AdvAcct Chapter03 Solutions Revised 010511

CHAPTER 3

SOLUTIONS TO EXERCISES AND PROBLEMS

EXERCISES

E3.1 Combination and Consolidation

a.Investment in Simon 30,000,000

Common stock 300,000Additional paid-in capital 29,700,000

b.

(E)Common stock 3,000,000Additional paid-in capital 7,000,000Retained earnings 4,000,000

Investment in Simon 14,000,000

(R)Goodwill 16,000,000

Investment in Simon 16,000,000

c. Total assets $120,000,000 Total liabilities $ 26,000,000Goodwill 16,000,000 Common stock 10,300,000

Additional paid-in capital 69,700,000___________ Retained earnings 30,000,000

Total assets $136,000,000 Total liabilities and equity $136,000,000

©Cambridge Business Publishers, 2010Solutions Manual, Chapter 3 41

E3.2 Eliminating Entries—Various Cases

In each case, Pluto acquires 100,000 shares of Saturn (=$200,000/$2).

Entry (E):(amounts in thousands)

Case a Case b Case cCommon stock 200 200 200Additional paid-in capital 1,300 1,300 1,300Retained earnings 350 350 350AOCI 150 150 150

Treasury stock 100 100 100Investment in S 1,900 1,900 1,900

Entry (R):(amounts in thousands)

Case a Case b Case cInvestment in S -- -- 300Goodwill 600 -- --

Investment in S 600 -- --Gain on acquisition -- -- 300

E3.3 Simple Consolidation, Previously Unreported Intangibles

(E)Stockholders’ equity–Senyo 6,000,000

Investment in Senyo 6,000,000

(R)Land 500,000Intangibles–in-process R&D 1,000,000Goodwill 2,500,000

Investment in Senyo 4,000,000

©Cambridge Business Publishers, 201042 Advanced Accounting, 1st Edition

E3.4 Eliminating Entries, Acquisition Expenses

(E)Capital stock 400,000Retained earnings 1,600,000

Investment in Small 2,000,000

(R)Inventories 40,000Plant assets, net 200,000Identifiable intangible assets 500,000Goodwill 360,000

Long-term debt 100,000Investment in Small 1,000,000

Note: Acquisition costs are expensed separately on Giant’s books and do not affect consolidation eliminating entries.

E3.5 Acquisition and Eliminating Entries—Bargain Purchase

(amounts in millions)

a. P’s acquisition entry:Investment in Sherman 2,980Merger expenses 40

Cash 2,790Gain on acquisition 230

Calculation of gain on acquisition: Fair value of S = $2,500 + $100 + $100 + $250 + $30 = $2,980$2,980 – $2,750 = $230 gain

b. Consolidation working paper elimination entries:(E)Stockholders’ equity–Sherman 2,500

Investment in Sherman 2,500

(R)Inventories 100Land 100Other plant assets, net 250Long-term debt 30

Investment in Sherman 480Note: Acquisition costs are expensed separately and do not affect consolidation eliminating entries.


E3.6 Interpreting Eliminating Entries

a.The stockholders’ equity (book value) of Seaboard is $48,000,000, based on the first eliminating entry.

b.The acquisition cost is $88,000,000, so the excess paid over book value is $40,000,000.

c.Acquisition cost $88,000,000Book value 48,000,000Excess of acquisition cost over book value 40,000,000Fair value less book value: Noncurrent assets (overvalued) (2,000,000) Goodwill $42,000,000 d.

Fair value Book value less fair value Book valueCurrent assets $ 26,000,000 -- $ 26,000,000Noncurrent assets 95,000,000 2,000,000 97,000,000Current liabilities (20,000,000) -- (20,000,000)Noncurrent liabilities (55,000,000) -- (55,000,000)Totals $ 46,000,000 $ 48,000,000

E3.7 Acquisition Entry and Consolidation Working Paper

a. Bates makes the following entry to record the acquisition (amounts in millions):

Investment in Wilkens 1,900Cash 300Common stock 200Additional paid-in capital 1,400

This entry is reflected in Bates’ account balances in the consolidation working paper below.


b.Consolidation Working Paper (in millions)

Accounts Taken From Books

Eliminations

Bates Wilkens Dr CrConsolidated

BalancesCurrent assets $ 700 $ 200 (R) 50 $ 950Plant and equipment, net 3,500 700 (R) 550 4,750Investment in Wilkens 1,900 -- 450 (E)

