CHAPTER 3 SOLUTIONS TO MULTIPLE MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS
MULTIPLE CHOICE QUESTIONS 1.
d The major motivation for off-balance-sheet financing is to avoid the impact on leverage.
2.
b The fair values of the entity’s assets and liabilities are included with those of the U.S. company on the consolidated balance sheet. The fair value of the the net assets is owned by outside parties, and is labeled noncontrolling interest.
3.
d Cash Flow $!",### (",)## &,'## Total
0.
b
.
a
P!s!"# $al%! $!#,### (!,### ,###
Po& #."! #.'# #.!
E'(!)#!* P$ $ % %,!## ,### (,!## $,###
I"+!s#!"# $,### ,### ,###
R!s-*%al R!#%"s $&,### *"",###+ *),###+
E'(!)#!* a-"s $'!,&!#
$'!,&!#
E'(!)#!* Loss!s
$*&,'##+ *',!#+ / '!,&!#
The entry on ’s boo/s is0 1nvestment in S2 3erger e4penses 5ash 5apital stoc/ ".
, ' ##
#,"## &,"##
a 6limination *6+ is0 5apital stoc/ etained earnings 7ccumulated 851 Treasury stoc/ 1nvestment in S2
Solutions Manual, Chapter 3
!,### ),### ,### ,"## ',(##
©Cambridge Business Publishers, 2016 3-1
.
c 6limination *+ is0 5urrent assets 1dentifiable intangible assets *+ 9ong-term debt :oodwill *'+ ;6 5urrent liabilities 1nvestment in S2 *+ *'+ *'+
5.
','## !,### ( ## &(,(## (,### (## (%,"##
$*(,### 4 $(,###+ $(,###+ < $(,### < $,### = $!,### $!#, $!#,## ### # > *$( *$(,' ,'## ## < $", $",## ### # < $(, $(,## ### # < $(,# $(,### ## < $, $,## ### # 4 $',### $',### 4 $,"##+ $,"##+ = $&(,(##
d See elimination above.
6.
d
1.
c 1?S re@uires consolidation of a less-than-majority-owned e@uity investment if the investor controls the investee. 1f 2 owns (#A of S5’s stoc/, and the other "#A is spread among small investors, it is li/ely that that 2 controls S5. 7lternative d is not correct because 2 does not have a majority vote and cannot ma/e decisions unilaterallyB other investors owning (!A of the stoc/ *= )!A shares voted - (#A shares voted by b y 2+ participate in the decision ma/ing process and influence decisions.
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Adan!ed A!!ounting, 3rd "dition
EXERCISES E3.1
El--"a# El--"a#-"7 -"7 E"# E"#-!s, -!s, A)8%-s A)8%-s-#-o -#-o" " a# Boo9 Boo9 $al $al%! %!
(amounts in millions)
*6+ 5apital stoc/ '' etained earnings ! Treasury stoc/ ' 1nvestment in SS5 &! To eliminate SS5’s SS5’s stoc/holders’ e@uity accounts and the boo/ value v alue portion of the investment account. Note: Eliminating Eliminating entry (R) (R) is not requir required ed because because the book book values of of SSC’s SSC’s assets and liabilities aro!imate fair value"
E3.2
El--"a# El--"a#-"7 -"7 E"# E"#-!s, -!s, R!+al%a R!+al%a#-o" #-o" o: R!(o R!(o#!* #!* N!# Ass!#s Ass!#s
(amounts in thousands)
a. 7c@uisition cost Samson’s boo/ value 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 7ccounts receivable 1nventories 9and, buildings and e@uipment, net Trademar/s Concurrent liabilities :oodwill
$ '#,### *%',###+ *!',###+ $
*##+ *#,###+ *%#,###+ !#,### *#,###+
(#,## $ )),##
Cote that even though etrel pays less than boo/ value for Samson’s stoc/, etrel still pays more than the fair value of Samson’s identifiable net assets, and therefore goodwill is recogniDed.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2016 3-3
b.
*6+ 5ommon stoc/ ,# # # 7dditional paid-in capital )# ,### 7 85 1 !## etained earnings !,!## Treasury stoc/ (,### 1nvestment in Samson %',### To eliminate eliminate Samson’s stoc/holders’ e@uity accounts and the boo/ value portion of the investment account. *+ Trademar/s ! # ,# # # :oodwill ) ) ,# # 1nvestment in Samson ! ' ,# # # 7ccounts receivable # # 1nventories #,### 9and, buildings and e@uipment, net %#,### Concurrent liabilities #,### To revalue Samson’s assets and liabilities to fair value and eliminate the difference between boo/ value and fair value of Samson’s net assets from the investment account. Note that because because the the acquisition acquisition cost is less less than book book value# eliminatin eliminating g entry (R) requires a debit to the investment account to eliminate it"
E3.3 E3.3
El-El--"a# "a#-"7 -"7 E" E"##-!s, !s, Ba7 Ba7a-" a-" a-" a-"
(amounts in millions)
a. 7c@uisition cost S/elton boo/ value 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 5urrent assets Concurrent assets 1dentifiable intangibles Eargain gain
$ ) *'#+ *'+ $ *'+ *'!+ %
# $ *'+
The fair value of S/elton’s identifiable net assets is $# *= $& < $'# < $% 4 $+. $+. helps paid only $), and records a gain of $' on ac@uisition 1nvestment in S/elton 5ash :ain on ac@uisition To record the bargain gain investment on helps’ boo/s. ©Cambridge Business Publishers, 2016 3-#
# ) '
Adan!ed A!!ounting, 3rd "dition
b. *6+ 5apital stoc/ '! etained earnings ! 1nvestment in S/elton '# To eliminate eliminate S/elton’s stoc/holders’ e@uity accounts and the boo/ value portion of the investment account. *+ 1dentifiable intangibles % 1nvestment in S/elton # 5urrent assets ' Concurrent assets '! To revalue S/elton’s assets assets and liabilities to fair value and eliminate the difference between boo/ value and fair value of Samson’s net assets assets from the investment account.
E3.0
El--"a# El--"a#-"7 -"7 E"#E"#-!s !s w-#h w-#h P!+-o P!+-o%sl %sl; ; U"!(o U"!(o#!* #!* I"#a I"#a"7-& "7-&l!s l!s
*6+ Stoc/holders’ e@uity>Senyo ",###,### 1nvestment in Senyo ",###,### To eliminate eliminate Senyo’s e@uity and the boo/ value portion of the investment account. *+ 9an d !## ,### 1n-process ;F ,###,### :oodwill ',!##,### 1nvestment in Senyo (,###,### To revalue Senyo’s identifiable net assets to fair value, recogniDe goodwill, and eliminate the remainder of the investment account.
E3.
A)8%-s-# A)8%-s-#-o" -o" a"* a"* El--"a El--"a#-"7 #-"7 E"# E"#-!s, -!s, A)8%-s A)8%-s-#-o -#-o" " E'(!"s! E'(!"s!ss
a. 1nvestment in Stengl 3erger e4penses 5ommon stoc/ 7dditional paid-in capital 5ash
Solutions Manual, Chapter 3
#,###,### #,### '!#,### ,%!#,### #,###
©Cambridge Business Publishers, 2016 3-$
b. *6+ 5apital stoc/ '##,### etained earnings ,)##,### 1nvestment in Stengl ',###,### To eliminate eliminate Stengl’s e@uity and the boo/ value portion of the investment account. *+ 9ong-term debt '!,### 1dentifiable intangible assets !##,### :oodwill ),'%!,### lant assets, net "##,### 1nventories '##,### 1nvestment in Stengl ),###,### To revalue Stengl’s identifiable net assets to fair value, recogniDe goodwill, go odwill, and eliminate the remainder of the investment account. Note: $cquisition $cquisition costs are e!ensed e!ensed searately searately on on %innacle’ %innacle’ss books and do not affect consolidation eliminating entries"
E3.<
A)8%-s-# A)8%-s-#-o" -o" a"* El--"a El--"a#-"7 #-"7 E"# E"#-!s, -!s, Ba7a-" Ba7a-" P%)ha P%)has! s!
