SOLUTIONS TO PROBLEMS

Problem 9-1
Persaud Corp.
Consolidated Balance Sheet
Cash (5 + 70 – 66 + 6) $ 15
Buildings & Equipment 120
Accumulated Depreciation (16)
Casino 66
Total assets $ 185

Accounts Payable 4
Bank Loan Payable 70
Bonds Payable 60
Common Shares 30
Retained Earnings 15
Noncontrolling interest 6
Total liabilities plus shareholder’s equity $ 185

Problem 9-2
(a)
Yemellas’ common shares and retained earnings should be the same for all three financial
statements as they represent only Yemellas’ shares outstanding and their own retained
earnings.
(b) Equity Proportionate Full
Method Consolidation Consolidation
Return on equity = Net income 150 = 22.3% 150 = 22.3% 150 + 120 = 14.4%
Shareholders’ equity 670 670 670 + 1,200
Current ratio = Current assets 320 = 1.68 896 = 1.34 1,760 = 1.27
Current liabilities 190 670 1,390
Debt-to-equity = Total liabilities 1,040 = 1.55 3,120 = 4.66 6,240 = 3.34
Total equity 670 670 1,870
(c)
The equity method and proportionate consolidation provide the best return on investment
because it is higher than the full consolidation method. The equity method provides the best
current ratio because it provides the highest liquidity. The equity method shows the best debt-to-
equity ratio because it has the least amount of debt relative to equity.
(d)
Current assets 1,760 – 320 = 1.2
Current liabilities 1,390 - 190

Problem 9-3
(in 000,000s)
(a) (b) (c)
Implied Value of consideration given
Fair value of amount invested by Benefit 0 0 0
Fair value of NCI (= value of common shares) 45 40 55
Total implied value of consideration given 45 40 55
Value of identifiable assets received
Carrying amount of amount invested by Benefit 0 0 0
Fair value of Pharma’s own assets 460 460 460
Less: Fair value of liabilities of Pharma (415) (415) (415)
Total value of identifiable net assets received 45 45 45
Acquisition differential 0 (5) 10
Assigned on consolidation to:
Goodwill 10
Gain on purchase (5) .
Balance to assign 0 0 0

The consolidated balance sheets would appear as follows:

Current assets $550 $550 $550
Property, plant & equipment 790 790 790
Intangible assets 220 220 220
Goodwill 10
$1,560 $1,560 $1,570

Current liabilities $405 $405 $405

Long-term debt 780 780 780
Common shares 60 60 60
Retained earnings 270 275 270

Noncontrolling interest 45 40 55
$1,560 $1,560 $1,570

Problem 9-4
Unrealized profits After tax
Closing inventory – Prince selling 40,000
– Albert selling 72,000

Unrealized gain on equipment Jan. 1, Year 4 – Albert selling 120,000

Amount realized annually through depreciation

(120,000 / 5 years) 24,000

(a) Albert owns 64% of Prince (a subsidiary)

Investment in Prince (64% × 860,000) 550,400

Equity method income 550,400
Year 5 net income

Dividends receivable (64% × 200,000) 128,000

Investment in Prince 128,000
Year 5 dividends declared but not received

Equity method income (64% × 40,000) 25,600

Investment in Prince 25,600
Unrealized closing inventory profit – Prince selling

Equity method income 72,000

Investment in Prince 72,000
Unrealized closing inventory profit – Albert selling
 Investment in Prince 24,000
Equity method income 24,000
Equipment profit realized in Year 5 – Albert selling

(b) Albert owns 30% of Prince (a joint venture)

Investment in Prince (30% × 860,000) 258,000

Equity method income 258,000
Year 5 net income

Dividends receivable (30% × 200,000) 60,000

Investment in Prince 60,000
Year 5 dividends declared but not received

Equity method income (30% × 40,000) 12,000

Investment in Prince 12,000
Unrealized closing inventory profit – Prince selling

Equity method income (30% × 72,000) 21,600

Investment in Prince 21,600
Unrealized closing inventory profit – Albert selling
(Note: 70% is realized selling to the other venturers)

