(1,296,800)

Net income

616,000

120,000

1,544,000

460,000

Net income

616,000

120,000

Dividends

(160,000)

(20,000)

EOY retained earnings

2,000,000

560,000

Cash

200,000

288,000

Accounts receivable

709,600

248,000

30,400

[Ipay]

927,200

Inventory

772,000

344,000

21,600

[Icogs]

1,094,400

PPE, net

2,560,000

560,000

8,000

[D]

3,208,000

616,000

Statement of RE: BOY retained earnings

[E]

460,000

1,544,000 616,000 20,000

[C]

(160,000) 2,000,000

Balance Sheet: Assets 488,000

[A]

96,000

Customer list

[A]

38,400

6,400

[D]

32,000

Royalty agreement

[A]

91,200

15,200

[D]

76,000

Goodwill

[A]

56,000

Equity investment

958,400

[Icogs]

14,400

56,000 63,200

[C]

628,000

[E]

281,600

[A]

5,200,000

1,440,000

5,881,600

Accounts payable

400,000

128,000

Other current liabilities

544,000

208,000

752,000

Long-term liabilities

1,600,000

376,000

1,976,000

Common stock

240,000

72,000

[E]

72,000

240,000

APIC

416,000

96,000

[E]

96,000

416,000

2,000,000

560,000

5,200,000

1,440,000

Liabilities & SE:

Retained earnings

Solutions Manual, Chapter 4

[Ipay]

30,400

497,600

2,000,000 1,165,600

1,165,600

5,881,600

©Cambridge Business Publishers, 2020 4-27

43.

a. Year ended December 31, 2017 2018 2016

100% AAP Amortization - Dr (CR) Property, plant and equipment (PPE), net Customer List Royalty Agreement

14,000 8,750 7,000 29,750

Goodwill Net amortization

100% Unamortized AAP - Dr (CR) Property, plant and equipment (PPE), net Customer List Royalty Agreement Goodwill Net unamortized

Jan. 1 2016

2016

140,000 70,000 56,000 84,000 350,000

126,000 61,250 49,000 84,000 320,250

14,000 8,750 7,000 29,750

2019

14,000 8,750 7,000 29,750

December 31, 2017 2018

2019

112,000 52,500 42,000 84,000 290,500

98,000 43,750 35,000 84,000 260,750

84,000 35,000 28,000 84,000 231,000

b. BOY [ADJ] for consolidation at December 31, 2019

Change in RE(S) thru BOY Cumulative AAP amort thru BOY BOY Upstream IIP ADJ Amount

147,000 (89,250) (7,350) 50,400

©Cambridge Business Publishers, 2017 4-28

Advanced Accounting by Halsey & Hopkins, 3rd Edition

43.

c. [ADJ]

BOY Equity Investment BOY Retained Earnings (P)

50,400

Income (loss) from subsidiary Dividends

10,500

BOY Common stock (S) BOY APIC (S) BOY Retained earnings (S) Equity investment

35,000 38,500 283,500

PPE, net Customer list Royalty Agreement Goodwill Equity Investment

98,000 43,750 35,000 84,000

Operating expenses PPE, net Customer List Royalty Agreement

29,750

[Icogs] Equity Investment Cost of goods sold

7,350

[Isales] Sales

42,000

[C]

[E]

[A]

[D]

50,400

10,500

357,000

260,750

14,000 8,750 7,000

7,350

Cost of goods sold

42,000

[Icogs] Cost of goods sold Inventory

5,600

[Ipay]

19,600

Accounts payable Accounts receivable

5,600

19,600

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

4-29

43.

continued Consolidation Entries

Income Statement

Parent

Subsidiary

Sales

3,045,000

560,000

[Isales]

42,000

Cost of goods sold

(2,135,000)

(336,000)

[Icogs]

5,600

Consolidated 3,563,000

7,350

[Icogs]

42,000

[Isales]

(2,427,250)

Gross profit

910,000

224,000

1,135,750

Operating expenses

(581,000)

(140,000)

Income (loss) from Sub

10,500

Net income

339,500

84,000

1,400,000

283,500

Net income

339,500

84,000

Dividends

(87,500)

(10,500)

Ending retained earnings

1,652,000

357,000

1,747,900

Cash

455,000

175,000

630,000

Accounts receivable

392,000

126,000

19,600

[Ipay]

498,400

Inventory

595,000

175,000

5,600

[Icogs]

764,400

Equity investment

560,000

[D]

29,750

(750,750)

[C]

10,500

0 385,000

RE statement: BOY retained earnings

[E]

283,500

50,400

[ADJ]

1,450,400 385,000

10,500

[C]

(87,500)

Balance sheet: Assets

PPE, net

294,000

50,400

357,000

[E]

[Icogs]

7,350

260,750

[A]

98,000

14,000

[D]

3,178,000

Customer List

[A]

43,750

8,750

[D]

35,000

Royalty Agreement

[A]

35,000

7,000

[D]

28,000

Goodwill

[A]

84,000

Total assets

2,800,000

[ADJ]

84,000

4,802,000

770,000

5,217,800

Accounts payable

245,000

70,000

Other current liabilities

280,000

87,500

367,500

Long-term liabilities

1,750,000

182,000

1,932,000

490,000

35,000

[E]

35,000

[E]

38,500

Liabilities and SE

Common stock APIC

385,000

38,500

Retained earnings

1,652,000

357,000

Total liabilities and equity

4,802,000

770,000

[Ipay]

19,600

295,400

490,000 385,000 1,747,900

782,950

5,217,800

©Cambridge Business Publishers, 2017 4-30

Advanced Accounting by Halsey & Hopkins, 3rd Edition

44.

a. 100% AAP Amortization - Dr (CR) Property, plant and equipment (PPE), net Customer List Patent Net amortization

100% Unamortized AAP - Dr (CR) Property, plant and equipment (PPE), net Customer List Patent Net unamortized

Jan. 1 2015 48,000 30,000 72,000 150,000

2015 4,800 3,750 6,000 14,550

Year Ended December 31 2016 2017 2018 4,800 4,800 4,800 3,750 3,750 3,750 6,000 6,000 6,000 14,550 14,550 14,550

2019 4,800 3,750 6,000 14,550

2015 43,200 26,250 66,000 135,450

December 31, 2016 2017 2018 38,400 33,600 28,800 22,500 18,750 15,000 60,000 54,000 48,000 120,900 106,350 91,800

2019 24,000 11,250 42,000 77,250

b. BOY [ADJ] for consolidation at December 31, 2019 Change in RE(S) thru BOY 120,000 Cumulative AAP amort thru BOY (58,200) BOY Upstream IIP (7,200) ADJ Amount 54,600

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

4-31

44.

c. [ADJ]

[C]

[E]

[A]

BOY Equity Investment BOY Retained Earnings (P)

54,600

Income (loss) from subsidiary Dividends

30,000

BOY Common stock (S) BOY APIC (S) BOY Retained earnings (S) Equity investment

60,000 75,000 855,000

PPE, net Customer List Patent

28,800 15,000 48,000

54,600

30,000

990,000

Equity Investment [D]

[Icogs]

[Isales]

91,800

Operating expenses PPE, net Customer List Patent

14,550

Equity Investment Cost of goods sold

7,200

Sales

60,000

4,800 3,750 6,000

7,200

Cost of goods sold [Icogs]

[Ipay]

60,000

Cost of goods sold Inventory

8,400

Accounts payable Accounts receivable

23,400

8,400

23,400

©Cambridge Business Publishers, 2017 4-32

Advanced Accounting by Halsey & Hopkins, 3rd Edition

44.

c. continued Consolidation Entries

Income Statement

Parent

Subsidiary

Sales

5,760,000

780,000

[Isales]

60,000

Cost of goods sold

(4,020,000)

(480,000)

[Icogs]

8,400

Gross profit

1,740,000

300,000

Operating expenses

(1,080,000)

(210,000)

Income (loss) from Sub

30,000

Net income

690,000

90,000

2,880,000

855,000

Consolidated 6,480,000

7,200

[Icogs]

60,000

[Isales]

(4,441,200) 2,038,800

[D]

14,550

(1,304,550)

[C]

30,000

0 734,250

RE statement: BOY retained earnings

[E]

855,000

54,600

[ADJ]

2,934,600

30,000

[C]

(150,000)

Net income

690,000

90,000

Dividends

(150,000)

(30,000)

734,250

Ending retained earnings

3,420,000

915,000

3,518,850

Cash

420,000

240,000

660,000

Accounts receivable

720,000

180,000

23,400

[Ipay]

876,600

Inventory

1,080,000

360,000

8,400

[Icogs]

1,431,600

Equity investment

1,020,000

Balance sheet: Assets

PPE, net

480,000

54,600

990,000

[E]

[Icogs]

7,200

91,800

[A]

28,800

4,800

[D]

3,504,000

Customer List

[A]

15,000

3,750

[D]

11,250

Patent

[A]

48,000

6,000

[D]

42,000

Total assets

3,000,000

[ADJ]

6,240,000

1,260,000

6,525,450

Accounts payable

420,000

90,000

Other current liabilities

540,000

120,000

660,000

Long-term liabilities

900,000

Common stock

360,000

60,000

[E]

60,000

360,000

APIC

600,000

75,000

[E]

75,000

600,000

Retained earnings

3,420,000

915,000

Total liabilities and equity

6,240,000

1,260,000

Liabilities and SE [Ipay]

23,400

486,600

3,518,850 1,279,950

1,279,950

6,525,450

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

4-33

45. a. Year Ended December 31 2017 2018 2019

100% AAP Amortization - Dr (CR) Accounts Receivable PPE, net Licenses Patent Net amortization

100% Unamortized AAP - Dr (CR) Accounts Receivable Property, plant and equipment (PPE), net Licenses Patent Goodwill Net unamortized

15,000 13,500 11,250 9,000 48,750

Jan. 1 2017

13,500 11,250 9,000 33,750

December 31, 2017 2018

13,500 11,250 9,000 33,750

2019

15,000

135,000 90,000 45,000 90,000 375,000

121,500 78,750 36,000 90,000 326,250

108,000 67,500 27,000 90,000 292,500

94,500 56,250 18,000 90,000 258,750

b. BOY [ADJ] for consolidation at December 31, 2019 Change in RE(S) thru BOY 157,500 Cumulative AAP amort thru BOY (82,500) BOY Upstream IIP (7,500) ADJ Amount 67,500

©Cambridge Business Publishers, 2017 4-34

Advanced Accounting by Halsey & Hopkins, 3rd Edition

45.

c. [ADJ]

[C]

[E]

[A]

BOY Equity Investment BOY Retained Earnings (P)

67,500

Income (loss) from subsidiary Dividends

11,250

BOY Common stock (S) BOY APIC (S) BOY Retained earnings (S) Equity investment

37,500 41,250 303,750

PPE, net Licenses Patent Goodwill

108,000 67,500 27,000 90,000

67,500

11,250

382,500

Equity Investment

[D]

[Icogs]

292,500

Operating expenses PPE, net Licenses Patent

33,750

Equity Investment Cost of goods sold

7,500

[Isales] Sales

13,500 11,250 9,000

7,500 30,000

Cost of goods sold [Icogs]

[Ipay]

30,000

Cost of goods sold Inventory

5,625

Accounts payable Accounts receivable

21,000

5,625

21,000

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

4-35

45.

c. continued Consolidation Entries

Income Statement

Parent

Subsidiary

Sales

3,262,500

600,000

[Isales]

30,000

Cost of goods sold

(2,287,500)

(360,000)

[Icogs]

5,625

Gross profit

975,000

240,000

Operating expenses

(622,500)

(150,000)

Consolidated 3,832,500

7,500

[Icogs]

30,000

[Isales]

(2,615,625) 1,216,875

[D]

33,750

(806,250)

[C]

11,250

Income (loss) from Sub.

11,250

Net income

363,750

90,000

1,500,000

303,750

Net income

363,750

90,000

Dividends

(93,750)

(11,250)

Ending retained earnings

1,770,000

382,500

1,884,375

Cash

487,500

187,500

675,000

Accounts receivable

420,000

135,000

21,000

[Ipay]

534,000

Inventory

637,500

187,500

5,625

[Icogs]

819,375

Equity investment

600,000

410,625

RE statement: BOY retained earnings

[E]

303,750

67,500

[ADJ]

1,567,500 410,625

11,250

[C]

(93,750)

Balance sheet: Assets

PPE, net

315,000

67,500

382,500

[E]

[Icogs]

7,500

292,500

[A]

108,000

13,500

[D]

3,409,500

Licenses

[A]

67,500

11,250

[D]

56,250

Patent

[A]

27,000

9,000

[D]

18,000

Goodwill

[A]

90,000

Total assets

3,000,000

[ADJ]

5,145,000

825,000

262,500

75,000

90,000 5,602,125

Liabilities and SE Accounts payable

[Ipay]

21,000

316,500

Other current liabilities

300,000

93,750

393,750

Long-term liabilities

1,875,000

195,000

2,070,000

Common stock

525,000

37,500

[E]

37,500

525,000

APIC

412,500

41,250

[E]

41,250

412,500

EOY Retained earnings

1,770,000

382,500

Total liabilities and equity

5,145,000

825,000

1,884,375 851,625

851,625

5,602,125

©Cambridge Business Publishers, 2017 4-36

Advanced Accounting by Halsey & Hopkins, 3rd Edition

46. a. Income (loss) from subsidiary Subsidiary net income Depreciation of [A] asset Income (loss) from subsidiary

$63,000 (18,000)* $45,000

b. Equity Investment EOY subsidiary retained earnings EOY subsidiary common stock EOY subsidiary APIC EOY Unamortized AAP Unconfirmed gain on intercompany sale @ EOY Equity investment

225,000 27,000 45,000 216,000 * (36,000) 477,000

*EOY Unamortized AAP:

dep/amort

Patent @ BOY

180,000

Goodwill

90,000

EOY AAP assets

270,000

-3x

18,000 18,000

126,000

90,000 216,000

c. [C]

[E]

[A]

Income (loss) from subsidiary Dividends Equity Investment

45,000

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity Investment - @BOY

27,000 45,000 177,300

Patent @ BOY Goodwill

15,300 29,700

249,300 144,000 90,000

Equity Investment - @BOY [D] [Igain]

234,000

Operating Expenses Patent @ BOY

18,000

Equity Investment @BOY Land

36,000

18,000 36,000

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

4-37

46.

d. Elimination Entries

Income Statement:

Parent

Subsidiary

Consolidated

Sales

2,700,000

342,000

3,042,000

Cost of goods sold

(1,890,000)

(198,000)

(2,088,000)

Gross profit

810,000

144,000

954,000

Income (loss) from Sub

45,000

[C]

45,000

Operating expenses

(513,000)

(81,000)

[D]

18,000

(612,000)

Net income

342,000

63,000

648,000

177,300

342,000

Statement of RE: BOY retained earnings

[E]

177,300

648,000

Net income

342,000

63,000

Dividends

(90,000)

(15,300)

342,000

EOY retained earnings

900,000

225,000

900,000

Cash

234,000

108,000

342,000

Accounts receivable

342,000

72,000

414,000

Inventory

522,000

135,000

PPE, net

1,800,000

193,500

15,300

[C]

(90,000)

Balance Sheet: Assets

657,000

Patent

[A]

144,000

Goodwill

[A]

90,000

[Igain]

36,000

Equity investment

477,000

36,000

[Igain]

1,957,500

18,000

[D]

126,000 90,000

29,700

[C]

249,300

[E]

234,000

[A]

3,375,000

508,500

3,586,500

Accounts payable

201,600

45,000

246,600

Other current liabilities

248,400

54,000

302,400

Long-term liabilities

1,350,000

112,500

1,462,500

Common stock

360,000

27,000

[E]

27,000

360,000

APIC

315,000

45,000

[E]

45,000

315,000

Retained earnings

900,000

225,000

3,375,000

508,500

Liabilities & SE

900,000 582,300

582,300

3,586,500

©Cambridge Business Publishers, 2017 4-38

Advanced Accounting by Halsey & Hopkins, 3rd Edition

47. a. Income (loss) from subsidiary Subsidiary net income Depreciation of [A] assets Income (loss) from subsidiary

148,200 (59,800)* 88,400

b. Equity Investment EOY subsidiary retained earnings EOY subsidiary common stock EOY subsidiary APIC EOY Unamortized AAP Unconfirmed gain on intercompany sale @ EOY Equity investment *EOY Unamortized AAP:

650,000 65,000 156,000 358,800 * (65,000) 1,164,800

dep/amort

Royalty agreement @ BOY

468,000

-4x

46,800

280,800

Customer list

130,000

-4x

13,000

78,000

EOY AAP assets

598,000

59,800

358,800

c. [C]

[E]

[A]

[D]

[Igain]

Income (loss) from subsidiary Dividends Equity investment

88,400

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

65,000 156,000 520,000

Royalty agreement @ BOY Customer list Equity investment - @BOY

327,600 91,000

Operating expenses Royalty agreement Customer list

59,800

Equity investment @BOY Land

65,000

18,200 70,200

741,000

418,600

46,800 13,000

65,000

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

4-39

47.

Elimination Entries Income Statement:

Parent

Subsidiary

Sales

5,980,000

1,053,000

7,033,000

Cost of goods sold

(4,186,000)

(631,800)

(4,817,800)

Gross profit

1,794,000

421,200

2,215,200

Income (loss) from Sub Operating expenses Net income

Consolidated

88,400

[C]

88,400

(1,136,200)

(273,000)

[D]

59,800

(1,469,000)

746,200

148,200

746,200

Statement of RE: BOY retained earnings

2,600,000

520,000

Net income

746,200

148,200

[E]

520,000

2,600,000

Dividends

(221,000)

(18,200)

EOY retained earnings

3,125,200

650,000

3,125,200

Cash

520,000

338,000

858,000

Accounts receivable

715,000

252,200

967,200

Inventory

988,000

338,000

1,326,000

PPE, net

5,712,200

631,800

746,200 18,200

[C]

(221,000)

Balance Sheet: Assets

Royalty Agreement Customer List Equity investment

1,164,800

65,000

[Igain]

6,279,000

[A]

327,600

46,800

[D]

280,800

[A]

91,000

13,000

[D]

78,000

[Igain]

65,000

70,200

[C]

741,000

[E]

418,600

[A]

9,100,000

1,560,000

9,789,000

447,200

124,800

572,000

Other current liabilities

574,600

213,200

787,800

Long-term liabilities

3,250,000

351,000

3,601,000

Common stock

977,600

65,000

[E]

65,000

977,600

APIC

725,400

156,000

[E]

156,000

725,400

3,125,200

650,000

9,100,000

1,560,000

Liabilities & SE Accounts payable

Retained earnings

3,125,200 1,372,800

1,372,800

9,789,000

©Cambridge Business Publishers, 2017 4-40

Advanced Accounting by Halsey & Hopkins, 3rd Edition

48.

a. Income (loss) from subsidiary Subsidiary net income Depreciation of [A] asset Income (loss) from subsidiary

$252,000 (19,200)* $232,800

$1,120,000 120,000 144,000 235,200 * (32,000) $1,587,200

dep/amort

Patent

192,000

Goodwill

120,000

BOY AAP assets

312,000

-4x

19,200 19,200

115,200

120,000 235,200

c. [C]

Income (loss) from subsidiary

232,800

Dividends Equity Investment [E]

[A]

32,000 200,800

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity Investment - @BOY

120,000 144,000 900,000

Patent Goodwill

134,400 120,000

1,164,000

Equity Investment - @BOY [D]

254,400

Operating expenses Patent

19,200

[Igain] Equity Investment @BOY Land

32,000

19,200

32,000

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

4-41

48.

d. Elimination Entries

Income Statement:

Parent

Subsidiary

Consolidated

Sales

4,880,000

1,720,000

6,600,000

Cost of goods sold

(3,440,000)

(1,000,000)

(4,440,000)

Gross profit

1,440,000

720,000

2,160,000

Income (loss) from Sub

232,800

[C]

232,800

Operating expenses

(912,000)

(468,000)

[D]

19,200

(1,399,200)

Net income

760,800

252,000

1,495,200

900,000

760,800

Statement of RE: BOY retained earnings

[E]

900,000

1,495,200

Net income

760,800

252,000

Dividends

(176,000)

(32,000)

760,800

EOY retained earnings

2,080,000

1,120,000

2,080,000

Cash

288,000

440,000

728,000

Accounts receivable

454,400

497,600

952,000

Inventory

720,000

536,000

PPE, net

2,550,400

926,400

32,000

[C]

(176,000)

Balance Sheet: Assets

1,256,000

Patent

[A]

134,400

Goodwill

[A]

120,000

[Igain]

32,000

Equity investment

1,587,200

32,000

[Igain]

3,444,800

19,200

[D]

115,200 120,000

200,800

[C]

1,164,000

[E]

254,400

[A]

5,600,000

2,400,000

6,616,000

Accounts payable

352,000

168,000

520,000

Other current liabilities

440,000

288,000

728,000

Long-term liabilities

1,360,000

560,000

1,920,000

Common stock

784,000

120,000

[E]

120,000

784,000

APIC

584,000

144,000

[E]

144,000

584,000

2,080,000

1,120,000

5,600,000

2,400,000

Liabilities & SE

Retained earnings

2,080,000 1,702,400

1,702,400

6,616,000

©Cambridge Business Publishers, 2017 4-42

Advanced Accounting by Halsey & Hopkins, 3rd Edition

49.

a. Income (loss) from subsidiary Subsidiary net income Depreciation of [A] asset Income (loss) from subsidiary

$280,000 (17,500)* $262,500

$840,000 140,000 304,500 171,500 * (56,000) $1,400,000

dep/amort

Customer list

126,000

-5x

12,600

63,000

Patent

49,000

-5x

4,900

24,500

Goodwill

84,000

EOY AAP assets

259,000

17,500

171,500

c. [C]

[E]

[A]

Income (loss) from subsidiary Dividends Equity investment

262,500

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

140,000 304,500 597,800

Customer list Patent Goodwill

75,600 29,400 84,000

37,800 224,700

1,042,300

Equity investment - @BOY [D]

Operating expenses Customer list Patent

[Igain] Equity investment @BOY Land

189,000 17,500 12,600 4,900 56,000 56,000

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

4-43

49.

d. Elimination Entries

Income Statement:

Parent

Subsidiary

Consolidated

Sales

4,900,000

2,100,000

7,000,000

Cost of goods sold

(3,220,000)

(1,260,000)

(4,480,000)

Gross profit

1,680,000

840,000

2,520,000

Income (loss) from Sub

262,500

[C]

262,500

Operating expenses

(1,260,000)

(560,000)

[D]

17,500

(1,837,500)

682,500

280,000

2,030,000

597,800

Net income

682,500

Statement of RE: BOY retained earnings

[E]

597,800

2,030,000

Net income

682,500

280,000

Dividends

(189,000)

(37,800)

682,500

EOY retained earnings

2,523,500

840,000

2,523,500

Cash

298,900

322,000

620,900

Accounts receivable

569,800

273,000

842,800

37,800

[C]

(189,000)

Balance Sheet: Assets

Inventory

699,300

483,000

PPE, net

3,122,000

1,372,000

1,182,300 56,000

[Igain]

4,438,000

Customer List

[A]

75,600

12,600

[D]

63,000

Patent

[A]

29,400

4,900

[D]

24,500

[A]

84,000

[Igain]

56,000

224,700

[C]

1,042,300

[E]

189,000

[A]

Goodwill Equity investment

1,400,000

84,000 0

6,090,000

2,450,000

7,255,500

Accounts payable

407,400

178,500

585,900

Other current liabilities

513,100

357,000

870,100

Long-term liabilities

Liabilities & SE

1,750,000

630,000

Common stock

215,600

140,000

[E]

140,000

215,600

APIC

680,400

304,500

[E]

304,500

680,400

2,523,500

840,000

6,090,000

2,450,000

Retained earnings

2,380,000

2,523,500 1,567,300

1,567,300

7,255,500

©Cambridge Business Publishers, 2017 4-44

Advanced Accounting by Halsey & Hopkins, 3rd Edition

50.

a. Subsidiary Cash Accumulated depreciation

72,000 33,600

Equipment Gain on sale of Equipment (to record the sale of equipment)

84,000 21,600

Parent Equipment

72,000

Cash (to record the purchase of equipment)

72,000

[Igain] Gain on sale of Equipment 21,600 Equipment 12,000 Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) [Idep]

Accumulated depreciation Depreciation expense (to eliminate the excess depreciation expense recorded by the parent, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $3,600 ($72,000 / 6 = $12,000 vs. $84,000 / 10 = $8,400).

33,600

3,600 3,600

b. The excess depreciation is $3,600 ($72,000 / 6 = $12,000 vs. $84,000 / 10 = $8,400). Through the BOY, one year have passed, so, at the beginning of the current year, the deferred gain is $18,000 ($21,600 - $3,600). c. Income (loss) from subsidiary Subsidiary net income AAP Depreciation Deferred gain on intercompany sale Income (loss) from subsidiary

84,000 (13,200)* 3,600 74,400

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

4-45

50.

d. Equity Investment EOY subsidiary retained earnings EOY subsidiary common stock EOY subsidiary APIC EOY Unamortized AAP Deferred gain on intercompany sale Equity investment *EOY Unamortized AAP:

240,000 68,400 90,000 156,000 * (14,400) 540,000 dep/amort

Customer List

132,000

Goodwill

90,000

EOY AAP assets

222,000

-5x

13,200 13,200

66,000

90,000 156,000

e. [C]

[E]

[A]

Income (loss) from subsidiary Dividends Equity Investment

74,400

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

68,400 90,000 168,000

Customer list Goodwill

79,200 90,000

12,000 62,400

326,400

Equity investment - @BOY [D] [Igain]

[Idep]

169,200

Operating expenses Customer list

13,200

Equity investment - @BOY Equipment Accumulated depreciation

18,000 12,000

Accumulated Depreciation Depreciation Expense

3,600

13,200

30,000 3,600

©Cambridge Business Publishers, 2017 4-46

Advanced Accounting by Halsey & Hopkins, 3rd Edition

50.

f. Elimination Entries

Income Statement:

Parent

Subsidiary

Consolidated

Sales

4,800,000

720,000

5,520,000

Cost of goods sold

(3,480,000)

(420,000)

(3,900,000)

Gross profit

1,320,000

300,000

1,620,000

74,400

[C]

74,400

(1,094,400)

(216,000)

[D]

13,200

300,000

84,000

Income (loss) from Sub Operating expenses Net income

0 3,600

[Idep]

(1,320,000) 300,000

Statement of RE: BOY retained earnings

2,268,000

168,000

Net income

300,000

84,000

[E]

168,000

2,268,000

Dividends

(168,000)

(12,000)

EOY retained earnings

2,400,000

240,000

2,400,000

Cash

330,000

192,000

522,000

Accounts receivable

420,000

258,000

678,000

Inventory

780,000

330,000

1,110,000

PPE, net

3,030,000

618,000

300,000 12,000

[C]

(168,000)

Balance Sheet: Assets

[Igain]

12,000

[Idep]

3,600

Customer List

[A]

79,200

Goodwill

[A]

90,000

[Igain]

18,000

Equity investment

540,000

5,100,000

30,000

[Igain]

3,633,600

13,200

[D]

66,000 90,000

62,400

[C]

326,400

[E]

169,200

[A]

1,398,000

6,099,600

Liabilities & SE Accounts payable

390,000

99,600

489,600

Other current liabilities

480,000

120,000

600,000

Long-term liabilities

900,000

780,000

1,680,000

Common stock

330,000

68,400

[E]

68,400

[E]

90,000

APIC Retained earnings

600,000

90,000

2,400,000

240,000

5,100,000

1,398,000

330,000 600,000 2,400,000

616,800

6,099,600

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

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51.

a. Subsidiary Cash Accumulated depreciation Equipment

200,000 230,400 384,000

Gain on sale of Equipment (to record the sale of equipment)

46,400

Parent Equipment

200,000

Cash (to record the purchase of equipment) [Igain]

[Idep]

200,000

Gain on sale of Equipment 46,400 Equipment 184,000 Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) Accumulated depreciation Depreciation expense (to eliminate the excess depreciation expense recorded by the parent, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $11,600 ($200,000 / 4 = $50,000 vs. $384,000 / 10 = $38,400).

230,400

11,600 11,600

b. The excess depreciation is $11,600 ($200,000 / 4 = $50,000 vs. $384,000 / 10 = $38,400). Through the BOY, three years have passed, so the deferred gain is now $11,600 ($46,400 – 3 x $11,600). c. Income (loss) from subsidiary Subsidiary net income AAP Depreciation Deferred gain on intercompany sale Income (loss) from subsidiary

$100,800 (44,000)* 11,600 $ 68,400

©Cambridge Business Publishers, 2017 4-48

Advanced Accounting by Halsey & Hopkins, 3rd Edition

51.

d. Equity Investment EOY subsidiary retained earnings EOY subsidiary common stock EOY subsidiary APIC EOY Unamortized AAP Deferred gain on intercompany sale Equity investment *EOY Unamortized AAP:

$400,000 88,000 268,000 44,000 * 0 $800,000 dep/amort

Royalty Agreement

168,000

-6x

24,000

Customer List

140,000

-6x

20,000

EOY AAP assets

308,000

44,000

e. [C]

[E]

[A]

[D]

[Igain]

Income (loss) from subsidiary Dividends Equity investment

68,400

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

88,000 268,000 312,800

Royalty agreement Customer list Equity investment - @BOY

48,000 40,000

Operating expenses Royalty agreement Customer list

44,000

Equity investment @ BOY

11,600

Equipment

184,000

13,600 54,800

668,800

88,000

24,000 20,000

Accumulated depreciation [Idep]

Accumulated depreciation Depreciation expense

195,600 11,600 11,600

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

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51.

f. Elimination Entries

Income Statement:

Parent

Subsidiary

Consolidated

Sales

2,640,000

704,000

3,344,000

Cost of goods sold

(1,920,000)

(420,800)

(2,340,800)

Gross profit

720,000

283,200

1,003,200

Income (loss) from Sub

68,400

[C]

68,400

Operating expenses

(408,400)

(182,400)

[D]

44,000

Net income

380,000

100,800

1,460,000

312,800

0 11,600

[Idep]

(623,200) 380,000

Statement of RE: BOY retained earnings

[E]

312,800

1,460,000

Net income

380,000

100,800

Dividends

(80,000)

(13,600)

380,000

EOY retained earnings

1,760,000

400,000

1,760,000

Cash

224,800

194,400

419,200

Accounts receivable

472,800

300,800

773,600

Inventory

702,400

384,800

PPE, net

2,600,000

720,000

13,600

[C]

(80,000)

Balance Sheet: Assets

Royalty Agreement Customer List Equity investment

800,000

1,087,200 [Igain]

184,000

195,600

[Igain]

3,320,000

[Idep]

11,600

[A]

48,000

24,000

[D]

24,000

[A]

40,000

20,000

[D]

20,000

[Igain]

11,600

54,800

[C]

668,800

[E]

88,000

[A]

4,800,000

1,600,000

5,644,000

Accounts payable

272,800

120,000

392,800

Other current liabilities

321,600

160,000

481,600

Long-term liabilities

1,200,000

564,000

148,000

88,000

[E]

88,000

148,000

APIC

1,097,600

268,000

[E]

268,000

1,097,600

Retained earnings

1,760,000

400,000

4,800,000

1,600,000

Liabilities & SE

Common stock

1,764,000

1,760,000 1,076,400

1,076,400

5,644,000

©Cambridge Business Publishers, 2017 4-50

Advanced Accounting by Halsey & Hopkins, 3rd Edition

52.

a. Parent Cash Accumulated depreciation Equipment Gain on sale of Equipment

160,000 92,500 185,000 67,500

(to record the sale of equipment)

Subsidiary Equipment

160,000

Cash (to record the purchase of equipment) [Igain]

[Idep]

160,000

Gain on sale of Equipment 67,500 Equipment 25,000 Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) Accumulated depreciation 13,500 Depreciation expense (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $13,500 ($160,000 / 5= $32,000 vs. $185,000 / 10 = $18,500).

92,500

13,500

b. The excess depreciation is $13,500 ($160,000 / 5= $32,000 vs. $185,000 / 10 = $18,500) . Through the BOY, one year has passed, so the deferred gain is now $54,000 ($67,500 – [1 x $13,500]). c. Income (loss) from subsidiary Subsidiary net income AAP Depreciation Deferred gain on intercompany sale Income (loss) from subsidiary

$320,000 (54,000)* 13,500 $279,500

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

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52.

d. Equity Investment EOY subsidiary retained earnings EOY subsidiary common stock EOY subsidiary APIC EOY Unamortized AAP Deferred gain on intercompany sale Equity investment *EOY Unamortized AAP:

$1,000,000 200,000 556,500 284,000 * (40,500) $2,000,000

amort

Patent

240,000

-4x

24,000

144,000

Customer List

150,000

-4x

30,000

Goodwill

110,000

EOY AAP assets

500,000

54,000

284,000

e. [C]

[E]

[A]

Income (loss) from subsidiary Dividends Equity investment

279,500

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

200,000 556,500 730,000

Patent Customer list Goodwill

168,000

50,000 229,500

1,486,500

60,000 110,000 Equity investment - @BOY

[D]

Operating expenses Patent Customer list

338,000 54,000 24,000 30,000

[Igain] Equity investment @ BOY Equipment Accumulated depreciation

54,000 25,000

[Idep] Accumulated depreciation Depreciation expense

13,500

79,000

13,500

©Cambridge Business Publishers, 2017 4-52

Advanced Accounting by Halsey & Hopkins, 3rd Edition

52.

f. Elimination Entries

Income Statement:

Parent

Subsidiary

Consolidated

Sales

6,920,000

2,500,000

9,420,000

Cost of goods sold

(4,422,000)

(1,520,000)

(5,942,000)

Gross profit

2,498,000

980,000

3,478,000

Income (loss) from Sub

279,500

[C]

279,500

Operating expenses

(1,777,500)

(660,000)

[D]

54,000

Net income

1,000,000

320,000

BOY retained earnings

3,290,000

730,000

Net income

1,000,000

320,000

Dividends

(290,000)

(50,000)

EOY retained earnings

4,000,000

1,000,000

4,000,000

Cash

160,000

408,000

568,000

Accounts receivable

500,000

605,000

1,105,000

0 13,500

[Idep]

(2,478,000) 1,000,000

Statement of RE: [E]

730,000

3,290,000 1,000,000 50,000

[C]

(290,000)

Balance Sheet: Assets

Inventory

840,000

865,000

PPE, net

5,000,000

2,622,000

1,705,000 [Igain]

25,000

[Idep]

13,500

Patent

[A]

Customer List Goodwill Equity investment

2,000,000

79,000

[Igain]

7,581,500

168,000

24,000

[D]

144,000

[A]

60,000

30,000

[D]

[A]

110,000

[Igain]

54,000

30,000 110,000

229,500

[C]

1,486,500

[E]

338,000

[A]

8,500,000

4,500,000

11,243,500

186,000

357,500

543,500

Liabilities & SE Accounts payable Other current liabilities

570,000

586,000

1,156,000

Long-term liabilities

2,500,000

1,800,000

4,300,000

Common stock

493,000

200,000

[E]

200,000

493,000

APIC

751,000

556,500

[E]

556,500

751,000

4,000,000

1,000,000

8,500,000

4,500,000

Retained earnings

4,000,000 2,250,500

2,250,500

11,243,500

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

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53.

a. Parent Cash Accumulated depreciation Equipment Gain on sale of Equipment (to record the sale of equipment)

63,000 22,500 75,000 10,500

Subsidiary Equipment

63,000

Cash (to record the purchase of equipment)

[Igain]

[Idep]

63,000

Gain on sale of Equipment 10,500 Equipment 12,000 Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) Accumulated depreciation Depreciation expense (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $1,500 ($63,000 / 7 = $9,000 vs. $75,000 / 10 = $7,500).

22,500

1,500 1,500

b. The Excess depreciation is $1,500 ($63,000 / 7 = $9,000 vs. $75,000 / 10 = $7,500). Through the BOY, three years have passed, so the deferred gain is now $6,000 ($10,500 – 3 x $1,500). c. Income (loss) from subsidiary Subsidiary net income Deferred gain on intercompany sale AAP Depreciation Income (loss) from subsidiary

$323,500 1,500 (22,500) * $300,000

©Cambridge Business Publishers, 2017 4-54

Advanced Accounting by Halsey & Hopkins, 3rd Edition

53.

d. Equity Investment EOY subsidiary retained earnings EOY subsidiary common stock EOY subsidiary APIC EOY Unamortized AAP Deferred gain on intercompany sale Equity investment *EOY Unamortized AAP:

$898,000 370,000 461,500 75,000 * (4,500) $1,800,000

amort

License agreement

250,000

EOY AAP assets

250,000

-7x

25,000

75,000

= 25,000

75,000

e. [C]

[E]

[A]

Income (loss) from subsidiary Dividends Equity investment

300,000

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

370,000 461,500 634,500

License agreement

100,000

60,000 240,000

1,466,000

Equity investment - @BOY [D]

Operating expenses

100,000 25,000

License agreement

25,000

[Igain] Equity investment - @BOY Equipment Accumulated depreciation

6,000 12,000

[Idep] Accumulated depreciation Depreciation expense

1,500

18,000

1,500

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

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53.

Elimination Entries Income Statement:

Parent

Subsidiary

Sales

5,000,000

3,000,000

8,000,000

Cost of goods sold

(3,500,000)

(1,800,000)

(5,300,000)

Gross profit

1,500,000

1,200,000

2,700,000

Income (loss) from Sub

300,000

[C]

300,000

Operating expenses

(1,100,000)

(876,500)

[D]

25,000

700,000

323,500

Net income

Consolidated

0 1,500

[Idep]

(2,000,000) 700,000

Statement of RE: BOY retained earnings

2,090,000

634,500

Net income

700,000

323,500

[E]

634,500

2,090,000

Dividends

(240,000)

(60,000)

EOY retained earnings

2,550,000

898,000

2,550,000

Cash

340,000

350,000

690,000

Accounts receivable

744,000

460,000

1,204,000

Inventory

900,000

690,000

1,590,000

PPE, net

4,716,000

2,000,000

700,000 60,000

[C]

(240,000)

Balance Sheet: Assets

License agreement Equity investment

1,800,000

[Igain]

12,000

18,000

[Igain]

6,711,500

[Idep]

1,500

[A] [Igain]

100,000

25,000

[D]

75,000

6,000

240,000

[C]

1,466,000

[E]

100,000

[A]

8,500,000

3,500,000

10,270,500

660,000

224,000

884,000

Other current liabilities

730,000

590,000

1,320,000

Long-term liabilities

2,500,000

956,500

3,456,500

410,000

370,000

[E]

370,000

410,000

APIC

1,650,000

461,500

[E]

461,500

1,650,000

Retained earnings

2,550,000

898,000

8,500,000

3,500,000

Liabilities & SE Accounts payable

Common stock

2,550,000 1,910,500

1,910,500

10,270,500

©Cambridge Business Publishers, 2017 4-56

Advanced Accounting by Halsey & Hopkins, 3rd Edition

54.

a. Parent Cash Accumulated depreciation

89,100 14,400

Equipment Gain on sale of Equipment (to record the sale of equipment)

86,400 17,100

Subsidiary Equipment

89,100

Cash (to record the purchase of equipment)

[Igain]

[Idep]

89,100

Gain on sale of Equipment 17,100 Equipment Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) PPE, net

2,700 14,400

1,710

Depreciation expense (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $1,710 ($86,400 / 12 = $7,200 vs. $89,100 / 10 = $8,910).

1,710

b. The Excess depreciation is $1,710 ($86,400 / 12 = $7,200 vs. $89,100 / 10 = $8,910) . Through the BOY, two years have passed, so the deferred gain is now $13,680 ($17,100 – 2 x $1,710). c. Income (loss) from subsidiary (“as if” Equity Method) Subsidiary net income Deferred gain on intercompany sale AAP Depreciation Income (loss) from subsidiary

$67,500 1,710 (13,500)* $55,710

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

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54.

d. Equity Investment (“as if” Equity Method) Common Stock (S) @ EOY Retained Earnings @ EOY Add: Unamortized AAP @ EOY Deduct: Unconfirmed gain @ EOY EOY Investment ("as if" equity method) *EOY Unamortized AAP:

$270,000 261,000 130,500* (11,970) $649,530

amort

PPE, net

45,000

-5x

4,500

22,500

Patent

72,000

-5x

9,000

27,000

Goodwill

81,000

EOY AAP assets

207,000

13,500

130,500

e. Computation of BOY [ADJ] for 2019 consolidation Change in RE(S) thru BOY Cumulative AAP amort thru BOY BOY Downstream Unconf Asset ADJ Amount [ADJ] [C] [E]

[A]

126,000 (63,000) (13,680) 49,320

BOY Equity Investment BOY Retained Earnings (P)

49,320

Income (loss) from subsidiary Dividends

31,500

BOY Common stock (S) BOY Retained earnings (S) Equity investment

270,000 225,000

PPE, net Patent Goodwill

27,000 36,000 81,000

49,320 31,500

495,000

Equity Investment [D]

[Igain] [Idep]

144,000

Depec. & amort. Expense PPE, net Patent

13,500

Equity Investment PPE, net

13,680

PPE, net

1,710

4,500 9,000 13,680

Depreciation expense

1,710

©Cambridge Business Publishers, 2017 4-58

Advanced Accounting by Halsey & Hopkins, 3rd Edition

54.

f. Consolidation Entries

Income Statement

Parent

Subsidiary

Sales

900,000

414,000

1,314,000

Cost of goods sold

(495,000)

(252,000)

(747,000)

Gross profit

405,000

162,000

567,000

Deprec. & amort. expense

(27,000)

(18,000)

Operating expenses

(270,000)

(72,000)

(342,000)

Interest expense

(13,500)

(4,500)

(18,000)

Total Expenses

(310,500)

(94,500)

(416,790)

Income (loss) from Sub

31,500

Net income

126,000

67,500

495,000

225,000

[D]

[C]

13,500

1,710

Consolidated

[Idep]

(56,790)

31,500 150,210

RE statement: BOY retained earnings

[E]

225,000

49,320

[ADJ]

544,320

31,500

[C]

(103,500)

Net income

126,000

67,500

Dividends

(103,500)

(31,500)

150,210

Ending retained earnings

517,500

261,000

591,030

Cash

81,000

54,000

135,000

Accounts receivable

108,000

81,000

189,000

Inventory

252,000

126,000

378,000

Equity investment

576,000

PPE, net

306,000

Balance sheet: Assets

Other assets

117,000

216,000

[ADJ]

49,320

495,000

[Igain]

13,680

144,000

[A]

27,000

4,500

[D]

[Idep]

1,710

13,680

[Igain]

198,000

0 532,530 315,000

Patent

[A]

36,000

Goodwill

[A]

81,000

Total assets

[E]

9,000

[D]

27,000 81,000

1,440,000

675,000

1,657,530

Accounts payable

225,000

48,600

273,600

Accrued liabilities

22,500

41,400

63,900

Notes payable

135,000

54,000

189,000

Common stock

540,000

270,000

Retained earnings

517,500

261,000

1,440,000

675,000

Liabilities and SE

Total liabilities and equity

[E]

270,000

540,000 591,030

748,710

1,657,530

©Cambridge Business Publishers, 2017 Solutions Manual, Chapter 4

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55.

a. Subsidiary Cash Accumulated depreciation Equipment Gain on sale of Equipment (to record the sale of equipment)

79,200 16,000 80,000 15,200

Parent Equipment

79,200

Cash (to record the purchase of equipment) [Igain]

[Idep]

79,200

Gain on sale of Equipment 15,200 Equipment 800 Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) PPE, net

16,000

1,900

Depreciation expense (to eliminate the excess depreciation expense recorded by the parent, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $1,900 ($80,000 / 10 = $8,000 vs. $79,200 / 8 = $9,900).

1,900

b. The excess depreciation is $1,900 ($80,000 / 10 = $8,000 vs. $79,200 / 8 = $9,900). Through the BOY, three years have passed, so the deferred gain is now $11,400 ($15,200 – [2 x $1,900]). c. Income (loss) from subsidiary (“as if” Equity Method) Subsidiary net income Deferred gain on intercompany sale AAP Depreciation Income (loss) from subsidiary

$76,000 1,900 (20,800)* $57,100

©Cambridge Business Publishers, 2017 4-60

Advanced Accounting by Halsey & Hopkins, 3rd Edition

55.

d. Equity Investment (“as if” Equity Method) Common Stock (S) @ EOY APIC(S) @ EOY Retained Earnings(S) @ EOY Add: Unamortized AAP @ EOY Deduct: Unconfirmed gain @ EOY EOY Investment ("as if" equity method) *EOY Unamortized AAP:

$48,000 192,000 248,000 136,000* (9,500) $614,500

amort

PPE, net

51,200

-4x

6,400

25,600

Licenses

72,000

-4x

14,400

Goodwill

96,000

EOY AAP assets

219,200

96,000 20,800

136,000

e. Computation of BOY [ADJ] for 2019 consolidation Change in RE(S) thru BOY Cumulative AAP amort thru BOY BOY Downstream Unconf Asset ADJ Amount

$147,200 (62,400) (11,400) $73,400

f. [ADJ] [C] [E]

[A]

BOY Equity Investment BOY Retained Earnings (P)

73,400

Income (loss) from subsidiary Dividends

28,000

BOY Common stock (S) BOY APIC (S) BOY Retained earnings (S) Equity investment

48,000 192,000 200,000

PPE Licenses Goodwill

32,000 28,800 96,000

73,400 28,000

440,000

Equity Investment [D]

[Igain] [Idep]

156,,800

Depec. & amort. expense PPE Licenses

20,800

Equity Investment PPE, net

11,400

PPE, net

1,900

6,400 14,400 11,400

Depreciation expense

1,900 ©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 4

4-61

55.

f. continued Consolidation Entries

Income Statement

Parent

Subsidiary

Sales

960,000

400,000

1,360,000

Cost of goods sold

(560,000)

(240,000)

(800,000)

Gross profit

400,000

160,000

560,000

Deprec. & amort. exp.

(24,000)

(16,000)

Operating expenses

(240,000)

(64,000)

(304,000)

Interest expense

(12,000)

(4,000)

(16,000)

Total Expenses

(276,000)

(84,000)

(378,900)

Income (loss) from Sub

28,000

Net income

152,000

76,000

440,000

200,000

[D]

[C]

20,800

1,900

Consolidated

[Idep]

(58,900)

28,000 181,100

RE statement: BOY retained earnings

[E]

200,000

73,400

[ADJ]

513,400

28,000

[C]

(92,000)

Net income

152,000

76,000

Dividends

(92,000)

(28,000)

181,100

Ending retained earnings

500,000

248,000

602,500

Cash

80,000

40,000

120,000

Accounts receivable

88,000

80,000

168,000

Inventory

240,000

120,000

360,000

Equity investment

512,000

PPE, net

400,000

Balance sheet: Assets

Other assets

80,000

Licenses

192,000

73,400

440,000

[E]

[Igain]

11,400

156,800

[A]

32,000

6,400

[D]

[Idep]

1,900

11,400

[Igain]

148,000 20,000

Goodwill Total assets

[ADJ]

0 608,100 228,000

[A]

28,800

[A]

96,000

14,400

[D]

34,400 96,000

1,400,000

600,000

1,614,500

Accounts payable

200,000

24,000

224,000

Accrued liabilities

100,000

36,000

136,000

Notes payable

120,000

52,000

172,000

Common stock

200,000

48,000

[E]

48,000

200,000

APIC

280,000

192,000

[E]

192,000

280,000

EOY Retained earnings

500,000

248,000

Total liabilities and equity

1,400,000

600,000

Liabilities and SE

602,500 732,300

732,300

1,614,500

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56.

a. Parent Cash Accumulated depreciation Equipment Gain on sale of Equipment (to record the sale of equipment)

97,500 37,500 112,500 22,500

Subsidiary Equipment

97,500

Cash (to record the purchase of equipment)

[Igain]

[Idep]

97,500

Gain on sale of Equipment Equipment Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry)

22,500 15,000

PPE, net

3,750

37,500

Depreciation expense (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $3,750 ($112,500 / 9 = $12,500 vs. $97,500 / 6 = $16,250).

3,750

b. The excess depreciation is $3,750 ($112,500 / 9 = $12,500 vs. $97,500 / 6 = $16,250). Through the BOY, one year has passed, so the deferred gain is now $18,750 ($22,500 – [1 x $3,750]). c. Income (loss) from subsidiary (“as if” Equity Method) Subsidiary net income Deferred gain on intercompany sale AAP Depreciation Income (loss) from subsidiary

$123,000 3,750 (22,500)* $104,250

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56.

d. Equity Investment (“as if” Equity Method) Common Stock (S) @ EOY $ 450,000 Retained Earnings(S) @ EOY 445,500 Add: Unamortized AAP @ EOY 238,500* Deduct:: Unconfirmed gain @ EOY (15,000) EOY Investment ("as if" equity method) $ 1,119,000 *EOY Unamortized AAP: PPE, net Patent Note Payable Goodwill EOY AAP assets

67,500 90,000 13,500 135,000 306,000

-3x -3x -3x

amort 6,750 11,250 4500

= = =

47,250 56,250 0 135,000 238,500

22,500

Computation of BOY [ADJ] for 2019 consolidation Change in RE(S) thru BOY Cumulative AAP amort thru BOY BOY Downstream IIP BOY Upstream IIP BOY Downstream Unconf Asset BOY Upstream IIP Unconf Asset ADJ Amount [ADJ] [C] [E]

[A]

171,000 (45,000) (18,750) 107,250

BOY Equity Investment BOY Retained Earnings (P)

107,250

Income (loss) from subsidiary Dividends

52,500

BOY Common stock (S) BOY Retained earnings (S) Equity investment

450,000 375,000

PPE Patent Goodwill Note payable

54,000 67,500 135,000 4,500

107,250 52,500

825,000

Equity Investment [D]

[Igain]

261,000

Depec. & amort. expense Interest expense PPE Patent Notes payable

18,000 4,500

Equity Investment

18,750

6,750 11,250 4,500

PPE, net [Idep]

PPE, net

18,750 3,750

Depreciation expense

3,750

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56.

f. continued Consolidation Entries

Income Statement

Parent

Subsidiary

Sales

1,395,000

690,000

2,085,000

Cost of goods sold

(750,000)

(420,000)

(1,170,000)

Gross profit

645,000

270,000

915,000

Deprec. & amort. exp.

(45,000)

(30,000)

Operating expenses

(405,000)

(109,500)

Interest expense

(22,500)

(7,500)

Total Expenses

(472,500)

(147,000)

[D]

18,000

3,750

Consolidated

[Idep]

(89,250) (514,500)

[D]

4,500

[C]

52,500

(34,500) (638,250)

Income (loss) from Sub.

52,500

Net income

225,000

123,000

BOY retained earnings

825,000

375,000

Net income

225,000

123,000

Dividends

(172,500)

(52,500)

Ending retained earnings

877,500

445,500

1,036,500

Cash

105,000

97,500

202,500

Accounts receivable

195,000

127,500

322,500

Inventory

450,000

270,000

Equity investment

960,000

276,750

RE statement: [E]

375,000

107,250

[ADJ]

932,250 276,750

52,500

[C]

(172,500)

Balance sheet: Assets

PPE, net Other assets

510,000 195,000

360,000

720,000 [ADJ]

107,250

825,000

[E]

[Igain]

18,750

261,000

[A]

54,000

6,750

[D]

[Idep]

3,750

18,750

[Igain]

270,000

902,250 465,000

Patent

[A]

67,500

Goodwill

[A]

135,000

Total assets

11,250

[D]

56,250 135,000

2,415,000

1,125,000

2,803,500

Accounts payable

375,000

61,500

436,500

Accrued liabilities

37,500

93,000

130,500

Notes payable

225,000

75,000

[A]

4,500

Common stock

900,000

450,000

[E]

450,000

EOY Retained earnings

877,500

445,500

Total liabilities and equity

2,415,000

1,125,000

Liabilities and SE

4,500

[D]

300,000 900,000 1,036,500

1,290,750

2,803,500

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57.

a. AAP Amortization Accounts Rec. Buildings & Equipment, net Customer list Notes payable Goodwill Net

Amortized Allocation (8,960) 40,320 94,080 3,200 28,800 157,440

2015 (8,960) 6,720 13,440 800 12,000

2016

2017

2018

2019

6,720 13,440 800

6,720 13,440

20,960

20,160

Unamortized AAP Accounts Rec. Buildings & Equipment, net Customer list Notes payable Goodwill Net

Unamortized Allocation (8,960) 40,320 94,080 3,200 28,800

12/31/15 33,600 80,640 2,400 28,800

12/31/16 26,880 67,200 1,600 28,800

12/31/17 20,160 53,760 800 28,800

12/31/18

12/31/19

13,440 40,320 28,800

6,720 26,880 28,800

157,440

145,440

124,480

103,520

82,560

62,400

b. Deferred Inventory Profit: Downstream Upstream

12/31/18 (26,880 x 25%) = 6,720 --

12/31/19 -(17,920 x 25%) = 4,480

6,400

8,960

FYE 2018 44,000

FYE 2019 33,600

Unpaid I-C amount

I-C Sales Deferred Depreciable Asset Profit: Sale Price Carrying value Profit (loss)

Deferred Downstream gain Life = 6 Recognized (each year)

145,600 112,000 33,600 1/1/18

12/31/18

12/31/19

12/31/20

33,600

28,000

22,400

16,800

5,600

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57.

c. Investment at 1/1/19 (Equity) p% * SE(S) @ BOY +p% * AAP -Def. 100%*EOY D-S IIP -Def 100%*EOY D-S Asset Gain

Investment at 12/31/2019 (Equity) p% * SE(S) @ EOY +p% * AAP -Def. p%*EOY U-S IIP -Def 100%*EOY D-S Asset Gain

537,600 82,560 (6,720) (28,000) 585,440

560,000 62,400 (4,480) (22,400) 595,520

Equity Investment at 1/1/19 Net Income (S) Deprec. profit confirmed BOY inventory profit confirmed Equity Investment at 12/31/19

Equity Investment 585,440 53,760 31,360 Dividends(S) 5,600 20,160 AAP Amortization 6,720 4,480 EOY inventory profit deferred 595,520

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57.

e. [C]

[E]

[A]

[D]

[Icogs]

Income (loss) from subsidiary Dividends - Subsidiary Equity investment

41,440

Common Stock (S) @ BOY Retained Earnings (S) @ BOY Equity investment @ BOY

291,200 246,400

Buildings & Equipment @ BOY Customer list @ BOY Goodwill Equity investment @ BOY

13,440 40,320 28,800

Depreciation & Amort Expense Buildings and Equipment, net Customer list

20,160

Equity investment @ BOY Cost of Goods Sold

6,720

31,360 10,080

537,600

82,560

6,720 13,440

6,720

[Isales] Sales

33,600 Cost of Goods Sold

[Icogs]

33,600

Cost of Goods Sold

4,480 Inventories

[Ipay]

4,480

Accounts Payable

8,960 Accounts receivable

[Igain]

[Idep]

8,960

Equity investment @ BOY Buildings and Equipment, net @ BOY

28,000

Buildings and Equipment, net Depreciation expense

5,600

28,000

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5,600

57.

e. continued Parent

Subsidiary

1,088,000 (550,400)

403,200 (241,920)

Gross Profit

537,600

161,280

Depreciation & Amort exp.

(26,880)

(21,440)

Operating Expenses Total expenses

(349,440) (376,320)

(86,080) (107,520)

Income (loss) from subsidiary Consolidated Net Income

41,440 202,720

53,760

[C]

41,440

202,720

RE Statement Beg. Ret. Earn Net Income Dividends Declared Ending Retained Earnings

653,600 202,720 (134,400) 721,920

246,400 53,760 (31,360) 268,800

[E]

246,400

653,600 202,720 (134,400) 721,920

Balance Sheet Cash Accounts receivable Inventories Buildings and Equipment, net

76,480 120,000 291,200 281,600

33,600 108,800 104,000 201,600

Other assets Customer list Equity investment

128,000 595,520

224,000 22,400

Income Statement Sales Cost of Goods Sold

Goodwill Total Assets

1,492,800

694,400

Accounts Payable Notes Payable Other liabilities Common Stock Retained Earnings Total Liabilities and Equity

72,000 112,000 49,280 537,600 721,920 1,492,800

28,800 48,000 57,600 291,200 268,800 694,400

Dr [Isales] [Icogs]

33,600 4,480

[Icogs] [Isales]

Consolidated 1,457,600 (756,480)

6,720 33,600

701,120 [D]

20,160

[Idep]

5,600

(62,880) (435,520) (498,400)

[C]

31,360

[Ipay] [Icogs] [D] [Igain]

8,960 4,480 6,720 28,000

[D] [C] [E] [A]

13,440 10,080 537,600 82,560

110,080 219,840 390,720 467,520

[A] [Idep]

13,440 5,600

[A] [Icogs] [Igain]

40,320 6,720 28,000

[A]

28,800

28,800 1,618,240

[Ipay]

8,960

[E]

291,200

[Σ]

769,120

91,840 160,000 106,880 537,600 721,920 1,618,240

[Σ]

352,000 49,280 -

769,120

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58.

a. Year Ended December 31 100% AAP Amortization - Dr (CR)

2016

2017

2018

2019

Accounts Receivable Property, plant and equipment (PPE), net

(7,500)

1,875

Licenses

6,000

Customer list

7,500

Notes Payable

750

8,625

16,125

Goodwill Net amortization

Jan. 1 100% Unamortized AAP - Dr (CR)

2016

Accounts Receivable Property, plant and equipment (PPE), net

December 31, 2016

2017

2018

2019

(7,500)

30,000

28,125

26,250

24,375

22,500

Licenses

60,000

54,000

48,000

42,000

36,000

Customer list

37,500

30,000

22,500

15,000

7,500

Notes Payable

3,750

3,000

2,250

1,500

750

Goodwill

210,000

Net unamortized

333,750

325,125

309,000

292,875

276,750

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58.

b. Deferred Inventory Profit: Intercompany sales

FYE 2018 60,000

Downstream Upstream

Intercompany EI 12/31/18 12/31/19 45,000 30,000 -

Intercompany Inventory Profits (28%) Downstream Upstream

12/31/18 8,400

12/31/19 12,600 -

18,000

24,000

Unpaid Intercompany amount

FYE 2019 75,000

Deferred I-C Asset Sales Profit: I-C Sale Amount Pre-Sale Carrying Value I-C Gain (Loss) Useful Life

150,000 120,000 30,000 8

Confirmed Each Year

3,750

Unconfirmed BOY Unconfirmed EOY

22,500 18,750

c. [ADJ] Computation Change in RE(S) thru BOY Cumulative AAP amort thru BOY BOY Upstream IIP BOY Downstream Unconf Asset ADJ Amount

198,750 (40,875) (8,400) (22,500) 126,975

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58.

d. [ADJ]

[C]

[E]

[A]

BOY Equity Investment BOY Retained Earnings (P)

126,975

Income (loss) from subsidiary Dividends

54,000

BOY Common stock (S) BOY APIC (S) BOY Retained earnings (S) Equity investment

90,000 360,000 375,000

PPE, net Licenses Customer list Goodwill Note payable

24,375 42,000 15,000 210,000 1,500

126,975

54,000

825,000

Equity Investment [D]

[Icogs]

[Isales]

292,875

Depec. & amort. expense Interest expense PPE, net Licenses Customer list Notes payable

15,375 750

Equity Investment Cost of goods sold

8,400

Sales

75,000

1,875 6,000 7,500 750

8,400

Cost of goods sold [Icogs]

[Ipay]

[Igain]

[Idep]

75,000

Cost of goods sold Inventory

12,600

Accounts payable Accounts receivable

24,000

Equity Investment PPE, net

22,500

PPE, net

3,750

12,600

24,000

22,500

Depreciation expense

3,750

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58.

d. continued Consolidation Entries

Income Statement

Parent

Sales

1,485,000

Subsidiary 705,000

[Isales]

75,000

Cost of goods sold

(810,000)

(418,500)

[Icogs]

12,600

Gross profit

675,000

286,500

Deprec. & amort. Exp.

