Solutions – Ch08

Problem 8-1

(a) The consolidated cash balance at January 1, Year 2, was $166,000, computed as follows:

Balance at December 31, Year 2 $ 114,000

Decrease in cash balance during Year 2:
Cash flows from operations $568,000
Cash outflow for investing activities (160,000)
Cash outflow for financing activities (460,000)
Net cash outflow 52,000
Cash balance at January 1, Year 2 $166,000

(b) Dividends of $96,000 were reported:

Dividends paid to Gonzalez shareholders $90,000
Dividends paid to noncontrolling interest of
Montebello Company ($20,000 x 0.30) 6,000
Total cash payments $96,000

(c) Consolidated net income was $414,000, computed as follows:

Cash flow from operations $568,000
Adjustments to reconcile consolidated net income
and cash provided by operations (154,000)
Consolidated net income $414,000

Problem 8-2

(a) Entries recorded by Ahmed Corporation:

Investment in Gander Common Shares 540,000

Investment in Gander Preferred Shares 160,000
Cash 700,000
Record purchase of Gander shares.
 Cash 6,400
Dividend Income 6,400
Record dividends on preferred shares from Gander: $400,000 x 4% x 40% = $6,400

Investment in Gander Common Shares 93,000

Income (EMI) from Gander Co. 93,000
Record equity-method income: ($140,000 - $16,000 for preferred) x 0.75 = $93,000

Cash 27,000
Investment in Gander Common Shares 27,000
Record dividends from Gander ($52,000 - $16,000 to preferred) x 0.75

(b)
NCI’s share of net income
Preferred shares (400,000 x 4%) x 60% ownership 9,600
Common shares (140,000 – 16,000) x 25% ownership 31,000
Total 40,600

NCI on consolidated balance sheet

Preferred shares 400,000 x 60% ownership 240,000
Common shares (300,000 + 420,000 +140,000 – 52,000) x 25% 202,000
Total 442,000

Problem 8-3
(a) Consolidated operating income for Year 5 is $210,000 (80,000 + 70,000 + 60,000).
(b) Operating income of $59,800 is assigned to the noncontrolling interest:

Operating income from Tremblant (60,000 x 0.29) $17,400

Operating income from Sherbrooke [(70,000 + 60,000 x 0.36) x 0.40] 36,640
Total income assigned to noncontrolling interest 54,040

(c) Operating income of $155,960 is assigned to the controlling interest:

 Consolidated operating income $210,000
Less: Operating income assigned to noncontrolling interest (54,040)
Operating income assigned to controlling interest $155,960

Or, DaSilva’s operating income $80,000

Operating income from Tremblant (60,000 x 0.35) 21,000
Operating income from Sherbrooke [(70,000 + 60,000 x 0.36) x 0.60] 54,960
Operating income assigned to controlling interest 155,960

(d) Only the $40,000 of dividends paid by DaSilva Corporation to its shareholders will be
reported as dividends declared in DaSilva’s Year 5 consolidated retained earnings
statement.

Problem 8-4

Corner Brook has 40,000 shares outstanding: $400,000 / $10 par value per share

(a) Investment in Corner Brook, January 1, Year 6:

Purchase price for 32,000 shares $720,000
Corner Brook net income in Year 4 and Year 5 $200,000
Dividends paid by Corner Brook in Year 4 and Year 5 (80,000)
$ 120,000
Proportion of stock held by Johannes x 0.80 96,000
Balance prior to sale of shares $816,000

(b) Journal entry recorded by Johannes for sale of shares of 8,000 shares:
Cash 240,000
Investment in Corner Brook (816,000 x 8,000 / 32,000) 204,000
Contributed Surplus 36,000

(c) Consolidated net income attributable to NCI

40% x subsidiary’s net income of $100,000 = $40,000
 NCI at end of Year 6
Corner Brook’s shareholder’s equity
Common shares 400,000
Retained earnings (500,000 + (100,000 – 40,000) x 3 680,000
1,080,000
NCI’s share x 40%
432,000