Investment in Prince (30% × 24,000) 7,200

Equity method income 7,200
Equipment profit realized in Year 5 – Albert selling
(70% is realized selling to other venturers)
Problem 9-6
(a)
Deferred liabilities pertaining to the subsidiary, Kamsack
Fair value Tax basis Difference
Property and equipment 22,100 18,300) 3,800)
Inventory 7,560 6,660) 900)
Total 4,700)
Subsidiary's future tax rate 25 %)
Subsidiary’s future tax liability – in total for consolidation 1,175
- already reported by Kamsack on separate entity books 325
- adjustment required on consolidation
850

Future income taxes liability on the consolidation balance sheet:

Peter’s separate entity books 2,300
Kamsack’s separate entity books 325
Adjustment on consolidation 850
Total 3,475

Noncontrolling interest on the consolidation balance sheet:

= zero because parent owns 100% of subsidiary

(b)
Future income taxes liability on the consolidation balance sheet: 3,475 = same as above
Noncontrolling interest on the consolidation balance sheet:
Acquisition cost for 80% of Subsidiary’s shares 10,500
Implied value for 100% of Subsidiary’s shares 13,125
NCI’s percentage ownership 20%
NCI’s value on consolidated balance sheet 2,625
Problem 9-7
(a)
Deferred liabilities pertaining to the subsidiary, Kindersley
Fair value Tax basis Difference
Inventory 3,160 3,660) (500))
Patent 5,300 3,500) 1,800)
Total 1,300)
Subsidiary's future tax rate 40%)
Subsidiary’s future tax liability – in total for consolidation 520
- already reported by Kindersley on separate entity books 400
- adjustment required on consolidation
120

Future income taxes liability on the consolidation balance sheet:

Darrell’s separate entity books 1,300
Kindersley’s separate entity books 400
Adjustment on consolidation 120
Total 1,820

Cost of 100% of Kindersley 7,500

Carrying amount of Kindersley’s net assets
Ordinary shares 1,000)
Retained earnings 5,360)
6,360
Acquisition differential 1,140
Allocated: FV – CA
Inventory (500))
Patent 800)
Future income tax payable (120)) 180
Goodwill 960
(b)
Changes to Acquisition Differential
Balance Changes Balance
Dec 31, Yr. 5 Year 6 Year 7 Dec 31, Yr. 7
Inventory (500) 500
Patent 800 (100) (100) 600
Future tax liability (40% of above) (120) (160) 40 (240)
Goodwill 960 (300) 660
1,140 240 (360) 1,020

(c)
Future income tax payable
Darrell’s separate entity books 1,570
Kindersley’s separate entity books 390
Adjustment on consolidation 240
Total 2,200
Goodwill 660

Problem 9-8
Revenue test
Percentage
Revenues of total
A 12,000 31%
B 9,600 24%
C 7,200 18%
D 3,600 9%
E 5,100 13%
F 1,800 5%
39,300 100%

From the revenue test, segments A, B, C, and E are reportable.

 Profit Loss
A 3,100
B 2,680
C 1,440
D 660
E 810
F 270
7,250 1,710
10% of above 725 171 725 is higher of two and is the benchmark for reportable.

From the operating profit test, segments A, B, C, and E are reportable.

Asset test
Percentage of
Assets total
A 24,000 30%
B 21,000 26%
C 15,000 19%
D 9,000 11%
E 8,400 10%
F 3,600 4%
81,000 100%

From the asset test, only segment F is not reportable. Since each other segment must be
reported separately, segment F will be reported separately by default.
Problem 9-9
(a)
Fair value of plant and equipment transferred $1,380,000
Carrying amount on Amco's books 1,120,000
Potential gain on transfer to joint venture (Bearcat) 260,000
Amco's portion – 35% (unrealized) 91,000
Newstar's portion – 65% 169,000
Recognized on transfer 169,000
(the entire amount because the transaction has commercial substance)
Recognized later $0