(45,000)

(30,000)

Operating expenses

(450,000)

(120,000)

Interest expense

(25,500)

(7,500)

Total Expenses

(520,500)

(157,500)

Income (loss) from subsidiary

54,000

Net income

208,500

129,000

BOY retained earnings

825,000

375,000

Net income

208,500

129,000

Dividends

(171,000)

(54,000)

Ending retained earnings

862,500

450,000

Consolidated 2,115,000

8,400

[Icogs]

75,000

[Isales]

(1,157,700) 957,300

[D]

15,375

[D]

750

3,750

[Idep]

(86,625) (570,000) (33,750) (690,375)

[C]

54,000 266,925

RE statement: [E]

375,000

126,975

[ADJ]

951,975 266,925

54,000

[C]

(171,000) 1,047,900

Balance sheet: Assets Cash

135,000

90,000

Accounts receivable

180,000

135,000

24,000

[Ipay]

291,000

Inventory

420,000

210,000

12,600

[Icogs]

617,400

Equity investment

960,000

PPE, net Other assets

510,000 195,000

Licenses

375,000

225,000

[ADJ]

126,975

825,000

[E]

[Icogs]

8,400

292,875

[A]

[Igain]

22,500

[A]

24,375

1,875

[D]

[Idep]

3,750

22,500

[Igain]

[A]

42,000

6,000

[D]

7,500

[D]

315,000 15,000

510,000

Customer list

[A]

15,000

Goodwill

[A]

210,000

Total assets

888,750

2,400,000

1,140,000

Accounts payable

262,500

81,000

Accrued liabilities

150,000

69,000

Notes payable

225,000

90,000

Common stock

270,000

90,000

APIC

630,000

360,000

EOY Retained earnings

862,500

450,000

Total liabilities and equity

2,400,000

1,140,000

51,000 7,500 210,000 2,800,650

Liabilities and SE [Ipay]

24,000

319,500 219,000

[A]

1,500

[E]

360,000

750

[D]

314,250 270,000 630,000 1,047,900

1,461,225

2,800,650

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Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 5— Consolidated Financial Statements with Less than 100% Ownership 1.

The FASB ASC Master Glossary defines a noncontrolling interest “The portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. A noncontrolling interest is sometimes called a minority interest.”

FASB ASC 810-10-10-1 defines the objective of consolidated financial statements as follows: “The purpose of consolidated statements is to present, primarily for the benefit of the shareholders and creditors of the parent entity, the results of operations and the financial position of a parent entity and its subsidiaries essentially as if the group were a single entity with one or more branches or divisions. There is a presumption that consolidated statements are more meaningful than separate statements and that they are usually necessary for a fair presentation when one of the entities in the group directly or indirectly has a controlling financial interest in the other entities.”

FASB ASC 810-10-45-12 provides the following guidance: “It ordinarily is feasible for the subsidiary to prepare, for consolidation purposes, financial statements for a period that corresponds with or closely approaches the fiscal period of the parent. However, if the difference is not more than about three months, it usually is acceptable to use, for consolidation purposes, the subsidiary's financial statements for its fiscal period; if this is done, recognition should be given by disclosure or otherwise to the effect of intervening events that materially affect the financial position or results of operations.”

FASB ASC 805-20-30-7 provides the following guidance: “Paragraph 805-20-30-1 requires the acquirer to measure a noncontrolling interest in the acquiree at its fair value at the acquisition date. An acquirer sometimes will be able to measure the acquisition-date fair value of a noncontrolling interest on the basis of a quoted price in an active market for the equity shares (that is, those not held by the acquirer). In other situations, however, a quoted price in an active market for the equity shares will not be available. In those situations, the acquirer would measure the fair value of the noncontrolling interest using another valuation technique.”

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©Cambridge Business Publishers, 2020 5-1

FASB ASC 810-10-45-16 provides the following guidance relating to the placement of noncontrolling interest in the consolidated balance sheet: “The noncontrolling interest shall be reported in the consolidated statement of financial position within equity (net assets), separately from the parent’s equity (or net assets). That amount shall be clearly identified and labeled, for example, as noncontrolling interest in subsidiaries (see ASC 810-10-55-4I). An entity with noncontrolling interests in more than one subsidiary may present those interests in aggregate in the consolidated financial statements.”

FASB ASC 810-10-45-21 provides the following guidance relating to the allocation of losses attributable to noncontrolling interest if such allocation results in a deficit balance for the noncontrolling interest: “Losses attributable to the parent and the noncontrolling interest in a subsidiary may exceed their interests in the subsidiary’s equity. The excess, and any further losses attributable to the parent and the noncontrolling interest, shall be attributed to those interests. That is, the noncontrolling interest shall continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance.”

FASB ASC 810-10-45-18 states: “The amount of intra-entity income or loss to be eliminated in accordance with paragraph 810-10-45-1 is not affected by the existence of a noncontrolling interest. The complete elimination of the intra-entity income or loss is consistent with the underlying assumption that consolidated financial statements represent the financial position and operating results of a single economic entity. The elimination of the intra-entity income or loss may be allocated between the parent and noncontrolling interests.” In other words, regardless of whether a sale of depreciable fixed assets is upstream or downstream, 100% of the intercompany transaction must be eliminated; however, if the sale is upstream, a portion of the eliminated gain or loss can be assigned to the noncontrolling interest. (Note that assignment to the noncontrolling interest of a portion of the upstream eliminated gain or loss is a “best practice.”) Thus, in the case of an upstream sale, the elimination of the gain will affect bottom-line net income attributable to the controlling interest by p% and will affect the bottom-line net income attributable to the noncontrolling interest by 1-p%.

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Advanced Accounting, 4th Edition

Under the cost method, the parent does not adjust its pre-consolidation equity investment account after the acquisition date. In addition, the parent company does not recognize the equity-method income statement effects in its pre-consolidation income statements. Because retained earnings is the place where income statement effects accumulate over time, this means that the parent company’s pre-consolidation retained earnings will move further away from the amount of the consolidated beginning balance of retained earnings. (Recall that, under the equity method, the parent’s reconsolidation net income and stockholders’ equity is the same as consolidated income attributable to the controlling interest and consolidated retained earnings.) As we describe in the text, when the parent company uses the cost method, the way to arrive at the correct consolidated beginning balance of retained earnings is to make the following adjustment to beginning retained earnings and to the investment account: [ADJ] = (p% x Change in subsidiary RE since Acqu thru BOY) – accum p% AAP amort thru BOY – 100% x unconfirmed downstream I-C profit – p% x unconfirmed upstream I-C profit

Conceptually, regardless of pre-consolidation investment bookkeeping method applied by the parent company, when the parent company owns less than 100% of a subsidiary, the purpose of the [C] entry is to remove the effect of the parent-company’s investment accounting during the year (i.e., the changes in the parent’s pre-consolidation books caused by investment accounting during the year) and the establish the change in the noncontrolling interest during the year. When the parent company uses the cost method, the income from investee will equal p% x investee dividends. Thus, the [C] entry under the cost method removes the p% portion of dividends from the parent’s income statement. It also establishes the change in the noncontrolling interest by establishing the income attributable to the noncontrolling interest and reducing the noncontrolling interest (i.e., balance sheet account) for the 1-p% portion of the subsidiary dividends.

10.

Under the full fair value approach, the consolidated goodwill and noncontrolling interest reflect the 100% values of the controlling and noncontrolling interest. Under the proportionate share approach, noncontrolling interest is assigned an acquisition date carrying value equal to the proportionate (i.e., 1-p%) interest in the fair value of the identifiable net assets. Thus, no goodwill is assigned to the noncontrolling interest.

11.

The date on which the investor gains control of the investee is the acquisition date. Both of the following occur on the acquisition date: a. All of the Equity Investments made by the investor in the investee must be revalued, and any gain or loss as a result of the revaluation should be recognized currently in income, and b. Goodwill is measured (this only occurs on the date that the parent obtains control of the investee).

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©Cambridge Business Publishers, 2020 5-3

12.

Once the parent loses control and deconsolidates the subsidiary, the earning process with respect to that Equity Investment has been completed, and the parent recognizes a gain or loss on the deconsolidation (see FASB ASC 810-10-40-5).

13.

When a subsidiary is initially consolidated, the consolidated financial statements include the subsidiary’s revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated (FASB ASC 810-10-45-4). In this example, sales of $250,000 and net income of $50,000 (one-half of the year) are included in the consolidated statement of income.

14.

Answer: d All statements are correct, except for d. The controlling and noncontrolling interests are valued separately. Because the controlling interest could have a controlled premium associated with it, the allocation of goodwill between the controlling and noncontrolling interests is sometimes disproportionate to the percentage ownership.

15.

Answer: a All statements are false, except for a. When the parent company applies the full equity method in its pre-consolidation financial statements, then (i) parent-company net income equals consolidated net income attributable to the controlling interest and (ii) parent-company retained earnings equals consolidated retained earnings.

16.

Answer: c If overall goodwill is positive, the goodwill attributable to the controlling and noncontrolling interest is determined by taking the fair value of each of these ownership stakes and subtracting the fair value of the identifiable net assets attributable to each ownership stake. Specifically: Controlling GW = $1,504,800 – (75% x $1,920,000) = $64,800 NCI Goodwill = $500,000 – (25% x $1,920,000) = $20,000

17.

Answer: a If overall goodwill is negative, the parent company recognizes a bargain acquisition gain in the consolidated financial statements. The bargain acquisition gain is 100 percent allocated to the controlling interest. Overall goodwill (gain) = ($1,288,000 + $322,000) – $1,680,000 = $(70,000) All of this gain is assigned to the controlling interest.

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Advanced Accounting, 4th Edition

18.

Answer: a Because the parent uses the equity method, the pre-consolidation net income of the parent equals the consolidated net income attributable to the controlling interest. (Note: We know the parent uses the equity method because Equity Income equals $81,770 [i.e., (85% x $187,200) – (85% x $91,000 AAP amortization)].) Consolidated net income attributable to the noncontrolling interest equals $14,430 (i.e., [15% x $187,200] – [15% x $91,000 AAP amortization]). Thus, consolidated net income equals $1,032,200 (i.e., $1,017,770 + $14,430).

19.

Answer: d $93,600 = (40% x $780,000) x 30%

20.

Answer: a Income attributable to the NCI = (nci% x [NI(S) – upstream deferred inventory profits]) Held by parent (upstream): $53,600 = 20% x [288,000 – (25% x 80,000)] Held by subsidiary (downstream): $57,600 = 20% x 288,000

21.

Answer: c Consol. Rev = Rev (P) + Rev (S) – I-C Sale = $5,360,000 = $4,800,000 + $800,000 - $240,000

22.

Answer: d Consol Exp = Exp (P) + Exp (S) – I-C Sale + AAP amort + Deferred Inv. Profit $3,498,000 = $3,200,000 + $480,000 - $240,000 + $40,000 + $18,000

Note: AAP amortization = $200,000 / 5 = $40,000 Deferred upstream profit at EOY = $18,000 = ($240,000 x 25%) x 30%

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-5

23.

Answer: d Income attrib. to the NCI = (nci% x [NI(S) – AAP amort. - upstream def. inventory profits]) $52,400 = 20% x ($320,000 - $40,000 - $18,000)

24.

Answer: a Based on the classification of accounts, current assets include inventories in this problem. Therefore, the deferred intercompany inventory profits must be removed from current assets account. $1,782,000 = $1,600,000 + $200,000 - $18,000

25.

Answer: d Unamortized 100% AAP at 12/31/2019 = 3/5 x $200,000 = $120,000 Noncurrent assets = $8,000,000 + $600,000 + $120,000 = $8,720,000

26.

Answer: c Consolidated RE = RE of the parent when the parent uses the full equity method

27.

Answer: a NCI = [nci% x (SE(S) - deferred upstream profits)] + [nci% x unamortized AAP]* $116,400 = [20% x (160,000 + 320,000 – $18,000)] + [20% x 120,000] * This is allocated based on the fair value of the NCI on the acquisition date. Because the controlling interest sometimes includes a control premium, the AAP is sometimes not allocated proportionally according to the ownership percentages. This is why we show it as a separate bracketed amount. In this problem, it is proportional, so we can multiply the 100% AAP times the nci%.

©Cambridge Business Publishers, 2020 5-6

Advanced Accounting, 4th Edition

Note: Questions 28-32 all involve the upstream sale of a building. The building was originally purchased by the subsidiary for $576,000 and had an estimated 8-year useful life. Thus, it was being depreciated at a rate of $72,000/year and had a net book value of $432,000 (i.e., $576,000 - $72,000 - $72,000) after two years when it was sold to the parent company on January 1, 2019 for $504,000. This means the unconfirmed intercompany gain on initial transfer was $72,000, and is confirmed at a rate of $12,000/year (i.e., $72,000/6). At the December 31, 2019 balance sheet date, $60,000 (i.e., $72,000 - $12,000) remained unconfirmed.

28.

Answer: a Equity method income = p% x (NI(S) – upstream IC gain + gain confirmed via deprec.) $45,000 = 75% x ($120,000 - $72,000 + $12,000)

29.

Answer: c This should be “as if” the building was never transferred between the companies. Thus, one more year of depreciation would have been taken on the original pre-sale basis. The net amount of building reported in the consolidated financial statements on December 31, 2019 equals $360,000 (i.e., $576,000 - $216,000).

30.

Answer: a This should be “as if” the building was never transferred between the companies. Thus, the depreciation expense is the same as the subsidiary’s pre-transaction depreciation expense.

31.

Answer: d Net income attributable to the controlling interest is same as the parent’s net income if it applies the equity method. The parent’s stand-alone income is $600,000 and its equity investment income is $45,000 (see #28, above), which results in $645,000.

32.

Answer: b Net income attributable to the noncontrolling interest = nci% x (NI(S) – upstream IC gain + upstream gain confirmed via depreciation.) $15,000 = 25% x ($120,000 - $72,000 + $12,000)

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-7

33.

a. $157,500 x 80% = $126,000 b. Consolidated Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income Net income attributable to noncontrolling interests Net income attributable to the parent

34.

$ 8,625,000 (5,925,000) 2,700,000 (1,717,500) 982,500 31,500 $ 951,000

a. ($180,000 - $31,500) x 70% = $103,950 b. Consolidated Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income Net income attributable to noncontrolling interests Net income attributable to the parent

35.

$ 9,180,000 (6,390,000) 2,790,000 (1,921,500) 868,500 44,550 $ 823,950

a. [($234,000 - $31,500 + $37,800) x 80%] - $58,500 = $133,740 b. Consolidated Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income Net income attributable to noncontrolling interests Net income attributable to the parent

©Cambridge Business Publishers, 2020 5-8

$ 8,910,000 (5,420,700) 3,489,300 (2,587,500) 901,800 48,060 $ 853,740

Advanced Accounting, 4th Edition

36.

a. ($240,000 + $12,000 - $27,200) x 75% = $168,600 b. Consolidated Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income Net income attributable to noncontrolling interests Net income attributable to the parent

37.

$ 11,120,000 (7,120,000) 4,000,000 (2,735,200) 1,264,800 56,200 $ 1,208,600

a. Reconciliation of Cost to Equity Method Parent's pre-consolidation net income (cost) Deduct Dividend Income Add: p% x NI(S) Deduct: p% x AAP amortization Net income attributable to controlling interest

$ 401,000 (81,000) 115,200 (32,400) $ 402,800

b. Consolidated Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income Net income attributable to noncontrolling interests Net income attributable to the parent

Solutions Manual, Chapter 5

12,200,000 (8,120,000) 4,080,000 (3,668,000) 412,000 9,200 402,800

©Cambridge Business Publishers, 2020 5-9

38.

a. Reconciliation of Cost to Equity Method Parent's pre-consolidation net income (cost) Deduct Dividend Income Add: p% x NI(S) Deduct: p% x AAP amortization Add: p% x Upstream BOY Deduct: Downstream EOY Net income attributable to controlling interest

$ 2,570,000 (70,000) 196,000 (26,600) 49,000 (50,000) $ 2,668,400

Consolidated Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income Net income attributable to noncontrolling interests Net income attributable to the parent

$ 12,900,000 (7,230,000) 5,670,000 (2,908,000) 2,762,000 93,600 $ 2,668,400

39.

a. Reconciliation of Cost to Equity Method Parent's pre-consolidation net income Deduct Dividend Income Add: p% x NI(S) Deduct: p% x AAP amortization Add: p% x Upstream Confirmed Gain Net income attributable to controlling interest

$ 448,000 (48,000) 80,000 (20,000) 14,400 $ 474,400

b. Consolidated Income Statement Sales Cost of goods sold Gross profit Operating expenses Net income Net income attributable to noncontrolling interests Net income attributable to the parent

©Cambridge Business Publishers, 2020 5-10

$ 10,200,000 (6,970,000) 3,230,000 (2,737,000) 493,000 18,600 $ 474,400

Advanced Accounting, 4th Edition

40.

a. (312,000 - $52,000) x 10% = $26,000 b. Beginning noncontrolling interest equity: Book value of Stockholders’ Equity BOY [A] asset allocation Net income attributable to noncontrolling interests Dividends received by NCI holders Noncontrolling interests equity

41.B

130,000 ($1,300,000 x 10%) 16,900 ($169,000 x 10%) 26,000 (part a) (2,600) $170,300

a. Consolidated basic EPS =

$180,000 − $17,100 + ($45,000 x 0.75) $196,650 = 50,000 50,000

= $3.93 b. Consolidated diluted EPS: Step 1: compute diluted EPS of subsidiary: Diluted EPS of subsidiary=

$45,000+ $7,200 $52,200 = =$1.97 22,000 +4,500 26,500

Step 2: compute consolidated diluted EPS: Consolidated diluted EPS=

$180,000-$0+ (16,500 x $1.97) $212,505 = =$3.60 50,000 +9,000 59,000

42.c Equity investment

225,000

Cash (to record the purchase of a 45% interest in the subsidiary) Equity investment

225,000

35,000

Gain on revaluation of subsidiary (to record to record the write-up of the Equity Investment account to its fair value)

35,000

43.C Equity investment APIC Cash (to record the purchase of an additional 20% in subsidiary from the noncontrolling shareholders)

Solutions Manual, Chapter 5

400,000 290,000 110,000

©Cambridge Business Publishers, 2020 5-11

44.C Cash

620,000

Equity investment APIC (parent) (to record the parent’s sale of 20% the stock owned in the subsidiary) 45.C

280,000 340,000

After the carve-out transaction by the subsidiary, the subsidiary’s stockholders’ equity is now $1,120,000 (i.e., $800,000 + $320,000). The parent owns 75% of the outstanding common stock after the transaction. The parent’s pre-consolidation equity-method Equity Investment account must now be reported at $840,000 (75% of $1,120,000) following the sale of stock. The parent, therefore, makes the following journal entry in its records to reflect the required increase in its Equity Investment account from $800,000 to $840,000: Equity investment

40,000

APIC (to record the increase in the parent’s Equity Investment account resulting from the subsidiary’s sale of 25% ownership interest to an unaffiliated party) 46.

40,000

a. This is our [C] consolidation journal entry and it is not recorded in the books of either the parent or the subsidiary. Net income attributable to noncontrolling interest Noncontrolling interest

35 35

This amount is not equal to the (pre-consolidation) subsidiary net income multiplied by the proportionate ownership of the noncontrolling interest. We must first adjust the subsidiary income for its proportionate share of the amortization expense related to AAP assets and any deferred profit on upstream asset sales. b. Noncontrolling interests represents the portion of controlled entities that Coca-Cola does not own. Ignoring variable interest entity rules (i.e., we will cover that topic in Chapter 6), Coca-Cola owns less than 100% of CCBA and greater than 50% of CCBA. Given the significant magnitude of the noncontrolling interest related to CCBA, we can infer that Coca-Cola likely owns significantly less than 100%. c. Coca-Cola likely sold entities that were not wholly owned. d. The ending balance for noncontrolling interest’s equity is reported in the stockholders’ equity section of the consolidated balance sheet.

©Cambridge Business Publishers, 2020 5-12

Advanced Accounting, 4th Edition

47.

a. Alcoa is drawing a distinction between the equity of its shareholders and the equity of the subsidiary’s noncontrolling shareholders. These are separate groups of shareholders with different claims on the net assets of the company. Alcoa’s shareholders have a claim on the net assets of the parent company (including its proportionate share of the subsidiary companies) and the noncontrolling shareholders only have a claim on the subsidiary whose common stock they own. b. The contribution from the noncontrolling shareholders is recorded by the following journal entry: Cash

80 Common stock and additional paid-in capital (subsidiary)

The Equity Investment account on the parent’s balance sheet has not changed as a result of this transaction. Consequently, when the subsidiary’s stockholders’ equity is eliminated in the consolidation process, more of the credit in the [E] consolidation journal entry will be reflected in the Noncontrolling Interests equity account on the consolidated balance sheet. The result of the transaction is an increase in Cash and Noncontrolling Interests equity on the consolidated balance sheet with no effect of the transaction in the consolidated income statement. 48.

HCA has a stockholders’ deficit before noncontrolling interest of $(6,806), and the $1,811 of noncontrolling interest actually improved HCA’s total stockholders’ deficit to $(4,995). This suggests that HCA’s wholly owned operations are running at a substantial deficit, while its non-wholly owned operations have positive net equity. (Given the information, it is impossible to tell whether the positive equity for the non-wholly owned subsidiaries is based on cumulated profitable operations or from contributed capital from the owners.

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-13

49.

a. [E]

Common stock (S) @ BOY

72,000

APIC (S) @ BOY

96,000

Retained earnings (S) @ BOY

584,000 564,000

Equity investment @ BOY

188,000 Noncontrolling interest (@ BOY) Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

PPE, net @ BOY (100% AAP)

88,000

Patent @ BOY (100% AAP)

144,000

GW @ BOY (100% AAP)

248,000

Equity investment @ BOY ( AAP)

360,000

Noncontrolling Interest 120,000 Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci%

b. Parent

Subsidiary

Consolidated

Cash

720,000

160,000

880,000

Accounts receivable

625,600

264,000

889,600

Inventory

880,000

340,000

1,220,000

Equity investment

924,000

PPE, net

640,000

[E]

360,000

[A]

88,000

3,928,000

Patent

[A]

144,000

Goodwill

[A]

248,000

Total assets

3,200,000

564,000

6,349,600

1,404,000

7,309,600

Current liabilities

640,000

252,000

892,000

Long-term liabilities

2,400,000

400,000

2,800,000

Common stock

720,000

72,000

[E]

72,000

720,000

Additional paid-in capital

560,000

96,000

[E]

96,000

560,000

2,029,600

584,000

[E]

584,000

2,029,600

Retained earnings Noncontrolling interest

Total liabilities and equity

©Cambridge Business Publishers, 2020 5-14

6,349,600

1,404,000

1,232,000

188,000

[E]

120,000

[A]

1,232,000

308,000

7,309,600

Advanced Accounting, 4th Edition

50.

a. [E]

Common stock (S) @BOY

72,000

APIC (S) @BOY

96,000

Retained earnings (S) @BOY

600,000

Equity investment @BOY

614,400

Noncontrolling interest (@BOY) 153,600 Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

Customer list, net @BOY (100% AAP)

384,000

GW @ BOY (100% AAP)

288,000

Equity investment @BOY ( AAP)

537,600

Noncontrolling interest 134,400 Allocates beginning of year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci%

b. Parent

Subsidiary

Cash

480,000

120,000

600,000

Accounts receivable

960,000

240,000

1,200,000

Inventory

1,080,000

360,000

1,440,000

Equity investment

1,152,000

PPE, net

2,400,000

Consolidated

614,400

[E]

537,600

[A]

720,000

0 3,120,000

Customer list

[A]

384,000

Goodwill

[A]

288,000

Total assets

6,072,000

1,440,000

7,032,000

Current liabilities

480,000

240,000

720,000

Long-term liabilities

1,800,000

432,000

2,232,000

Common stock

600,000

72,000

[E]

72,000

600,000

Additional paid-in capital

1,200,000

96,000

[E]

96,000

1,200,000

Retained earnings

1,992,000

600,000

[E]

600,000

1,992,000

Noncontrolling interest

Total liabilities and equity

Solutions Manual, Chapter 5

6,072,000

1,440,000

153,600

[E]

134,400

[A]

1,440,000

288,000

7,032,000

©Cambridge Business Publishers, 2020 5-15

51.

a. [E]

Common stock (S) @BOY

130,000

APIC (S) @BOY

260,000

Retained earnings (S) @BOY

975,000

Equity investment @BOY

955,500

Noncontrolling interest (@BOY) 409,500 Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

Royalty agreement, net @BOY (100% AAP)

390,000

Customer list, net @BOY (100% AAP)

312,000

GW @ BOY (100% AAP)

208,000

Equity investment @BOY ( AAP)

637,000

Noncontrolling Interest 273,000 Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci%

b. Parent

Subsidiary

Consolidated

Cash

260,000

195,000

455,000

Accounts receivable

832,000

520,000

1,352,000

Inventory

1,300,000

910,000

2,210,000

Equity investment

1,592,500

PPE, net

3,900,000

955,500

[E]

637,000

[A]

1,300,000

0 5,200,000

Royalty agreement

[A]

390,000

Customer list

[A]

312,000

Goodwill

[A]

208,000

Total assets

7,884,500

2,925,000

10,127,000

Current liabilities

876,200

520,000

1,396,200

Long-term liabilities

3,120,000

1,040,000

Common stock

1,040,000

130,000

[E]

130,000

1,040,000

780,000

260,000

[E]

260,000

780,000

2,068,300

975,000

[E]

975,000

2,068,300

Additional paid-in capital Retained earnings

4,160,000

Noncontrolling interest

Total liabilities and equity

©Cambridge Business Publishers, 2020 5-16

7,884,500

2,925,000

2,275,000

409,500

[E]

273,000

[A]

2,275,000

682,500

10,127,000

Advanced Accounting, 4th Edition

52.

a. Unamort

Unamort

AAP

2016

AAP

2017

AAP

2018

AAP

2019

AAP

100% AAP

1/1/2016

Amort

12/31/2016

Amort

12/31/2017

Amort

12/31/2018

Amort

12/31/2019

PPE, net

312,000

15,600

296,400

15,600

280,800

15,600

265,200

15,600

249,600

Patent Customer List

130,000

13,000

117,000

13,000

104,000

13,000

91,000

13,000

78,000

7,800

70,200

7,800

62,400

7,800

54,600

7,800

46,800

Goodwill

260,000

780,000

36,400

743,600

36,400

707,200

36,400

670,800

36,400

634,400

PPE, net

249,600

12,480

237,120

12,480

224,640

12,480

212,160

12,480

199,680

Patent Customer List

104,000

10,400

93,600

10,400

83,200

10,400

72,800

10,400

62,400

6,240

56,160

6,240

49,920

6,240

43,680

6,240

37,440

Goodwill

208,000

624,000

29,120

594,880

29,120

565,760

29,120

536,640

29,120

507,520

PPE, net

62,400

3,120

59,280

3,120

56,160

3,120

53,040

3,120

49,920

Patent Customer List

26,000

2,600

23,400

2,600

20,800

2,600

18,200

2,600

15,600

1,560

14,040

1,560

12,480

1,560

10,920

1,560

9,360

Goodwill

52,000

156,000

7,280

148,720

7,280

141,440

7,280

134,160

7,280

126,880

Parent (p%):

Subsidiary (nci%):

b. No intercompany transactions c. Equity Investment account at 1/1/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Equity Investment account at 12/31/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP

Solutions Manual, Chapter 5

774,800 536,640 1,311,440 982,800 507,520 1,490,320

©Cambridge Business Publishers, 2020 5-17

52.

d. Equity Investment Equity Investment at 1/1/19 p% Net Income

1,311,440 260,000 0

Equity Investment at 12/31/19

1,490,320

52,000 29,120

p% Dividends p% AAP Amortization

e. Noncontrolling interest at 1/1/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP NCI

193,700 134,160 327,860

Noncontrolling interest at 12/31/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP NCI

245,700 126,880 372,580

f. Parent's stand-alone net income Subsidiary's stand-alone net income Less: 100% AAP amortization Consolidated net income

520,000 325,000 (36,400) 808,600

Parent's stand-alone net income p% of subsidiary's stand-alone net income Less: p% AAP amortization Consolidated net income attributable to the controlling interest

520,000 260,000 (29,120) 750,880

nci% of subsidiary's stand-alone net income Less: nci% AAP amortization Consolidated net income attributable to the noncontrolling interest

65,000 (7,280) 57,720

©Cambridge Business Publishers, 2020 5-18

Advanced Accounting, 4th Edition

52.

g. [C]

Equity investment income

230,880

Consol. NI attributable to NCI

57,720

Dividends

65,000

Equity investment

178,880

Noncontrolling interest Eliminates the change in the investment account of AAP adjusted changes in SE(S) [E]

44,720

Common stock (S) @BOY

91,000

APIC (S) @BOY

117,000

Retained earnings (S) @BOY

760,500 774,800

Equity investment @BOY

193,700

Noncontrolling interest (@BOY) Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

PPE, net @BOY (100% AAP)

265,200

Patent, net @BOY (100% AAP)

91,000

Customer list, net @BOY (100% AAP)

54,600

GW @ BOY (100% AAP)

260,000

Equity investment @BOY ( AAP) Noncontrolling interest

536,640 134,160

Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci% [D]

Operating expenses (for 100% AAP amort)

36,400

PPE, net (for 100% AAP amort)

15,600

Patent (for 100% AAP amort)

13,000

Customer list

7,800

Recognition of dep and amort of AAP assets [I]

Not applicable in this problem

continued

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-19

52.

g. continued Parent

Subsidiary

Consolidated

Sales

10,790,000

1,560,000

12,350,000

Cost of Goods sold

(8,190,000)

(780,000)

(8,970,000)

Gross profit

2,600,000

780,000

Income Statement:

Income (loss) from subsidiary Operating expenses Net Income

230,880 (2,080,000)

(455,000)

750,880

325,000

Consol NI attrib to NCI

3,380,000 [C]

230,880

[D]

36,400

(2,571,400) 808,600

[C]

57,720

(57,720)

Consol NI attrib to CI

750,880

Statement of Ret Earnings: BOY retained earnings

713,440

760,500

[E]

760,500

713,440

Net income

750,880

325,000

Dividends

(234,000)

(65,000)

750,880

EOY retained earnings

1,230,320

1,020,500

1,230,320

Cash

520,000

370,500

890,500

Accounts receivable

780,000

325,000

1,105,000

Inventory

1,170,000

429,000

1,599,000

Equity investment

1,490,320

65,000

[C]

(234,000)

Balance Sheet:

PPE, net

2,600,000

1,170,000

178,880

[C]

774,800

[E]

536,640

[A]

265,200

15,600

[D]

4,019,600

Patent

[A]

91,000

13,000

[D]

78,000

Customer List

[A]

54,600

7,800

[D]

46,800

Goodwill

[A]

260,000

6,560,320

2,294,500

7,998,900

Current liabilities

1,170,000

325,000

1,495,000

Long-term liabilities

2,600,000

741,000

3,341,000

520,000

91,000

[E]

91,000

520,000

[E]

117,000

1,040,000

Common stock APIC

1,040,000

117,000

Retained earnings

1,230,320

1,020,500

1,230,320

Noncontrolling interest

6,560,320

©Cambridge Business Publishers, 2020 5-20

2,294,500

1,964,300

44,720

[C]

193,700

[E]

134,160

[A]

1,964,300

372,580

7,998,900

Advanced Accounting, 4th Edition

53.

a. Unamort

Unamort

AAP

2015

AAP

2016

AAP

2017

AAP

2018

AAP

2019

AAP

100% AAP

1/1/2015

Amort

12/31/2015

Amort

12/31/2016

Amort

12/31/2017

Amort

12/31/2018

Amort

12/31/2019

PPE, net

160,000

16,000

144,000

16,000

128,000

16,000

112,000

16,000

96,000

16,000

80,000

Customer List

96,000

19,200

76,800

19,200

57,600

19,200

38,400

19,200

Goodwill

224,000

480,000

35,200

444,800

35,200

409,600

35,200

374,400

35,200

339,200

35,200

304,000

PPE, net

144,000

14,400

129,600

14,400

115,200

14,400

100,800

14,400

86,400

14,400

72,000

Customer List

86,400

17,280

69,120

17,280

51,840

17,280

34,560

17,280

Goodwill

201,600

432,000

31,680

400,320

31,680

368,640

31,680

336,960

31,680

305,280

31,680

273,600

PPE, net

16,000

1,600

14,400

1,600

12,800

1,600

11,200

1,600

9,600

1,600

8,000

Customer List

9,600

1,920

7,680

1,920

5,760

1,920

3,840

1,920

Goodwill

22,400

48,000

3,520

44,480

3,520

40,960

3,520

37,440

3,520

33,920

3,520

30,400

p% AAP Parent:

nci% AAP Subsidiary:

Solutions Manual, Chapter 5

5-21

53.

b. No intercompany transactions c. Equity Investment account at 1/1/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP

Equity Investment account at 12/31/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP

d. Equity Investment at 1/1/19 p% Net Income Equity Investment at 12/31/19

540,000 305,280 845,280

648,000 273,600 921,600

Equity Investment 845,280 144,000 36,000 0 31,680 921,600

e. Noncontrolling interest at 1/1/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

Noncontrolling interest at 12/31/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

p% Dividends p% AAP Amortization

60,000 33,920 93,920

72,000 30,400 102,400

f. Parent's stand-alone net income Subsidiary's stand-alone net income Less: 100% AAP amortization Consolidated net income

640,000 160,000 (35,200) 764,800

Parent's stand-alone net income p% of subsidiary's stand-alone net income Less: p% AAP amortization Consolidated net income attributable to the controlling interest

640,000 144,000 (31,680) 752,320

nci% of subsidiary's stand-alone net income Less: nci% AAP amortization Consolidated net income attributable to the noncontrolling interest

16,000

©Cambridge Business Publishers, 2020 5-22

(3,520) 12,480

Advanced Accounting, 4th Edition

53.

g. [C]

Equity income

112,320

Consol. NI attributable to NCI

12,480

Dividends

40,000

Equity investment

76,320

Noncontrolling interest Eliminates the change in the investment account of AAP adjusted changes in SE(S) [E]

8,480

Common stock (S) @BOY

80,000

APIC (S) @BOY

120,000

Retained earnings (S) @BOY

400,000

Equity investment @BOY

540,000

Noncontrolling interest (@BOY) Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

60,000

PPE, net @BOY (100% AAP)

96,000

Customer List, net @BOY (100% AAP)

19,200

GW @ BOY (100% AAP)

224,000

Equity investment @BOY ( AAP)

305,280

Noncontrolling interest Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci% [D]

Operating expenses (for 100% AAP amort)

33,920

35,200

PPE, net (for 100% AAP amort)

16,000

Customer List, net (for 100% AAP amort)

19,200

Recognition of dep and amort of AAP assets. [I]

Not applicable in this problem

continued

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-23

53.

g. continued Parent

Subsidiary

Consol.

Sales

5,760,000

1,520,000

7,280,000

Cost of Goods sold

(4,000,000)

(960,000)

(4,960,000)

Gross profit

1,760,000

560,000

2,320,000

Income Statement:

Income (loss) from subsidiary Operating expenses Net Income

112,320 (1,120,000)

(400,000)

752,320

160,000

Consolidated NI attrib to NCI

[C]

112,320

[D]

35,200

(1,555,200) 764,800

[C]

12,480

(12,480)

Consolidated NI attrib to CI

752,320

Statement of Ret Earnings: BOY retained earnings

1,401,280

400,000

[E]

400,000

1,401,280

Net income

752,320

160,000

Dividends

(160,000)

(40,000)

EOY retained earnings

1,993,600

520,000

1,993,600

Cash

400,000

80,000

480,000

Accounts receivable

752,000

200,000

952,000

Inventory

960,000

440,000

Equity investment

921,600

752,320 40,000

[C]

(160,000)

Balance Sheet:

PPE, net

2,240,000

720,000

1,400,000 76,320

[C]

540,000

[E]

305,280

[A]

96,000

16,000

[D]

3,040,000

Customer List

[A]

19,200

[D]

Goodwill

[A]

224,000

5,273,600

1,440,000

6,096,000

Current liabilities

800,000

320,000

1,120,000

Long-term liabilities

1,600,000

400,000

2,000,000

160,000

80,000

[E]

80,000

720,000

120,000

[E]

120,000

1,993,600

520,000

Common stock APIC Retained earnings

©Cambridge Business Publishers, 2020 5-24

1,440,000

720,000 1,993,600

Noncontrolling interest

5,273,600

160,000

1,099,200

8,480

[C]

60,000

[E]

33,920

[A]

1,099,200

102,400

6,096,000

Advanced Accounting, 4th Edition

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54.

a. Unamort

Unamort AAP

Unamort 2014

AAP

Unamort

AAP

2013

100%

1/1/2013

Amort

Patent

270,000

27,000

243,000

27,000

216,000

27,000

189,000

27,000

162,000

Goodwill

135,000

405,000

27,000

378,000

27,000

351,000

27,000

324,000

27,000

297,000

Patent

202,500

20,250

182,250

20,250

162,000

20,250

141,750

20,250

121,500

Goodwill

101,250

303,750

20,250

283,500

20,250

263,250

20,250

243,000

20,250

222,750

Patent

67,500

6,750

60,750

6,750

54,000

6,750

47,250

6,750

40,500

Goodwill

33,750

101,250

6,750

94,500

6,750

87,750

6,750

81,000

6,750

74,250

12/31/2013 Amort

2015

Unamort

AAP

12/31/2014 Amort

2016

12/31/2015 Amort

AAP 12/31/2016

nci%

Unamort

100% Patent Goodwill

Unamort

2017

AAP

2018

AAP

2019

AAP

Amort

12/31/2017

Amort

12/31/2018

Amort

12/31/2019

27,000

135,000

27,000

108,000

27,000

81,000

135,000

27,000

270,000

27,000

243,000

27,000

216,000

20,250

101,250

20,250

81,000

20,250

60,750

101,250

20,250

202,500

20,250

182,250

20,250

162,000

6,750

33,750

6,750

27,000

6,750

20,250

33,750

6,750

67,500

6,750

60,750

6,750

54,000

p% Patent Goodwill

nci% Patent Goodwill

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-25

54.

b. No intercompany transactions c. Equity Investment account at 1/1/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Less: 100% of downstream deferred intercompany profits Less: p% of upstream deferred intercompany profits

Equity Investment account at 12/31/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Less: 100% of downstream deferred intercompany profits Less: 100% of downstream deferred intercompany profits

1,147,500 182,250

0 0 1,329,750

1,215,000 162,000

0 0 1,377,000

Equity Investment Equity Investment at 1/1/19 p% Net Income

1,329,750 135,000 0

Equity Investment at 12/31/19

1,377,000

e. Noncontrolling interest at 1/1/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

Noncontrolling interest at 12/31/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

©Cambridge Business Publishers, 2020 5-26

p% Dividends 67,500 20,250 p% AAP Amortization

382,500 60,750 443,250

405,000 54,000 459,000

Advanced Accounting, 4th Edition

54.

Parent's stand-alone net income Subsidiary's stand-alone net income Less: 100% AAP amortization Consolidated net income

900,000 180,000 (27,000) 1,053,000

Parent's stand-alone net income p% of subsidiary's stand-alone net income Less: p% AAP amortization Consolidated net income attributable to the controlling interest

900,000 135,000 (20,250) 1,014,750

nci% of subsidiary's stand-alone net income Less: nci% AAP amortization Consolidated net income attributable to the noncontrolling interest g.

[C]

[E]

45,000 (6,750) 38,250

Equity income

114,750

Consol. NI attributable to NCI Dividends

38,250 90,000

Equity investment

47,250

Noncontrolling interest

15,750

Common Stock (S) @BOY

252,000

APIC (S) @BOY

405,000

Retained Earnings (S) @BOY

873,000

Equity Investment @BOY

1,147,500

Noncontrolling interest (@BOY) 382,500 Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

Patent, net @BOY (100% AAP)

108,000

GW @ BOY (100% AAP)

135,000

Equity investment @BOY ( AAP)

182,250

Noncontrolling interest Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci% [D]

Operating expenses (for 100% AAP amort)

60,750

27,000

Patent, net (for 100% AAP amort)

27,000

Recognition of dep and amort of AAP assets. [I]

Not applicable in this problem continued

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-27

54.

g. continued Parent

Subsidiary

Consol

Sales

6,300,000

1,620,000

7,920,000

Cost of Goods sold

(3,780,000)

(900,000)

(4,680,000)

Gross profit

2,520,000

720,000

Income Statement:

Income (loss) from subsidiary

114,750

Operating expenses

(1,620,000)

(540,000)

Net Income

1,014,750

180,000

Consolidated NI attrib to NCI

3,240,000 [C]

114,750

[D]

27,000

(2,187,000) 1,053,000

[C]

38,250

(38,250)

Consolidated NI attrib to CI

1,014,750

Statement of Ret Earnings: BOY retained earnings

1,473,250

873,000

Net income

1,014,750

180,000

[E]

873,000

1,473,250

Dividends

(171,000)

(90,000)

EOY retained earnings

2,317,000

963,000

2,317,000

Cash

270,000

90,000

360,000

Accounts receivable

540,000

360,000

900,000

Inventory

720,000

792,000

1,512,000

1,014,750 90,000

[C]

(171,000)

Balance Sheet:

Equity investment

PPE, net

1,377,000

1,800,000

47,250

[C]

1,147,500

[E]

182,250

[A]

1,080,000

2,880,000

Patent

[A]

108,000

Goodwill

[A]

135,000

27,000

[D]

81,000 135,000

4,707,000

2,322,000

Current liabilities

500,000

162,000

662,000

Long-term liabilities

990,000

540,000

1,530,000

Common stock

540,000

252,000

[E]

252,000

540,000

APIC

360,000

405,000

[E]

405,000

360,000

2,317,000

963,000

Retained earnings

5,868,000

2,317,000

Noncontrolling interest

4,707,000

©Cambridge Business Publishers, 2020 5-28

2,322,000

1,953,000

15,750

[C]

382,500

[E]

60,750

[A]

1,953,000

459,000

5,868,000

Advanced Accounting, 4th Edition

55.

a. Unamort AAP

Unamort 2016

AAP

Unamort 2017

AAP

Unamort 2018

AAP

Unamort 2019

AAP

100%

1/1/2016 Amort

12/31/2016 Amort

12/31/2017 Amort

12/31/2018 Amort

12/31/2019

PPE, net

240,000 20,000

220,000 20,000

200,000 20,000

180,000 20,000

160,000

Patent

260,000 26,000

234,000 26,000

208,000 26,000

182,000 26,000

156,000

Goodwill

500,000 46,000

454,000 46,000

408,000 46,000

362,000 46,000

316,000

PPE, net

204,000 17,000

187,000 17,000

170,000 17,000

153,000 17,000

136,000

Patent

221,000 22,100

198,900 22,100

176,800 22,100

154,700 22,100

132,600

Goodwill

425,000 39,100

385,900 39,100

346,800 39,100

307,700 39,100

268,600

PPE, net

36,000 3,000

33,000

3,000

30,000

3,000

27,000

3,000

24,000

Patent

39,000 3,900

35,100

3,900

31,200

3,900

27,300

3,900

23,400

Goodwill

75,000 6,900

68,100

6,900

61,200

6,900

54,300

6,900

47,400

nci%

b. Intercompany profit on 1/1/19 Intercompany profit on 12/31/19

Downstream 0 0

c. Equity Investment A/C at 1/1/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Less: p% of upstream deferred intercompany profits

Equity Investment A/C at 12/31/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Less: p% of upstream deferred intercompany profits

Solutions Manual, Chapter 5

Upstream 20,000 42,000

790,500 307,700 (17,000) 1,081,200

943,500 268,600 (35,700) 1,176,400

©Cambridge Business Publishers, 2020 5-29

55.

d. Equity Investment Equity Investment at 1/1/19 p% Net Income p% BOY U-S inventory profits

1,081,200 170,000 17,000

17,000 p% Dividends 39,100 p% AAP Amortization

p% EOY U-S inventory 35,700 profits Equity Investment at 12/31/19

1,176,400

e. Noncontrolling interest at 1/1/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Less: nci% of upstream deferred intercompany profits

Noncontrolling interest at 12/31/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Less: nci% of upstream deferred intercompany profits

139,500 54,300 (3,000) 190,800

166,500 47,400 (6,300) 207,600

f. Parent's stand-alone net income Subsidiary's stand-alone net income Plus: 100% realized upstream deferred profits Less: 100% unrealized upstream deferred profits Less: 100% AAP amortization Consolidated net income

800,000 200,000 20,000 (42,000) (46,000)

932,000

Parent's stand-alone net income p% of subsidiary's stand-alone net income Plus: p% realized upstream deferred profits Less: p% unrealized upstream deferred profits Less: p% AAP amortization Consolidated net income attributable to the controlling interest nci% of subsidiary's stand-alone net income Plus: nci% realized upstream deferred profits Less: nci% unrealized upstream deferred profits Less: nci% AAP amortization Consolidated net income attributable to the noncontrolling interest

©Cambridge Business Publishers, 2020 5-30

800,000 170,000 17,000 (35,700) (39,100)

912,200 30,000 3,000 (6,300) (6,900) 19,800

Advanced Accounting, 4th Edition

55.

g. [C]

Equity income

112,200

Consol. NI attributable to NCI

19,800

Dividends

20,000

Equity investment

95,200

Noncontrolling interest Eliminates the change in the investment account of AAP adjusted changes in SE(S) [E]

16,800

Common stock (S) @BOY

100,000

APIC (S) @BOY

200,000

Retained earnings (S) @BOY

630,000

Equity investment @BOY

790,500

Noncontrolling interest (@BOY) Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

139,500

PPE, net @BOY (100% AAP)

180,000

Patent, net @BOY (100% AAP)

182,000

Equity investment @BOY ( AAP)

307,700

Noncontrolling interest Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci% [D]

Operating expenses (for 100% AAP amort)

54,300

46,000

PPE, net (for 100% AAP amort)

20,000

Patent, net (for 100% AAP amort)

26,000

Recognition of dep and amort of AAP assets [Icogs]

Equity investment

17,000

Noncontrolling interest @ BOY

3,000

Cost of goods sold Recognition of deferred gain on inventory sale and proration between parent and subsidiary [Isales]

Sales

20,000

350,000 Cost of goods sold

350,000

Elimination of 100% of all intercompany transactions [Icogs]

Cost of goods sold

42,000

Inventory

42,000

Deferral of gross profit on this year inventory sales [Ipay]

Accounts payable

105,000

Accounts receivable

105,000

Elimination of intercompany receivable and payable continued

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-31

55.

g. continued Parent

Subsidiary

Sales

6,000,000

1,500,000 [Isales]

350,000

Cost of Goods sold

(4,000,000)

(1,000,000)

42,000

Gross profit

2,000,000

500,000

Consol

Income Statement: [Icogs]

7,150,000 350,000 [Isales] 20,000

Income (loss) from subsidiary Operating expenses Net Income

112,200 (1,200,000)

(300,000)

912,200

200,000

Consolidated NI attrib to NCI

(4,672,000)

[Icogs] 2,478,000

[C]

112,200

[D]

46,000

(1,546,000) 932,000

[C]

19,800

(19,800)

Consolidated NI attrib to CI

912,200

Statement of Ret Earnings: BOY retained earnings

2,014,200

630,000

[E]

630,000

2,014,200

Net income

912,200

200,000

Dividends

(250,000)

(20,000)

EOY retained earnings

2,676,400

810,000

2,676,400

Cash

400,000

60,000

460,000

Accounts receivable

550,000

300,000

850,000

400,000

912,200 20,000

[C]

(250,000)

Balance Sheet:

Inventory Equity investment

PPE, net

1,176,400

4,000,000

[Icogs]

850,000

Patent

17,000

105,000

[Ipay]

745,000

42,000

[Icogs]

1,208,000

95,200

[C]

790,500

[E]

307,700

[A]

180,000

20,000

[D]

5,010,000

[A]

182,000

26,000

[D]

156,000

6,976,400

1,610,000

Current liabilities

700,000

100,000

Long-term liabilities

2,000,000

400,000

600,000

100,000

[E]

100,000

600,000

APIC

1,000,000

200,000

[E]

200,000

1,000,000

Retained earnings

2,676,400

810,000 [Icogs]

3,000

Common stock

Noncontrolling interest

6,976,400

©Cambridge Business Publishers, 2020 5-32

1,610,000

7,579,000

[Ipay]

105,000

695,000 2,400,000

2,676,400

1,987,000

16,800

[C]

139,500

[E]

54,300

[A]

1,987,000

207,600

7,579,000

Advanced Accounting, 4th Edition

56.

100% Patent Goodwill p% Patent Goodwill nci% Patent Goodwill

100% Patent Goodwill p% Patent Goodwill

Unamort AAP 1/1/2013 180,000 300,000 480,000

2013 Amort 18,000 0 18,000

Unamort AAP 12/31/2013 162,000 300,000 462,000

2014 Amort 18,000 0 18,000

Unamort AAP 12/31/2014 144,000 300,000 444,000

144,000 240,000 384,000

14,400 0 14,400

36,000 60,000 96,000

3,600 0 3,600

2015 Amort 18,000 0 18,000

Unamort AAP 12/31/2015 126,000 300,000 426,000

2016 Amort 18,000 0 18,000

129,600 240,000 369,600

14,400 0 14,400

115,200 240,000 355,200

14,400 0 14,400

100,800 240,000 340,800

14,400 0 14,400

32,400 60,000 92,400

3,600 0 3,600

28,800 60,000 88,800

3,600 0 3,600

25,200 60,000 85,200

3,600 0 3,600

Unamort AAP 12/31/2016 108,000 300,000 408,000

2017 Amort 18,000 0 18,000

Unamort AAP 12/31/2017 90,000 300,000 390,000

2018 Amort 18,000 0 18,000

Unamort AAP 12/31/2018 72,000 300,000 372,000

2019 Amort 18,000 0 18,000

Unamort AAP 12/31/2019 54,000 300,000 354,000

86,400 240,000 326,400

14,400 0 14,400

72,000 240,000 312,000

14,400 0 14,400

57,600 240,000 297,600

14,400 0 14,400

43,200 240,000 283,200

21,600 60,000 81,600

3,600 0 3,600

18,000 60,000 78,000

3,600 0 3,600

14,400 60,000 74,400

3,600 0 3,600

10,800 60,000 70,800

nci% Patent Goodwill

b. Intercompany profit on 1/1/19 Intercompany profit on 12/31/19

Solutions Manual, Chapter 5

Downstream 0 0

Upstream $28,000 $37,500

©Cambridge Business Publishers, 2020 5-33

56.

c. Equity Investment account at 1/1/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Less: p% of upstream deferred intercompany profits

Equity Investment account at 12/31/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Less: p% of upstream deferred intercompany profits

d. Equity Investment at 1/1/19 p% Net Income p% BOY U-s inventory profits

Equity Investment at 12/31/19

1,120,000 283,200 (30,000) 1,373,200

Equity Investment 1,267,200 160,000 32,000 p% Dividends 22,400 14,400 p% AAP Amortization p% EOY U-S inventory 30,000 profits 1,373,200

e. Noncontrolling interest at 1/1/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Less: nci% of upstream deferred intercompany profits

Noncontrolling interest at 12/31/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Less: nci% of upstream deferred intercompany profits

©Cambridge Business Publishers, 2020 5-34

992,000 297,600 (22,400) 1,267,200

248,000 74,400 (5,600) 316,800

280,000 70,800 (7,500) 343,300

Advanced Accounting, 4th Edition

56.

200,000 200,000

200,000

28,000 (37,500) (18,000)

372,500

nci% of subsidiary's stand-alone net income Plus: nci% realized upstream deferred profits Less: nci% unrealized upstream deferred profits Less: nci% AAP amortization Consolidated net income attributable to the noncontrolling interest

Solutions Manual, Chapter 5

160,000 22,400 (30,000) (14,400)

338,000

40,000 5,600 (7,500) (3,600) 34,500

©Cambridge Business Publishers, 2020 5-35

56.

[C]

Equity investment income Consol. NI attributable to NCI

138,000 34,500

Dividends

40,000

Equity Investment

106,000

Noncontrolling interest Eliminates the change in the investment account of AAP adjusted changes in SE(S) [E]

26,500

Common stock (S) @BOY

100,000

APIC (S) @BOY

200,000

Retained earnings (S) @BOY

940,000

Equity investment @BOY

992,000

Noncontrolling interest (@BOY) Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

248,000

Patent, net @BOY (100% AAP)

72,000

Goodwill @BOY (100% AAP)

300,000

Equity investment @BOY ( AAP)

297,600

Noncontrolling interest Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci% [D]

Operating Expenses (for 100% AAP amort)

74,400

18,000

Patent, net (for 100% AAP amort)

18,000

Recognition of dep and amort of AAP assets [Icogs]

Equity investment

22,400

Noncontrolling interest @ BOY

5,600

Cost of goods sold Recognition of deferred gain on inventory sale and proration between parent and subsidiary [Isales]

Sales

28,000

600,000 Cost of goods sold

600,000

Elimination of 100% of all intercompany transactions [Icogs]

Cost of goods sold

37,500

Inventory

37,500

Deferral of gross profit on this year’s inventory sales [Ipay]

Accounts payable Accounts receivable

140,000 140,000

Elimination of intercompany receivable and payable

©Cambridge Business Publishers, 2020 5-36

Advanced Accounting, 4th Edition

56.

g. continued Parent

Subsidiary

Consol

Income Statement: Sales

6,700,000

2,500,000

[Isales]

600,000

Cost of Goods sold

(4,500,000)

(1,500,000)

[Icogs]

37,500

Gross profit Income (loss) from subsidiary Operating expenses Net Income

2,200,000

8,600,000 600,000

[Isales]

28,000

[Icogs]

1,000,000

138,000 (2,000,000)

(800,000)

338,000

200,000

Consolidated NI attrib to NCI

(5,409,500) 3,190,500

[C]

138,000

[D]

18,000

(2,818,000) 372,500

[C]

34,500

(34,500)

Consolidated NI attrib to CI

338,000

Statement of Ret Earnings: BOY retained earnings

2,035,200

940,000

[E]

940,000

2,035,200

Net income

338,000

200,000

Dividends

(200,000)

(40,000)

EOY retained earnings

2,173,200

1,100,000

Cash

500,000

400,000

Accounts receivable

700,000

600,000

140,000

[Ipay]

1,160,000

Inventory

900,000

800,000

37,500

[Icogs]

1,662,500

106,000

[C]

338,000 40,000

[C]

(200,000) 2,173,200

Balance Sheet:

Equity investment

PPE, net

1,373,200

4,000,000

900,000

[Icogs]

22,400

[A] 5,000,000

[A]

72,000

Goodwill

[A]

300,000

7,473,200

2,800,000

Current liabilities

800,000

500,000

Long-term liabilities

3,000,000

900,000

500,000

APIC Retained earnings

18,000

[D]

54,000 300,000 9,076,500

[Ipay]

140,000

100,000

[E]

100,000

500,000

1,000,000

200,000

[E]

200,000

1,000,000

2,173,200

1,100,000

Noncontrolling interest

2,800,000

1,160,000 3,900,000

2,173,200 [Icogs]

7,473,200

Solutions Manual, Chapter 5

[E]

297,600 1,000,000

Patent

Common stock

992,000

5,600

2,608,000

26,500

[C]

248,000

[E]

74,400

[A]

2,608,000

343,300

9,076,500

©Cambridge Business Publishers, 2020 5-37

57.

100% PPE, net p% PPE, net nci% PPE, net

Unamort AAP 2016 1/1/2016 Amort 160,000 16,000

Unamort AAP 2017 12/31/2016 Amort 144,000 16,000

Unamort AAP 2018 12/31/2017 Amort 128,000 16,000

160,000 16,000

144,000 16,000

128,000 16,000

112,000 11,200

100,800 11,200

89,600 11,200

112,000 11,200

100,800 11,200

89,600 11,200

48,000

4,800

43,200

4,800

38,400

4,800

48,000

4,800

43,200

4,800

38,400

4,800

Unamort AAP 2019 12/31/2018 Amort 112,000 16,000

Unamort AAP 12/31/2019 96,000

112,000 16,000

96,000

78,400 11,200

67,200

78,400 11,200

67,200

33,600

4,800

28,800

33,600

4,800

28,800

b. Intercompany profit on 1/1/19 Intercompany profit on 12/31/19

©Cambridge Business Publishers, 2020 5-38

Downstream 24,000 9,000

Upstream 0 0

Advanced Accounting, 4th Edition

57.

c. Equity Investment A/C at 1/1/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Less: 100% of downstream deferred intercompany profits Less: p% of upstream deferred intercompany profits

Equity Investment A/C at 12/31/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Less: 100% of downstream deferred intercompany profits Less: p% of upstream deferred intercompany profits

d. Equity Investment at 1/1/19 p% Net Income 100% BOY D-S inventory profits

Equity Investment 652,900 140,000 35,000 24,000 11,200 9,000

Equity Investment at 12/31/19

703,500 67,200 (9,000) 0 761,700

p% Dividends p% AAP Amortization 100% EOY D-S inventory profits

761,700

e. Noncontrolling interest at 1/1/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

Noncontrolling interest at 12/31/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

Solutions Manual, Chapter 5

598,500 78,400 (24,000) 0 652,900

256,500 33,600 290,100

301,500 28,800 330,300

©Cambridge Business Publishers, 2020 5-39

57.

f. Parent's stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent's adjusted stand-alone net income

300,000 24,000 (9,000) 315,000

Subsidiary's stand-alone net income Less: 100% AAP amortization Subsidiary's adjusted stand-alone net income Consolidated net income

200,000 (16,000) 184,000 499,000

Parent's stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent's adjusted stand-alone net income

300,000 24,000 (9,000) 315,000

p% of subsidiary's stand-alone net income Less: p% AAP amortization p% of subsidiary's stand-alone net income Consolidated net income attributable to the controlling interest

140,000 (11,200) 128,800 443,800

nci% of subsidiary's stand-alone net income Less: nci% AAP amortization Consolidated net income attributable to the noncontrolling interest

60,000 (4,800) 55,200

©Cambridge Business Publishers, 2020 5-40

Advanced Accounting, 4th Edition

57.

g. [C]

Equity income

143,800

Consol. NI attributable to NCI

55,200

Dividends

50,000

Equity investment

108,800

Noncontrolling interest Eliminates the change in the investment account of AAP adjusted changes in SE(S) [E]

40,200

Common stock (S) @BOY

60,000

APIC (S) @BOY

80,000

Retained earnings (S) @BOY

715,000

Equity investment @BOY

598,500

Noncontrolling interest (@BOY) Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

PPE, net @BOY (100% AAP)

256,500

112,000

Equity Investment @BOY ( AAP) Noncontrolling Interest Allocates beginning of year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci% [D]

Operating Expenses (for 100% AAP amort)

78,400 33,600

16,000

PPE, net (for 100% AAP amort)

16,000

Recognition of dep and amort of AAP assets [Icogs]

Equity investment

24,000

Cost of goods sold Recognition of deferred gain on inventory sale and proration between parent and subsidiary [Isales]

Sales

24,000

200,000 Cost of goods sold

200,000

Elimination of 100% of all intercompany transactions [Icogs]

Cost of goods sold

9,000

Inventory

9,000

Deferral of gross profit on TY inventory sales [Ipay]

Accounts payable

20,000

Accounts receivable

20,000

Elimination of intercompany receivable and payable continued

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-41

57.

continued Parent

Subsidiary

Sales

6,400,000

1,500,000

[Isales]

200,000

Cost of Goods sold

(4,500,000) (1,000,000)

[Icogs]

9,000

Gross profit

1,900,000

Consol

Income Statement:

Income (loss) from subsidiary Operating expenses Net Income

7,700,000 200,000

[Isales]

24,000

[Icogs]

(5,285,000)

500,000

143,800 (1,600,000)

(300,000)

443,800

200,000

Consolidated NI attrib to NCI

2,415,000 [C]

143,800

[D]

16,000

(1,916,000) 499,000

[C]

55,200

(55,200)

Consolidated NI attrib to CI

443,800

Statement of Ret Earnings: BOY retained earnings

1,237,900

715,000

[E]

715,000

1,237,900

Net income

443,800

200,000

Dividends

(120,000)

(50,000)

EOY retained earnings

1,561,700

865,000

1,561,700

Cash

400,000

80,000

480,000

Accounts receivable

600,000

210,000

Inventory

800,000

340,000

Equity investment

761,700

443,800 50,000

[C]

(120,000)

Balance Sheet:

PPE, net

2,800,000

[Icogs]

800,000

[A]

24,000

112,000

20,000

[Ipay]

790,000 1,131,000

9,000

[Icogs]

108,800

[C]

598,500

[E]

78,400

[A]

16,000

[D]

Goodwill

3,696,000 0

5,361,700

1,430,000

Current liabilities

500,000

125,000

Long-term liabilities

2,000,000

300,000

Common stock

400,000

60,000

[E]

60,000

400,000

APIC

900,000

80,000

[E]

80,000

900,000

1,561,700

865,000

Retained earnings

6,097,000

[Ipay]

20,000

1,561,700

Noncontrolling interest

5,361,700

©Cambridge Business Publishers, 2020 5-42

1,430,000

605,000 2,300,000

1,435,000

40,200

[C]

256,500

[E]

33,600

[A]

1,435,000

330,300

6,097,000

Advanced Accounting, 4th Edition

58.

a. Unamort 100%

Unamort

AAP

2012

AAP

2013

AAP

2014

1/1/2012

Amort

12/31/2012

Amort

12/31/2013

Amort

12/31/2014 Amort

AAP

2015

PPE, net

270,000

27,000

243,000

27,000

216,000

27,000

189,000 27,000

Patent

216,000

27,000

189,000

27,000

162,000

27,000

135,000 27,000

Goodwill

450,000

936,000

54,000

882,000

54,000

828,000

54,000

774,000 54,000

PPE, net

243,000

24,300

218,700

24,300

194,400

24,300

170,100 24,300

Patent

194,400

24,300

170,100

24,300

145,800

24,300

121,500 24,300

Goodwill

405,000

842,400

48,600

793,800

48,600

745,200

48,600

696,600 48,600

PPE, net

27,000

2,700

24,300

2,700

21,600

2,700

18,900

2,700

Patent

21,600

2,700

18,900

2,700

16,200

2,700

13,500

2,700

Goodwill

45,000

93,600

5,400

88,200

5,400

82,800

5,400

77,400

5,400

450,000

405,000

nci%

Unamort 100%

Unamort

AAP

2016

AAP

2017

AAP

Unamort 2018

AAP

Unamort 2019

AAP

12/31/2015

Amort

12/31/2016

Amort

12/31/2017

Amort

12/31/2018 Amort

12/31/2019

PPE, net

162,000

27,000

135,000

27,000

108,000

27,000

81,000 27,000

54,000

Patent

108,000

27,000

81,000

27,000

54,000

27,000

27,000 27,000

Goodwill

450,000

720,000

54,000

666,000

54,000

612,000

145,800

24,300

121,500

24,300

Patent

97,200

24,300

72,900

Goodwill

405,000

648,000

48,600

PPE, net

16,200

Patent

10,800

Goodwill

450,000

54,000

558,000 54,000

504,000

97,200

24,300

72,900 24,300

48,600

24,300

48,600

24,300

405,000

599,400

48,600

550,800

48,600

2,700

13,500

2,700

10,800

2,700

8,100

2,700

5,400

2,700

8,100

2,700

5,400

2,700

45,000

72,000

5,400

66,600

5,400

61,200

5,400

55,800

5,400

50,400

p% PPE, net

24,300 24,300 405,000

405,000

502,200 48,600

453,600

nci%

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-43

58.

b. Downstream Intercompany profit on 1/1/19 Intercompany profit on 12/31/19 c.