Problem 8-6
(a) Parento Inc.
Consolidated Cash Flow Statement
for the Year Ended December 31, Year 4
Operating
Net Income 54,200)
Add (deduct): )
Database amortization 2,400)
Depreciation 37,500)
Bond premium amortization (1,200)
Loss on sale of land 2,500)
Decrease in accounts receivable 21,000)
Increase in inventory (38,000)
Increase in accounts payable 24,200)
Increase in accrued liabilities 200
102,800)
Investing
Proceeds from sale of land 25,500)
Purchase of buildings and equipment (98,000)
(72,500)
Financing
Issue of bonds payable 60,000)
Dividends – to shareholders of Parento (17,000)
– to noncontrolling shareholders (2,000)
41,000)
Increase in cash during the year 71,300)
Cash at beginning of year 49,800)
Cash at end of year 121,100)

(b) Santana paid dividends of $10,000 of which 20% went to the noncontrolling interest and
80% went to Parento. Only the 20% paid to the noncontrolling interest shows up on the
consolidated cash flow statement because the noncontrolling interest is an outside entity
wheras Parento is within the consolidated entity.

Problem 8-7
Shareholders' equity of Sub Dec. 31, Year 1: 1,135,000

Parent's investment account Dec. 31, Year 1:

(1,135,000 + 610,000) 1,745,000

Parent's journal entry Jan. 1, Year 2:

Cash 644,000
Investment (30%  1,745,000) 523,500
Retained earnings - gain on sale 120,500

Effect on consolidated statements:

Cash 644,000
Non-controlling interest (30%  1,745,000) 523,500
Retained earnings - gain on sale 120,500

* Calculation of dividends paid to noncontrolling shareholders:

Opening balance of noncontrolling interest 0

Carrying amount of shares purchased from parent (30%  1,745,000) 523,500
Add noncontrolling interest’s share of sub's income 39,900
563,400
Less: Ending balance of noncontrolling interest 534,500
Non-controlling interest in sub's dividends 28,900

Parent Ltd.
Consolidated Cash Flow Statement
For the Year Ended December 31, Year 2

Operating cash flow:

Profit 583,900)
Add (deduct):
 Depreciation 370,000)
Goodwill impairment loss 49,500)
Increase in inventory (535,500)
Decrease in current liabilities (748,600)
Decrease in accounts receivable 89,600)
Cash used in operations (191,100)

Investing cash flow:

Proceeds from sale of investment in Sub 644,000)
Acquisition of plant and equipment (250,000)
Cash from investing 394,000)

Financing cash flow:

Issuance of long-term debt 295,400)
Dividends – to Parent Ltd. shareholders (108,500)
– to noncontrolling shareholders (28,900)*
Cash from financing 158,000)

Net increase in cash 360,900)

Cash – January 1 350,000)
Cash – December 31 710,900)

Problem 8-8
1st 2nd
Cost of 75% purchase 717,000
Cost of 20% purchase 197,000
Implied value of 100% 956,000
Carrying amount of Sic’s net assets
Ordinary shares 200,000 200,000
Retained earnings 321,000 344,000
521,000 544,000
100 % 521,000 20% 108,800
Acquisition differential 435,000 88,200
Allocated to:
 Customer contracts 435,000 58,0001
Direct charge to retained earnings for excess of cost over
Carrying amount transferred from NCI 30,200
Total 435,000 88,200

Allocation and changes to acquisition differential allocated to customer contracts

Total Parent NCI

Purchase on Jan 1, Year 5 435,000 326,250 108,750

Amort. for Year 5 (3 years) (145,000) (108,750) (36,250)
Dec 31, Year 5 290,000 217,500 72,500
1NCI sold 2,000 / 2,500 x 72,500 58,0001 (58,000)
290,000 275,500 14,500

Amort. for Year 6 (2 years) (145,000) (137,750) (7,250)

Dec 31, Year 6 145,000 137,750 7,250

(a) Calculation of consolidated profit for Year 6

Pic profit 153,000
Less: Dividends from Sic (95% x 90,000) (85,500)
67,500
Sic profit 148,000
Less: amortization of customer contracts 145,000 3,000
Consolidated profit 70,500
Attributable to:

Pic’s shareholders 70,350

NCI (5% x 3,000) 150
70,500

(b)
(i) Customer contracts (see amortization schedule above) 145,000
(ii) Sic’s ordinary shares 200,000
Sic’s retained earnings 402,000
602,000
NCI’s ownership 5%
30,100
NCI’s share of undepleted acquisition differential 7,250
Total NCI on statement of financial position 37,350
(iii) Pic’s retained earnings 626,000
st nd
1 2
Sic’s retained earnings 344,000 402,000
Sic’s retained earnings, at acquisition 321,000 344,000
Change since acquisition 23,000 58,000
Cumulative depletion of acq. diff. (145,000) (145,000)
(122,000) (87,000)
Pic’s ownership 75% 95%
(91,500) (82,650) (174,150)
Excess of acquisition cost over carrying amount for 2nd purchase (30,200)
Consolidated retained earnings 421,650

Problem 8-9
(a)
Jensen’s shareholders’ equity $1,800,000
Undepleted acquisition differential 420,000
Total value of subsidiary for consolidation purposes 2,220,000
Hein’s percentage ownership 90%
Balance in investment in Jensen account under equity method 1,998,000 (a)
Non-controlling interest on consolidated balance sheet (10% x 2,220,000) 222,000

(b)
Cash 500,000
Investment in Jensen (20 / 90 x (a) 1,998,000) 444,000
Contributed surplus 56,000
Record sale of 20,000 ordinary shares of Jensen

Investment in Jensen (70% x 210,000) 147,000

Equity method income 147,000
Record Hein’s share of Jensen’s net income

Equity method income (180,000 / 9 years x 70%) 14,000

 Investment in Jensen 14,000
Record Hein’s share of amortization of trademarks

Cash (70% x 100,000) 70,000

Investment in Jensen 70,000
Record dividend received from Jensen

(c)
Jensen’s shareholders’ equity (800,000 + 1,110,000) $1,910,000
Undepleted acquisition differential (420,000 – 180,000 / 9) 400,000
Total value of subsidiary for consolidation purposes 2,310,000 (b)
Hein’s percentage ownership 70%
Balance in investment in Jensen account under equity method 1,617,000 (c)
Non-controlling interest on consolidated balance sheet (30% x (b) 2,310,000) 693,000

(d)
Trademarks at December 31, Year 4 180,000
Amortized in Year 5 (180,000 / 9) (20,000)
Trademarks at December 31, Year 5 160,000

(e)
Cash (30,000 x 26) 780,000
Investment in Jensen (30 / 70 x (c) 1,617,000) 693,000 (d)
Gain on sale of shares in Jensen 87,000
Record sale of 30,000 ordinary shares

Investment in Jensen (40,000 x 26 – [(c) 1,617,000 – (d) 693,000])116,000

Remeasurement gain on investment in Jensen 116,000
Record remeasurement gain on 40,000 shares retained in Jensen

Problem 8-10
Investment in Delta 490,000
Carrying amount of Delta (250,000 + 350,000) 600,000
 80% 480,000
Craft’s share of unamortized patent Dec. 31, Year 12 10,000
Value of 100% of unamortized patent Dec. 31, Year 12 12,500

Before share issue, Craft's holdings (80%  49,000) = 39,200 shares

After share issue, Delta's shares outstanding (49,000 + 12,250) = 61,250 shares

Craft's ownership before 80%

Craft's ownership after (39,200  61,250) 64%
Change 16%

Reduction in ownership 16%  80 = 20%

Analysis
Reduction in investment (20%  490,000) 98,000
New shares (12,250 shares  $15) 183,750
64% 117,600
Net gain from share issue 19,600

Non-controlling interest – Dec. 31, Year 12

Previous ordinary shares 250,000
New shares issued 183,750
Retained earnings 350,000
783,750
Add: Unamortized patent 12,500
796,250
36%
286,650

(a)
Craft Ltd.
Consolidated Statement of Financial Position
as at December 31, Year 12
Buildings and equipment (600,000 + 400,000) 1,000,000)
Patent 12,500)
Inventory (180,000 + 200,000) 380,000)
Accounts receivable (90,000 + 120,000) 210,000)
Cash (50,000 + 65,000 + 183,750) 298,750)
1,901,250)

Ordinary shares 480,000)

Retained earnings 610,000)
Contributed surplus 19,600
Non-controlling interest 286,650)
Mortgage payable 250,000)
Accrued liabilities 85,000)
Accounts payable (70,000 + 100,000) 170,000)
1,901,250)

(b)

Since the acquisition differential at the date of acquisition did not contain any goodwill, there
would be no difference between the identifiable net assets and fair value enterprise methods.
Therefore, the return on equity under the identifiable net assets would be the same as the fair
value enterprise method.

