Problem 1 (Recommended: review slides 3-41)

Hoyle, Schaefer and Doupnik – Chapter 5 Modified Problems 11 – I use Equity method instead
of Initial Value method
On January 1, Jarel acquired 80% of the outstanding voting stocks of Suarez for $260,000 cash
consideration. The remaining 20% of Suarez had an acquisition-date fair value of $65,000. On
January 1, Suarez possessed equipment (5-year life) that was undervalued on its book by $25,000.
Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas,
although not recorded in Suarez’s financial records, were estimated to have a 20-year future life.
As of December 31, the financial statements appeared as follows:

Jarel Suarez

Revenues (300,000) (200,000)

Cost of Goods Sold 140,000 80,000
Expenses 20,000 10,000
Equity in Investee Income (70,000)
Net Income (210,000) (110,000)
Retained Earnings, 1/1 (300,000) (150,000)
Net Income (210,000) (110,000)
Dividend Paid 0 0
Retained Earnings, 12/31 (510,000) (260,000)
Cash and receivables 210,000 90,000
Inventory 150,000 110,000
Investment in Suarez 330,000
Equipment (net) 440,000 300,000
Total Assets 1,130,000 500,000
Liabilities (420,000) (140,000)
Common Stock (200,000) (100,000)
Retained Earnings 12/31 (510,000) (260,000)
Total Liabilities and Equity (1,130,000) (500,000)

During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these
goods, Suarez still owns 60% on December 31.

1. What is the goodwill at the acquisition date?

2. What is the ECOBV amortization?

3. What is the consolidated total of non-controlling interest appearing on the balance sheet?

4. Prepare the consolidation journal entries.

5. Complete the consolidation worksheet and then answer the following questions:
a. What is the total consolidated revenue?
b. What is the total consolidated cost of goods sold?
c. What is the consolidated total for equipment (net) at December 31?
d. What is the consolidated total for inventory at December 31?
 Consolidation
Accounts Jarel Suarez Entries Noncontrolling Consolidat.
Debit Credit Interest Totals

Revenues (300,000) (200,000)

Cost of Goods Sold 140,000 80,000
Expenses 20,000 10,000
Equity in Investee Income (70,000)
Separated company net income (210,000) (110,000)
Consolidated Net Income
Non-controlling Interest in sub's Income
Net Income to Controlling Interest

Retained Earnings, 1/1

Jarel (300,000)
Suarez (150,000)
Net Income (210,000) (110,000)
Dividend Paid
Retained Earnings, 12/31 (510,000) (260,000)

Cash and Receivables 210,000 90,000

Inventory 150,000 110,000
Investment in Suarez 330,000

Equipment (net) 440,000 300,000

Total Assets 1,130,000 500,000

Liabilities (420,000) (140,000)
Common Stock (200,000) (100,000)
Non-controlling Interest in Subsidiary 1/1

Non-controlling Interest in Subsidiary 12/31

Retained Earnings 12/31 (510,000) (260,000)
Total Liabilities and Equities (1,130,000 (500,000)
)
Problem 2 (Recommended: review slides 42-54)
On January 1, 2024, Corgan Company acquired 80% of the outstanding voting stock of
Smashing, Inc., for a total of $980,000 in cash and other consideration. At the acquisition date,
Smashing had common stock of $700,000, retained earnings of $250,000, and a non-controlling
interest fair value of $245,000. Corgan attributed the excess of fair value over Smashing’s book
value to various covenants with a 20-year life. Corgan uses the equity method to account for its
investment in Smashing.

During the next two years, Smashing reported the following:

Net Income Dividends
2024 150,000 35,000
2025 130,000 45,000

And Corgan reported:

Inventory purchases
from Smashing
100,000
120,000

Smashing sells inventory to Corgan using a 60% markup on cost. At the end of 2024 and 2025,
40% of the current year purchases remain in Corgan’s inventory.

