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Gleim CPA Review
Updates to Financial
2011 Edition, 1st Printing
June 20, 2011
NOTE: Text that should be deleted from the outline is displayed with a line through the text.
New text is shown with a blue background.
Study Unit 2 – Financial Statements
Page 83, 2.6, 5.a.: These changes correct the outline’s treatment of exceptions to
retrospective application of other IFRSs.
5. Exceptions to Retrospective Application of Other IFRSs
a. With certain exceptions, Rretrospective application is prohibited for the following:
1)
2)
3)
4)
5)
6)
Derecognition of financial assets and liabilities
Hedges
Estimates
Assets classified as held for sale and discontinued operations Noncontrolling interests
Classification and measurement of financial assets
Embedded derivatives
Page 95, question 36: These changes edit the question to match the outline updates.
36. Which of the following may be accounted for
retrospectively by first-time adopters of IFRSs?
A. Hedge accounting Hedges.
B. Discontinued operations Estimates.
C. Employee benefit plans.
D. Derecognition of financial assets and liabilities
Noncontrolling interests.
Answer (C) is correct. (Publisher, adapted)
REQUIRED: The item for which retrospective
application is allowed to first-time adopters of IFRSs.
DISCUSSION: The four items for which retrospective
application is prohibited for first-time adopters of IFRSs are
derecognition of financial assets and liabilities; hedges;
estimates; and assets classified as held for sale and
discontinued operations. With certain exceptions, the six
items for which retrospective application is prohibited for
first-time adopters of IFRSs are (1) derecognition of financial
assets and financial liabilities, (2) hedges, (3) estimates,
(4) noncontrolling interests, (5) classification and
measurement of financial assets, and (6) embedded
derivatives.
Answer (A) is incorrect. Retrospective application for
hedge accounting is prohibited for first-time adopters of
IFRSs. Answer (B) is incorrect. Retrospective application for
assets classified as held for sale and discontinued
operations is estimates is prohibited for first-time adopters of
IFRSs. Answer (D) is incorrect. Retrospective application for
derecognition of financial assets and liabilities noncontrolling
interests is prohibited for first-time adopters of IFRSs.
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Study Unit 3 – Income Statement Items
Page 110, 3.3, 6.d.: This edit corrects the explanation of and example for counterbalancing.
d. An error that affects prior-period net income is counterbalancing if it self-corrects over
two periods. For example, understating ending inventory for one period (and the
beginning inventory of the next period) understates (U) the net income and retained
earnings of the first period but overstates (O) the net income and retained earnings of the
next period by the same amount (assuming no tax changes). Ending retained earnings for
the second period is not misstated. However, despite the self-correction, the financial
statements remain misstated. They are restated if presented comparatively in a later
period.
EXAMPLE
Year 1
Beginning inventory
+ Purchases
– Ending inventory
= Cost of goods sold
Net income
Retained earnings
Year 2
(U)
(O)
(U)
(U)
Beginning inventory
+ Purchases
– Ending inventory
= Cost of goods sold
Net income
Retained earnings
U
(U)
(O)
(O)
Study Unit 8 – Property, Plant, Equipment, and Depletable Resources
Page 319, 8.8, last example in subunit: This edit adjusts the purchase price so the correct
depletion base will result.
EXAMPLE
Mullinax Mining acquired a mine in Idaho for $2.8 3.2 million. The company estimates that the mine contains
1,125 recoverable grams of a particular rare earth. Mullinax further estimates that it will be able to sell the mine eventually
for $600,000 after spending $200,000 on restoration. The company must spend $800,000 to prepare the site for mining.
The depletion base for this mine is calculated as follows:
Purchase price
Add: preparation costs
Add: restoration costs
Minus: residual value
Depletion base
$2,800,000 3,200,000
800,000
200,000
(600,000)
$3,600,000
The depletion charge for this mine will therefore be $3,200 per gram ($3,600,000 depletion base ÷ 1,125 total recoverable
grams). During the first year of operations, the mine produced 200 grams of ore. The depletion charge for the first year
was thus $640,000 (200 grams × $3,200 per gram).
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Study Unit 14 – Equity
Page 524, 14.2, 7. Example: This edit corrects the journal entry amounts in the example.
EXAMPLE
Parvenu issued 5,000 shares of $40 par value, 7% preferred stock, each share convertible into five shares of its no-par,
$1 stated value common stock beginning 6 months after issue. The market price on the day of issue was $68 per share.
Cash (5,000 shares × $68 market price)
7% convertible preferred stock (5,000 shares × $40 par value)
Additional paid-in capital -- preferred (difference)
$544,000 340,000
$200,000
344,000 140,000
Six months after the convertible preferred stock was issued, all the shareholders exercised their conversion privilege.
7% convertible preferred stock (balance)
Additional paid-in capital -- preferred (balance)
Common stock (5,000 shares × 5 × $1 stated value)
Additional paid-in capital -- common (difference)
$200,000
344,000 140,000
$ 25,000
519,000 315,000
Page 529, 14.6: This update corrects an error in the outline. No cash is involved in a
retirement of stock transaction.