1,450 (R)--

Brand names and trademarks -- -- (R) 200 200 Goodwill ______ ______ (R) 650 650Total assets $ 6,100 $ 900 $ 6,550

Current liabilities $ 500 $ 150 $ 650Long-term liabilities 2,000 300 2,300Common stock, par value 500 100 (E) 100 500Additional paid-in capital 2,000 50 (E) 50 2,000Retained earnings 1,100 300 (E) 300 _______ 1,100Total liabilities and equity $ 6,100 $ 900 $ 1,900 $ 1,900 $ 6,550

E3.8 Identifying and Analyzing Variable Interest Entities

a.The equity interests are traditional variable interests. However, because minority shareholder C guarantees 92% of A’s debt, which is most of A’s capital, and will absorb 92% of A=s expected losses by protecting the subordinated debtholders, A is a VIE. Even if a single investor owns the other 70% of the equity, and obtains 70% of the expected residual returns, C will absorb a majority of A’s expected losses and will likely be designated as A’s primary beneficiary. One could also note that because A’s equity is less than 10% of its total assets (.08 = 1 - .92) a presumption exists that A is a VIE.

b.Without any other information, D is the sole owner of B and should consolidate B under SFAS 94. Although contractual and other arrangements could suggest that B is a VIE, the problem is silent on these matters.


c.The 15% equity could be enough to avoid identifying A as a VIE, if that amount of equity is deemed adequate to absorb A’s expected losses. If the 15% equity is not adequate, by agreeing to compensate E for any of A=s losses, C is providing the subordinated financial support that qualifies as a variable interest, makes A into a VIE, and is likely A’s primary beneficiary. As an example, if A reports income that exceeds 10% of its average equity, the excess is distributed to C. A’s shareholders could view this as a kind of insurance payment for being protected from losses, and would report it as an expense. Suppose A earns $18 on average equity of $100. Of this, $8 (= $18 – 10% x $100) is C=s share, accounted for as follows:

Dr. Expense 8Cr. Payable to C 8

A therefore reports final net income of $10 (= $18 - $8).

d.The facts indicate that D is the likely primary beneficiary of variable interest entity B. B’s 10% stockholders= equity is insulated from losses by the guarantees provided by C and D, indicating that B is a VIE. Even though B leases far more property to C than to D, losses in guaranteed residual values on D’s specialized property seem much more likely because of the active aftermarket for property leased by C. Moreover, D’s unsecured loan to B provides additional subordinated financial support.

E3.9 Reconstructing Eliminating Entries and Book Value

a.Consolidated total assets $ 13,000,000Less: Cove’s current assets (5,200,000)Less: Cove’s noncurrent assets (3,800,000)Fair value of Bay’s total assets $ 4,000,000Less: Goodwill (340,000)Fair value of Bay’s identifiable assets $ 3,660,000

b.Acquisition cost $ 1,600,000Less: Goodwill (340,000)Fair value of Bay’s identifiable net assets $ 1,260,000

Fair value of Bay’s identifiable assets (from a. above) $ 3,660,000Less: Fair value of Bay’s identifiable net assets (1,260,000)Fair value of Bay’s liabilities $ 2,400,000

c.Fair value of Bay’s identifiable net assets (from b. above) $ 1,260,000Less: Fair value of previously unreported intangibles (800,000)Book value of Bay’s net assets $ 460,000


d. (E)Stockholders’ equity–Bay 460,000

Investment in S 460,000

(R)Identifiable intangibles 800,000Goodwill 340,000

Investment in S 1,140,000

E3.10 Identification of Variable Interest Entity and Primary Beneficiary

a. The answer to this question depends on the ability of the equity interest to absorb Startek’s potential losses. FIN46(R) specifies that if the equity interest is less than 10 percent of total assets, the entity is a VIE unless there is evidence to the contrary. However, in this case, the equity interest is 13 percent of assets (= $4,000,000/$30,000,000). An analysis of expected gains and losses is as follows (in millions):

Expected cash flow

Present value Prob.

Expected PV

Investment fair value

Residual returns

Expected gains

Expectedlosses

$ 11 $ 10 0.40 $ 4 $ 30 $ (20) $ (8)33 30 0.20 6 30 --55 50 0.40 20 30 20 $ 8 _____

$ 30 $ 8 $ (8)

The equity interest of $4,000,000 is insufficient to absorb expected losses of $8,000,000, so Startek would likely be identified as a VIE.

b. Because Softek guarantees Startek’s debt, it is the primary beneficiary that will consolidate Startek.