64,800 81,000

Equity Investment account at 1/1/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP

882,900 502,200

Less: 100% of downstream deferred intercompany profits Less: p% of upstream deferred intercompany profits

Equity Investment account at 12/31/19: p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Less: 100% of downstream deferred intercompany profits Less: p% of upstream deferred intercompany profits

Upstream 0 0

(64,800) 0 1,320,300

915,300 453,600 (81,000) 0 1,287,900

Equity Investment Equity Investment at 1/1/19 p% Net Income 100% BOY D-S inventory profits

1,320,300 81,000

Equity Investment at 12/31/19

1,287,900

64,800

48,600 p% Dividends

48,600 p% AAP Amortization 81,000 100% EOY D-S inventory profits

e. Noncontrolling interest at 1/1/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

98,100 55,800

153,900 Noncontrolling interest at 12/31/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

101,700 50,400

152,100

©Cambridge Business Publishers, 2020 5-44

Advanced Accounting, 4th Edition

58.

f. Parent's stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent's adjusted stand-alone net income

540,000 64,800 (81,000) 523,800

Subsidiary's stand-alone net income Less: 100% AAP amortization Subsidiary's adjusted stand-alone net income Consolidated net income

90,000 (54,000) 36,000 559,800

Parent's stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent's adjusted stand-alone net income

540,000 64,800 (81,000) 523,800

p% of subsidiary's stand-alone net income Less: p% AAP amortization p% of subsidiary's stand-alone net income Consolidated net income attributable to the controlling interest

81,000 (48,600) 32,400 556,200

nci% of subsidiary's stand-alone net income Less: nci% AAP amortization Consolidated net income attributable to the noncontrolling interest

9,000 (5,400) 3,600

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-45

58.

g. [C]

Equity income

16,200

Consol. NI attributable to NCI

3,600

Equity investment

32,400

Noncontrolling interest

1,800

Dividends Eliminates the change in the investment account of AAP adjusted changes in SE(S) [E]

54,000

Common stock (S) @BOY

90,000

APIC (S) @BOY

360,000

Retained earnings (S) @BOY

531,000

Equity investment @BOY

882,900

Noncontrolling interest (@BOY) Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account [A]

98,100

PPE, net @BOY (100% AAP)

81,000

Patent, net @BOY (100% AAP)

27,000

GW @ BOY (100% AAP)

450,000

Equity investment @BOY ( AAP)

502,200

Noncontrolling interest Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests by eliminating the remaining investment account and establishing the BOY AAP for nci% [D]

Operating expenses (for 100% AAP amort)

55,800

54,000

PPE, net (for 100% AAP amort)

27,000

Patent, net (for 100% AAP amort)

27,000

Recognition of dep and amort of AAP assets [Icogs]

Equity investment

64,800

Cost of goods sold Recognition of deferred gain on inventory sale and proration between parent and subsidiary [Isales]

Sales

64,800

405,000 Cost of goods sold

405,000

Elimination of 100% of all intercompany transactions [Icogs]

Cost of goods sold

81,000 Inventory

81,000

Deferral of gross profit on this year’s inventory sales [Ipay]

Accounts payable

36,000 Accounts receivable

36,000

Elimination of intercompany receivable and payable

©Cambridge Business Publishers, 2020 5-46

Advanced Accounting, 4th Edition

58.

g. continued Parent

Subsidiary

Consol

Income Statement: Sales

5,490,000

990,000

[Isales]

405,000

Cost of Goods sold

(4,140,000)

(630,000) [Icogs]

81,000

Gross profit Income (loss) from subsidiary

1,350,000

Operating expenses

(810,000)

(270,000)

Net Income

556,200

90,000

6,075,000 405,000

[Isales]

64,800

[Icogs]

360,000

16,200

Consolidated NI attrib to NCI

(4,381,200) 1,693,800

[C]

16,200

[D]

54,000

(1,134,000) 559,800

[C]

3,600

(3,600)

Consolidated NI attrib to CI

556,200

Statement of Ret Earnings: BOY retained earnings

1,811,700

531,000

[E]

531,000

1,811,700

Net income

556,200

90,000

Dividends

(180,000)

(54,000)

556,200

EOY retained earnings

2,187,900

567,000

2,187,900

Cash

405,000

72,000

477,000

Accounts receivable Inventory

720,000 810,000

261,000 405,000

Equity investment

1,287,900

54,000

[C]

(180,000)

Balance Sheet:

PPE, net

2,700,000

900,000

36,000 81,000 [C]

32,400

[Icogs]

64,800

[Ipay] [Icogs]

945,000 1,134,000 0

882,900

[E]

502,200

[A]

81,000

27,000

[D]

3,654,000

Patent

[A]

27,000

[D]

Goodwill

[A]

450,000

5,922,900

1,638,000

Current liabilities

585,000

81,000

Long-term liabilities

1,800,000

540,000

450,000

90,000

[E]

90,000

900,000

360,000

[E]

360,000

2,187,900

567,000

Common stock APIC Retained earnings Noncontrolling interest

Solutions Manual, Chapter 5

6,660,000

[Ipay]

1,638,000

36,000

630,000 2,340,000 450,000 900,000 2,187,900

[C] 5,922,900

450,000

1,800 2,233,800

98,100

[E]

55,800

[A]

2,233,800

152,100 6,660,000

©Cambridge Business Publishers, 2020 5-47

59.

a. Unamort AAP 1/1/2013 240,000 300,000 540,000

2013 Amort 24,000 0 24,000

Unamort AAP 12/31/2013 216,000 300,000 516,000

2014 Amort 24,000 0 24,000

Unamort AAP 12/31/2014 192,000 300,000 492,000

2015 Amort 24,000 0 24,000

Unamort AAP 12/31/2015 168,000 300,000 468,000

2016 Amort 24,000 0 24,000

180,000 225,000 405,000

18,000 0 18,000

162,000 225,000 387,000

18,000 0 18,000

144,000 225,000 369,000

18,000 0 18,000

126,000 225,000 351,000

18,000 0 18,000

60,000 75,000 135,000

6,000 0 6,000

54,000 75,000 129,000

6,000 0 6,000

48,000 75,000 123,000

6,000 0 6,000

42,000 75,000 117,000

6,000 0 6,000

100%

Unamort AAP 12/31/2016

2017 Amort

Unamort AAP 12/31/2017

2018 Amort

Unamort AAP 12/31/2018

2019 Amort

Unamort AAP 12/31/2019

Patent Goodwill

144,000 300,000

24,000 0

120,000 300,000

24,000 0

96,000 300,000

24,000 0

72,000 300,000

444,000

24,000

420,000

24,000

396,000

24,000

372,000

108,000 225,000 333,000

18,000 0 18,000

90,000 225,000 315,000

18,000 0 18,000

72,000 225,000 297,000

18,000 0 18,000

54,000 225,000 279,000

36,000 75,000 111,000

6,000 0 6,000

30,000 75,000 105,000

6,000 0 6,000

24,000 75,000 99,000

6,000 0 6,000

18,000 75,000 93,000

100% Patent Goodwill

p% Patent Goodwill

nci% Patent Goodwill

p% Patent Goodwill

nci% Patent Goodwill

b. Intercompany profit in inventory on 1/1/19 Intercompany profit in inventory on 12/31/19

©Cambridge Business Publishers, 2020 5-48

Downstream 0 0

Upstream 32,000 36,000

Advanced Accounting, 4th Edition

59.

Computation of [ADJ] amount p% of change in RE(S) from acquisition date through BOY Less: Cum p% AAP amort. from acquisition date through BOY Less: 100% of the BOY D-S unconf. intercompany inventory profits Less: p% of the BOY U-S unconf intercompany inventory profits Less: 100% of the BOY D-S unconf. intercompany deprec. asset profits Less: p% of the BOY U-S unconf. intercompany deprec. asset profits [ADJ] Amount

Noncontrolling interest at 1/1/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Less: 10% of upstream deferred intercompany profits

Noncontrolling interest at 12/31/19: nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Less: 10% of upstream deferred intercompany profits

Solutions Manual, Chapter 5

660,000 297,000 0 (24,000) 933,000

750,000 279,000 0 (27,000) 1,002,000

165,000 (108,000) 0 (24,000) 0 0 33,000

220,000 99,000 (8,000) 311,000

250,000 93,000 (9,000) 334,000

©Cambridge Business Publishers, 2020 5-49

59.

600,000

200,000 32,000 (36,000) (24,000) 172,000 772,000

©Cambridge Business Publishers, 2020 5-50

150,000 24,000 (27,000) (18,000) 129,000 729,000

50,000 8,000 (9,000) (6,000) 43,000

Advanced Accounting, 4th Edition

59.

g. [ADJ]

Equity Investment

33,000

Retained earnings of Parent - BOY [C]

[E]

[A]

[D]

33,000

Equity investment income

60,000

Consolidated Net Income attribute to noncontrolling interest

43,000

Dividends

80,000

Noncontrolling interest

23,000

Common stock (S)

140,000

APIC (S)

300,000

Retained earnings (S)

440,000

Equity investment

660,000

Noncontrolling interest

220,000

PPE, net

96,000

Patent

300,000

Equity investment

297,000

Noncontrolling interest

99,000

Operating expenses

24,000

Patent [Icogs]

24,000

Equity Investment

24,000

Noncontrolling interest

8,000

Cost of Goods Sold [Isales]

Sales

32,000 800,000

Cost of Goods Sold [Icogs]

Cost of Goods Sold

800,000 36,000

Inventory [Ipay]

Accounts Payable Accounts Receivable

Solutions Manual, Chapter 5

36,000 120,000 120,000

©Cambridge Business Publishers, 2020 5-51

59.

g. continued Parent

Subsidiary

Consol

Sales

5,700,000

2,000,000

[Isales]

800,000

6,900,000

Cost of Goods sold

(3,500,000) (1,200,000) [Icogs]

36,000

800,000 [Isales] (3,904,000)

Gross profit

2,200,000

Income Statement:

32,000 [Icogs] Income (loss) from subsidiary Operating expenses Net Income

800,000

60,000 (1,600,000)

(600,000)

660,000

200,000

Consolidated NI attrib to NCI

2,996,000 [C]

60,000

[D]

24,000

(2,224,000) 772,000

[C]

43,000

(43,000)

Consolidated NI attrib to CI

729,000

Statement of Ret Earnings: BOY retained earnings

340,000

440,000

[E]

440,000

33,000

[ADJ]

373,000

Net income

660,000

200,000

Dividends

(200,000)

(80,000)

EOY retained earnings

800,000

560,000

902,000

Cash

500,000

350,000

850,000

Accounts receivable

700,000

550,000

Inventory

900,000

700,000

Equity investment

900,000

729,000 80,000

[C]

(200,000)

Balance Sheet: 120,000 [Ipay]

1,130,000

36,000 [Icogs]

1,564,000

[ADJ]

33,000

660,000

[E]

[Icogs]

24,000

297,000

[A]

Patent

[A]

96,000

24,000

[D]

Goodwill

[A]

300,000

PPE, net

3,400,000

900,000

4,300,000 72,000 300,000

6,400,000

2,500,000

Current liabilities

1,300,000

800,000

Long-term liabilities

2,800,000

700,000

300,000

140,000

[E]

140,000

300,000

1,200,000

300,000

[E]

300,000

1,200,000

800,000

560,000

Common stock APIC Retained earnings Noncontrolling interest

[Ipay]

2,500,000

120,000

1,980,000 3,500,000

902,000 [Icogs]

6,400,000

©Cambridge Business Publishers, 2020 5-52

8,216,000

8,000

2,424,000

23,000

[C]

220,000

[E]

99,000

[A]

2,424,000

334,000

8,216,000

Advanced Accounting, 4th Edition

60.

a. 100% AAP Amortization Customer List Goodwill Net

100% Unamortized AAP Customer List Goodwill Net

Allocation

2015

Amortized 2016 2017

2018

2019

200,000

20,000

100,000 300,000

20,000

Unamortized Allocation 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 200,000 180,000 160,000 140,000 120,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 300,000 280,000 260,000 240,000 220,000 200,000

p% AAP Amortization Customer List Goodwill Net

Allocation 160,000 80,000 240,000

p% Unamortized AAP Customer List Goodwill Net

Allocation 160,000 80,000 240,000

nci% AAP Amortization Allocation Customer List 40,000 Goodwill 20,000 Net 60,000

2015 16,000 16,000

2016 16,000

Amortized 2017 16,000

2018 16,000

2019 16,000

16,000

Unamortized 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 144,000 128,000 112,000 96,000 80,000 80,000 80,000 80,000 80,000 80,000 224,000 208,000 192,000 176,000 160,000

2015 4,000 4,000

2016 4,000

Amortized 2017 4,000

2018 4,000

2019 4,000

4,000

nci% Unamortized AAP Unamortized Allocation 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 Customer List 40,000 36,000 32,000 28,000 24,000 20,000 Goodwill 20,000 20,000 20,000 20,000 20,000 20,000 Net 60,000 56,000 52,000 48,000 44,000 40,000

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-53

60.

b. Intercompany depreciable asset sale: One downstream asset sale. Intercompany profit recognized on January 1, 2018: $125,000 - $100,000 = $25,000, 10-year remaining life Profit confirmed each year: $25,000 / 10 = $2,500

Net intercompany profit deferred at January 1, 2019 Less: Deferred intercompany profit recognized during 2019 Net intercompany profit deferred at December 31, 2019

Downstream $22,500 2,500 $20,000

Upstream $0 0 $0

c. Investment at 1/1/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def 100%*EOY D-S Asset Gain

724,000 176,000 (22,500) 877,500

Investment at 12/31/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def 100%*EOY D-S Asset Gain

796,000 160,000 (20,000) 936,000

d. January 1, 2019

Equity Investment 877,500

(1) p% x net income of Sub. = p% x $150,000

120,000

48,000 (2) p% x dividends of Sub. = p% x $60,000

(4) 100% x downstream equipment profits recognized via depreciation during 2019

2,500

16,000 (3) p% AAP amortization (see part a)

December 31, 2019

©Cambridge Business Publishers, 2020 5-54

936,000

Advanced Accounting, 4th Edition

60.

e. NCI at 1/1/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Deduct: Def. nci%*EOY IIP Deduct: Def nci%*EOY Asset Gain

181,000 44,000 225,000

NCI at 12/31/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Deduct: Def. nci%*EOY IIP Deduct: Def nci%*EOY Asset Gain

199,000 40,000 239,000

f. Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent’s adjusted stand-alone net income Subsidiary’s stand-alone net income Plus: 100% realized upstream deferred profits Less: 100% unrealized upstream deferred profits Less: 100% AAP amortization Subsidiary’s adjusted stand-alone net income Consolidated net income

400,000 2,500

Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent’s adjusted stand-alone net income p% x subsidiary’s stand-alone net income Plus: p% realized upstream deferred profits Less: p% AAP amortization p% x subsidiary’s adjusted stand-alone net income Consolidated net income attributable to the CI

400,000 2,500

nci% x subsidiary’s stand-alone net income Plus: nci% realized upstream deferred profits Less: nci% unrealized upstream deferred profits (none) Less: nci% AAP amortization Consolidated net income attributable to the NCI

30,000

Solutions Manual, Chapter 5

402,500 150,000

(20,000) 130,000 532,500

402,500 120,000 (16,000) 104,000 506,500

(4,000) 26,000

©Cambridge Business Publishers, 2020 5-55

60.

g. [C]

[E]

[A]

[D]

[Igain]

[Idep]

Equity Income from Subsidiary Income attributable to NCI Dividends - Subsidiary Equity Investment Noncontrolling Interest

106,500 26,000

Common Stock (S) @ BOY APIC

125,000 170,000

Retained Earnings (S) @ BOY Equity Investment @ BOY Noncontrolling interest @ BOY

610,000

Customer List Goodwill Equity Investment @ BOY Noncontrolling interest @ BOY

120,000 100,000

Operating Expenses Customer List

20,000

Equity Investment @ BOY Property, Plant & Equipment, net @ BOY

22,500

Property, Plant & Equipment, net Operating expense

2,500

60,000 58,500 14,000

724,000 181,000

176,000 44,000

20,000

22,500

2,500

continued

©Cambridge Business Publishers, 2020 5-56

Advanced Accounting, 4th Edition

60.

g. continued Parent

Subsidiary

Consol

Income Statement

9,000,000 Sales (7,200,000) Cost of Goods Sold 1,800,000 Gross Profit 106,500 Income (loss) from subsidiary (1,400,000) Operating Expenses Net Income Consolidated NI attrib to NCI Consolidated NI attrib to CI Statement of Ret Earnings: Beg. Ret. Earn. Consolidated NI attrib to CI Dividends Declared Ending Retained Earnings

506,500 506,500

1,029,500 506,500 (300,000) 1,236,000

1,100,000 (650,000) 450,000 [C] (300,000) [D] 150,000 [C] 150,000

106,500 20,000 [Idep]

610,000 150,000 (60,000) 700,000

610,000

[E]

2,500

26,000

[C]

60,000

10,100,000 (7,850,000) 2,250,000 (1,717,500) 532,500 (26,000) 506,500

1,029,500 506,500 (300,000) 1,236,000

Balance Sheet Cash Accounts receivable Inventories PPE, net Customer List Equity investment

900,000 300,000 1,200,000 400,000 1,600,000 500,000 5,000,000 1,000,000 [Idep] [A] 936,000 [Igain]

[A]

Goodwill Total Assets

9,636,000 2,200,000

Accounts Payable Other current liabilities Long-term liabilities Common Stock APIC Retained Earnings Noncontrolling Interest

1,000,000 1,100,000 3,500,000 800,000 2,000,000 1,236,000

Total Liabilities and Equity

9,636,000 2,200,000

Solutions Manual, Chapter 5

175,000 230,000 800,000 125,000 170,000 700,000

[E] [E]

2,500 [Igain] 120,000 [D] 22,500 [C] [E] [A] 100,000

22,500 20,000 58,500 724,000 176,000

100,000 11,080,000

125,000 170,000 [C] [E] [A] 1,302,500

1,200,000 1,600,000 2,100,000 5,980,000 100,000 -

14,000 181,000 44,000 1,302,500

1,175,000 1,330,000 4,300,000 800,000 2,000,000 1,236,000 239,000

11,080,000

©Cambridge Business Publishers, 2020 5-57

61.

a. 100% AAP Amortization Royalty

100% Unamortized AAP Royalty

Allocation 455,000

2014 65,000

2015 65,000

p% Unamortized AAP Royalty

Allocation 318,500

2014 45,500

2015 45,500

2019 65,000

Amortized 2016 2017 45,500 45,500

2018 45,500

2019 45,500

Allocation 136,500

2014 19,500

2015 19,500

Amortized 2016 2017 19,500 19,500

2018 19,500

2019 19,500

Allocation 136,500

12/31/14 117,000

12/31/15 97,500

Unamortized 12/31/16 12/31/17 78,000 58,500

12/31/18 39,000

12/31/19 19,500

nci% Unamortized AAP Royalty

2018 65,000

Unamortized Allocation 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 318,500 273,000 227,500 182,000 136,500 91,000 45,500

nci% AAP Amortization Royalty

Amortized 2017 65,000

Unamortized Allocation 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 455,000 390,000 325,000 260,000 195,000 130,000 65,000

p% AAP Amortization Royalty

2016 65,000

b. Intercompany depreciable asset sale: One downstream asset sale. Intercompany profit recognized on January 1, 2017: $325,000 - $249,600 = $75,400, 4-year remaining life Profit confirmed each year: $75,400/ 4 = $18,850

Net intercompany profit deferred at January 1, 2019 Less: Deferred intercompany profit recognized during 2019 Net intercompany profit deferred at December 31, 2019 ©Cambridge Business Publishers, 2020 5-58

Downstream $37,700 (18,850) $18,850

Upstream $0 0 $0

Advanced Accounting, 4th Edition

61.

c. Investment at 1/1/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def 100%*EOY D-S Asset Gain

409,500 91,000 (37,700) 462,800

Investment at 12/31/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def 100%*EOY D-S Asset Gain

518,700 45,500 (18,850) 545,350

d. January 1, 2019

Equity Investment 462,800

(1) p% x net income of Sub. = p% x $195,000

136,500

27,300 (2) p% x dividends of Sub. = p% x $39,000

(4) 100% x downstream equipment profits recognized via depreciation during 2019

18,850

45,500 (3) p% AAP amortization (see part a)

December 31, 2019

545,350

e. NCI at 1/1/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

NCI at 12/31/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

Solutions Manual, Chapter 5

175,500 39,000 214,500

222,300 19,500 241,800

©Cambridge Business Publishers, 2020 5-59

61.

f. Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Parent’s adjusted stand-alone net income

621,400 18,850 640,250

Subsidiary’s stand-alone net income Less: 100% AAP amortization Subsidiary’s adjusted stand-alone net income Consolidated net income

195,000 (65,000) 130,000 770,250

Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Parent’s adjusted stand-alone net income

621,400 18,850 640,250

p% x subsidiary’s stand-alone net income Less: p% AAP amortization p% x subsidiary’s adjusted stand-alone net income Consolidated net income attributable to the CI

136,500 (45,500) 91,000 731,250

nci% x subsidiary’s stand-alone net income Less: nci% AAP amortization Consolidated net income attributable to the NCI

58,500 (19,500) 39,000

©Cambridge Business Publishers, 2020 5-60

Advanced Accounting, 4th Edition

61.

g. [C]

[E]

[A]

[D]

[Igain]

[Idep]

Equity Income from Subsidiary Income attributable to NCI Dividends - Subsidiary Equity Investment Noncontrolling Interest

109,850 39,000

Common Stock (S) @ BOY APIC Retained Earnings (S) @ BOY Equity Investment @ BOY Noncontrolling interest @ BOY

130,000 195,000 260,000

Royalty Agreement Equity Investment @ BOY Noncontrolling interest @ BOY

130,000

Operating Expenses Royalty Agreement

65,000

Equity Investment @ BOY Property, Plant & Equipment, net @ BOY

37,700

Property, Plant & Equipment, net Operating expense

18,850

39,000 82,550 27,300

409,500 175,500

91,000 39,000

65,000

37,700

18,850

continued

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-61

61.

g. continued Parent

Subsidiary

4,420,000 (3,120,000) 1,300,000 109,850 (678,600) 731,250 731,250

1,170,000 (650,000) 520,000

2,296,450 731,250 (130,000) 2,897,700

260,000 195,000 (39,000) 416,000

805,350 689,000 1,170,000 4,550,000

325,000 546,000 715,000 1,300,000 -

Consol

Income Statement Sales Cost of Goods Sold Gross Profit Income (loss) from subsidiary Operating Expenses Net Income Consolidated NI attrib to NCI Consolidated NI attrib to CI Statement of Ret Earnings: Beg. Ret. Earn. Consolidated NI attrib to CI Dividends Declared Ending Retained Earnings Balance Sheet Cash Accounts receivable Inventories PPE, net Royalty Agreement Equity investment

(325,000) 195,000 195,000

545,350

[C] [D]

109,850 65,000

[C]

39,000

[E]

260,000

[Idep]

[C]

[Idep] [A] [Igain]

18,850 130,000 37,700

[Igain] [D] [C] [E] [A]

18,850

39,000

37,700 65,000 82,550 409,500 91,000

5,590,000 (3,770,000) 1,820,000 (1,049,750) 770,250 (39,000) 731,250

2,296,450 731,250 (130,000) 2,897,700

1,130,350 1,235,000 1,885,000 5,831,150 65,000 -

Total Assets

7,759,700

2,886,000

10,146,500

Accounts Payable Other current liabilities Long-term liabilities Common Stock APIC Retained Earnings Noncontrolling Interest

442,000 520,000 1,950,000

325,000 390,000 1,430,000 130,000 195,000 416,000

767,000 910,000 3,380,000 260,000 1,690,000 2,897,700 241,800

Total Liabilities and Equity

7,759,700

©Cambridge Business Publishers, 2020 5-62

260,000

1,690,000 2,897,700

[E]

130,000

[E]

195,000 [C] [E] [A]

2,886,000

985,400

27,300 175,500 39,000

985,400 10,146,500

Advanced Accounting, 4th Edition

62.

a. 100% AAP Amortization Royalty

2015 65,000

Amortized 2016 2017 65,000 65,000

2018 65,000

2019 65,000

Allocation 455,000

12/31/14 12/31/15 390,000 325,000

Unamortized 12/31/16 12/31/17 260,000 195,000

12/31/18 130,000

12/31/19 65,000

Allocation 318,500

2014 45,500

2015 45,500

Amortized 2016 2017 45,500 45,500

2018 45,500

2019 45,500

12/31/14 12/31/15 273,000 227,500

Unamortized 12/31/16 12/31/17 182,000 136,500

12/31/18 91,000

12/31/19 45,500

Amortized 2016 2017 19,500 19,500

2018 19,500

2019 19,500

Unamortized Allocation 12/31/14 12/31/15 12/31/16 12/31/17 136,500 117,000 97,500 78,000 58,500

12/31/18 39,000

12/31/19 19,500

Allocation 455,000

2014 65,000

100% Unamortized AAP Royalty

p% AAP Amortization Royalty

p% Unamortized AAP Royalty

Allocation 318,500

nci% AAP Amortization Royalty nci% Unamortized AAP Royalty

Allocation 136,500

2014 19,500

2015 19,500

b. Intercompany depreciable asset sale: One upstream asset sale. Intercompany profit recognized on January 1, 2017: $325,000 - $249,600 = $75,400, 4-year remaining life Profit confirmed each year: $75,400 / 4 = $18,850

Net intercompany profit deferred at January 1, 2019 Less: Deferred intercompany profit recognized during 2019 Net intercompany profit deferred at December 31, 2019

Solutions Manual, Chapter 5

Downstream $0 0 $0

Upstream $37,700 (18,850) $18,850

©Cambridge Business Publishers, 2020 5-63

62.

c. Investment at 1/1/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def. 100%*EOY D-S IIP Deduct: Def. p%*EOY U-S IIP Deduct: Def 100%*EOY D-S Asset Gain Deduct: Def p%*EOY U-S Asset Gain

409,500 91,000 (26,390) 474,110

Investment at 12/31/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def. 100%*EOY D-S IIP Deduct: Def. p%*EOY U-S IIP Deduct: Def 100%*EOY D-S Asset Gain Deduct: Def p%*EOY U-S Asset Gain

518,700 45,500 (13,195) 551,005

d. January 1, 2019

Equity Investment 474,110

(1) p% x net income of Sub. = p% x $195,000

136,500

27,300 (2) p% x dividends of Sub. = p% x $39,000

(4) p% x upstream equipment profits recognized via depreciation during 2019

13,195

45,500 (3) p% AAP amortization (see part a)

December 31, 2019

551,005

©Cambridge Business Publishers, 2020 5-64

Advanced Accounting, 4th Edition

62.

e. NCI at 1/1/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Deduct: Def nci%*EOY Asset Gain

NCI at 12/31/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Deduct: Def nci%*EOY Asset Gain

175,500 39,000 (11,310) 203,190

222,300 19,500 (5,655) 236,145

f. Parent’s stand-alone net income Subsidiary’s stand-alone net income Plus: 100% realized upstream deferred profits Less: 100% AAP amortization Subsidiary’s adjusted stand-alone net income Consolidated net income

621,400 195,000 18,850 (65,000) 148,850 770,250

Parent’s stand-alone net income p% x subsidiary’s stand-alone net income Plus: p% realized upstream deferred profits Less: p% AAP amortization p% x subsidiary’s adjusted stand-alone net income Consolidated net income attributable to the CI

621,400 136,500 13,195 (45,500) 104,195 725,595

nci% x subsidiary’s stand-alone net income Plus: nci% realized upstream deferred profits Less: nci% AAP amortization Consolidated net income attributable to the NCI

58,500 5,655 (19,500) 44,655

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-65

62.

g. [C]

[E]

Equity Income from Subsidiary Income attributable to NCI Dividends - Subsidiary Equity Investment Noncontrolling Interest

104,195 44,655

Common Stock (S) @ BOY APIC Retained Earnings (S) @ BOY

130,000 195,000 260,000

39,000 76,895 32,955

Equity Investment @ BOY Noncontrolling interest @ BOY [A]

Royalty Agreement

409,500 175,500 130,000

Equity Investment @ BOY Noncontrolling interest @ BOY [D]

Operating expenses

91,000 39,000 65,000

Royalty Agreement [Igain]

[Idep]

65,000

Equity Investment @ BOY Noncontrolling interest @ BOY Property, plant, & equipment, net @ BOY

26,390 11,310

Property, plant & equipment, net Operating expenses

18,850

37,700

18,850

continued

©Cambridge Business Publishers, 2020 5-66

Advanced Accounting, 4th Edition

62.

g. continued Parent

Subsidiary

4,420,000 (3,120,000) 1,300,000 104,195 (678,600) 725,595 725,595

1,170,000 (650,000) 520,000

2,307,760 725,595 (130,000) 2,903,355

260,000 195,000 (39,000) 416,000

Cash Accounts receivable Inventories PPE, net Customer List

805,350 689,000 1,170,000 4,550,000

325,000 546,000 715,000 1,300,000 -

Equity investment

551,005

Consol

Income Statement Sales Cost of Goods Sold Gross Profit Income (loss) from subsidiary Operating expenses Net Income Consolidated NI attrib to NCI Consolidated NI attrib to CI Statement of Ret Earnings: Beg. Ret. Earn. Consolidated NI attrib to CI Dividends Declared Ending Retained Earnings

(325,000) 195,000 195,000

[C] [D]

104,195 65,000

[C]

44,655

[E]

260,000

[Idep]

[C]

18,850

39,000

5,590,000 (3,770,000) 1,820,000 (1,049,750) 770,250 (44,655) 725,595

2,307,760 725,595 (130,000) 2,903,355

Balance Sheet

[Idep] 18,850 [A] 130,000 [Igain] 26,390

[Igain] [D] [C] [E] [A]

37,700 65,000 76,895 409,500 91,000

1,130,350 1,235,000 1,885,000 5,831,150 65,000 -

Total Assets

7,765,355

2,886,000

10,146,500

Accounts Payable Other current liabilities Long-term liabilities Common Stock APIC Retained Earnings Noncontrolling Interest

442,000 520,000 1,950,000

325,000 390,000 1,430,000

767,000 910,000 3,380,000

260,000

130,000

[E]

130,000

260,000

1,690,000 2,903,355

195,000 416,000

[E]

195,000

[Igain]

11,310

1,690,000 2,903,355 236,145

Total Liabilities and Equity

7,765,355

Solutions Manual, Chapter 5

2,886,000

985,400

[C] [E] [A]

32,955 175,500 39,000

985,400 10,146,500

©Cambridge Business Publishers, 2020 5-67

63. a. Parent’s pre-consolidation net income in problem 61 Deduct: nci% x Upstream Confirmed Gain Parent’s pre-consolidation net income in problem 62

731,250 5,655 725,595

b. Parent’s pre-consolidation retained earnings in problem 61 Add: nci% x Unconfirmed gain remaining at EOY Parent’s pre-consolidation retained earnings in problem 62

2,897,700 5,655 2,903,355

Pre-consolidation equity investment account in problem 61 Add: nci% x Unconfirmed gain remaining at EOY Pre-consolidation equity investment account in problem 62

545,350 5,655 551,005

d. Income attributable to the noncontrolling interest in problem 61 Add: nci% x Upstream Confirmed Gain Income attributable to the noncontrolling interest in problem 62

e. Noncontrolling interest in Problem 61 Deduct: nci% x Unconfirmed gain remaining at EOY

©Cambridge Business Publishers, 2020 5-68

39,000 5,655 44,655

241,800 5,655 236,145

Advanced Accounting, 4th Edition

64.

a. 100% AAP Amortization Patent Goodwill Net

Allocation 252,000 198,000 450,000

2016 25,200 25,200

Amortized 2017 2018 25,200 25,200 25,200 25,200

Allocation 252,000 198,000 450,000

12/31/2016 226,800 198,000 424,800

Unamortized 12/31/2017 12/31/2018 201,600 176,400 198,000 198,000 399,600 374,400

12/31/2019 151,200 198,000 349,200

Allocation 226,800 178,200 405,000

2016 22,680 22,680

Amortized 2017 2018 22,680 22,680 22,680 22,680

2019 22,680 22,680

Allocation 226,800 178,200 405,000

12/31/2016 204,120 178,200 382,320

Unamortized 12/31/2017 12/31/2018 181,440 158,760 178,200 178,200 359,640 336,960

12/31/2019 136,080 178,200 314,280

Allocation 25,200 19,800 45,000

2016 2,520 2,520

Amortized 2017 2018 2,520 2,520 2,520 2,520

2019 2,520 2,520

Allocation 25,200 19,800 45,000

12/31/2016 22,680 19,800 42,480

Unamortized 12/31/2017 12/31/2018 20,160 17,640 19,800 19,800 39,960 37,440

12/31/2019 15,120 19,800 34,920

100% Unamortized AAP Patent Goodwill Net

p% AAP Amortization Patent Goodwill Net p% Unamortized AAP Patent Goodwill Net

nci% AAP Amortization Patent Goodwill Net nci% Unamortized AAP Patent Goodwill Net

Solutions Manual, Chapter 5

2019 25,200 25,200

©Cambridge Business Publishers, 2020 5-69

64.

b. Intercompany depreciable asset sale: One upstream asset sale. Intercompany profit recognized on January 1, 2017: $75,600 - $113,400 = $(37,800), 7-year remaining life Loss confirmed each year: $37,800 / 7 = $5,400

Net intercompany loss deferred at January 1, 2019 Less: Deferred intercompany loss recognized during 2019 Net intercompany loss deferred at December 31, 2019

Downstream $0 0 $0

Upstream $(27,000) 5,400 $(21,600)

c. Investment at 1/1/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Add: Def p%*EOY D-S Asset Loss

Investment at 12/31/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Add: Def p%*EOY U-S Asset Loss

1,117,800 336,960 24,300 1,479,060

1,296,000 314,280 19,440 1,629,720

d. January 1, 2019 (1) p% x net income of Sub. = p% x $378,000

December 31, 2019

©Cambridge Business Publishers, 2020 5-70

Equity Investment 1,479,060 340,200

162,000 (2) p% x dividends of Sub. = p% x $180,000 22,680 (3) p% AAP amortization (see part a) 4,860 (4) p% x upstream equipment losses recognized via depreciation during 2019 = p% x $5,400

1,629,720

Advanced Accounting, 4th Edition

64.

e. NCI at 1/1/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Add: Def nci%*EOY Asset Loss NCI at 12/31/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Add: Def nci%*EOY Asset Gain

124,200 37,440 2,700 164,340 144,000 34,920 2,160 181,080

f. Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent’s adjusted stand-alone net income

450,000 --

Subsidiary’s stand-alone net income Less: 100% realized upstream deferred losses Less: 100% unrealized upstream deferred profits Less: 100% AAP amortization Subsidiary’s adjusted stand-alone net income Consolidated net income

378,000 (5,400)

Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent’s adjusted stand-alone net income

450,000 --

p% x subsidiary’s stand-alone net income Less: p% realized upstream deferred losses Less: p% AAP amortization p% x subsidiary’s adjusted stand-alone net income Consolidated net income attributable to the CI

340,200 (4,860) (22,680) 312,660 762,660

nci% x subsidiary’s stand-alone net income Less: nci% realized upstream deferred losses Less: nci% unrealized upstream deferred profits (none) Less: nci% AAP amortization Consolidated net income attributable to the NCI

37,800 (540) -(2,520) 34,740

Solutions Manual, Chapter 5

450,000

(25,200) 347,400 797,400

450,000

©Cambridge Business Publishers, 2020 5-71

64.

g. [C]

[E]

[A]

Equity Income from Subsidiary Income attributable to NCI Dividends – Subsidiary Equity Investment Noncontrolling Interest

312,660 34,740

Common Stock (S) @ BOY APIC Retained Earnings (S) @ BOY Equity Investment @ BOY Noncontrolling interest @ BOY

180,000 540,000 522,000

Patent Goodwill

176,400 198,000

180,000 150,660 16,740

1,117,800 124,200

336,960 37,440

Equity Investment @ BOY Noncontrolling interest @ BOY [D]

[Igain]

[Idep]

Operating expenses Patent

25,200

Property, plant & Equipment, net @ BOY Equity Investment @ BOY Noncontrolling interest @ BOY

27,000

Operating expenses Property, plant & equipment, net

5,400

25,200

24,300 2,700

5,400

continued

©Cambridge Business Publishers, 2020 5-72

Advanced Accounting, 4th Edition

64.

g. continued Parent

Subsidiary

Sales Cost of Goods Sold Gross Profit

8,010,000 (6,390,000) 1,620,000

2,160,000 (1,215,000) 945,000

Operating Expenses

(1,170,000)

(567,000)

Income (loss) from subsidiary Consolidated Net Income Consolidated NI attrib to NCI

312,660 762,660 -

378,000 -

Consolidated NI attrib to CI

762,660

378,000

Consolidated

Income Statement

Statement of Ret Earnings: Beg. Ret. Earn. – Parent Beg. Ret. Earn. – Subsidiary Consolidated NI attrib to CI

10,170,000 (7,605,000) 2,565,000 [D] [Idep] [C]

25,200 5,400 312,660

[C]

34,740

(1,767,600) 797,400 (34,740) 762,660

2,082,060 762,660 2,844,720

522,000 378,000 900,000

[E]

2,082,060 762,660 2,844,720

522,000

Dividends Declared Parent Subsidiary

(450,000)

Ending Retained Earnings

2,394,720

720,000

2,394,720

Cash Accounts receivable

405,000 630,000

360,000 540,000

765,000 1,170,000

Inventories PPE, net Patent Equity investment

1,170,000 3,240,000

810,000 1,890,000 -

1,980,000 5,151,600 151,200 -

(180,000)

[C]

180,000

(450,000) -

Balance Sheet

[Igain] [A]

27,000 176,400

[A]

198,000

1,629,720

Goodwill

[Idep] [D] [C] [E] [A] [Igain]

5,400 25,200 150,660 1,117,800 336,960 24,300

198,000

Total Assets

7,074,720

3,600,000

9,415,800

Accounts Payable Other current liabilities Long-term liabilities Common Stock APIC Retained Earnings Noncontrolling Interest

450,000 630,000 1,890,000 360,000

225,000 585,000 1,350,000 180,000

675,000 1,215,000 3,240,000 360,000

1,350,000 2,394,720

540,000 720,000

Total Liabilities and Equity

7,074,720

Solutions Manual, Chapter 5

[E]

180,000

[E]

540,000 [C] [E] [A] [Igain]

3,600,000

2,021,400

16,740 124,200 37,440 2,700 2,021,400

1,350,000 2,394,720 181,080

9,415,800

©Cambridge Business Publishers, 2020 5-73

65.

a. 100% AAP Amortization Customer List Goodwill Net

Allocation 180,000 70,000 250,000

2015 18,000 18,000

2016 18,000 18,000

2017 18,000 18,000

2018 18,000 18,000

2019 18,000 18,000

Allocation 180,000 70,000 250,000

12/31/2015 162,000 70,000 232,000

12/31/2016 144,000 70,000 214,000

12/31/2017 126,000 70,000 196,000

12/31/2018 108,000 70,000 178,000

12/31/2019 90,000 70,000 160,000

Allocation 135,000 52,500 187,500

2015 13,500 13,500

2016 13,500 13,500

2017 13,500 13,500

2018 13,500 13,500

2019 13,500 13,500

Allocation 135,000 52,500 187,500

12/31/2015 121,500 52,500 174,000

12/31/2016 108,000 52,500 160,500

12/31/2017 94,500 52,500 147,000

12/31/2018 81,000 52,500 133,500

12/31/2019 67,500 52,500 120,000

Allocation 45,000 17,500 62,500

2015 4,500 4,500

2016 4,500 4,500

2017 4,500 4,500

2018 4,500 4,500

2019 4,500 4,500

Allocation 45,000 17,500 62,500

12/31/2015 40,500 17,500 58,000

12/31/2016 36,000 17,500 53,500

12/31/2017 31,500 17,500 49,000

12/31/2018 27,000 17,500 44,500

12/31/2019 22,500 17,500 40,000

100% Unamortized AAP Customer List Goodwill Net

p% AAP Amortization Customer List Goodwill Net p% Unamortized AAP Customer List Goodwill Net

nci% AAP Amortization Customer List Goodwill Net nci% Unamortized AAP Customer List Goodwill Net

©Cambridge Business Publishers, 2020 5-74

Advanced Accounting, 4th Edition

65.

b. Intercompany depreciable asset sale: One downstream asset sale. Intercompany profit recognized on January 1, 2018: $140,000 - $120,000 = $20,000, 10-year remaining life Loss confirmed each year: $20,000 / 10 = $2,000

Net intercompany loss deferred at January 1, 2019 Less: Deferred intercompany loss recognized during 2019 Net intercompany loss deferred at December 31, 2019

Downstream $18,000 2,000 $16,000

Upstream $0 0 $0

c. Equity Method Investment at 1/1/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def 100%*EOY D-S Asset Gain

720,000 133,500 (18,000) 835,500

Equity Method Investment at 12/31/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def 100%*EOY D-S Asset Gain

825,000 120,000 (16,000) 929,000

d. p% of change in RE(S) from acqu date through BOY Less: Cum p% AAP amort from acqu date through BOY Less: 100% of the BOY D-S unconf interco deprec asset profits [ADJ] Amount

270,000 (54,000) (18,000) 198,000

e. NCI at 1/1/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

NCI at 12/31/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

Solutions Manual, Chapter 5

240,000 44,500 284,500

275,000 40,000 315,000

©Cambridge Business Publishers, 2020 5-75

65.

f. Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Parent’s adjusted stand-alone net income

700,000 2,000 702,000

Subsidiary’s stand-alone net income Less: 100% AAP amortization Subsidiary’s adjusted stand-alone net income Consolidated net income

220,000 (18,000) 202,000 904,000

Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Parent’s adjusted stand-alone net income

700,000 2,000 702,000

p% x subsidiary’s stand-alone net income Less: p% AAP amortization p% x subsidiary’s adjusted stand-alone net income Consolidated net income attributable to the CI

165,000 (13,500) 151,500 853,500

nci% x subsidiary’s stand-alone net income Less: nci% AAP amortization Consolidated net income attributable to the NCI

55,000 (4,500) 50,500

©Cambridge Business Publishers, 2020 5-76

Advanced Accounting, 4th Edition

65.

g. [ADJ]

[C]

[E]

[A]

Equity investment Beg. Ret. Earn.

198,000

Income (loss) from subsidiary Consolidated NI attrib to NCI Dividends – Subsidiary Noncontrolling Interest

60,000 50,500

Common Stock (S) @ BOY APIC Retained Earnings (S) @ BOY Equity Investment @ BOY Noncontrolling interest @ BOY

100,000 400,000 460,000

Customer list Goodwill

108,000 70,000

198,000

80,000 30,500

720,000 240,000

Equity Investment @ BOY Noncontrolling interest @ BOY

[D]

[Igain]

[Idep]

133,500 44,500

Operating expenses Customer list

18,000

Equity Investment @ BOY Property, Plant & Equipment, net @ BOY

18,000

PPE, net

2,000

18,000

Operating expenses

Solutions Manual, Chapter 5

2,000

©Cambridge Business Publishers, 2020 5-77

65.

g. continued Parent

Subsidiary

Consol

Sales Cost of Goods Sold Gross Profit Income (loss) from subsidiary Operating Expenses

9,000,000 (6,500,000) 2,500,000 60,000 (1,800,000)

1,100,000 (600,000) 500,000 2,000

10,100,000 (7,100,000) 3,000,000 (2,096,000)

(280,000)

[C] [D]

60,000 18,000

Net Income Consolidated NI attrib to NCI

760,000 -

220,000 -

[C]

50,500

Consolidated NI attrib to CI

760,000

220,000

Statement of Ret Earnings: Beg. Ret. Earn. Consolidated NI attrib to CI Dividends Declared

840,000 760,000 (400,000)

460,000 220,000 (80,000)

Ending Retained Earnings

1,200,000

600,000

1,491,500

Cash Accounts receivable Inventories PPE, net Customer List

712,500 850,000 1,300,000 4,500,000

400,000 500,000 600,000 1,100,000 -

1,112,500 1,350,000 1,900,000 5,584,000 90,000

Equity investment

637,500

Income Statement

[Idep]

904,000 (50,500) 853,500

[E]

460,000

[ADJ]

198,000

[C]

80,000

1,038,000 853,500 (400,000)

Balance Sheet

Goodwill

[Idep] [A]

2,000 108,000

[Igain] [D]

18,000 18,000

[ADJ] [Igain]

198,000 18,000

[E] [A]

720,000 133,500

[A]

70,000

Total Assets

8,000,000

2,600,000

10,106,500

Accounts Payable Other current liabilities Long-term liabilities Common Stock APIC Retained Earnings Noncontrolling Interest

600,000 1,200,000 3,500,000 500,000 1,000,000 1,200,000

100,000 200,000 1,200,000 100,000 400,000 600,000

700,000 1,400,000 4,700,000 500,000 1,000,000 1,491,500 315,000

Total Liabilities and Equity

8,000,000

©Cambridge Business Publishers, 2020 5-78

[E] [E]

100,000 400,000 [C] [E] [A]

2,600,000

1,484,500

30,500 240,000 44,500 1,484,500

10,106,500

Advanced Accounting, 4th Edition

66.

a. 100% AAP Amortization

Amortized

2016

2017

2018

2019

(4,000) 18,000 42,000 6,000 34,000 96,000

2015 (4,000) 3,000 6,000 1,500 6,500

3,000 6,000 1,500 10,500

3,000 6,000 9,000

Allocation

12/31/2015

12/31/2016

Unamortized 12/31/2017

12/31/2018

12/31/2019

(4,000) 18,000 42,000 6,000 34,000 96,000

15,000 36,000 4,500 34,000 89,500

12,000 30,000 3,000 34,000 79,000

9,000 24,000 1,500 34,000 68,500

6,000 18,000 34,000 58,000

3,000 12,000 34,000 49,000

Allocation

2015 (3,200) 2,400 4,800 1,200 5,200 5,200

2016

2017

2018

2019

2,400 4,800 1,200

2,400 4,800

8,400 13,600

8,400 22,000

8,400 30,400

7,200 37,600

Allocation Accounts Rec. Buildings & Equipment, net Licenses Notes payable Goodwill Net

100% Unamortized AAP Accounts Rec. Buildings & Equipment, net Licenses Notes payable Goodwill Net

p% AAP Amortization Accounts Rec. Buildings & Equipment, net Licenses Notes payable Goodwill Net

Amortized

(3,200) 14,400 33,600 4,800 27,800 77,400

Cumulative

p% Unamortized AAP Accounts Rec. Buildings & Equipment, net Licenses Notes payable Goodwill Net

Allocation

12/31/2015

(3,200) 14,400 33,600 4,800 27,800 77,400

12,000 28,800 3,600 27,800 72,200

Unamortized 12/31/2016 12/31/2017 12/31/2018

9,600 24,000 2,400 27,800 63,800

7,200 19,200 1,200 27,800 55,400

4,800 14,400 27,800 47,000

12/31/2019

2,400 9,600 27,800 39,800

continued

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-79

66.

a. continued nci% AAP Amortization

Amortized Allocation

Accounts Rec. Buildings & Equipment, net Licenses Notes payable Goodwill Net

(800) 3,600 8,400 1,200 6,200 18,600

2015 (800) 600 1,200 300

2016

2017

2018

2019

600 1,200 300

600 1,200

1,300 1,300

2,100 3,400

2,100 5,500

2,100 7,600

1,800 9,400

12/31/2018

12/31/2019

1,200 3,600 6,200 11,000

600 2,400 6,200 9,200

Downstream $12,500 2,500 $10,000

Upstream $0 0 $0

Cumulative

nci% Unamortized AAP Accounts Rec. Buildings & Equipment, net Licenses Notes payable Goodwill Net

Allocation

12/31/2015

(800) 3,600 8,400 1,200 6,200 18,600

3,000 7,200 900 6,200 17,300

Unamortized 12/31/2016 12/31/2017

2,400 6,000 600 6,200 15,200

1,800 4,800 300 6,200 13,100

b. Intercompany depreciable asset sale: One downstream asset sale. Intercompany profit recognized on January 1, 2018: $80,000 - $65,000 = $15,000, 6-year remaining life Profit confirmed each year: $15,000 / 6 = $2,500

Net intercompany profit deferred at January 1, 2019 Less: Deferred intercompany profit recognized during 2019 Net intercompany profit deferred at December 31, 2019 Intercompany inventory transactions: Intercompany inventory sales during 2019: $15,000

Intercompany profit in inventory on January 1, 2019 Intercompany profit in inventory on December 31, 2019

Downstream (in Sub’s inventory) $3,000 $0

Upstream (in Parent’s inventory) $0 $2,000

Intercompany accounts receivables and payables at December 31, 2019: $4,000 ©Cambridge Business Publishers, 2020 5-80

Advanced Accounting, 4th Edition

66.

c. Investment at 1/1/2019 (Equity) p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP -Def. 100%*EOY D-S IIP -Def. p%*EOY U-S IIP -Def 100%*EOY D-S Asset Gain -Def p%*EOY D-S Asset Gain

199,200 47,000 (3,000) (12,500) 230,700

Investment at 12/31/2019 (Equity) p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP -Def. 100%*EOY D-S IIP -Def. p%*EOY U-S IIP -Def 100%*EOY D-S Asset Gain -Def p%*EOY U-S Asset Gain

204,800 39,800 (1,600) (10,000) 233,000

d. January 1, 2019

Equity Investment 230,700

(1) p% x net income of Sub. = p% x $22,000

17,600

12,000 (2) p% x dividends of Sub. = p% x $15,000

(4) 100% x downstream inventory profits recognized during 2019

3,000

7,200 (3) p% AAP amortization (see part a)

(4) 100% x downstream equipment profits recognized via depreciation during 2019

2,500

1,600 (4) p% x upstream inventory profits deferred during 2019

December 31, 2019

Solutions Manual, Chapter 5

233,000

©Cambridge Business Publishers, 2020 5-81

66.

e. NCI at 1/1/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

49,800 11,000 60,800

NCI at 12/31/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP -Def. nci%*EOY IIP -Def nci%*EOY Asset Gain

51,200 9,200 (400) 60,000

f. Parent’s stand-alone net income Plus: 100% realized downstream deferred profits - Deprec. Asset Plus: 100% realized downstream deferred profits - Inventory Parent’s adjusted stand-alone net income

67,000 2,500 3,000 72,500

Subsidiary’s stand-alone net income Less: 100% unrealized upstream deferred profits Less: 100% AAP amortization Subsidiary’s adjusted stand-alone net income Consolidated net income

22,000 (2,000) (9,000) 11,000 83,500

Parent’s stand-alone net income Plus: 100% realized downstream deferred profits - Deprec. Asset Plus: 100% realized downstream deferred profits - Inventory Parent’s adjusted stand-alone net income

67,000 2,500 3,000 72,500

80% x subsidiary’s stand-alone net income Less: 80% unrealized upstream deferred profits Less: 80% AAP amortization 80% x subsidiary’s adjusted stand-alone net income Consolidated net income attributable to the CI

17,600 (1,600) (7,200) 8,800 81,300

20% x subsidiary’s stand-alone net income Less: 20% unrealized upstream deferred profits Less: 20% AAP amortization Consolidated net income attributable to the NCI

4,400 (400) (1,800) 2,200

©Cambridge Business Publishers, 2020 5-82

Advanced Accounting, 4th Edition

66.

g. [C]

Equity Income from Subsidiary Consolidated NI attrib to NCI Noncontrolling Interest

14,300 2,200 800 Dividends - Subsidiary Equity Investment

[E]

15,000 2,300

Common Stock (S) @ BOY Retained Earnings (S) 2 BOY

120,000 129,000 Equity Investment @ BOY Noncontrolling interest @ BOY

[A]

Buildings & Equipment @ BOY Licenses @ BOY Goodwill

199,200 49,800

6,000 18,000 34,000 Equity Investment @ BOY Noncontrolling interest @ BOY

[D]

Depreciation & Amort Expense

47,000 11,000

9,000 Buildings and Equipment, net Licenses

[Icogs]

Equity Investment @ BOY

3,000 6,000 3,000

Cost of Goods Sold

[Isales]

3,000

Sales

15,000 Cost of Goods Sold

[Icogs]

15,000

Cost of Goods Sold

2,000 Inventories

[Ipay]

2,000

Accounts Payable

4,000 Accounts receivable

[Igain]

4,000

Equity Investment @ BOY

12,500 Buildings and Equipment, net @ BOY

[Idep]

Buildings and Equipment, net

12,500

2,500 Depreciation expense

2,500

continued

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-83

66.

g. continued Parent

Subsidiary

Sales Cost of Goods Sold

500,000 (260,000)

200,000 (128,000)

Gross Profit

240,000

72,000

Depreciation & Amort Expense Operating Expenses Interest Expense Total expenses Income (loss) from Subsidiary Consolidated Net Income Consolidated NI attrib to NCI

(12,000) (155,000) (6,000) (173,000) 14,300 81,300 -

(10,000) (38,000) (2,000) (50,000) 22,000 -

81,300

22,000

Consol

Income Statement

Consolidated NI attrib to CI

[Isales] [Icogs]

15,000 2,000

[Icogs] [Isales]

3,000 15,000

685,000 (372,000) 313,000

[D]

9,000

[C]

14,300

[C]

2,200

[Idep]

2,500

(28,500) (193,000) (8,000) (229,500) 83,500 (2,200) 81,300

Statement of Ret Earnings: Beg. Ret. Earn. - Parent Beg. Ret. Earn. - Subsidiary Consolidated NI attrib to CI Dividends Declared

266,700 81,300 (60,000)

129,000 22,000 (15,000)

Ending Retained Earnings

288,000

136,000

288,000

Balance Sheet Cash

45,000

25,000

70,000

Accounts receivable Inventories

54,000 130,000

48,000 46,000

Buildings and Equipment, net

126,000

90,000

Other assets Licenses Equity Investment

57,000 233,000

100,000 10,000

Total Assets

645,000

319,000

Accounts Payable Notes Payable Other liabilities Common Stock Retained Earnings Noncontrolling Interest

35,000 50,000 22,000 250,000

15,000 22,000 26,000 120,000

288,000 -

136,000 -

Goodwill

Total Liabilities and Equity

©Cambridge Business Publishers, 2020 5-84

645,000

319,000

[E]

129,000 [C]

266,700 81,300 15,000 (60,000)

[Ipay] [Icogs]

4,000 2,000

98,000 174,000 209,000

[A] [Idep]

6,000 2,500

[D] [Igain]

3,000 12,500

[A] [Icogs] [Igain]

18,000 3,000 12,500

[D] [C] [E] [A]

6,000 2,300 199,200 47,000

[A]

34,000

157,000 22,000 -

34,000 764,000

[Ipay]

4,000

[E]

120,000

46,000 72,000 48,000 250,000

800

288,000 60,000

[C]

372,300

[E]

49,800

[A]

11,000 372,300

764,000

Advanced Accounting, 4th Edition

67.

a. 100% AAP Amortization Inventories Intang. Asset Bargain Purchase Net 100% Unamortized AAP Inventories Intang. Asset Bargain Purchase Net

Allocation 50,000 300,000 (70,000) 280,000

2017 50,000 30,000 (70,000) 10,000

Allocation 50,000 300,000 (70,000) 280,000

12/31/2017 270,000 270,000

Amortized 2018 30,000 30,000 Unamortized 12/31/2018 240,000 240,000

2019 30,000 30,000 12/31/2019 210,000 210,000

Because ASC 805-30-25-2 requires that 100% of the bargain purchase gain is allocated to the controlling interest, the elements of the NCI AAP have to be adjusted downward for the NCI portion of the bargain purchase gain that was allocated to the parent company. Recall that, on the acquisition date, the FV of the NCI was $270,000. If we simply take the NCI% portion of the AAP assigned to the inventories and intangible and add that to the NCI% x BVNA(S), then we will arrive at an amount greater than the FV of the NCI. Specifically, nci% times the inventory AAP is $15,000 (i.e., $50,000 x nci%) and nci% times the intangible asset AAP is $90,000 ($300,000 x nci%). So, if we mechanically determine the NCI by adding up the components (without adjustment), we arrive at an acquisitiondate reported value of $285,000 (i.e., (nci% x $600,000) + $15,000 + $90,000). Of course, this is not acceptable because the FV of the NCI is only $270,000 on the acquisition date (and the illustration in FASB ASC 805-30-55-14 through -06 clearly presents the NCI at FV after recording the bargain purchase gain). To solve this problem, we allocate the $15,000 excess over FV of the NCI (i.e., $285,000 - $270,000) to the NCI portion of the inventories and the intangible asset by decreasing those allocations. To make sure the 100% values for the identifiable net assets reflect acquisition date fair values (i.e., as list d in the table above), we will need to make corresponding increases to the allocations made to the p% allocations. This process is illustrated, as follows (on the acquisition date, immediately following the recording of the bargain purchase gain): Adjusted AAP assigned to the p% and nci% portions:

Inventories Intang. Asset Net *Adjustment:

100% AAP 50,000 300,000 350,000

Unadjusted nci% AAP 15,000 90,000 105,000

Unadjusted p% AAP 35,000 210,000 245,000

Adjustment* (2,143) (12,857) (15,000)

ADJUSTED nci% AAP 12,857 77,143 90,000

ADJUSTED p% AAP 37,143 222,857 260,000

Inventories: [$15,000/$105,000] x $(15,000) = $(2,143) Intang. Asset: [$90,000/$105,000] x $(15,000) = $(12,857)

(We thank Professor Marc Picconi for alerting us to this issue.) continued

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-85

67.

a. continued ADJUSTED p% AAP Amortization Inventories Intang. Asset Bargain Purchase Net ADJUSTED p% Unamortized AAP Inventories Intang. Asset Bargain Purchase Net

Allocation 37,143 222,857 (70,000) 190,000

2017 37,143 22,286 (70,000) (10,571)

Allocation 37,143 222,857 (70,000) 190,000

12/31/2017 200,571 200,571

Amortized 2018 22,286 22,286 Unamortized 12/31/2018 178,286* 178,286*

2019 22,286 22,286 12/31/2019 156,000* 156,000*

*rounding may cause +/- 1 differences in answer (and subsequent answers). ADJUSTED nci% AAP Amortization Adjusted NCI Allocation Inventories 12,857 Intang. Asset 77,143 Bargain Purchase Net 90,000 ADJUSTED nci% Unamortized AAP Adjusted NCI Allocation Inventories 12,857 Intang. Asset 77,143 Bargain Purchase Net 90,000

Amortized 2017 12,857 7,714 20,571

12/31/2017 69,429 69,429

2018

2019

7,714 7,714 Unamortized

7,714 7,714

12/31/2018 61,714* 61,714*

12/31/2019 54,000* 54,000*

*rounding may cause +/- 1 differences in answer (and subsequent answers).