14.6 RETIREMENT OF STOCK
1. A retirement of treasury stock does not change the number of shares authorized.
2. Accounting Treatment
a. When stock is retired, (cash or treasury stock) is credited. The stock account is debited
for the par or stated value. Additional paid-in capital is debited to the extent additional
paid-in capital exists from the original issuance.
1) Any remainder is debited to retained earnings or credited to additional paid-in capital
from stock retirement.
b. No gain or loss is reported on transactions involving an entity’s own stock.
1) However, the transfer of nonmonetary assets in exchange for stock requires
recognition of any holding gain or loss on the nonmonetary assets.
c.
Preferred stock may be subject to a call provision, that is, mandatory redemption at the
option of the issuer at a specified price.
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Study Unit 15 – Business Combinations and Consolidated Financial Reporting
Pages 571 through 574, 15.2: These changes correct the accounting for business
combinations when NCI exists.
f. Adjustment for Noncontrolling Interest
1) A noncontrolling interest exists when some portion of the subsidiary’s equity is
not attributable to the parent.
EXAMPLE
In this scenario version of the example, assume that (1) PPE is undervalued by $10,000, and that (2) Platonic transfers
$108,000 for a 90% stake voting interest in Socratic, and (3) the fair value of the noncontrolling interest (NCI) is 10% of the
implied fair value of the acquiree’s identifiable net assets. Platonic performs the following calculation:
Consideration transferred
Noncontrolling interest ($114,000 × 10%) [($108,000 ÷ 90%) × 10%]
Acquisition-date fair value of net assets acquired:
Carrying amount
Undervaluedation of inventories
Undervaluedation of PP&E
Goodwill
$108,000
11,400 12,000
$100,000
4,000
10,000
(114,000)
$ 5,400 6,000
15.2 CONSOLIDATED FINANCIAL REPORTING – ACQUISITION-DATE BALANCE SHEET
1. Acquisition-Date Balance Sheet
a. A balance sheet should be prepared that reports the financial position of the consolidated
entity as of the acquisition date.
2. Process of Preparation
a. Step 1 -- Calculate the excess of consideration transferred over fair value acquired
Determine the excess of fair values over carrying amounts (or of carrying amounts over fair
values).
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EXAMPLE
Just prior to acquisition, Platonic and Socratic have the following condensed balance sheets:
Current assets
Noncurrent assets
Platonic
$140,000
180,000
Socratic
$ 40,000
80,000
Total assets
$320,000
$120,000
Platonic
Current liabilities
$ 60,000
Long-term Noncurrent debt
100,000
Shareholders’ equity
160,000
Total liabs. & SE
$320,000
Socratic
$ 20,000
-0100,000
$120,000
On January 1, Year 1, Platonic borrowed $120,000 and used the proceeds to purchase 80% of the outstanding common
stock shares of Socratic. Platonic had no prior equity interest in Socratic. Assume that the carrying amounts of Socratic’s
assets and liabilities equal their fair value except that inventory is undervalued by $25,000. Also assume that the fair
value of the noncontrolling interest (NCI) was 20% of the implied fair value of the acquiree. Platonic begins the process of
preparing its consolidated balance sheet immediately after the acquisition of Socratic with this calculation:
Consideration transferred
Acquirer’s interest in acquiree’s carrying amounts:
Assets ($120,000 × 80%)
Liabilities ($20,000 × 80%)
Excess
Implied fair value of
acquiree ($120,000 ÷ 80%)
Carrying amount of acquiree’s
net assets (equity)
Excess of FV over CA
$120,000
(96,000)
16,000
$ 40,000
$150,000
(100,000)
$ 50,000
b. Step 2 -- Allocate the excess to under- or overvalued assets acquired and liabilities
assumed. Allocate remaining excess to goodwill.
EXAMPLE
The excess of the consideration transferred implied fair value of the acquiree over Platonic’s interest in the carrying
amount of Socratic’s identifiable net assets should be allocated to inventory and goodwill.
Undervaluation of inventory
Parent’s equity percentage
Excess allocated to inventory
$25,000
× 80%
$20,000
Total excess Excess of FV over CA
Allocated to inventory ion to identifiable net assets
Excess allocated to gGoodwill
$40,000 50,000
(20,000) (25,000)
$20,000 25,000
Goodwill also is calculated as follows:
FV of consideration transferred
FV of NCI ($150,000 implied FV of transferee × 20%)
FV of identifiable net assets acquired ($100,000 + $25,000)
Goodwill
$120,000
30,000
$150,000
(125,000)
$ 25,000
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c. Step 3 -- Prepare the assets section of the consolidated balance sheet. Assets and liabilities
are reported at 100% of their fair value even if a noncontrolling interest though an NCI
exists.
EXAMPLE
Consolidated assets are calculated as follows:
Current assets of parent
Current assets of subsidiary
Total undervaluation of inventory
Consolidated current assets
$140,000
40,000
25,000
$205,000
Noncurrent assets of parent
Noncurrent assets of subsidiary
Goodwill
Consolidated noncurrent assets
$180,000
80,000
20,000 25,000
$280,000 285,000
d. Step 4 -- Properly classify newly issued debt into current and noncurrent portions.