E3.11 Acquisition and Eliminating Entries

a. No—goodwill of $2.2 billion is currently present, so it is unlikely that any revaluations will result in a bargain purchase.

b.Investment in Energy Brands 4.1

Cash 2.9Put and call liability 1.2


c. (E)Stockholders’ equity–Energy Brands 1.4

Investment in Energy Brands 1.4

(R)Trademarks ($2.8 – $1.6) 1.2Customer relationships 0.2Goodwill 2.2

Deferred tax liabilities 0.9Investment in Energy Brands 2.7

E3.12 Consolidation Policy: U.S. GAAP and IFRS

a.Randolph owns 64% of the voting rights [.64 = (.8 x .60) + (.4 x .40)], and meets the majority ownership test for consolidation of SFAS 94.

b.IFRS also recognizes the legal control signified by ownership of 64% of the voting rights and consolidation would occur.

c.Randolph’s ownership of the Class A shares produces 48% ( = .8 x .60) of the voting interest. U.S. GAAP emphasizes majority ownership of the voting stock, so consolidation is unlikely. IFRS looks at decision making power. The other investor owns 40% of the voting rights. Thus Randolph does not control the voting rights and decision-making authority appears to be shared. However, the influence of the other 12% of the Class A shares voting rights must be examined. If Randolph can demonstrate sufficient influence over that other 12% to dominate Marshall’s governing board, effective control may exist, requiring consolidation under IFRS, but it seems unlikely without additional information. In sum, the available evidence points away from consolidation.

d.Now Randolph owns 42% ( = .7 x .60) of the voting interest and all other interests are dispersed. These facts suggest that Randolph can dominate Marshall’s governing board thereby possessing unshared decision-making power and consolidation would be required under IFRS. Randolph does not have majority ownership, and consolidation under U.S. GAAP is unlikely.


PROBLEMS

P3.1 Working Paper Eliminating Entries, Goodwill

(amounts in millions)a. Acquisition cost $ 100 Book value (19)Excess of acquisition cost over book value $ 81Fair value less book value: Fixed assets, net $ 5 Liabilities (1) Customer lists 25 Brand names 30 59Goodwill $ 22

b.(E)Common stock 3Additional paid-in capital 9Retained earnings 14

Accumulated other comprehensive income 5Treasury stock 2Investment in Abba, Inc. 19

(R)Fixed assets, net 5Customer lists 25Brand names 30Goodwill 22

Liabilities 1Investment in Abba, Inc. 81


P3.2 Consolidated Balance Sheet Working Paper, Identifiable Intangibles, Goodwill

a. (in millions)Investment in GOC 112Merger expenses 5

Common stock 2Additional paid-in capital (1) 55Contingent consideration liability 2Cash 58

(1) APIC = fair value of shares issued – par value of shares issued – registration fees: $55 = $60 – $2 - $3

b. Consolidation Working Paper (in millions)


Eliminations

ITI GOC Dr CrConsolidated

BalancesCurrent assets $ 142 $ 10 (R) 5 $ 157Property, plant and equipment, net

500 130 60 (R) 570

Investment in GOC 112 40 (E)72 (R)

--

Identifiable intangible assets

1,300 20 (R) 10(R) 5(R) 25

1,360

Goodwill ______ ______ (R) 90 90Total assets $ 2,054 $ 160 $ 2,177

Current liabilities $ 150 $ 20 $ 170Long-term liabilities 1,202 100 3 (R) 1,305Common stock, par 22 4 (E) 4 22Additional paid-in capital 605 60 (E) 60 605Retained earnings 95 (25) 25 (E) 95Accumulated other comprehensive income

(15) 3 (E) 3 (15)

Treasury stock (5) (2) _____ 2 (E) (5)Total liabilities and equity $ 2,054 $ 160 $ 202 $ 202 $ 2,177