©Cambridge Business Publishers, 2020 5-86

Advanced Accounting, 4th Edition

67.

b. Intercompany depreciable asset sale: One upstream asset sale. Intercompany profit recognized on January 1, 2018: $100,000, 10-year remaining life Profit confirmed each year: $100,000 / 10 = $10,000

Net intercompany profit deferred at January 1, 2019 Less: Deferred intercompany profit recognized during 2019 Net intercompany profit deferred at December 31, 2019

Downstream $0 0 $0

Upstream $90,000 (10,000) $80,000

Intercompany inventory transactions: Intercompany inventory sales during 2019: $200,000

Intercompany profit in inventory on January 1, 2019 Intercompany profit in inventory on December 31, 2019

Downstream Upstream (in Sub’s (in Parent’s inventory) inventory) $14,000 $0 $21,000 $0

Intercompany accounts receivables and payables at December 31, 2019: $50,000 c. Investment at 1/1/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP -Def. 100%*EOY D-S IIP -Def p%*EOY D-S Asset Gain

Investment at 12/31/2019 p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP -Def. 100%*EOY D-S IIP -Def p%*EOY U-S Asset Gain

Solutions Manual, Chapter 5

700,000 178,286 (14,000) (63,000) 801,286

735,000 156,000 (21,000) (56,000) 814,000

©Cambridge Business Publishers, 2020 5-87

67.

January 1, 2019

Equity Investment 801,286

(1) p% x net income of Sub. = p% x $100,000

70,000

35,000

(2) p% x dividends of Sub. = p% x $50,000

(4) 100% x BOY downstream inventory profits recognized during 2019

14,000

22,286

(3) p% AAP amortization (see part b)

(4) p% x upstream equipment profits recognized via depreciation during 2019

7,000

21,000

(5) 100% x EOY downstream inventory profits deferred until year of sale to unaffiliated party

December 31, 2019

814,000

e. NCI at 1/1/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP -Def nci%*EOY Asset Gain

NCI at 12/31/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP -Def nci%*EOY Asset Gain

©Cambridge Business Publishers, 2020 5-88

300,000 61,714 (27,000) 334,714*

315,000 54,000 (24,000) 345,000

Advanced Accounting, 4th Edition

67.

f. Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent’s adjusted stand-alone net income

300,000 14,000 (21,000) 293,000

Subsidiary’s stand-alone net income Plus: 100% realized upstream deferred profits Less: 100% AAP amortization Subsidiary’s adjusted stand-alone net income Consolidated net income

100,000 10,000 (30,000) 80,000 373,000

Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent’s adjusted stand-alone net income

300,000 14,000 (21,000) 293,000

p% x subsidiary’s stand-alone net income Plus: p% realized upstream deferred profits Less: p% AAP amortization p% x subsidiary’s adjusted stand-alone net income Consolidated net income attributable to the CI

70,000 7,000 (22,286) 54,714 347,714

nci% x subsidiary’s stand-alone net income Plus: nci% realized upstream deferred profits Less: nci% AAP amortization Consolidated net income attributable to the NCI

30,000 3,000 (7,714) 25,286

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-89

67.

g. [C]

[E]

[A]

[D]

[Icogs]

[Isales]

Equity Income from Subsidiary Income attributable to NCI Dividends - Subsidiary Equity Investment Noncontrolling Interest

47,714 25,286

Common Stock (S) @ BOY Retained Earnings (S) @ BOY Equity Investment @ BOY Noncontrolling interest @ BOY

500,000 500,000

Intangible Assets @ BOY Equity Investment @ BOY Noncontrolling interest @ BOY

240,000

Depreciation & Amort Expense Intangible Assets

30,000

Equity Investment @ BOY Cost of Goods Sold

14,000

Sales

200,000

50,000 12,714 10,286

700,000 300,000

178,286 61,714

30,000

14,000

Cost of Goods Sold [Icogs]

Cost of Goods Sold

200,000 21,000

Inventories [Ipay]

Accounts Payable

21,000 50,000

Accounts receivable [Igain]

[Idep]

50,000

Equity Investment @ BOY Noncontrolling interest @ BOY Buildings & Equipment, net @ BOY

63,000 27,000

Buildings & Equipment, net Depreciation expense

10,000

90,000

10,000

continued

©Cambridge Business Publishers, 2020 5-90

Advanced Accounting, 4th Edition

67.

g. continued Parent

Subsidiary

Consol

Income Statement Sales

2,000,000

750,000 [Isales]

200,000

Cost of Goods Sold

(1,000,000)

(450,000) [Icogs]

21,000

Gross Profit

1,000,000

2,550,000 [Icogs]

14,000 (1,257,000)

[Isales]

200,000

300,000

1,293,000

Depreciation & Amort Expense

(50,000)

(40,000)

Operating Expenses

(650,000)

(160,000)

[D]

(810,000)

Total expenses

(700,000)

(200,000)

(920,000)

Income (loss) from Subsidiary

47,714

Consolidated Net Income

347,714

100,000

Consolidated NI attrib to NCI

Consolidated NI attrib to CI

347,714

100,000

Beg. Ret. Earn.

681,786

500,000

Consolidated NI attrib to CI

347,714

100,000

Dividends Declared

(300,000)

(50,000)

Ending Retained Earnings

729,500

550,000

729,500

Cash

78,000

100,000

178,000

Accounts receivable

100,000

200,000

[Ipay]

50,000

250,000

Inventories

500,000

150,000

[Icogs]

21,000

629,000

Buildings and Equipment, net

400,000

300,000

[Igain]

90,000

620,000

Other assets

237,500

500,000

[C]

30,000

[Idep]

10,000

(110,000)

47,714

373,000

[C]

25,286

(25,286) 347,714

Statement of Ret Earnings: [E]

500,000

681,786 347,714 [C]

50,000(300,000)

Balance Sheet

Intangible assets Equity Investment

Total Assets

814,000

2,129,500

1,250,000

100,000

50,000

Other liabilities

300,000

150,000

Common Stock

1,000,000

500,000

Retained Earnings

729,500

550,000

Accounts Payable

Noncontrolling Interest

Total Liabilities and Equity

Solutions Manual, Chapter 5

2,129,500

[Idep]

737,500 [A]

240,000

[D]

30,000

210,000

[Icogs]

14,000

[C]

12,714

[Igain]

63,000

[E]

700,000

[A]

178,286 2,624,500

[Ipay]

50,000

[E]

500,000

100,000 450,000

- [Igain]

1,250,000

10,000

1,000,000 729,500

27,000

1,728,000

[C]

10,286

[E]

300,000

[A]

61,714 1,728,000

345,000

2,624,500

©Cambridge Business Publishers, 2020 5-91

68.

a. 100% AAP Amortization Allocation Accounts Rec. (4,000) PPE, net 35,000 Patents 30,000 Notes payable 6,000 Goodwill 49,000 Net 116,000

2015 (4,000) 3,500 5,000 1,500 6,000

2016 3,500 5,000 1,500 10,000

Amortized 2017 3,500 5,000 1,500 10,000

2018

2019

3,500 5,000 1,500 10,000

3,500 5,000 8,500

100% Unamortized AAP Allocation Accounts Rec. (4,000) PPE, net 35,000 Patents 30,000 Notes payable 6,000 Goodwill 49,000 Net 116,000

Unamortized 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 31,500 28,000 24,500 21,000 17,500 25,000 20,000 15,000 10,000 5,000 4,500 3,000 1,500 49,000 49,000 49,000 49,000 49,000 110,000 100,000 90,000 80,000 71,500

p% AAP Amortization Allocation Accounts Rec. (2,800) PPE, net 24,500 Patents 21,000 Notes payable 4,200 Goodwill 34,950 Net 81,850

2016

Amortized 2017

2018

2019

2,450 3,500 1,050

2,450 3,500

7,000

5,950

p% Unamortized AAP Allocation Accounts Rec. (2,800) PPE, net 24,500 Patents 21,000 Notes payable 4,200 Goodwill 34,950 Net 81,850

2015 (2,800) 2,450 3,500 1,050 4,200

Unamortized 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 22,050 19,600 17,150 14,700 12,250 17,500 14,000 10,500 7,000 3,500 3,150 2,100 1,050 34,950 34,950 34,950 34,950 34,950 77,650 70,650 63,650 56,650 50,700 continued

©Cambridge Business Publishers, 2020 5-92

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68.

a. continued nci% AAP Amortization Allocation Accounts Rec. (1,200) PPE, net 10,500 Patents 9,000 Notes payable 1,800 Goodwill 14,050 Net 34,150

nci% Unamortized AAP Allocation Accounts Rec. (1,200) PPE, net 10,500 Patents 9,000 Notes payable 1,800 Goodwill 14,050 Net 34,150

2015 (1,200) 1,050 1,500 450

2016

Amortized 2017

1,050 1,500 450

1,050 1,500

1,800

3,000

2,550

2018

2019

Unamortized 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 9,450 8,400 7,350 6,300 5,250 7,500 6,000 4,500 3,000 1,500 1,350 900 450 14,050 14,050 14,050 14,050 14,050 32,350 29,350 26,350 23,350 20,800

b. Intercompany depreciable asset sale: One downstream asset sale. Intercompany profit recognized on January 1, 2018: $90,000 - $60,000 = $30,000, 5-year remaining life Profit confirmed each year: $30,000 / 5 = $6,000

Net intercompany profit deferred at January 1, 2019 Less: Deferred intercompany profit recognized during 2019 Net intercompany profit deferred at December 31, 2019

Downstream $24,000 (6,000) $18,000

Upstream $0 0 $0

Downstream (in Sub’s inventory) $0 $5,000

Upstream (in Parent’s inventory) $3,750 $0

Intercompany inventory transactions: Intercompany inventory sales during 2019: $30,000

Intercompany profit in inventory on January 1, 2019 Intercompany profit in inventory on December 31, 2019

Intercompany accounts receivables and payables at December 31, 2019: $10,000

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-93

68.

c. Investment at 1/1/2019 (Equity) p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def. 100%*EOY D-S IIP Deduct: Def. p%*EOY U-S IIP Deduct: Def 100%*EOY D-S Asset Gain Deduct: Def p%*EOY D-S Asset Gain

Investment at 12/31/2019 (Equity) p% x book value of the net assets of subsidiary Add: unamortized (p%) AAP Deduct: Def. 100%*EOY D-S IIP Deduct: Def. p%*EOY U-S IIP Deduct: Def 100%*EOY D-S Asset Gain Deduct: Def p%*EOY U-S Asset Gain

294,000 56,650 (2,625) (24,000) 324,025

343,000 50,700 (5,000) (18,000) 370,700

d. p% of change in RE(S) from acquisition date through BOY Less: Cum p% AAP amort. from acquisition date through BOY Less: p% of the BOY U-S unconfirmed intercompany inventory profits Less: 100% of the BOY D-S unconfirmed intercompany deprec. asset profits [ADJ] Amount

193,200 (25,200) (2,625) (24,000) 141,375

e. NCI at 1/1/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP Deduct: Def. nci%*EOY IIP

NCI at 12/31/2019 nci% of book value of the net assets of subsidiary Add: nci% unamortized AAP

©Cambridge Business Publishers, 2020 5-94

126,000 23,350 (1,125) 148,225

147,000 20,800 167,800

Advanced Accounting, 4th Edition

68.

f. Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent’s adjusted stand-alone net income

72,000 6,000 (5,000) 73,000

Subsidiary’s stand-alone net income Plus: 100% realized upstream deferred profits Less: 100% AAP amortization Subsidiary’s adjusted stand-alone net income

90,000 3,750 (8,500) 85,250

Consolidated net income

158,250

Parent’s stand-alone net income Plus: 100% realized downstream deferred profits Less: 100% unrealized downstream deferred profits Parent’s adjusted stand-alone net income

72,000 6,000 (5,000) 73,000

p% x subsidiary’s stand-alone net income Plus: p% realized upstream deferred profits Less: p% AAP amortization (from schedule) p% of the Subsidiary’s adjusted stand-alone net income

63,000 2,625 (5,950) 59,675

Consolidated net income attributable to the CI

132,675

nci% x subsidiary’s stand-alone net income Plus: nci% realized upstream deferred profits Less: nci% AAP amortization (from schedule) Consolidated net income attributable to the NCI

27,000 1,125 (2,550) 25,575

Solutions Manual, Chapter 5

©Cambridge Business Publishers, 2020 5-95

68.

g. [ADJ]

Equity Investment

141,375 Retained Earnings (P) @ BOY

[C]

[E]

[A]

[D]

[Icogs]

[Isales]

141,375

Equity Income from Subsidiary Income attributable to NCI Noncontrolling Interest Dividends - Subsidiary

14,000 25,575

Common Stock (S) @ BOY Retained Earnings (S) @ BOY Equity Investment @ BOY Noncontrolling interest @ BOY

130,000 290,000

Buildings & Equipment @ BOY Patents @ BOY Goodwill Equity Investment @ BOY Noncontrolling interest @ BOY

21,000 10,000

19,575 20,000

294,000 126,000

49,000 56,650 23,350

Depreciation & Amort Expense Buildings & Equipment, net Patents

8,500

Equity Investment @ BOY Noncontrolling interest @ BOY Cost of Goods Sold

2,625 1,125

Sales

30,000

3,500 5,000

3,750

Cost of Goods Sold [Icogs]

Cost of Goods Sold

30,000 5,000

Inventories [Ipay]

Accounts Payable

5,000 10,000

Accounts receivable [Igain]

[Idep]

10,000

Equity Investment @ BOY Buildings & Equipment, net @ BOY

24,000

Buildings & Equipment, net Depreciation expense

6,000

24,000

6,000

continued ©Cambridge Business Publishers, 2020 5-96

Advanced Accounting, 4th Edition

68.

g. continued Parent

Subsidiary

500,000 (280,000)

260,000 (125,000)

Consol

[Icogs]

3,750

730,000 (376,250)

[Isales]

30,000

Income Statement Sales Cost of Goods Sold

[Isales] [Icogs]

30,000 5,000

Gross Profit

220,000

135,000

Depreciation & Amort Expense

(12,000)

(9,000)

Operating Expenses Interest Expense Total expenses Income (loss) from Subsidiary Consolidated Net Income Consolidated NI attrib to NCI

(130,000) (6,000) (148,000) 14,000 86,000 -

(24,000) (12,000) (45,000) 90,000 -

Consolidated NI attrib to CI

86,000

90,000

Statement of Ret Earnings: Beg. Ret. Earnings Consolidated NI attrib to CI Dividends Declared

575,000 86,000 (60,000)

290,000 90,000 (20,000)

Ending Retained Earnings

601,000

360,000

789,050

Balance Sheet Cash

160,000

20,000

180,000

Accounts receivable Inventories

200,000 340,000

50,000 80,000

1,500,000

440,000

78,350 182,650

100,000 10,000

Total Assets

2,461,000

700,000

Accounts Payable Notes Payable Other liabilities Common Stock Retained Earnings Noncontrolling Interest

460,000 1,000,000 100,000 300,000 601,000 -

22,000 158,000 30,000 130,000 360,000 -

Buildings & Equipment, net Other assets Patents Equity Investment

Goodwill

Total Liabilities and Equity

Solutions Manual, Chapter 5

2,461,000

700,000

353,750 [D]

8,500

[C]

14,000

[C]

25,575

[Idep]

6,000

(23,500) (154,000) (18,000) (195,500) 158,250 (25,575) 132,675

[E]

290,000

[ADJ] [C]

141,375 716,375 132,675 20,000 (60,000)

[Ipay] [Icogs]

10,000 5,000

240,000 415,000 1,939,500

[A] [Idep]

21,000 6,000

[D] [Igain]

3,500 24,000

[A] [ADJ] [Icogs] [Igain] [A]

10,000 141,375 2,625 24,000 49,000

[D] [E] [A]

5,000 294,000 56,650

178,350 15,000 0

49,000 3,016,850

[Ipay]

10,000

[E]

130,000

[Icogs]

1,125

768,200

[C]

472,000 1,158,000 130,000 300,000 789,050 19,575 167,800

[E] [A]

126,000 23,350 768,200

3,016,850

©Cambridge Business Publishers, 2020 5-97

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 6— Consolidation of Variable Interest Entities and Other Intercompany Investments 1.

It is an entirely separate legal, bankruptcy remote entity created by a sponsoring company (typically the operating company) in order to fulfill very specific and limited goals of the business.

Because a SPE is bankruptcy remote, even if the sponsoring company goes bankrupt, the assets under the SPE are protected from the creditors of the sponsoring company. In addition, if both the sponsoring company and SPE go bankrupt the assets of the SPE can only be accessed by owners of the SPE.

When a primary beneficiary transfers assets to a SPE, its primary goal is to help reduce the cost of capital for the overall business. A company is able to do this by transferring a group of assets with steady, predictable cash flows, such as accounts receivable, to a legally isolated entity. As a result, the overall riskiness of the SPE is considerably lower compared to the operating portion of the business; thereby, reducing the return that debt holders expect from the SPE.

By shifting some of its assets off balance-sheet, the company is able to improve metrics that investors use to compare companies, such as asset-turnover, return-on-assets, and financial leverage ratios. As a result, the value of the company often increases.

FMC is able to borrow against the assets of the less risky SPE. As a result of being less risky, the SPE is able to borrow at a much lower interest rate.

Variable interest entities (VIEs) were first introduced by the FASB in 2003, in order for a company to have to consolidate SPEs even if they did not hold a majority stake in the business. As a result, VIEs are defined as entities that are candidates for consolidation under VIE rules in the ASC 810 codification.

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-1

A voting interest entity is controlled through its voting common equity holders. This type of entity is often seen as a “traditional majority-owned” entity, compared to the VIE which is more specialized.

FASB ASC 810 integrates variable and voting interest entities by first evaluating whether a company might consolidate a legal entity in which the company has variable interest. If variable interest is held by the company, the company must identify if a “general scope exception” applies. Within ASC 810, FASB allows numerous scope exceptions that might preclude an entity from consolidation under ASC 810. If there is no general scope exception, the company then has to evaluate if there is a “business-related scope exception”. At this point, the criterion for consolidating a “variable interest” entity versus a “voting interest” entity begins to diverge. If there is a “business-related scope exception”, the company must evaluate the entity based on direct or indirect ownership of voting shares of the entity. If a majority share is owned, then the company needs to consolidate the entity. If no “business-related scope exception” exists, then the company must evaluate if the entity is a variable interest entity. This step then attempts to determine whether the legal entity is controlled through its voting common equity making it a “voting interest” entity; or whether conditions exist that suggest that it is controlled by means other than voting common equity, making it a “variable interest” entity. The criterion for “variable interest” entity is defined within ASC 810. If the entity is deemed as a “voting interest” entity, it then should be consolidated if the company owns more than 50% of the voting common equity shares. Conversely, if an entity is deemed a “variable interest” entity, the entity should be consolidated if the company is considered the “primary beneficiary”. For a graphic comparison of coding and variable consolidation criterion, see Exhibit 6.2.

Variable interest is a financial interest whose values vary based on the change in the value of an entity’s net assets, such as common stock and unsecured debt. Therefore, owners of variable interest within an entity must be entitled to the expected residual returns of the entity, as well as the expected losses.

©Cambridge Business Publishers, 2020 6-2

Advanced Accounting, 4th Edition

10.

The business-related scope exception allows entities that are considered “businesses” under ASC 805 to avoid the complicated “variable interest” entity evaluation except in four specific scenarios. 1. The reporting entity, its related parties or both participated significantly in the design or redesign of the legal entity. Note that this condition does not apply if the legal entity is an operating joint venture under joint control of the reporting entity and one or more independent parties. 2. The legal entity is designed so that substantially all of its activities either involve or are conducted on behalf of the reporting entity and its related parties. 3. The reporting entity and its related parties provide more than half of the total of the equity, subordinated debt, and other forms of subordinated financial support to the legal entity based on an analysis of the fair values of the interests in the legal entity. 4. The activities of the legal entity are primarily related to securitizations or other forms of asset‐backed financings or single‐lessee leasing arrangements.

11.

There are two sets of criterion which must be fulfilled for an entity to be considered a VIE. First, the total equity that is invested and at risk by the possible consolidating company is not sufficient for the entity to finance its activities without subordinate financial support, whether that is in equity or unsecured debt holdings. Second, if the equity holders lack any one of the following rights, it is considered a VIE: 1. The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance. 2. The obligation to absorb the expected losses of the legal entity. 3. The right to receive the expected residual returns of the legal entity.

12.

Expected losses are characterized by the expected negative variability in the fair value of a legal entity’s net assets. Expected losses are not the expected variability of the net income/loss of the entity. Expected residual returns are the expected positive variability in the fair value of the legal entity’s net assets. Like expected losses, expected residual returns is not the expected variability of the net income/loss of the entity.

13.

The primary beneficiary is a reporting company that has a controlling financial interest of the VIE. The determination of the primary beneficiary is important because it determines whether or not a VIE must be consolidated by the reporting company.

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-3

14.

A controlling financial interest exists when a reporting company has the power to direct the economic activities of the VIE, and when the company has the obligation to absorb the losses and receive the gains of the VIE. As previously mentioned, the determination of the primary beneficiary is important because it determines whether or not a VIE must be consolidated by the reporting company.

15.

It is important to identify if the entity meets the definition of a business under ASC 805 to determine the recognition of goodwill. As discussed earlier, if the reporting company is identified as the primary beneficiary of a VIE, then it should be consolidated. However, the reporting company should only recognize goodwill if the VIE satisfies the ASC 805 definition of a business.

16.

In the year of the parent’s purchase of the subsidiary bonds, all of the bond-related accounts (for the proportion of subsidiary bonds held by the parent) must be eliminated from the consolidated financial statements. Because the companies are dealing directly with each other, there is usually no gain or loss on constructive retirement of the debt. In the years after the parent’s purchase of the subsidiary bonds, all of the bond-related accounts (for the proportion of subsidiary bonds held by the parent) must continue to be eliminated from the consolidated financial statements. During the life of the bonds, the amount eliminated will converge toward the face amount of the bonds as any discounts or premiums are amortized by the two companies in their pre-consolidation books.

17.

No, the answer would be the same.

18.

In the year of the parent’s purchase of the subsidiary bonds, all of the bond-related accounts (for the proportion of subsidiary bonds held by the parent) must be eliminated from the consolidated financial statements, and a gain or loss on constructive retirement of debt must be recognized. This gain or loss is equal to the net of the Parent’s and Subsidiary’s discounts and/or premiums (across the two companies). (Under the full equity method, this constructive gain or loss would also be recognized by the parent company in its pre-consolidation books.) In the years after the parent’s purchase of the subsidiary bonds, all of the bond-related accounts (for the proportion of subsidiary bonds held by the parent) must continue to be eliminated from the consolidated financial statements. During the life of the bonds, the amount eliminated will converge toward the face amount of the bonds as any discounts or premiums are amortized by the two companies in their pre-consolidation books. Because we assume that 100% of the constructive retirement gain or loss is allocated to the Parent Company, there is no gain or loss allocated to the noncontrolling interest.

19.

No, the answer would be the same. Because we assume that 100% of the constructive retirement gain or loss is allocated to the Parent Company, there is no gain or loss allocated to the noncontrolling interest (i.e., regardless of whether the parent purchases the bonds or if the subsidiary purchases the bonds), see footnote 27.

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Advanced Accounting, 4th Edition

20.

The gain or loss on constructive retirement is equal to the difference between the carrying amount of the debt on the Subsidiary’s books and the amount for which the debt was purchased by the Parent. Mechanically, this amount is also equal to the net of the unamortized discount/premium on the Subsidiary’s books and the discount/premium recorded by the Parent on the date the bonds were purchased. The entire gain or loss on constructive retirement of the debt should be recognized in the period in which the Parent initially invests in the intercompany debt.

21.

22.

The gain or loss on constructive retirement is equal to the difference between the carrying amount of the debt on the Subsidiary’s books and the amount for which the debt was purchased by the Parent. Mechanically, this amount is also equal to the net of the unamortized discount/premium on the Subsidiary’s books and the discount/premium recorded by the Parent on the date the bonds were purchased. Thus, the consolidated gain or loss on constructive retirement of debt is recognized in the separate pre-consolidation books of the Parent and Subsidiary in interest income and interest expense via the amortization of the bond discount/premium by the Parent and Subsidiary.

23.

Under the full equity method, the gain or loss on constructive retirement of intercompany debt is recognized by the parent company in its pre-consolidation books. This makes the gain or loss part of the investment account. When consolidating, the entire investment account is eliminated, including the intercompany bond gains and losses. This amount gradually declines over the remaining life of the bonds so that by the time the bond matures, any difference will be fully amortized and the carrying value of the bond will equal the face value of the bond.

24.

FASB ASC 810 does not mandate any specific proportion of elimination to the parent or the subsidiary. Therefore, even if the parent company owns less than 100 percent of the subsidiary and regardless of whether the purchasing party is the parent or the subsidiary, we assign 100 percent of the intercompany bond elimination to the parent’s interest in the subsidiary. This is consistent with the parent company being in control, and therefore responsible for the constructive retirement of the debt, even in cases where the subsidiary purchases the parent’s bonds on the open market.

25.

If none of the Preferred Stock is owned by the Parent company, all of the preferred stock equity account is assigned to the noncontrolling interests.

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-5

26.

If all of the preferred stock is owned by the Parent company, then all of the preferred stock equity account is eliminated against the Investment in Subsidiary account on the Parent’s balance sheet.

27.

If 35% of the Preferred Stock is owned by the Parent company, 35% of the Preferred Stock equity account is eliminated against the Equity Investment account on the parent’s balance sheet and 65% is allocated to the noncontrolling interests equity account.

28.

Answer: d SPEs are legitimate financing vehicles that are usually “robot-like” entities that have no distinct physical location, have no independent management or employees, and make no strategic business decisions

29.

Answer: a SPEs are legitimate financing vehicles that are usually “robot-like” entities that have no distinct physical location, have no independent management or employees, and make no strategic business decisions. Thus, the SPE is not expected to seek strategic business opportunities that maximize returns to the SPE's equity investors.

30.

Answer: c All of the other financial instruments absorb some of the variability of the entity on which the claim is written.

31.

Answer: c While there is a business scope exception for applying the VIE model, businesses are not automatically exempt from the consolidation provisions (i.e., both voting interest and variable interest) of FASB ASC 810.

32.

Answer: b The business-related scope exception allows reporting entities to skip directly to the voting interest evaluation of a legal entity.

33.

Answer: a The primary beneficiary has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

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Advanced Accounting, 4th Edition

34.

Answer: d Goodwill is only recognized by the Primary Beneficiary when a consolidated VIE is a “business.”

35.

Answer: a Because the transaction occurred on the first day of the fiscal year, the consolidated income statement will include none of the interest expense.

36.

Answer: c Because the transaction occurred partway through the fiscal year, the consolidated income statement will include interest expense for the portion of the year the debt was not held by the Subsidiary.

37.

Answer: b Consolidated NI NI (P, alone) Add: Int. Expense (P) p% x NI(S, confirmed) Less: Int Inc (S) Add: Gain on Retire

$ 38.

650,000 45,500 260,000 (41,600) 32,500 946,400

Answer: d Consolidated NI NI (P, alone) Add: Int. Expense (P) p% x NI(S, confirmed) Less: Int Inc (S) Add: Gain on Retire

Solutions Manual, Chapter 6

650,000 45,500 260,000 (41,600) None 913,900

©Cambridge Business Publishers, 2020 6-7

39.

Answer: d Consolidated NI NI (P, alone) p% x NI(S, confirmed) Add: Gain on Retire

40.

420,000 52,500 $ 1,522,500

Answer: c Consolidated NI NI (Alone) Interest Expense Interest Income Loss on Constructive Retir. NI (Confirmed) x p% Incremental effect

41.

$ 1,050,000

P-Confirmed $1,275,000 $88,400 $(93,500) $(25,500) $1,244,400 100% $1,244,400

S-Confirmed $595,000

$1,870,000

$595,000 70% $416,500

$1,660,900

Answer: a Subsidiary net income of $595,000 * 30% = $178,500

42.

a. The business-related scope exception allows the Reporting Company to bypass the VIE provisions of FASB ASC 810 in its evaluation of the consolidation of the Legal Entity, and to “shortcut” directly to the majority-voting-interest test. b. The Chairman of the Board of the Reporting Company would be considered a related party. FASB ASC 810 indicates that the scope exception is not allowed if the reporting entity, its related parties or both participated significantly in the design or redesign of the legal entity. The Legal Entity is not eligible for the business scope exception. c. Yes, the answer to (b) changes. The related-party exclusion does not apply if the legal entity is an operating joint venture under joint control of the reporting entity and one or more independent parties. In this case, the Legal Entity is still eligible for the business scope exception.

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Advanced Accounting, 4th Edition

43.

a. FASB ASC 810 indicates that the scope exception is not allowed if the legal entity is designed so that substantially all of its activities either involve or are conducted on behalf of the reporting entity and its related parties. The Legal Entity is not eligible for the business scope exception. b. Yes, the answer to (a) changes. Because 70 percent of the building is being leased to an unaffiliated third party, then far less than “substantially all” of the activities of the Legal Entity are conducted on behalf of the reporting entity and its related parties. In this case, the Legal Entity is still eligible for the business scope exception. c. Yes, the answer to (a) changes. Employee benefit plans are outside the scope of FASB ASC 810. (As an aside, given that the sole purpose of the Legal Entity is to administer the pension and postretirement plans of the Reporting Entity, the assumption that the Legal Entity is a “business” is unrealistic. However, whether a business or not, Legal Entities that administer pension and postretirement plans are outside the scope of FASB ASC 810.)

44.

a. No, the Reporting Company cannot qualify for the business-related scope exception because it provides more than half of the of the total of the equity, subordinated debt, and other forms of subordinated financial support to the legal entity based on an analysis of the fair values of the interests in the legal entity. b. Yes, the answer to (a) changes. This is because the other (unrelated) party provides more than half of the of the total of the equity, subordinated debt, and other forms of subordinated financial support to the legal entity based on an analysis of the fair values of the interests in the legal entity. c. No, the Reporting Company cannot qualify for the business-related scope exception because the activities of the Legal Entity are primarily related to securitizations. (This is one of the four exceptions that preclude use of the business-related scope exception.)

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-9

45.

a. $108,000 Common Stock Additional paid in capital Retained earnings

$ 27,000 67,500 13,500

The equity investment at risk can only include interests reported as owners’ equity in the legal entity’s GAAP financial statements. b. No Change The important point is that the equity investment at risk can only include interests reported as equity in the legal entity’s GAAP financial statements, regardless of the source of that equity. c. No Change The important point is that the equity investment at risk can only include interests reported as equity in the legal entity’s GAAP financial statements, regardless of the source of that equity. Convertible debt is classified as a liability. 46.

a. $119,000 Common Stock Additional paid in capital Retained earnings

$ 34,000 85,000 ---

The equity investment at risk can only include interests reported as owners’ equity in the legal entity’s GAAP financial statements. This point is independent of the identity of the parties that contributed capital to the entity. b. $90,100 If one equity investor provides financing to another equity investor, the investment made by the equity investor who received the financing generally would be excluded from equity investment at risk.

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Advanced Accounting, 4th Edition

47.

$435,500 General partner capital Limited partner capital Total partnership capital Less: Fee Equity at risk

$ 46,000 414,000 460,000 (24,500) $ 435,500

If one equity investor makes payments to another equity investor, the investment made by the equity investor who received the financing generally would be excluded from equity investment at risk. 48.

Because the general partner holds a substantive equity investment at risk, and the equity holders, as a group, have the power, the provisions of ASC 810-10-15-14(b)(1) are not violated. It is not necessary for the 99% limited partner interests to have participating rights for the criterion of ASC 810-10-15-14(b)(1) to be met. It is important to note that any time the voting rights of an equity investor are not proportional to its obligation to absorb the expected losses of the entity, to receive the expected residual returns of the entity, or both, the “anti-abuse” provision in ASC 810-10-15-14(c) should be evaluated.

49.

In this example, since the lender is one party that has the ability to exercise a participating right relating to an activity of the entity which has a significant impact on the entity’s performance, the Legal Entity would be considered to be a VIE under Characteristic 2: Equity Lacks Decision-Making Rights.

50.

In this example, the power rests with the pharmaceutical company by virtue of the service agreement rather than through its equity interest. Therefore, the entity would be a VIE because there is no decision making for the entity embodied in the equity interests.

51.

a. Goodwill = $30,000

Original investment New Investment Noncontrolling interest Less: 100% FVINA

FV $ 90,000 180,000 330,000 600,000 (570,000) $ 30,000

b. Gain or Loss = none

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-11

52.

a. Goodwill = none b. Gain = $15,000 Original investment @ BV New Investment @ FV Noncontrolling interest @ FV Less: 100% FVINA (Gain) Loss

53.

45,000 180,000 330,000 555,000 (570,000) $ (15,000)

a. Equity method income (loss) from VIE = $(24,850) Sales Cost of goods sold Gross profit Operating expenses Net income P% = 35% 100% EOY IIP(Upstream) $105,000*40%

VIE 210,000 (140,000) 70,000 (21,000) 49,000 35% 17,150 (42,000) (24,850)

b. Consolidated net income = $281,500 Sales ($770,000 + $210,000 - $105,000) Cost of goods sold ($462,000 + $140,000 + $42,000 – $105,000) Gross margin Operating expenses ($123,200 + $21,000) Equity method income (loss) from VIE Consolidated Net income Net income attributable to NCI ($49,000 * 65%) Net income attributable to Controlling Interest

Consolidated $875,000 539,000 336,000 (144,200) 0 191,800 (31,850) $ 159,950

c. VIE Net Income*nci%: $49,000*65%=$31,850 d. Reporting Company (Stand Alone) Net Income + (VIE Net Income *p%) – IIP (Upstream) $184,800 + ($49,000*35%) – $42,000 = $159,950

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Advanced Accounting, 4th Edition

e. If voting interest, pro-rata elimination of upstream profits assigned to NCI. Sales ($770,000 + $210,000 - $105,000) Cost of goods sold ($462,000 + $140,000 + $42,000 – $105,000) Gross margin Operating expenses ($123,200 + $21,000) Equity method income (loss) from VIE Consolidated Net income Net income attributable to NCI ([$49,000 - $42,000]* 65%) Net income attributable to Controlling Interest

Consolidated $875,000 539,000 336,000 (144,200) 0 191,800 (4,550) $ 187,250

Updated b: Same Consolidated Net income, but NCI and controlling interest income would changes as above. Updated c: Confirmed VIE Net Income*nci%: ([$49,000 - $42,000]* 65%) = $4,550 Updated d: Reporting Company (Stand Alone) Net Income + (VIE Net Income *p%) – IIP (Upstream) * p% $184,800 + ($49,000*35%) – ($42,000 * 35%) = $187,250 54.

a. There is no gain or loss when one affiliate directly places the debt with another affiliate. The net recorded value of the bond payable will exactly equal the net recorded value of the bond receivable. b. There is no gain or loss when one affiliate issues the bonds at par (to an unaffiliated company) and another affiliate subsequently acquires those same bonds at par. Gains and losses arise when (on a per-bond basis) the bond purchaser pays an amount different from the net carrying amount recorded by the bond issuer. In this case, 70% of the bonds have a carrying value of $70,000 on the issuer’s books, which is the amount paid by the affiliated bond purchaser. c. Answer = $6,500 Gain. Given the straight-line amortization assumption, on the date of affiliate purchase, the bonds have an approximate carrying value equal to $101,500 (initial premium = $3,000 and 5/10 of the bonds’ term remains: $3,000 x 50% = $1,500). The affiliated purchaser paid $95,000 to constructively retire 100% of the debt that has a carrying value equal to $101,500. This is a constructive gain equal to $101,500 - $95,000 = $6,500.

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-13

d. Answer = $3,500 Loss. Given the straight-line amortization assumption, on the date of affiliate purchase, the bonds have an approximate carrying value equal to $98,000 (initial discount = $4,000 and 5/10 of the bonds’ term remains: $4,000 x 50% = $2,000). The affiliated purchaser paid $72,100 to constructively retire 70% of the debt that has a total carrying value equal to $98,000. This means the percentage that was constructively retired had a carrying value equal to $68,600 (70% x $98,000). This is a constructive loss equal to $68,600 - $72,100 = $(3,500) for 70% of the debt. e. As we note in the chapter, FASB ASC 810 does not mandate any specific proportion of elimination to the parent or the subsidiary. Therefore, even if the parent company owns less that 100 percent of the subsidiary and regardless of whether he purchasing party is the parent or the subsidiary, we assign 100 percent of the intercompany bond elimination to the parent’s interest in the subsidiary. This is consistent with the parent company being in control, and therefore responsible for the constructive retirement of the debt. 55.

©Cambridge Business Publishers, 2020 6-14

$ 270,000 150,000 67,500 (61,500) 36,000 $ 462,000

Advanced Accounting, 4th Edition

56.

a. Zero. The interest income was earned by an unaffiliated company. b. $67,500. For interest expense, the reason that the amount is $67,500 is because the bond was constructively retired on the last day of the fiscal year. If, instead, the intercompany bond transaction occurred on the first day of the year, then none of the interest expense would have appeared in the consolidated financial statements. (For any other date of constructive retirement during the year, a proportionate share of interest expense would be recognized in the consolidated financial statements for the period of time the bonds were held by unaffiliated parties.) c. $36,000 Gain. The debt had a carrying value of $630,000 on the date of constructive retirement. This debt was constructively retired for $594,000, resulting in a gain equal to $36,000 ($630,000 - $594,000). d. $456,000 Parent Net Income (Alone) p% x Subsidiary Net Income (Alone) Back out: 100% Interest Expense (add back) 100% Interest Income (deduct) Add in: 100% Constructive Gain Consol. NI

$ 270,000 150,000 *0 *0 36,000 $ 456,000

* = Adjustment amounts are zero because transaction occurred on last day of the year. The subsidiary had no interest income in its pre-consolidation income and the parent company’s bonds were held by unaffiliated parties for the whole year.

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-15

57.

a. Zero. The consolidated financial statements will never include any interest income from a bond investment in an affiliated company. b. Zero. For interest expense, the reason that the amount is zero is because the bond was constructively retired on the first day of the fiscal year. If, instead, the intercompany bond transaction occurred on the last day of the year, then all of the interest expense would have appeared in the consolidated financial statements. (For any other date of constructive retirement during the year, a proportionate share of interest expense would be recognized in the consolidated financial statements for the period of time the bonds were held by unaffiliated parties.) c. $12,300 Gain. The debt had a carrying value of $286,800 on the date of constructive retirement. This debt was constructively retired for $274,500, resulting in a gain equal to $12,300 ($286,800 - $274,500). d. $1,415,100 100% of all intercompany bond eliminations are assigned to the controlling interest. As indicated in the chapter, FASB ASC 810 does not mandate any specific proportion of elimination to the parent or the subsidiary. Therefore, even if the parent company owns less that 100 percent of the subsidiary and regardless of whether he purchasing party is the parent or the subsidiary, we assign 100 percent of the intercompany bond elimination to the parent’s interest in the subsidiary. This is consistent with the parent company being in control, and therefore responsible for the constructive retirement of the debt, even in cases where the subsidiary purchases the parent’s bonds on the open market. Parent Net Income (Alone) p% x Subsidiary Net Income (Alone) (80% x $330,000) Back out: 100% Interest Expense (add back) 100% Interest Income (deduct) Add in: 100% Constructive Gain Consol. NI

©Cambridge Business Publishers, 2020 6-16

$1,140,000 264,000

25,800 (27,000) 12,300 $1,415,100

Advanced Accounting, 4th Edition

e. $66,000. As mentioned in (d), 100% of the bond eliminations are assigned to the controlling interest. This means that the noncontrolling interest income is equal to the noncontrolling interest percentage times the net income of the subsidiary (i.e., 20% x $330,000 = $66,000) 58.

BOY Investment adjustment required for the December 31, 2019 consolidation = $21,000 debit. This adjustment is necessary because, under full equity method accounting, the parent company will constructively recognize the full gain for the 30% bond purchase and also will adjust for the subsequent recognition of the gain in the separate parent and subsidiary books via the discount and premium amortization. The bond premium annually amortized by the parent after January 1, 2015 equals $5,000 (i.e., $50,000/10) and the discount annually amortized by the subsidiary after January 1, 2018 equals $2,000 (i.e., $14,000/7). The $24,500 constructive retirement gain recognized by the parent on January 1, 2018 is the difference between the carrying value of 30% of the bonds (i.e., $310,500 = 30% x [$1,050,000 - {3 x $5,000}]) and the net bond investment for the 30% purchase of bonds (i.e., $286,000). Through the end of 2018, a portion of this gain is recognized in the pre-consolidation financial statements of the parent and subsidiary via amortization of 30% of the bond premium (i.e., the 30% portion that corresponds to theproportion of bonds purchase by the subsidiary) and bond discount, respectively. Thus, the pre-consolidation recognition of $1,500 (i.e., 30% x $5,000) of amortized bond premium and $2,000 of amortized bond interest during 2018, reduces the beginning of year adjustment necessary at 2019 by $3,500 (i.e., $1,500 + $2,000). This means that the bond-related adjustment necessary to the beginning of year Equity Investment account is a debit equal to $21,000 ($24,500 $3,500). It is extremely important to recognize that the $21,000 beginning of year adjustment is not just an arbitrary number. Recall that the way the constructive gain is ultimately recognized in the individual companies’ pre-consolidation financial is via the preconsolidation amortization of the discounts and premiums. Well, at January 1, 2019 there are six more years of amortization remaining. In each year, $3,500 of gain is recognized in the pre-consolidation books as a result of the amortization process. This represents $21,000 (i.e., 6 x $3,500) total gains. This also means that the beginning of year adjustment necessary for the investment account will decrease by $3,500 in each year until the bonds mature.

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-17

59.

The preferred dividends for the year equals $43,200 (i.e., 6% x $720,000). The subsidiary income available to the controlling and noncontrolling interests equals $73,800 (i.e., $117,000 - $43,200) after dividends are deducted. The subsidiary income attributable to the noncontrolling interest equals $14,760 (i.e., 20% x $73,800). The subsidiary income attributable to the controlling interest equals $59,040 (i.e., 80% x $73,800). Thus, the consolidated net income attributable to the controlling interest equals $320,040 (p’s stand-alone net income of $261,000 plus the subsidiary income attributable to the controlling interest of $59,040).

60.

The preferred dividends for the year equals $42,000 (i.e., 7% x $600,000). The subsidiary income available to the controlling and noncontrolling interests equals $83,000 (i.e., $125,000 - $42,000) after dividends are deducted. The subsidiary income attributable to the noncontrolling interest equals $20,750 (i.e., 25% x $83,000). The subsidiary income attributable to the controlling interest equals $62,250 (i.e., 75% x $83,000). Thus, the consolidated net income attributable to the controlling interest equals $362,250 (p’s stand-alone net income of $300,000 plus the subsidiary income attributable to the controlling interest of $62,250).

61.

a. $1,800 on January 1, 2019 Amortization table for the bonds issued by the Parent (represents 100% of the bonds issued): Date 1-Jan-2014 31-Dec-2014 31-Dec-2015 31-Dec-2016 31-Dec-2017 31-Dec-2018 31-Dec-2019

Cash payment

Amortization of (prem) disc

Interest expense

$21,000 $21,000 $21,000 $21,000 $21,000 $21,000

$1,200 $1,200 $1,200 $1,200 $1,200 $1,200

$19,800 $19,800 $19,800 $19,800 $19,800 $19,800

Carrying amount $312,000 $310,800 $309,600 $308,400 $307,200 $306,000 $304,800

Amortization table for the bonds purchased by the Subsidiary (represents 60% of the bonds originally issued by the Parent): Date Jan. 1 2019 Dec. 31, 2019

Cash payment

Amortization of (prem) disc

Interest income

$12,600

$360

$12,240

Carrying amount $181,800 $181,440

Thus, the gain on constructive retirement of the bonds on January 1, 2019 is equal to $1,800 (i.e., [60% x $306,000] - $181,800).

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Advanced Accounting, 4th Edition

61.

b. Entries on the pre-consolidation financial statements of the Parent and Subsidiary during 2019: Parent: Interest expense 19,800 Bond premium 1,200 Cash 21,000 (Recognize interest expense and payment of cash related to bond payable)

Equity Investment 161,440 Equity income 161,440 (Equity method income (i.e., (80% x 200,000) + 1,800 constructive gain – 360 recognized via amortization of premium and discount during year subsequent to I-C purchase) Subsidiary: Bond investment Cash (Record purchase of 60% of parent’s bonds) Cash

181,800 181,800

12,600

Interest income 12,240 Bond Investment 360 (Recognize interest income and receipt of cash related to bond investment) c. Income attributable to controlling interest: 100% x NI(P) (Alone) p% x NI(S) (Alone) Less: I-C Int. Income in NI Plus: I-C Int Expense in NI Plus: Gain on Constr. Retirement Controlling Interest NI

$ 450,000 160,000 (12,240) 11,880 1,800 $ 611,440

Income attributable to noncontrolling interest: $40,000 = 20% x $200,000

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-19

61.

d. Consolidation entries: [C]

[E]

[Ibond]

Equity Income from Subsidiary

161,440

Income attributable to NCI

40,000

Investment in Subsidiary

161,440

Noncontrolling Interest

40,000

Common Stock (S) @ BOY

500,000

Retained Earnings (S) @ BOY

400,000

Investment in Subsidiary @ BOY

720,000

Noncontrolling interest @ BOY

180,000

Bond payable (net)

182,880

Interest income

62.

12,240 Investment in Bonds (net)

181,440

Interest expense

11,880

Gain on Constructive Retirement (1/1/2019)

1,800

a. $(42,000) loss on December 31, 2018 Amortization table for the bonds issued by the Parent (represents 100% of the bonds issued): Date 1-Jan-2017 31-Dec-2017 31-Dec-2018 31-Dec-2019

Cash payment

Amortization of (prem) disc

Interest expense

$35,000 $35,000 $35,000

$2,500 $2,500 $2,500

$37,500 $37,500 $37,500

Carrying amount $470,000 $472,500 $475,000 $477,500

Amortization table for the bonds purchased by the Subsidiary (represents 80% of the bonds originally issued by the Parent): Date 1-Jan-2019 31-Dec-2019

Cash payment

Amortization of (prem) disc

$28,000

$(1,600)

Interest income $26,400

Carrying amount $416,000 $414,400

Thus, the loss on constructive retirement of 80% of the bonds on December 31, 2018 is equal to $(36,000) (i.e., [80% x $475,000] - $416,000).

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Advanced Accounting, 4th Edition

62.

b. Entries on the pre-consolidation financial statements of the Parent and Subsidiary during 2019: Parent: Interest expense 37,500 Bond discount 2,500 Cash 35,000 (Recognize interest expense and payment of cash related to bond payable) Equity Investment 146,100 Equity income 146,100 (Equity method income (i.e., (75% x 190,000) + 3,600 recognized via amortization of discount and premium during year subsequent to I-C purchase)

Subsidiary: Cash

28,000

Interest income 26,400 Bond Investment 1,600 (Recognize interest income and receipt of cash related to bond investment) c. Income attributable to controlling interest: 100% x NI(P) (Alone) p% x NI(S) (Alone) Less: I-C Int. Income in NI Plus: I-C Int Expense in NI Controlling Interest NI

270,000 142,500 (26,400) 30,000 416,100

Income attributable to noncontrolling interest: $47,500 = 25% x $190,000

Solutions Manual, Chapter 6

©Cambridge Business Publishers, 2020 6-21

62.

d. Consolidation entries: [C]

[E]

[Ibond]

63.

Equity Income from Subsidiary Income attributable to NCI Dividends - Subsidiary Investment in Subsidiary Noncontrolling Interest

146,100 47,500

Common Stock (S) @ BOY Retained Earnings (S) @ BOY Investment in Subsidiary @ BOY Noncontrolling interest @ BOY

300,000 200,000

Bond payable (net) Interest income Equity investment (BOY) Investment in Bonds (net) Interest expense

382,000 26,400 36,000

50,000 108,600 35,000

375,000 125,000

414,400 30,000

Consolidation entries: Dr [C]

[E]

[Ibond]

Equity Income from Subsidiary Income attributable to NCI Dividends - Subsidiary (common) Investment in Subsidiary Noncontrolling Interest

65,900 32,100

Common Stock (S) @ BOY APIC Retained Earnings (S) @ BOY Investment in Subsidiary @ BOY Noncontrolling interest @ BOY

150,000 170,000 433,000

Bond payable (net) Interest income Investment in Bonds (net) Interest expense

508,000 35,000

BOY Investment in Subsidiary

50,000 30,900 17,100

527,100 225,900

490,000 26,000 27,000

continued

©Cambridge Business Publishers, 2020 6-22

Advanced Accounting, 4th Edition

63.

continued Parent

Subsidiary

Income Statement Sales

2,800,000

900,000

3,700,000

Cost of Goods Sold Gross Profit Operating & other expenses

(1,500,000) 1,300,000 (1,100,000)

(530,000) 370,000 (298,000)

(2,030,000) 1,670,000 (1,398,000)

Bond interest income Bond interest expense Income from Subsidiary Consolidated Net Income Income attributable to NCI

(26,000) 65,900 239,900 -

107,000 -

Income attrib to Control Int

239,900

107,000

Retained Earnings Statement BOY retained earnings Income attrib to Control Int Dividends

1,777,100 239,900 (150,000)

433,000 107,000 (50,000)

Ending Retained Earnings

1,867,000

490,000

1,867,000

800,000

300,000

1,100,000

900,000 1,000,000 2,240,000

400,000 500,000 900,000

1,300,000 1,500,000 3,140,000

Balance Sheet Cash Accounts receivable Inventories PP&E, net Investment in Subsidiary

35,000

[Ibond]

Consol

35,000 [Ibond]

[C]

65,900

[C]

32,100

26,000

272,000 (32,100) 239,900

[E]

433,000 [C]

585,000

Investment in Bond (net) Total Assets

[C] [E] [Ibond] [Ibond]

490,000

50,000

1,777,100 239,900 (150,000)

30,900 527,100

27,000 490,000

5,525,000

2,590,000

7,040,000

Accounts Payable Other current liabilities Bond Payable (net) Other long-term liabilities

600,000 800,000 508,000 800,000

480,000 500,000

1,080,000 1,300,000 1,600,000

Common Stock APIC Retained Earnings Noncontrolling Interest

450,000 500,000 1,867,000

150,000 170,000 490,000

Total Liabilities and Equity

5,525,000

Solutions Manual, Chapter 6

[Ibond]

508,000

800,000 [E] [E]

150,000 170,000 [C] [E]

2,590,000

1,394,000

17,100 225,900 1,394,000

450,000 500,000 1,867,000 243,000 7,040,000

©Cambridge Business Publishers, 2020 6-23

64.

Consolidation entries: Dr [C]

[E]

[Ibond]

Equity Income from Subsidiary

62,720

Income attributable to NCI

19,280

Dividends - Subsidiary

40,000

Investment in Subsidiary

30,720

Noncontrolling Interest

11,280

Common Stock (S) @ BOY

140,000

APIC

500,000

Retained Earnings (S) @ BOY

240,800

Investment in Subsidiary @ BOY

704,640

Noncontrolling interest @ BOY

176,160

Bond payable (net)

812,800

Interest income

72,000 Investment in Bonds (net)

784,000

Interest expense

57,600

BOY Investment in Subsidiary

43,200

Parent

Subsidiary

Income Statement Sales

4,500,000

800,000

5,300,000

Cost of Goods Sold Gross Profit Operating & other expenses Bond interest income

(2,800,000) 1,700,000 (1,400,000) 72,000

(500,000) 300,000 (146,000)

(3,300,000) 2,000,000 (1,546,000) [Ibond]

Bond interest expense Total expenses Equity Income from Subsidiary Consolidated Net Income Income attributable to NCI

(1,328,000) 62,720 434,720 -

(57,600) (203,600) 96,400 -

Income attributable to Control Int

434,720

96,400

1,577,840

240,800

434,720

96,400

(200,000)

(40,000)

1,812,560

297,200

Retained Earnings Statement Beg. Ret. Earnings Income attributable to Control Int Dividends Declared Ending Retained Earnings

Consolidated

72,000 [Ibond]

[C]

62,720

[C]

19,280

57,600

(1,546,000) 454,000 (19,280) 434,720

[E]

240,800

1,577,840

434,720 [C]

40,000

(200,000)

1,812,560

Table continued next page

Advanced Accounting, 4th Edition

64.

Table continued Parent

Subsidiary

700,000 850,000 900,000 2,000,000 778,560

400,000 600,000 800,000 1,500,000

Consolidated

Balance Sheet Cash Accounts receivable Inventories PP&E, net Investment in Subsidiary

[Ibond] [Ibond]

7,750,000

1,000,000

450,000 650,000 812,800 450,000

1,150,000 1,550,000 1,450,000

600,000

APIC Retained Earnings Noncontrolling Interest

1,000,000 1,812,560

Total Liabilities and Equity

6,012,560

Total Assets Accounts Payable Other current liabilities Bond Payable (net) Other long-term liabilities Common Stock

784,000 6,012,560

30,720 704,640 43,200 784,000

3,300,000

Investment in Bond (net)

65.

[C] [E]

1,100,000 1,450,000 1,700,000 3,500,000 -

700,000 900,000

[Ibond]

812,800

140,000

[E]

140,000

600,000

500,000 297,200

[E]

500,000

1,000,000 1,812,560 187,440

[C] [E] 3,300,000

1,847,600

11,280 176,160 1,847,600

7,750,000

Consolidation entries: Dr [C]

[E]

Equity Income from Subsidiary

117,000

Income attributable to NCI

12,000

Dividends - Subsidiary

50,000

Investment in Subsidiary

72,000

Noncontrolling Interest

7,000

Common Stock (S) @ BOY

400,000

APIC

600,000

Retained Earnings (S) @ BOY

[Ibond]

130,000

Investment in Subsidiary @ BOY

1,017,000

Noncontrolling interest @ BOY

113,000

Bond payable (net)

492,000

Interest income

20,000

BOY Investment in Subsidiary

27,000

Investment in Bonds (net)

510,000

Interest expense

29,000

continued

Solutions Manual, Chapter 6

65.

continued Parent

Subsidiary

Consol.

Sales Cost of Goods Sold Gross Profit Operating & other expenses

5,000,000 (2,600,000) 2,400,000 (1,800,000)

Bond interest income Bond interest expense Total expenses Equity Income from Subsidiary Consolidated Net Income Income attributable to NCI

1,000,000 (600,000) 400,000 (300,000) 20,000

(29,000) (1,829,000) 117,000 688,000 -

(280,000) 120,000 -

Income attrib to Control Int

688,000

120,000

Retained Earnings Statement Beg. Ret. Earnings Income attrib to Control Int

1,432,000 688,000

130,000 120,000

Dividends Declared

(400,000)

(50,000)

Ending Retained Earnings

1,720,000

200,000

1,720,000

Income Statement 6,000,000 (3,200,000) 2,800,000 (2,100,000) [Ibond]

20,000 [Ibond]

[C]

117,000

[C]

12,000

29,000

(2,100,000) 700,000 (12,000) 688,000

[E]

130,000

1,432,000 688,000 [C]

50,000

(400,000)

Balance Sheet Cash Accounts receivable Inventories

800,000

190,000

990,000

900,000 1,000,000

400,000 600,000

1,300,000 1,600,000

PP&E, net

3,000,000

1,000,000

4,000,000

Investment in Subsidiary

1,062,000

[Ibond]

27,000

510,000

Investment in Bond (net)

[C] [E] [Ibond]

72,000 1,017,000 510,000

Total Assets

6,762,000

2,700,000

7,890,000

Accounts Payable Other current liabilities Bond Payable (net) Other long-term liabilities

850,000 1,000,000 492,000 1,400,000

400,000 500,000

1,250,000 1,500,000 2,000,000

Common Stock APIC Retained Earnings Noncontrolling Interest

400,000 900,000 1,720,000

400,000 600,000 200,000

Total Liabilities and Equity

6,762,000

[Ibond]

492,000

[E] [E]

400,000 600,000

600,000

[C] [E] 2,700,000

1,798,000

7,000 113,000 1,798,000

400,000 900,000 1,720,000 120,000 7,890,000

Advanced Accounting, 4th Edition

66.

Consolidation entries: Dr [C]

[E]

[Ibond]

Equity Income from Subsidiary

64,560

Income attributable to NCI

13,440

Dividends - Subsidiary (common)

30,000

Investment in Subsidiary

40,560

Noncontrolling Interest

7,440

Common Stock (S) @ BOY

60,000

APIC

200,000

Retained Earnings (S) @ BOY

402,400

Investment in Subsidiary @ BOY

529,920

Noncontrolling interest @ BOY

132,480

Bond payable (net)

590,400

Interest income

42,000

BOY Investment in Subsidiary

32,400

Investment in Bonds (net)

612,000

Interest expense

52,800

Parent

Subsidiary

Consolidated

Income Statement Sales

4,000,000

600,000

4,600,000

Cost of Goods Sold

(2,400,000)

(340,000)

(2,740,000)

Gross Profit

1,600,000

260,000

1,860,000

Operating & other expenses Bond interest income

(1,200,000) 42,000

(140,000)

(1,340,000)

Income attrib to Control Int

(1,158,000) 64,560 506,560 506,560

(192,800) 67,200 67,200

Retained Earnings Stmt Beg. Ret. Earnings Income attribe to Control Int

943,520 506,560

402,400 67,200

Dividends Declared Ending Retained Earnings

(300,000) 1,150,080

(30,000) 439,600

Bond interest expense Total expenses Equity Income - Subsidiary Consolidated Net Income Income attributable to NCI

[Ibond]

42,000

(52,800)

[Ibond] [C]

64,560

[C]

13,440

[E]

52,800

(1,340,000) 520,000 (13,440) 506,560

402,400

943,520 580,560 [C]

30,000

(300,000) 1,150,080

Table continued next page

Solutions Manual, Chapter 6

66.