EXAMPLE
The new debt issued to effect the acquisition requires 10 equal annual principal and interest payments beginning
December 31, Year 1. For the January 1, Year 1, consolidated balance sheet, the principal amount of the first payment
must be classified as current and the balance noncurrent.
Current portion [($120,000 ÷ 10) × 1]
Noncurrent portion [($120,000 ÷ 10) × 9]
Total new debt
$ 12,000
108,000
$120,000
e. Step 5 -- Prepare the liabilities section of the consolidated balance sheet.
EXAMPLE
Consolidated liabilities are calculated as follows:
Current liabilities of parent
Current liabilities of subsidiary
Current portion of new LT debt
Consolidated current liabilities
$60,000
20,000
12,000
$92,000
Noncurrent liabilities of parent
Noncurrent liabilities of subsidiary
New long-term noncurrent debt
Consolidated noncurrent liabilities
$100,000
–
108,000
$208,000
f. Step 6 -- Calculate Determine the noncontrolling interest (NCI) in the subsidiary. An NCI is
not reported for every asset and liability. The entire amount of an NCI is reported as a
single component of consolidated equity.
EXAMPLE
The portion of the inventory undervaluation not attributable to Platonic is attributable to the NCI: The fair value of the NCI
is given as 20% of the implied fair value of the acquiree.
Total undervaluation of inventory Implied FV of acquiree ($120,000 ÷ 80%)
NCI percentage
NCI in inventory undervaluation
$25,000 150,000
× 20%
$ 5,000 30,000
The total noncontrolling interest can now be calculated as follows: calculation of NCI is an input to the formula for goodwill
(or gain from a bargain purchase).
NCI in inventory undervaluation
NCI in Socratic’s equity ($100,000 × 20%)
Total noncontrolling interest
Consideration transferred
NCI
Previous equity interest
Fair value of identifiable net
assets acquired ($100,000 CA + $25,000)
Goodwill (see Step 2)
$ 5,000
20,000
$25,000
$120,000
30,000
0
(125,000)
$ 25,000
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g. Step 7 -- Eliminate reciprocal investments. Subsidiary shareholdings in a parent are treated
as treasury stock of the consolidated entity. Because no gain or loss on treasury stock
transactions is recognized, reciprocal investments have no effect on the net income or
retained earnings of the consolidated entity.
EXAMPLE
On the date of acquisition, Socratic held 1,000 shares of Platonic common stock. In preparing the consolidated balance
sheet, this holding will be eliminated by a debit to treasury stock and a credit to investment in Platonic.
h. Step 8 – Because Aa combination is an acquisition of net assets, the subsidiary’s equity
accounts are not included eliminated. Thus, in the absence of a bargain purchase, the
equity of the consolidated entity immediately after acquisition is the same as the equity of
the parent.
EXAMPLE
Consolidated total equity at the acquisition date is Platonic’s total equity at the acquisition date ($160,000). This amount
can be is confirmed by the following calculation:
Consolidated current assets
Consolidated noncurrent assets
Consolidated current liabilities
Consolidated noncurrent liabilities
Noncontrolling interest
Consolidated total equity
$205,000
280,000 285,000
(92,000)
(208,000)
(25,000)(30,000)
$160,000
Page 575 through 576, 15.3: The following changes correct the accounting for business
combinations when NCI exists.
2. Net Income
a. The parent's proportionate share of the subsidiary's net income since the date of acquisition
is a component of income before taxes of the parent. Thus, net income of the consolidated
entity is the net income of the parent. Because of adjustments required in the
consolidation process, consolidated net income is not the same as the aggregate of items
in the separate income statements of the parent and the subsidiary. In the case of a
noncontrolling interest, the consolidated net income also is not the parent-only net income
plus the parent’s share of the subsidiary’s net income.
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Page 8 of 18
EXAMPLE
Platonic is preparing the December 31, Year 1, consolidated financial statements. Excerpts from the two companies'
separate income statements for the year are presented below: Assume that the NCI’s share of Socratic’s net income
included in the consolidated financial statements is $10,200. The following illustrates the basic presentation of a
consolidated income statement when a noncontrolling interest exists:
Platonic
Operating income
$ 80,000
Equity in earnings of subsidiary ($30,000 × 80%)
24,000
Income before income taxes
$104,000
Income taxes (40%)
(41,600)
Net income
$ 62,400
Operating income
Income taxes (40%)
Consolidated net income
Minus: net income attributable to NCI
Net income attributable to parent
Socratic
$50,000
-$50,000
(20,000)
$30,000
$121,000
(48,400)
$ 72,600
10,200
$ 62,400
Consolidated net income for the year is therefore $62,400.
b. If an acquisition is on other than the first business day of the year, revenues, expenses,
gains, and losses of the subsidiary are included in the financial statements of the
consolidated entity only from the date of the acquisition.