P3.3 Stock Acquisition and Consolidation Working Paper Eliminating Entries

(amounts in millions)

a.Investment in Pharmacia (1) 55,873Merger expenses 101

Common stock 91Additional paid-in capital 55,782Cash 101

(1) $55,873 = 1,817 x $30.75

b.Acquisition cost $55,873Pharmacia book value (7,236)Excess of acquisition cost over book value $48,637Excess of fair value over book value:Inventory $ 2,939Long-term investments 40Property, plant and equipment (317)In-process R&D 5,052Developed technology rights 37,066Long-term debt (1,841)Other assets (15,606) 27,333Goodwill $21,304

c. (E)Stockholders’ equity—Pharmacia 7,236

Investment in Pharmacia 7,236

(R)Inventory 2,939Long-term investments 40In-process R&D 5,052Developed technology rights 37,066Goodwill 21,304

Property, plant and equipment 317Long-term debt 1,841Other assets 15,606Investment in Pharmacia 48,637


P3.4 Consolidated Balance Sheet, Bargain Purchase

( amounts in millions)

a. Calculation of gain on acquisition:

Acquisition cost $ 1,800Book value (1,295)Excess of acquisition cost over book value $ 505Excess of fair value over book value:Inventory $ 100Marketable securities (50)Land 245Buildings and equipment, net 300Long-term debt 110 705Gain on acquisition $ 200

b.Consolidation Working Paper (in millions)


Eliminations

Paxon Saxon Dr CrConsolidated

BalancesCash and receivables $ 1,060 $ 720 $ 1,780Inventory 1,700 900 (R) 100 2,700Marketable securities -- 300 50 (R) 250Investment in Saxon 2,000 1,295 (E)

705 (R)--

Land 650 175 (R) 245 1,070Buildings and equipment, net 3,400 600 (R) 300 4,300Accumulated depreciation (1,000) -- (1,000)Total assets $ 7,810 $ 2,695 $ 9,100

Current liabilities $ 1,500 $ 1,000 $ 2,500Long-term debt 2,000 400 (R) 110 2,290Common stock, par value 500 100 (E) 100 500Additional paid-in capital 1,200 350 (E) 350 1,200Retained earnings 2,610 845 (E) 845 ______ 2,610Total liabilities and equity $ 7,810 $ 2,695 $ 2,050 $ 2,050 $ 9,100


P3.5 Consolidated Balance Sheet Working Paper, Previously Reported Goodwill

( amounts in thousands)a.Investment in Stagnant 8,000Merger expenses 35

Common stock 100Additional paid-in capital 7,700Cash 235

b. Acquisition cost $ 8,000Stagnant’s book value (4,000)Excess of acquisition cost over book value $ 4,000Excess of fair value over book value:Cash and receivables $ (200)Marketable securities (1) 400Inventory 200Plant assets, net (600)Copyrights 1,800Goodwill (2) (500)Noncurrent liabilities 300 1,400Goodwill $ 2,600

(1) Although proper accounting for held-to-maturity debt securities is amortized cost, they are nonetheless adjusted to fair value, as that represents their cost to Placid.

(2) All pre-existing goodwill is eliminated, even though it may be deemed to have a non-zero fair value.


c. Consolidation Working Paper (in thousands)


Eliminations

Placid Stagnant Dr CrConsolidated

BalancesCash and receivables $ 7,765 $ 2,000 200 (R) $ 9,565Marketable securities -- 600 (R) 400 1,000Inventory 7,000 2,400 (R) 200 9,600Investment in Stagnant 8,000 4,000 (E)

4,000 (R)--

Plant assets, net 10,000 3,600 600 (R) 13,000Copyrights 1,000 200 (R) 1,800 3,000Goodwill -- 500 (R) 2,600 500 (R) 2,600Total assets $ 33,765 $ 9,300 $ 38,765

Current liabilities $ 6,000 $ 2,000 $ 8,000Noncurrent liabilities 4,000 3,300 (R) 300 7,000Common stock, par 200 100 (E) 100 200Additional paid-in capital 8,600 400 (E) 400 8,600Retained earnings 14,965 3,500 (E) 3,500 _____ 14,965Total liabilities and equity $ 33,765 $ 9,300 $ 5,300 $ 5,300 $ 38,765

P3.6 Consolidated Balances, Different Acquirers

a. The consolidated working paper for Microtech’s acquisition of Webnet Solutions is as follows:

Consolidation Working Paper (in millions)Accounts Taken From

Books Eliminations

MicrotechWebnet

Solutions Dr CrConsol.