Table continued Parent

Subsidiary

Consolidated

Balance Sheet Cash Accounts receivable Inventories PP&E, net Investment in Subsidiary

500,000

250,000

750,000

700,000 900,000 2,000,000

450,000 500,000 900,000

1,150,000 1,400,000 2,900,000

538,080

Investment in Bond (net)

[Ibond]

32,400

[C] [E] [Ibond]

612,000

Total Assets Accounts Payable Other current liabilities Bond Payable (net) Other long-term liabilities Common Stock APIC Retained Earnings

5,250,080

2,100,000

800,000 750,000 950,000

210,000 300,000 590,400 300,000

600,000 1,000,000 1,150,080

60,000 200,000 439,600

5,250,080

[Ibond]

590,400

[E] [E]

60,000 200,000

1,010,000 1,050,000 1,250,000

[C] [E]

Total Liabilities and Equity

6,200,000

Noncontrolling Interest

67.

40,560 529,920 612,000

2,100,000

1,405,200

7,440 132,480 1,405,200

600,000 1,000,000 1,150,080 139,920 6,200,000

Consolidation entries: [ADJ]

Investment in Subsidiary

118,500

Beg. Ret. Earn. - Parent [C]

[E]

[Ibond]

118,500

Income from Subsidiary

30,000

Income attributable to NCI

27,000

Dividends - Subsidiary (common)

40,000

Noncontrolling Interest

17,000

Common Stock (S) @ BOY

150,000

APIC

500,000

Retained Earnings (S) @ BOY

276,000

Investment in Subsidiary @ BOY

694,500

Noncontrolling interest @ BOY

231,500

Bond payable (net)

756,000

Interest income

50,000

Investment in Bonds (net)

740,000

Interest expense

42,000

BOY Investment in Subsidiary

24,000

Advanced Accounting, 4th Edition

67.

Table continued Parent

Subsidiary

Consolidate d

Income Statement Sales

6,500,000

800,000

7,300,000

Cost of Goods Sold Gross Profit

(4,500,000) 2,000,000

(450,000) 350,000

(4,950,000) 2,350,000

Operating & other expenses Bond interest income

(1,500,000) 50,000

(200,000)

(1,700,000) [Ibond]

50,000

Bond interest expense Total expenses Income from Subsidiary Consolidated Net Income Income attributable to NCI

(1,450,000) 30,000 580,000 -

(42,000) (242,000) 108,000 -

Income attrib to Contr. Int

580,000

108,000

Retained Earnings Statement Beg. Ret. Earnings Income attrib to Contr. Int

760,000 580,000

276,000 108,000

Dividends Declared

(200,000)

(40,000)

Ending Retained Earnings

1,140,000

344,000

1,301,500

700,000 800,000 1,000,000 3,000,000

300,000 500,000 800,000 1,250,000

1,000,000 1,300,000 1,800,000 4,250,000

[Ibond] [C]

30,000

[C]

27,000

42,000

(1,700,000) 650,000 (27,000) 623,000

[E]

276,000

[ADJ]

118,500

878,500 623,000

[C]

40,000

(200,000)

Balance Sheet Cash Accounts receivable Inventories PPE, net Investment in Subsidiary Investment in Bond (net) Total Assets

600,000

[ADJ]

118,500

740,000

[E]

694,500

[Ibond] [Ibond]

24,000 740,000

0 0

6,840,000

2,850,000

8,350,000

800,000 900,000

250,000 400,000

1,050,000 1,300,000

Other long-term liabilities

1,400,000

756,000 450,000

Common Stock APIC Retained Earnings Noncontrolling Interest

600,000 2,000,000 1,140,000

150,000 500,000 344,000

Total Liabilities and Equity

6,840,000

Accounts Payable Other current liabilities Bond Payable (net)

Solutions Manual, Chapter 6

[Ibon d]

756,000

1,850,000

[E] [E]

150,000 500,000

600,000 2,000,000 1,301,500 248,500

[C] [E] 2,850,000

1,907,500

17,000 231,500 1,907,500

8,350,000

68.

Consolidation entries: [ADJ]

Beg. Ret. Earn. - Parent

134,625

Investment in Subsidiary

[C]

[E]

[Ibond]

134,625

Income from Subsidiary

42,500

Income attributable to NCI

21,375

Dividends - Subsidiary (common)

50,000

Noncontrolling Interest

13,875

Common Stock (S) @ BOY APIC

100,000 200,000

Retained Earnings (S) @ BOY

237,500

Investment in Subsidiary @ BOY

456,875

Noncontrolling interest @ BOY

80,625

Bond payable (net)

496,000

Interest income

27,500

BOY Investment in Subsidiary

13,500

Investment in Bonds (net)

505,000

Interest expense

32,000

continued

Advanced Accounting, 4th Edition

68.

continued Parent

Subsidiary

Consolidate d

Income Statement Sales

9,500,000

900,000

10,400,000

Cost of Goods Sold Gross Profit

(6,800,000) 2,700,000

(550,000) 350,000

(7,350,000) 3,050,000

Operating & other expenses Bond interest income

(1,650,000)

(235,000) 27,500 [Ibond]

Bond interest expense Total expenses Income from Subsidiary Consolidated Net Income Income attributable to NCI

(32,000)

Income attrib to Contr. Int Retained Earnings Statement Beg. Ret. Earn. - Parent Beg. Ret. Earn. - Subsidiary Income attrib to Contr. Int

(1,682,000) 42,500 1,060,500 1,060,500

[Ibond] (207,500) 142,500 142,500

1,501,500 1,060,500

(1,885,000) 27,500

237,500 142,500

[C]

42,500

[C]

21,375

[ADJ] [E]

134,625 237,500

32,000

(1,885,000) 1,165,000 (21,375) 1,143,625

1,366,875 0 1,143,625

Dividends Declared

(400,000)

(50,000)

Ending Retained Earnings

2,162,000

330,000

[C]

50,000

2,110,500

(400,000)

880,000

275,000

1,155,000

900,000 1,500,000 4,000,000

400,000 600,000 800,000

1,300,000 2,100,000 4,800,000

Balance Sheet Cash Accounts receivable Inventories PPE, net Investment in Subsidiary

578,000

Investment in Bond (net)

[Ibond]

13,500

505,000

[ADJ]

134,625

[E]

456,875

[Ibond]

505,000

Total Assets

7,858,000

2,580,000

9,355,000

Accounts Payable Other current liabilities Bond Payable (net) Other long-term liabilities Common Stock APIC Retained Earnings Noncontrolling Interest

850,000 1,000,000 496,000 1,400,000

450,000 500,000 1,000,000

1,300,000 1,500,000 2,400,000

850,000 1,100,000 2,162,000

100,000 200,000 330,000

Total Liabilities and Equity

Solutions Manual, Chapter 6

[Ibond]

496,000

[E] [E]

100,000 200,000 [C] [E]

7,858,000

2,580,000

1,273,000

13,875 80,625 1,273,000

850,000 1,100,000 2,110,500 94,500 9,355,000

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Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 7— Accounting for Foreign Currency Transactions and Derivatives 1.

The Glossary to FASB ASC 830 defines exchange rate as follows: “The ratio between a unit of one currency and the amount of another currency for which that unit can be exchanged at a particular time.”

Currency is a commodity. It is bought and sold in foreign exchange markets. And like other commodities, as the demand for $US increases, the price of the $US increases, and as demand falls, so does the value of the $US. Demand for $US increases as the United States exports more of its products (foreign customers must purchase $US to make payment). Demand also increases as the U.S. stock and bond markets increase, since foreign investors will need to purchase $US in order to make investments in these markets. Conversely, demand for $US falls as the United States imports more goods and services and as interest rates and stock returns decline. $US also become less desirable as the inflation rate in the U.S. increases since $US owned lose their purchasing power.

U.S. companies must report to their shareholders and to the SEC in $US. This means that these companies must first convert their subsidiaries’ foreign-currency-denominated income statements and balance sheets into $US before they can be consolidated with the U.S. parent company. As $US weakens, the $US value of sales and expenses that are denominated in foreign currencies increases. Companies, thus, report higher levels of sales, expenses and profit even if unit volumes are constant.

FASB ASC 830-10-10-1 provides the following rationale: “Financial statements are intended to present information in financial terms about the performance, financial position, and cash flows of a reporting entity. For this purpose, the financial statements of separate entities within a reporting entity, which may exist and operate in different economic and currency environments, are consolidated and presented as though they were the financial statements of a single reporting entity. Because it is not possible to combine, add, or subtract measurements expressed in different currencies, it is necessary to translate into a single reporting currency those assets, liabilities, revenues, expenses, gains, and losses that are measured or denominated in a foreign currency.”

Solutions Manual, Chapter 7

FASB ASC 830-20-35-1 provides the following rationale: “A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes.” The recognition of a gain or loss, thus, reflects the expectation of a change in expected cash flows as a result of the fluctuation in the exchange rate.

No. FASB ASC 830-25-35-8 states the following: “A reporting entity's financial statements shall not be adjusted for a rate change that occurs after the date of the reporting entity's financial statements.”

Yes, averages can be used. FASB ASC 830-10-55-10 and -11 provides the following guidance: “Literal application of the standards in this Subtopic might require a degree of detail in record keeping and computations that could be burdensome as well as unnecessary to produce reasonable approximations of the results. Accordingly, it is acceptable to use averages or other methods of approximation… Average rates used shall be appropriately weighted by the volume of functional currency transactions occurring during the accounting period. For example, to translate revenue and expense accounts for an annual period, individual revenue and expense accounts for each quarter or month may be translated at that quarter's or that month's average rate. The translated amounts for each quarter or month should then be combined for the annual totals.”

FASB ASC 830-20-50-3 recommends the following additional disclosure: “Management is encouraged to supplement the disclosures required by this Subtopic with an analysis and discussion of the effects of rate changes on the reported results of operations. This type of disclosure might include the mathematical effects of translating revenue and expenses at rates that are different from those used in a preceding period as well as the economic effects of rate changes, such as the effects on selling prices, sales volume, and cost structures. The purpose is to assist financial report users in understanding the broader economic implications of rate changes and to compare recent results with those of prior periods.”

Advanced Accounting, 4th Edition

The Glossary to FASB ASC 815 defines a firm commitment as follows: “An agreement with an unrelated party, binding on both parties and usually legally enforceable, with the following characteristics: a. the agreement specifies all significant terms, including the quantity to be exchanged, the fixed price, and the timing of the transaction…A price that varies with the market price of the item that is the subject of the firm commitment cannot qualify as a fixed price, and b. the agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable.” In contrast, a forecasted transaction is defined as “a transaction that is expected to occur for which there is no firm commitment. Because no transaction or event has yet occurred and the transaction or event when it occurs will be at the prevailing market price, a forecasted transaction does not give an entity any present rights to future benefits or a present obligation for future sacrifices.”

10.

FASB ASC 815-20-55-24 requires the support of facts and circumstances in addition to management’s intent: “An assessment of the likelihood that a forecasted transaction will take place should not be based solely on management's intent because intent is not verifiable. The transaction's probability should be supported by observable facts and the attendant circumstances. Consideration should be given to all of the following circumstances in assessing the likelihood that a transaction will occur: a. the frequency of similar past transactions, b. the financial and operational ability of the entity to carry out the transaction, c. substantial commitments of resources to a particular activity (for example, a manufacturing facility that can be used in the short run only to process a particular type of commodity), d. the extent of loss or disruption of operations that could result if the transaction does not occur, and e. the likelihood that transactions with substantially different characteristics might be used to achieve the same business purpose (for example, an entity that intends to raise cash may have several ways of doing so, ranging from a short-term bank loan to a common stock offering).

11.

No, the group cannot include both forecasted foreign currency inflows and outflows. According to FASB ASC 815-20-25- 39(c), an entity that forecasts sales and purchases in the same foreign currency cannot net the forecasted sales and purchases and hedge the net foreign currency exposure. The entity has to separately hedge the forecasted sales and the forecasted purchases.

12.

Answer: D (150,000 Euros x $1.157/euros = $173,550)

Solutions Manual, Chapter 7

13.

Answer: C If a derivative instrument qualifies as a fair value hedge, both the derivative and the asset or liability to which it relates are reported at fair value at each statement date. Gains or losses on the hedged assets or liabilities are offset (in whole or in part) by losses or gains in the derivative financial instrument. If a derivative instrument qualifies as a cash flow hedge, the after-tax gain or loss on fair value remeasurement of the derivative is included as a component of Other Comprehensive Income (OCI). This means that these gains and losses are deferred until the transaction to which the derivative relates occurs and affects net income. Then, these deferred gains or losses are reclassified from Accumulated Other Comprehensive Income (AOCI) into current net income to offset (in whole or in part) the hedged transaction’s effect on reported profit.

14.

Answer: B The $US value of the foreign currency-denominated payable has increased because of the strengthening of the $US, resulting in a loss computed as follows: ($1.30 - $1.27) x 260,000 British pounds = $7,800.

15.

Answer: D A derivative instrument is a financial instrument or other contract with 1) One or more underlyings and 2) One or more notional amounts or payment provisions or both. An underlying is a variable that, along with either a notional amount or a payment provision, determines the settlement of a derivative instrument. It can be a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself (FASB ASC 815-10-15-88). A notional amount is a number of currency units, shares, bushels, pounds, or other units specified in the contract. The settlement of a derivative instrument with a notional amount is determined by interaction of that notional amount with the underlying. The interaction may be simple multiplication, or it may involve a formula with leverage factors or other constants. A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner (FASB ASC 815-10-15-92).

16.

Answer: A (($1.36 - $1.38) x 3,000 = $(60))

17.

Answer: C (($1.06 - $1.02) x 60,000 Swiss francs = $2,400)

18.

Answer: A (($1.44 - $1.40) x 16,000 = $640)

Advanced Accounting, 4th Edition

19.

Answer: C The spot rate of the dollar weakened from $1.22:€1 on November 1 to $1.33:€1 on December 31. This will result in an increase in the euro-denominated accounts receivable of $19,800 (i.e., ($1.33 - $1.22) x 180,000).

20.

Answer: D The foreign-currency forward contract is a derivative and must be marked to fair value at each balance sheet date. This derivative qualifies as a fair value hedge of a foreigncurrency-denominated accounts receivable, which was initiated as part of the sale to a customer. Pursuant to FASB ASC 815-25-35-1, each of these gains/losses is “presented in the same income statement line item as the earnings effect of the hedged item” Therefore, the fair value gain and the partially offsetting change in spot rate for the accounts receivable will be recorded in sales. The amount for the foreign currency forward is a debit of $14,400 to sales (i.e., ($1.34 – $1.26) x 180,000)

21.

Answer: A The firm commitment allows the company to apply fair value hedge treatment to the foreign-currency forward-contract derivative. However, it does not allow the company to record sales before they occur. The sales transaction will take place on February 15, 2019. To the extent the derivative is ineffective in hedging the foreign currency exposure of the firm commitment, some small adjustments to sales might occur at future financial statement dates when the derivative and firm commitment are marked to fair value.

22.

Answer: C The change in forward rates were favorable for the fair value of the forward contract derivative (i.e., we will receive $1.40 per euro and the forward rate for the euros we will deliver are only $1.38). Thus we will record an asset of $16,000 for the derivative fair value (i.e., ($1.40 - $1.38) x $800,000). The firm commitment represents the opposite side of this derivative (i.e., the forecasted rate indicates we will receive euros only worth $1.38), which means we lost money on the firm commitment arrangement. Thus, the firm commitment represents an offsetting liability of $16,000.

23.

Answer: D Our company received cash worth $1,040,000 for the sales transaction (i.e., €800,000 x $1.30), and we received $80,000 for the settlement of our derivative contract (i.e., fair value provided in the facts). Thus, the net cash is $1,120,000, which is also equal to the forward rate of $1.40:€1 times the €800,000 nominal amount of the derivative contract.

Solutions Manual, Chapter 7

24.

Answer: A Because there is no ineffective portion of the cash flow hedge derivative, there will be no adjustments to sales until the March 1, 2019 delivery of the merchandise and settlement of the derivative.

25.

Answer: C The fair value of the derivative is a $63,000 liability at December 31, 2018. Thus the change of $63,000 will be recognized as a loss in other comprehensive income.

26.

Answer: B Our company will recognize $1,314,000 of sales for the original transaction, include in sales $18,000 of losses on the derivative contract from December 31, 2018 to March 1, 2019, and reclassify into sales $63,000 of losses from accumulated other comprehensive income (i.e., the fair value of the derivative at December 31, 2018). This nets to $1,233,000.

27.

Answer: A At the inception of the futures contracts, their fair value was $0 because the contracts were entered into at the futures price at that date. On November 30, the fair value of the futures contracts is equal to the change in the futures price between the inception price and the November 30 price. Given that the futures contracts created an obligation to receive 3,750,000 lb. (25,000 lb. x 150 contracts) of cotton at $0.80/lb. and that the price had risen to $0.85/lb. at the date of the financial statements, the company should record a gain and an asset of $187,500 [3,750,000 lb. x ($0.85 - $0.80)].

28.

Answer: D The original purchase was at $0.68 x 3,750,000 = $2,550,000 MM and was carried at the lower of cost or market until hedged in November. On November 30, the company recognized a gain and an asset for the futures contracts of $187,500 [3,750,000 lb. x ($0.85 - $0.80)]. If the hedge was completely effective, the gain on the hedging derivatives must have been offset by a $187,500 loss on the hedged item, resulting in a carrying value of the cotton inventory of $2,362,500 [($0.68 x 3,750,000) original cost $187,500 loss].

29.

Answer: C For a Cash Flow Hedge, the change in the fair value of the effective portion of the derivative is recognized, net of tax, in other comprehensive income (OCI) and, later, is reclassified to earnings when the hedged item impacts earnings. The ineffective portion of the cash flow hedge is reported currently in earnings.

Advanced Accounting, 4th Edition

30.

Date Dec. 15

Dec. 31

Mar. 15

31.

Journal Entries Inventories Accounts payable (to record the purchase of inventories at $0.046:1 Peso)

9,200

Foreign currency transaction loss Accounts payable (to record the increase in the account payable to $0.053:1 Peso)

1,400

Accounts payable Foreign currency transaction gain Cash (to record payment of the account payable at an exchange rate of $0.050:1Peso)

10,600

Date Nov 3

9,200

1,400

600 10,000

Journal Entries Inventories

75,000

Accounts payable (to record the purchase of inventories at US $0.75 : CA $1)

75,000

Dec. 31 Accounts payable Foreign currency transaction gain (to record the decrease in the account payable to US $0.70 : CA $1)

5,000

Feb. 1

70,000 2,000

Accounts payable Foreign currency transaction loss Cash (to record payment of the account payable at an exchange rate of US $0.72 : CA $1)

Solutions Manual, Chapter 7

5,000

72,000

32.

Date Oct. 15

Dec. 31

Jan. 15

33.

Journal Entries Accounts receivable Sales (to record the sale of product at $1.17: €1)

468,000

Accounts receivable Foreign currency transaction gain (to record the increase in the account receivable to $1.24: €1)

28,000

Cash Foreign currency transaction loss Accounts receivable (to record receipt of payment of the account receivable at an exchange rate of $1.20: €1)

480,000 16,000

Date Nov 20

Dec. 31

Feb. 20

468,000

28,000

496,000

Journal Entries Accounts receivable Sales (to record the sale of product at $1.13:1CHF)

339,000 339,000

Foreign currency transaction loss Accounts receivable (to record the decrease in the account receivable to $1.10:1CHF)

9,000 9,000

Cash Foreign currency transaction gain Accounts receivable (to record receipt of payment of the account receivable at an exchange rate of $1.12:1CHF)

336,000 6,000 330,000

Advanced Accounting, 4th Edition

34.

a. Hedged Transaction Date 15-Oct-18

Accounts Accounts receivable (€420,000) Sales (to record the sale of inventories for €420,000 when the exchange rate is $1.25:€1)

Debit 525,000

31-Dec-18 Accounts receivable (€420,000) Sales (to record the increase in the $US value of the €420,000 when the exchange rate is $1.36:€1)

46,200

15-Jan-19

Accounts receivable (€420,000) Sales (to record the increase in the $US value of the €420,000 when the exchange rate is $1.40:€1)

16,800

Cash

588,000

Credit 525,000

46,200

16,800

Accounts receivable (€420,000) (to record the payment of €420,000 when the exchange rate is $1.40:€1)

588,000

FV Hedge Date 15-Oct-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Sales

33,600

Forward contract (liability) (to record the increase in the value of the forward contract liability: [$1.37:€1 - $1.29:€1] X €420,000 = $33,600) 15-Jan-19 Sales

33,600

12,600

Forward contract (liability) (to record the increase in the value of the forward contract liability: [$1.40:€1 - $1.37:€1] X €420,000 = $12,600) Forward contract (liability) Cash (to record the net settlement of the forward contract)

Solutions Manual, Chapter 7

12,600

46,200 46,200

b. Settle receivable Settle derivative Net cash

$588,000 (46,200) $541,800

Forward rate x sales

$541,800

Sales recognized in Q4 2018: Sales recognized in Q1 2019:

$537,600 4,200 $541,800

35.

a. Hedged Transaction Date 15-Nov-18

31-Dec-18

Accounts Debit Accounts receivable (€720,000) 993,600 Sales (to record the sale of inventories for €720,000 when the exchange rate is $1.38:€1) Sales

993,600

14,400

Accounts receivable (€720,000) (to record the increase in the $US value of the €720,000 when the exchange rate is $1.36:€1) 15-Feb-19

Credit

Sales

14,400

43,200

Accounts receivable (€720,000) (to record the increase in the $US value of the €720,000 when the exchange rate is $1.30:€1) Cash

43,200

936,000

Accounts receivable (€720,000) (to record the payment of €720,000 when the exchange rate is $1.37:€1)

936,000

continued

Advanced Accounting, 4th Edition

a. continued FV Hedge Date 15-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Forward contract (liability) Sales (to record the increase in the value of the forward contract liability: [$1.35:€1 - $1.33:€1] X €720,000 = $14,400)

14,400

15-Feb-19 Forward contract (liability) Sales (to record the increase in the value of the forward contract liability: [$1.33:€1 - $1.30:€1] X €720,000 = $5,400)

21,600

Cash

14,400

21,600

36,000

Forward contract (liability) (to record the net settlement of the forward contract)

36,000

b. Settle receivable Settle derivative Net cash

$936,000 36,000 $972,000

Forward rate x sales

$972,000

Sales recognized in Q4 2018: Sales recognized in Q1 2019:

$993,600 (21,600) $972,000

Solutions Manual, Chapter 7

36.

a. Hedged Transaction Date 20-Nov-18

Accounts Inventories

Debit 728,000

Accounts payable (€560,000) (to record the purchase of inventories for €560,000 when the exchange rate is $1.30:€1) 31-Dec-18

20-Feb-19

Credit 728,000

Cost of goods sold Accounts payable (€560,000) (to record the increase in the $US value of the €560,000 when the exchange rate is $1.40:€1)

56,000

Cost of goods sold Accounts payable (€560,000) (to record the increase in the $US value of the €560,000 when the exchange rate is $1.45:€1)

28,000

Accounts payable (€560,000) Cash (to record the payment of €560,000 when the exchange rate is $1.45:€1)

812,000

56,000

28,000

812,000

FV Hedge Date 20-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Forward contract (asset) Cost of goods sold (to record the increase in the value of the forward contract: [$1.42:€1 - $1.35:€1] X €560,000 = $10,500)

39,200

20-Feb-19 Forward contract (asset) Cost of goods sold (to record the increase in the value of the forward contract: [$1.45:€1 - $1.42:€1] X €560,000 = $4,500)

16,800

Cash

16,800

56,000

Forward contract (asset) (to record the net settlement of the forward contract)

39,200

56,000

Advanced Accounting, 4th Edition

b. Settle payable Settle derivative Net cash

$812,000 (56,000) $756,000

Forward rate x purchase

$756,000

Cost of goods sold recognized in Q4 2018: Sales recognized in Q1 2019:

$744,800 11,200 $756,000

37.

a. Hedged Transaction Date 20-Oct-18

Accounts Inventories

Debit 882,000

Accounts payable (€600,000) (to record the purchase of inventories for €600,000 when the exchange rate is $1.47:€1)

Credit 882,000

31-Dec-18 Accounts payable (€600,000) Cost of goods sold (to record the increase in the $US value of the €600,000 when the exchange rate is $1.40:€1)

42,000

20-Jan-19

Accounts payable (€600,000) Cost of goods sold (to record the increase in the $US value of the €600,000 when the exchange rate is $1.37:€1)

18,000

Accounts payable (€600,000) Cash (to record the payment of €600,000 when the exchange rate is $1.37:€1)

822,000

42,000

18,000

822,000

continued

Solutions Manual, Chapter 7

a. continued FV Hedge Date 20-Oct-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Cost of goods sold Forward contract (liability) (to record the increase in the value of the forward contract: [$1.44:€1 - $1.39:€1] X €600,000 = $30,000)

30,000

20-Jan-19 Cost of goods sold Forward contract (liability) (to record the increase in the value of the forward contract: [$1.39:€1 - $1.37:€1] X €600,000 = $4,500)

12,000

Forward contract (liability) Cash (to record the net settlement of the forward contract)

30,000

12,000

42,000 42,000

b. Settle payable Settle derivative Net cash

$(822,000) (42,000) $(864,000)

Forward rate x purchase

$(864,000)

Cost of goods sold recognized in Q4 2018: Sales recognized in Q1 2019:

$870,000 (6,000) $864,000

Advanced Accounting, 4th Edition

38.

a. Hedged Transaction Date 1-Nov-18

Accounts Investment in AFS Security Cash (to record the purchase of the AFS security for €500,000 when the exchange rate is $1.28:€1)

Debit 640,000

31-Dec-18 Investment in AFS Debt Security Gain (loss) on AFS security (to record the increase in the $US value of the €500,000 when the exchange rate is $1.30:€1)

10,000

31-Jan-19

Investment in AFS Debt Security Gain (loss) on AFS security (to record the increase in the $US value of the €500,000 when the exchange rate is $1.33:€1)

15,000

Cash

665,000

Credit 640,000

10,000

15,000

Investment in AFS Security (to record the receipt of €500,000 when the exchange rate is $1.33:€1)

665,000

FV Hedge Date 1-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Gain (loss) on AFS security Forward contract (liability) (to record the increase in the value of the forward contract: [$1.32:€1 - $1.31:€1] X €500,000 = $5,000)

5,000

31-Jan-19 Gain (loss) on AFS security Forward contract (liability) (to record the increase in the value of the forward contract: [$1.33:€1 - $1.32:€1] X €500,000 = $5,000)

5,000

Forward contract (liability) Cash (to record the net settlement of the forward contract)

Solutions Manual, Chapter 7

5,000

10,000 10,000

39.

Sell security Settle derivative Net cash

$665,000 (10,000) $655,000

Forward rate x sales

$655,000

a. Hedged Transaction Date 15-Nov-18

31-Dec-18

15-Feb-19

Accounts Investment in AFS Security Cash (to record the purchase of the AFS security for €250,000 when the exchange rate is $1.36:€1)

Debit 340,000

Gain (loss) on AFS security Investment in AFS Debt Security (to record the decrease in the $US value of the €250,000 when the exchange rate is $1.30:€1)

15,000

Gain (loss) on AFS security Investment in AFS Debt Security (to record the decrease in the $US value of the €250,000 when the exchange rate is $1.28:€1)

5,000

Cash

Credit 340,000

15,000

5,000

320,000

Investment in AFS Security (to record the receipt of €250,000 when the exchange rate is $1.28:€1)

320,000

continued

Advanced Accounting, 4th Edition

a. continued FV Hedge Date 15-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Forward contract (asset) Gain (loss) on AFS security (to record the increase in the value of the forward contract: [$1.34:€1 - $1.32:€1] X €250,000 = $2,000)

5,000

15-Feb-19 Forward contract (asset) Gain (loss) on AFS security (to record the increase in the value of the forward contract: [$1.32:€1 - $1.28:€1] X €250,000 = $5,000)

10,000

Cash

5,000

10,000

15,000

Forward contract (asset) (to record the net settlement of the forward contract)

15,000

b. Sell security Settle derivative Net cash

$320,000 15,000 $335,000

Forward rate x sales

$335,000

Solutions Manual, Chapter 7

40.

a. Hedged Transaction Date 10-Nov-18 31-Dec-18

10-Feb-19

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry. Hedged firm commitment (asset) 31,500 Sales 31,500 (to record the creation of a firm commitment asset equal to the complement of the loss on the forward contract when the forward rate changed to $1.22:€1) Cash 800,100 Sales 800,100 (to record sale of inventory at spot rate) Hedged firm commitment (asset) 12,600 Sales 12,600 (to record the change in value of the firm commitment asset through the settlement date when the exchange rate is $1.27:€1) Sales 44,100 Hedged firm commitment (asset) 44,100 (to reclassify the firm commitment asset to sales when the sales transaction is completed )

FV Hedge Date 10-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry. 31-Dec-18 Sales 31,500 Forward contract (liability) 31,500 (to record the increase in the value of the forward contract: [$1.25:€1 - $1.20:€1] X €630,000 = $31,500) 10-Feb-19 Sales 12,600 Forward contract (liability) 12,600 (to record the increase in the value of the forward contract: [$1.27:€1 - $1.25:€1] X €630,000 = $12,600) Forward contract (liability) 44,100 Cash 44,100 (to record the net settlement of the forward contract)

Advanced Accounting, 4th Edition

b. Sale of goods Settle derivative Net cash

$800,100 (44,100) $756,000

Forward rate x sales

$756,000

Sales recognized in Q4 2018: Sales recognized in Q1 2019:

$ ― 756,000 $756,000

41.

a. Hedged Transaction Date 5-Dec-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18

Sales

10,800

Hedged firm commitment (liability) (to record the creation of a firm commitment liability equal to the complement of the gain on the forward contract when the forward rate changed to $1.18:€1) 5-Mar-19

Cash

10,800

417,600

Sales (to record sale of inventory at spot rate)

417,600

Sales

7,200

Hedged firm commitment (liability) (to record the change in value of the firm commitment liability through the settlement date when the exchange rate is $1.16:€1) Hedged firm commitment (liability) Sales (to reclassify the firm commitment liability to sales when the sales transaction is completed )

7,200

18,000 18,000

continued

Solutions Manual, Chapter 7

a. continued FV Hedge Date 5-Dec-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Forward contract (asset) Sales (to record the increase in the value of the forward contract: [$1.21:€1 - $1.18:€1] X €360,000 = $10,800)

10,800

5-Mar-19 Forward contract (asset) Sales (to record the increase in the value of the forward contract: [$1.18:€1 - $1.16:€1] X €360,000 = $7,200)

7,200

Cash

10,800

7,200

18,000

Forward contract (asset) (to record the net settlement of the forward contract)

18,000

b. Sale of goods Settle derivative Net cash

$417,600 18,000 $435,600

Forward rate x sales

$435,600

Sales recognized in Q4 2018: Sales recognized in Q1 2019:

$ — 435,600 $435,600

Advanced Accounting, 4th Edition

42.

a. Hedged Transaction Date 15-Oct-18 31-Dec-18

15-Mar-19

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry. Depreciation expense 24,000 Hedged firm commitment (liability) 24,000 (to record the creation of a firm commitment liability equal to the complement of the gain on the forward contract when the forward rate changed to $1.31:€1) Depreciation expense 8,000 Hedged firm commitment (liability) 8,000 (to record the change in value of the firm commitment liability through the settlement date when the exchange rate is $1.32:€1) Plant and equipment 1,056,000 Cash 1,056,000 (to record the purchase of fixed assets at spot rate) Hedged firm commitment (liability) 32,000 Plant and equipment 32,000 (to reclassify the firm commitment liability to the plant and equipment account when the purchase transaction is completed )

FV Hedge Date 15-Oct-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry. 31-Dec-18 Forward contract (asset) 24,000 Depreciation expense 24,000 (to record the increase in the value of the forward contract: [$1.31:€1 - $1.28:€1] X €800,000 = $24,000) 15-Mar-19 Forward contract (asset) 8,000 Depreciation expense 8,000 (to record the increase in the value of the forward contract: [$1.32:€1 - $1.32:€1] X €800,000 = $8,000) Cash 32,000 Forward contract (asset) 32,000 (to record the net settlement of the forward contract)

Solutions Manual, Chapter 7

43.

Purchase Equipment Settle derivative Net cash

$(1,056,000) 32,000 $(1,024,000)

Forward rate x sales

$(1,024,000)

a. Hedged Transaction Date 5-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18

Hedged firm commitment (asset) Depreciation expense (to record the creation of a firm commitment liability equal to the complement of the gain on the forward contract when the forward rate changed to $1.32:€1)

26,000

Hedged firm commitment (asset) Depreciation expense (to record the change in value of the firm commitment liability through the settlement date when the exchange rate is $1.30:€1)

13,000

Plant and equipment (asset) Cash (to record the purchase of fixed assets at spot rate)

845,000

Plant and equipment Hedged firm commitment (asset) (to reclassify the firm commitment liability to the plant and equipment account when the purchase transaction is completed )

39,000

20-Mar-19

26,000

13,000

845,000

39,000

continued

Advanced Accounting, 4th Edition

a. continued FV Hedge Date 5-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Depreciation expense Forward contract (liability) (to record the increase in the value of the forward contract: [$1.36:€1 - $1.32:€1] X €650,000 = $26,000)

26,000

20-Mar-19 Depreciation expense Forward contract (liability) (to record the increase in the value of the forward contract: [$1.32:€1 - $1.30:€1] X €650,000 = $13,000)

13,000

Forward contract (liability) Cash (to record the net settlement of the forward contract)

39,000

26,000

13,000

39,000

b. Purchase Equipment Settle derivative Net cash

$(845,000) (39,000) $(884,000)

Forward rate x sales

$(884,000)

Solutions Manual, Chapter 7

44.

a. Hedged Transaction Date 20-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18

No entry.

20-Feb-19

Cash

669,600

Sales (to record sale of inventory at spot rate)

669,600

CF Hedge Date 20-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 OCI - Foreign currency transaction loss 16,200 Forward contract (liability) (to record the increase in the value of the forward contract: [$1.22:€1 - $1.19:€1] X €540,000 = $16,200) 20-Feb-19 Sales

16,200

10,800

Forward contract (liability) (to record the increase in the value of the forward contract: [$1.24:€1 - $1.22:€1] X €540,000 = $10,800)

10,800

Note: this is adjusted to Sales (instead of OCI) because this is the same period as the sale that is being hedged. An alternative approach is to debit OCI and then make a separate entry to reclassify the amount out of AOCI and into Sales.

Forward contract (liability) 27,000 Cash (to record the net settlement of the forward contract) Sales

16,200

AOCI - Foreign currency transaction loss (to record the reclassification of the AOCI FC transaction losses to sales in the period of the transaction)

27,000

16,200

Advanced Accounting, 4th Edition

b. Sale of goods Settle derivative Net cash

$669,600 (27,000) $642,600

Forward rate x sales

$642,600

Sales recognized in Q4 2018: Sales recognized in Q1 2019:

$ ― 642,600 $642,600

45.

a. Hedged Transaction Date 15-Oct-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 No entry.

1-Feb-19

Cash

737,100

Sales (to record sale of inventory at spot rate)

737,100

continued

Solutions Manual, Chapter 7

a. continued CF Hedge Date 15-Oct-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Forward contract (asset) OCI - Foreign currency transaction gain (to record the increase in the value of the forward contract: [$1.21:€1 - $1.18:€1] X €630,000 = $18,900)

18,900

1-Feb-19 Forward contract (asset) Sales (to record the increase in the value of the forward contract: [$1.18:€1 - $1.17:€1] X €630,000 = $6,300)

6,300

18,900

6,300

Note: this is adjusted to Sales (instead of OCI) because this is the same period as the sale that is being hedged. An alternative approach is to credit OCI and then make a separate entry to reclassify the amount out of AOCI and into Sales

Cash

25,200

Forward contract (asset) (to record the net settlement of the forward contract) AOCI - Foreign currency transaction gain Sales (to record the reclassification of the AOCI FC transaction losses to sales in the period of the transaction)

25,200

18,900 18,900

b. Sale of goods Settle derivative Net cash

$737,100 25,200 $762,300

Forward rate x sales

$762,300

Sales recognized in Q4 2018: Sales recognized in Q1 2019:

$ — 762,300 $762,300

Advanced Accounting, 4th Edition

46.

a. Hedged Transaction Date 10-Oct-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18

No entry.

10-Mar-19

Inventory

444,500

Cash (to record sale of inventory at spot rate) 15-May-19

444,500

Cost of goods sold Inventory

444,500 444,500

CF Hedge Date 10-Oct-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 Forward contract (asset) OCI - Foreign currency transaction gain (to record the increase in the value of the forward contract: [$1.25:€1 - $1.20:€1] X €350,000 = $17,500)

17,500

10-Mar-19 Forward contract (asset) OCI - Foreign currency transaction gain (to record the increase in the value of the forward contract: [$1.27:€1 - $1.25:€1] X €350,000 = $7,000)

7,000

17,500

7,000

(Note: ASC 815-30-35-3(b) states that amounts in accumulated other comprehensive income related to the derivative designated as a hedging instrument included in the assessment of hedge effectiveness are reclassified to earnings in the same period or periods during which the hedged forecasted transaction affects earnings) (Note: According to ASC 815-30-35-39, "If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gains and losses in accumulated other comprehensive income that are included in the assessment of effectiveness shall be reclassified into earnings in the same period or periods during which the asset acquired or liability incurred affects earnings (such as in the periods that depreciation expense, interest expense, or cost of sales is recognized).") continued

Solutions Manual, Chapter 7

a. continued CF Hedge continued Date 10-Mar-19

Accounts

Debit

Credit

continued

Cash

24,500

Forward contract (asset) (to record the net settlement of the forward contract) 15-May-19 AOCI - Foreign currency transaction gain Cost of goods sold (to record the reclassification of the AOCI FC transaction losses to sales in the period of the transaction)

24,500

24,500 24,500

b. Purchase of inventory Settle derivative Net cash

$(444,500) 24,500 (420,000)

Forward rate x sales

$(420,000)

CGS recognized in Q4 2018: CGS recognized in Q1 2019: CGS recognized in Q2 2019:

― — 420,000 $420,000

Advanced Accounting, 4th Edition

47.

a. Hedged Transaction Date 15-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18

No entry.

25-Mar-19

Inventory

968,000

Cash (to record sale of inventory at spot rate) 1-Jun-19

968,000

Cost of goods sold Inventory

968,000 968,000

CF Hedge Date 15-Nov-18

Accounts Debit Credit Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry.

31-Dec-18 OCI - Foreign currency transaction loss Forward contract (liability) (to record the increase in the value of the forward contract: [$1.26:€1 - $1.21:€1] X $800,000 = $24,000)

24,000

25-Mar-19 OCI - Foreign currency transaction loss Forward contract (liability) (to record the increase in the value of the forward contract: [$1.26:€1 - $1.26:€1] X $800,000 = $40,000)

40,000

24,000

40,000

Solutions Manual, Chapter 7

a. continued CF Hedge continued Date 25-Mar-19

Accounts

Debit

Credit

continued

Forward contract (liability) Cash (to record the net settlement of the forward contract) 1-Jun-19 Cost of goods sold AOCI - Foreign currency transaction loss (to record the reclassification of the AOCI FC transaction losses to sales in the period of the transaction)

64,000 64,000

b. Purchase of inventory Settle derivative Net cash

$ (968,000) (64,000) $(1,032,000)

Forward rate x sales

$(1,032,000)

CGS recognized in Q4 2018: CGS recognized in Q1 2019: CGS recognized in Q1 2019:

— ― 1,032,000 $1,032,000

Advanced Accounting, 4th Edition

48. Hedged Transaction Date 12-Jan-19

Accounts (No entry)

31-Mar-19

(No entry)

30-Jun-19

Cash

Debit

Credit

792,000

Sales (to record sale of inventory at the spot rate)

792,000

CF Hedge: Entries assuming all of excluded option value change runs through income Date Accounts Debit 12-Jan-19 Option contract (asset) 18,000 Cash (Option recorded at fair value. Also, must document hedging relationship and hedge effectiveness in accounting system.)

18,000

31-Mar-19 OCI - Cash flow hedge loss Option contract (asset) (to recognize the change in the fair value of the option)

7,200

Sales

Credit

7,200

OCI - Cash flow hedge loss (to recognize in current earnings [i.e., sales] the change in the other sources of option value as the ineffective portion of the hedge) 30-Jun-19 OCI - Cash flow hedge loss Option contract (asset) (to recognize the change in the fair value of the option) Sales

7,200

10,800 10,800

10,800

OCI - Cash flow hedge loss (to recognize in current earnings [i.e., sales] the change in the other sources of option value as the ineffective portion of the hedge)

10,800

The option contract expires unexercised. continued

Solutions Manual, Chapter 7

CF Hedge: Entries assuming excluded option value amortized through income Date Accounts Debit 12-Jan-19 Option contract (asset) 18,000 Cash (Option recorded at fair value. Also, must document hedging relationship and hedge effectiveness in accounting system.)

18,000

31-Mar-19 OCI - Cash flow hedge loss Option contract (asset) (to recognize the change in the fair value of the option)

7,200

Sales

Credit

7,200

9,000

10,800 10,800

9,000

OCI - Cash flow hedge loss (to recognize in current earnings [i.e., sales] the change in the other sources of option value as the ineffective portion of the hedge)

9,000

The option contract expires unexercised.

Advanced Accounting, 4th Edition

49. Hedged Transaction Date 5-Jan-19

Accounts (No entry)

31-Mar-19

(No entry)

30-Jun-19

Cash

Debit

Credit

907,500

Sales (to record sale of inventory at the spot rate)

907,500

CF Hedge: Entries assuming all of excluded option value change runs through income Date Accounts Debit 5-Jan-19 Option contract (asset) 22,500 Cash (Option recorded at fair value. Also, must document hedging relationship and hedge effectiveness in accounting system.)

22,500

31-Mar-19 Option contract (asset) OCI – Cash flow hedge gain (to recognize the change in the fair value of the option)

28,500

Sales

Credit

28,500

9,000

OCI - Cash flow hedge gain (to recognize in current earnings [i.e., sales] the change in the other sources of option value as the ineffective portion of the hedge) 30-Jun-19 Option contract (asset) OCI - Cash flow hedge gain (to recognize the change in the fair value of the option) Sales

9,000

16,500 16,500

13,500

OCI - Cash flow hedge gain (to recognize in current earnings [i.e., sales] the change in the other sources of option value as the ineffective portion of the hedge) Cash

13,500

67,500

Option contract (asset) (to record the net settlement of the option contract)

67,500

continued

Solutions Manual, Chapter 7

Date 30-Jun-19

Accounts AOCI - Cash flow hedge gain Sales (to record the reclassification of the cash flow hedge gains for the changes in intrinsic value to sales in the period of the transaction)

Debit 67,500

Credit 67,500

CF Hedge: Entries assuming excluded option value amortized through income Date Accounts Debit 5-Jan-19 Option contract (asset) 22,500 Cash (Option recorded at fair value. Also, must document hedging relationship and hedge effectiveness in accounting system.)

22,500

31-Mar-19 Option contract (asset) OCI - Cash flow hedge gain (to recognize the change in the fair value of the option)

28,500

Sales

28,500

11,250

16,500 16,500

11,250

OCI - Cash flow hedge gain (to recognize in current earnings [i.e., sales] the change in the other sources of option value as the ineffective portion of the hedge) Cash

11,250

67,500

Option contract (asset) (to record the net settlement of the option contract)

67,500

AOCI - Cash flow hedge gain 67,500 Sales (to record the reclassification of the cash flow hedge gains for the changes in intrinsic value to sales in the period of the transaction)

Credit

67,500

Advanced Accounting, 4th Edition

50.

a. We are concerned that the $US may strengthen vis-à-vis the NZD during the interim, thus reducing the $US value of the forecasted sales. b. We will account for this transaction as a cash flow hedge since it is a hedge of exposure relating to a forecasted purchase of inventory. Changes in the options’ time value are reflected in current earnings. Changes in the options’ intrinsic value are deferred in other comprehensive income. Unrealized gains or losses on the put option will be deferred in accumulated other comprehensive income and will be reclassified to earnings when the sale is recognized (i.e., when earnings are impacted). c. Foreign currency options (FV) Other comprehensive income (To record the change in the fair value of the option)

280,000 280,000

Sales

20,000

Other comprehensive income (To record the change in the time value of the option--not using amortization method)

51E.

20,000

a. Since the forward price is less than the spot price, the market is expecting the price of copper to decline. b. Our firm commitment locks in the price of copper at the forward rate. However, if the price of copper declines, we are foregoing the opportunity to purchase it at the lower spot price. In the case of declining prices, locking in the higher price means the firm commitment would be economically costly. The purchase of a forward contract to sell copper at $3.10 allows us to benefit from such a price decline and offset the fair value losses from the firm commitment. c. After the firm commitment and the derivative contract are settled, the inventory will be recognized at its fair value on the purchase date (i.e., the spot rate on the purchase date times the quantity purchased). d. The net purchase price for the inventory is the spot rate of $2.75 times 100,000 lbs., or $275,000. Our forward contract will be worth an inflow of $35,000 (($3.10-$2.75) x 100,000) at the settlement date, and our firm commitment specifies that we pay $310,000 ($3.10 x 100,000 lbs.) for the copper purchase. This hedge made sure we didn’t overpay for the copper at settlement; although, this arrangement also would have caused us to forego any profits if the spot price of copper increased above $3.10/lb.

Solutions Manual, Chapter 7

52E.

Date

Journal Entries

Sep. 30

No entry

Dec. 31

Cost of goods sold Firm purchase commitment liability (to record the loss on the firm purchase commitment [($2.75/lb. - $3.10/lb.) x 100,000 lbs. = $35,000)

35,000

Forward contract (asset)

35,000

Cost of goods sold (to record the gain on the forward contract [($3.10/lb. $2.75/lb.) x 100,000 lbs. = $35,000

Cash

35,000

Forward contract (asset) (to record the settlement of the forward contract) Firm purchase commitment liability Inventory Cash (to record the purchase of the 100,000 lbs. of copper inventory at the spot rate of $2.75/lb.)

35,000

35,000 275,000 310,000

The inventory is reported at acquisition date market price of $2.75/lb. x 100,000 lbs. = $275,000. The net cash paid for the inventory is $310,000 - $35,000 = $275,000. 53E.

a. The loss on the decline in fair value of the inventory is $30,000 and the gain on the futures contract is $25,000 for a net loss of $5,000. b. The net loss of $5,000 will be reflected in net income since this is a hedge of an existing asset and is, therefore, a fair value hedge.

Advanced Accounting, 4th Edition

54E.

a. We are a manufacturer that uses gold in our products and we want to mitigate the risk of future price increases as we will not be able to readily increase the selling price of our products. If gold prices increase, the profit on the purchased call options will approximately offset the higher price that we will pay for the gold to be used in our manufacturing process. And, if gold prices decline, we will lose the premium we paid for the call options, but can then buy gold at the lower price. b. Option Fair Value Analysis Date January

Time Value $1,500*

April

Intrinsic Value $0**

Total Fair Value Prior to Exercise $1,500

$5,000***

$5,000

* 2 April calls = 200 x $7.50 = $1,500 ** Intrinsic value is calculated as the difference between the spot price and the strike price. For April the intrinsic value is ($291 spot - $291 strike) x 200 = $0 *** ($316 - $291) x 200 = $5,000

c. We will account for this transaction as a cash flow hedge since it is a hedge of exposure relating to a forecasted purchase of inventory. d. Changes in the options’ time value are reflected in current earnings. Changes in the options’ intrinsic value are deferred in other comprehensive income. e. Unrealized gains or losses on the call option will be deferred in accumulated other comprehensive income and will be reclassified to earnings when the inventory is sold (i.e., when earnings are impacted). 55E. Debit (Credit) Cash Recognize the change in the FV of the derivative

Derivative $20,000

Recognize the change in the FV of the inventory Recognize revenue from the sale

Inventory

Earnings a $(20,000)

$(20,000) $790,000

$20,000 $(790,000)

Recognize COGS relating to the sale

$(730,000)

Recognize settlement of the derivative

$20,000

$(20,000)

Total

$810,000

―

$730,000 $

$(750,000)

$(60,000)

a The change in fair value of the hedging derivative is presented in the same income statement line item

as the earnings effect of the hedged item.

Solutions Manual, Chapter 7

―

56E. Debit (Credit) Cash Recognize the change in the FV of the derivative

Derivative $18,000

Recognize the change in the FV of the inventory Recognize revenue from the sale

Inventory

Earnings a $(18,000)

$(20,000) $790,000

$20,000 $(790,000)

Recognize COGS relating to the sale Recognize settlement of the derivative

$18,000

$(18,000)

Total

$808,000

―

$(730,000)

$730,000 $ ―

$(750,000)

$(58,000)

a The change in fair value of the hedging derivative is presented in the same income statement line item

as the earnings effect of the hedged item.

The difference between the effect on earnings in Exercise 56 and the effect on earnings in Exercise 55 is the $2,000 of hedge ineffectiveness. 57E. Debit (Credit) Cash Recognize the change in the FV of the derivative Recognize revenue from the sale

$884,000

Recognize settlement of the derivative

$16,000

Derivative

OCI

$16,000

$(16,000)

$900,000

― $(884,000)

―

$(16,000)

Reclassify the change in the FV of the derivative Total

Earnings

―

$16,000

$(16,000)

―

$(900,000)

58E.

The value of the forward contact on December 15 is ($1,250 - $1,170) x 800 = $64,000 and we will receive that amount when the forward contact is settled for cash on December 15. The gold inventory will be purchased for the contract price of $1,250 or $1,000,000 and will be recorded at $1,000,000 - $64,000 = $936,000, which is the same amount as the December 15 spot rate times the quantity purchased (i.e., 800 x $1,170 = $936,000).

59E.

The $21.0 million recognized in OCI decreased the Accumulative Other Comprehensive Income account in Tiffany’s Stockholders’ equity in 2018. The $13.0 million loss represents the amount that was reclassified from AOCI into earnings during 2018. This amount relates to deferred losses on cash flow hedges for which the underlying transaction has occurred and has affected earnings. Of the $13.0 million recognized in earnings, $0.5 million ($0.1 + $0.3 - $0.9) was recognized in COGS. Of the remaining, $11.1 of losses were on cross-currency swaps and recognized in “Other (income) expenses, net” and the remainder relating to interest rate swaps, in “Interest expense and financing costs.”

Advanced Accounting, 4th Edition

60.

Date a. May

Journal Entries A/R (€750,000) Sales To record the sale of €750,000 at $1.32:$1€

990,000 990,000

No entry is made to record the FV of the futures contracts, because at the time of their inception their FV is zero. b. June 30

Sales

37,500

A/R (€750,000) To record decline in the reported amount of the receivable

c. July

37,500

Forward contract Sales To record gain on forward contract

22,500

Forward contract Sales To record gain on forward contract

7,500

Cash Sales

22,500

7,500

937,500 15,000

A/R (€750,000) To settle A/R (€750,000) Cash Forward contract To settle futures contract

Solutions Manual, Chapter 7

952,500

30,000 30,000

61.

A contract to purchase equipment for a fixed price is an unrecognized firm commitment. The hedge of the foreign currency exposure in an unrecognized firm commitment is considered a foreign currency fair value hedge. Accordingly, the forward contract is recognized as an asset or liability and marked to market through the income statement as depreciation expense. The change in the value of the firm commitment that arises due to fluctuations in the forward exchange rate is also reflected in income and as an asset or liability on the balance sheet. The equipment is recorded at the amount of the liability, net of the amount previously recorded for the firm commitment. Date a. Sept

No entry required

Journal Entries

b. Dec

Forward contract

160,000

Foreign exchange rate (to recognize the change in the fair value of the forward exchange contract at December 31: 4 million x ($1.27-$1.23)) Foreign exchange loss

160,000

Firm commitment (to recognize the change in the fair value of the firm commitment that is due to changes in exchange rates)

c. March

Forward contract

160,000

40,000

Foreign exchange rate (to recognize the change in the fair value of the forward exchange contract as of March 31) Foreign exchange loss

40,000

Firm Commitment (to recognize the change in the fair value of the firm commitment that is due to changes in exchange rates) Cash

40,000

200,000

Forward contract (to record settlement of derivative contract) Equipment

200,000

4,920,000 Cash

Firm commitment

200,000 Equipment

4,920,000

200,000

Advanced Accounting, 4th Edition

62.

a. Hedged Transaction Date 15-Oct-18

Accounts Investment in AFS Security Cash (to record the purchase of the AFS security for €750,000 when the exchange rate is $1.15:€1)

Debit 862,500

31-Dec-18 Investment in AFS Security Gain (loss) on AFS security (to record the increase in the $US value of the €750,000 when the exchange rate is $1.20:€1)

37,500

15-Jan-19

Investment in AFS Security Gain (loss) on AFS security (to record the increase in the $US value of the €750,000 when the exchange rate is $1.23:€1)

22,500

Cash

922,500

Credit 862,500

37,500

22,500

Investment in AFS Security (to record the receipt of €750,000 when the exchange rate is $1.23:€1)

922,500

FV Hedge Date Accounts Debit Credit 15-Oct-18 Must document hedging relationship and hedge effectiveness in accounting system. FV = 0 at inception, so no entry. 31-Dec-18 Gain (loss) on AFS security Forward contract (liability) (to record the increase in the value of the forward contract: [$1.22:€1 - $1.19:€1] X €750,000 = $22,500)

22,500

15-Jan-19 Gain (loss) on AFS security Forward contract (liability) (to record the increase in the value of the forward contract: [$1.23:€1 - $1.22:€1] X €750,000 = $7,500)

7,500

Forward contract (liability) Cash (to record the net settlement of the forward contract)

Solutions Manual, Chapter 7

22,500

7,500

30,000 30,000

63.

Sell security Settle derivative Net cash

$922,500 (30,000) 892,500

Forward rate x sales

$892,500

a. This transaction should be accounted for as a cash flow hedge. Our projected sales are considered a forecasted transaction. A derivative instrument that hedges the foreign currency exposure to the variability of cash flows associated with a forecasted transaction will be a foreign currency cash flow hedge. The use of an option contract to offset a loss qualifies for cash-flow hedge accounting, provided that it is highly effective. b. We must record the fair value of the option on its balance sheet. Changes in the time value of the option are recorded currently in earnings (time value is considered to be the excess of the fair value of the option over their intrinsic value - ASC 81520-20). Changes in the option’s intrinsic value, to the extent that they are effective as a hedge, are recorded in other comprehensive income. The balance in other comprehensive income is reclassified to earnings at the date of the sale (ASC 815-3035-38 through 35-41). c. Date September 30 December 31 March 31 (next year)

Time Value (dealer quote) $20,000 $9,000 $0

Intrinsic value $0 $ 238,095* $ 652,174 **

Total value $20,000 $247,095 $ 652,174

Intrinsic value is computed based on the changes in spot rates as compared to the strike rate: (NZD 10,000,000 ÷ 2.00 = $5,000,000) less (NDZ 10,000,000 ÷ 2.10 = $4,761,905) = $238,095. ** (NZD 10,000,000 ÷ 2.00 = $5,000,000) less (FC 10,000,000 ÷ 2.30 = $4,347,826) = $652,174. The increase in intrinsic value is $414,079 ($652,174 less $238,095).

Advanced Accounting, 4th Edition

d. 1. Foreign currency option Cash (To record the premium paid on the purchased option)

20,000 20,000

2. Loss on hedging activity 11,000 Foreign currency option 11,000 (To record the change in the time value of the option ($9,000 - $20,000)) Foreign-currency option 238,095 Other comprehensive income 238,095 (To record the change in the intrinsic value of the option ($238,095 - $0) 3. Loss on hedging activity Foreign currency option (To record the change in the time value of the option)

9,000 9,000

Foreign currency option 414,079 Other comprehensive income (To record the change in the intrinsic value of the option) 4. Cash

4,347,826

Sales (To record NZD 10,000,000 in sales at a spot rate of NZD 2.30 : $1) 5. Cash

414,079

4,347,826

652,174

Foreign currency option (To record net cash settlement of the option at its maturity) 6. Accumulated other comprehensive income 652,174 Sales (To transfer the gain on the hedging activity to earnings)

652,174

e. By entering into the option contract, we contracted to receive $5,000,000 from our anticipated NZD 10,000,000 sales, less the option contract premium. On March 31 we received $4,347,826 from sales at the spot rate and also recognized in sales $652,174 from the gain on the option contract for a total of $5,000,000.

Solutions Manual, Chapter 7

64.

a. Date

Forward rate ($US:CAD)

February 28

$0.7067

March 31

$0.7143

April 30

$0.7353

Value of forward contract $33,500 = CAD 5MM x ($0.7067-$0.7000) $71,500 = CAD 5MM x ($0.7143-$0.7000) $176,500 = CAD 5MM x ($7353-$0.7000)

b. Date

Journal entries

February 28

Forward contract 33,500 Gain on forward contract (To record change in fair value of forward contract) Loss on firm commitment

33,500

Fair value of firm commitment (To record change in fair value of firm commitment) March 31

33,500

Forward contract Gain on forward contract (To record change in fair value of forward contract = $38,000 = $71,500 - $33,500)

33,500

38,000 38,000

Loss on firm commitment 38,000 Fair value of firm commitment (To record change in fair value of firm commitment) Inventory Accounts payable (To record purchase of inventory at the spot exchange rate at March 31 – CAD 5,000,000 x $0.7092:CAD 1 = $3,546,000)

3,546,000

Fair value of firm commitment Inventory To adjust inventory value to reflect the hedge of the firm commitment.

71,500

38,000

3,546,000

71,500

Continued

Advanced Accounting, 4th Edition

64.

b. continued Date April 30

Journal entries Forward contract 105,000 Gain on forward contract (To record change in fair value of forward contract) Loss on transaction remeasurement of accounts payable Accounts payable (To remeasure the carrying amount of accounts payable at the prevailing spot rate in accordance with ASC 830 – CAD 5,000,000 x $0.7353:CAD 1 = $3,676,500 - $3,546,000 = $130,500). Accounts payable Cash To record payment of accounts payable ($3,546,000 + $130,500)

105,000

130,500 130,500

3,676,500 3,676,500

Cash Forward contract To record net settlement of forward contract.

176,500 176,500

c. The cash paid for the inventory is $3,676,500 - $176,500 = $3,500,000, the amount we locked in at the inception of the forward contract. Had we not hedged this exposure, our cash outlay would have been $176,500 higher. Our inventory is recognized at a carrying value of $3,546,000 - $71,500 = $3,474,500. This will be the amount reflected in COGS when the inventory is sold. The difference between COGS and the cash outflow for the settlement of the payable of $25,500 reflects the gain on the forward contract between the purchase of inventory on March 31 and the settlement of the forward contract and account payable on April 30. Finally, the transaction loss on the remeasurement of the account payable in the amount of $130,500 is nearly offset by the gain on the forward contract of $105,000.

Solutions Manual, Chapter 7

65.E

Date a. 12/1/18

Journal Entries Cotton inventory Accounts payable (to record purchase of cotton inventory – 10 million lbs. @ $0.95/lb.)

9,500,000 9,500,000

b. 12/1/18

No entry is made to record the fair value of the futures contracts, because at the time of their inception their fair value is zero.

c. 12/31/18

Cost of goods sold Cotton inventory (To adjust the carrying amount of the inventory for changes in its fair value = 10 million lbs. x [$0.94 - $0.85])

900,000

Futures contract Cost of goods sold (To record the gain on futures contract – 10 million lbs. x [$0.86 - $0.76])

1,000,000

Cash

1,900,000

d. 6/1/19

900,000

1,000,000

Cost of goods sold Futures contract (To close out futures contract and recognize the gain on the futures contracts from 12/31/2018 to 6/1/2019 = 10 million lbs. x ($0.76 - $0.67) Cost of goods sold Cotton inventory (To adjust the carrying amount of the inventory that is due to the decrease in spot prices = 10 million lbs. x [$0.85 - $0.67])

900,000 1,000,000

1,800,000 1,800,000

continued

Advanced Accounting, 4th Edition

d. continued

Date

Journal Entries

6/1/19

Accounts receivable Cost of goods sold1 Cotton sales Cotton inventory (To record the sale of 10,000,000 pounds of cotton inventory at $0.67/lb.)