(amounts in millions)
a. ubl ubli4 i4 ac@ ac@ui uisi siti tion on ent entry ry00 1nvestment in Sherman 3erger e4penses 5ash :ain on ac@uisition
',)# (# ',%# '
5alculation of gain on ac@uisition0 ?air value of Sherman = $',!## < $## < $## < $'!# < $ = $',)# $',)# > $',%!# = $' gain b. 5onsolidation wor/ing paper elimination entries0 *6+ Stoc/holders’ e@uity>Sherman ' ,! # # 1nvestment in Sherman ',!## To eliminate Sherman’s e@uity and the boo/ value portion of the investment account.
©Cambridge Business Publishers, 2016 3-6
Adan!ed A!!ounting, 3rd "dition
*+ 1nventories ## 9and ## 8ther plant assets, net ' !# 9ong-term debt 1nvestment in Sherman ( )# To revalue Sherman’s identifiable net assets to fair value and eliminate the remainder of the investment account. Note: $cquisition $cquisition costs and the gain gain on acquisition acquisition are are record recorded ed searately searately as e!enses and gains# resectively# on %ubli!’ books# and do not affect consolidation eliminating entries"
E3. E3.
I"#!( I"#!(! !#-" #-"7 7 ElEl--" -"a#a#-"7 "7 E" E"# #-!s -!s
a. The stoc/holde stoc/holders’ rs’ e@uity *boo/ *boo/ value+ value+ of Seaboard Seaboard is $(),###,## $(),###,###, #, based on the the first first eliminating entry. b. The ac@uisition cost is $)),###,###, so the e4cess paid over boo/ value is $(#,###,###. c. 7c@uisition cost Eoo/ value 64cess of ac@uisition cost over boo/ value ?air value less boo/ value0 Concurrent assets *overvalued+ :oodwill
E3.5
$)),###,### (),###,### (#,###,### ',###,### $(',###,###
A)8%-s-# A)8%-s-#-o" -o" E"# E"#; ; a"* Co"sol-* Co"sol-*a#-o a#-o" " =o =o9-"7 9-"7 Pa(! Pa(!
a. hoeni4 hoeni4 ma/es ma/es the the followin following g entry entry to record record the ac@uisitio ac@uisition n (amounts in millions) 0 1nvestment in Spar/ 3erger e4penses 5ash 5ommon stoc/ 7dditional paid-in capital *+ *+ G*$# > $#+ 4 '!H > $! = $,!
',"!# ) ( & ' !# ,!
This entry is reflected in hoeni4’s account balances in the consolidation wor/ing paper below.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2016 3-%
b. Co"sol-*a#-o" =o9-"7 Pa(! (in millions) A))o%"#s Ta9!" Fo Boo9s Pho!"-' D>C?
5urrent assets
$
El--"a#-o"s
S(a9 D>C?
!)%
$ '##
lant and e@uipment, net
&,!##
% ##
1nvestment in Spar/
',"!#
--
D
Co"sol-*a#!* Bala")!s D>C?
C
# *+ *+
$
'# '##
%% % (,(##
(!# *6+
--
','## *+ Erand names and trademar/s
--
--
*+
#
#
:oodwill
--
--
*+ ,%#
,%#
5urrent liabilities
*!##+
*!#+
*"!#+
*',###+
*#+
*',#+
5ommon stoc/, par value
*!!#+
*##+
*6+
# ##
*!!#+
7dditional paid-in capital
*',!!+
*!#+
*6+
!#
*',!!+
etained earnings
*,#'+
*#+
9ong-term liabilities
Total
$
#
$
#
*6+ & ##
$ ',""#
$ ',""#
*,#'+ $
#
:oodwill may be separately calculated as follows0 7c@uisition cost Spar/’s boo/ value 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 5urrent assets lant and e@uipment, net Erand names and trademar/s :oodwill
©Cambridge Business Publishers, 2016 3-&
$',"!# *(!#+ $','## $ *#+ '# # #
*(#+ $,%#
Adan!ed A!!ounting, 3rd "dition
E3.6
Co"sol-* Co"sol-*a#-o a#-o" " =o =o9-"7 9-"7 Pa(! Pa(!,, S-(l! S-(l! E'a(l! E'a(l!
(in millions) a. 1nvestment in Sylvan 5ash
(# (#
b. Co"sol-*a#-o" =o9-"7 Pa(! (in millions) A))o%"#s Ta9!" Ta9!" Fo Boo9s P-")!)a: # S;l+a" D>C? D>C?
5ash
$
'#
$
El--"a#-o"s
D
C
Co"sol-*a#!* Bala")!s D>C?
'
$ ''
8ther current assets
'#
)
')
roperty and e@uipment, net
%#
!
)!
1nvestment in Sylvan
(#
--
% *6+
--
'& *+ :oodwill
--
--
9iabilities
*+
*)+
5ommon stoc/
*!+
*!+
*6+ !
*!+
7dditional paid-in capital
*(!+
*#+
*6+ #
*(!+
etained earnings
*"#+
*'+
*6+ '
Total
$
#
$
#
*+ '&
'& *&)+
$
(#
$ (#
*"#+ $
Note for eliminatin eliminating g entry (R): (R): &ecause there there are no revaluation revaluationss of Sylvan’s Sylvan’s identifiable assets and liabilities# the e!cess of acquisition cost over the book value of the acquired comany is attributed entirely to good'ill" ood'ill acquisition cost of *+, minus book value of *-. */0" Eliminating entry (R) eliminates the remainder of the investment account and recogni1es the acquired good'ill"
c. P-")!)a:# Co(a"; a"* S%&s-*-a; Co"sol-*a#!* Bala")! Sh!!# Da#! o: A)8%-s-#-o" Ass!#s 5ash 8ther current assets roperty and e@uipment, net :oodwill
Total assets
Solutions Manual, Chapter 3
$
'' ') )! '&
$ ! )
L-a&-l-#-!s Total liabilities
$ &)
S#o)9hol*!s@ !8%-#; 5ommon stoc/ 7dditional paid-in capital etained earnings Total To tal e@uity Total liabilities and e@uity
! (! "# '# $ !)
©Cambridge Business Publishers, 2016 3-'
#
E3.1 Co"sol-*a#-o" Co"sol-*a#-o" w-#h R!+al%a#-o"s R!+al%a#-o"s o: R!)o*!* N!# Ass!#s
(amounts in millions) a. 7c@uisition cost Shelby boo/ value 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 5ash and receivables 1nventory roperty and e@uipment, net 9ong term liabilities :oodwill
$ !# *!+ &! $
*&+ *#+ '
# $ (!
b. Co"sol-*a#-o" =o9-"7 Pa(! (in millions) A))o%"#s Ta9!" Fo Boo9s Pa"o D>C?
5ash and receivables
$
1nventory roperty and e@uipment, net 1nvestment in Shelby
#
El--"a#-o"s
Sh!l&; D>C?
$
!
D
C
*+
Co"sol-*a#!* Bala")!s D>C?
$
"
(#
#
& *+
(%
&! #
##
# *+
((#
!#
--
! *6+
--
&! *+ :oodwill
--
--
*"#+
*'#+
9ong term liabilities
*'##+
*)#+
*+ '
*'%)+
5apital stoc/
*'#+
*#+
*6+ #
*'#+
etained earnings
*##+
*"+
*6+ "
*##+
7851
#
*+
*6+
#
Treasury stoc/
'#
'
#
$ "!
5urrent liabilities
Total
©Cambridge Business Publishers, 2016 3-10
$
#
$
*+ (!
(! *)#+
' *6+ $ "!
'# $
#
Adan!ed A!!ounting, 3rd "dition
c. Pa"o Co(oa#-o" a"* S%&s-*-a; Co"sol-*a#!* Bala")! Sh!!# Da#! o: A)8%-s-#-o" Ass!#s 5ash and receivables 1nventory roperty and e@uipment, net :oodwill
Total assets
$ " " (% (( # (!