3. Dividends Paid
a. Consolidated dividends are those paid to parties outside the consolidated entity by the
parent and the subsidiary minus the parent's proportionate share of those paid by the
subsidiary.
EXAMPLE
Platonic and Socratic declared and paid $40,000 and $20,000 of dividends, respectively, during the year. Because no
dividends are paid on treasury stock (the 1,000 shares of Platonic originally held by Socratic), Cconsolidated dividends
paid can be are calculated as follows:
Dividends paid by parent
Dividends paid by subsidiary
Parent's proportionate share of sub's dividends
($20,000 × 80%)
Consolidated dividends paid
$40,000
20,000
(16,000)
$44,000
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5. Noncontrolling Interest
a. The NCI must be adjusted for its proportionate share of the net income of, and dividends
paid by, the subsidiary.
EXAMPLE
NCI at acquisition date
NCI in subsidiary's net income ($30,000 × 20%)
NCI in dividend's paid by subsidiary ($20,000 × 20%)
Total NCI at reporting date
$25,000 30,000
6,000
(4,000)
$27,000 32,000
Pages 584 through 586, Subunit 15.2, Questions 8 through 12: The following changes
correct the accounting for business combinations when NCI exists:
Questions 8 through 12 are based on the following information. On January 2, Parma borrowed $60,000 and used the
proceeds to purchase 90% of the outstanding common shares of Seville. Parma had no prior equity interest in Seville.
Ten equal principal and interest payments begin December 30. The excess of the consideration transferred implied fair
value of Seville over Seville’s the carrying amount of its identifiable net assets should be assigned 60% to inventory and
40% to goodwill. Moreover, the per-share fair value of the controlling interest and noncontrolling interest (NCI) is the same
at the acquisition date 10% of the implied fair value of the acquiree.
Current assets
Noncurrent assets
Total assets
Parma
$ 70,000
90,000
$160,000
Seville
$20,000
40,000
$60,000
Current liabilities
Noncurrent liabilities
Equity
Total liabilities and equity
$ 30,000
50,000
80,000
$160,000
$10,000
–
50,000
$60,000
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Page 10 of 18
8. On Parma’s January 2 consolidated balance sheet,
current assets equal
A. $100,000
B. $96,000
C. $90,000
D. $80,000
Answer (A) is correct. (CPA, adapted)
REQUIRED: The consolidated current assets.
DISCUSSION: First, the excess of the consideration
transferred over the acquirer’s interest in the carrying amount
of the acquiree’s identifiable net assets is calculated. Because
inventory and goodwill absorb the excess, all other assets and
liabilities are carried at fair value.
Consideration transferred
Acquirer’s interest in identifiable net assets:
Assets ($60,000 × 90%)
Liabilities ($10,000 × 90%)
Excess
$ 60,000
(54,000)
9,000
$ 15,000
The implied fair value of the subsidiary is $66,667 ($60,000
cash paid by the parent ÷ 90%). The excess of this amount
over the carrying amount of the subsidiary’s identifiable net
assets is $16,667 ($66,667 – $50,000). This amount is
allocated $910,000 to inventory ($15,00016,667 × 60%) and
$6,000667 to goodwill ($15,00016,667 × 40%). The inventory
allocation is then divided by the parent’s ownership
percentage to arrive at the total undervaluation ($9,000 ÷ 90%
= $10,000). Thus, the reported fair value amount of the
current assets is $100,000.
Current assets of Parma
Current assets of Seville
Undervaluedation of inventory
Consolidated current assets
$ 70,000
20,000
10,000
$100,000
Answer (B) is incorrect. The amount of $96,000 assumes
an assignment of $6,000 to inventory. Answer (C) is incorrect.
The figure amount of $90,000 ignores the $10,000 excess of
the fair value of inventory over its carrying amount. Answer
(D) is incorrect. The figure amount of $80,000 excludes the
carrying amount of Seville’s current assets.
9. On Parma’s January 2 consolidated balance sheet,
noncurrent assets equal
A. $130,000
B. $134,000
C. $136,000 667
D. $140,000
Answer (C) is correct. (CPA, adapted)
REQUIRED: The consolidated noncurrent assets.
DISCUSSION: First, the excess of the consideration
transferred over the acquirer’s interest in the carrying
amount of the acquiree’s identifiable net assets is calculated.
Because inventory and goodwill absorb the excess, all other
assets and liabilities are carried at fair value.
Consideration transferred
Acquirer’s interest in identifiable net assets:
Assets ($60,000 × 90%)
Liabilities ($10,000 × 90%)
Excess
$ 60,000
(54,000)
9,000
$ 15,000
The implied fair value of the subsidiary is $66,667 ($60,000
cash paid by the parent ÷ 90%). The excess of this amount
over the carrying amount of the subsidiary’s identifiable net
assets is $16,667 ($66,667 – $50,000). This amount is
allocated $910,000 to inventory ($15,00016,667 × 60%) and
$6,000667 to goodwill ($15,00016,667 × 40%). Thus,
reported noncurrent assets equal $136,000667.