$9,500,000 (900,000) (1,800,000) $6,800,000

6,700,000 6,800,000 6,700,000 6,800,000

Avg. cost (10 million lbs. x $0.95) 12/31/18 adj 6/01/19 adj

By hedging its cotton inventory at December 1, 2018, the company locked in a loss of 8¢/lb. ($0.94/lb. spot price vs. $0.86/lb. futures price), or $800,000 on 10 million lbs. of inventory. Its inventory declined by $0.27/lb. ($0.94/lb. to $0.67/lb.) over this period of time, resulting in an inventory loss of $2,700,000 on 10 million lbs. of inventory. However, the futures contract increased in value by $0.19/lb. ($0.86/lb. – $0.67/lb.) or $1,900,000. Under FASB ASC 815, the change in value of both the hedged inventory and the hedging instrument (the futures contract) must be reflected in income. 66.E

Date

Journal Entries

a. January

No entry is made to record the fair value of the futures contracts, because at the time of their inception their fair value is zero.

b. March 31

Futures contract Other comprehensive income (to record unrealized gain on futures contract = [$2.77 - $2.68] x 300,000 lbs.)

27,000

Inventory Cash (to purchase inventory – 300,000 lbs. @ $2.94/lb.)

882,000

Cash

78,000

c. May 31

Futures contract Other comprehensive income (to record the settlement of the futures contact at a current fair value of $2.94/lb. ($78,000 = 300,000 lbs. x [$2.94-$2.68]/lb.) and the increase in value of the futures contract 3/31-5/31 ($51,000 = 300,000 lbs. x [$2.94-$2.77])

Solutions Manual, Chapter 7

27,000

882,000

27,000 51,000

d. Date June 1

Journal Entries Cash Cost of goods sold Sales Inventory (to recognize sale of 300,000 lbs. of inventory in June @ market price of $3.16/lb.)

948,000 882,000

Other comprehensive income Cost of goods sold (to recognize deferred gain as a reduction of cost of goods sold $27,000 + $51,000)

78,000

948,000 882,000

78,000

The deferred gain on the futures contract is recorded in accumulated other comprehensive income until the inventory is sold, at which time it is reflected in income as a reduction of cost of goods sold. The income statement for this transaction is as follows: Sales Cost of Goods Sold Gross Profit

948,000 804,000 (882,000 – 78,000) 96,000

The Cost of Goods Sold reflects the purchase price of $2.68/lb. ($804,000 = 300,000 lbs. x $2.68/lb.) locked in by the futures contract.

Advanced Accounting, 4th Edition

67.E

The hedge of the interest-rate exposure in a recognized fixed-rate liability is considered a fair value hedge. Accordingly, the swap is reported on the balance sheet as an asset or liability at fair value with changes in fair value reflected in the income statement each reporting period. The change in the fair value of the debt (that is, the gain or loss on the hedged item) attributable to changes in the benchmark interest rate (i.e., six-month U.S. LIBOR) is also reflected in earnings through adjustments to the debt’s carrying amount. Date a. June 30, (year of borrowing)

Journal Entries Cash

25,000,000

Debt (to record debt) b. December 31

25,000,000

Interest expense Cash (to record semiannual interest payment: $25 mil. x 7.5%/2 = $937,500)

937,500

Cash

187,500

937,500

Interest expense (to record the settlement of the semiannual swap-amount receivable at 7.5%, less the amount payable at LIBOR, 6%, as an adjustment to interest: $25 mil x [7.5% - 6%]/2 = $187,500)

Solutions Manual, Chapter 7

187,500

Interest expense Debt (to record the change in the debt’s fair value that is attributable to changes in the benchmark interest rate (given) at the end of the first reporting period)

68,750

Interest expense Gain on hedge (to record the change in the fair value (given) of the swap at the end of the first reporting period)

68,750

Date c. June 30 (following year)

Journal Entries Interest expense

937,500

Cash (to record the semiannual debt interest payment) Cash

937,500

218,750

Interest expense (to record the receipt of the semiannual swap amount receivable at 7.5%, less the amount payable at LIBOR, 5.75%: $25 mil x [7.5% - 5.75%]/2 = $218,750)

218,750

Interest expense Debt (to record the change in the debt’s fair value that is attributable to changes in the benchmark interest rate (given) at the end of the second reporting period)

68,750

Interest expense Gain on hedge (to record the change in the fair value (given) of the swap at the end of the second reporting period)

68,750

The debt is presented on the balance sheet at an amount that reflects the impact of changes in the benchmark interest rates (e.g., six-month U.S. LIBOR) on its fair value. The swap contract is presented on the balance sheet at its fair value. The changes in the fair value of (1) the debt that are attributable to the hedged interest rate risk and (2) the swap contract are recognized in current-period earnings. Net interest expense for the period reflects the debt’s coupon rate adjusted for the swap’s settlement for the period. The effective interest rate paid on the debt for the first two periods is as follows:

December 31 June 30

Interest expense (net) $750,000 ($937,500 – 187,500)

Effective annual interest rate (on $25 million of debt) 6% ([$750,000/$25 million]x2)

$718,750 ($937,500 – 218,750)

5.75% ([$718,750/$25 million]x2)

Advanced Accounting, 4th Edition

68.E

Date a. June 1

Journal Entries Investment in bonds

10,000,000 Cash

10,000,000

(to record the purchase of debt securities)

No entry is made to record the fair value of the futures contracts, because at the time of their inception their fair value is zero.

b. August

Loss on hedge

100,000

Investment in bonds (to record the loss on bonds at the end of the first reporting period: $10 mil x [100.0%99.0%]=$100,000) Futures contract

100,000

75,000

Gain on hedge (to record the change in the fair value of contracts) c. Sept.

Loss on hedge

75,000

50,000

Investment in bonds (to record the loss on AFS bonds that is due to the change in the interest rate) Futures contract

50,000

Gain on hedge (to record the change in the fair value of contracts) d.

Cash Investment in bonds (to record the sale of AFS bonds at fair value)

50,000

9,850,000 9,850,000

The hedge of the interest-rate exposure in a recognized fixed-rate asset is considered a fair value hedge. Accordingly, the futures contracts are recorded on the balance sheet as an asset or liability and marked to market, with changes in the fair value reflected in the income statement each reporting period. The fair value changes of the AFS Bonds that are due to changes in the benchmark interest rate are also recognized in earnings. Had these securities not been hedged, unrealized gains and losses would have been recorded in Other Comprehensive Income until the securities are sold.

Solutions Manual, Chapter 7

69.E The interest payments on the debt are variable, which will subject the future interest cash flows on the debt to gains or losses should the general level of market interest rates change. The hedge of the changes in cash flows (attributable to a particular risk) on a recognized liability (i.e., the variable-rate debt) is considered a cash-flow hedge. Accordingly, the fair value of the swap (the hedging instrument) is recorded on the balance sheet as an asset or a liability. The effective portion of the swap’s gain or loss (change in fair value) is reported in other comprehensive income, and the ineffective portion is reported in earnings. Amounts accumulated in other comprehensive income are reclassified as earnings when the related interest payments (that is, the hedged forecasted transactions) affect earnings. Date a. June 30

Journal Entries Cash

10,000,000

Debt (To record the issuance of the debt) b. Sept 30

10,000,000

Interest expense

150,000

Interest payable (to accrue semiannual interest on the debt at a variable rate of 6.0%: $10 mil x 6%/4 = $150,000) Swap contract

150,000

Other comprehensive income (to record the change in the fair value of the swap at the end of September) Interest expense

37,500

Other comprehensive income (to record the accrual of the semiannual swap amount payable at 7.50%, less amount receivable at LIBOR, 6.00% as an adjustment of interest expense and other comprehensive income for the first quarter amount: $10 mil x [7.5%-6%]/4 = $37,500)

150,000

37,500

Advanced Accounting, 4th Edition

Date c. Dec. 31 Interest expense

Journal Entries 150,000

Interest payable (to accrue the quarterly interest on the debt at a variable rate of 6.0%) Interest payable

150,000

300,000

Cash (to record the semiannual debt-interest payment) Swap contract

300,000

150,000

Other comprehensive income (to record the change in the fair value of the swap at the end of the reporting period) Interest expense Other comprehensive income Cash (to record the payment of the semiannual swap amount payable at 7.50%, less amount receivable at LIBOR, 6.00% as an adjustment of interest expense and other comprehensive income for the second quarter amount.)

150,000

37,500 37,500 75,000

The swap contract is measured at fair value on the balance sheet. The swap’s gain or loss, which is assumed to be 100 percent effective as a hedge, is reported in other comprehensive income. Since the debt is at a variable rate of interest, its fair value does not change. Amounts accumulated in other comprehensive income are indirectly recognized in earnings as periodic settlements of the swap occur and the fair value of the swap declines to zero. Debt interest payments, including swap settlements, are fixed at $375,000, or 7.50%.

Solutions Manual, Chapter 7

70.E

Our projected purchase of gold is considered forecasted transaction, and the derivative is considered to be a cash-flow hedge. The effective portion (intrinsic value) of the call option’s gain or loss is reported in other comprehensive income, and the ineffective portion (time value) is reported currently in earnings. Amounts accumulated in other comprehensive income are reclassified as earnings when the related inventory impacts earnings. Date a. February

Journal Entries Purchased call options

2,000

Cash (to record the purchase of call options) b. March

2,000

Option expense

500

Purchased call options (to record the change in the time value of the purchased call options ($2,000 less $1,500) Purchased call options

500

6,000

Other Comprehensive Income (to record the change in the intrinsic value of the purchased call options) c. May

Options expense

6,000

1,500

Purchased call options (to record the change in the time value of the purchased call options ($0 less $1,500) Purchased call options

1,500

4,000

Other comprehensive income (to record the change in the intrinsic value of the purchased call options) Cash

4,000

10,000

Purchased call options (to record the cash settlement of the May call options $25 x 400 ounces) Gold inventory

10,000

250,000

Cash (to record the purchase of 400 ounces of gold at the purchase price of $625 per ounce) d. June

Other comprehensive income Cost of goods Sold (to record reclassification of other comprehensive income to Cost of goods sold when the products using the inventory are sold)

250,000

10,000 10,000

Advanced Accounting, 4th Edition

71.E

We must record the fair value of the options on our balance sheet. Changes in the time value of the options are recorded currently in earnings, and time value is considered the excess of the fair value of the options over their intrinsic value (ASC 815-20-25-82). Changes in the options’ intrinsic value, to the extent that they are effective as a hedge, are recorded in other comprehensive income. Journal entries: January 1. Purchased call options Cash (to record the purchase of call options)

1,500 1,500

April 2. Loss on hedge activity 1,500 Purchased call options (to record the change in the time value of the purchased call options) 3. Purchased call options 5,000 Other comprehensive income (to record the change in the intrinsic value of the purchased call options) 4. Cash

1,500

5,000

Purchased call options (to record the cash settlement of the purchased call options 5. Gold inventory 63,200 Cash (to record the purchase of 200 oz. of gold at the spot price of $316/oz.)

5,000

63,200

6. As of April, we have deferred in accumulated other comprehensive income $5,000 of gains that have resulted from changes in the intrinsic value of the call-option contracts. The gains deferred in accumulated other comprehensive income will be reclassified to earnings when the inventory is sold (i.e., when earnings are impacted). 7. The net cash outlay is $63,200 - $5,000 = $58,200, which is the option price for the gold purchase that we contracted for initially ($291 option strike price/oz. x 200 oz. = $58,200).

Solutions Manual, Chapter 7

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 8— Consolidation of Foreign Subsidiaries 1.

The Glossary to FASB ASC 830-30 defines foreign currency translation as “The process of expressing in the reporting currency of the reporting entity those amounts that are denominated or measured in a different currency.”

The Glossary to FASB ASC 830 defines functional currency as: “An entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.” If a company has operations that are relatively selfcontained and integrated within a particular country, the functional currency generally would be the currency of that country (FASB ASC 830-10-45-4a). A company might have more than one operating unit, however, such as multiple divisions or branches that conduct business in different countries. Each operating unit, then, may be considered a separate entity, each with their own functional currency (FASB ASC 830-10-45-5). The foreign subsidiary must prepare its financial statements in its functional currency prior to translation during the consolidation process. If its books are not maintained in its functional currency, it must, first remeasure its financial statements into its functional currency prior to translation.

The Glossary to FASB ASC 830 defines functional currency as: “An entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.” The factors that we should consider in determining the functional currency include the following (our Practice Insight box on page 513 provides a more complete description): a. In which currencies does the subsidiary transact sales and, ultimately, generate its cash? b. In which currencies does the subsidiary purchase labor, materials, and other goods and services and ultimately expend cash? c. In which currencies does the subsidiary obtain its financing?

Solutions Manual, Chapter 8

FASB ASC 830-10-55-10 provides the following explanation: “Literal application of the standards in this Subtopic might require a degree of detail in record keeping and computations that could be burdensome as well as unnecessary to produce reasonable approximations of the results. Accordingly, it is acceptable to use averages or other methods of approximation.”

No restatement is permitted. FASB ASC 830-10-45-7 provides the following guidance: “Once the functional currency for a foreign entity is determined, that determination shall be used consistently unless significant changes in economic facts and circumstances indicate clearly that the functional currency has changed. Previously issued financial statements shall not be restated for any change in the functional currency. ”

FASB ASC 830-10-45-17 and -18 provide that nonmonetary assets and liabilities should be remeasured at historical rates in effect when those assets and liabilities were recognized (Common Stock and Additional Paid-in Capital accounts are remeasured at historical exchange rates whether or not remeasurement is required). Remeasurement gains and losses only result from fluctuations in foreign exchange rates for monetary accounts that are remeasured at current exchange rates.

No. FASB ASC 830-10-45-19 provides that “… gains or losses from exchange or translation of foreign currencies, including those relating to major devaluations and revaluations, shall not be reported as extraordinary items because they are usual in nature or may be expected to recur as a consequence of customary and continuing business activities.”

FASB ASC 830-30-40-1 provides the following guidance: “Upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity, the amount attributable to that entity and accumulated in the translation adjustment component of equity shall be both: a. Removed from the separate component of equity, and b. Reported as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs.” If the parent reports a positive balance for the cumulative translation adjustment relating to the subsidiary sold, then, that positive balance is recognized as an increase in the gain on the sale or a reduction of the loss on the sale.

No. FASB ASC 830-30-45-12 provides the following guidance: “If an entity's functional currency is a foreign currency, translation adjustments result from the process of translating that entity's financial statements into the reporting currency. Translation adjustments shall not be included in determining net income but shall be reported in other comprehensive income.”

Advanced Accounting, 4th Edition

10.

Yes, translation adjustments are allocated to the noncontrolling shareholder equity account. FASB ASC 830-30-45-17 provides the following guidance: “Accumulated translation adjustments attributable to noncontrolling interests shall be allocated to and reported as part of the noncontrolling interest in the consolidated reporting entity.”

11.

FASB ASC 830-30-45-18 provides that “An analysis of the changes during the period in the accumulated amount of translation adjustments reported in equity shall be provided in any of the following ways: a. In a separate financial statement, b. In notes to financial statements, and c. As part of a statement of changes in equity.”

12.

Answer: B The translation approach technically requires the use of current exchange rates on the dates that each item of revenue and expense is recognized and FASB ASC 830-10-55-10 allows companies to “use averages and other methods of approximation” in the translation of income statement accounts.

13.

Answer: C The translation approach technically requires the use of current exchange rates on the dates that each item of revenue and expense is recognized and FASB ASC 830-10-55-10 allows companies to “use averages and other methods of approximation” in the translation of income statement accounts.

14.

Answer: A The functional currency is the currency of the primary economic environment in which the subsidiary operates. Normally, that is the currency of the environment in which a subsidiary primarily generates and expends cash (FASB ASC 830-10- 20 Glossary).

15.

Answer: D The net gain or loss from the remeasurement process is reported in Net Income rather than in Other Comprehensive Income.

16.

Answer: C Nonmonetary assets and liabilities are restated at historical exchange rates (i.e., the exchange rates in effect when the nonmonetary assets and liabilities were initially recognized). Prepaid expenses are a nonmonetary asset.

Solutions Manual, Chapter 8

17.

Answer: B The net gain or loss from the remeasurement process is reported in Net Income rather than in Other Comprehensive Income as is the case in the translation process.

18.

Answer: A The debit or credit necessary to balance the translated trial balance is the amount of Cumulative Translation Adjustment (this amount can be positive or negative). The Cumulative Translation Adjustment is a component of Accumulated Other Comprehensive Income (AOCI), a stockholders’ equity account, not in current earnings, and does not affect cash flows.

19.

Answer: A The debit or credit necessary to balance the translated trial balance is the amount of Cumulative Translation Adjustment (this amount can be positive or negative). It, therefore, related to the translated amounts to total assets less total liabilities.

20.

Answer: D The Cumulative Translation Adjustment is a component of Accumulated Other Comprehensive Income (AOCI), a stockholders’ equity account.

21.

Answer: C FASB ASC 830 provides that, upon sale of the subsidiary, the Cumulative Translation Adjustment should be removed from the Stockholders’ Equity of the parent company and reported as part of the gain or loss on sale (FASB ASC 830-30-40-1).

Advanced Accounting, 4th Edition

22.

a. Subsidiary (in €)

Translation Rate

Subsidiary (in $)

1,350,000 (810,000) 540,000 (351,000) 189,000

$1.19 $1.19

$1,606,500 (963,900) 642,600 (417,690) $224,910

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

708,750 189,000 (18,900) 878,850

given above $1.21 computed

$553,612 224,910 (22,869) $755,653

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

384,210 313,200 402,300 744,120 1,843,830

$1.22 $1.22 $1.22 $1.22

$468,736 382,104 490,806 907,826 $2,249,472

228,960 533,520 90,000 112,500 878,850

$1.22 $1.22 $0.98 $0.98 above plug

$279,331 650,894 88,200 110,250 755,653 365,144 $2,249,472

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity

1,843,830

$1.19

continued

Solutions Manual, Chapter 8

a. continued Subsidiary (in €) Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities Change in PPE, net Net cash flows from investing activities Change in long-term debt Dividends Net cash flows from financing activities Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

Translation Rate

Subsidiary (in $)

189,000 (52,200) (67,050) 38,160 107,910 (69,120) (69,120)

$1.19 $1.19 $1.19 $1.19

$224,910 (62,118) (79,790) 45,410 $128,412 ($82,944) ($82,944)

88,920 (18,900) 70,020 108,810

$1.20 $1.21

275,400 384,210

$1.20

plug $1.17 $1.22

$106,704 (22,869) $83,835 $129,303 17,215 322,218 $468,736

b.A Computation of the Cumulative Translation Adjustment is as follows: BOY Net assets x EOY -BOY Exchange rates

911,250

$0.050

$45,563

1.22

1.17

Net income x EOY -Avg. Exchange rates

189,000

$0.030

5,670

1.22

1.19

Dividends x EOY -Div. Exchange rates

(18,900)

$0.010

(189)

1.22

1.21

$51,044 BOY Cumulative Translation Adjustment

314,100

EOY Cumulative Translation Adjustment

$365,144

An alternate approach yields the same answer: BOY Net assets @ BOY Exchange rate

911,250

$1.170

$1,066,163

Net income

189,000

$1.190

224,910

Dividends

(18,900)

$1.210

(22,869) $1,268,204

EOY Net assets @ EOY Exchange rate

1,081,350

$1.220

1,319,247

Translation Adjustment for the year

$51,043

BOY Cumulative Translation Adjustment

314,100

EOY Cumulative Translation Adjustment

$365,143

Advanced Accounting, 4th Edition

23.

a. Subsidiary (in CAD)

Translation Rate

Subsidiary (in $)

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income

1,650,000 (990,000) 660,000 (429,000) 231,000

$0.82 $0.82

$1,353,000 (811,800) 541,200 (351,780) $189,420

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

866,250 231,000 (23,100) 1,074,150

given above $0.84 computed

$676,636 189,420 (19,404) $846,652

469,590 382,800 491,700 909,480 2,253,570

$0.85 $0.85 $0.85 $0.85

$399,152 325,380 417,945 773,058 $1,915,535

279,840 652,080 110,000 137,500 1,074,150

$0.85 $0.85 $0.69 $0.69 above plug

$237,864 554,268 75,900 94,875 846,652 105,976 $1,915,535

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity

$0.82

2,253,570

continued

Solutions Manual, Chapter 8

a. continued Subsidiary (in CAD)

Translation Rate

Subsidiary (in $)

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

231,000 (63,800) (81,950) 46,640 131,890

$0.82 $0.82 $0.82 $0.82

$189,420 (52,316) (67,199) 38,245 $108,150

Change in PPE, net Net cash flows from investing activities

(84,480) (84,480)

$0.83

($70,118) ($70,118)

Change in long-term debt Dividends Net cash flows from financing activities

108,680 (23,100) 85,580

$0.83 $0.84

$90,204 (19,404) $70,800

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

132,990 336,600 469,590

plug $0.79 $0.85

$108,832 24,406 265,914 $399,152

b.A Computation of the Cumulative Translation Adjustment is as follows: BOY Net assets x EOY -BOY Exchange rates

1,113,750

$0.060

$66,825

0.85

0.79

Net income x EOY -Avg. Exchange rates

231,000

$0.030

6,930

0.85

0.82

Dividends x EOY -Div. Exchange rates

(23,100)

$0.010

(231)

0.85

0.84

$73,524 BOY Cumulative Translation Adjustment

32,452

EOY Cumulative Translation Adjustment

$105,976

An alternate approach yields the same answer: BOY Net assets @ BOY Exchange rate

1,113,750

$0.790

$879,863

Net income

231,000

$0.820

189,420

Dividends

(23,100)

$0.840

(19,404) $1,049,879

EOY Net assets @ EOY Exchange rate

1,321,650

$0.850

1,123,403

Translation Adjustment for the year

$73,524

BOY Cumulative Translation Adjustment

32,452

EOY Cumulative Translation Adjustment

$105,976

Advanced Accounting, 4th Edition

24.

a. Subsidiary (in BRL)

Translation Rate

Subsidiary (in $)

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income

3,000,000 (1,800,000) 1,200,000 (780,000) 420,000

$0.29 $0.29

$870,000 (522,000) 348,000 (226,200) $121,800

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

1,575,000 420,000 (42,000) 1,953,000

given above $0.31 computed

$1,230,248 121,800 (13,020) $1,339,028

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

853,800 696,000 894,000 1,653,600 4,097,400

$0.33 $0.33 $0.33 $0.33

$281,754 229,680 295,020 545,688 $1,352,142

508,800 1,185,600 200,000 250,000 1,953,000

$0.33 $0.33 $0.14 $0.14 above plug

$167,904 391,248 28,000 35,000 1,339,028 (609,038) $1,352,142

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity

4,097,400

$0.29

continued

Solutions Manual, Chapter 8

a. continued Subsidiary (in BRL)

Translation Rate

Subsidiary (in $)

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

420,000 (116,000) (149,000) 84,800 239,800

$0.29 $0.29 $0.29 $0.29

$121,800 (33,640) (43,210) 24,592 $69,542

Change in PPE, net Net cash flows from investing activities

(153,600) (153,600)

$0.30

($46,080) ($46,080)

Change in long-term debt Dividends Net cash flows from financing activities

197,600 (42,000) 155,600

$0.30 $0.31

$59,280 (13,020) $46,260

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

241,800 612,000 853,800

plug $0.26 $0.33

$69,722 52,912 159,120 $281,754

b.A Computation of the Cumulative Translation Adjustment is as follows: BOY Net assets x EOY -BOY Exchange rates

2,025,000

$0.070

$141,750

0.33

0.26

Net income x EOY -Avg. Exchange rates

420,000

$0.040

16,800

0.33

0.29

Dividends x EOY -Div. Exchange rates

(42,000)

$0.020

(840)

0.33

0.31

$157,710 BOY Cumulative Translation Adjustment

(766,748)

EOY Cumulative Translation Adjustment

($609,038)

An alternate approach yields the same answer: BOY Net assets @ BOY Exchange rate

2,025,000

$0.260

$526,500

Net income

420,000

$0.290

121,800

Dividends

(42,000)

$0.310

(13,020) $635,280

EOY Net assets @ EOY Exchange rate

2,403,000

$0.330

792,990

Translation Adjustment for the year

$157,710

BOY Cumulative Translation Adjustment

(766,748)

EOY Cumulative Translation Adjustment

($609,038)

Advanced Accounting, 4th Edition

25.

a. Subsidiary (in GBP)

Translation Rate

Subsidiary (in $)

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income

4,500,000 (2,700,000) 1,800,000 (1,170,000) 630,000

$1.43 $1.43

$6,435,000 (3,861,000) 2,574,000 (1,673,100) $900,900

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

2,362,500 630,000 (63,000) 2,929,500

given above $1.45 computed

$1,845,372 900,900 (91,350) $2,654,922

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

1,280,700 1,044,000 1,341,000 2,480,400 6,146,100

$1.47 $1.47 $1.47 $1.47

$1,882,629 1,534,680 1,971,270 3,646,188 $9,034,767

763,200 1,778,400 300,000 375,000 2,929,500

$1.47 $1.47 $1.20 $1.20 above plug

$1,121,904 2,614,248 360,000 450,000 2,654,922 1,833,693 $9,034,767

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity

6,146,100

$1.43

continued

Solutions Manual, Chapter 8

25.

a. continued Subsidiary (in GBP)

Translation Rate

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

630,000 (174,000) (223,500) 127,200 359,700

$1.43 $1.43 $1.43 $1.43

$900,900 (248,820) (319,605) 181,896 $514,371

Change in PPE, net Net cash flows from investing activities

(230,400) (230,400)

$1.44

($331,776) ($331,776)

Change in long-term debt Dividends Net cash flows from financing activities

296,400 (63,000) 233,400

$1.44 $1.45

$426,816 (91,350) $335,466

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

362,700 918,000 1,280,700

plug $1.40 $1.47

Subsidiary (in $)

$518,061 79,368 1,285,200 $1,882,629

b.A Computation of the Cumulative Translation Adjustment is as follows: BOY Net assets x EOY -BOY Exchange rates

3,037,500

$0.070

$212,625

1.47

1.40

Net income x EOY -Avg. Exchange rates

630,000

$0.040

25,200

1.47

1.43

Dividends x EOY -Div. Exchange rates

(63,000)

$0.020

(1,260)

1.47

1.45

$236,565 BOY Cumulative Translation Adjustment

1,597,128

EOY Cumulative Translation Adjustment

$1,833,693

An alternate approach yields the same answer: BOY Net assets @ BOY Exchange rate

3,037,500

$1.400

$4,252,500

Net income

630,000

$1.430

900,900

Dividends

(63,000)

$1.450

(91,350) $5,062,050

EOY Net assets @ EOY Exchange rate

3,604,500

$1.470

5,298,615

Translation Adjustment for the year

$236,565

BOY Cumulative Translation Adjustment

1,597,128

EOY Cumulative Translation Adjustment

$1,833,693

Advanced Accounting, 4th Edition

26.

a. Year 1

Year 2

Subsidiary (in AUD)

Translation Rate

Subsidiary (in $)

Subsidiary (in AUD)

Translation Rate

Subsidiary (in $)

Sales

5,000,000

0.89

$4,450,000

6,000,000

0.77

$4,620,000

Cost of goods sold

(3,000,000)

0.89

($2,670,000)

(3,600,000)

0.77

(2,772,000)

Gross Profit

2,000,000

1,780,000

2,400,000

Operating expenses

(1,300,000)

($1,157,000)

(1,560,000)

$623,000

840,000

$600,000

3,150,000

EOY – Year 1

623,000

840,000

above

646,800

(59,500)

(84,000)

0.72

(60,480)

$1,163,500

3,906,000

computed

$1,749,820

Income statement:

Net income

0.89

700,000

1,848,000 0.77

(1,201,200) $646,800

Statement of retained earnings: BOY retained earnings

2,520,000

Net income

700,000

Dividends

(70,000)

Ending retained earnings

given 0.85

3,150,000

$1,163,500

Balance sheet: Assets Cash

636,800

0.84

$534,912

1,707,600

0.71

$1,212,396

Accounts receivable

1,160,000

0.84

974,400

1,392,000

0.71

988,320

Inventory

1,490,000

0.84

1,251,600

1,788,000

0.71

1,269,480

PPE, net

3,587,200

0.84

3,013,248

3,307,200

0.71

2,348,112

Total Assets

6,874,000

$5,774,160

8,194,800

$5,818,308

Liabilities and Stockholders’ Equity Current Liabilities

848,000

0.84

$712,320

1,017,600

0.71

$722,496

Long-term Liabilities

1,976,000

0.84

1,659,840

2,371,200

0.71

1,683,552

Common Stock

400,000

1.03

412,000

400,000

1.03

412,000

APIC

500,000

1.03

515,000

500,000

1.03

515,000

Retained Earnings Cumulative translation adjustment

3,150,000

above

1,163,500

3,906,000

above

1,749,820

plug

1,311,500

plug

735,440

Total Liabilities & Equity

6,874,000

$5,774,160

8,194,800

$5,818,308

continued

Solutions Manual, Chapter 8

26.

a. continued Subsidiary (in AUD)

Year 2 Translation Rate

Subsidiary (in $)

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

840,000 (232,000) (298,000) 169,600 479,600

0.77 0.77 0.77 0.77

$646,800 (178,640) (229,460) 130,592 $369,292

Change in PPE, net Net cash flows from investing activities

280,000 280,000

0.73

$204,400 $204,400

Change in long-term debt Dividends Net cash flows from financing activities

395,200 (84,000) 311,200

0.73 0.74

$288,496 (62,160) $226,336

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

1,070,800 636,800 1,707,600

plug 0.84 0.71

$800,028 (122,544) 534,912 $1,212,396

b.A Computation of the Cumulative Translation Adjustment is as follows: BOY Net assets x EOY -BOY Exchange rates

4,050,000

(0.13)

($526,500)

$0.71

0.84

Net income x EOY -Avg. Exchange rates

840,000

(0.06)

(50,400)

$0.71

0.77

Dividends x EOY -Div. Exchange rates

(84,000)

(0.01)

840

$0.71

0.72

($576,060) BOY Cumulative Translation Adjustment

1,311,500

EOY Cumulative Translation Adjustment

$735,440

BOY Net assets @ BOY Exchange rate

4,050,000

0.84

$3,402,000

Net income @ Avg. Exchange rate

840,000

0.77

646,800

Dividends @ Div Exchange rate

(84,000)

0.72

(60,480) $3,988,320

EOY Net assets @ EOY Exchange rate

4,806,000

0.71

3,412,260

Translation Adjustment for the year

($576,060)

BOY Cumulative Translation Adjustment

1,311,500

EOY Cumulative Translation Adjustment

$735,440

Advanced Accounting, 4th Edition

27.

a. Year 1

Year 2

Subsidiary (in €)

Translation Rate

Subsidiary (in $)

Subsidiary (in €)

Translation Rate

Subsidiary (in $)

Sales

3,250,000

1.25

$4,062,500

3,900,000

1.18

$4,602,000

Cost of goods sold

(1,950,000)

1.25

($2,437,500)

(2,340,000)

1.18

(2,761,200)

Gross Profit

1,300,000

1,625,000

1,560,000

Operating expenses

(845,000)

($1,056,250)

(1,014,000)

Net income

455,000

$568,750

546,000

$780,000

2,047,500

EOY – Year 1

568,750

546,000

above

644,280

(55,510)

(54,600)

1.16

(63,336)

$1,293,240

2,538,900

computed

$1,874,184

Income statement:

1.25

1,840,800 1.18

(1,196,520) $644,280

Statement of retained earnings: BOY retained earnings

1,638,000

given

Net income

455,000

Dividends

(45,500)

Ending retained earnings

1.22

2,047,500

$1,293,240

Balance sheet: Assets Cash

413,920

1.21

$500,843

1,109,940

1.15

$1,276,431

Accounts receivable

754,000

1.21

912,340

904,800

1.15

1,040,520

Inventory

968,500

1.21

1,171,885

1,162,200

1.15

1,336,530

PPE, net

2,331,680

1.21

2,821,333

2,149,680

1.15

2,472,132

Total Assets

4,468,100

$5,406,401

5,326,620

$6,125,613

Liabilities and Stockholders’ Equity Current Liabilities

551,200

1.21

$666,952

661,440

1.15

$760,656

Long-term Liabilities

1,284,400

1.21

1,554,124

1,541,280

1.15

1,772,472

Common Stock

260,000

1.41

366,600

260,000

1.41

366,600

APIC

325,000

1.41

458,250

325,000

1.41

458,250

Retained Earnings Cumulative translation adjustment

2,047,500

above

1,293,240

2,538,900

above

1,874,184

plug

1,067,235

plug

893,451

Total Liabilities & Equity

4,468,100

$5,406,401

5,326,620

$6,125,613

continued

Solutions Manual, Chapter 8

a. continued

Subsidiary (in €)

Year 2 Translation Rate

Subsidiary (in $)

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

546,000 (150,800) (193,700) 110,240 311,740

1.18 1.18 1.18 1.18

$644,280 (177,944) (228,566) 130,083 $367,853

Change in PPE, net Net cash flows from investing activities

182,000 182,000

1.17

$212,940 $212,940

Change in long-term debt Dividends Net cash flows from financing activities

256,880 (54,600) 202,280

1.17 1.16

$300,550 (63,336) $237,214

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

696,020 413,920 1,109,940

plug 1.21 1.15

$818,007 (42,419) 500,843 $1,276,431

b.A Computation of the cumulative Translation Adjustment is as follows: BOY Net assets x EOY -BOY Exchange rates

2,632,500

(0.06)

($157,950)

$1.15

1.21

Net income x EOY -Avg. Exchange rates

546,000

(0.03)

(16,380)

$1.15

1.18

Dividends x EOY -Div. Exchange rates

(54,600)

(0.01)

546

$1.15

1.16

($173,784) BOY Cumulative Translation Adjustment

1,067,235

EOY Cumulative Translation Adjustment

$893,451

BOY Net assets @ BOY Exchange rate

2,632,500

1.21

$3,185,325

Net income @ Avg. Exchange rate

546,000

1.18

644,280

Dividends @ Div Exchange rate

(54,600)

1.16

(63,336) $3,766,269

EOY Net assets @ EOY Exchange rate

3,123,900

1.15

3,592,485

Translation Adjustment for the year

($173,784)

BOY Cumulative Translation Adjustment

1,067,235

EOY Cumulative Translation Adjustment

$893,451

Advanced Accounting, 4th Edition

28.

a. Year 2 Remeasure Rate $0.83 $0.76 $0.70

Beginning inventory Purchases Ending inventory Cost of Goods Sold

Subsidiary (in AUD) 819,500 2,143,900 (983,400) 1,980,000

Land Building Accum Deprec. - Building Equipment Accum Deprec. - Equipment PPE, net

718,960 1,320,000 (660,000) 880,000 (440,000) 1,818,960

$0.72 $0.72 $0.72 $0.72 $0.72

$517,651 950,400 (475,200) 633,600 (316,800) $1,309,651

66,000 88,000 154,000

$0.72 $0.72

$47,520 63,360 $110,880

Depreciation expense - building Depreciation expense - equipment Depreciation expense

Subsidiary (in AUD) Income statement: Sales Cost of goods sold Gross Profit Operating expenses Depreciation Remeasurement gain or loss Net income

3,300,000 (1,980,000) 1,320,000 (704,000) (154,000)

Year 2 Remeasure Rate $0.76 computed $0.76 computed plug #3

462,000

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

1,732,500 462,000 (46,200) 2,148,300

given plug #2 $0.71 computed

Subsidiary (in $) $680,185 1,629,364 (688,380) $1,621,169

Subsidiary (in $) $2,508,000 (1,621,169) 886,831 (535,040) (110,880) 46,781 $287,692

$1,126,899 287,692 (32,802) $1,381,789

Table continued next page

Solutions Manual, Chapter 8

a. continued

Subsidiary (in AUD)

Year 2 Remeasure Rate

Subsidiary (in $)

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

939,180 765,600 983,400 1,818,960 4,507,140

$0.70 $0.70 computed computed

$657,426 535,920 688,380 1,309,651 $3,191,377

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Total Liabilities & Equity

559,680 1,304,160 220,000 275,000 2,148,300 4,507,140

$0.70 $0.70 $1.02 $1.02 plug #1

$391,776 912,912 224,400 280,500 1,381,789 $3,191,377

Advanced Accounting, 4th Edition

28.

b.A Computation of the Remeasurement gain (loss) is as follows: Subsidiary (in AUD) Net monetary assets: Cash Accounts Receivable Current liabilities Long-term liabilities

Sales Purchases Operating expenses Change in net monetary assets BOY Net monetary assets x EOY - BOY Exchange rates Chg. Net monetary assets x EOY - Avg. Exchange rates Dividends x EOY - Div. Exchange rates Remeasurement gain (loss) Change in net monetary assets: Beginning net monetary assets Sales Purchases Operating expenses Dividends Ending net monetary assets Remeasurement gain (loss)

Solutions Manual, Chapter 8

350,240 638,000 (466,400) (1,086,800) (564,960)

939,180 765,600 (559,680) (1,304,160) (159,060)

3,300,000 (2,143,900) (704,000) 452,100

(564,960)

-$0.13

$73,445 $0.70 - $0.83

452,100 (46,200)

-$0.06 -$0.01

(27,126) $0.70 - $0.76 462 $0.70 - $0.71 $46,781

(564,960) 3,300,000 (2,143,900) (704,000) (46,200) (159,060)

$0.83 ($468,917) $0.76 2,508,000 $0.76 (1,629,364) $0.76 (535,040) $0.71 (32,802) ($158,123) $0.70 (111,342) $46,781

29.

Beginning inventory Purchases Ending inventory Cost of Goods Sold

Subsidiary Remeasure Subsidiary (in GBP) Rate (in $) 931,250 $1.41 $1,313,063 2,436,250 $1.44 3,508,200 (1,117,500) $1.48 (1,653,900) 2,250,000 $3,167,363

Land Building Accum Deprec. - Building Equipment Accum Deprec. - Equipment PPE, net

817,000 1,500,000 (750,000) 1,000,000 (500,000) 2,067,000

$1.45 $1.45 $1.45 $1.45 $1.45

$1,184,650 2,175,000 (1,087,500) 1,450,000 (725,000) $2,997,150

75,000 100,000 175,000

$1.45 $1.45

$108,750 145,000 $253,750

Subsidiary (in GBP)

Remeasure Rate

Subsidiary (in $)

3,750,000 (2,250,000) 1,500,000 (800,000) (175,000)

$1.44 computed

$5,400,000 (3,167,363) 2,232,638 (1,152,000) (253,750) (25,966) $800,922

Depreciation expense - building Depreciation expense - equipment Depreciation expense

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Depreciation Remeasurement gain or loss Net income

$1.44 computed plug #3

525,000

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

1,968,750 525,000 (52,500) 2,441,250

given plug #2 $1.45 computed

$3,011,868 800,922 (76,125) $3,736,665

Table continued next page

Advanced Accounting, 4th Edition

a. continued Subsidiary (in GBP)

Remeasure Rate

Subsidiary (in $)

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

1,067,250 870,000 1,117,500 2,067,000 5,121,750

$1.48 $1.48 computed computed

$1,579,530 1,287,600 1,653,900 2,997,150 $7,518,180

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Total Liabilities & Equity

636,000 1,482,000 250,000 312,500 2,441,250 5,121,750

$1.48 $1.48 $1.15 $1.15 plug #1

$941,280 2,193,360 287,500 359,375 3,736,665 $7,518,180

Solutions Manual, Chapter 8

29.

b.A Computation of the Remeasurement gain or (loss) is as follows: Net monetary assets: Cash Accounts Receivable Current liabilities Long-term liabilities BOY Net monetary assets:

398,000 725,000 (530,000) (1,235,000) (642,000)

Sales Purchases Operating expenses Chg. Net monetary assets

3,750,000 (2,436,250) (800,000) 513,750

BOY Net monetary assets x EOY - BOY Exchange rates Chg. Net monetary assets x EOY - Avg. Exchange rates Dividends x EOY - Div. Exchange rates Remeasurement gain (loss) Change in net monetary assets: Beginning net monetary assets Sales Purchases Operating expenses Dividends Ending net monetary assets Remeasurement gain (loss)

1,067,250 870,000 (636,000) (1,482,000) (180,750)

(642,000) $0.07

($44,940)

$1.48

- $1.41

513,750 $0.04 (52,500) $0.03

20,550 (1,575) ($25,965)

$1.48 $1.48

- $1.44 - $1.45

(642,000) $1.41 ($905,220) 3,750,000 $1.44 5,400,000 (2,436,250) $1.44 (3,508,200) (800,000) $1.44 (1,152,000) (52,500) $1.45 (76,125) (180,750) ($241,545) $1.48 (267,510) ($25,965)

Advanced Accounting, 4th Edition

30.

Beginning inventory Purchases Ending inventory Cost of Goods Sold

Subsidiary (in CAD) 1,303,750 3,410,750 (1,564,500) 3,150,000

Remeasure Rate $0.73 $0.76 $0.79

Subsidiary (in $) $951,738 2,592,170 (1,235,955) $2,307,953

Land Building Accum Deprec. - Building Equipment Accum Deprec. - Equipment PPE, net

1,143,800 2,100,000 (1,050,000) 1,400,000 (700,000) 2,893,800

$0.77 $0.77 $0.77 $0.77 $0.77

$880,726 1,617,000 (808,500) 1,078,000 (539,000) $2,228,226

105,000 140,000 245,000

$0.77 $0.77

$80,850 107,800 $188,650

Subsidiary (in CAD)

Remeasure Rate

Subsidiary (in $)

5,250,000 (3,150,000) 2,100,000 (1,120,000) (245,000)

$0.76 computed

$3,990,000 (2,307,953) 1,682,048 (851,200) (188,650) (33,086) $609,112

Depreciation expense - building Depreciation expense - equipment Depreciation expense

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Depreciation Remeasurement gain or loss Net income

$0.76 computed plug #3

735,000

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

2,756,250 735,000 (73,500) 3,417,750

given plug #2 $0.78 computed

$2,216,365 609,112 (57,330) $2,768,147

Table continued next page

Solutions Manual, Chapter 8

a. continued Subsidiary (in CAD)

Remeasure Rate

Subsidiary (in $)

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

1,494,150 1,218,000 1,564,500 2,893,800 7,170,450

$0.79 $0.79 computed computed

$1,180,379 962,220 1,235,955 2,228,226 $5,606,780

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Total Liabilities & Equity

890,400 2,074,800 350,000 437,500 3,417,750 7,170,450

$0.79 $0.79 $0.63 $0.63 plug #1

$703,416 1,639,092 220,500 275,625 2,768,147 $5,606,780

Advanced Accounting, 4th Edition

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30.

b.A Computation of the Remeasurement gain or (loss) is as follows: Subsidiary (in CAD) Net monetary assets: Cash

557,200

1,494,150

Accounts Receivable

1,015,000

1,218,000

Current liabilities

(742,000)

(890,400)

Long-term liabilities

(1,729,000)

(2,074,800)

BOY Net monetary assets

(898,800)

(253,050)

Sales

5,250,000

Purchases

(3,410,750)

Operating expenses

(1,120,000)

Chg. Net monetary assets

719,250

BOY Net monetary assets x EOY - BOY Exchange rates

(898,800) $0.06

Chg. Net monetary assets x EOY - Avg. Exchange rates

719,250

Dividends x EOY - Div. Exchange rates

(73,500) $0.01

$0.03

Remeasurement gain (loss)

($53,928) $0.79

$0.73

$0.79

$0.76

(735) $0.79

$0.78

21,578 ($33,085)

Change in net monetary assets: Beginning net monetary assets

(898,800) $0.73

($656,124)

Sales

5,250,000

$0.76

3,990,000

Purchases

(3,410,750) $0.76

(2,592,170)

Operating expenses

(1,120,000) $0.76

(851,200)

Dividends

(73,500) $0.78

(57,330)

Ending net monetary assets

(253,050)

($166,824) $0.79

Remeasurement gain (loss)

Solutions Manual, Chapter 8

(199,910) ($33,086)

31.

Subsidiary (in GBP)

Translation Rate

Subsidiary (in $)

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income

3,150,000 (1,890,000) 1,260,000 (819,000) 441,000

$1.48 $1.48

$4,662,000 (2,797,200) 1,864,800 (1,212,120) $652,680

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

1,653,750 441,000 (44,100) 2,050,650

given above $1.50 computed

$2,926,035 652,680 (66,150) $3,512,565

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

896,490 730,800 938,700 1,736,280 4,302,270

$1.52 $1.52 $1.52 $1.52

$1,362,665 1,110,816 1,426,824 2,639,146 $6,539,451

534,240 1,244,880 210,000 262,500 2,050,650

$1.52 $1.52 $0.55 $0.55 above plug

$812,045 1,892,218 115,500 144,375 3,512,565 62,748 $6,539,451

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity

4,302,270

$1.48

Table continued next page

Advanced Accounting, 4th Edition

a. continued Subsidiary (in GBP)

Translation Rate

Subsidiary (in $)

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

441,000 (121,800) (156,450) 89,040 251,790

$1.48 $1.48 $1.48 $1.48

$652,680 (180,264) (231,546) 131,779 $372,649

Change in PPE, net Net cash flows from investing activities

(161,280) (161,280)

$1.49

($240,307) ($240,307)

Change in long-term debt Dividends Net cash flows from financing activities

207,480 (44,100) 163,380

$1.49 $1.50

$309,145 (66,150) $242,995

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

253,890 plug $1.45 $1.52

642,600 896,490

$375,337 55,558 931,770 $1,362,665

b.A Computation of the Cumulative Translation Adjustment is as follows: Subsidiary (in GBP) BOY Net assets x EOY -BOY Exchange rates

2,126,250

$0.07

$148,838

$1.52

$1.45

Net income x EOY -Avg. Exchange rates

441,000

$0.04

17,640

$1.52

$1.48

Dividends x EOY -Div. Exchange rates

(44,100)

$0.02

(882)

$1.52

$1.50

$165,596 BOY Cumulative Translation Adjustment

(102,848)

EOY Cumulative Translation Adjustment

$62,748

BOY Net assets @ BOY Exchange rate

2,126,250

$1.45

$3,083,063

Net income

441,000

$1.48

652,680

Dividends

(44,100)

$1.50

(66,150) $3,669,593

EOY Net assets @ EOY Exchange rate

2,523,150

$1.52

3,835,188

Translation Adjustment for the year

$165,595

BOY Cumulative Translation Adjustment

(102,848)

EOY Cumulative Translation Adjustment

$62,747

Solutions Manual, Chapter 8

31.

b.A continued The Parent makes the following journal entry for the year based on the net asset translation computation: <a>

Equity Investment

165,596

Cumulative Translation Adjustment (to record the translation adjustment for the year)

165,596

There is no amortization of the AAP asset relating to Land. The $14,000 Adjustment to the Accumulated Currency Translation AOCI account is based on the following calculation: BOY Balance Amortization EOY Balance

£ 200,000 200,000

Rate 1.45

1.52 AAP translation gain (loss)

US $ 290,000 290,000 304,000 14,000

The Parent makes the following journal entry for the year based on the AAP computation: <b>

Equity Investment

14,000

Cumulative Translation Adjustment (to record the translation adjustment for the AAP during the year) c. BOY BOY BOY BOY BOY

Common Stock APIC Ret Earnings AAP CTA Equity income Translation adj. AAP CTA AOCI net bal

14,000

Equity Investment 115,500 144,375 2,926,035 290,000 (102,848) 652,680 66,150 dividends 165,596 14,000 4,205,338 66,150 4,139,188

The equity income of $652,680 equals the net income of the Subsidiary because the land asset is not depreciated.

Advanced Accounting, 4th Edition

31.

d. Parent

Subsidiary

Income statement: Sales Cost of goods sold Gross Profit Equity income Operating expenses

13,815,000 (9,670,500) 4,144,500 652,680 (2,624,850)

4,662,000 (2,797,200) 1,864,800 (1,212,120)

18,477,000 (12,467,700) 6,009,300 0 (3,836,970)

Net income

2,172,330

652,680

2,172,330

Statement of retained earnings: BOY retained earnings Net income Dividends

11,898,000 2,172,330 (475,920)

2,926,035 652,680 (66,150)

Ending retained earnings

13,594,410

3,512,565

Statement of Accum. Comp. Income: BOY Cumulative Translation Adjustment Current Year Translation Gain (Loss)

(102,848) 179,596

(102,848) 165,596

EOY Cumulative Translation Adjustment

76,748

62,748

76,748

Balance sheet: Assets Cash Accounts receivable Inventory Equity Investment

1,526,569 1,768,320 2,680,110 4,139,188

1,362,665 1,110,816 1,426,824

2,889,234 2,879,136 4,106,934 0

PPE, net

14,273,658

2,639,146

Total assets

24,387,845

6,539,451

27,092,108

Liabilities and Stockholders’ Equity Current liabilities Long-term Liabilities Common Stock APIC

1,106,582 750,000 1,568,535 7,291,571

812,045 1,892,218 115,500 144,375

1,918,627 2,642,218 1,568,535 7,291,571

Retained Earnings Cumulative Translation Adjustment

13,594,410 76,748

3,512,565 62,748

Total liabilities and stockholders’ equity

24,387,845

6,539,451

Solutions Manual, Chapter 8

[C]

[E]

Consolidated

652,680

2,926,035 [C]

66,150

11,898,000 2,172,330 (475,920) 13,594,410

[E] [C]

(102,848) 179,596 [D]

[C] [E] [A] [A] [D]

[E] [E]

14,000

766,126 3,083,062 290,000

290,000 14,000

(102,848) 179,596

17,216,804

115,500 144,375

13,594,410 76,748 ∑

4,219,338

∑

4,219,338

27,092,108

32.

a. Subsidiary (in €)

Translation Rate

Subsidiary (in $)

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income

5,250,000 (3,150,000) 2,100,000 (1,365,000) 735,000

$1.16 $1.16

$6,090,000 (3,654,000) 2,436,000 (1,583,400) $852,600

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

2,756,250 735,000 (73,500) 3,417,750

given above $1.18 computed

$4,876,725 852,600 (86,730) $5,642,595

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

1,494,150 1,218,000 1,564,500 2,893,800 7,170,450

$1.19 $1.19 $1.19 $1.19

$1,778,039 1,449,420 1,861,755 3,443,622 $8,532,836

890,400 2,074,800 350,000 437,500 3,417,750

$1.19 $1.19 $0.95 $0.95 above plug

$1,059,576 2,469,012 332,500 415,625 5,642,595 (1,386,472) $8,532,836

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity

7,170,450

$1.16

Table continued next page

Advanced Accounting, 4th Edition

a. continued Subsidiary (in €)

Translation Rate

Subsidiary (in $)

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

735,000 (203,000) (260,750) 148,400 419,650

$1.16 $1.16 $1.16 $1.16

$852,600 (235,480) (302,470) 172,144 $486,794

Change in PPE, net Net cash flows from investing activities

(268,800) (268,800)

$1.17

($314,496) ($314,496)

Change in long-term debt Dividends Net cash flows from financing activities

345,800 (73,500) 272,300

$1.17 $1.18

$404,586 (86,730) $317,856

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

423,150 plug $1.14 $1.19

1,071,000 1,494,150

$490,154 66,945 1,220,940 $1,778,039

b.A Computation of the Cumulative Translation Adjustment is as follows: BOY Net assets x EOY -BOY Exchange rates

3,543,750

$0.05

$177,188

$1.19

$1.14

Net income x EOY -Avg. Exchange rates

735,000

$0.03

22,050

$1.19

$1.16

Dividends x EOY -Div. Exchange rates

(73,500)

$0.01

(735)

$1.19

$1.18

$198,503 BOY Cumulative Translation Adjustment

(1,584,975)

EOY Cumulative Translation Adjustment

($1,386,472)

BOY Net assets @ BOY Exchange rate

3,543,750

$1.14

$4,039,875

Net income

735,000

$1.16

852,600

Dividends

(73,500)

$1.18

(86,730) $4,805,745

EOY Net assets @ EOY Exchange rate Translation Adjustment for the year

4,205,250

$1.19

5,004,248 $198,503

BOY Cumulative Translation Adjustment

(1,584,975)

EOY Cumulative Translation Adjustment

($1,386,472)

Solutions Manual, Chapter 8

32.

b.A continued The parent makes the following journal entry for the year based on this computation: Equity investment

198,503 Cumulative translation adjustment

198,503

(to record the translation adjustment for the year)

There is no amortization of the AAP asset relating to Land. The $15,000 Adjustment to the Accumulated Currency Translation AOCI account is based on the following calculation: BOY Balance No Amortization EOY Balance AAP translation gain (loss)

£ 300,000 -

Rate 1.14

300,000

1.19

US $ 342,000 342,000 357,000 15,000

The Parent makes the following journal entry for the year based on the AAP computation: <b>

Equity Investment

15,000 Cumulative Translation Adjustment

15,000

(to record the translation adjustment for the AAP during the year)

c. BOY BOY BOY BOY BOY

Common Stock APIC Retained Earn. AAP CTA Equity income Translation adj. OCI

Equity Investment 332,500 415,625 4,876,725 342,000 (€300,000 x $1.09/€) (1,584,975) 852,600 86,730 Dividends 198,503 15,000 (€300,000 x [$1.09-$1.14]/€) 5,447,978 86,730 5,361,248

The Equity Income of $852,600 equals the net income of the subsidiary because the land asset is not depreciated.

Advanced Accounting, 4th Edition

32.

d. Parent

Subsidiary

23,025,000 (16,117,500) 6,907,500 852,600 (4,374,750)

6,090,000 (3,654,000) 2,436,000 (1,583,400)

29,115,000 (19,771,500) 9,343,500 0 (5,958,150)

Net income

3,385,350

852,600

3,385,350

Statement of retained earnings: BOY retained earnings Net income Dividends

19,830,000 3,385,350 (793,200)

4,876,725 [E] 852,600 (86,730)

Ending retained earnings

22,422,150

5,642,595

Statement of Accum. Comp. Income: BOY Cumulative Translation Adjustment Current Year Translation Gain (Loss)

(1,584,975) 213,503

(1,584,975) [E] (1,584,975) 198,503 [C] 213,503 [D]

EOY Cumulative Translation Adjustment

(1,371,472)

(1,386,472)

(1,371,472)

Balance sheet: Assets Cash Accounts receivable Inventory Equity Investment

2,347,095 2,947,200 4,466,850 5,361,248

1,778,039 1,449,420 1,861,755

4,125,134 4,396,620 6,328,605 0

PPE, net

23,789,430

3,443,622 [A] [D]

38,911,823

8,532,836

42,440,411

Liabilities and Stockholders’ Equity Current liabilities Long-term Liabilities Common Stock APIC Retained Earnings

1,844,303 1,250,000 2,614,225 12,152,618 22,422,150

1,059,576 2,469,012 332,500 415,625 5,642,595

2,903,879 3,719,012 2,614,225 12,152,618 22,422,150

Cumulative Translation Adjustment

(1,371,472)

(1,386,472)

38,911,823

8,532,836

Income statement: Sales Cost of goods sold Gross Profit Equity income Operating expenses

Solutions Manual, Chapter 8

[C]

852,600

4,876,725 [C]

86,730

Consolidated

19,830,000 3,385,350 (793,200) 22,422,150

15,000

[C] 979,373 [E] 4,039,875 [A] 342,000

[E] [E]

342,000 15,000

(1,584,975) 213,503

27,590,052

332,500 415,625

(1,371,472) ∑

5,462,978

∑

5,462,978

42,440,411

33.

a. Subsidiary (in BRL)

Translation Rate

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income

7,350,000 (4,410,000) 2,940,000 (1,911,000) 1,029,000

$0.22 $0.22

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

3,858,750 given 1,029,000 above (102,900) $0.24 4,784,850 computed

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

2,091,810 1,705,200 2,190,300 4,051,320 10,038,630

$0.26 $0.26 $0.26 $0.26

$543,871 443,352 569,478 1,053,343 $2,610,044

1,246,560 2,904,720 490,000 612,500 4,784,850

$0.26 $0.26 $0.07 $0.07 above plug

$324,106 755,227 34,300 42,875 819,084 634,452 $2,610,044

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity

10,038,630

$0.22

Subsidiary (in $) $1,617,000 (970,200) 646,800 (420,420) $226,380

$617,400 226,380 (24,696) $819,084

Table continued next page

Advanced Accounting, 4th Edition

33.

a. continued Subsidiary (in BRL)

Translation Rate

Subsidiary (in $)

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

1,029,000 (284,200) (365,050) 207,760 587,510

$0.22 $0.22 $0.22 $0.22

$226,380 (62,524) (80,311) 45,707 $129,252

Change in PPE, net Net cash flows from investing activities

(376,320) (376,320)

$0.23

($86,554) ($86,554)

Change in long-term debt Dividends Net cash flows from financing activities

484,120 (102,900) 381,220

$0.23 $0.24

$111,348 (24,696) $86,652

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

592,410 1,499,400 2,091,810

plug $0.19 $0.26

$129,350 129,635 284,886 $543,871

b.A Computation of the Cumulative Translation Adjustment is as follows: BOY Net assets x EOY -BOY Exchange rates

4,961,250

$0.07

$347,288

$0.26

$0.19

Net income x EOY -Avg. Exchange rates

1,029,000

$0.04

41,160

$0.26

$0.22

Dividends x EOY -Div. Exchange rates

(102,900)

$0.02

(2,058) $0.26

$0.24

$386,390 BOY Cumulative Translation Adjustment

248,062

EOY Cumulative Translation Adjustment

$634,452

BOY Net assets @ BOY Exchange rate

4,961,250

$0.19

$942,638

Net income

1,029,000

$0.22

226,380

Dividends

(102,900)

$0.24

(24,696) $1,144,322

EOY Net assets @ EOY Exchange rate

5,887,350

$0.26

1,530,711

Translation Adjustment for the year

$386,389

BOY Cumulative Translation Adjustment

248,062

EOY Cumulative Translation Adjustment

$634,451

Solutions Manual, Chapter 8

33.

b.A continued The parent makes the following journal entry for the year based on this computation: Equity investment

386,390 Other comprehensive income

386,390

(to record the translation adjustment for the year)

In addition, the parent will accrue the translation again or loss for the year related to the AAP assets as follows: BOY Balance Amortization - Year 2 EOY Balance AAP translation gain (loss)

R 270,000 (30,000)

rate 0.19 0.22

240,000

0.26

$ 51,300 (6,600) 44,700 62,400 17,700

The Parent makes the following journal entry (to recognize the AAP translation gain for the year) based on the AAP computation of an AAP asset relating to a patent: Equity investment

17,700

Other comprehensive income (to recognize the AAP translation gain for the year)

17,700

c. i. BOY BOY BOY BOY BOY

Common Stock APIC Ret Earnings Unamort. AAP CTA Equity income Trans adj OCI APIC

Equity Investment 34,300 42,875 617,400 51,300 (R270,000 x $0.19/R) 248,062 219,780 24,696 dividends 386,390 17,700 1,617,807 24,696 1,593,111

ii. The equity income of $219,780 equals the net income of the Subsidiary ($226,380) less the amortization of the AAP in the amount of $6,600.