BalancesCurrent assets $ 10 $ 10 $ 20Property, plant and equipment, net 50 50 100Investment in Webnet 200 41 (E)

159 (R)--

Patents 5 5 10Goodwill -- -- (R) 159 159Total assets $ 265 $ 65 $ 289Current liabilities $ 4 $ 4 $ 8Long-term debt 20 20 40Common stock, par 3 2 (E) 2 3Additional paid-in capital 224 25 (E) 25 224Retained earnings 14 14 (E) 14 _____ 14Total liabilities and equity $ 265 $ 65 $ 200 $ 200 $ 289


b. The consolidated working paper for Webnet Solutions’ acquisition of Microtech is as follows:

Consolidation Working Paper (in millions)Accounts Taken From

Books Eliminations

Webnet Solutions Microtech Dr Cr

ConsolidatedBalances

Current assets $ 10 $ 10 $ 20Property, plant and equipment, net 50 50 (R) 20 120Investment in Microtech 200 41 (E)

159 (R)--

Patents 5 5 (R) 10 20Developed technology (R) 100 100Client relationships (R) 29 29Goodwill -- -- --Total assets $ 265 $ 65 $ 289

Current liabilities $ 4 $ 4 $ 8Long-term debt 20 20 40Common stock, par 3 2 (E) 2 3Additional paid-in capital 224 25 (E) 25 224Retained earnings 14 14 (E) 14 _____ 14Total liabilities and equity $ 265 $ 65 $ 200 $ 200 $ 289

c.Both sets of consolidated balances report the same total assets and the same individual liabilities and equities. However, the individual asset accounts differ. The acquirer’s assets are not revalued to fair value, nor are previously unreported assets recognized. Microtech has understated property, plant and equipment and patents, as well as unreported identifiable intangible assets. Webnet Solutions’ assets and liabilities are fairly reported, and there are no identifiable intangibles. When Microtech is the acquirer, the difference between Webnet Solutions’ acquisition price and reported book value is reported as goodwill, and the difference between book and fair value of Microtech’s assets is not recognized. When Webnet Solutions is the acquirer, its goodwill is not recognized, but Microtech’s property, patents, and identifiable intangibles are reported.


Does management want the $159 million purchase premium to be reported as the unspecified and possibly unproductive asset goodwill, or distributed among several potentially productive identifiable assets ($20 million to property, plant and equipment; $10 million to patents; $100 million to developed technology; $29 million to client relationships)? If Webnet Solutions is the acquirer, Microtech’s previously unreported assets will come to light. To the extent that the existence of identifiable intangibles such as developed technology and client relationships indicate favorable future earnings potential, investors may view the new disclosures as a positive signal, increasing stock price. If Microtech is the acquirer, no identifiable intangibles are recognized, and investors may wonder if Webnet Solutions will sustain its value in the future, as these assets would seem to be the lifeblood of a technology company.

Management will also consider the implications for future income. Identifiable assets usually have limited lives and are depreciated or amortized over time, reducing earnings on a regular basis. Goodwill is tested for impairment loss, and may never be written off. If Microtech is the acquirer, future reported income may be higher because there are no identifiable intangibles to be amortized.

Note to instructor: This contrived problem illustrates the games companies can play to choose between different financial statement effects portraying the same transaction economics.

P3.7 Tangible and Intangible Asset Revaluations

(in millions)

a.Symbol

TechnologiesGood

Technology Netopia TerayonPrice $3,528 $ 438 $ 183 $ 137Previously unrecorded intangibles acquired:Goodwill $2,300 $301 $122 $102IPR&D 95 -- -- --Other identifiable intangibles 1,000 (3,395) 158 (459) 100 (222) 52 (154)Fair value of tangible net assets acquired $ 133 $ (21) $ (39) $ (17)


b.The fair values of the tangible liabilities of Good Technology, Netopia, and Terayon are greater than the fair values of their assets, and since net book values are positive, the fair values of net tangible assets must be less than related book values. Since book values of liabilities are generally close to fair value, the cause is likely to be a decline in the value of tangible assets. For technology companies, tangible assets such as equipment are likely to lose resale value quickly. Motorola lists identifiable intangibles acquired as completed technology, patents, customer-related assets, licensed technology and other intangibles. Value is derived almost exclusively from the future earnings potential of these intangible assets.

c.

