UNDERSTANDING THE ISSUES

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CHAPTER 2

UNDERSTANDING THE ISSUES

• (a) Jacobson has a passive level of own-

ership and in future periods will record dividend income of only 15% of Bil- trite’s declared dividends. Jacobson will also have to adjust the investment to market value at the end of each period.(b) Jacobson has an influential level of ownership and in future periods will record investment income of 40% of Biltrite’s net income. Any dividends declared by Biltrite will reduce the in- vestment account but will not affect the investment income amount.(c) Jacobson has a controlling level of ownership and in future periods will add 100% of Biltrite’s net income to its own net income. Biltrite’s nominal account balances will be added to Jacobson’s nominal accounts. Any dividends de- clared by Biltrite will not affect Jacob- son’s income.(d) Jacobson has a controlling level of ownership and in future periods will add 100% of Biltrite’s net income to its own net income. All (100%) of Biltrite’s nom- inal account balances will be added to Jacobson’s nominal account balances.This will result in consolidated net in- come, followed by a distribution to the non-controlling interest equal to 20% of Biltrite’s income. Any dividends de- clared by Biltrite will not affect Jacob- son’s income.

• The elimination process serves to make the

consolidated financial statements appear as though the parent had purchased the net assets of the subsidiary. The invest- ment account and the subsidiary equity ac- counts are eliminated and replaced by the subsidiary’s net assets.

• (a) Company Parent NCI

Implied Price Value Value Analysis Schedule Fair Value (100%) (0%)

Company fair value ...................................... $1,200,000 $1,200,000 N/A Fair value of net assets excluding goodwill . 800,000 800,000 Goodwill ....................................................... $ 400,000 $ 400,000

Net Assets—marked up 300,000 ($800,000 fair value – $500,000 book value) Goodwill—$400,000 ($1,200,000 – $800,000)

(b) Company Parent NCI Implied Price Value Value Analysis Schedule Fair Value (80%) (20%)

Company fair value ...................................... $1,200,000 $960,000 $240,000 Fair value of net assets excluding goodwill . 800,000 640,000 160,000 Goodwill ....................................................... $ 400,000 $320,000 $ 80,000

Net Assets—marked up $300,000 ($8 00,000 fair value – $500,000 book value) Goodwill—$400,000 ($1,200,000 – $800,000) The NCI would be valued at $240,000 (20% of t he implied company value) to allow the full rec- ognition of fair values.Advanced Accounting 12th Edition Fischer Solutions Manual Visit TestBankDeal.com to get complete for all chapters

2–2 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• (a) Company Parent NCI

Implied Price Value Value Analysis Schedule Fair Value (100%) (0%)

Company fair value ...................................... $1,000,000 $1,000,000 N/A Fair value of net assets excluding goodwill . 850,000 850,000 Goodwill ....................................................... $ 150,000 $ 150,000

The determination and distribution of excess schedule would make the following adjustments: $1,000,000 price – $350,000 net book value = $650,000 excess to be allocated as follows: Current asse ts ............................................. $ 50,000 Fixed assets ................................................ 450,000 Goodwill ....................................................... 150,000

$650,000

(b) Company Parent NCI Implied Price Value Value Analysis Schedule Fair Value (100%) (0%)

Company fair value ...................................... $ 500,000 $ 500,000 N/A Fair value of net assets excluding goodwill . 850,000 850,000 Gain on acquisi tion ...................................... $ (350,000) $ (350,000)

The determination and distribution of excess schedule would make the following adjustments:

$500,000 price – $350,000 net book value = $150,000 excess to be allocated as follows: Current assets .................................................... $ 50,000 Fixed assets ....................................................... 450,000 Gain on acquisition ............................................ (350,000)

$ 150,000

• (a) Company Parent NCI

Implied Price Value Value Analysis Schedule Fair Value (80%) (20%)

Company fair value ...................................... $1,000,000* $800,000 $200,000 Fair value of net assets excluding goodwill . 850,000 680,000 170,000 Goodwill ....................................................... $ 150,000 $120,000 $ 30,000

*$800,000/80% = $1,000,000.

The determination and distribution of excess schedule would make the following adjustments:

$800,000 parent’s pr ice – (80% × $350,000 net book value) ............. $520,000 NCI adjustment, $200,000 – (20% × $350,000 net book value) ......... 130,000 Total adjustment to be allocated ......................................................... $650,000 as follows:

Current asse ts .................................................................................... $ 50,000 Fixed asse ts ....................................................................................... 450,000 Goodwill ............................................................................................... 150,000

$650,000

2–3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.(b) Company Parent NCI Implied Price Value Value Analysis Schedule Fair Value (80%) (20%)

Company fair value ...................................... $770,000** $600,000 $170,000* Fair value of net assets excluding goodwill . 850,000 680,000 170,000 Gain on acquisition ...................................... $ (80,000) $ (80,000) N/A

*Cannot be less than the NCI share of the fair value of net assets excluding goodwill.**$600,000 parent price + $170,000 mi nimum allowable for NCI = $770,000.

$600,000 parent’s pr ice – (80% × $350,000 book value) ............... $320,000 NCI adjustment, $170,000 – (20% × $350,000 net book value) ..... 100,000

Total adjustment to be allocated ..................................................... $420,000 as follows:

Current asse ts ................................................................................. $ 50,000 Fixed asse ts .................................................................................... 450,000 Gain on acquisition .......................................................................... (80,000)

$420,000

• Company Parent NCI

Implied Price Value Value Analysis Schedule Fair Value (80%) (20%)

Company fair value ...................................... $1,000,000* $800,000 $200,000 Fair value of net assets excluding goodwill . 850,000 680,000 170,000 Goodwill ....................................................... $ 150,000 $120,000 $ 30,000

*$800,000/80% = $1,000,000

The NCI will be valued at $200,000, which is 20% of the implied company value. The NCI ac- count will be displayed on the consolidated balance sheet as a subdivision of equity. It is shown as a total, not broken down into par, paid-in capital in excess of par, and retained earnings.

Ch. 2—Exercises 2–4 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

EXERCISES

EXERCISE 2-1

Santos Corporation Pro Forma Income Statement Ownership Levels

10%

30% 80%

Sales ........................................................................ $700,000 $700,000 $1,150,000 Cost of goods sold ................................................... 300,000

300,000 600,000

Gross profit .............................................................. $400,000 $400,000 $ 550,000 Selling and administrative expenses ........................ 120,000

120,000 200,000

Operating income ..................................................... $280,000 $280,000 $ 350,000 Dividend income (10% × $15,000 dividends) ........... 1,500 Investment income (30% × $70,000 reported income) ..............................................................

21,000

Net income ............................................................... $281,500 $301,000 $ 350,000 Noncontrolling interest (20% × $70,000 reported income) .............................................................. 14,000

Controlling interest ................................................... $ 336,000

EXERCISE 2-2

Company Parent NCI Implied Price Value Value Analysis Schedule Fair Value (100%) (0%)

Company fair value .................................................. $530,000 $530,000 N/A Fair value of net assets excluding goodwill ($280,000 book value + $20,000) ..................... 300,000

300,000

Goodwill ................................................................... $230,000 $230,000

• (a) Cash .................................................................................. 20,000*

Accounts Receivable ......................................................... 70,000 Inventory ........................................................................... 100,000 Property, Plant, and Equipment ($270,000 + $20,000) ..... 290,000 Goodwill ............................................................................ 230,000 Current Liabilities ......................................................... 80,000 Bonds Payable ............................................................ 100,000 Cash ............................................................................ 530,000*

*Cash may be shown as a net credit of $510,000.