Noncurrent assets of Parma
Noncurrent assets of Seville
Goodwill
$ 90,000
40,000
6,000667
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Page 11 of 18
Consolidated noncurrent assets
$136,000667
Answer (A) is incorrect. The amount of $130,000
ignores goodwill. Answer (B) is incorrect. The amount of
$134,000 assumes that a 100% interest was acquired and
that goodwill was therefore $4,000 [($60,000 – $50,000) ×
40%]. Answer (D) is incorrect. The amount of $140,000
assumes that a 100% interest was acquired and that
goodwill was $10,000.
10. On Parma’s January 2 consolidated balance sheet,
current liabilities equal
A. $50,000
B. $46,000
C. $40,000
D. $30,000
11. Refer to the information on the preceding page(s). On
Parma’s January 2 consolidated balance sheet, the sum of
the noncurrent liabilities and the NCI equal
A. $116,000667
B. $110,000667
C. $104,000
D. $50,000
Answer (B) is correct. (CPA, adapted)
REQUIRED: The consolidated current liabilities.
DISCUSSION: Consolidated current liabilities contain
the current portion of the debt issued by Parma to finance
the acquisition ($60,000 ÷ 10 equal principal payments =
$6,000). Reported current liabilities equal $46,000.
Current liabilities of Parma
Current liabilities of Seville
Current component of new debt
Consolidated current liabilities
$30,000
10,000
6,000
$46,000
Answer (A) is incorrect. The pre-existing long-term
noncurrent debt is $50,000. Answer (C) is incorrect. The
amount of $40,000 ignores the new borrowing. Answer (D) is
incorrect. The amount of Parma’s pre-existing current
liabilities is $30,000.
Answer (B) is correct. (CPA, adapted)
REQUIRED: The sum of the noncurrent liabilities and
the noncontrolling interest NCI.
DISCUSSION: Consolidated noncurrent liabilities
include the noncurrent portion of the debt issued by Parma
to finance the acquisition ($60,000 – $6,000 = $54,000).
Thus, reported noncurrent liabilities equal $104,000.
Noncurrent liabilities of Parma
Noncurrent component of new debt
Consolidated noncurrent liabilities
$ 50,000
54,000
$104,000
It is given that the fair values of the 90% interest and the
10% NCI are proportionate (their per-share fair values are
equal). Accordingly, the fair value of the NCI must be $6,000
The implied fair value of the subsidiary is $66,667 ($60,000
cash paid by the parent ÷ 90%), and the NCI is $6,667
($66,667 × 10%). The sum of the noncurrent liabilities and
the NCI is therefore $110,667 ($104,000 + $6,667).
Seville’s net assets
Controlling interest ($50,000 × 90%)
Excess FV of inv. ($10,000 × 10%)
NCI
$ 50,000
(45,000)
1,000
$ 6,000
Accordingly, the sum of the noncurrent liabilities and the NCI
is $110,000 ($104,000 + $6,000).
Answer (A) is incorrect. The amount of $116,000667
results from including the NCI is the sum of noncurrent
liabilities (excluding the new borrowing) and the implied fair
value of the subsidiary. Answer (C) is incorrect. The amount
of $104,000 omits the NCI. Answer (D) is incorrect. The
amount of $50,000 ignores the new borrowing and the NCI.
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Page 12 of 18
12. Refer to the information on the preceding page(s). On
Parma’s January 2 consolidated balance sheet, equity
should be
A. $80,000
B. $86,000
C. $90,000
D. $130,000
Answer (A) is correct. (CPA, adapted)
REQUIRED: The equity in the consolidated balance
sheet.
DISCUSSION: Consolidated equity immediately after
an acquisition is the same as the equity of the parent. Thus,
consolidated equity is $80,000. This can be confirmed by the
following calculation An NCI is the equity of a subsidiary not
directly or indirectly attributable to the parent. Thus, the
equity section of the consolidated balance sheet at the
acquisition date is not the same as the equity section of the
parent’s separate balance sheet. Consolidated equity
includes any NCI in the fair value of the acquiree’s
identifiable net assets presented separately from the
parent’s equity. The equity on the consolidated balance
sheet is therefore calculated as follows:
Consolidated current assets
Consolidated noncurrent assets
Consolidated current liabilities
Consolidated noncurrent liabilities
Total noncontrolling interest NCI
Consolidated total equity
$ 100,000
136,000667
(46,000)
(104,000)
(6,000667)
$ 80,000
Answer (B) is incorrect. Parma’s equity at 1/1 plus the
fair value of the noncontrolling interest equals $86,000.
Answer (C) is incorrect. The total liabilities of the two entities
at 1/1 equal $90,000. Answer (D) is incorrect. The sum of
the equity amounts for Parma and Seville at 1/1 is $130,000.