Jan. 1, Year 1
Cash 469,000
Investment in Bearcat (1,380,000 - 469,000) 911,000
Plant and equipment 1,120,000
Unrealized gain - contra account 91,000
Gain on transfer to Bearcat 169,000

Dec 31, Year 1

Investment in Bearcat 69,650
Equity earnings 69,650
(35% x 199,000)

Dividend receivable 32,900

Investment in Bearcat 32,900
(35% × 94,000)

Unrealized gain - contra account 4,550

Gain on transfer to Bearcat 4,550
 (91,000/ 20 years)

(b)
Since the transaction does not have commercial substance, a gain can only be recognized to
the extent of portion realized via cash regardless of whether it was received indirectly from
Newstar or borrowed by the joint venture.

Cash received by Amco (deemed to be proceeds from partial sale) $469,000

Carrying amount sold (469,000 / 1,380,000 × 1,120,000) 380,638
Gain on transfer to Bearcat $88,362

Jan. 1, Year 1
Cash $469,000
Investment in Bearcat 911,000
Plant and equipment 1,120,000
Unrealized gain - contra account 171,638
Gain on transfer to Bearcat 88,362

Dec. 31, Year 1

Investment in Bearcat 69,650
Equity method income 69,650

Dividend receivable 32,900

Investment in Bearcat 32,900

Unrealized gain - contra account 8,582

Gain on transfer to Bearcat 8,582
(171,638 / 20 years)
Problem 9-10

Fair value of equipment 2,000,000

Carrying amount of equipment on Clifford's books 1,700,000
Unrealized gain on transfer of equipment 300,000

(a)
Equity method journal entries on Clifford's books:

January 1, Year 3
Investment in Jager Ltd. 2,000,000
Equipment 1,700,000
Unrealized gain – contra account 300,000

To record initial investment in Jager Ltd.

December 31, Year 3

Investment in Jager Ltd. (40% x 200,000) 80,000
Equity method income from Jager Ltd 80,000
To record 40% of net income of Jager Ltd.

Unrealized gain - contra account 37,500

Gain on transfer to Jager Ltd. 37,500

To recognize a portion of the gain on transfer of equipment to joint venture

(300,000 / 8 years expected useful life = 37,500)

(b)
Fair value of equipment 2,000,000
Carrying amount of equipment on Clifford's books 1,700,000
Potential gain on transfer of equipment 300,000
Portion recognized due to deemed sale (900K/2,000K x 300,000) 135,000
Unrealized portion –contra account 165,000

Equity method journal entries on Clifford’s books:

January 1, Year 3
Cash 900,000
Investment in Jager Ltd. 1,100,000
Equipment 1,700,000
Gain on transfer of equipment 135,000
Unrealized gain – contra account 165,000
To record initial investment in Jager Ltd.

December 31, Year 3

Investment in Jager Ltd. (40% x 200,000) 80,000
Equity method income from Jager Ltd. 80,000
To record 40% of net income of Jager Ltd.

Unrealized gain - contra account 20,625

Gain on transfer to Jager Ltd. 20,625
To recognize a portion of the gain on transfer of equipment to joint venture
(165,000 / 8 years expected useful life = 20,625)

Problem 9-11
(a)
Deferred tax assets and liabilities pertaining to Mansford
Fair value Tax basis Difference
Inventory 135,500) 125,000) 10,500)
Land 225,000) 90,000) 135,000)
Buildings 39,000) 16,500) 22,500)
Equipment 25,000) 15,000) 10,000)
Noncurrent liabilities (155,000) (153,000) (2,000)
269,500) 93,500) 176,000)
Subsidiary's tax rate 40 %)
Deferred tax liability – in total on consolidation 70,400
- already reported by Mansford 12,200
- adjustment required on consolidation 58,200