(E) Symbol Tech Good Tech Netopia TerayonStockholders’ equity 100 30 10 15

Investment in acquiree 100 30 10 15

(R)Goodwill 2,300 301 122 102IPR&D 95 -- -- --Other identifiable intangibles 1,000 158 100 52Tangible net assets 33 51 49 32

Investment in acquiree 3,428 408 173 122

d.IPR&D reflects the estimated fair value of projects that have not yet resulted in viable products. Fair value is generally based on the present value of future expected cash flows. Below is an excerpt from Motorola’s disclosure of Symbol Technologies, Inc. in-process R&D:

At the date of acquisition, 31 projects were in process and are expected to be completed through 2008. The average risk adjusted rate used to value these projects is 15-16%. The allocation of value to in-process research and development was determined using expected future cash flows discounted at average risk adjusted rates reflecting both technological and market risk as well as the time value of money. (Source: Motorola, Inc. annual report, 2007)


P3.8 Working Backwards—Eliminating Entries, Preparing Subsidiary’s Balance Sheeta.

(E)Stockholders’ equity–Scientific 9,000,000

Investment in Scientific 9,000,000

(R)Current assets 500,000Plant assets 1,200,000Identifiable intangibles 2,000,000Goodwill 2,300,000

Investment in Scientific 6,000,000

b.Scientific Company

Balance Sheet, December 31, 2010Current assets (1) $ 3,200,000 Liabilities (3) $ 8,000,000Plant assets, net (2) 13,800,000 Stockholders’ equity 9,000,000Total assets $ 17,000,000 Total liabilities and equity $ 17,000,000

(1) $3,200,000 = $8,700,000 - $500,000 - $5,000,000(2) $13,800,000 = $40,000,000 - $1,200,000 - $25,000,000(3) $8,000,000 = $27,000,000 - $19,000,000

P3.9 Merger and Stock Acquisition, Merger-Related Costs

(all amounts in thousands)

a.Fair value of net assets acquired $3,556,500Value of consideration given: 46,700,000 shares x $75.25 $3,514,175Stock options 4,000Total consideration given $3,518,175Apparent amount of merger-related costs capitalized $ 38,325


b. (entry on books of MCBC)

Current assets 486,700Property, plant and equipment 1,011,600Other assets 489,600Identifiable intangibles 3,734,900Goodwill 1,837,600

Current liabilities 688,300Noncurrent liabilities 3,315,600Capital stock 3,514,175Stock options 4,000Cash (merger-related costs) 38,325

c.Book value of Molson’s stockholders’ equity = net assets carried at fair value = $486,700 + 1,011,600 + 489,600 – 688,300 – 3,315,600 = $(2,016,000).

(consolidated balance sheet working paper):

(E)Investment in Molson, Inc. 2,016,000

Stockholders’ equity–Molson, Inc. 2,016,000

(R)Intangible assets 3,734,900Goodwill 1,837,600

Investment in Molson, Inc. 5,572,500

This solution assumes Molson did not previously report recognized intangible assets. If intangible assets already had a substantial book value, a positive stockholders’ equity could result.


d.If SFAS 141R had been in effect when this merger occurred, the $38,325 of merger-related costs would have been expensed and not capitalized. Goodwill would therefore have been smaller by $38,325, or $1,799,275. The entries would be as follows:

Requirement b. (entry on books of MCBC)

Current assets 486,700Property, plant and equipment 1,011,600Other assets 489,600Identifiable intangibles 3,734,900Goodwill 1,799,275Merger-related expenses 38,325

Current liabilities 688,300Noncurrent liabilities 3,315,600Capital stock 3,514,175Stock options 4,000Cash (merger-related costs) 38,325

Requirement c. (consolidated balance sheet working paper)

(E)Investment in Molson, Inc. 2,016,000

Stockholders’ equity—Molson, Inc. 2,016,000

(R)Intangible assets 3,734,900Goodwill 1,799,275

Investment in Molson, Inc. 5,534,175

Note: Because merger-related costs are not capitalized under SFAS 141R, the Investment account balance on the books of MCBC is $38,325 lower.