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Page 13 of 18
Pages 587 through 588, Subunit 15.3, Questions 14 through 16: The following changes
correct the accounting for business combinations when NCI exists:
14. On January 1, Pathan Corp. acquired 80% of Samoa
Answer (D) is correct. (CPA, adapted)
Corp.’s $10 par common stock for $975,000. Pathan had no
REQUIRED: The amount of the NCI.
prior equity interest in Samoa. The remaining 20% of this
DISCUSSION: An noncontrolling interest NCI is the
stock is held by Unpar Co., an unrelated party. On the
equity of a subsidiary not directly or indirectly attributable to
acquisition date for this business combination, the carrying
the parent. Thus, the noncontrolling interest NCI is equal to
amount of Samoa’s net assets was $1 million. The fair
the 20% (100% – 80%) interest in Samoa not held by
values of the assets acquired and liabilities assumed were
Pathan. The implied fair value of the noncontrolling interest
the same as their carrying amounts on Samoa’s balance
NCI at the acquisition date was $220,000 243,750
sheet except for plant assets (net), the fair value of which
[($1,000,000 975,000 carrying amount + $100,000
was $100,000 in excess of the carrying amount. The fair
undervalued plant assets) ÷ 80%) implied fair value of
value of the noncontrolling interest (NCI) is 20% of the
acquiree × 20%]. The noncontrolling interest NCI to be
implied fair value of the acquiree’s net assets at the
reported at year end is calculated as follows:
acquisition date. (No exceptions to the recognition or
Noncontrolling interest NCI at 1/1
$220,000 243,750
measurement principles apply.) For the year ended
Noncontrolling interest NCI in subsidiary’s
December 31, Samoa's had net income included in
net income included in consolidated
consolidated net income of was $190,000, and Samoa paid
net income ($190,000 × 20%)
38,000
cash dividends totaling $125,000. In the December 31
Noncontrolling interest NCI in subsidiary’s
consolidated balance sheet, the noncontrolling interest NCI
dividends paid ($125,000 × 20%)
(25,000)
is reported at
Noncontrolling interest NCI at 12/31
$233,000 256,750
A. $200,000
B. $213,000
C. $220,000 243,750
D. $233,000 256,700
Answer (A) is incorrect. This figure is the carrying
amount of the noncontrolling interest on 1/1, assuming it
equaled amount ($200,000) is 20% of the carrying amount
of the net assets on 1/1. Answer (B) is incorrect. The amount
of $213,000 is the noncontrolling interest measured at its
carrying amount on 1/1, plus its share of net income, minus
its share of dividends 20% of the carrying amount of the net
assets on 1/1, plus 20% of net income, minus 20% of
dividends. Answer (C) is incorrect. The amount of $220,000
243,750 is the noncontrolling interest NCI measured at fair
value at 1/1.
15. A 70%-owned subsidiary declares and pays a cash
Answer (B) is correct. (CPA, adapted)
dividend. What effect does the dividend have on the retained
REQUIRED: The effect of payment of a cash dividend
earnings and noncontrolling interest balances in the
by a subsidiary.
consolidated balance sheet?
DISCUSSION: The parent’s investment in subsidiary,
intraentity dividends, and the subsidiary’s equity accounts,
A. No effect on either retained earnings or the
which include retained earnings, are among the eliminations
noncontrolling interest.
in a consolidation. The equity (net assets) of the subsidiary
not directly or indirectly attributable to the parent is reported
B. No effect on retained earnings and a decrease
separately in consolidated equity as the noncontrolling
in the noncontrolling interest.
interest. Consolidated retained earnings equals the
C. Decreases in both retained earnings and the
accumulated earnings of the consolidated group not
noncontrolling interest.
distributed to the owners of, or capitalized by, the parent.
Thus, it equals the parent’s retained earnings. Accordingly,
D. A decrease in retained earnings and no effect
the subsidiary’s cash dividend reduces its retained earnings
on the noncontrolling interest.
balance and the noncontrolling interest but not the
consolidated retained earnings.
Answer (A) is incorrect. Cash dividends from a
subsidiary decrease the noncontrolling interest. Answer (C)
is incorrect. Cash dividends from a subsidiary have no
effect on consolidated retained earnings but decrease the
noncontrolling interest. Answer (D) is incorrect. Cash
dividends from a subsidiary have no effect on consolidated
retained earnings.
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Page 14 of 18
16. On January 1, Year 4, Pane Corp. exchanged 150,000
shares of its $20 par value common stock for all of Sky
Corp.’s common stock. At that date, the fair value of Pane’s
common stock issued was equal to the carrying amount of
Sky’s identifiable net assets. Also, the carrying amounts of
Sky’s assets and liabilities were their fair values. Moreover,
no eliminations or adjustments are necessary in the
consolidation procedure other than for the investment in Sky
and Sky’s equity accounts. Both corporations continued to
operate as separate businesses, maintaining accounting
records with years ending December 31. In its separate
statements, Pane accounts for the investment using the
equity method. Information from separate company
operations follows:
Retained earnings –
12/31/Yr 3
Net income – 6 months
ended 6/30/Yr 4
Dividends paid – 3/24/Yr 4
Pane
Sky
$3,200,000
$925,000
800,000
750,000
275,000
–
What amount of retained earnings should Pane report in its
June 30, Year 4, consolidated balance sheet?