$ !( )
L-a&-l-#-!s 5urrent liabilities 9ong-term liabilities Total liabilities
$ )# )# '% ) &! )
S#o)9hol*!s@ !8%-#; 5apital stoc/ etained earnings 7ccumulated other comprehensive income Treasury stoc/ Total To tal e@uity Total liabilities and e@uity
' # # # *#+ *'#+ # $ !( )
E3.11 Co"sol-*a#-o" Co"sol-*a#-o" w-#h P!+-o%sl; P!+-o%sl; U"!)o*! U"!)o*!* * I"#a"7-&l!s I"#a"7-&l!s a"* oo*w-ll >s!! >s!! !la#!* !la#!* E2.5?
(all amounts in thousands)
a. 7c@uisition cost 5iber boo/ value 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 5urrent assets lant and e@uipment, net 9icenses and trademar/s 9ong term liabilities 5ustomer contracts Erand names ?avorable leases Feveloped technology 1n-process ;F :oodwill
Solutions Manual, Chapter 3
$!#,### *","##+ $(&,(## $ *##+ *),###+ ' ,# # # *,###+ ,## # ! ,## # ( ## ,! # # #
*,##+ $(',#
©Cambridge Business Publishers, 2016 3-11
b. Co"sol-*a#-o" =o9-"7 Pa(! (in thousands) A))o%"#s Ta9!" Ta9!" Fo Boo9s B-7h#)o+! D>C?
5urrent assets
$
%#,###
El--"a#-o"s
C-&! D>C?
$
C
( ##
## *+
$ %#,#
),### *+
'#(,###
lant and e@uipment, net
'##,###
',###
9icenses and trademar/s
--
!,###
!#,###
--
1nvestment in 5iber
D
Co"sol-*a#!* Bala")!s D>C?
*+ ',###
%,### ","## *6+
--
(&,(## *+ 5ustomer contracts
--
--
*+ ,###
,###
Erand names
--
--
*+ !,###
!,###
?avorable leases
--
--
*+
(##
(##
Feveloped technology
--
--
*+ ,!##
,!##
1n-process ;F
--
--
*+
#
#
:oodwill
--
--
*+ (',#
(',#
5urrent liabilities
*)#,###+
*)##+
*!#,###+
*#,###+
5apital stoc/
*&!,###+
*),###+
etained earnings
*!!,###+
,(##
#
$ "#,!##
9ong-term liabilities
Total
$
#
$
*)#,)##+ ,### *+
*",###+
*6+ ),###
*&!,###+ ,(## *6+ $ "#,!##
*!!,###+ $
#
c. B-7h#)o+!, I"). a"* S%&s-*-a; Co"sol-*a#!* Bala")! Sh!!# Da#! o: A)8%-s-#-o" Ass!#s L-a&-l-#-!s 5urrent assets $ %#,# 5urrent liabilities lant and e@uipment, net '#(,### 9ong-term liabilities 9icenses and trademar/s %,### Total liabilities 8ther identifiable intangible assets ),'## :oodwill (',# S#o)9hol*!s@ !8%-#; 5apital stoc/ etained earnings Total To tal e@uity Total assets $ &&,)## Total liabilities and e@uity
©Cambridge Business Publishers, 2016 3-12
$ )#,)## ",### '(,)##
&!,### !!,### #,### $ &&,)##
Adan!ed A!!ounting, 3rd "dition
E3.12 R!)o"s#%)#-"7 R!)o"s#%)#-"7 El--"a#-"7 El--"a#-"7 E"#-!s a"* Boo9 $al%! $al%!
(all numbers in millions)
a. 5onsolidated total assets 9ess0 5ove’s current assets *$%! > $"!+ 9ess0 5ove’s noncurrent assets ?air value of Eay’s total assets 9ess0 :oodwill ?air value of Eay’s identifiable assets
$ *#+ *'!+ $ %" %" *&%+ $ &
b. 7c@uisition cost 9ess0 :oodwill ?air value of Eay’s identifiable net assets ?ai ?air val value of Eay Eay’s iden identtifi ifiable able asse assetts *from from a. abov above+ e+ 9ess0 ?air value of Eay’s identifiable net assets ?air value of Eay’s liabilities
$ "! *&%+ $ ') $ & *')+ $
c. ?air ?air valu valuee of Eay’ Eay’ss iden identi tifi fiab able le net net asse assets ts *fro *from m b. abov above+ e+ 9ess0 ?air value of pre previously unr unreport orted intangibles Eoo/ value of Eay’s net assets
$ ') *"+ $ ' '
d. *6+ Stoc/holders’ e@uity>Eay 1nvestment in Eay
'
*+ 1dentifiable intan intangibles :oodwill 1nvestment in Eay
" &%
'
!&
E3.13 I*!"#-:;-"7 I*!"#-:;-"7 a"* A"al;-"7 A"al;-"7 $a $a-a&l! -a&l! I"#!!s# I"#!!s# E"#-#-!s E"#-#-!s
a. 3inority shareholder 5 guarantees 'A of 7’ 7’s debt, which is most most of 7’s capital, capital, providing evidence that 7 cannot obtain financing on its own, and indicating that 7’ 7’s owners lac/ the usual characteristics of e@uity. Therefore 7 is li/ely to be classified as a I16. 5 has decision-ma/ing power through through its majority representation representation on the board. 5 has the obligation to absorb 7’ 7’s significant significant losses and benefits through its e@uity interest and guarantee of 7’s ban/ loans, and will li/ely be designated as 7’s primary beneficiary. Therefore 5 will consolidate 7. 7.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2016 3-13
b. Jithout any other information, information, E is not a I16. F is the sole owner of E through its 2oic ic 3-,. 7lthough ##A e@uity ownership, and should consolidate E under $SC 2o contractual and other arrangements may suggest that E is a I16, the problem is silent on these matters. The point here is that a small proportion of e@uity does not automatically lead to the conclusion that the e@uity holders are not e4posed to the usual ris/s and rewards of stoc/ ownership. c. The !A e@uity e@uity could could be enough to avoid avoid identify identifying ing 7 as a I16, I16, if there there is evidence evidence that 7 can obtain financing on its own, has a level of e@uity comparable co mparable to other entities who can obtain financing on their own, or that its e@uity is deemed ade@uate to absorb 7’ 7’s e4pected losses. 1n that case, 6 is the controlling investor and 5 does not consolidate 7. 1f 7 cannot obtain financing on its own, or its e@uity is not sufficient to absorb e4pected losses, 7 is a I16. 5 has the decision ma/ing power, and by agreeing to compensate 6 for any of 7’s 7’s losses, 5 absorbs significant losses. Therefore 5 is li/ely 7’s 7’s primary beneficiary and should consolidate 7. d. E’s stoc/holder stoc/holders’ s’ e@uity is is insulated insulated from losses losses by the the guarantees guarantees provided provided by 5 and F. 3oreover, F’s unsecured loan to E provides additional subordinated financial support. These factors indicate that E is a I16. I16. F has decision decision ma/ing power through its control of E’s E’s board. 9osses in guaranteed residual values on F’s specialiDed property, and its unsecured loan to E, re@uire F to absorb a potentially significant amount of E’s losses. losses. Therefore it is li/ely that F is E’s primary beneficiary and must consolidate E.
E3.10 I*!"#-:-)a#-o" I*!"#-:-)a#-o" o: $a $a-a&l! I"#!!s# I"#!!s# E"#-#; E"#-#; a"* P-a; B!"!:-)-a B!"!:-)-a; ;
a.
1f @u @ualitative fa factors ar are in inconclusive, th the an answer to to th this @u @uestion de depends on on a @uantitative analysis of the ability of the e@uity interest to absorb Starte/’s potential losses. 3-,4-,45544 Using the @uantitative analysis presented in the chapter *and illustrated in $SC ara" 3-,4-,455 50+, e4pected gains and losses are computed as follows (in millions) 0 E'(!)#!* Cash Flow
$ && !!
P!s!"# $al%!
Po&.
$ # !#
#.(# #.'# #.(#
E'(!)#!* P$
$
( " '# $
I"+!s#!"# Fa- $al%!
R!s-*%al R!#%"s
$
$ *'#+ -'#
E'(!)#!* a-"s
E'(!)#!* Loss!s
$ $ $
) )
*)+
$ *)+
Eecause the $(,###,### e@uity interest is insufficient to absorb the e4pected losses of $),###,### computed above, the @uantitative analysis indicates that Starte/ is a I16.