P3.10 Consolidation of Variable Interest Entities

(dollar amounts in thousands)

a. MCBC owns about 50% of each of these joint ventures, close to the over 50% needed for traditional consolidation; its 52% interest in BRI suggests consolidation. It reports guarantees of debt issued by BTI and RMMC but it is not clear how significant this is. All of these ventures appear to be captive or near-captive entities largely designed to serve MCBC’s needs in beer production and distribution. The ventures’ profits directly benefit MCBC and the other owners. RMMC and RMBC are nontaxable entities and Grolsch is a taxable entity in the U.K., not the U.S. Grolsch’s profits are limited by agreement. These conditions point toward VIE status and there are likely other agreements not disclosed that point toward MCBC being the primary beneficiary of all four ventures.

b. At the end of 2007, total assets of the four VIEs sum to $580,341; half is $290,171, a little over 2% of MCBC’s $13,451,566 of total assets, with and without the $290,171. Half of the $38,356 in pre-tax income of the ventures (credited to cost of goods sold) is $19,178, about 4% of MCBC’s 2007 net income of $497,192. Neither of these are highly significant percentages of MCBC; the ventures’ liabilities (unknown) are not likely large enough to have much of an effect on MCBC’s leverage ratios.

c. Considering that MCBC’s purchases from the ventures affect its cost of goods sold, offsetting ventures’ “profits” against COGS to reduce the cost reported there seems reasonable.


P3.11 Identifiable Intangibles and Goodwill

a.Prince makes the following entry to record the acquisition on its own books (in thousands):

Investment in Squire 35,000Merger expenses 1,200

Capital stock 34,400Cash 1,800

The account balances for Prince, shown in the working paper below, reflect the above entry. Merger expenses reduce retained earnings, a component of stockholders’ equity.

Consolidation Working Paper (in thousands)Accounts Taken From

Books Eliminations

Prince Squire Dr CrConsolidated

BalancesCash $ 1,000 $ 300 $ 1,300Accounts receivable 6,000 2,700 100 (R) 8,600Parts inventory -- 5,200 (R) 800 6,000Vehicle inventory 15,000 -- 15,000Equipment, net 40,000 17,600 (R) 1,900 59,500Investment in Squire 35,000 -- 14,100 (E)

20,900(R)--

Intangible: Lease (R) 1,250 1,250Intangible: Service contracts (R) 2,000 2,000Intangible: Trade name (R) 200 200Goodwill -- -- (R)14,250 14,250Total assets $ 97,000 $ 25,800 $ 108,100

Current liabilities $ 5,000 $ 3,100 $ 8,100Noncurrent liabilities 25,000 8,600 (R) 600 33,000Stockholders’ equity 67,000 14,100 (E)14,100 _______ 67,000

$ 97,000 $ 25,800 $ 35,100 $ 35,100 $ 108,100


b.If Prince records the acquisition as a statutory merger, Prince makes the following entry (in thousands):

Cash 300Accounts receivable 2,600Parts inventory 6,000Equipment, net 19,500Intangible: Lease 1,250Intangible: Service contracts 2,000Intangible: Trade name 200Goodwill 14,250Merger expenses 1,200

Cash 1,800Current liabilities 3,100Long-term liabilities 8,000Capital stock 34,400

When the above entry is reflected in Prince’s account balances, Prince’s balance sheet is identical to that shown in the consolidated working paper for a stock acquisition.


P3.12 Consolidation Policy: U.S. GAAP and IFRS

Subcase U.S. GAAP IFRS(1) Do not consolidate Consolidate(2) Do not consolidate Consolidate(3) Do not consolidate Consolidate(4) Do not consolidate Possibly consolidate(5) Do not consolidate Possibly consolidate(6) Do not consolidate Possibly consolidate

Under SFAS 94, consolidation is not appropriate, as no case has majority ownership. Under IFRS, the following considerations apply.

In cases (1), (2) and (3),

1. Andrews owns a large minority interest (40 to 49 percent) and the remaining ownership is widely dispersed (no single party holds more than 3 percent).

2. A recent election has shown that Andrews is able to cast a majority of votes cast (53 to 58 percent).

Absent evidence to the contrary, either one of these is sufficient to presume that Andrews has effective control, and that consolidated statements should be prepared.

In cases (4), (5) and (6), the conclusion is less clear. While Andrews owns a fairly large minority interest (25 to 35 percent) and other ownership is widely dispersed, it would be a matter of judgment as to whether Andrews' interest is large enough. Andrews was able to nominate its director candidates, solicit some proxies, and convince other stockholders to vote for its nominees in order to obtain a majority of the votes. While a conclusion of effective control seems highly likely here, it is not automatic. Further, case (4) is stronger than case (5), which in turn is stronger than case (6).


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AdvAcct Chapter03 Solutions Revised 010511