Cost of 60% of Mansford Corp. 210,000

Implied value of 100% of Mansford Corp. 350,000
Carrying amount of Mansford Corp.’s net assets
Assets 394,700)
Liabilities 208,565)
186,135)
Green Inc.'s percentage ownership 100%) 186,135
Acquisition differential 163,865
Allocated: FV – CA
Inventory 10,500)
Land 135,000)
Buildings 3,000)
Equipment (1,000)
147,500)
Deferred tax liability (58,200))
Noncurrent liabilities (2,000)) 87,300
Goodwill 76,565

The deferred tax liability and the allocation of the Acquisition differential for Problem 11 are the
same as for Problem 19. The implied value of a 100% investment in Mansford is $350,000
($210,000 / 60%), which is the same amount, paid in Problem 19 for a 100% purchase of
Mansford. The only items that are different on the consolidated balance sheet are cash and
noncontrolling interest as indicated below:

Green Inc.
Consolidated Balance Sheet
 at January 1, Year 5

Cash (352,750 – 210,000 + 54,000) 196,750

Accounts receivable (167,950 + 63,700) 231,650
Inventory (275,620 + 125,000 + 10,500) 411,120
Land (327,250 + 90,000 + 135,000) 552,250
Buildings (252,250 + 36,000 + 3,000) 291,250
Equipment (79,750 + 26,000 – 1,000) 104,750
Goodwill 76,565
1,864,335

Current liabilities (203,930 + 43,365) 247,295

Deferred tax liabilities (54,320 + 12,200 + 58,200) 124,720
Noncurrent liabilities (0 + 153,000 + 2,000) 155,000
Common shares 386,000
Retained earnings 811,320
Noncontrolling interest (40% x 350,000) 140,000
1,864,335

(b) Goodwill NCI

Fair value enterprise method (as per part a) 76,565 140,000
Less: NCI’s share of goodwill (40% x 76,565) 30,626 30,626
Identifiable net assets method 45,939 109,374

(c) Since tax returns are filed for separate legal entities and not the consolidated entity, the
fair value excess in a business combination is not recognized for tax purposes. If the net
assets acquired in a business combination were sold at their fair value, a gain would be
reported for tax purposes because the fair value is greater than the cost base for tax
purposes. This tax obligation is reported as a deferred tax liability on the consolidated
financial statements at the date of acquisition.

Problem 9-13
(a)
 Kent Corp.
Income Statement
for the Year Ended December 31, Year 9

Sales $3,180,000
Other income (218,000 – [40% x 107,000]) 175,200
Investment income (Note 1) 130,596
3,485,796
Cost of sales $1,445,000
Selling and administrative 518,000
expenses
Other expenses 109,000
Income tax 418,000
2,490,000
Net income $995,796

Note 1:
Investment income
Laurier’s income $356,000
Kent’s percentage 40%
142,400
Less: Changes to acquisition differential 18,500
123,900
Realized gain on sale of land
Kent selling (93,000 x 40% x 30% x [1 – 40%]) 6,696
$130,596

(b)
Intercompany eliminations
Rent (30,000 x 40%) $12,000

Intercompany profits Before Tax After

tax 40% tax
Land – Kent selling in Year 6 $93,000
Considered realized 60%
55,800
Considered unrealized in Year 6 40%
37,200
Realized in Year 9 (30%) $11,160 $4,464 $6,696
Unrealized at end of
Year 9 (70%) $26,040 $10,416 $15,624

Calculation of consolidated net income Year 9

Net income, Kent $908,000

Less: dividends 40% x $107,000 $42,800
Changes to acquisition differential 18,500 61,300
846,700
Add: realized land gain 6,696
853,396
Net income, Laurier 356,000
40% 142,400
$995,796

Kent Corp.
Consolidated Income Statement
for the Year Ended December 31, Year 9

Sales (3,180,000 + [40% x 1,380,000]) $3,732,000

Other income (218,000 – [40% x 107,000] + [40% x 88,000] – 12,000) 198,400
Gain on sale of land (11,160 + [40% x 118,000]) 58,360
Total 3,988,760