©Cambridge Business Publishers, 2016 3-1#
Adan!ed A!!ounting, 3rd "dition
b.
Softe/ must have *+ the power to direct Starte/’s activities that most significantly affect its economic performance, and *'+ be e4posed to the losses and benefits that are potentially significant to Starte/. Eecause Softe/ guarantees Starte/’s Starte/’s debt, it probably meets re@uirement *'+. Kowever, we don’t have enough information to assess assess Softe/’s decision ma/ing power over Starte/.
E3.1 E3.1 Co"sol-* Co"sol-*a#-o a#-o" " Pol-); Pol-); U.S. AAP a"* a"* IFRS
a. andolph andolph owns "(A of the the voting voting rights rights G#."( G#."( = *#.) *#.) 4 #."#+ < *#.( 4 #.(#+H, #.(#+H, and meets the majority ownership test for consolidation of $SC 2o 2oic 3-," b. 1?S also recogniDes the legal control signified by ownership of "(A of the voting rights and consolidation would occur. c. andolph’ andolph’ss ownershi ownership p of the 5lass 5lass 7 shares shares produces produces ()A *= #.) #.) 4 ."#+ of the the voting interest. U.S. :77 emphasiDes majority ownership of the voting stoc/, so consolidation is unli/ely. unli/ely. 1?S loo/s for control, regardless regardless of e@uity ownership. The other investor owns (#A of the voting rights. Thus andolph does not control the voting rights and decision-ma/ing decision-ma/ing authority appears to be shared. Kowever, the influence of the other 'A of the 5lass 7 shares voting rights must be e4amined. 1f andolph can demonstrate sufficient influence over that other 'A to dominate 3arshall’s governing board, effective control may e4ist, re@uiring consolidation con solidation under 1?S. d. Cow andolph andolph owns ('A ('A *= #.% 4 #."#+ #."#+ of the the voting interes interestt and all other other interest interestss are dispersed. These facts suggest that that andolph can dominate 3arshall’s 3arshall’s governing board thereby possessing unshared decision-ma/ing power and consolidation would be re@uired under 1?S. andolph does not have majority ownership, and consolidation under U.S. :77 is unli/ely.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2016 3-1$
PROBLEMS P3.1 P3.1
El- El--" -"a# a#-" -"7 7 E"# E"#-! -!s, s, oo* oo*ww-ll ll
(amounts in millions) a. 7c@uisition cost Eoo/ value *deficit+ 64cess of ac@uisition cost over boo/ value ?air value less boo/ value0 ?i4ed assets, net 9i 9 iabilities 5ustomer lists Erand names :oodwill
$ (# # '! $ (' ('! $ *&!+ *+ "! ##
' $ '"
b. *6+ 5ommon stoc/ ! 7dditional paid-in capital ! 1nvestment in Sherwood '! etained earnings 7ccumulated other comprehensive loss Treasury stoc/ To eliminate eliminate Sherwood’s e@uity accounts and the boo/ value portion of the investment account.
(# ' &
*+ 5ustomer lists "! Erand names ## :oodwill ' " ?i4ed assets, net &! 9iabilities 1nvestment in Sherwood (' ! To revalue Sherwood’s assets assets and liabilities to fair value valu e and eliminate the remainder of the investment account.
©Cambridge Business Publishers, 2016 3-16
Adan!ed A!!ounting, 3rd "dition
P3.2
Co"sol-* Co"sol-*a#-o a#-o" " =o9-" =o9-"7 7 Pa(! Pa(!, I*!"#I*!"#-:-a& :-a&l! l! I"#a"7-& I"#a"7-&l!s, l!s, oo*woo*w-ll ll
a. (in millions) 1nvestment in :85 3erger e4penses 5ommon stoc/ 7dditional paid-in capital *+ 5ontingent consideration liability 5ash
' ! ' !! ' !)
*+ 715 = fair value of shares shares issued > par value of shares issued > registration fees0 fees0 $!! = $"# > $' > $&
b. Co"sol-*a#-o" =o9-"7 Pa(! (in millions) A))o%"#s Ta9!" Ta9!" Fo Boo9s ITI OC D >C? D >C?
5urrent assets roperty, plant and e@uipment, net 1nvestment in :85
$
('
1dentifiable intangible assets
:oodwill 5urrent liabilities 9ong-term liabilities 5ommon stoc/, par 7dditional paid-in capital etained earnings 7ccumulated other comprehensive income Treasury stoc/ Total
Solutions Manual, Chapter 3
$
!## '
,#
'#
*!#+ *,'#'+ *''+ *"#!+ *!+
$
#
! ! #
*'#+ *##+ *(+ *"#+ '!
$
*&+ ' #
El--"a#-o"s D
Co"sol-*a#!* Bala")!s D >C?
C
*+ !
$
!%
"# *+ (# *6+ %' *+ *+ # *+ ! *+ '! *+ #
,&"#
& *+ *6+ ( *6+ "# '! *6+ *6+ & $ '#'
!%# --
' *6+ $ '#'
# *%#+ *,!+ *''+ *"#!+ *!+
$
! ! #
©Cambridge Business Publishers, 2016 3-1%
P3.3
S#o)9 S#o)9 A)8%-sA)8%-s-#-o" #-o" a"* a"* Co"sol-*a Co"sol-*a#-o" #-o" =o =o9-"7 9-"7 Pa(! Pa(! El--" El--"a#-" a#-"7 7 E"#-!s E"#-!s
(amounts in millions)
a. 1nvestment in harmacia *+ 3erger e4penses 5ommon stoc/ 7dditional paid-in capital 5ash
!!,)%& # !! ,%) ' #
*+ $!! $!!,)% ,)%& & = ,)% ,)% 4 $.% $.%! !
b. 7c@uisition cost harmacia boo/ value 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 1nventory 9ong-term investments roperty, plant and e@uipment 1n-process ;F Feveloped technology rights 9ong-term debt 8ther assets :oodwill c. *6+ Stoc/holders’ e@uityLharmacia 1nvestment in harmacia *+ 1nventor y 9ong-term investments 1n-process ;F Feveloped technology rights :oodwill roperty, plant and e@uipment 9ong-term debt 8ther assets 1nvestment in harmacia
©Cambridge Business Publishers, 2016 3-1&
$!!,)%& *%,'&"+ $(),"&% $
',& (# * & % + !,#!' &%,#"" *,)(+ *!,"#"+
'%,&&& $',(
%,'&" %,'&"
',& (# !,#!' &%,#"" ',( & % ,)( !,"#" (),"&%
Adan!ed A!!ounting, 3rd "dition
P3.0
Co"sol-* Co"sol-*a#!* a#!* Bala" Bala")! )! Sh!!# Sh!!# =o =o9-"7 9-"7 Pa(! Pa(!, , Ba7a-" Ba7a-" P%) P%)has has!!
(amounts in millions)
a. 5alcul 5alculati ation on of of gain gain on on ac@ui ac@uisit sition ion00 7c@uisition cost Eoo/ value 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 1nventory 9ong-term investments 9and Euildings and e@uipment 9ong-term debt :ain on ac@uisition
$ ,)## *,'!+ $ !#! $ ## *!#+ ' (! # # $
%#! ' ##
b. Co"sol-*a#-o" =o9-"7 Pa(! A))o%"#s Ta9!" Ta9!" Fo Boo9s Pa'o" Sa'o" D >C? D >C?
5ash and receivables
$ ,#"#
1nventory 9ong-term investments 1nvestment in Sa4on
$
El--"a#-o"s D
C
% '#
,%##
##
--
#
Co"sol-*a#!* Bala")!s D >C?
$ ,%)# *+ ##
',###
',%## !# *+
'!#
,'! *6+
--
%#! *+ 9and
"!#
%!
*+ '(!
,#%#
Euildings and e@uipment
&,(##
"##
*+ #
(,#
7ccumulated depreciation
*,###+
5urrent liabilities
*,!##+
*,###+
9ong-term debt
*',###+
*(##+
*+ #
*','#+
5ommon stoc/, par value
*!##+
*##+
*6+ ##
*!##+
7dditional paid-in capital
*,'##+
*&!#+
*6+ &!#
*,'##+
etained earnings
*',"#+
*)(!+
*6+ )(!