1. Compute the equity method balance in Corgan’s Investment in Smashing, Inc. account as
of December 31, 2025.

2. Prepare the worksheet adjustment for the December 31, 2025, consolidation of Corgan
and Smashing.
3. What is the consolidated total of noncontrolling interest appearing on the balance sheet?
Problem 3 (Recommended: review slides 55-73)
The individual financial statements for Gibson Company and Keller Company for the year
ending December 31, 2025, follow. Gibson acquired a 60% interest in Keller on January 1,
2024, in exchange for various considerations totaling $570,000. At the acquisition date, the
fair value of the non-controlling interest was 380,000 and Keller’s book value was $850,000.
Keller had developed internally a customer list that was not recorded on its books but had
an acquisition- date fair value of $100,000. This intangible asset is being amortized over 20
years.

Gibson sold Keller land with a book value of $60,000 on January 2, 2024, for $100,000. Keller
still holds this land at the end of the current year.

Keller reported Net Income $200,000 and Dividends for $20,000 in 2024.

Keller regularly transfer inventory to Gibson. In 2024, it shipped inventory costing $100,000 to
Gibson at a price of $150,000. During 2025, intra-entity shipments totaled $200,000,
although the original cost to Keller was only $140,000. In each of these years, 20% of the
merchandise was not resold to outside parties until the period following the transfer.
Gibson owes Keller $40,000 at the end of 2025.
Gibson Keller
Revenues (800,000) (500,000)
Cost of Goods Sold 500,000 300,000
Operating Expenses 100,000 60,000
Income of Keller Company (79,800)
Net Income (279,800) (140,000)
Retained Earnings, 1/1/25 (1,067,000) (620,000)
Net Income (279,800) (140,000)
Dividend Paid 115,000 60,000
Retained Earnings, 12/31/25 (1,231,800) (700,000)
Cash and receivables 177,000 90,000
Account Receivables 356,000 410,000
Inventory 440,000 320,000
Investment in Keller 672,800 -
Land 180,000 390,000
Building & Equipment (net) 496,000 300,000
Total Assets 2,321,800 1,510,000
Liabilities (480,000) (400,000)
Common Stock (610,000) (320,000)
Additional Paid-in Capital (90,000)
Retained Earnings 12/31/25 (1,231,800) (700,000)
Total Liabilities and Equity (2,321,800) (1,510,000)
1. What is the goodwill at the acquisition date?

2. What is the ECOBV amortization?

3. Determine the unrealized gain on the sale of land from Gibson to Keller in 2024?
4. Determine the unrealized profits on the transfer of inventory from Keller to Gibson in
2024 and 2025?

5. What is the consolidated total of noncontrolling interest appearing on the balance sheet?
6. Prepare the consolidation journal entries
7. Complete the consolidation Worksheet and then answer the following questions:
a. What is the total consolidated revenue?
b. What is the total consolidated cost of goods sold?
c. What is the consolidated total for equipment (net) at December 31?
d. What is the consolidated total for inventory at December 31?
e. What is the consolidated total for Land at December 31?
 Consolidation
Entries Noncontrolling Consolidated
Accounts Gibson Keller Interest Totals
Debit Credit
Revenues (800,000) (500,000)
Cost of Goods Sold 500,000 300,000

Operating Expenses 100,000 60,000

Income of Keller Company (79,800)
Separated company net income (279,800) (140,000)
Consolidated Net Income
Noncontrolling Interest in Sub's Income
Net Income to Controlling Interest

Retained Earnings, 1/1/25

Gibson (1,067,000)
Keller (620,000)

Net Income (279,800) (140,000)

Dividend Paid 115,000 60,000
Retained Earnings, 12/31/25 (1,231,800) (700,000)

Cash and receivables 177,000 90,000

Account Receivables 356,000 410,000
Inventory 440,000 320,000
Investment in Keller 672,800

Land 180,000 390,000

Building & Equipment (net) 496,000 300,000
 Consolidation
Entries Noncontrolling Consolidated
Accounts Gibson Keller Interest Totals
Debit Credit
Total Assets 2,321,800 1,510,000
Liabilities (480,000) (400,000)
Common Stock (610,000) (320,000)
Additional Paid in Capital 0 (90,000)
Non-controlling Interest in Sub 1/1

