Chapter_5.pdf

Chapter 5 : Advanced Accounting

Problem On January 1, 20X8, Vector Company acquired 80 percent of Scalar Company's ownership on for $120,000 cash. At that date, the fair value of the non-controlling interest was $30,000. The book value of Scalar's net assets at acquisition was $125,000. The book values and fair values of Scalar's assets and liabilities were equal, except for buildings and equipment, which were worth $15,000 more than book value. Buildings and equipment are depreciated on a 10year basis. Although goodwill is not amortized, the management of Vector concluded at December 31, 20X8, that goodwill from its acquisition of Scalar shares had been impaired and the correct carrying amount was $5,000. Goodwill and goodwill impairment were assigned proportionately to the controlling and non-controlling shareholders. No additional impairment occurred in 20X9. Trial balance data for Vector and Scalar on December 31, 20X9, are as follows:

Required: a. Provide all eliminating entries needed to prepare a three-part consolidation worksheet as of December 31, 20X9. b. Prepare a three-part consolidation worksheet for 20X9 in good form.

Chapter 5 : Advanced Accounting

Solution: Primary Computations 1-

2-

3-

At Acquisition Date January 1, 2008 Fair Value of Consideration Transferred From Controlling 120,000 From Non-Controlling 30,000 150,000 Book Value Of Net Assets Received Given Excess Of Fair Value Over Book Value Allocated To: Under Valued Building & Equipment Goodwill

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7-

8-

125,000 25,000 15,000 10,000 25,000

At Consolidation Date December 31, 2009 Income from Scalar Reported Net Income of Scalar ( × ) Controlling Interest Percentage

NCI in Net Income Of Scalar Adjusted Net Income ( × ) Non-Controlling Interest Percentage

Dividends From Scalar Scalar Dividends (×) Controlling Interest Percentage

NCI Share of Scalar Dividends Scalar Dividends (×) Controlling Interest Percentage

Years 10 0

Amortization 1500 0 1,500

24,000 80% 19,200

24,000 20% 4,800

10,000 80% 8,000

10,000 20% 2,000

Chapter 5 : Advanced Accounting

a. eliminating entries needed to prepare a full set of consolidated financial statements for 20X5. Basic Elimination Entry Common Stock Retained Earnings Income From Scalar NCI in NI of Scalar Dividends Decleard Investment In Bromze NCI in NA of Scalar Amortization excess value reclassification Depreciation Expenses Income from Scalar NCI in NI of Scalar Excess value reclassification Building and Equipment` Goodwill Accumulated Depreciation Investment in Scalar NCI in NA of Scalar Elimination of Intercompany accounts

100,000 50,000 19,200 4,800 10,000 131,200 32,800

1,500 1,200 300

15,000 5,000 3,000 13,600 3,400

Chapter 5 : Advanced Accounting

b. Work Sheet

Chapter 5 : Advanced Accounting

Self Study Problem: Magellan Corporation acquired 80 percent ownership of Dipper Corporation on January 1, 20X8, for $200,000. At that date, Dipper reported common stock outstanding of $75,000 and retained earnings of $150,000. The fair value of the non-controlling interest was $50,000. The differential is assigned to equipment, which had a fair value $25,000 greater than book value and a remaining economic life of five years at the date of the business combination. Canton Dipper reported net income of $40,000 and paid dividends of $20,000 in 20X8. Required: 1) Provide the journal entries recorded by Magellan during 20X8 on its books if it accounts for its investment in Dipper using the equity method. 2) Give the eliminating entries needed at December 31, 20X8, to prepare consolidated financial statements.

1)

Chapter 5 : Advanced Accounting

2)