$ ',#!#
$ ',#!#
Total
Solutions Manual, Chapter 3
$
#
--
$
#
*,###+ *',!##+
*',"#+ $
©Cambridge Business Publishers, 2016 3-1'
#
c. Pa'o" Co(oa#-o" a"* S%&s-*-a; Co"sol-*a#!* Bala")! Sh!!# a"%a; 1, 21< Ass!#s 5ash and receivables 1nventory 9ong-term investments 9and Euildings and e@uipment, net of $,### accumulated depreciation
Total assets
P3.
$ , ,% ) # ',%## '! # ,#%#
&,#
$ , # #
L-a&-l-#-!s 5urrent liabilities 9ong-term debt Total liabilities
$ ', ' ,! # # ','# (,%#
S#o)9hol*!s@ !8%-#; 5ommon stoc/, par value 7dditional paid-in ca capital etained earnings Total To tal e@uity Total liabilities and e@uity
! ## ,'## ',"# (,&# $ ,##
Co"sol-* Co"sol-*a#!* a#!* Bala" Bala")! )! Sh!!# Sh!!# =o9-" =o9-"7 7 Pa(!, Pa(!, P!+-o P!+-o%sl %sl; ; R!(o#!* R!(o#!* oo*w-ll oo*w-ll
(amounts in thousands)
a. 1nvestment in Static 3erger e4penses 5ommon stoc/ 7dditional paid-in capital 5ash
!,### "# ' ## (,(## ("#
b. 7c@uisition cost Static’s boo/ value 64cess of ac@ ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 5ash and receivables 1nventory 6@uity method investments lant assets, net 5opyrights :oodwill *+ Concurrent liabilities :oodwill
$ !,### *(,###+ $ ,### $ *'##+ *(##+ ',(## *',##+ ',)## *!##+ ## $
',## ),##
*+ 7ll pre-e4isting goodwill is eliminated, even though it may be deemed to have a non-Dero fair value.
©Cambridge Business Publishers, 2016 3-20
Adan!ed A!!ounting, 3rd "dition
c. Co"sol-*a#-o" =o9-"7 Pa(! (in thousands) A))o%"#s Ta9!" Ta9!" Fo Boo9s Po7!ss-+! S#a#-) D >C? D >C?
5ash and receivables
El--"a#-o"s D
C
$ %,!(#
$ ',###
'## *+
%,###
',(##
(## *+
--
"##
!,###
--
1nventory 6@uity method investments 1nvestment in Static
Co"sol-*a#!* Bala")!s D >C?
$
,&(# ,###
*+ ',(##
&,### (,### *6+
--
,###*+ lant assets, net 5opyrights :oodwill
#,###
&,"##
',## *+
,###
'##
*+ ',)##
--
!# #
*+ ),##
,!## (,###
!## *+
),##
5urrent liabilities
*",###+
*',###+
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*(,###+
*&,#+
*+
##
*%,'##+
*#+
*##+
*6+
# #
*#+
7dditional paid-in capital
*!,#+
*(##+
*6+
(# ( ##
*!,#+
etained earnings
*(,(#+
*&,!##+
5ommon stoc/, par
Total
$
#
$
#
*),###+
*6+ &,!##
$ ),'##
$ ),'##
*(,(#+ $
#
d. Po7!ss-+! Co(oa#-o" a"* S%&s-*-a; Co"sol-*a#!* Bala")! Sh!!# %"! 3, 21< Ass!#s 5ash and receivables 1nventory 6@uity method investments lant assets, net 5opyrights :oodwill
Total assets
Solutions Manual, Chapter 3
$ , ,&( # ,# # # & ,# # # ,!## ( ,# # # ) ,##
$ (! ,%(#
L-a&-l-#-!s 5urrent liabilities 9ong-term debt Total liabilities
$ ), ) ,# # # % ,'# # ! ,' # #
S#o)9hol*!s@ !8%-#; 5ommon stoc/, par 7dditional paid-in ca capital etained earnings Total To tal e@uity Total liabilities and e@uity
& ## ! ,# ( , (# ,!(# $ (! ,%(#
©Cambridge Business Publishers, 2016 3-21
P3.< P3.<
Co"sol Co"sol-* -*a#! a#!* * Bala") Bala")!s, !s, D-::! D-::!!" !"## A)8%- A)8%-! !ss
a. Co"sol-*a#-o" =o9-"7 Pa(! (in millions) A))o%"#s Ta9!" Fo Boo9s =!&"!# M-)o#!)h Sol%#-o"s D >C? D >C?
5urrent assets
$
roperty, plant and e@uipment, net 1nvestment in Jebnet
#
$
El--"a#-o"s
D
C
#
!#
!#
'##
--
Co"sol. Bala")!s D >C?
$
'# # #
( *6+
--
! *+ atents
!
!
:oodwill
--
--
5urrent liabilities
*(+
*(+
*)+
*'#+
*'#+
*(#+
*&+
*'+
*6+
'
*&+
*''(+
*'!+
*6+
'! '!
*''(+
*(+
*(+
*6+
(
'##
$ '##
9ong-term debt 5ommon stoc/, par 7dditional paid-in capital etained earnings Total
$
#
$
#
# *+ !
$
!
*(+ $
#
b. Co"sol-*a#-o" =o9-"7 Pa(! (in millions) A))o%"#s Ta9!" Fo Boo9s =!&"!# Sol%#-o"s M-)o#!)h D >C? D >C?
5urrent assets
$
roperty, plant and e@uipment, net 1nvestment in 3icrotech
#
$
El--"a#-o"s
D
C
#
!#
!#
'##
--
Co"sol. Bala")!s D >C?
$ *+ '#
'# ' #
( *6+
--
! *+ atents
!
!
*+ #
'#
Feveloped technology
--
--
*+ ##
# #
5lient relationships
--
--
*+ '
'
:oodwill
--
--
--
5urrent liabilities
*(+
*(+
*)+
*'#+
*'#+
*(#+
*&+
*'+
*6+
'
*&+
*''(+
*'!+
*6+
'! '!
*''(+
*(+
*(+
*6+
(
9ong-term debt 5ommon stoc/, par 7dditional paid-in capital etained earnings Total
©Cambridge Business Publishers, 2016 3-22
$
#
$
#
$
'## $
'##
*(+ $
#
Adan!ed A!!ounting, 3rd "dition
c. The consolidated consolidated balance sheets sheets are compared compared below below.. Co"sol-*a#!* Bala")! Sh!!# M-)o#!)h a)8%-!s =!&"!# Ass!#s 5urrent assets roperty, plant and e@uipment, net 1dentifiable intangibles :oodwill Total assets L-a&-l-#-!s 5urrent liabilities 9ong-term debt Total liabilities S#o)9hol*!s@ !8%-#; 5ommon stoc/, par 7dditional paid-in capital etained earnings Total e@uity Total liabilities and e@uity
$
=!&"!# a)8%-!s M-)o#!)h
'# ## # ! $ ' )
$
$
$
) (# ()
& ' '( ( '( $ ')
'# '# ( -$ ')
) (# ()
& '' ( ( '( $ ')
Eoth sets of consolidated balances report the same total assets and the same individual liabilities liabilities and e@uities. Kowever, the the individual asset accounts differ. differ. The ac@uirer’s assets are not revalued to fair value, nor are previously unreported assets recogniDed. 3icrotech has understated property, property, plant and e@uipment and patents, patents, as well as unreported identifiable intangible assets. Jebnet Jebnet Solutions’ assets and liabilities are reported at amounts appro4imating fair value, and there are no identifiable intangibles. Jhen 3icrotech is the the ac@uirer, the the difference between Jebnet Jebnet Solutions’ ac@uisition price and reported boo/ value is reported as goodwill, and the difference between boo/ and fair value of 3icrotech’s assets is not recogniDed. Jhen Jebnet Jebnet Solutions is the the ac@uirer, its goodwill is is not recogniDed, but 3icrotech’s property and patents are reported at fair value, and its identifiable intangibles are recogniDed. Foes management want the $! million e4cess of ac@uisition cost over boo/ value to be reported as the unspecified asset goodwill, goo dwill, or distributed among several identifiable assets *property, *property, plant and e@uipment, patents, client relationships+M relationships+M 1f Jebnet Jebnet Solutions is the ac@uirer, ac@u irer, 3icrotech’s 3icrotech’s previously unreported identifiable assets will come to light. To the e4tent that the e4istence of identifiable intangibles such as developed technology and client relationships indicate favorable future
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2016 3-23
earnings potential, investors may view the new disclosures as a positive signal, increasing stoc/ price. 1f 3icrotech is the the ac@uirer, no identifiable intangibles are recogniDed, and investors may wonder if Jebnet Solutions will sustain its value in the future, as these assets would seem to be the lifeblood of a technology company. co mpany. 3anagement will also consider consider the implications for future income. 1dentifiable assets usually have limited lives and are depreciated or amortiDed over time, reducing earnings on a regular basis. :oodwill is tested tested for impairment loss, loss, and may never be written off. 1f 3icrotech is the the ac@uirer, future future reported income may be higher because there are no identifiable intangibles to be amortiDed. Cote to instructor0 This problem illustrates the games companies can play to choose between different financial statement displays displays of the same transaction economics.