Problem 8-11
Part a
Investment account (9,000 shares) – January 1, Year 6 320,000
Carrying amount of Sub 260,000
90% 234,000
Parent’s share of acquisition differential 86,000
Allocated: Land 45% 38,700
Equipment 30% 25,800

Patents 25% 21,500

86,000
Implied value of 100% of acquisition differential
Land (38,700 / 90%) 43,000
Equipment (25,800 / 90%) 28,667
Patents (21,500 / 90%) 23,889
Total 95,556

1,800
P sold = 20%
shares
9,000
shares

7,200
New ownership = 72%
shares
10,000
shares

(i)
Cash 64,800
Investment in Sub (20%  320,000) 64,000
Contribution surplus 800

(ii) Land Equipment Patents Total

Balance Jan. 1, Year 6 43,000 28,667 23,889 95,556
Changes in Year 6 – (5,733) (2,389) (8,122)
Balance Dec. 31, Year 6 43,000 22,934 21,500 87,434

(iii)
Investment account Jan. 1, Year 6 320,000
20% sold (64,000)
Changes to acquisition differential (8,122 x 72%) (5,848)
Net income (72%  145,000) 104,400
Dividends (72%  80,000) (57,600)
Balance Dec. 31, Year 6 – equity method 296,952
Shareholders' equity Sub (260,000 + 145,000 – 80,000) 325,000
72% 234,000
Balance – Parent’s share of undepleted acquisition differential 62,952
 100% of undepleted acquisition differential (62,952 / 72%) 87,434

Part b

Problem 8-14
Cost of 90% (900  1,000) of SET 72,000
Implied value of 100% of SET 80,000
Shareholders' equity Total Preferred Ordinary
Ordinary shares 20,000 20,000
Preferred stock 40,000 41,6001 (1,600)
Retained earnings 30,000 12,0002 18,000
90,000 53,600) 36,400
Acquisition differential (all allocated to patents) 43,600
Patent amortization – Year 5 (five-year life) (8,720)
Unamortized patent, December 31, Year 5 34,880
NCI, date of acquisition
- interest in ordinary shares (10% x 80,000) 8,000
- interest in preferred stock (100% x 53,600) 53,600
Total 61,600 (a)

Calculation of consolidated profit

PET profit 30,000
Less: Dividends from SET3 (1,800)
28,200
SET profit 20,000
Less: Patent amortization (8,720) 11,280
Consolidated profit 39,480
Attributable to:

PET’s shareholders 34,752

NCI (4,0004 + 7285]) 4,728
39,480

Notes:
1. Liquidation value of 4,000 shares x $10.40 = 41,600
 2. Dividends in arrears: 4,000 shares x $1/year x 3 years = 12,000
3. Dividends on ordinary shares: (18,000 – 4,000 x $1/year x 4 years) x 90% = 1,800
4. Income for preferred: 4,000 x $1/year x 1 year = 4,000
5. Income for ordinary: 10% x [11,280 as per above – 4,000]

(a)
PET Company
Statement of Retained Earnings
For the year ended December 31, Year 5
Retained earnings, beginning of year $50,000
Profit 34,752
Dividends (25,000)
Retained earnings, end of year $59,752

(b)
PET’s retained earnings 55,000
Total Preferred Ordinary
SET’s retained earnings,
End of Year 5 32,000 32,000
At acquisition 30,000 12,000 18,000
Change since acquisition 2,000 (12,000) 14,000
Amortization of patents (8,720) 0 (8,720)
(6,720) (12,000) 5,280
PET’s share 90% 4,752
Consolidated retained earnings, December 31, Year 5 59,752
(c)
Calculation of noncontrolling interest – income statement
Interest in preferred shares (100% x 4,000) 4,000
Interest in ordinary shares (10% x [11,280 as per above – 4,000]) 728
Total 4,728