Advanced Accounting, 4th Edition

33.

d. Parent Income statement: Sales Cost of goods sold Gross Profit Equity income Operating expenses

Subsidiary

30,310,000 (21,217,000) 9,093,000 219,780 (5,758,900)

1,617,000 (970,200) 646,800

Net income

3,553,880

226,380

Statement of retained earnings: BOY retained earnings Net income Dividends

23,940,718 3,553,880 (957,628)

617,400 [E] 226,380 (24,696)

Ending retained earnings

26,536,970

819,084

[C] (420,420) [D]

Consolidated 31,927,000 (22,187,200) 9,739,800 0 (6,185,920)

219,780 6,600

3,553,880

617,400 [C]

24,696

23,940,718 3,553,880 (957,628) 26,536,970

Statement of Accum. Comp. Income: BOY Cumulative Translation Adjustment Current Year Translation Gain (Loss)

248,062 404,090

248,062 [E] 386,390 [C]

EOY Cumulative Translation Adjustment

652,152

634,452

652,152

Balance sheet: Assets Cash Accounts receivable Inventory Equity Investment

7,297,685 3,879,680 5,880,140 1,593,111

543,871 443,352 569,478

7,841,556 4,323,032 6,449,618 0

PPE, net

31,316,292

1,053,343 [A] [D]

49,966,908

2,610,044

[D]

[C] [E] [A]

Liabilities and Stockholders’ Equity Current liabilities Long-term Liabilities Common Stock APIC Retained Earnings

2,427,831 8,750,000 2,053,580 9,546,376 26,536,970

Cumulative Translation Adjustment

652,152

634,452

49,966,908

2,610,044

Solutions Manual, Chapter 8

248,062 404,090

17,700

599,174 942,637 51,300

51,300 11,100

248,062 404,090

32,432,035 51,046,241

324,106 755,227 34,300 [E] 42,875 [E] 819,084

2,751,937 9,505,227 2,053,580 9,546,376 26,536,970

34,300 42,875

652,152 ∑

1,635,507

∑

1,635,507

51,046,241

34.

a. Subsidiary (in CAD)

Translation Rate

Subsidiary (in $)

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income

4,200,000 (2,520,000) 1,680,000 (1,092,000) 588,000

$0.79 $0.79

$3,318,000 (1,990,800) 1,327,200 (862,680) $464,520

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

2,205,000 given 588,000 above (58,800) $0.81 2,734,200 computed

$1,609,650 464,520 (47,628) $2,026,542

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

1,195,320 974,400 1,251,600 2,315,040 5,736,360

$0.82 $0.82 $0.82 $0.82

$980,162 799,008 1,026,312 1,898,333 $4,703,815

712,320 1,659,840 280,000 350,000 2,734,200

$0.82 $0.82 $0.66 $0.66 above plug

$584,102 1,361,069 184,800 231,000 2,026,542 316,302 $4,703,815

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity

5,736,360

$0.79

Table continued next page

Advanced Accounting, 4th Edition

34.

a. continued Subsidiary (in CAD)

Translation Rate

Subsidiary (in $)

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

588,000 (162,400) (208,600) 118,720 335,720

$0.79 $0.79 $0.79 $0.79

$464,520 (128,296) (164,794) 93,789 $265,219

Change in PPE, net Net cash flows from investing activities

(215,040) (215,040)

$0.80

($172,032) ($172,032)

Change in long-term debt Dividends Net cash flows from financing activities

276,640 (58,800) 217,840

$0.80 $0.81

$221,312 (47,628) $173,684

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

338,520 plug $0.76 $0.82

856,800 1,195,320

$266,871 62,123 651,168 $980,162

b.A Computation of the Cumulative Translation Adjustment is as follows: BOY Net assets x EOY -BOY Exchange rates

2,835,000

$0.06

$170,100

$0.82

$0.76

Net income x EOY -Avg. Exchange rates

588,000

$0.03

17,640

$0.82

$0.79

Dividends x EOY -Div. Exchange rates

(58,800)

$0.01

(588)

$0.82

$0.81

$187,152 BOY Cumulative Translation Adjustment

129,150

EOY Cumulative Translation Adjustment

$316,302

BOY Net assets @ BOY Exchange rate

2,835,000

$0.76

$2,154,600

Net income

588,000

$0.79

464,520

Dividends

(58,800)

$0.81

(47,628) $2,571,492

EOY Net assets @ EOY Exchange rate

3,364,200

$0.82

2,758,644

Translation Adjustment for the year

$187,152

BOY Cumulative Translation Adjustment

129,150

EOY Cumulative Translation Adjustment

$316,302

Solutions Manual, Chapter 8

34.

b.A continued The parent makes the following journal entry for the year based on this computation: Equity investment

187,152

Other comprehensive income (to record the translation adjustment for the year)

187,152

In addition, the parent will accrue the translation again or loss for the year related to the AAP assets as follows: *BOY Balance Amortization

450,000 (50,000)

0.76 $0.79

EOY Balance AAP translation gain (loss)

400,000

0.82

342,000 (39,500) 302,500 328,000 25,500

The Parent makes the following journal entry (to recognize the AAP translation gain for the year) based on the AAP computation of an AAP asset related to a patent, as follows: Equity investment

25,500*

Other comprehensive income (to recognize the AAP translation gain for the year)

25,500

c. i. BOY BOY BOY BOY BOY

Common Stock APIC Ret Earnings Unamort. AAP CTA Equity income Trans adj OCI net bal

Equity Investment 184,800 231,000 1,609,650 342,000 (CAD450,000 x $0.76/CAD) 129,150 425,020 47,628 dividends 187,152 25,500 3,134,272 47,628 3,086,644

ii. The Equity Income of $425,020 equals the net income of the Subsidiary ($464,520) less the amortization of the AAP asset ($39,500).

Advanced Accounting, 4th Edition

34.

d. Parent

Subsidiary

Income statement: Sales Cost of goods sold Gross Profit Equity income Operating expenses Net income

17,320,000 (12,124,000) 5,196,000 425,020 (3,290,800) 2,330,220

3,318,000 (1,990,800) 1,327,200 [C] (862,680) [D] 464,520

425,020 39,500

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

13,680,410 2,330,220 (547,216) 15,463,414

1,609,650 [E] 464,520 (47,628) 2,026,542

1,609,650

Statement of Accum. Comp. Income: BOY Cumulative Translation Adjustment Current Year Translation Gain (Loss) EOY Cumulative Translation Adjustment

Consolidated 20,638,000 (14,114,800) 6,523,200 0 (4,192,980) 2,330,220

[C]

13,680,410 2,330,220 47,628 (547,216) 15,463,414

129,150

[E]

129,150

212,652

187,152

[C]

212,652

341,802

316,302

341,802

Balance sheet: Assets Cash Accounts receivable Inventory Equity Investment

2,262,386 2,216,960 3,360,080 3,086,644

980,162 799,008 1,026,312

3,242,548 3,015,968 4,386,392 0

PPE, net

17,895,024

1,898,333

28,821,094

4,703,815

30,766,265

1,387,332 5,000,000 1,173,474 5,455,072 15,463,414

584,102 1,361,069 184,800 231,000 2,026,542

1,971,434 6,361,069 1,173,474 5,455,072 15,463,414

341,802 28,821,094

316,302 4,703,815

Liabilities and Stockholders’ Equity Current liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative Translation Adjustment

Solutions Manual, Chapter 8

129,150 [D]

[C] [E] [A] [A] [D]

342,000 (14,000)

[E] [E]

184,800 231,000

∑

3,159,772

25,500

590,044 2,154,600 342,000

212,652

20,121,357

∑

341,802 3,159,772 30,766,265

35.

a. Subsidiary (in €)

Translation Rate

Subsidiary (in $)

Income statement: Sales Cost of goods sold Gross Profit Operating expenses Net income

6,300,000 (3,780,000) 2,520,000 (1,638,000) 882,000

$1.17 $1.17

$7,371,000 (4,422,600) 2,948,400 (1,916,460) $1,031,940

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

3,307,500 882,000 (88,200) 4,101,300

given above $1.19 computed

$3,704,400 1,031,940 (104,958) $4,631,382

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Total Assets

1,792,980 1,461,600 1,877,400 3,472,560 8,604,540

$1.20 $1.20 $1.20 $1.20

$2,151,576 1,753,920 2,252,880 4,167,072 $10,325,448

1,068,480 2,489,760 420,000 525,000 4,101,300

$1.20 $1.20 $0.96 $0.96 above plug

$1,282,176 2,987,712 403,200 504,000 4,631,382 516,978 $10,325,448

Liabilities and Stockholders’ Equity Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings Cumulative translation adjustment Total Liabilities & Equity

8,604,540

$1.17

Table continued next page

Advanced Accounting, 4th Edition

35.

a. continued Subsidiary (in €)

Translation Rate

Subsidiary (in $)

Statement of cash flows: Net income Change in Accounts Receivable Change in Inventories Change in Current Liabilities Net cash flows from operating activities

882,000 (243,600) (312,900) 178,080 503,580

$1.17 $1.17 $1.17 $1.17

$1,031,940 (285,012) (366,093) 208,354 $589,189

Change in PPE, net Net cash flows from investing activities

(322,560) (322,560)

$1.18

($380,621) ($380,621)

Change in long-term debt Dividends Net cash flows from financing activities

414,960 (88,200) 326,760

$1.18 $1.19

$489,653 (104,958) $384,695

Net change in cash Effect of exchange rate on cash Beginning cash Ending cash

507,780 1,285,200 1,792,980

plug $1.15 $1.20

$593,263 80,333 1,477,980 $2,151,576

b.A BOY Net assets x EOY -BOY Exchange rates

4,252,500

$0.05

$212,625

$1.20

$1.15

Net income x EOY -Avg. Exchange rates

882,000

$0.03

26,460

$1.20

$1.17

Dividends x EOY -Div. Exchange rates

(88,200)

$0.01

(882)

$1.20

$1.19

$238,203 BOY Cumulative Translation Adjustment

278,775

EOY Cumulative Translation Adjustment

$516,978

BOY Net assets @ BOY Exchange rate

4,252,500

$1.15

$4,890,375

Net income

882,000

$1.17

1,031,940

Dividends

(88,200)

$1.19

(104,958) $5,817,357

EOY Net assets @ EOY Exchange rate

5,046,300

$1.20

6,055,560

Translation Adjustment for the year

$238,203

BOY Cumulative Translation Adjustment

278,775

EOY Cumulative Translation Adjustment

$516,978

Solutions Manual, Chapter 8

35.

b.A continued The parent makes the following journal entry for the year based on this computation: Equity investment

238,203 Other comprehensive income

238,203

(to record the translation adjustment for the year)

In addition, the parent will accrue the translation again or loss for the year related to the AAP assets as follows: AAP

BOY Balance Amortization

400,000 (80,000)

1.15 $1.17

EOY Balance AAP translation gain (loss)

320,000

1.20

460,000 (93,600) 366,400 384,000 17,600

The Parent makes the following journal entry (to recognize the AAP translation gain for the year) based on the AAP computation of an AAP asset related to a patent, as follows: Equity investment

17,600

Other comprehensive income (to recognize the AAP translation gain for the year)

17,600

c. i. BOY BOY BOY BOY BOY

CS APIC RE Unamort. AAP CTA Equity income (see below: ii) Trans adj OCI (see above) net bal

Equity Investment 403,200 504,000 3,704,400 460,000 278,775 938,340 104,958 dividends 238,203 17,600 6,544,518 104,958 6,439,560

ii. Sub NI Amort of AAP

Equity Income 1,031,940 (93,600) 938,340

Advanced Accounting, 4th Edition

35.

d. Parent

Subsidiary

25,980,000 (18,186,000) 7,794,000 938,340 (4,936,200)

7,371,000 (4,422,600) 2,948,400

Net income

3,796,140

1,031,940

Statement of retained earnings: BOY retained earnings Net income Dividends

20,520,615 3,796,140 (820,824)

3,704,400 1,031,940 (104,958)

Ending retained earnings

23,495,931

4,631,382

Statement of Accum. Comp. Income: BOY Cumulative Translation Adjustment Current Year Translation Gain (Loss)

278,775 255,803

278,775 238,203

EOY Cumulative Translation Adjustment

534,578

516,978

534,578

Balance sheet: Assets Cash Accounts receivable Inventory Equity Investment

1,906,670 3,325,440 5,040,120 6,439,560

2,151,576 1,753,920 2,252,880

4,058,246 5,079,360 7,293,000 0

PPE, net

26,842,536

4,167,072

43,554,326

10,325,448

47,824,214

Liabilities and Stockholders’ Equity Current liabilities Long-term Liabilities Common Stock APIC Retained Earnings

2,080,998 7,500,000 1,760,211 8,182,608 23,495,931

1,282,176 2,987,712 403,200 504,000 4,631,382

3,363,174 10,487,712 1,760,211 8,182,608 23,495,931

Cumulative Translation Adjustment

534,578

516,978

43,554,326

10,325,448

Income statement: Sales Cost of goods sold Gross Profit Equity income Operating expenses

Solutions Manual, Chapter 8

(1,916,460)

[C] [D]

Consolidated 33,351,000 (22,608,600) 10,742,400 0 (6,946,260)

938,340 93,600

3,796,140

[E]

3,704,400 [C]

104,958

20,520,615 3,796,140 (820,824) 23,495,931

[E] [C]

278,775 255,803

[D]

[C] [E] [A] [A] [D]

[E] [E]

17,600

1,089,185 4,890,375 460,000

460,000 (76,000)

278,775 255,803

31,393,608

403,200 504,000

534,578 ∑

6,562,118

∑

6,562,118

47,824,214

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 9— Government Accounting: Fund-Based Financial Statements 1.

Some of the questions we have about the financial affairs of a government are the following: Is the government efficient in delivering the services that we expect? Is it financially solvent? Can we account for all of the funds that have been entrusted to it? The GASB identifies the following three groups as the primary users of governmental financial statements in its Concept Statement No. 1: 1) citizens, 2) regulators and 3) investors. Further, it confirms that financial reports are used, primarily, “to compare actual financial results with the legally adopted budget; to assess financial condition and results of operations; to assist in determining compliance with finance-related laws, rules, and regulations; and to assist in evaluating efficiency and effectiveness” (GASBCS 1, Summary).

The cornerstone of governmental financial reporting is the concept of accountability which the GASB defines as follows: “Governmental accountability is based on the belief that the citizenry has a ‘right to know,’ a right to receive openly declared facts that may lead to public debate by the citizens and their elected representatives. Financial reporting plays a major role in fulfilling government's duty to be publicly accountable in a democratic society” (GASBCS 1, ¶56).

GASBS 34 requires governments to issue fund financial statements and governmentwide financial statements. Governmental fund financial statements are prepared using a modified accrual basis of accounting because they focus on the flow of current financial resources that have been entrusted to governmental officials. A significant use of fund financial statements is to ensure that the assets entrusted to the government by its citizens have been used as they have directed and that the government has operated within the budget set for it by its citizenry. Government-wide financial statements provide information about the government as a whole on an accrual basis and are similar to the types of financial reports we have used to describe the financial activities of businesses. These statements allow users to better assess the financial condition of the government in their investment decisions.

Solutions Manual, Chapter 9

The fund accounting system organizes the government into discrete accounting entities, called funds, each of which is accounted for separately. The primary purpose of fund accounting is to segregate the accounting for these activities so that they can be monitored. Fund accounting is designed to provide the control mechanism necessary to ensure that cash is spent as appropriated in the budget. Funds are also fiscal entities that, in addition to real/permanent/balance sheet accounts, have nominal/temporary/operating statement accounts which are closed out at the end of each accounting period.

Fund accounting for governmental funds focuses primarily on cash inflows and outflows and the current year’s budget in the short-term. Long-term assets (like PPE and infrastructure) and long-term liabilities (like bonds and leases) are not reported on the fund balance sheet. The absence of this information makes it difficult to effectively analyze the financial condition of the government. In contrast, proprietary funds, fiduciary funds, and government-wide financial statements are prepared under accrual accounting because their measurement focus is on the long-term flow of economic resources, and, as a result, include long-term assets and liabilities. Consequently, we are better able to answer the first two questions we pose about the governmental unit we are interested in: Is it efficient in delivering the services that we expect, and is it financially solvent?

The GASB confirms the importance of a budget in its first Concept Statement: “[A budget] is a form of control usually having the force of law. A legally adopted budget provides both authorizations of and limitations on amounts that may be spent for particular purposes. Because budgetary authorizations result from competition for scarce resources and budgetary limitations generally cannot be exceeded without due process, the governmental entity needs to demonstrate that it is accountable from both the authorization and the limitation perspectives [emphasis the GASB]” (GASBCS 1, ¶19c).

An appropriation is a sum of money that has been set aside for a specific use in the legally approved budget of a governmental entity.

The three types of funds are governmental funds, proprietary funds, and fiduciary funds. Governmental funds include the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds. Proprietary funds include enterprise funds and internal service funds. Fiduciary funds include pension and other employee benefit funds, investment trust funds, private purpose trust funds, and agency funds.

Advanced Accounting, 4th Edition

There is only one requirement relating to the establishment of funds: there should be one and only one general fund (GASB Cod. Sec. 1300.116). Aside from that restriction, governmental units should establish and maintain only those funds that are required by law and necessary for sound financial administration. Only the minimum number of funds consistent with legal and operating requirements should be established because unnecessary funds result in inflexibility, undue complexity, and inefficient financial administration (GASB Cod. Sec. 1300.118).

10.

Revenues and expenditures in governmental funds are recognized on the current financial resources measurement focus and the modified accrual basis of accounting (GASB Cod. Sec. 1100.110). Current financial resources measurement focus measures what resources can be consumed in the near future. For assets, this includes cash, investments, and receivables (plant, property, and equipment is not included in fund financial statements as it is consumed over a longer period of time). For liabilities, this includes those obligations that would normally be liquidated with expendable available financial resources, such as accounts payable and accruals. These liabilities will, in the determination of management, require the use of current resources for payment. Longterm liabilities are not reported in fund financial statements because their liquidation will require the use of future financial resources. The modified accrual basis of accounting refers to when the transaction is recognized. Revenues are recognized in the accounting period in which they become susceptible to accrual, that is, when they become both measurable and available to finance expenditures. "Available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period, usually 60 days after year-end. Expenditures should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term debt and on special assessment indebtedness secured by interest-bearing special assessment levies, which should be recognized when due.

11.

Property taxes due to a government, net of estimated uncollectibles, typically can be determined and recorded in a governmental or agency fund when levied. Property taxes levied for the current fiscal year are "available" and should be recognized as revenue, even though collectible in the period subsequent to levy, if (1) their ultimate collectibility is reasonably assured, net of reasonably estimated losses, and (2) they are collectible soon enough in the subsequent period to finance current-period expenditures (GASB Cod. Sec. P70.104). Collectible “soon enough in the subsequent period to finance current period expenditures” is interpreted to mean 60 days. The 60day rule implies that governments that expect receivables to be collected after 60 days should defer the revenue until collected.

Solutions Manual, Chapter 9

12.

Local governments often receive aid from the state or federal government in the form of revenue sharing, grants, and other subsidies. These grants often contain conditions such as the required characteristics of recipients, time requirements, the use of funds only as a reimbursement, and contingencies such as those related to a specified action of the recipient. Recipients should recognize receivables (or a decrease in liabilities) and revenues (net of estimated uncollectible amounts), when all applicable eligibility requirements, including time requirements, are met. Resources transmitted before the eligibility requirements are met should be reported as deferred revenues by recipients. (GASB Cod. Sec. N50.117-.118)

13.

Proprietary and fiduciary fund revenues and expenses should be recognized on the accrual basis because their measurement focus is on the long-term flow of economic resources. Revenues should be recognized in the accounting period in which they are earned and become measurable; expenses should be recognized in the period incurred, if measurable.

14.

The reason for a budgetary journal entry is so that government administrators can regularly monitor variances between actual and budgeted revenues and expenditures in order to make corrections as needed. This monitoring process is critical since, unlike businesses, governments can only change revenues through the legislative process and cannot move cash from one fund to another to make up for shortfalls. Instead, managers must take steps to ensure that expenditures not exceed appropriations.

15.

An encumbrance is a purchase order or other contractual commitment that requires the payment of funds in the future relating to an existing appropriation. Accountability is the cornerstone of financial reporting in government. Encumbrances is a budgetary account that serves to set aside funds that have been appropriated at an expected amount so that the government does not expend more than it was authorized to spend.

16.

An expenditure is the using up (or expending) of an appropriation, the legal authority to spend.

17.

The remaining authority to issue further appropriations of approved expenditures is given by the following formula: Remaining authority

BUDGETARY APPROPRIATIONS

ENCUMBRANCES + Expenditures outstanding to date

At any time, therefore, government managers can assess their authority to issue additional appropriations. The general ledger can be set up with a column for appropriations with columns for encumbrances and expenditures to its right, leading to a far right column showing the remaining budget available for future encumbrances/expenditures.

Advanced Accounting, 4th Edition

18.

19.

The four types of interfund activities are as follows: •

Interfund loans — amounts provided between funds with a requirement for repayment.

•

Interfund services provided and used — sales and purchases of goods and services between funds for a price approximating their external exchange value.

•

Interfund transfers — flows of assets (such as cash or goods) between funds without equivalent flows of assets in return and without a requirement for repayment.

•

Interfund reimbursements — repayments from the funds responsible for particular expenditures or expenses to the funds that initially paid for them.

The reporting government’s main operating fund is the General Fund and should always be reported as a major fund. Other funds are designated as major funds, and reported in separate columns in the fund financial statements, if (GASB Cod. Sec. 2200.153), a. Total assets, liabilities, revenues, or expenditures/expenses are at least 10% of the corresponding total for all funds of the fund’s type (i.e., a specific enterprise fund whose total assets are greater than 10% of the total assets of all enterprise funds), and b. Total assets, liabilities, revenues, or expenditures/expenses of the individual governmental fund or enterprise fund are at least 5% of the corresponding total for all governmental and enterprise funds combined (i.e., a governmental fund whose total assets are greater than 5% of the total assets for all governmental and enterprise funds combined).

20.

The required financial statements for the three types of funds are as follows: •

Governmental funds o Balance sheet o Statement of revenues, expenditures, and changes in fund balances

•

Proprietary funds o Statement of net position o Statement of revenues, expenses, and changes in fund position o Statement of cash flows

•

Fiduciary funds (and component units that are fiduciary in nature) o Statement of fiduciary net position o Statement of changes in fiduciary net position

Solutions Manual, Chapter 9

21.

Answer: D The transfers in from other funds is not revenue. Total estimated revenue is, therefore, $4,000,000 + $300,000 + $250,000 = $4,550,000.

22.

Answer: C Only the $10,000 cash paid by the government is considered an expenditure since the accounting entity we are focused on is the government’s General Fund that follows modified accrual basis of accounting. Under this system we are matching up the amounts approved in the budget with those actually expended. The actuariallydetermined annual required contribution is not relevant and the $8,200 and $800 amounts are paid and refunded by the pension plan, respectively, not the General Fund.

23.

Answer: A An enterprise fund is a business-type activity of the government that is available to the public and is financed, in whole or in part, by fees charged to users of the enterprise. The municipal landfill recovers its costs by charges to customers and, therefore, meets the definition of an enterprise fund.

24.

Answer: C Fiduciary funds are used to monitor resources that are required to be held in trust for others. They include funds for defined benefit pension plans, defined contribution plans, other post-employment benefit plans, and the like. The private-purpose trust fund is a fiduciary fund.

25.

Answer: D An enterprise fund is a business-type activity of the government that is available to the public and is financed, in whole or in part, by fees charged to users of the enterprise. Since King City desires to recoup 55% of its costs from library fees, the library should be established as an enterprise fund.

26.

Answer: A Only the transfer to the debt service fund is “other financing uses.”

27.

Answer: B Wythe should recognize 99% of the property tax levy since that is the amount is expects to collect and all amounts are expected to be collected within 60 days of its fiscal yearend.

Advanced Accounting, 4th Edition

28.

Answer: A Agency funds are used to report resources held by the reporting government in a purely custodial capacity (assets equal liabilities). Agency funds typically involve only the receipt, temporary investment, and remittance of fiduciary resources to individuals, private organizations, or other governments.

29.

Answer: A The Governmental Accounting Standards Board (GASB) is the primary standard-setting body for governmental accounting standards. The Federal Accounting Standards Advisory Board (FASAB) sets accounting standards for the Federal Government.

30.

Answer: B The financial statements for the internal service fund would be prepared using the economic resources measurement focus and the accrual basis of accounting. Governmental funds, including the general fund, special revenue fund, capital projects fund, debt service fund, and permanent fund, are prepared using the current financial resources measurement focus and the modified accrual basis of accounting.

31.

Answer: A

32.

Answer: C Governmental funds use the current financial resources measurement focus and the modified accrual basis of accounting. Proprietary and fiduciary funds use the economic resources measurement focus and the accrual basis of accounting.

33.

Answer: D

34.

Answer: C Restricted fund balances are those with resources whose use has been limited by external sources such as enabling legislation. Assigned fund balances are constrained by the government’s intent, but are neither restricted nor committed. Nonspendable fund balances represent resources which are in a form that cannot be spent, such as inventories or prepaid assets. Committed fund balances represent balances that can only be used for specific purposes.

35.

Answer: B Since the property taxes will not be collected within 60 days of the close of the fiscal year, they are considered to be unavailable to satisfy current obligations and should be recorded with a credit to a deferred inflow of resources.

Solutions Manual, Chapter 9

36.

Answer: A When the truck is finally purchased, the Town of Bolton should debit the budgetary control account and credit encumbrances for the same amount as was recorded in the initial journal entry.

37.

Answer: C Debt service funds are used to account for the accumulation of resources for, and the payment of, principal and interest of general debt of the government. Both fiduciary funds and proprietary funds record long-term liabilities and service their own debt.

38.

Answer: D Capital projects funds are governmental funds; consequently, they use the financial resources measurement focus and do not recognize either long-term assets or the depreciation related to those assets.

39.

The journal entry to record the budget is as follows: ESTIMATED REVENUES ESTIMATED OTHER FINANCING SOURCES

60,000,000 9,000,000 APPROPRIATIONS ESTIMATED OTHER FINANCING USES BUDGETARY FUND BALANCE BABALANCEBALANCE

40,000,000 25,000,000 4,000,000

(to record the budget for the year)

40.

The fund balance section of the balance sheet for the City of Fox Trail’s General Fund is as follows: FUND BALANCES NONSPENDABLE: INVENTORIES RESTRICTED: INTERGOVERMENTAL GRANTS EMERGENCY SERVICES COMMITTED: CONTINGENCIES CAPITAL PROJECTS ASSIGNED UNASSIGNED TOTAL FUND BALANCE

15,000 175,000 250,000 300,000 200,000 800,000 $ 1, 740,000

Advanced Accounting, 4th Edition

41.

The journal entries to record the issuance of the purchase order for the truck and its ultimate payment at delivery are as follows: a. ENCUMBRANCES

48,000 BUDGETARY FUND BALANCE

48,000

(to record issuance of purchase order for a truck)

BUDGETARY FUND BALANCE ENCUMBRANCES

48,000 48,000

c. Expenditures

51,000 Cash or Vouchers payable

51,000

(to reverse the previous encumbrance entry and record purchase of the truck)

42.

The journal entry to close the encumbrance account at year-end and to reestablish the encumbrance in the succeeding year are as follows (assuming budgetary authority carries over to the succeeding year): To close the encumbrance account. a. BUDGETARY FUND BALANCE

80,000 ENCUMBRANCES

80,000

b. Fund balance – unassigned

80,000 Fund balance – assigned

80,000

(to reverse the budgetary encumbrance and reserve the fund balance for the outstanding encumbrance)

43.

The journal entry to close the encumbrance account at year-end and to re-establish the encumbrance in the succeeding year are as follows (assuming budgetary authority does not carry over to the succeeding year): To close the encumbrance account. a. BUDGETARY FUND BALANCE

45,000 ENCUMBRANCES

45,000

b. Fund balance – unassigned

45,000 Fund balance – assigned

45,000

(to reverse the budgetary encumbrance and reserve the fund balance for the outstanding encumbrance)

Solutions Manual, Chapter 9

44.

The journal entry to record the sale of the truck in the general fund is as follows: Cash

25,000 Other financing sources

25,000

(to record the sale of the truck)

45.

The journal entry to record the issuance of the bond is as follows: Cash

5,000,000 Other financing sources – proceeds from bond issue

5,000,000

(to record sale of a bond)

Expenditure – Interest on bond Expenditure – Principal on bond Cash

250,000 1,000,000 1,250,000

(to record payment of interest and principal on bond issue)

46.

The journal entry to record the acquisition of equipment via lease is as follows: Expenditure – capital outlay Other financing sources – proceeds from capital lease

40,000 40,000

(to record the acquisition of a capital asset via lease)

Expenditure – interest Expenditure – lease obligation Cash

1,000 2,000 3,000

(to record the payment on a capital lease)

47.

The journal entries to record the purchase and year-end adjustment are as follows (purchases method): Expenditures Vouchers payable (to record purchase of $4,000 of supplies inventory)

4,000

Inventory - supplies Fund balance—nonspendable (to recognize the $1,500 remaining balance of supplies inventory)

1,500

4,000

1,500

Advanced Accounting, 4th Edition

48.

The journal entries to record the purchase and year-end adjustment are as follows (consumption method):

49.

Expenditures Vouchers payable (to record purchase of $4,000 of supplies inventory)

4,000

Inventory - supplies Expenditures (to recognize the $1,500 remaining balance of supplies inventory)

1,500

Fund balance - unassigned Fund balance—nonspendable (to recognize the $1,500 remaining balance of supplies inventory)

1,500

4,000

1,500

The journal entries to record the transactions are as follows: a.

ESTIMATED REVENUES APPROPRIATIONS BUDGETARY FUND BALANCE

3,700,000

Cash

3,600,000

3,500,000 200,000

Revenues c.

3, 600,000

ENCUMBRANCES BUDGETARY FUND BALANCE

500,000

BUDGETARY FUND BALANCE ENCUMBRANCES

450,000

Expenditures Cash

445,000

Expenditures Cash

2,000,000

Solutions Manual, Chapter 9

500,000

450,000

445,000

2,000,000

50.

a. The journal entries to record the transactions are as follows: 1.

Cash

300,000

Revenues from grants To record revenues 2.

300,000

Expenditures—Truck Cash To record expenditure for purchase of truck

50,000

Expenditures—wages Cash To record expenditure for payment of wages and salaries

25,000

Cash

50,000

25,000

Other financing sources – proceeds of borrowing To record receipt of loan proceeds 5.

Expenditures—interest Cash To record payment of interest on note

50,000

500 500

b. TOWN OF BOLTON Balance Sheet General Fund Asset: Cash Fund balance

$374,500 $374,500

continued

Advanced Accounting, 4th Edition

50.

b. continued TOWN OF BOLTON Statement of Revenues, Expenditures and Changes in Fund Balances Revenues: Grants

$300,000

Expenditures: Acquisition of truck Wages Interest Total expenditures

50,000 25,000 500 75,500

Excess of revenues over expenditures

224,500

Other financing sources(uses): Proceeds of borrowing

50,000

Net change in fund balances

$274,500

Fund Balance, beginning Fund Balance, ending

100,000 $374,500

Solutions Manual, Chapter 9

51.

The journal entries to record the transactions are as follows: a. ESTIMATED REVENUES ESTIMATED OTHER FINANCING SOURCES APPROPRIATIONS BUDGETARY FUND BALANCE (to record the budget)

97,490 2,000

b. Cash Receivables—real estate & personal property taxes Receivables—intergovernmental revenues Revenues—real estate & personal property taxes Revenues—intergovernmental Other financing sources—bond proceeds (record revenues and other financing sources)

2,000 82,100 14,742

c. ENCUMBRANCES

91,810

92,728 6,762

82,100 14,742 2,000

BUDGETARY FUND BALANCE (to record the issuance of purchase invoices) d. BUDGETARY FUND BALANCE ENCUMBRANCES (to reverse previous encumbrance journal entry) Expenditures—general government Expenditures—public safety Expenditures—education Expenditures—public works Expenditures—human services Payables (to record expenditures) e. Expenditures—debt principal Expenditures—debt interest Cash (to record debt payments)

91,810

91,810 91,810

15,227 9,181 55,086 4,590 9,181 93,265

700 100 800

Advanced Accounting, 4th Edition

51.

f. Cash Payables

5,571 89,974

Receivables—real estate & personal property taxes Receivables—intergovernmental revenues (to record collection of receivables and payment of payables) g. Revenues

81,540 14,005

1,170

Deferred revenues (to defer revenues)

1,170

Closing Entries h. 1. APPROPRIATIONS BUDGETARY FUND BALANCE ESTIMATED REVENUES ESTIMATED OTHER FINANCING SOURCES (to reverse budget entry)

92,728 6,762 97,490 2,000

2. Revenues - real estate & personal property taxes Revenues - intergovernmental Other financing sources - bond proceeds Expenditures—general government Expenditures—public safety Expenditures—education Expenditures—public works Expenditures—human services Expenditures—debt principal Expenditures—debt interest Fund Balance—unassigned (to close out revenue and expenditure accounts)

80,930 14,742 2,000

3. BUDGETARY FUND BALANCE ENCUMBRANCES

1,080

15,227 9,181 55,086 4,590 9,181 700 100 3,607

1,080

Fund balance—unassigned Fund balance - assigned (to close remaining encumbrances and reserve fund balance for encumbrances that lapsed, but are expected to be honored in the following year)

Solutions Manual, Chapter 9

1,080 1,080

52.

a. The pre-closing trial balance for the General Fund of the City of Iron River is as follows: Trial Balance: Cash Receivables: Real estate & personal property Intergovernmental Payables Deferred revenues Fund balances: Assigned Unassigned Revenues—Real estate taxes Intergovernmental revenues Expenditures—General government Expenditures—Public safety Expenditures—Education Expenditures—Public works Expenditures—Human services Expenditures—Debt principal payments Expenditures—Debt interest payments Other financing sources—proceeds from bonds

DR $26,091 2,360 22,337

$4,011 24,570 6,480 12,120 80,930 14,742 15,227 9,181 55,086 4,590 9,181 700 100 $144,853

2,000 $144,853

Advanced Accounting, 4th Edition

52.

b. The Balance Sheet and the Statement of Revenues, Expenditures, and Changes in Fund Balances for the fiscal year for the General Fund for Iron River are as follows: Balance Sheet: Cash Receivables: Real estate & personal property Intergovernmental Total Assets

$26,091 2,360 22,337 $50,788

Payables Deferred revenues Total Liabilities Fund Balances: Assigned Unassigned Total fund balances Total liabilities and fund balances

6,480 15,727 22,207 $50,788

Statement of Revenues, Expenditures, and Changes in Fund Balances: Revenues: Real estate taxes Intergovernmental Total Revenues

$80,930 14,742 95,672

Expenditures: General government Public safety Education Public works Human services Debt principal payments Debt interest payments Total Expenditures

15,227 9,181 55,086 4,590 9,181 700 100 94,065

Excess (Deficiency) of Revenues over Expenditures

1,607

Other Financing Sources (Uses) Proceeds from bonds Total Other Financing Sources (Uses)

2,000 2,000

Net Change in Fund Balances Fund Balances at Beginning of Year Fund Balances at End of Year

$3,607 18,600 $22,207

Solutions Manual, Chapter 9

$4,011 24,570 28,581

53.

The journal entries to record the transactions for the City of Superior are as follows: a. ESTIMATED REVENUES ESTIMATED OTHER FINANCING SOURCES APPROPRIATIONS BUDGETARY FUND BALANCE (to record the budget)

184,226 4,600

b. Cash Receivables—real estate & personal property taxes Receivables—intergovernmental revenues Revenues— real estate & personal property taxes Revenues—intergovernmental Other financing sources—bond proceeds (record revenues and other financing sources)

4,600 156,975 28,256

c. ENCUMBRANCES

178,039

177,729 11,097

156,975 28,256 4,600

BUDGETARY FUND BALANCE (to record the issuance of purchase invoices)

178,039

d. BUDGETARY FUND BALANCE 175,969

ENCUMBRANCES (to reverse previous Encumbrance journal entry) Expenditures—general government Expenditures—public safety Expenditures—education Expenditures—public works Expenditures—human services Payables (to record expenditures) e. Expenditures—debt principal Expenditures—debt interest Cash (to record debt payments)

175,969

26,396 17,597 105,581 8,798 17,597 175,969

690 230

920

Advanced Accounting, 4th Edition

53.

f. Cash Payables

10,678 172,450

Receivables—real estate & personal property taxes Receivables—intergovernmental revenues (to record collection of receivables and payment of payables) g. Revenues

156,285 26,843

2,243

Deferred revenues (Deferral of revenues)

2,243

h. Closing Entries 1. APPROPRIATIONS BUDGETARY FUND BALANCE ESTIMATED REVENUES ESTIMATED OTHER FINANCING SOURCES (to reverse budget entry)

177,729 11,097 184,226 4,600

2. Revenues—real estate & personal property taxes Revenues—intergovernmental Other financing sources—bond proceeds Expenditures—general government Expenditures—public safety Expenditures—education Expenditures—public works Expenditures—human services Expenditures—debt principal Expenditures—debt interest Fund Balance—unassigned (to close out revenue and expenditure accounts)

154,732 28,256 4,600 26,396 17,597 105,581 8,798 17,597 690 230 10,699

3. BUDGETARY FUND BALANCE 2,070 ENCUMBRANCES

2,070

Fund balance - unassigned Fund Balance - assigned (to close remaining encumbrances and assign fund balance for encumbrances that lapsed, but are expected to be honored in the following year)

Solutions Manual, Chapter 9

2,070 2,070

54.

The pre-closing trial balance for the General Fund of the City of Superior is as follows: Trial Balance: Cash Receivables: Real estate & personal property Intergovernmental Payables Deferred revenues Fund balances: Assigned Unassigned Revenues—real estate taxes Intergovernmental revenues Expenditures—general government Expenditures—public safety Expenditures—education Expenditures—public works Expenditures—human services Expenditures—debt principal Expenditures—debt interest Other financing sources - proceeds from bonds

DR $51,388 4,140 42,813

$4,899 47,093 12,420 23,230 154,732 28,256 26,396 17,597 105,581 8,798 17,597 690 230 $275,230

4,600 $275,230

Advanced Accounting, 4th Edition

54.

The Balance Sheet and the Statement of Revenues, Expenditures, and Changes in Fund Balances for the fiscal year for the General Fund for the City of Superior are as follows: Balance Sheet: Cash Receivables: Real estate & personal property Intergovernmental Total assets Payables Deferred revenues Total liabilities Fund balances: Assigned Unassigned Total Fund Balances Total Liabilities and Fund Balances Statement of Revenues, Expenditures, and Changes in Fund Balances: Revenues: Real estate taxes Intergovernmental Total Revenues Expenditures: General government Public safety Education Public works Human services Debt principal Debt interest Total Expenditures Excess (Deficiency) of Revenues over Expenditures Other financing sources (uses) Proceeds from bonds Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances at Beginning of Year Fund Balances at End of Year

Solutions Manual, Chapter 9

$51,388 4,140 42,813 $98,341 $4,899 47,093 51,992 12,420 33,929 46,349 $98,341

$154,732 28,256 182,988 26,396 17,597 105,581 8,798 17,597 690 230 176,889 6,099 4,600 4,600 $10,699 35,650 $46,349

55.

Balance Sheet: Cash Receivables: Real Estate & Personal Property Intergovernmental Total Assets

$149,727

Payables Deferred Revenues Total Liabilities

$13,846 133,088 146,934

Fund Balances: Assigned Unassigned Total Fund Balances Total Liabilities and Fund Balances

35,100 100,386 135,486 $282,420

11,700 120,993 $282,420

Statement of Revenues, Expenditures, and Changes in Fund Balances: Revenues: Real Estate Taxes Intergovernmental Total Revenues Expenditures: General Government Public Safety Education Public Works Human Services Debt Principal Debt Interest Total Expenditures Excess (Deficiency) of Revenues over Expenditures Other financing Sources (Uses) Proceeds from Bonds Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balances at Beginning of Year Fund Balances at End of Year

$441,788 79,852 521,640 74,597 49,730 298,382 24,865 49,730 1,950 650 499,904 21,736 13,000 13,000 $34,736 100,750 $135,486

Advanced Accounting, 4th Edition

56.

The closing entries are as follows: APPROPRIATIONS BUDGETARY FUND BALANCE ESTIMATED REVENUES ESTIMATED OTHER FINANCING SOURCES (to reverse budget entry)

664,551 31,398

Revenues—Real Estate & personal Property Taxes Revenues—Intergovernmental Other Financing Sources—Bond Proceeds Expenditures—General Government Expenditures—Public Safety Expenditures—Education Expenditures—Public Works Expenditures—Human Services Expenditures—Debt Principal Expenditures—Debt Interest Fund Balance—Unreserved (to close out revenue and expenditure accounts)

580,765 105,651 17,200

678,749 17,200

98,694 65,797 394,783 32,899 65,797 2,580 860 42,206

BUDGETARY FUND BALANCE ENCUMBRANCES

7,740

Fund Balance—Unassigned Fund Balance—Assigned (to close remaining encumbrances and reserve Fund Balance for encumbrances that lapsed, but are expected to be honored in the following year)

7,740

Solutions Manual, Chapter 9

7,740

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 10— Government Accounting: Government-wide Financial Statements 1.

Government-wide financial statements are required under GASBS 34. In the preface to this accounting standard, the GASB identifies a number of ways in which these additional financial statements help users: assess the finances of the government in its entirety, including the year's operating results; determine whether the government's overall financial position improved or deteriorated; evaluate whether the government's current-year revenues were sufficient to pay for current-year services; see the cost of providing services to its citizenry; see how the government finances its programs— through user fees and other program revenues versus general tax revenues; understand the extent to which the government has invested in capital assets, including roads, bridges, and other infrastructure assets; and make better comparisons between governments.

Once the fund financial statements are developed, long-term assets (i.e. capital assets such as land, buildings, vehicles, equipment, etc.) and liabilities (i.e. bonds payable and related discounts and premiums) are added, together with other adjustments, to create the government-wide financial statements.

The CAFR is the governmental entity's official annual report. In addition to the fund financial statements and the government-wide financial statements, it should also contain introductory information, supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, and statistical data. The purpose of the reporting entity's financial statements is to report the financial position and results of operations of the primary government and provide an overview of the discretely presented component units (GASB Cod. Sec. 2200.101).

GASB Cod. Sec. 2100.112 defines the primary government as the governmental unit that has a separately elected governing body, is legally separate, and is fiscally independent of other state and local governments. The primary government is any state, city, county, town, village, or other governmental unit. Primary governments are separate legal entities, with governing bodies duly elected to carry out the role of the government in meeting the needs of its citizens, and with powers of taxation that make them fiscally independent so that they can set their own budgets and fund those budgets from tax inflows.

Solutions Manual, Chapter 10

A component unit is a unit of the primary government for which the primary government is financially accountable (GASB Cod. Sec. 2100.119 and .120). A primary government is financially accountable for a component unit when it can incur financial obligations (or derive financial benefits) from the component unit and it controls the appointment of a majority of the controlling board and can “impose its will” on the component’s activities.

Some component units, despite being legally separate from the primary government, are so intertwined with the primary government that they are, in substance, the same as the primary government and should be reported as part of the primary government. This method of inclusion is known as blending. A component unit should be included in the reporting entity financial statements using the blending method in either of these circumstances (GASB Cod. Sec. 2600.113): The component unit's governing body is substantively the same as the governing body of the primary government or the component unit provides services entirely, or almost entirely, to the primary government or otherwise exclusively, or almost exclusively, benefits the primary government even though it does not provide services directly to it. If that criteria is met, the funds of the component unit are added to similar funds of the primary government to form the numbers in the primary government’s financial statements. Note that the general fund of the component unit is blended in as a special revenue fund of the primary government.

Government-wide financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Economic resources are broader than the “financial resources” measurement focus that we use in the preparation of the governmental funds financial statements. The economic resources measurement focus includes long-term assets and liabilities as well as current financial resources. The accrual basis of accounting requires that revenues should be recognized in the period in which the tax is levied for imposed taxes (like real estate taxes), the period in which the transaction occurs for derived taxes (such as sales or income taxes), and the period in which eligibility conditions are met for grants related to governmentmandated programs.

The statement of net position reports both current and long-term assets and liabilities. The difference between assets and liabilities is called net position. Net position should be classified into three sections: Invested in capital assets, net of related debt, restricted, and unrestricted.

Advanced Accounting, 4th Edition

Capital assets are initially recorded at historical cost, and should be depreciated over their estimated useful lives unless they are indefinite-lived assets (e.g., land) or are exempted from depreciation and reported using the modified approach for depreciation. The modified approach requires that, in lieu of depreciation expense, all maintenance expenditures made for those assets (except for additions and improvements) should be expensed in the period incurred. Infrastructure assets that are part of a network (like a road or lighting system), are not required to be depreciated as long as two requirements are met (GASB Cod. Sec. 1400.105): the government manages the infrastructure assets using an asset management system, and the government documents that the infrastructure assets are being preserved approximately at least at a condition level established and disclosed by the government.

10.

Composite depreciation methods refer to depreciating a grouping of similar assets (for example, interstate highways in a state) or dissimilar assets of the same class (for example, all the roads and bridges of a state) using the same depreciation rate.

11.

Purchased works of art and historical treasures should be recorded at their purchase price on the date of acquisition. If donated, they should be recorded at fair value whether held as individual items or in a collection. The capitalization of works of art and historical treasures is encouraged, but is not required, for collections that are 1) held for public exhibition, education, or research in furtherance of public service, rather than financial gain, 2) protected, kept unencumbered, cared for, and preserved, and 3) subject to an organizational body that requires the proceeds from sales of collection items to be used to acquire other items for collections (GASB Cod. Sec. 1400.109).

12.

The estimated closure and post-closure costs of a landfill must be estimated and recorded as a liability in the statement of net position together with a corresponding expense in the statement of activities. After the initial calculation of estimated total current cost of landfill closure and post-closure care, current cost should be adjusted each year for the effects of inflation or deflation. In addition, current cost should be adjusted when changes in the closure or post-closure care plan or landfill operating conditions increase or decrease estimated costs.

13.

Unlike the income statement for a business, the statement of activities for a state or local government starts with the cost of government services on the left, then nets out any dedicated program revenue for those services, and finally looks to general revenues to cover the remaining cost of services. The statement of activities presents the operations of the reporting government in two parts: The net (expense) or revenue of each governmental function (e.g., general government, public safety, education, public works) and each business-type activity (e.g., sanitation, sewer, nursing home), and general revenues (e.g., tax receipts, excise taxes, grants, investment income). The difference between the net (expense) or revenue and the general revenues yields the continued

Solutions Manual, Chapter 10

change in net position for the year. This change when added to the beginning balance of net position (the ending net position balance from the prior year) yields the net position of the current year that is reported in the statement of net position. Presentation of the net expense of the individual functions of the primary government provides information about the relative financial burden of each of the reporting government’s functions on its taxpayers. 14.

Program revenues derive directly from the program itself or from parties outside the reporting government's taxpayers or citizenry, as a whole. They reduce the net cost of the function to be financed from the government's general revenues. Program revenues include charges for services and program-specific grants and contributions. All revenues are general revenues unless they are required to be reported as program revenues. All taxes, even those that are levied for a specific purpose, are general revenues and should be reported by type of tax—for example, sales tax, property tax, franchise tax, income tax. All other nontax revenues (including interest, grants, contributions, and the sale of capital assets) that do not meet the criteria to be reported as program revenues should also be reported as general revenues.

15.

Answer: B Since the public school system is inter-twined with the primary government, but is not a separate legal entity and does not have the ability to either issue bonds or assess taxes, it should be blended with the primary government.

16.

Answer: C Compensated absences expense is equal to the amount paid plus the change in the accrued liability. Since the accrual liability increased by $25,000 during the year, the expense is equal to $400,000 + $25,000 = $425,000.

17.

Answer: D Government-wide financial statements should be prepared using the economic resources measurement focus and the accrual basis of accounting.

18.

Answer: A Included in the financial report and separate from the notes to the financial statements, the required supplementary information consists of schedules, statistical data, and other information that the GASB has determined are an essential part of financial reporting and should be presented with, but are not part of, the basic financial statements of a governmental entity.

Advanced Accounting, 4th Edition

19.

Answer: C Property taxes are imposed nonexchange revenue transactions.

20.

Answer: C GASB Cod. Sec. 2200.112 states that the focus of the government-wide financial statements should be on the primary government. In addition to the financial statements for the primary government, GASB Cod. Sec. 2100 also requires separate presentation of financial statements for all of the primary government’s component units. Some component units, despite being legally separate from the primary government, are so intertwined with the primary government that they are, in substance, the same as the primary government and should be reported as part of the primary government. This method of inclusion is known as blending.

21.

Answer: C The primary government is a governmental unit that, a) Has a separately elected governing body, b). is legally separate, and c). is fiscally independent of other state and local governments. (GASB Cod. Sec. 2100.112).

22.

Answer: C The capitalization of works of art and historical treasures is encouraged, but is not required, for collections that are: 1) held for public exhibition, education, or research in furtherance of public service, rather than financial gain, 2) protected, kept unencumbered, cared for, and preserved, and 3) subject to an organizational body that requires the proceeds from sales of collection items to be used to acquire other items for collections (GASB Cod. Sec. 1400.109).

23.

Answer: A The School district is financial accountable to the Town and meets the criteria of a component unit. Since the school system is not substantially the same as the Town (it is legally separate) it should not be presented in a blended format.

24.

Answer: A The Housing Authority is governed by a Board that is appointed by the Town’s Manager and its debt is guaranteed by the Town. It does, however, provide services to the Town’s residents, not to the Town, and the governing boards of the Town and the Housing Authority are not the same; hence, it does not satisfy the requirements for blending and should be presented discretely.

Solutions Manual, Chapter 10

25.

Answer: C Government-wide financial statements provide information that is relevant to assess the extent to which the government is meeting its operational objectives effectively and efficiently.

26.

Answer: A The MD&A section contains a discussion of the financial results presented for the year and not prospective forward-looking financial information.

27.

Answer: D The required supplementary information consists of schedules, statistical data, and other information that the GASB has determined are an essential part of financial reporting and should be presented with, but are not part of, the basic financial statements of a governmental entity. In addition to those presentations, the RSI includes budgetary comparisons that include the originally adopted budget, the final budget (including any subsequent amendments), and the actual inflows and outflows and balances of net assets. Governments are also encouraged, but not required, to provide a column indicating the variances between the final budget and the actual amounts.

28.

Answer: C Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. The statement of activities, therefore, backs out the expenditure and recognizes depreciation expense on the capital asset.

29.

Answer: D A government is fiscally independent if it can a) determine its budget without another government having the substantive authority to approve and modify that budget, b) levy taxes or set rates or charges without substantive approval by another government, and c) issue bonded debt without substantive approval by another government. (GASB Cod. Sec. 2100.115)

Advanced Accounting, 4th Edition

30.

Answer: D A government must present a budgetary comparison of the budget to actual results, but it may choose to put those in a statement within the basic financial statements or in a schedule along with other required supplementary information. Included in the financial report and separate from the notes to the financial statements, the required supplementary information consists of schedules, statistical data, and other information that the GASB has determined are an essential part of financial reporting and should be presented with, but are not part of, the basic financial statements of a governmental entity. The RSI may include budgetary comparisons that include the originally adopted budget, the final budget (including any subsequent amendments), and the actual inflows and outflows and balances of net assets. Governments are also encouraged, but not required, to provide a column indicating the variances between the final budget and the actual amounts.

31.

a. The two reconciliation entries that the City must include in its spreadsheet related to capital assets are as follows (all numbers in $1,000s): 1. Capital assets, net

600,000 Net position

600,000

The effect is to increase capital assets by the beginning of the year book value of $600,000 with a resulting increase in net position. 2. Depreciation expense Capital assets, net

25,000 275,000 Expenditures - capital outlay

300,000

The effect is to reverse out the expenditures account and to increase capital assets by $300,000 less $25,000 of depreciation expense recognized for the year for a net increase in $275,000 in the capital assets account.

b. The first journal entry recognizes on the government-wide statement of net position the capital assets at the beginning of the year that are omitted in the fund financial statements. These capital assets are not recognized on fund financial statements because they are prepared using the current financial resources measurement focus which reports only those resources that are available to meet current obligations. Since fund accounting records capital asset purchases as expenditures rather than assets, the second journal entry reverses the expenditures journal entry and records depreciation expense for the year. The debit or credit to capital assets, net reflects the net increase (decrease) in capital assets for the year.

Solutions Manual, Chapter 10

32.

a. The two journal entries that the Village must make in its spreadsheet related to its Bond liability are as follows (all numbers in $1,000s): 1. Net position Bonds payable

10,000 10,000

The effect is to recognize the beginning of year balance of bonds payable in the amount of $10,000 and to reduce the net position by that amount. 2. Other financing sources - proceeds from bonds Bonds payable Expenditures - debt principal

3,000 2,500 500

The effect is to reverse out the $500 of expenditures account relating to debt payments as well as the other financial sources relating to borrowing during the year in the amount of $3,000. The bonds payable account is recognized for the net balance of $2,500. b. The first journal entry recognizes on the government-wide statement of net position the bonds payable at the beginning of the year that are omitted in the fund financial statements. These liabilities are not recognized on fund financial statements because they are prepared using the current financial resources measurement focus which reports only those liabilities that can be satisfied from current financial resources. Since fund accounting records new bond borrowings as other financing sources and payments as expenditures, the second journal entry reverses the other financing sources and expenditures –debt principal payments journal entries and the net increase (decrease) in bonds payable for the year.

Advanced Accounting, 4th Edition

33.

a. The journal entries that the City must make in its spreadsheet related to deferred revenues and compensated absences are as follows: 1. Deferred revenues

4,000 Revenues Net position

500 3,500

The effect is to recognize the $3,500 beginning of year balance of deferred revenues as well as the increase in deferred revenues of $500 during the year recognized as revenues. Net position is recognized for the beginning of year deferred revenue amount of $3,500. 2. Net position Compensated absence expense Compensated absences

1,000 150 1,150

The effect is to recognize the $1,000 beginning of year balance of compensated absences as well as the increase in compensated absences of $150 during the year recognized as expense. Net position is recognized for the beginning of year compensated absences amount of $1,000. b. The first journal entry recognizes on the government-wide statement of net position the deferred revenues at the beginning of the year, and the changes to that account during the year, that are omitted in the fund financial statements. The second journal entry recognizes on the government-wide statement of net position the compensated absences at the beginning of the year, and the change to that account during the year, that are omitted in the fund financial statements. These liabilities are not recognized on fund financial statements because they are prepared using the current financial resources measurement focus which reports only those liabilities that can be satisfied from current financial resources.

Solutions Manual, Chapter 10

34.

a. The journal entries are as follows: 1. Net position

3,000,000 Landfill liability

3,000,000

The effect is to recognize the beginning of year landfill liability in the amount of $3,000,000 and to reduce net position by that amount. 2. Landfill expense

500,000* Landfill liability

500,000

The effect is to recognize the increase in landfill liability during the year as expense in the amount of $500,000. *Current period cost (Cumulative capacity used) ) − Amount prevously recognized (Total estimated capacity) 3.5 million = ($10 million x ) − $3 million 10 million = $500,000. = (Total estimated cost x

b. The first journal entry recognizes on the government-wide statement of net position the landfill liability at the beginning of the year and the second journal entry recognizes the increase in the reported liability during the year as the landfill usage increases (per the above formula) as a percentage of total capacity. These liabilities are not recognized on fund financial statements because they are prepared using the current financial resources measurement focus which reports only those liabilities that can be satisfied from current financial resources.

Advanced Accounting, 4th Edition

35. TOWN OF BOLTON Statement of Net Position Assets: Cash Truck Less: accumulated depreciation Total assets Liabilities and net position: Note payable Net position Total liabilities and net position

$374,500 50,000 (5,000)

45,000 $419,500

50,000 369,500 $419,500

TOWN OF BOLTON Statement of Activities Expenses: Wages Interest Depreciation Total expenses

$ 25,000 500 5,000 30,500

General revenues: Grants

300,000

Increase in net position

269,500

Net position, beginning Net position, ending

100,000 $369,500

Solutions Manual, Chapter 10

36.

Functions/Programs Primary Government Governmental Activities: General government Public safety Education Public works Human services Library Pension & benefits Interest Total governmental activities Business-Type Activities: Sanitation Municipal pool Total Primary Government

CITY OF TUSCOLA Statement of Activities Program Revenues Operating Net Charges for Grants and (Expense) Expenses Services Contributions Revenue

$6,969 8,237 59,867 3,465 2,012 1,292 5,532 1,275 $88,649

$409 1,175 1,092 87 850 66 $3,679

$580 $(5,980) 308 (6,754) 5,524 (53,251) 195 (3,183) 138 (1,024) 96 (1,130) 4,110 (1,422) (1,275) $10,951 $(74,019)

$3,407 742 $4,149

$5,961 524 $6,485

$2,554 (218) $2,336

$92,798

$10,164

(continued from above) General Revenues: General revenues Real estate and personal property taxes Motor vehicle and other excise taxes Grants and contributions not restricted Total general revenues and transfers Change in net position Net Position: Beginning of Year End of Year

$10,951 $(71,683)

Governmental Business-Type Activities Activities Total $(74,019) $2,336 $(71,683)

$75,401 3,692 3,634 $82,727

$8,708

$2,336

$11,044

175,638 $184,346

35,554 211,192 $37,890 $222,236

Advanced Accounting, 4th Edition

37.

Total Primary Government

CITY OF EDGAR Statement of Activities ($ in 1,000s) Program Revenues Operating Charges for Grants and Expenses Services Contributions

$11,794 13,939 97,761 5,863 3,406 2,187 9,361 2,158 $146,469

$594 1,989 1,848 147 1,439 112 $6,129

$5,766 4,652 $10,418 $156,887

(continued from above) General Revenues: Real estate and personal property taxes Motor vehicle and other excise taxes Grants and contributions not restricted Total general revenues and transfers Change in net position Net position: Beginning of year End of Year

Solutions Manual, Chapter 10

$981 521 9,348 330 233 163 5,540

Net (Expense) Revenue

$17,116

$(10,219) (11,429) (86,565) (5,386) (1,734) (1,912) (3,821) (2,158) $(123,224)

$7,817 5,887 $13,704

$2,051 1,235 $3,286

$19,833

$17,116

$(119,938)

Governmental Business-Type Activities Activities Total $(123,224) $ 3,286 $(119,938) $119,944 6,248 6,149 $132,341

$119,944 6,248 6,149 $132,341

$9,117

$3,286

$12,403

379,401 $388,518

60,168 $63,454

439,569 $451,972

38.

The journal entries for the spreadsheet to yield Government-wide financial statements from fund financial statements for the City of Rowan are as follows: 1. Capital assets, net Net position (Capital assets, net-beginning of year)

210,630

2. Depreciation expense Capital assets, net Expenditures - capital outlay (Change in capital assets, net)

8,699 3,263

3. Net position Bonds payable (Bonds and notes payable, beginning of year)

9,000

4. Other financing sources—proceeds from bonds Bonds payable Expenditures—debt principal (Change in bonds payable)

2,000

5. Deferred revenues Net position (Deferred revenues—beginning of year)

27,300

6. Deferred revenues Revenues (Change in deferred revenues)

1,365

7. Net position Compensated absence expense Compensated absences (to record beginning of year compensated absences and change for the year)

3,988 199

8. Net position Interest expense Accrued interest (to record beginning of year accrued Interest and change for the year)

20 33

9. Net position Landfill closure and post-closure care costs (Beginning of year landfill closure and post-closure care costs)

11,962

9,000

1,300 700

27,300

1,365

4,187

5,482 5,482

Advanced Accounting, 4th Edition

38.

b. The spreadsheet to yield the government-wide financial statements from the fund financial statements is as follows: RECONCILIATION WORKSHEET Governmental Funds

Governmental Activities

Balance Sheet/Statement of Net Position: Current Assets: Cash

$32,400

$2,400

2,520 26,060

Receivables: Real Estate & Personal Property Intergovernmental Noncurrent: Receivables Capital assets, net of accumulated depreciation Total Assets

1 199,360 2 1,994

201,354

$60,980

$262,334

$2,982

$2,982 53 8,300

LIABILITIES Payables Accrued interest Bond and notes payable Compensated advances Landfill closure and postclosure care costs Deferred revenues

28,665

5 6

8 3 4 7

53 7,000 1,300 4,187

5,482

27,300 1,365

4,187 5,482 0

Total Liabilities

31,647

21,004

FUND BALANCE

29,333

29,333 192,360 23,312 (20) (5,482) 1,827 241,330

3 7 8 9

Adjustments:

Net income adjustments NET POSITION Check: Liabilities + Net Position = Total Assets

7,000 3,988 20 5,482

1 5

199,360 27,300

below

1,827

$262,334 continued

Solutions Manual, Chapter 10

38.

b. continued Statement of Revenues, Expenditures, and Changes in Fund Balances: Governmental Activities Total revenues—fund statements

$111,384

Governmental Activities

$111,384

Adjustments:

Deferred revenues Total revenues—statement of activities Total expenditures—fund statements

1,365

1,365 112,749

107,912

Adjustments: Debt principal payments Depreciation expense/capital outlay

2 7 8

Compensated absences Interest expense Total expenses—statement of activities

9,968 199 33

700

(700)

11,962

(1,994) 199 33 105,450

Miscellaneous adjustments: OFS—proceeds from bonds Net change in fund balances/ change in net position

2,000

$5,472

2,000

12,200

14,027

$7,299

Advanced Accounting, 4th Edition

39. a.