Cost of sales (1,445,000 + [40% x 605,000]) 1,687,000

Selling & admin expenses (518,000+ [40% x 318,000] + 18,000 + 685,200
22,000)
Other expenses (109,000 + [40% x 139,000] – 12,000 – 21,500) 131,100
Income tax (418,000 + 4,464 + [40% x 168,000]) 489,664
2,992,964
Net income $995,796

Problem 9-15
(a)
Cost of 60% of Joker – January 1, Year 4 420,000
Shareholders' equity – Joker 600,000
60% 360,000
Acquisition differential – Jan. 1, Year 4 60,000
Allocated:
Equipment 100,000 × 60% 60,000
Balance –0–

Yearly changes to acquisition differential (60,000 / 10) 6,000

Intercompany profits — trademark Before Tax Tax 30% After Tax

Trademark — Poker Selling $70,000
Considered realized in Year 5 (40%) (28,000)
Unrealized in Year 5 (60%) 42,000
Realized in Year 9 (one-half) 21,000 6,300 14,700

Investment income from Joker

Joker’s reported profit 147,000
Poker’s share 60%
88,200
Changes to acquisition differential (6,000)
Realized gain on trademark 14,700
96,900

POKER INC.
 Income Statement
Year ended December 31, Year 9

Sales $ 1,000,000
Investment income from Joker 96,900
Other income (200,000 – 60% x 200,000) 80,000

1,176,900
Cost of sales 600,000
Selling and administrative expenses 200,000
Other expenses 50,000
850,000
Income before income taxes 326,900
Income taxes 105,000
Profit $ 221,900

(b)
Cost of 60% of Joker – January 1, Year 4 420,000
Implied value of 100% 700,000
Shareholders' equity – Joker 600,000
Acquisition differential – Jan. 1, Year 4 100,000
Allocated:
Equipment 100,000
Balance –0–

Yearly changes to acquisition differential (100,000 / 10) 10,000

Intercompany transactions
Management fees 50,000
Dividends (60% x 200,000) 120,000

Intercompany profits — trademark Before Tax Tax 30% After Tax

Trademark — Poker Selling in Year 5 70,000
Considered realized in Year 9 (one-half) 35,000 10,500 24,500
Poker’s profit as reported $ 245,000
Management fee — no adjustment required —
Less: dividend income (200,000 x 60%) (120,000)
Add: realized gain on trademark 24,500
149,500
Joker’s reported profit $ 147,000
Changes to acquisition differential (10,000)
137,000
286,500
Attributable to:
Shareholders of Poker 231,700
Noncontrolling interest (40% x 137,000) 54,800
 POKER INC.
Consolidated Income Statement
Year ended December 31, Year 9

Sales (1,000,000 + 800,000)] $ 1,800,000

Other income [200,000 + 110,000 - 50,000 - (60% x 200,000)] 140,000
Gain on sale of trademarks [40,000 + 35,000] 75,000
2,015,000
Cost of sales [600,000 + 550,000] 1,150,000
Selling and administrative expenses [200,000 + 150,000 - 50,000 + 10,000] 310,000
Other expenses [50,000 + 40,000] 90,000
1,550,000
Income before income taxes 465,000
Income taxes [105,000 + 63,000 + 10,500] 178,500
Profit $ 286,500
Attributable to:
Shareholders of Poker $231,700
Noncontrolling interest (40% x 137,000) 54,800

(c)
When Joker is a subsidiary in part b), the entire gain from sale of trademarks was held back in
Year 5 whereas only 60% of the gain was held back in part a) when Joker was a joint venture.
Half of the gain held back in Year 5 was released into income in Year 9 under both methods.
Since the gain held back was higher in Year 5 in part b), the gain being released in Year 9 is
also higher.
Problem 9-19
(a)
Deferred tax assets and liabilities pertaining to Mansford
Fair value Tax basis Difference
Inventory 135,500) 125,000) 10,500)
Land 225,000) 90,000) 135,000)
Buildings 39,000) 16,500) 25,500)
Equipment 25,000) 15,000) 10,000)
Noncurrent liabilities (155,000) (153,000) (2,000)
269,500) 93,500) 176,000)
Subsidiary's tax rate 40 %)
Deferred tax liability – in total on consolidation 70,400
- already reported by Mansford 12,200
- adjustment required on consolidation 58,200

