Solution Manual Advanced Accounting 12e Beams Ch 3
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Advanced Accounting (AKK301)
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Airlangga University
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Advanced Accounting
Solution manual for questions, exercises, and problems of Advanced Accounting 12e by Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, and Kenneth A. Smith.
Test Bank - Advanced Accounting 13th Edition by Floyd Beams All Chapters Covered ,Latest Edition, ISBN:9780134472140
Test Bank - Advanced Accounting 13th Edition by Floyd Beams, All Chapters Covered ,Latest Edition, ISBN:9780134472140
Test Bank for Advanced Accounting 13th Edition by Floyd Beams, Joseph Anthony, Bruce Bettinghaus, Kenneth Smith, All Chapters |Complete Guide A+
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CHAPTER 3
AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
Answers to Questions
1 A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a
controlling financial interest (generally over 50 percent) of its outstanding voting stock.
2 Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the
subsidiary are not recorded separately by the parent. Instead, the parent records the fair value/purchase
price of the interest acquired in an investment account. The assignment to identifiable asset and liability
accounts is made through working paper entries when the parent and subsidiary financial statements are
consolidated.
3 The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the
purchase price of the subsidiary is greater than the book value of the subsidiary’s net assets. If the parent
had acquired an 80 percent interest and the implied fair value of the subsidiary was greater than the book
value of the subsidiary’s net assets, the land would still appear in the consolidated balance sheet at
$100,000. Under GAAP, the noncontrolling interest is also reported based on fair values at the acquisition
date.
4 Parent and subsidiaries should maintain separate accounting record because legally they are separate
entities. However, in parent-subsidiary relationship, the parent has a control over the subsidiary. Thus
there is only one economic entity because all resources are under control of a single management, which
is the management of parent. Therefore, the separate accounting record should be consolidated for
reporting purposes.
5 A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the
affiliation structure. In other words, it is the equity interest in a subsidiary (recorded at fair value) that is
not held by the parent or subsidiaries of the parent.
6 Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner, such
as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under
severe foreign exchange restrictions or other governmentally imposed uncertainties. Other conditions for
not consolidating a subsidiary are: (1) formation of joint ventures, (2) the acquisition of an asset or group
of assets that does not constitute a business, (3) combination between entities under common control and
(4) combination between not-for-profit entities or the acquisition of a for-profit business by a not-for-
profit entity.
7 Cash is not the only permissible options to finance the acquisition. Investor may also sell shares of
authorized but previously unissued common stock, issue preferred shares, sell debt securities (bonds), or
combine these possible options.
8 The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of
the outstanding capital stock of the parent.
9 All elimination entries are not recorded in a ledger because the purpose of the entries is to help the
process of consolidating the parent and subsidiary financial statement. These entries are fictitious and do
not need to be journalized or posted in either parent accounting records or subsidiary accounting records.
,3-2 An Introduction to Consolidated Financial Statements
investments or other assets. They are accounted for under the equity method if the parent can exercise
significant influence over the subsidiary; otherwise, they are accounted for by the fair value / cost
method.
11 Parent’s books: Reciprocal accounts on subsidiary’s books:
Investment in subsidiary Capital stock and retained earnings
Sales Cost of Goods Sold
Accounts receivable Accounts payable
Interest income Interest expense
Dividends receivable Dividends payable
Advance to subsidiary Advance from parent
12 Reciprocal accounts are eliminated in the process of preparing consolidated financial statements in order
to show the financial position and results of operations of the total economic entity that is under the
control of a single management team. Sales by a parent to a subsidiary are internal transactions from the
viewpoint of the economic entity and the same is true of interest income and interest expense and rent
income and rent expense arising from intercompany transactions. Similarly, receivables from and
payables to affiliates do not represent assets and liabilities of the economic entity for which consolidated
financial statements are prepared.
13 The stockholders’ equity of a parent under the equity method is the same as the consolidated
stockholders’ equity of a parent and its subsidiaries except for the noncontrolling interest.
14 No. The amounts that appear in the parent’s statement of retained earnings under the equity method and
the amounts that appear in the consolidated statement of retained earnings are identical, assuming that the
noncontrolling interest is included as a separate component of stockholders’ equity.
15 Income attributable to noncontrolling interest is not an expense, but rather it is an allocation of the total
income to the consolidated entity between controlling and noncontrolling stockholders. From the
viewpoint of the controlling interest (the stockholders of the parent), income attributable to
noncontrolling interest has the same effect on consolidated net income as an expense. This is because
consolidated net income is income to all stockholders. Alternatively, you can view total consolidated net
income as being allocated to the controlling and noncontrolling interests.
16 The computation of noncontrolling interest is comparable to the computation of retained earnings. It is
computed:
Noncontrolling interest beginning of the period XX
Add: Income attributable to noncontrolling XX
interest
Deduct: Noncontrolling interest dividends (XX)
Deduct: Noncontrolling interest of amortization of
excess of fair value over book value (XX)
Add: Noncontrolling interest of amortization of
excess of book value over fair value XX
Noncontrolling interest end of the period XX
17 It is acceptable to consolidate the annual financial statements of a parent and a subsidiary with different
fiscal periods, provided that the dates of closing are not more than three months apart. Any significant
developments that occur in the intervening three-month period should be disclosed in notes to the
financial statements. In the situation described, it is acceptable to consolidate the financial statements of
the subsidiary with an October 31 closing date with the financial statements of the parent with a
December 31 closing date.
18 The acquisition of shares from noncontrolling stockholders is not a business combination. It must be
accounted for as a treasury stock transaction if the acquirer is the controlling interest. It is not possible,
by definition, to acquire a controlling interest from noncontrolling stockholders.
SOLUTIONS TO EXERCISES
Solution E3-1 Solution E3-2
1 b 1 d
2 c 2 b
3 d 3 d
4 d 4 d
5 a 5 a
6 b
7 c
Solution E3-3 [AICPA adapted]
1 c Advance to Hill $75,000 + receivable from Ward $200,000 = $275,000
2 a Zero, goodwill has an indeterminate life and is not amortized.
3 a Pow accounts for Sap using the equity method, therefore,
consolidated retained earnings is equal to Pow’s retained earnings, or
$2,480,000.
4 d On the consolidated balance sheet, intercompany receivables should
be zero.
Solution E3-4 (in thousands)
1 Implied fair value of San ($3,%) $4,000
Less: Book value of San (3,600)
Excess fair value over book value $ 400
Equipment undervalued 120
Goodwill at January 1, 2011 $ 280
Goodwill at December 31, 2011 = Goodwill from consolidation $ 280
Since goodwill is not amortized
2 Consolidated net income
Pin’s reported net income $1,960
Less: Correction to income from San for
depreciation on excess allocated
to equipment [($120,000/3 years)x 90%] (36)
Controlling share of consolidated net income $1,924
Noncontrolling share of consolidated net income:
($400,000 - $40,000 depreciation) x 10% $36
Controlling share of consolidated net income 1,924
Consolidated net income $1,960
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