The journal entries for the spreadsheet to yield Government-wide financial statements from fund financial statements for the City of Highland are as follows: 1. Capital assets, net Net position (Capital assets, net at beginning of year)

968,320

2. Depreciation expense Capital assets, net Expenditures—capital outlay (Change in capital assets, net)

50,123 7,976

3. Net position Bonds payable (Bonds Payable at beginning of year)

7,000

4. Other financing sources—proceeds from bonds Bonds payable Expenditures—debt principal payments (Change in bonds payable)

2,000

968,320

58,099

7,000

1,300 700

5. Deferred revenues Net position (Deferred revenues at beginning of year)

132,600 132,600

6. Deferred revenues Revenues (Change in deferred revenues)

6,630 6,630

7. Net position 18,636 Compensated absence expense 968 Compensated Absences (to record beginning of year compensated absences and change for the year)

19,604

8. Net position 20 Interest expense 33 Accrued interest (to record beginning of year accrued Interest and change for the year)

9. Net position Landfill closure and post-closure care costs (Beginning of year landfill closure and post-closure care costs)

Solutions Manual, Chapter 10

26,629 26,629

39.

b. The spreadsheet to yield the government-wide financial statements from the fund financial statements for the City of Highland is as follows: Governmental Funds

Governmental Activities

Statement of Net Position: ASSETS: Current: Cash

$242,250

Receivables: Real estate & personal property

12,240

Intergovernmental

126,577

Noncurrent: Receivables Capital assets, net of accumulated depreciation Total Assets

968,320

7,976

976,296

$381,067

$1,357,363

$14,485

LIABILITIES: Payables Accrued interest

Bond and notes payable

7,000

8,300

Compensated advances Landfill closure and postclosure care costs Deferred revenues

139,230

132,600

6,630

1,300

19,604

26,629

26,629 0

Total Liabilities

153,715

69,071

Fund Balance

227,352

Adjustments:

7,000

968,320

961,320

18,636

132,600

113,964

(20)

26,629

(26,629)

Net income adjustments

below

Net position

12,305

12,305 1,288,292 $1,357,363

continued

Advanced Accounting, 4th Edition

39.

b. continued Statement of Revenues, Expenditures, and Changes in Fund Balances: Governmental Activities Total revenues—fund financial statements

$111,384

Governmental Activities

$111,384

Adjustments: Deferred revenues Total revenues—statement of activities Total expenditures

6,630

6,630 118,014

107,912

Adjustments: Debt principal payments Depreciation expense/ capital outlay

700

(700)

50,123

58,099

(7,976)

Compensated absences

968

Interest expense Total Expenses—statement of activities

33 100,237

Miscellaneous Adjustments: Proceeds from bonds Excess (deficiency) of revenues over expenditures / change in net position

Solutions Manual, Chapter 10

2,000

$5,472

2,000

53,124

65,429

$17,777

40.

The reconciliation of the financial statements of the City and County of Denver CO from governmental funds fund balance to government-wide net position reflects the difference between the current financial resources measurement focus with the modified accrual basis of accounting used in governmental fund accounting and the economic resources measurement focus with the accrual basis of accounting used in the preparation of the government-wide financial statements. The statement of net position and the statement of activities in the government-wide financial statements reflect the recognition of long-term assets and long-term liabilities and the recognition of revenue that is deferred in fund financial statements. Some of the major effects are summarized as follows ($000s): 1. Capital assets and outlays: government-wide financial statements reflect long-term assets that are not capitalized in fund accounting under the current financial resources measurement focus, resulting in the following effects: a. Statement of net position – capital assets are recognized, thus increasing the net position ($ 3,032,331) b. Statement of activities –expenditures relating to the purchase of capital assets are eliminated ($263,726) and depreciation of the assets is recognized $151,855)) 2. Accrued revenues: government-wide financial statements reflect the accrual of revenues that are expected to be received in cash beyond the 60 day horizon and are, therefore, not recognized in fund accounting, resulting in the following effects: a. Statement of net position – inflow of resources from property taxes, etc. (i.e., accounts receivable) are recognized, thus increasing the net position ($37,124) b. Statement of activities - Current year revenues are recognized and prior year’s revenues (which are currently recognized in the fund statement of revenues, expenditures and changes in fund balances) are eliminated. The amount reported in the current year reflects an increase of deferred revenues over the two years ($21,910) continued

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40.

continued 3. Long-term obligations: government-wide financial statements reflect the recognition of long-term obligations that are excluded in fund accounting, resulting in the following effects: a. Statement of net position –long-term debt, pension and other post-employment obligations are recognized, thus decreasing the net position ($2,820,428) b. Statement of activities -Receipts of bond proceeds and payments on that debt are reported in governmental funds as other financing sources and expenditures, and in the government-wide statements as long-term liabilities. Other financial sources relating to the issuance of debt are eliminated •

Interest expense is recognized

•

Expenditures relating to the payment of principal and interest are eliminated

The effects relating to the differences between the current financial resources measurement focus and the modified accrual basis of accounting used in fund accounting and the economic resources measurement focus and the accrual basis of accounting used in the preparation of the government-wide financial statements are substantial. The increase in assets, net of the related increase in liabilities, resulted in the recognition of a net position of governmental activities that is $637,097,000 greater than the total governmental fund balances reported under fund accounting. The government-wide statements of net position and activities provide a significant amount of additional information that is useful to help us evaluate the extent to which whether the government is operating efficiently or whether it is financially solvent. 4. Internal service funds are reported as proprietary funds on the funds financial statements but as governmental activities (not business-type activities) on the government-wide statements. Internal service funds provide services within the government’s itself to different departments and employees, so GASB felt it was more informative to be included along with governmental activities.

Solutions Manual, Chapter 10

41.

The reconciliation of the financial statements of Dallas County TX from governmental funds to government-wide reflects the difference between the current financial resources measurement focus and the modified accrual basis of accounting used in fund accounting and the economic resources measurement focus and the accrual basis of accounting used in the preparation of the government-wide financial statements. The statement of net position and the statement of activities in the government-wide financial statements reflect the recognition of long-term assets and long-term liabilities and the recognition of revenue that is deferred in fund financial statements. Note that Dallas County presents the reconciliation of governmental fund balances to governmental activities net assets at the bottom of the governmental funds balance sheet. Some of the major effects are summarized as follows ($000s): 1. Capital assets: government-wide financial statements reflect long-term assets that are excluded in fund accounting under the current financial resources measurement focus, resulting in the following effects: a. Statement of net position –capital assets are recognized, thus increasing the net position ($ 623,741) b. Statement of activities – Expenditures relating to the purchase of capital assets are eliminated and depreciation of the assets is recognized ($14,296) 2. Accrued revenues: Government-wide financial statements reflect the accrual of revenues that are expected to be received in cash beyond the 60 day horizon and are, therefore, not recognized in fund accounting, resulting in the following effects: a. Statement of net position – Other long-term assets not available to pay for current expenditures are recognized thus increasing the net position (22,198) b. Statement of activities - current year revenues are recognized and prior year’s revenues (which are currently recognized in the fund Statement of revenues, expenditures and changes in fund balances) are eliminated. The negative amount reported in the current year reflects a reduction of deferred revenues over the two years 6,390) 3. Accrued expenses: government-wide financial statements reflect the accrual of expenses that are not recognized in fund accounting, resulting in the following effects: a. Statement of net position –accrued expenses are recognized, thus decreasing the net position b. Statement of activities –accrued expenses, such as for compensated absences, are recognized ($83,256) continued

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41.

continued 4. Long-term obligations: government-wide financial statements reflect the recognition of long-term obligations that are excluded in fund accounting, resulting in the following effects: a. Statement of net position –long-term debt, pension and other post-employment obligations are recognized, thus decreasing the net position ($ 773,815) b. Statement of activities ($34,059) i. Other financial sources relating to the issuance of debt are eliminated ii. Interest expense is recognized iii. Expenditures relating to the payment of principal and interest are eliminated 5. Internal service funds are reported as proprietary funds on the funds financial statements but as governmental activities (not business-type activities) on the government-wide statements. Internal service funds provide services within the government’s itself to different departments and employees, so GASB felt it was more informative to be included along with governmental activities. The effects relating to the differences between the current financial resources measurement focus and the modified accrual basis of accounting used in fund accounting and the economic resources measurement focus and the accrual basis of accounting used in the preparation of the government-wide financial statements are substantial. The increase in long-term liabilities is greater than the increase in capital assets which resulted in the recognition of a net position of governmental activities that is $ 129,243,000 lower than the total governmental fund balances reported under fund accounting. The government-wide statements of net position and activities provide a significant amount of additional information that is useful to help us evaluate the extent to which whether the government is operating efficiently or whether it is financially solvent.

Solutions Manual, Chapter 10

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 11—Accounting for Not-for-Profit Organizations 1.

Not-for-profit organizations are fundamentally different from business enterprises. They derive a significant portion of their resources in the form of contributions from individuals who do not expect a monetary payment in return (i.e., nonexchange transactions), their operating purpose is to provide a social benefit, not primarily to provide goods or services at a profit, and they have no owners who expect a return on their capital investment.

Not-for-profit organizations are required to issue three financial statements, together with appropriate notes (FASB ASC 958-205-05-5): a statement of financial position, a statement of activities, and a statement of cash flows. In addition, under ASU 2016-14 NFPs must report on both functional and natural categories of expenses, which can be done on a separate statement of functional expenses, on the face of the statement of activities, or in the notes to the financial statements.

The first issue is that a significant portion of the cash received by not-for-profit organizations is in the form of donations that may be paid over a period of time or may be promises to donate in the future. This type of transaction is a “nonexchange” one; that is, income is not “earned” in the sense that we apply to businesses. Consequently, we need guidance in order to account for contributions received. Second, many donations are accompanied by restrictions limiting the types of activities for which the donation can be used, or stipulating that the principal of the contribution must be preserved and only the interest earned on the contributions can be spent.

The statement of financial position provides information that focuses on the organization’s ability to continue to provide services, and its liquidity and financial flexibility to meet obligations, and needs for external financing.

Solutions Manual, Chapter 11

The FASB requires reporting a not-for-profit’s net assets in two categories (FASB ASC 958-210-45-9 and Glossary): net assets with donor restrictions (the part of net assets resulting from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of the organization pursuant to those stipulations; and, net assets without donor restrictions (the part of net assets that is neither permanently restricted nor temporarily restricted by donor-imposed stipulations). Segregating the net assets of the not-for-profit in these categories assists readers in understanding better the liquidity position of the organization.

The purpose of the statement of activities is to provide information to donors, creditors and other interested parties to evaluate the organization’s performance during a period, assess an organization’s service efforts and its ability to continue to provide services, and assess how an organization’s managers have discharged their stewardship responsibilities and other aspects of their performance (FASB ASC 958-225-05-3).

a. Contributions received in cash are recognized when received, provided that the contribution is not restricted as to the use of funds or availability of funds. b. Promises to contribute cash in the future are recognized when made at the present value of the contribution as net assets with donor restrictions. c. Contributions of long-lived assets are also recognized when made as net assets with donor restrictions. For both b and c, when the cash is received or the asset is used, the net assets with donor restrictions are released from the restriction and that release is recognized in the statement of activities as a reduction of net assets with donor restrictions and an increase in net assets without donor restrictions.

Conditional promises depend on the occurrence of a specified future and uncertain event to bind the promisor. Conditional promises are recognized as revenues when the conditions on which they depend are substantially met (i.e., when the conditional promise becomes unconditional) (FASB ASC 958-605-25-13).

Contributions of services shall be recognized if the services create or enhance nonfinancial assets, or require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Contributions of services are reported at fair value (FASB ASC 958-605-25-16).

Advanced Accounting, 4th Edition

10.

Not-for-profits may receive gifts of collections of art, historical treasures and other similar collectibles. These contributions, while valuable, may present problems for the receiving organization. The collections must be maintained and protected, often at a significant cost. In addition, not-for-profits face the continual challenge of raising funds to support the programs that they are chartered to provide. To the extent that the donated collections are recognized as revenues, this might give future donors the false impression that the not-for-profit’s revenue stream is strong and that donations are unnecessary. Desperately needed cash to support the not-for-profit’s ongoing programs may be harder to solicit as a result of the revenues recognized from donated collections. A not-for-profit need not recognize contributions of works of art, historical treasures, and similar assets as revenue or record assets if the donated items are added to collections that meet all of the following conditions (FASB ASC 958-605-25-18 and Glossary): a). are held for public exhibition, education, or research in furtherance of public service rather than financial gain; b). are protected, kept unencumbered, cared for, and preserved; and c). are subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.

11.

Answer: A Long-term contributions receivables are initially recognized at the present value of the future cash receipts. The present value of the receivable is $20,000 x 3.312 = $66,240. The initial $20,000 that was received on January 1 is not restricted as to purpose or time so it would be recorded as a debit to cash and a credit to contributions-without donor restrictions.

12.

Answer: B Not-for-profit organizations are required to issue the following financial statements: statement of financial position, statement of activities, and statement of cash flows. The revisions in ASU 2016-14 also require NFPs to present the functional and natural classification of expenses which can be done on the face of the statement of activities, in a separate statement of functional expenses, or in the notes to the financial statements.

13.

Answer: C The statement of financial position reports the assets, liabilities and net assets of the not-for-profit organization.

Solutions Manual, Chapter 11

14.

Answer: A Since the assets were pledged to another organization, Great Sports must recognize the assets received as well as a liability to transfer the assets to the appropriate organization.

15.

Answer: A The contribution is recorded at its fair value on the date it is received.

16.

Answer: A Under the revision to FASB ASC 958 in ASU 2016-14, both the initial contribution of $100,000 and the interest earned on the contribution in the amount of $15,000 are recognized as net assets with donor restrictions. The NFP may want to specify in the notes to the financial statements that the $100,000 is an endowment that is permanently restricted and the $15,000 is investment income that is temporarily restricted.

17.

Answer: A Assets received by a not-for-profit that are not restricted are classified as net assets without donor restrictions.

18.

Answer: B Support services are all activities of a not-for-profit organization other than program services. Generally, they include management and general, fundraising, and membership-development activities” (FASB ASC Master Glossary). Of the amounts listed, “fundraising” and “management and general” totaling $450,000 meet this definition. Research and Education are presumably part of the museum’s programs that meet its tax-exempt mission.

19.

Answer: D The fair value of the investment has increased by $50,000 during the year ($40,000 in earnings and $10,000 in market price appreciation) and this increase is reflected in net assets with donor restrictions at year-end.

Advanced Accounting, 4th Edition

20.

Answer: C The $100,000 of restricted contributions is reported as a financing activity since the restriction relates solely to the acquisition of land, building or equipment and does not relate to general operating activities. Financing activities include receiving restricted resources that by donor stipulation must be used for long-term purposes (FASB ASC 230-10-20 Glossary). The $50,000 of contributions without donor restrictions is reported in the operating activities section of the statement of cash flows.

21.

Answer: C Contributions of services are recognized only if the services create or enhance nonfinancial assets or require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Neither the receptionist nor the dog walker require specialized skills.

22.

Answer: C Restricted donations are released from restriction when the conditions relating to their use or eligibility requirements are met. Spending $150,000 on research activities satisfied the restriction and this is the amount that should be reported as released from restriction for the year.

23.

Answer: C Contributions from donors can be without donor restrictions (i.e., can be used at the discretion of management) or may be with donor restrictions. Contributions must be segregated into these categories. The contribution is reported as income in year 1 as a contribution with donor restrictions.

24.

Answer: A The donation is initially recognized as an increase in net assets with donor restrictions which is subsequently reduced when the scholarships are awarded and the amount transferred to net assets without donor restrictions. Net assets without donor restrictions, therefore, show an increase from the transfer and a decrease in the award.

Solutions Manual, Chapter 11

25.

Statement of Activities:

Support—contributions Revenues—investment Net assets released from restrictions Total support and revenue

Without Donor Restrictions $4,108,993 183,224 337,833 4,630,050

Expenses program Expenses support

3,794,599 916,853

Total expenses

4,711,452

Change in net assets Net assets, beginning of year Net assets, end of year

(81,402) 3,372,358 $3,453,760

Statement of Financial Position: Cash Investments Contributions receivable Total current assets

7,323,726 $10,495,230

Payables Total current liabilities

1,276,180 7,007,253 $8,283,433

827,938 827,938

Long-term Liabilities Total liabilities

1,383,859 2,211,797

Net assets—without donor restrictions Net assets—with donor restrictions

3,290,956 4,992,477

1,357,582 3,634,895 $4,992,477

Total $5,616,878 370,754 0 5,987,632

948,159 984,688 1,238,657 3,171,504

Property, plant and equipment, net Total assets

Total net assets Total liabilities and net assets

With Donor Restrictions $1,507,885 187,530 (337,833) 1,357,582

8,283,433 $10,495,230

Advanced Accounting, 4th Edition

26.

Statement of Activities:

Support- contributions Revenues - investment Net assets released from restrictions Total support and revenue

Without Donor Restrictions $8,287,953 398,543 621,337 9,307,833

Expenses - program Expenses - support

8,239,149 1,030,365

Total expenses

9,269,514

Change in net assets Net assets, beginning of year Net assets, end of year

38,319 3,732,853 $3,771,172

Statement of Financial Position: Cash Investments Contributions receivable Total current assets

With Donor Restrictions $991,161 389,222 (621,337) 759,046

759,046 3,634,895 $4,393,941

4,337,898 $12,740,335

Payables Total current liabilities

$ 1,837,222 1,837,222

Long-term liabilities Total liabilities

2,738,000 4,575,222

Net assets—without donor restrictions Net assets—with donor restrictions

3,771,172 4,393,941

Solutions Manual, Chapter 11

797,365 7,367,748 $8,165,113

838,934 5,125,565 2,437,938 8,402,437

Property, plant and equipment, net Total assets

Total net assets Total liabilities and net assets

Total $9,279,114 787,765 0 10,066,879

8,165,113 $12,740,335

27. a.

Contributions receivable Cash Support—contributions (without donor restrictions) Support—contributions (with donor restrictions) Revenues—investment (without donor restrictions) Revenues—investment (with donor restrictions)

Net assets released from restrictions—with donor b. restrictions Net assets released from restrictions—without donor restrictions Expenses—program Expenses—support Payables c.

Property, plant and equipment, net Depreciation expense Cash Note: Depreciation expense should be allocated to program and support expense. More information is needed.

d. Investments Cash e. Cash

1,250,000 38,400 1,120,000 130,000 7,680 30,720

80,000 80,000 1,040,000 148,000 1,188,000 16,000 36,000 52,000

48,000 48,000 1,200,000

Contributions receivable Payables Cash

1,200,000 1,160,000 1,160,000

Advanced Accounting, 4th Edition

28. a.

Net assets released from restrictions - with donor b. restrictions Net assets released from restrictions - without donor restrictions Expenses—program Expenses—support Payables c.

Property, plant and equipment, net Depreciation expense Cash Note: Depreciation expense should be allocated to program and support expenses. More information is needed.

d. Investments Cash e. Cash

18,750,000 576,000 16,800,000 1, 950,000 115,200 460,800

1,200,000 1,200,000 15,600,000 2,220,000 17,820,000 240,000 540,000 780,000

360,000 360,000 18,000,000

Contributions receivable Payables Cash

Solutions Manual, Chapter 11

18,000,000 17,400,000 17,400,000

29. a. i.

ii.

Cash Contributions receivable Support—contributions (without donor restrictions) Support—contributions (with donor restrictions) Revenues— investment (without donor restrictions) Revenues— investment (with donor restrictions)

Net assets released from restrictions - with donor restrictions Net assets released from restrictions - without donor restrictions

124,800 4,062,500 3,640,000 422,500 24,960 99,840

260,000 260,000

iii. Expenses— program Expenses— support Payables

3,380,000 481,000

iv. Cash Payables Contributions receivable

130,000 3,770,000

Property, plant and equipment, net Program expense Support expense Cash

3,861,000

3,900,000 52,000 102,960 14,040 169,000

vi. Investments Cash

156,000

vii. Long-term debt Cash

149,500

156,000

149,500

Advanced Accounting, 4th Edition

29.

b. Statement of Activities:

Support-- contributions Revenues - investment Net assets released from restrictions Total revenue and gains

Without Donor Restrictions $3,640,000 24,960

With Donor Restrictions $ 422,500 99,840

Total $4,062,500 124,800

260,000 3,924,960

(260,000) 262,340

4,187,300

Expenses - program Expenses - support

3,482,960 495,040

Total expenses

3,978,000

Change in net assets Net assets, beginning of year Net assets, end of year

(53,040) 2,080,000 $2,026,960

Statement of Financial Position: Cash Investments Contributions receivable Total current assets Property, plant and equipment, net Total assets

262,340 1,950,000 $2,212,340

14,300 3,276,000 838,500 4,128,800

1,612,000 $5,740,800

Payables Total current liabilities

$611,000 611,000

Long-term liabilities Total liabilities

890,500 1,501,500

Net assets—without donor restrictions Net assets—with donor restrictions Total net assets Total liabilities and net assets

2,026,960 2,212,340 4,239,300 $5,740,800

Solutions Manual, Chapter 11

209,300 4,030,000 $4,239,300

30. a. i.

ii.

Cash Contributions receivable Support—contributions (without donor restrictions) Support—contributions (with donor restrictions) Revenues - investment without donor restrictions Revenues - investment with donor restrictions

Net assets released from restrictions - with donor restrictions Net assets released from restrictions without donor restrictions

266,400 11,396,000 10,360,000 1,036,000 111,888 154,512

740,000 740,000

iii. Expenses - program Expenses - support Payables

9,620,000 1,369,000

iv. Cash Payables Contributions receivable

370,000 10,730,000

Property, plant and equipment, net Program expense Support expense Cash .

10,989,000

11,100,000 148,000 293,040 39,960 481,000

Advanced Accounting, 4th Edition

30.

b. Statement of Activities:

Support- contributions Revenues_investment Net assets released from restrictions Total revenue and gains

Without Donor With Donor Restrictions Restrictions $10,360,000 $1,036,000 111,888 154,512 740,000 11,211,888

(740,000) 450,512

Total $11,396,000 266,400

11,662,400

Expenses - program Expenses - support

9,913,040 1,408,960

Total operating expenses

11,322,000

Change in net assets Net assets, beginning of year Net assets, end of year

(110,112) 5,920,000 $5,809,888

Statement of Financial Position: Cash Investments Contributions receivable Total current assets

450,512 5,550,000 $6,000,512

821,400 8,880,000 2,220,000 11,921,400

Property, plant and equipment, net Total assets

4,588,000 $16,509,400

Payables Total current liabilities

$1,739,000 1,739,000

Long-term liabilities Total liabilities

2,960,000 4,699,000

Net assets—without donor restrictions Net assets with—donor restrictions

5,809,888 6,000,512

Total net assets Total liabilities and net assets

Solutions Manual, Chapter 11

340,400 11,470,000 $11,810,400

11,810,400 $16,509,400

31. a. i.

ii.

Cash Contributions receivable Support - contributions without donor restrictions Support - contributions with donor restrictions Revenues - investment without donor restrictions Revenues - investment with donor restrictions

Net assets released from restrictions—with donor restrictions Net assets released from restrictions— without donor restrictions

iii. Expenses—program Expenses—support Payables

57,600 2,500,000 2,240,000 260,000 23,040 34,560

160,000 160,000 2,080,000 296,000 2,376,000

iv. Property, plant and equipment, net Program expense Support expense Cash

160,000 64,800 7,200

Investments Cash

96,000

vi. Long-term debt Cash

92,000

vii. Cash Payables Contributions receivable

232,000

96,000

92,000 80,000 2,320,000 2,400,000

Advanced Accounting, 4th Edition

31.

b. Statement of Activities:

Support - contributions Revenues_investment Net assets released from restrictions Total revenue and support

Without Donor Restrictions $2,240,000 23,040

With Donor Restrictions $260,000 34,560

Total $2,500,000 57,600

160,000 2,423,040

(160,000) 134,560

2,557,600

Expenses_program Expenses_support

2,144,800 303,200

Total operating expenses

2,448,000

Change in net assets Net assets, beginning of year Net assets, end of year

(24,960) 1,280,000 $1,255,040

134,560 1,200,000 $1,334,560

Statement of Financial Position: Investments Contributions receivable Total current assets

$2,016,000 516,000 2,532,000

Property, plant and equipment , net Total assets

1,120,000 $3,652,000

Cash overdraft Payables Total current liabilities

$ 138,400 376,000 514,400

Long-term liabilities Total liabilities

548,000 1,062,400

Net assets without donor restrictions Net assets with donor restrictions Total net assets Total liabilities and net assets

1,255,040 1,334,560 2,589,600 $3,652,000

109,600 2,480,000 $2,589,600

Note: the cash overdraft signals that Wings will need to liquidate a sufficient amount of investment securities to restore the balance to a positive amount and to provide sufficient cash to conduct operations.

Solutions Manual, Chapter 11

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 12—Segment Disclosures and Interim Financial Reporting 1.

In its preamble to the standard, the FASB argued for increased disclosure as follows (FASB ASC 280-10-10-1): “The objective of requiring disclosures about segments of a public entity and related information is to provide information about the different types of business activities in which a public entity engages and the different economic environments in which it operates to help users of financial statements do all of the following: a. Better understand the public entity's performance, b. Better assess its prospects for future net cash flows, c. Make more informed judgments about the public entity as a whole” Segment disclosures can provide valuable insight into the drivers of a company’s profitability and ability to generate cash flow, and its ability to sustain them. Companies become vulnerable to competition as they begin to rely heavily on one business segment or on one customer. Analysts favor companies with diversification of profit and cash flow across multiple operating segments and with no concentration of revenues in any one customer.

The management approach requires disclosures for the same business units that are routinely reported to senior management. FASB ASC 280-10-05-3 and 05-4 describe this approach as follows: “The management approach facilitates consistent descriptions of a public entity in its annual report and various other published information. It focuses on financial information that a public entity's decision makers use to make decisions about the public entity's operating matters. The components that management establishes for that purpose are called operating segments…To provide some comparability between public entities, this Subtopic requires that an entity report certain information about the revenues that it derives from each of its products and services (or groups of similar products and services) and about the countries in which it earns revenues and holds assets, regardless of how the entity is organized. As a consequence, some entities are likely to be required to provide limited information that may not be used for making operating decisions and assessing performance.”

Solutions Manual, Chapter 12

An operating segment is a component of an enterprise: a. That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise), b. Whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and c. For which discrete financial information is available.

Once an operating segment has been identified with the criteria presented above, it must be disclosed in the footnotes provided that it meets any one of the following three quantitative thresholds based on revenues, profit, and assets (FASB ASC 280-10-50-12): a. Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments. b. The absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of (1) the combined reported profit of all operating segments that did not report a loss or (2) the combined reported loss of all operating segments that did report a loss. c. Its assets are 10 percent or more of the combined assets of all operating segments.

Two or more operating segments may be aggregated into a single operating segment if the segments have similar economic characteristics, and if the segments are similar in each of the following areas (FASB ASC 280-10-50-11): a. The nature of the products and services b. The nature of the production processes c. The type or class of customer for their products and services d. The methods used to distribute their products or provide their services e. If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

Advanced Accounting, 4th Edition

The “once in – always in” provision of FASB ASC 280 says the following: a. If management judges an operating segment identified as a reportable segment in the immediately preceding period to be of continuing significance, information about that segment shall continue to be reported separately in the current period even if it no longer meets the criteria for reportability (FASB ASC 250-10-50-16), and b. If an operating segment is identified as a reportable segment in the current period due to the quantitative thresholds, prior-period segment data presented for comparative purposes shall be restated to reflect the newly reportable segment as a separate segment even if that segment did not satisfy the criteria for reportability … unless it is impracticable to do so (FASB ASC 280-10-50-17).

Required disclosures include the following: a. General information, including the way in which the company is organized, and the types of products or services from which each reportable segment derives its revenues, b. Financial data (typically, sales, income, depreciation and amortization expense, interest income/expense, tax expense, unusual items, total assets, and capital expenditures, c. Reconciliation to consolidated totals, d. Geographical area of operations, e. Disclosures relating to customers comprising 10% or more of total revenues

The overriding philosophy for interim financial reporting is that each interim period should be viewed primarily as an integral part of an annual period (FASB ASC 270-10-452).

FASB ASC 270-10-05-2 permits companies to use estimated gross profit rates, or other reasonable methods, to determine the cost of goods sold during interim periods. If they do, they are required to disclose the method used at the interim date and any significant adjustments that result from reconciliations with the annual physical inventory.

10.

If the decline in the market value of the inventory is expected to be restored by yearend, the decline is not recognized at the interim date since no loss is expected to be incurred in the fiscal year (FASB ASC 270-10-45-6c).

Solutions Manual, Chapter 12

11.

When a cost that is expensed for annual reporting purposes clearly benefits two or more interim periods, each interim period should be charged for an appropriate portion of the annual cost by the use of accruals or deferrals (FASB ASC 270-10-45-8).

12.

FASB ASC 740-270-25-2 requires companies to estimate the effective tax rate expected to be applicable for the full fiscal year, and to use that rate in providing for income taxes in an interim period (FASB ASC 740-270-25-2). Further, the effective tax rate should reflect anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives, but should not take into account significant unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year.

13.

Companies are required to disclose the seasonal nature of their business in order to avoid the possibility that interim results with material seasonal variations may be taken as fairly indicative of the estimated results for a full fiscal year.

14.

Whenever a change in accounting principles is made, FASB ASC 250, “Accounting Changes and Error Corrections,” requires that the change be made retrospectively (i.e., financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle), with a cumulative adjustment to the beginning balance of assets and liabilities affected by the change in the earliest period reported, and an offsetting adjustment to Retained Earnings (FASB ASC 270-10-45-5). When a change in accounting principle is made in an interim period, the effect of the change on prior interim periods should be made retrospectively by adjusting each prior interim financial statement for the effects of the change (FASB ASC 250-10-45-14).

15.

ASC 270 requires the following general categories of disclosures for interim financial reports: a. Income statement items (sales, taxes, extraordinary items, net income, comprehensive income, and basic and diluted earnings per share), b. Footnote discussions (seasonality, significant changes in estimates, disposal of a component of the business, contingent items, changes in accounting principles or estimates, and significant changes in financial position), c. Information about reportable operating segments, d. Information about defined benefit pension plans and other defined benefit postretirement benefit plans e. The information about the use of fair value to measure assets and liabilities.

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16.

Answer: a Companies must disclose information about the extent of their reliance on major customers if revenues from transactions with a single external customer amount to 10% or more of the company’s total revenues (FASB ASC 280-10-50-42). The company does not need to disclose, however, the identity of a major customer or the amount of revenues that each segment reports from that customer.

17.

Answer: b If the market price reversal does not occur, the company should compute its gross profit for the interim 4th quarter reporting period.

18.

Answer: d The combined operating profit of all operating segments that did not report a loss is $742,500 ($67,500 + $675,000) and the combined reported loss of all operating segments that did report a loss is $375,000 ($75,000 + $300,000). The operating profit threshold of $742,500 is greater and the 10% threshold is $74,250. Segments A, C and D exceed this amount in absolute value.

19.

Answer: a Selected data for an operating segment of a business are to be separately reported when its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments.

20.

Answer: c Engaging in sales with unaffiliated entities is not one of their requirements to determine whether a business entity meets the definition of a reportable segment.

21.

Answer: d Two or more operating segments may be aggregated into a single operating segment if the segments have similar economic characteristics, and if the segments are similar in each of the following areas (FASB ASC 280-10-50-11): a. The nature of the products and services, b. The nature of the production processes, c. The type or class of customer for their products and services, d. The methods used to distribute their products or provide their services, e. If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

Solutions Manual, Chapter 12

22.

Answer: b If cost variances are planned and expected to be absorbed by the end of the annual period, the company should not recognize the cost of the variance in the interim reporting period.

23.

Answer: d When a cost that is expensed for annual reporting purposes clearly benefits two or more interim periods, each interim period should be charged for an appropriate portion of the annual cost by the use of accruals or deferrals (FASB ASC 270-10-45-8).

24.

Answer: b Whenever a change in accounting principles is made, FASB ASC 250, “Accounting Changes and Error Corrections,” requires that the change be made retrospectively (i.e., financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle), with a cumulative adjustment to the beginning balance of assets and liabilities affected by the change in the earliest period reported, and an offsetting adjustment to Retained Earnings (FASB ASC 250-10-45-5).

25.

a. The R&D unit is regularly reviewed by the CEO, who reviews its financial statements. It does not earn revenues, however. So, it does not pass all three of the criteria and we cannot classify it as an operating segment. b. Since our export company does not prepare discrete financial information, we cannot classify the branch office as an operating segment. c. Yes. The export company engages in business activities, it may earn revenues and incur expenses, and we prepare discrete financial statements for the company which the CEO regularly reviews. The export company is, therefore, an operating segment.

Advanced Accounting, 4th Edition

26.

Following is our analysis of the sales, profit, and asset tests to determine whether an operating segment should be disclosed: Segment test:

Sales Profit Assets

Quantitative Thresholds A No No No

B No No Yes

C Yes Yes Yes

D Yes Yes Yes

E Yes Yes Yes

Sales & Assets Profit Loss $1,437 $318 $(112) $2,647

The sales and assets thresholds are $1,437 and $2,647, respectively. Units C, D and E pass the sales test, and units B, C, D, and E pass the assets test. The profit test is based on greater of the absolute value of aggregate segment profit (for profitable operating segments) or absolute value of aggregate segment losses (for unprofitable segments). Aggregate segment profits (for profitable segments) are $318 and aggregate segment losses (for unprofitable segments) are $(112). Since the profit threshold is the greater in absolute value of the two measures, we use the $318 threshold and segments C, D, and E have absolute value of profits or losses that exceed this threshold. Operating segment B meets the threshold for combined assets. Operating segment A does not meet any of the three thresholds, so it does not need to be separately disclosed. 27.

Following is our analysis of the sales, profit, and asset tests to determine whether an operating segment should be disclosed: Segment test:

Sales Profit Assets

A No No No

B No No No

C Yes No Yes

D Yes No Yes

E Yes Yes Yes

Quantitative Thresholds Sales & Assets Profit Loss $458,702 $48,565 $(430) $1,608,275

The sales and assets thresholds are $458,702 and $1,608,275, respectively. Units C, D, and E pass the sales test, and units C, D, and E pass the assets test. The profit test is based on greater of the absolute value of aggregate segment profit (for profitable operating segments) or absolute value of aggregate segment losses (for unprofitable segments). Aggregate segment profits (for profitable segments) are $48,565 and aggregate segment losses (for unprofitable segments) are $(430). Since the profit threshold is the greater in absolute value of the two measures, we use the $48,565 threshold and only segment E has an absolute value of profits or losses that exceed this threshold. Operating segments A and B do not need to be separately disclosed.

Solutions Manual, Chapter 12

28.

a. Our gross profit for the quarter is computed as follows: Sales (1,600 @$60) COGS (1280@$35 + 320@$40) Gross Profit

$ 96,000 (57,600) $ 38,400

b. Our journal entries to record the sale (assuming perpetual inventory accounting), are as follows: Cash

96,000

Sales (to record the sale)

96,000

Cost of goods sold Inventory Excess of replacement cost over LIFO cost (to record Cost of Goods Sold in the interim income statement, assuming replacement of inventories at $40/unit)

57,600 52,800 4,800

c. If the planned replacement of the inventories does not occur, the $4,800 Excess of Replacement Cost over LIFO Cost will be removed from inventories and credited to Cost of Goods Sold, thus increasing gross profit to reflect the LIFO liquidation that will have occurred if the inventories are not replaced. This will be reflected in the following journal entry: Excess of replacement cost over LIFO cost Cost of goods sold (to write off the excess of replacement cost over LIFO cost account when the inventories are not replenished) 29.

4,800 4,800

a. Since we expect our customer to achieve the volume of purchases for the year that entitles it to a 2% volume discount, we should accrue the discount in the interim reporting period. Based on sales for this period, therefore, we would accrue the sales discount for the interim period as follows (using the net method): Sales Accounts Receivable (to accrue sales discount for the quarter)

10,000 10,000

b. We should accrue ¼ of the $30,000 estimated property tax assessment ($7,500) in each quarter.

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c. The advertising cost should be reflected as expense in the quarters benefitted by the advertising. Therefore, expense should be recognized in the next and following quarters. d. Since we expect that the bonus commission will be paid based on annual sales volume, we should accrue it for the quarter with the following journal entry: Bonus commission expense Bonus commission payable (to accrue Bonus Commission Expense for the quarter) 30.

30,000 30,000

a. Estimated Annual Taxable Income Tax Rate of 22.0% Tax credit Net tax Liability ÷ Taxable income Percent of taxable income

$7,200,000 x 0.22 $1,584,000 324,000 $1,260,000 ÷$7,200,000 17.5%

b. The estimated income tax on the $900,000 of pretax income that we report for this period is $157,500 ($900,000 x 17.5%). The required journal entry to accrue the estimated tax liability is as follows: Income tax expense Income tax payable (to accrue income tax expense for the quarter)

Solutions Manual, Chapter 12

157,500 157,500

31.

a. Following are the quantitative threshold tests: Revenues Media Networks Parks and Resorts Studio Entertainment Consumer Products & Interactive Media

2017 43% 33% 15% 9% 100%

Operating Income Media Networks Parks and Resorts Studio Entertainment Consumer Products & Interactive Media

2017 47% 26% 16% 12% 100%*

Assets Media Networks Parks and Resorts Studio Entertainment Consumer Products & Interactive Media

2017 37% 34% 19% 10% 100%

*Does not total to 100% due to rounding.

In 2017, Media Networks, Parks and Resorts, and Studio Entertainment exceed the 10% threshold of revenues, profit (loss) and assets. Consumer Products & Interactive Media exceeds the 10% threshold on profit (loss) and assets. b.

Media Networks Parks and Resorts Studio Entertainment Consumer Products & Interactive Media

Revenue 43% 33% 15% 9% 100%

Profit 47% 26% 16% 12% 100%*

*Does not total to 100% due to rounding.

The Media Network, Studio Entertainment and Consumer Products & Interactive Media segments contribute an equal or greater proportion to profit than their contribution to revenues. While the Parks and Resorts segment has a lower proportion of contribution to profitability than its share of revenues.

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c. The DuPont analysis of Disney’s operating segments is as follows: Profit Margin Media Networks Parks and Resorts Studio Entertainment Consumer Products & Interactive Media

2017 29% 20% 28% 36%

Asset Turnover Media Networks Parks and Resorts Studio Entertainment Consumer Products & Interactive Media

0.72 0.62 0.51 0.54

ROA Media Networks Parks and Resorts Studio Entertainment Consumer Products & Interactive Media

21% 12%* 14% 19%

*Computing ROA, as requested by the problem, that is, as the Profit Margin (20%) x Asset Turnover (.62) yields 12%; while computing the ROA as profits / assets yields 13%. The difference is due to rounding.

For 2017, the highest return on assets is reported by the Media Networks segment, with a profit margin of 29% and asset turnover of 0.72, reflecting the relative asset intensity of this line of business. Interestingly, the Consumer Products & Interactive Media segment has a higher profit margin (i.e., 36%), but a much lower asset turnover ratio (i.e., 0.54). However, this segment only accounts for 9% of Disney’s total revenues. The Media Networks segment is the driver of Disney’s profitability and returns on assets, accounting for 43% of Disney’s revenues and 37% of Disney’s assets.

Solutions Manual, Chapter 12

d. Free cash flow for the operating segments over the past three years is as follows:

Media Networks Parks and Resorts Studio Entertainment Consumer Products & Interactive Media Total

2017 $7,000 2,582 2,385 1,893 $13,860

2016 $7,844 804 2,742 2,087 $13,477

2015 $7,861 944 2,005 1,980 $12,790

Media Networks is consistently generating over 50% of free cash flow for Disney. e. Media Networks is clearly an important segment of the company. It accounts for 47% of the company’s operating profit, 43% of the company revenue, and over 50% of the company’s free cash flow. Its financial performance is driven by a 29% profit margin, second only to the Consumer Products and Interactive Media segment. Our concern relates to the extent to which a high profit margin can be competed away. We will monitor the market closely for signs of weakening or increased competitive pressure.

Advanced Accounting, 4th Edition

Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey

Solution Manual Chapter 13—Accounting for Partnerships 1.

The Uniform Partnership Act (1997), drafted by the National Conference of Commissioners on Uniform State Laws, provides a model for partnership governance that has now been adopted by a majority of states. It defines a partnership as an association of two or more individuals to co-own and operate a business (UPA, §101).

The taxing authorities view the partnership as a conduit to pass through income directly to the partners. The partnership thus avoids the problem of double taxation that is present with the corporate form of organization. Partnerships also pass through liabilities to the partners.

Some of the most prominent departures from GAAP include the use of cash basis and modified-cash basis of accounting and the revaluation of assets and creation of goodwill upon the admission of a new partner if such accounting is permitted by the Partnership Agreement.

All partners are liable jointly and severally for all obligations of the partnership. This means that every partner is personally liable for the obligations of the partnership (UPA §306).

Many professional service organizations, such as law firms and public accounting firms, are now organized as a limited liability partnership (abbreviated as LLP). The LLP has elements of both partnerships and corporations. In an LLP, all partners have a form of limited liability, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly rather than through a board of directors. In addition, professional service organizations typically maintain a significant amount of malpractice insurance as additional protection.

Solutions Manual, Chapter 11

Each partner has a Capital Account to represent his or her interest in the partnership (i.e., the claim against the net assets of the partnership). That Capital Account is credited for the initial contribution to the partnership and is increased (decreased) for the partner’s share of the partnership profits (losses) and is decreased by any amounts withdrawn from the partnership (called “drawings”). Each partner’s Capital Account is like an “individualized” Owners’ Equity section found in a typical corporate balance sheet, incorporating both Contributed Capital and Retained Earnings components into the account.

Partners typically have the ability to withdraw funds from the partnership during the year. These withdrawals are called “drawings” and are usually recorded in a Drawing Account that is maintained for each partner and is closed to the partner’s Capital Account at the end of the year. Drawings do not require service as salary does.

Answer: B Corporations are legal entities, separate from their shareholders and partnerships are legal entities separate from their partners. Only sole proprietorships are not separate from their owners.

Answer: A Assets contributed and liabilities assumed are initially recorded at fair value based on valuations performed upon formation of the partnership.

10.

Answer: D Partnerships are not required to use GAAP. If a partnership is not publicly traded, it can adopt whatever accounting policies that the partners agree to use, including the use of accrual accounting, cash basis accounting, or some hybrid approach.

11.

Answer: C A common practice when admitting a new partner to a partnership is to revalue the partnership net assets to fair value, with the resulting gains and losses accruing to the existing partners. This practice provides the most transparency of the relative values contributed by the existing partners and the newly admitted partners.

12.

Answer: A The Uniform Partnership Act of 1997 states that “a partner is not entitled to remuneration for services performed for the partnership” (UPA, §401h).

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13.

Answer: B If a partner’s Capital Account becomes negative as a result of the sales of assets, the partner must make a cash contribution to the partnership in an amount sufficient to bring the Capital Account to a zero balance.

14.

Answer: C In the liquidation of a partnership, it is often difficult to estimate liquidation expenses, not all liabilities may be reported, and sales of assets may not yield any cash. The liquidation administrator must, therefore, be conservative in estimating the amount of cash that can be safely disbursed.

15.

Answer: B Under the bonus method, since the partners are agreeing to an equal division of partner capital upon formation of the partnership, Partner B is effectively paying a bonus to Partner A in the amount of $5,000.

16.

Answer: D Since the partners are agreeing to an equal division of partner capital, Partner B is receiving a 50% interest for a contribution of $45,000, implying a value of the partnership of $90,000 and the recognition of $15,000 of goodwill. Total partnership capital, therefore, equals $90,000 with an equal split agreed to by the partners.

17.

Answer: A The salary paid to Partner C is deducted from the $480,000 excess of revenues over expenses, leaving $390,000 to be allocated to the partners in the sharing ratio of 40:40:20.

18.

Answer: C The $78,000 capital contribution with an ownership interest of 25% implies a value for the partnership of $78,000/25% = $312.000. The total capital after the contribution is $117,000 + $65,000 + $78,000 = $260,000, thus implying a goodwill asset of $52,000.

19.

Answer: A The total capital after the contribution is $117,000 + $65,000 + $78,000 = $260,000 and a 25% interest is $65,000. Since Partner C is investing $78,000. The bonus to Partners A and B is $78,000 - $65,000 = $13,000.

Solutions Manual, Chapter 11

20.

Answer: A Capital Interest @ 10% Allocation of profit Total allocation

Partner A $256,000 25,600 3,200 $28,800

Partner B $160,000 16,000 3,200 $19,200

Partner B’s capital increases by $19,200

21.

There are two ways in which the partners could be credited with equal capital accounts upon formation: via the Bonus Method or via the Goodwill Method. The two questions that will determine which of these methods is employed are: •

Is there evidence of an unrecognized intangible asset upon formation of the partnership? If the answer to this question is, “no,” then the partnership should use the Bonus Method. If the answer is, “yes,” then a second question should be asked:

•

If there is evidence of an unrecorded intangible asset, do the partners wish to record the intangible asset? If the answer to this second question is, “no,” then the partnership should use the Bonus Method. If the answer is, “yes,” then the partners should use the Goodwill Method.

Assuming that the partners answer is “no,” to either of these questions, the partners would apply the Bonus Method. This involves recording the contributed net assets at their fair values and then allocating the capital accounts according to the proportions agreed upon by the partners. The following entry records the initial formation under the Bonus Method: Cash Receivables Inventories

91,000 28,000 56,000

Accounts payable 42,000 Accrued liabilities 28,000 Partner A Capital 52,500 Partner B Capital 52,500 (to record initial capital contribution to the Partnership using the Bonus Method)

Continued next page

Advanced Accounting, 4th Edition

21.

continued Assuming that the partners answer, “yes,” to both of these questions, the partners would apply the Goodwill Method. This involves recording the contributed net assets at their fair values, recording the previously unrecognized intangible asset, and then allocating the capital accounts according to the proportions agreed upon by the partners. In this case, we can estimate the implied amount of Goodwill by evaluating the partners’ individual contributions. Partner A contributed $28,000 in net assets for a 50% capital interest, while Partner B contributed $77,000 for a 50% capital interest. If we believe these to be “arm’s-length” transactions, then the total implied value of the new partnership is $154,000 and the total value of the identifiable contributed net assets is $105,000. This means that the partnership potentially has $49,000 of Goodwill (i.e., $154,000 - $105,000). The following entry records the initial formation under the Goodwill Method: Cash Receivables Inventories Goodwill

91,000 28,000 56,000 49,000

Accounts payable 42,000 Accrued liabilities 28,000 Partner A Capital 77,000 Partner B Capital 77,000 (to record initial capital contribution to the Partnership using the Goodwill Method)

Solutions Manual, Chapter 11

22.

Bonus Method—Assuming that the partners do not wish to record any (previously unrecognized) implied Goodwill, the journal entry to record the admission of Partner C merely reallocates the Partner Capital account from Partner A to Partner C. Partner A, Capital 250,000 Partner C, Capital 250,000 (to record the purchase of Partner A’s partnership interest by Partner C) Given that the partners do not wish to record any previously unrecognized implied intangible assets, the $300,000 purchase price is between the partners and does not affect the partnership. Goodwill Method—Assuming that the partners wish to record any (previously unrecognized) implied Goodwill, the journal entry to record the admission of Partner C is as follows: Goodwill

100,000 Partner A, Capital Partner B, Capital

Partner A, Capital Partner C, Capital 23.

50,000 50,000 300,000 300,000

The journal entry merely records the purchase of one-third of Partner A’s and Partner B’s Capital Accounts and the admission of Partner C with a Capital Account equal to 1/3 of the total partnership capital ($800,000 x 1/3 = 266,667). Partner A, Capital 133,333 Partner B, Capital 133,334 Partner C, Capital (to record the purchase of Partner A and Partner B partnership interests by Partner C)

24.

266,667

No mention of profit sharing in facts, so assumption is partners A and B share equally. Partner C capital = 1/3 of total capital of $810,000 ($280,000 + $280,000 + $150,000 + $90,000). Journal entry: Cash Land Partner A, Capital Partner B, Capital Partner C, Capital (to record the capital contribution of Partner C)

160,000 90,000 10,000 10,000 250,000

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25.

Following the cash contribution, the total capital accounts (and total partnership net assets) are $1,800,000 (i.e., $500,000 + $500,000 + $800,000). The 1/3 capital interest means that Partner C will receive $600,000 of capital credit in exchange for the $800,000 contribution. Under the Bonus Method, we assume that Partner C is paying a $200,000 premium (i.e., $800,000 contribution by C, minus the $600,000 capital credit awarded to C) over book value in order to join the partnership, and the preexisting partners receive that premium as a bonus. This $200,000 bonus is allocated according to the partners’ profit-and-loss sharing ratio. This means Partner A will receive $120,000 (i.e., 60%) of capital credit for the bonus “paid” by Partner C, and Partner B will receive the remaining $80,000 (i.e., 40%). The journal entry to record this transaction is as follows: Cash

800,000 A, Capital B, Capital C, Capital (to record the purchase of a 1/3 partnership interest by C for $800,000)

120,000 80,000 600,000

NOTE: The following is not requested by the Exercise: Partners A, B and C capital accounts are now equal to $620,000, $580,000 and $600,000. In addition, the post-realignment profit-and-loss sharing ratios are 45% for A (60% x [100% - 25%]), 30% for B (40% x [100% - 25%]), and 25% for C. 26.

In this case, we can estimate the implied amount of Goodwill by evaluating the partners’ contributions. Partner C contributed $800,000 in cash for a 1/3 capital interest, while the existing partners (i.e., Partners A and B, together) “contributed” $1,00,000 (i.e., $500,000 + $500,000) for a 2/3 post-realignment capital interest. If we believe these to be “arm’s-length” transactions, then the total implied value of the new partnership is $2,400,000 (i.e., $800,000 contribution by Partner C  1/3). The Goodwill implied by Partner C’s capital contribution is equal to $600,000, which equals the total fair value of the partnership entity (i.e., $1,800,000) minus the fair value of the identifiable net assets of the partnership in the amount of $1,800,000 (equals the existing capital of $1,000,000 and the $800,000 of cash received by the partnership from Partner C). This Goodwill will be allocated to the existing partners in proportion to their relative profit and loss ratios. The journal entry to record this transaction is as follows: Cash Goodwill

800,000 600,000

A, Capital B, Capital C, Capital (to record the purchase of a 1/3 partnership interest by C for $800,000)

Solutions Manual, Chapter 11

360,000 240,000 800,000

27.

The exercise does not provide information on the relative profit-and-loss-sharing ratio of Partners A and B. When the partnership agreement does not explicitly indicate a profit-sharing ratio, the partners allocate profits equally. Therefore, the journal entry to revalue the assets is as follows: Land and Buildings

195,000

Partner A, Capital Partner B, Capital (to revalue the land and buildings prior to the admission of Partner C)

97,500 97,500

At this point, the total capital account balances for Partners A and B reflect the fair value of the identifiable net assets of the partnership immediately prior to the admission of the new partner. The individual capital account balances for A and B are $877,500 and $682,500, respectively, which means the total net assets of the partnership (preadmission) are $1,560,000. After C’s contribution, the total net assets balance of the partnership equals $2,379,000 (i.e., $1,560,000 + $819,000). This means Partner C’s 1/3 interest is valued at $793,000 (i.e., $2,379,000 x 1/3). Partners A and B equally split the $26,000 “bonus” (i.e., $819,000 - $793,000). The admission of Partner C, then, is recorded as follows: Cash

819,000 A, Capital B, Capital C, Capital (to record the purchase of a 1/3 partnership interest by C for $819,000)

13,000 13,000 793,000

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28.

Under the Goodwill approach, the partners can determine a partnership-entity fair value that is implied by the $540,000 contribution by incoming Partner C. Given that Partner C is receiving a 1/3 ownership interest, the implied value of the entire partnership entity is $1,620,000 ($540,000/[1/3]). After C’s payment of cash into the partnership, the total identifiable net assets balance of the partnership (i.e., before considering the implied, previously unrecorded intangible asset) is $1,200,000 (i.e., $300,000 + $360,000 + $540,000). Consequently, it appears that Partner C’s contribution provides evidence that the partnership has an unrecorded intangible asset (i.e., Goodwill) with a fair value of $420,000 ($1,620,000 - $1,200,000). The partnership recognizes the cash contribution and the new intangible asset (i.e., Goodwill) with the following journal entry: Cash Goodwill

540,000 420,000

Partner A, Capital Partner B, Capital Partner C, Capital (to record the cash contribution and goodwill asset and the related adjustments to the capital accounts)

210,000 210,000 540,000

Because the exercise does not specify a pre-realignment profit-and-loss-sharing ratio, Partners A and B equally split the $420,000 capital credit that arises from recognizing the previously unrecorded Goodwill. 29. A

Total Allocation

180,000

220,000 ---

Excess of revenues over expenses Salary Allocation of residual profit

110,000 66,000

44,000

220,000

Total Allocation

110,000 66,000

224,000

400,000

Solutions Manual, Chapter 11

Remaining 400,000

30.

The weighted-average Capital Accounts for the three partners and the allocation of capital account interest is as follows: Partner A B C

Weighted average Capital Account balance $400,000 x 12/12 = $400,000 $400,000 x 12/12 = $400,000 ($0 x 3/12) + ($270,000 x 8/12) = $180,000

Interest allocation $400,000 x 5% = $20,000 $400,000 x 5% = $20,000 $180,000 x 5% = $9,000

The allocation of partnership profit is as follows: A Excess of revenues over expenses Salary Interest Allocation of residual profit Total Allocation

20,000 117,300 137,300

Total Allocation

20,000 195,500 215,500

60,000 9,000 78,200 147,200

60,000 49,000 391,000 500,000

Remaining 500,000 440,000 391,000 ---

31.

Capital Account, beginning of year Capital contributions Withdrawals Salary Interest Allocation of remaining profit Capital Account, end of year

A $ 300,000 0 (20,000)

Partners B $ 300,000 0 (30,000)

20,000 90,000 $ 390,000

20,000 100,000 $ 390,000

C $

0 200,000 (10,000) 35,000 15,000 40,000 $ 280,000

Total $ 600,000 200,000 (60,000) 35,000 55,000 230,000 $ 1,060,000

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32. 35% 20% 45% Partners' Capital Accounts Debit (Credit) Balance prior to liquidation Sale of noncash assets Payment of creditors Distribution to partners Post-liquidation balances

Cash $ 300,000 500,000 800,000 (430,000) 370,000 (370,000) 0

Noncash Assets Liabilities A $ 700,000 $ 430,000 $ 150,000 (700,000) (70,000) 430,000 80,000 (430,000) 80,000 (80,000) 0 0 0

Cash $ 400,000 1,000,000 1,400,000 150,000 1,550,000 (700,000) 850,000 (850,000) 0

20% 30% 50% Noncash Partners' Capital Accounts Assets Liabilities A B C $ 1,500,000 $ 700,000 $ 600,000 $ 500,000 $ 100,000 (1,500,000) (100,000) (150,000) (250,000) 700,000 500,000 350,000 (150,000) 150,000 700,000 500,000 350,000 (700,000) - 500,000 350,000 (500,000) (350,000) 0 0 0 0 0

B C $ 180,000 $ 240,000 (40,000) (90,000) 140,000 150,000 140,000 150,000 (140,000) (150,000) 0 0

33.

Debit (Credit) Balance prior to liquidation Sale of noncash assets Capital contribution Payment of creditors Distribution to partners Post-liquidation balances

34.

Debit (Credit) Balance prior to liquidation Sale of noncash assets

Noncash Cash Assets $250,000 $1,200,000 800,000 (1,200,000) 1,050,000 -

Liabilities $600,000 600,000

Allocation of deficit Payment of creditors Distribution to partners Post-liquidation balances

Solutions Manual, Chapter 11

1,050,000 (600,000) 450,000 (450,000) 0

600,000 (600,000) -

30% 20% 50% Partners' Capital Accounts A B C $300,000 $450,000 $100,000 (120,000) (80,000) (200,000) 180,000 370,000 (100,000) (60,000) (40,000) 100,000 120,000 330,000 120,000 330,000 (120,000) (330,000) 0 0

35.

Debit (Credit) Balance prior to liquidation Sale of noncash assets

25% 35% 40% Partners' Capital Accounts A B C $60,000 $300,000 $26,000 (50,000) (70,000) (80,000) 10,000 230,000 (54,000) (22,500) (31,500) 54,000 (12,500) 198,500 12,500 (12,500) 186,000 -

Cash $400,000 600,000 1,000,000

Noncash Assets Liabilities $800,000 $814,000 (800,000) 814,000

1,000,000

814,000

1,000,000 (814,000) 186,000 (186,000) 0

814,000 (814,000) -

40%

30%

Allocation of deficit Allocation of deficit Payment of creditors Distribution to partners Post-liquidation balances

186,000 (186,000) 0

36. Debit (Credit) Balance prior to liquidation Sale of noncash assets in month #1 Installment distribution to Partners #1 Sale of noncash assets in month #2 Installment distribution to Partners #2

Noncash Assets

$6,000

$124,800 $(12,000)

$(33,600) $(49,200)

37,200

(66,000)

11,520

43,200

58,800

(12,000)

(31,200)

12,000

58,800

33,600

(38,400)

45,600

20,400

$(21,600)

$(14,400)

8,640

5,760

2,880

(22,080)

(40,560)

(15,840)

(11,520)

22,200

3,600

5,400

(12,000)

(22,080)

(18,360)

(12,240)

(6,120)

1,920

1,440

960

480

(12,000)

(20,160)

(16,920)

(11,280)

(5,640)

12,000

10,800

7,200

3,600

(12,000)

(8,160)

(6,120)

(4,080)

(2,040)

8,160

6,120

4,080

2,040

(20,400) 12,000

Post-liquidation balances

Liabilities

(33,600) 12,000

(12,000) 0

10%

Partners' Capital Accounts

Cash

Write off noncash assets in month #3 Pay creditors

20%

(12,000)

12,000 0

Advanced Accounting, 4th Edition

36.

continued Safe Payment #1

40%

30%

20%

10%

Partners' Capital Accounts Debit (Credit)

$(22,080)

$(40,560)

$(15,840)

$(11,520)

23,520

17,640

11,760

5,880

1,440

(22,920)

(4,080)

(5,640)

ASSUME that A deficit is allocated

(1,440)

720

480

240

Safe Payment for Installment #1

$(22,200)

$(3,600)

$(5,400)

Safe Payment #2

40%

30%

20%

10%

Partners' Capital Assumed Losses ASSUME that noncash sold for Zero

58,800

Partners' Capital Accounts Debit (Credit) Partners' Capital

$(20,160)

$(16,920)

$(11,280)

$(5,640)

8,160

6,120

4,080

2,040

$(12,000)

$(10,800)

$(7,200)

$(3,600)

Assumed Losses ASSUME that noncash sold for Zero Safe Payment for Installment #2

Solutions Manual, Chapter 11

20,400

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