P3.
Ta"7-&l! "7-&l! a"* I"#a"7-& I"#a"7-&l! l! Ass!# Ass!# R!+al%a# R!+al%a#-o" -o"ss
(in thousands)
a. 5onsideration paid reviously unrecorded intangibles ac@uired0 5ustomer contracts and related relationships Feveloped technology Trade name, trademar/, and domain name :oodwill ?air value of tangible net assets ac@uired
-"#!)l-)9 $ '!),!#
$ (',%## &!,"## "## %,"(
T%&l $
#,'
$)',(## '&,%##
*'!#,!(+ $ %,"#
!",!## %!,%"!
*,#(,&"!+ $
*'(,!(+
b. The fair values of Tumblr’s Tumblr’s liabilities liabilities are greater than the fair values of their tangible assets. Since net boo/ values are positive, and boo/ values of liabilities are generally close to fair value, the cause is li/ely to be a decline in the fair value of tangible assets. ?or technology companies, tangible assets such as e@uipment are li/ely to to lose resale value @uic/ly. Nahoo lists identifiable identifiable intangibles ac@uired as customer contracts, developed technology, technolog y, trade names, trademar/s, and domain names. n ames. Ialue Ialue is derived almost e4clusively from the future earnings potential of these intangible assets, not the tangible assets.
©Cambridge Business Publishers, 2016 3-2#
Adan!ed A!!ounting, 3rd "dition
c. interclic/ eliminations0 *6+ Stoc/holders’ e@uityLinterclic/ 1nvestment in interclic/
# ,## # #,###
*+ 5ustomer contracts and related relationships Feveloped technology Trade name, trademar/, and domain name :oodwill Tangible net assets *+ 1nvestment in interclic/
(' ,% ## & ! ," # # "# # % ,"( ',#(# '(),!#
*+ $#,### > $%,"# = $',#(#. The fair value value of tangible net net assets is $',#(# less than boo/ value, re@uiring a credit of $',#(# to revalue them to fair value.
Tumblr eliminations0 *6+ Stoc/holders’ e@uityLTumblr 1nvestment in Tumblr
!# ,### !#,###
*+ 5ustomer contracts and related relationships Feveloped technology Trade name, trademar/, and domain name :oodwill Tangible net assets *'+ 1nvestment in Tumblr
) ' ,( # # ' & ,% # # !" ,!## %! ,%" ! %(,!( (#,'
*'+ $!#,### < $'(,!( = $%(,!(. The fair value of tangible net net assets is $*'(,!(+, while boo/ value value is $!#,###. Therefore the fair value of tangible net assets is $%(,!( less than boo/ value, re@uiring a credit of $%(,!( to revalue them to fair value.
P3.5
El--"a# El--"a#-"7 -"7 E"# E"#-!s, -!s, S%& S%&s-*s-*-a;@ a;@ss S!(a S!(aa#! a#! Bala")! Bala")! Sh! Sh!!# !#
a. *6+ Stoc/holders’ e@uity>Sonara 1nvestment in Sonara *+ 5urrent assets 1dentifiable intangibles :oodwill lant assets 1nvestment in Sonara
Solutions Manual, Chapter 3
),###,### ),###,###
',###,### ",###,### '),###,### (,###,### &',###,###
©Cambridge Business Publishers, 2016 3-2$
b. So"aa Co(a"; Bala")! Sh!!#, Da#! o: A)8%-s-#-o"
5urrent assets *+ lant assets, net *'+
$ ,###,### '(,###,###
Total assets
$ '!,###,###
9iabilities *&+ Stoc/holders’ e@uity Total liabilities and e@uity
$ %,###,### ),###,### $ '!,###,###
*+ $,###,### $,###,### = $),###,# $),###,### ## - $',###,## $',###,### # - $!,###,### $!,###,### *'+ $'(,###,### $'(,###,### = $(!,###,# $(!,###,### ## < $(,###,### $(,###,### - $'!,###, $'!,###,### ### *&+ $%,###,### $%,###,### = $!",###,# $!",###,### ## - $&,###,### $&,###,###
P3.6
S#o)9 S#o)9 A)8%-sA)8%-s-#-o" #-o",, P!+-o%s P!+-o%s E8%-#; E8%-#; I"#!!s I"#!!s## a"* oo*w-ll, oo*w-ll, M!7! M!7!R!la R!la#!* #!* Cos#s, Cos#s, D!:!!* Ta'!s
(amounts in millions)
a. 1nvestment in :rupo 3odelo 3erger e4penses 5ash *+ 1nvestment in associates
&(,##) # # ' # ,' # & & ,# !
*+ $'#,#& < $## = $'#,'#&
b. :oodwill reported on an ac@uired company’s boo/s is not an identifiable asset and is not separately reported. The difference between ac@uisition ac@uisition cost and the fair value of net identifiable assets ac@uired is reported as goodwill on the consolidated balance sheet. c. This ac@uisi ac@uisition tion must must be nonta4abl nonta4ableB eB the ac@uire ac@uireee does not not pay ta4es ta4es on any any gain. Therefore the ta4 basis of the ac@uired net assets remains at :rupo 3odelo’s ta4 basis, which is typically lower than fair value at the date of ac@uisition. 7E 1nEev reports net assets ac@uired at fair value on its boo/s, and writes them off over time. Therefore the boo/ write-offs are higher than the ta4 deductions, causing cash paid for ta4es to be greater than ta4 e4pense. The discrepancy is payment of deferred deferred ta4 liabilities, created at the date of ac@uisition. The ac@uiring company reports a deferred ta4 liability for the additional ta4es it will pay in e4cess of the ta4 e4pense it reports on its boo/s, as these intangible assets are written off.
©Cambridge Business Publishers, 2016 3-26
Adan!ed A!!ounting, 3rd "dition
d. 7c@uisition cost *see a" above+ :rupo 3odelo’s boo/ value 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value *'+0 roperty, plant and e@uipment :oodwill 1ntangible assets 1nvestment in associates 1nvestment securities 5urrent assets 6mployee benefits Trade and other payables Feferred ta4 liabilities 5urrent liabilities :oodwill
$ &(,##) *,'#&+ $ '( '(,)#! $
*%"+ (,(!( *(+ -(,&&& -*!#+ *%(+ *,"!#+
*!,'&+ $ ,!'
*'+ Fifference between between fair and boo/ value amounts.
e. *6+ Stoc/holders’ e@uity>:rupo 3odelo 1nvestment in :rupo 3odelo *+ roperty, plant and e@uipment 1ntangible assets 5urrent assets :oodwill *new+ :oodwill *old+ 1nvestment in associates Trade and other payables Feferred ta4 liabilities 5urrent liabilities 1nvestment in :r :rupo 3odelo
Solutions Manual, Chapter 3
,'#& ,'#&
(,(!( (,&&& ,!' % " ( !# %( ,"!# '(,)#!