Non-contorlling Interest in Sub 12/31

Retained Earnings 12/31/25 (1,231,800) (700,000)
Total Liabilities and Equities (2,321,800) (1,510,000)
Problem 4 (Recommended: review slides 74-88)
Following are financial statements for Moore Company and Kirby Company for 2025:

Moore Kirby
Sales (800,000) (600,000)
Cost of Goods Sold 500,000 400,000
Operating and Interest 100,000 160,000
expense Equity in Kirby's ?
earnings
Net Income (40,000)
Retained earnings 1/1/25 (1,025,970) (550,000)
Net Income ? (40,000)
Dividend paid 130,000 0
Retained earnings 12/31/25 ? (590,000)
Cash and receivables 217,000 180,000
Inventory 224,000 160,000
Investment in Kirby ? 0
Equipment (net) 600,000 420,000
Buildings 1,000,000 650,000
Accumulated depreciation Buildings (100,000) (200,000)
Other Assets 200,000 100,000
Total Assets ? 1,310,000
Liabilities (1,138,000) (570,000)
Common Stock (600,000) (150,000)
Retained earnings, 12/31/25 ? (590,000)
Total Liabilities and Equity ? (1,310,000)

 Moore purchased 90% of Kirby on January 1, 2024, for $657,000 in cash. On that date, the
10% noncontrolling interest was assessed to have a $73,000 fair value. Also, at the
acquisition date, Kirby held equipment (4-year remaining life) undervalued on the financial
records by $20,000 and interest-bearing liabilities (5-year remaining life) overvalued by
$40,000. The rest of the excess fair value over book value was assigned to previously
unrecognized brand names and amortized over a 10-year life.

 During 2024 Kirby earned Net Income of $80,000 and paid no dividends.

 Each year Kirby sells Moore inventory at a 20% gross profit rate. Intra-entity sales were
$145,000 in 2024 and $160,000 in 2025. On January 1, 2025, 30% of the 2024 transfers were
still on hand and, on December 31, 2025, 40% of the 2025 transfers remained.

 Moore sold Kirby a building on January 2, 2024. It had cost Moore $100,000 but had
$90,000 in accumulated depreciation at the time of this transfer. The price was $25,000 in
cash. At that time the building had a five-year remaining life.
1. What is the goodwill at the acquisition date?

2. What is the ECOBV amortization?

3. Determine the unrealized gain on the sale of the building from Moore to Kirby in 2024.

4. Determine the unrealized profits on the transfer of inventory from Kirby to Moore in
2024 and 2025.

5. Determine the balance of Investment in Kirby at December 2025. The parent company
uses the equity method to account for the investment.
6. Determine the balance of Equity in Kirby’s earnings at December 2025. The
parent company uses the equity method to account for the investment.

7. Prepare the consolidation journal entries.

8. Complete the consolidation Worksheet and then answer the following questions:
a. What is the total consolidated revenue?
b. What is the total consolidated cost of goods sold?
c. What is the consolidated total for buildings at December 31?
d. What is the consolidated total for inventory at December 31?
 Consolidation Entries Noncontrolling Consolidated
Accounts Moore Kirby
Debits Credits Interest Totals
Sales (800,000) (600,000)
Cost of Goods Sold 500,000 400,000

Operating Expenses 100,000 160,000

Equity in Kirby's Income
Separate company NI (40,000)
Consolidated Net Income
NCI in Sub’s Income
Net Income to Controlling Interest

Retained Earnings 1/1

Moore Company (1,025,970)
Kirby Company (550,000)

Net Income (above) (40,000)

Dividend Paid 130,000 0
Retained Earnings 12/31 (590,000)

Cash & Receivables 217,000 180,000

Inventory 224,000 160,000
Investment in Kirby 0

Equipment (net) 600,000 420,000

Buildings 1,000,000 650,000
Accumulated Depreciation-Buildings (100,000) (200,000)
Other Assets 200,000 100,000
Brand name
Total Assets 1,310,000
Liabilities (1,138,000) (570,000)
Common Stock (600,000) (150,000)

NCI Interest in Sub 1/1

NCI Interest in Sub 12/31

Retained Earnings 12/31 (590,000)
Total Liabilities and Equities (1,310,000)