Cost of 100% of Mansford Corp. 350,000

Carrying amount of Mansford Corp.’s net assets
Assets 394,700)
Liabilities 208,565)
186,135)
Green Inc.'s percentage ownership 100%) 186,135
Acquisition differential 163,865
Allocated: FV – CA
Inventory 10,500)
Land 135,000)
Buildings 3,000)
Equipment (1,000)
147,500)
Deferred tax liability (58,200))
Noncurrent liabilities (2,000)) 87,300
Goodwill 76,565
 Green Inc.
Consolidated Balance Sheet
at January 1, Year 5

Cash (352,750 – 350,000 + 54,000) 56,750

Accounts receivable (167,950 + 63,700) 231,650
Inventory (275,620 + 125,000 + 10,500) 411,120
Land (327,250 + 90,000 + 135,000) 552,250
Buildings (252,250 + 36,000 + 3,000) 291,250
Equipment (79,750 + 26,000 – 1,000) 104,750
Goodwill 76,565
1,724,335

Current liabilities (203,930 + 43,365) 247,295

Deferred tax liabilities (54,320 + 12,200 + 58,200) 124,720
Noncurrent liabilities (0 + 153,000 + 2,000) 155,000
Common shares 386,000
Retained earnings 811,320
1,724,335

(b)
Changes to Acquisition Differential
Balance Changes Balance
Jan 1, Yr 5 Yrs 5 to 7 Yr 8 Dec 31, Yr 8
Inventory 10,500 (10,500)
Land 135,000 135,000
Buildings 3,000 (600) (200) 2,200
Equipment (1,000) 750 250
Noncurrent liabilities (2,000) 600 200 (1,200)
145,500 (9,750) 250 136,000
Deferred tax liability (40%) (58,200) 3,900 (100) (54,400)
Goodwill 76,565 76,565
163,865 (5,850) 150 158,165
(c) See below for summary of journal entries.

CONSOLIDATED FINANCIAL STATEMENT WORKING PAPER

GREEN INC.
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, YEAR 5
Eliminations
Green Mansford Dr. Cr. Consolidated
Statement of Financial Position
Cash $ 352,750 $ 54,000 1 350,000 56,750
Accounts receivable 167,950 63,700 231,650
3
275,620 125,000
Inventory 10,500 411,120
Investment in 1 2
Mansford 350,000 350,000
Acquisition 2 3
differential 163,865 163,865
3
327,250 90,000
Land 135,000 552,250
3
252,250 36,000
Buildings (net) 3,000 291,250
3
79,750 26,000
Equipment (net) 1,000 104,750
3
Goodwill 0 0 76,565 76,565
$ $
$1,455,570 394,700 1,724,335
Current liabilities $ 203,930 $ 43,365 $ 247,295
3
54,320 12,200
Deferred tax liability 58,200 124,720
3
0 153,000
Noncurrent liabilities 0 2,000 155,000
2
386,000 104,500
Common shares 104,500 386,000
2
811,320 81,635
Retained earnings 81,635 811,320
$ $
$1,455,570 394,700 1,724,335

$ $
925,065 925,065

JOURNAL ENTRIES

1 Investment in Mansford $ 350,000

Cash $ 350,000
To record investment in Mansford

2 Common shares 104,500

Retained earnings 81,635
Acquisition differential 163,865
Investment in K Company 350,000
 To eliminate investment account and establish acquisition differential

3 Inventory 10,500
Land 135,000
Buildings 3,000
Goodwill 76,565
Equipment 1,000
Deferred tax liability 58,200
Noncurrent liabilities 2,000

Acquisition differential 163,865

To allocate the acquisition differential

Total $ 925,065 $ 925,065