©Cambridge Business Publishers, 2016 3-2%
P3.1 Co"sol-*a#-o" Co"sol-*a#-o" o: $a-a&l! a-a&l! I"#!!s# I"#!!s# E"#-#-!s E"#-#-!s
(dollar amounts in millions)
a. U.S. :77 re@uires a '-step process to determine if S6s should be consolidated. ?irst, determine if the S6 is a variable interest entity. entity. The S6 is a I16 if its e@uity does not have the usual e@uity characteristics, characteristics, in terms of ris/ and return. These factors must be considered0 *+ Foes the e@uity interes interestt have the power to ma/e decisionsM decisionsM *'+ 1s the e@uity interest e4posed to the ris/s and rewards connected with the S6M *&+ 1s the e@uity interest sufficient to allow the S6 to obtain financing financing on its ownM 9imitations on the voting power of the e@uity interest, and caps on the amount of losses the e@uity interest may incur, incur, are indicators of I16 status. status. 1f the S6’s business activities are predominantly conducted on behalf of an entity that has few voting rights, the S6’s e@uity interest may not be e4posed to the normal ris/s and returns of stoc/ ownership. To determine the sufficiency of the S6’s e@uity, @ualitative factors include whether the S6 is in fact able to obtain financing on its own, or has ha s e@uity e@uivalent to other entities who are able to to obtain financing on their own. 1f @ualitative factors are not conclusive, a @uantitative analysis may be done to determine if the S6’s e@uity level is sufficient to absorb e4pected future losses. 8nce the S6 is classified as a I16, :3 consolidates it if it is the I16’s primary primary beneficiary. :3 determines if it has the power to direct the decisions that that significantly affect the I16’s performance, performance, and is e4posed to the ris/s and returns connected with that performance. :3 li/ely classified the S6s as I16s because :3 ?inancial provides the assets that are used to repay the debt. 1t seems unli/ely that the S6s could obtain financing financing on their own, since they e4ist to securitiDe these assets. assets. :3 ?inancial is the primary primary beneficiary of the I16s because it services the securitiDed securitiDed assets, and therefore has the power to direct the I16s’ major decisions. :3 ?inancial also apparently has e4posure to the I16s’ ris/s and returns. b. 5onsolidation of the I16s adds $,!'& and $'&,!)( to consolidated assets, and $,(() to consolidated liabilities. liabilities. The remainder of $!,"! *= $,!'& < $'&,!)( – $,(()+ is the I16s’ e@uity interest, which is included as Ononcontrolling interestP in the e@uity section of :3’s consolidated balance sheet.
©Cambridge Business Publishers, 2016 3-2&
Adan!ed A!!ounting, 3rd "dition
P3.11 I*!"#-:-a&l! I*!"#-:-a&l! I"#a"7-&l! I"#a"7-&l!ss a"* oo*w-ll >s!! !la#!* !la#!* P2.? P2.?
a. rince rince ma/es the followin following g entry to record record the ac@uisi ac@uisition tion on its its own boo/s (in thousands) 0 1nvestment in S@uire 3erger e4penses 5apital stoc/ 5ash
&!,### ,'## &(,(## ,)##
The account balances for rince, shown in the wor/ing paper below, reflect the above entry. 3erger e4penses reduce retained earnings, a component of stoc/holders’ e@uity. Co"sol-*a#-o" =o9-"7 Pa(! (in thousands) A))o%"#s Ta9!" Ta9!" Fo Boo9s P-")! D >C?
5ash 7ccounts receivable arts inventory Iehicle inventory 6@uipment, net 1nvestment in S@uire 1ntangible0 9ease 1ntangible0 Service contracts 1ntangible0 Trade name :oodwill 5urrent liabilities 9ong-term liabilities Stoc/holders’ e@uity Total
Solutions Manual, Chapter 3
$
,### ",### -!,### (#,### &!,### --
---*!,###+ *'!,###+ *"%,###+ $ #
El--"a#-o"s
S8%-! D >C?
$
# ',%## !,'## -%,"## ---
---*&,##+ *),"##+ *(,##+ $ #
D
C
Co"sol-*a#!* Bala")!s D >C?
$ ## *+ *+
)##
*+ ,## (,## *6+ '#,##*+ *+ ,'!#
,'!#
*+ ',### *+ '## *+(,'!# *+ "# "## *6+(,## $ &!,##
,# ),"## ",### !,### !,!## --
$ &!,##
',### '# # (,'!# *),##+ *&&,###+ *"%,###+ $ #
©Cambridge Business Publishers, 2016 3-2'
b. 1f rince records the ac@uisition as a statutory merger, merger, rince ma/es the following following entry (in thousands) 0 5ash 7ccounts receivable arts inventory 6@uipment, net 1ntangible0 9ease 1ntangible0 Service contracts 1ntangible0 Trade name :oodwill 3erger e4penses 5ash 5urrent liabilities 9ong-term liabilities 5apital stoc/
& ## ',"## ",### ,!## ,'!# ',### ' ## (,'!# ,'## ,)## &,## ),### &(,(##
Jhen the above entry is reflected in rince’s account balances, rince’s balance sheet account balances are identical to those shown in the consolidated column of the wor/ing paper for a stoc/ ac@uisition. ac@u isition.
P3.12 Co"sol-*a#-o" Co"sol-*a#-o" Pol-); :o E8%-#; I"+!s#!"#s I"+!s#!"#s U.S. AAP a"* IFRS
5ase
U.S. :77
1?S
*+
Fo not consolidate
5onsolidate
*'+
Fo not consolidate
5onsolidate
*&+
Fo not consolidate
5onsolidate
*(+
Fo not consolidate
ossibly consolidate
*!+
Fo not consolidate
ossibly consolidate
*"+
Fo not consolidate
ossibly consolidate
There is no evidence that Eenson is is a I16. Therefore the consolidation standards standards for e@uity investments investments apply. Under $SC 2o 2oic 3-,# consolidation is generally not appropriate, as no case has majority ownership and there is little guidance to determine control when the investor holds a minority of the stoc/. Under 1?S, there is guidance to to determine if control e4ists with minority stoc/ ownership.
©Cambridge Business Publishers, 2016 3-30
Adan!ed A!!ounting, 3rd "dition
1n cases *+, *'+ and *&+, . 7ndrews 7ndrews owns a large large minority minority interest interest *(# to to (A+ and the the remaining remaining ownership ownership is widely dispersed *no single party holds more than & percent+. '. 7 recent recent election election has has shown that that 7ndrews 7ndrews is able to to cast a majority majority of of the votes votes cast *!& to !)A+. 7bsent evidence to the contrary, con trary, either one of these is sufficient per 1?S to presume that 7ndrews has effective control, and that consolidated statements should be prepared. 1n cases *(+, *!+ and *"+, the conclusion is less clear. clear. Jhile 7ndrews 7ndrews owns a fairly large minority interest *'! to &! percent+ and other ownership is widely dispersed, it is a matter of judgment as to whether 7ndrewsQ 7ndrewsQ interest leads to control. 7ndrews was able to nominate its director candidates, solicit some pro4ies, and convince other stoc/holders to vote for its nominees nominees in order to obtain a majority majority of the votes. Jhile a conclusion of effective control seems li/ely, it is not automatic.