Calculation of noncontrolling interest – statement of financial position (Method 1)

Preferred Ordinary Total
Ordinary shares 20,000 20,000
Preferred stock 41,600 (1,600) 40,000
Retained earnings . 32,000 32,000
41,600 50,400
92,000
Undepleted acquisition differential . 34,880
41,600 85,280
100% 10% )
41,600 8,528) 50,128

Calculation of noncontrolling interest – statement of financial position (Method 2)

Non-controlling interests at date of acquisition (a) 61,600
NCI’s share of Set’s adjusted increase in retained earnings
- on ordinary shares (10% x 5,280) 528
- on preferred stock (100% x –12,000) (12,000) (11,472)
Non-controlling interest, Dec. 31, Year 5 50,128
Problem 8-16
Jan. 1, Year 4 Jan. 1, Year 5 Jan. 1, Year 6
Percentage acquired 25% 20% 10%
Percentage owned 25% 45% 55%
Cost of purchase 142,400 121,600 63,000
Previous equity interest remeasured at fair value
(63,000 / 10 x 45) 283,500 (A)
Total value of 55% 346,500
Implied value of 100% 630,000
Carrying amount of Jovano’s net assets
Ordinary shares 200,000 200,000 200,000
Retained earnings 300,000 330,000 361,000
500,000 530,000 561,000
25% 20% 100%
125,000 106,000 561,000
Acquisition differential = customer lists (3-year life) 17,400 15,600 69,000
Amortization – Year 4 (5,800)
Amortization – Year 5 (5,800) (5,200)
Amortization – Year 6 n/a n/a (23,000)
Unamortized, end of Year 6 46,000

(a) Cost method Equity method

Year 4
Investment in Jovano 142,400 142,400
Cash 142,400 142,400
Investment in Jovano (50,000 x 25%) 12,500
Equity method income 12,500

Equity method income 5,800

Investment in Jovano 5,800

Cash (20,000 x 25%) 5,000 5,000

Dividend income 5,000
Investment in Jovano 5,000

Year 5
Investment in Jovano 121,600 121,600
Cash 121,600 121,600

Investment in Jovano (52,000 x 45%) 23,400

Equity method income 23,400

Equity method income (5,800 + 5,200) 11,000

Investment in Jovano 11,000

Cash (21,000 x 45%) 9,450 9,450

Dividend income 9,450
Investment in Jovano 9,450

Year 6
Investment in Jovano 63,000 63,000
Cash 63,000 63,000

Investment in Jovano ((per A above) 283,500 – (per B below) 268,650) 14,850

Remeasurement gain 14,850

Investment in Jovano (56,000 x 55%) 30,800

Equity method income 30,800
Equity method income (23,000 x 55%) 12,650
Investment in Jovano 12,650

Cash (22,000 x 55%) 12,100 12,100

Dividend income 12,100
Investment in Jovano 12,100

(b) Cost method Equity method

Investment in Jovano (based on entries above)
- end of Year 4 142,400 144,100
- end of Year 5 264,000 268,650 (B)
- end of Year 6 327,000 352,550

(c)
Jovano’s shareholders’ equity, end of Year 6 (200,000 + 395,000) 595,000
Unamortized customer lists 46,000
641,000
Hidden’s percentage ownership 55%
Hidden’s $ interest 352,550

(d)
(i) customer lists 46,000
(ii) noncontrolling interest on the statement of financial position
Jovano’s shareholders’ equity, end of Year 6 (200,000 + 395,000) 595,000
Unamortized customer lists 46,000
641,000
NCI’s percentage ownership 45%
NCI’s $ interest 288,450
(iii) consolidated net income attributable to the noncontrolling interest
Jovano’s net income for Year 6 56,000
Changes to acquisition differential (23,000)
33,000
NCI’s percentage ownership 45%
NCI’s $ interest 14,850