A. $5,200,000
B. $4,450,000
C. $3,525,000
D. $3,250,000
Answer (D) is correct. (CPA, adapted)
REQUIRED: The consolidated retained earnings.
DISCUSSION: Retained earnings of the consolidated
entity at the acquisition date consist solely of the retained
earnings of the parent (since the consolidated entity does
not include any equity amounts of the subsidiary). Retained
earnings of the consolidated entity at the reporting date
consist of acquisition date retained earnings, plus the
parent’s net income for the year (which includes its
proportionate share of the subsidiary’s net income), minus
consolidated dividends paid. Since Sky paid no dividends
during the year, consolidated dividends consist entirely of
those paid by Pane. Consolidated retained earnings at the
acquisition date are simply the retained earnings of the
parent ($3,200,000). Consolidated net income for the period
includes all of Sky's net income since acquisition because
Pane owns 100% of Sky, and no facts indicate that any
consolidation adjustments are required that would change
the amount of Sky's net income reflected in consolidated net
income. Dividends paid by the parent during the year reduce
consolidated retained earnings ($750,000). Consolidated
retained earnings at June 30, Year 4, are therefore
calculated as follows:
Retained earnings at acquisition date
Parent's net income for period
Dividends paid during period
Consolidated retained earnings at reporting date
$3,200,000
800,000
(750,000)
$3,250,000
Answer (A) is incorrect. The amount of $5,200,000
includes Sky’s retained earnings at 6/30/Yr 4 and does not
reflect an adjustment for the dividends paid. Answer (B) is
incorrect. TheThis amount of $4,450,000 equals the
consolidated retained earnings if the combination had been
accounted for as a pooling, a method no longer applicable to
business combinations. Answer (C) is incorrect. The amount
of $3,525,000 double counts Sky’s net income through
6/30/Yr 4. This amount is included in Pane’s separate net
income.
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Page 15 of 18
Pages 596, Practice Simulation, Tab 1: The following changes clarify the fair value of the
NCI.
Presented below are the balance sheets of Prawn Co. and Shell Corp. at December 31, Year 1.
On January 2, Year 2, Prawn borrowed $300,000 and used the proceeds to purchase 80% of Shell’s common stock.
The fair value of the noncontrolling interest (NCI) equals 20% of the implied fair value of the acquiree. On that date, the
fair values of Shell’s inventories and plant assets exceeded their carrying amounts by $12,500 and $75,000,
respectively. The remaining assets and all liabilities are reported at fair value. The principal of the new debt incurred by
Prawn to effect the acquisition must be repaid in 10 equal annual installments.
Assets:
Cash
Accounts receivable
Inventories
Current assets
Prawn
$ 73,000
40,000
167,000
$280,000
Shell
4,000
12,000
29,000
$ 45,000
Property, plant, and equp. (net)
Intangible assets
Noncurrent assets
Total assets
$477,000
23,000
$500,000
$780,000
$240,000
--$240,000
$285,000
Liabilities and shareholders' equity:
Accounts payable
Note payable
Current liabilities
$ 61,000
9,000
$ 70,000
$ 25,000
--$ 25,000
Bonds payable
$200,000
---
Common stock
Additional paid-in capital
Retained earnings
Total shareholders' equity
$100,000
210,000
200,000
$510,000
$ 50,000
50,000
160,000
$260,000
Total liabilities and shareholders' equity
$780,000
$285,000
$
Enter in the shaded cells below the correct balance amount for each consolidated balance sheet line item.
Consolidated Balance Sheet Line Item
Balance
Immediately after
Acquisition
1. Consolidated current assets
2. Consolidated noncurrent assets
3. Consolidated current liabilities
(
)
4. Consolidated noncurrent liabilities
(
)
5. Noncontrolling interest
(
)
6. Consolidated equity (total of above)
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Page 16 of 18
Pages 597, Practice Simulation, Tab 3: The following changes clarify the fair value of the
NCI.
On January 2, Year 7, a parent with no prior equity interest in the acquiree purchased 90% of a subsidiary its 100,000
outstanding common shares for cash of $155,000. On that date, (1) the subsidiary’s equity equaled $150,000, and
(2) the acquisition-date fair values of the subsidiary’s assets and liabilities equaled their carrying amounts, and (3) the
fair value of the noncontrolling interest (NCI) was 10% of the implied fair value of the acquiree.
For each of the following transactions, determine the dollar effect on Year 7 consolidated income before considering any
noncontrolling interest, and enter the correct amount in the shaded cell below. Ignore income tax considerations.
Transaction
Amount
1. On January 3, Year 7, the subsidiary sold equipment with an original cost of $30,000 and
a carrying amount of $15,000 to the parent for $36,000. The equipment had a remaining
life of 3 years and was depreciated using the straight-line method by both companies.
2. During Year 7, the subsidiary sold merchandise to the parent for $60,000, which included
a profit of $20,000. At December 31, Year 7, half of this merchandise remained in the
parent’s inventory.
3. On December 31, Year 7, the parent paid $91,000 to purchase the outstanding bonds
issued by the subsidiary. The bonds mature on December 31, Year 13, and were originally
issued at their face amount of $100,000. The bonds pay interest annually on December
31 of each year, and the interest was paid to the prior investor immediately before the
parent’s purchase of the bonds.