P3.13 =o9-"7 =o9-"7 Ba)9wa*sR! Ba)9wa*sR!)o"s#%) )o"s#%)## Bala")! Sh!!# a"* El--"a#-"7 El--"a#-"7 E"#-!s E"#-!s
(in thousands)
a. iedmont’ iedmont’ss entry to to record record the ac@uisitio ac@uisition n was as follows0 follows0 1nvestment in Stearns 3erger e4penses 5apital stoc/ *+ 5ash *'+ 6arnings contingency liability
' ' # ,# # # ! ## ,# ",'## !,###
*+ $'#,### > $%## = $,# *'+ $!,### < $!## < $%## = $",'##
eversing this entry out of iedmont’s balance sheet produces its balance sheet just prior to the ac@uisition0 P-!*o"# Co(oa#-o" Bala")! Sh!!#, I!*-a#!l; P-o #o Da#! o: A)8%-s-#-o"
5urrent assets *&+ lant assets, net Total assets
$ &" ,'## & " # ,# # # $ ( (",'##
9iabilities *(+ 5apital stoc/ *!+ etained earnings *"+ Total liabilities and e@uity
$ '!,### )#,%## ##,!## $ ( (",'##
*&+ $(#,### < $",'## = $&",'## *(+ $''#,### - $!,### = $'!,### *!+ $#,### - $,# = $)#,%## *"+ $##,### < $!## = $##,!##
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2016 3-31
b. *6+ 5apital stoc/ etained earnings 1nvestment in Stearns *+ 1dentifiable intangibles :oodwill lant assets, net *%+ 1nvestment in Stearns
(#,### ' ! ,# # # ! ,###
##,### &!,### & # ,# # # '# ! ,## #
*%+ $(%#,### > $&"#,### > $(#,### = $*,###+
c. 7c@uisition cost Stearns’ boo/ value 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 lant assets, net 1dentifiable intangibles :oodwill
$ ''#,### *!,###+ $ '# '#!,### $ *,###+ ##,###
*%#,###+ $ &!,###
P3.10 Co"sol-*a#!* Co"sol-*a#!* Bala")! Bala")! Sh!!# =o9 =o9-"7 -"7 Pa(!, Pa(!, I*!"#-:-a&l! I*!"#-:-a&l! I"#a"7-&l! I"#a"7-&l!ss
a. 7c@uisition cost *+ :’s boo/ value *'+ 64cess of ac@uisition cost over boo/ value 64cess of fair value over boo/ value0 5urrent assets ?i4ed assets, net Trademar/s 9icensing agreements 8rder bac/logs 9ong-term liabilities :oodwill
$ (,'!# *!,###+ &",'!# $ '# # *%,###+ ',"## ',(## !,### ,###
*(,'##+ $ &',#!#
*+ $!,### < $&",### < $'!# = $(,'!# *'+ $!## < $),!## > $',### > $,(## > $"## = $!,###
Note: 2he skilled skilled 'orkforce 'orkforce and and future future synergies synergies are are not caitali1ed caitali1ed searately searately but but are included in good'ill"
©Cambridge Business Publishers, 2016 3-32
Adan!ed A!!ounting, 3rd "dition
b. Co"sol-*a#-o" =o9-"7 Pa(! (in thousands) A))o%"#s Ta9!" Ta9!" Fo Boo9s I"#!"a#-o"al A%#o D >C?
5urrent assets ?i4ed assets, net 1nvestment in : Trademar/s 8ther identifiable intangibles :oodwill 5urrent liabilities 9ong-term liabilities 5ommon stoc/, par 7dditional paid-in capital etained earnings 7851 Treasury stoc/ Total
$
'',## ('#,### (,'!#
El--"a#-o"s
!"%-"! Pa#s D >C?
$
,### '%,### --
D
*+
C
'##
Co"sol-*a#!* Bala")!s D >C?
$ %,### *+ !,### *6+ &",'!# *+
' '( (,## ((#,### --
),###
&,(##
*+ ',"##
!,###
--
--
*+ ',(## *+ !,### *+&',#!#
%,(##
-*'!,###+ *&!#,'!#+ *#,###+ *(&,##+ *(&,)##+ *(,###+ &,### $ #
-*(##+ *'",###+ *!##+ *),!##+ ',### ,(## "## $ #
*+ ,### *6+ !## *6+ ),!##
$ !','!#
',### *6+ ,(## *6+ "## *6+ $ !','!#
&',#!# *'!,(##+ *&%!,'!#+ *#,###+ *(&,##+ *(&,)##+ *(,###+ &,### $ #
Note: 6nternational 6nternational $uto’ $uto’ss trial balance balance at the date date of acquisition acquisition is determined determined by combining its trial balance 7ust rior to the acquisition 'ith this acquisition 7ournal entry:
1nvestment in : 3erger e4penses 5ommon stoc/, par 7dditional paid-in capital 5ash 6arnings contingency liability
Solutions Manual, Chapter 3
(,'!# ,'## ' ,# # # & & ,# # % , # # '! #
©Cambridge Business Publishers, 2016 3-33
c. I"#!"a#-o"al A%#o a"* S%&s-*-a; Co"sol-*a#!* Bala")! Sh!!#, Da#! o: A)8%-s-#-o" Ass!#s 5urrent assets ?i4ed assets, net Trademar/s 8ther identifiable intangibles :oodwill
Total assets
$ '(,## ((#,### !,### %,(## &',#!#
$ ! !),!!#
L-a&-l-#-!s 5urrent liabilities 9ong-term liabilities Total liabilities
$
S#o)9hol*!s@ !8%-#; 5ommon stoc/, par 7dditional pa paid-in capital etained earnings 7ccumulated other comprehensive income Treasury stoc/ Total Total stoc/holders’ e@uity Total liabilities and e@uity
'!,(## &%!,'!# (##,"!#
#,### (&,## (&,)## (,### *&,###+ %,## $ ! !),!!#
P3.1 Co"sol-*a#!* Co"sol-*a#!* Bala")! Bala")! Sh!!# =o9 =o9-"7 -"7 Pa(!, Pa(!, Ba7a-" Ba7a-" a-", S(!)-al S(!)-al Iss%!s
(in thousands)
a. 7c@uisition cost Steamobile’s boo/ value 64cess of boo/ value over ac@uisition cost 64cess of fair value over boo/ value0 5urrent assets ?i4ed assets, net *+ 1dentifiable intangibles :oodwill *old+ 9iabilities Eargain gain
$ '#,### *,###+ *#,###+ $ *',###+ ,### ",### *&!,###+ *,###+
',### $ ),###
*+ $(#,### > *$!#,### > $(#,###+ = $,###
©Cambridge Business Publishers, 2016 3-3#
Adan!ed A!!ounting, 3rd "dition
b. Co"sol-*a#-o" =o9-"7 Pa(! (in thousands) A))o%"#s Ta9!" Ta9!" Fo Boo9s
Pa)9a* D >C?
5urrent assets ?i4ed assets 7ccumulated depreciation 1nvestment in Steamobile 1dentifiable intangibles :oodwill 9iabilities 5apital stoc/ etained earnings 7851 Total
$
El--"a#-o"s
S#!ao&-l! D >C?
!,### !##,### *"#,###+ '),### --*'!,###+ *#,###+ *%),!##+ !## $ #
$
!,### !#,### *(#,###+ --
&!,### *'#,###+ *&!,###+ !,)## *)##+ $ #
D
*+ ,### *+ (#,### *+ ',### *+ ",###
C
',###*+ (#,###*+ ,###*6+ &!,###*+ ,###*+
*6 +&!,### *6+ )## $ &,)##
!,)##*6+ $ &,)##
Co"sol-*a#!* Bala")!s D >C?
$
),### "(#,### *"#,###+ -",### -*&&",###+ *#,###+ *%),!##+ !# # $ #
Note -: %ackard’ %ackard’ss trial balance balance at the date date of acquisition acquisition is determine determined d by combining combining its trial balance 7ust rior to the acquisition 'ith this acquisition 7ournal entry:
1nvestment in Steamobile 5ash Eargain gain
'),### '#,### ),###
Note /: $n $n additional additional eliminating eliminating entry removes removes Steamobile’ Steamobile’ss accumulated accumulated dereciation account and nets it against the fi!ed assets account"
c. Pa)9a* a"* S%&s-*-a; Co"sol-*a#!* Bala")! Sh!!#, Da#! o: A)8%-s-#-o" Ass!#s 5urrent assets ?i4ed assets, net of $"#,### accumulated de depreciation 1dentifiable intangibles
Total assets
Solutions Manual, Chapter 3
$
) ),### ()#,### ",###
$ !# !#(,###
L-a&-l-#-!s 9iabilities
S#o)9hol*!s@ !8%-#; 5apital stoc/ etained earnings 7ccumulated other comprehensive income Total Total stoc/holders’ e@uity Total liabilities and e@uity
$ &&",###
#,### %),!## *!##+ "),### $ !#(,###
©Cambridge Business Publishers, 2016 3-3$