4. The parent recognized goodwill on January 2, Year 7. It determined on December 31,
Year 7, that goodwill was not impaired.
Page 599, Unofficial Answers, 1. Acquisition-Date Balance Sheet: The following edits update
the Answer Key to reflect the changes to the question.
1. Acquisition-Date Balance Sheet (6 Gradable Items)
1.
$337,500. Consolidated current assets are calculated as follows:
Current assets of Prawn
Current assets of Shell
Undervaluation of inventories
Consolidated current assets
2.
$280,000
45,000
12,500
$337,500
$837,500 842,500. Before calculating noncurrent assets, Prawn must calculate goodwill, the excess of the sum of
(a) the acquisition-date fair values of the consideration transferred, (b) any noncontrolling interest, and (c) any
acquirer’s previous equity stake interest over the acquisition-date fair value of the net assets acquired.
Consideration transferred
$300,000
Noncontrolling interest ($347,500 × 20%)[($300,000 ÷ 80%) implied FV of Shell × 20%]
69,500 75,000
Acquisition-date fair value of net assets acquired:
Carrying amount ($285,000 – $25,000)
$260,000
Undervaluation of inventories
12,500
Undervaluation of plant assets
75,000 (347,500)
Goodwill
$ 22,000 27,500
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Page 17 of 18
Consolidated current assets are calculated as follows:
Noncurrent assets of Prawn
Nonurrent assets of Shell
Undervaluation of plant assets
Goodwill
Consolidated noncurrent assets
3.
$125,000. The current portion of the new debt must be classified as a current liability ($300,000 ÷ 10 years =
$30,000). Consolidated current liabilities are calculated as follows:
Current liabilities of Prawn
Current liabilities of Shell
Current portion of new long-term noncurrent debt
Consolidated current liabilities
4.
$200,000
-270,000
$470,000
$69,500 75,000. The total noncontrolling interest can be calculated as follows: The fair value of the NCI is given as
20% of the implied fair value of the acquiree [($300,000 consideration transferred ÷ 80% interest acquired) × 20% =
$75,000].
Noncontrolling interests in:
Undervaluation of inventories ($12,500 × 20%)
Undervaluation of plant asset ($75,000 × 20%)
Shell's equity ($260,000 × 20%)
Total noncontrolling interest
6.
$ 70,000
25,000
30,000
$125,000
$470,000. The noncurrent portion of the new debt is classified as a noncurrent liability ($300,000 – $30,000 =
$270,000). Consolidated noncurrent liabilities are calculated as follows:
Noncurrent liabilities of Prawn
Noncurrent liabilities of Shell
New long-term noncurrent debt
Consolidated noncurrent liabilities
5.
$500,000
240,000
75,000
22,000 27,500
$837,000 842,500
$ 2,500
15,000
52,000
$69,500
$510,000. In the absence of a bargain purchase, tThe equity of the consolidated entity immediately after acquisition is
the same as the equity of the parent calculated as follows:
Consolidated current assets
Consolidated noncurrent assets
Consolidated current liabilities
Consolidated noncurrent liabilities
NCI
$337,500
842,500
(125,000)
(470,000)
(75,000)
$510,000
Page 600, Unofficial Answers, 3. Intraentity Eliminations: The following edits update the
Answer Key to reflect the changes to the question.
3. Intraentity Eliminations (4 Gradable Items)
1.
$14,000. The intraentity profit to be eliminated is $21,000 ($36,000 sales price – $15,000 carrying amount).
Accordingly, the excess depreciation to be eliminated is $7,000 ($21,000 ÷ 3 years). The net adjustment to
consolidated net income before considering any noncontrolling interest and taxes is therefore $14,000 ($21,000 –
$7,000).
2.
$10,000. The profit on the intraentity sale of inventory should be eliminated to the extent that it is unrealized. Thus, the
net adjustment to consolidated net income before considering any noncontrolling interest and taxes is $10,000
($20,000 profit × 50% inventory still held by the parent).
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Page 18 of 18
3.
$9,000. This transaction is a retirement of debt by the consolidated entity that resulted in a $9,000 gain before taxes
and before considering any noncontrolling interest ($100,000 carrying amount on the subsidiary’s books – $91,000
paid by the parent).
4.
$0. On the date of acquisition, the consolidated entity recognized goodwill was $20,000 [$155,000 price – ($150,000
balance in equity equal to acquisition-date fair value of net assets × 90%)]. Goodwill is the excess of the sum of the
fair value of (1) (a) the consideration transferred ($155,000), (b) the NCI [($155,000 ÷ 90%) × 10% = $17,222], and (c)
any prior equity interest ($0) over (2) the fair value of the acquiree’s net identifiable assets ($155,000). Thus, goodwill
at the acquisition date was $172,222. However, no Year 2 amortization or impairment loss is recognized. Goodwill is
not amortized. Moreover, the entity determined at year end that goodwill was not impaired.
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