Student Name:Class:

Problem 03-25

Part a. Mitchell Company and Andrews Company

- Purchase price allocation and annual amortization

Purchase priceBook value of subsidiaryExcess cost over book value AnnualAllocation to specific accounts Life Excess based on fair market value: (years) Amortizations Buildings and equipment Trademark Total

-Conversion to equity method for years prior to 2004

Andrews' retained earnings, 1/1/04Retained earnings at date of purchaseIncrease since date of purchaseExcess amortization expenses Conversion to equity method for years prior to 2004

Student Name:Class:

Problem 03-25

Part a. Consolidated Worksheet

MITCHELL COMPANY AND CONSOLIDATED SUBSIDIARYConsolidation Worksheet

For Year Ending December 31, 2004

Mitchell Andrews Consolidation Entries ConsolidatedAccounts Company Company Debit Credit Totals

Income StatementRevenues $ (610,000) $ (370,000) $ (980,000) Correct!Expenses 270,000 140,000 410,000 Correct!Depreciation expense 115,000 80,000 195,000 Try again!Amortization expense - Try again!Dividend income (5,000) - (5,000) Try again!

Net income $ (230,000) $ (150,000) $ (380,000) Try again!

Statement of Retained EarningsRetained earnings, 1/1/04 $ (880,000) $ (880,000) Try again!

$ (490,000) (490,000) Try again!Net income (230,000) (150,000)Dividends paid 90,000 5,000 95,000 Try again!

Retained earnings, 12/31/04 $ (1,020,000) $ (635,000) $(1,275,000) Try again!

Balance SheetCash $ 110,000 $ 15,000 $ 125,000 Correct!Receivables 380,000 220,000 600,000 Correct!Inventory 560,000 280,000 840,000 Correct!Investment in Andrews Co. 470,000 - 470,000 Try again!

Land 460,000 340,000 800,000 Correct!Buildings and equipment 920,000 380,000 1,300,000 Try again!Trademark - - - Try again!

Total assets $ 2,900,000 $ 1,235,000 $ 4,135,000 Try again!

Liabilities (780,000) (470,000) (1,250,000) Correct!Preferred stock (300,000) - (300,000) Correct!Common stock (500,000) (100,000) (600,000) Try again!Additional paid-in capital (300,000) (30,000) (330,000) Try again!Retained earnings, 12/31/04 (1,020,000) (635,000) Total liabilities and equity $ (2,900,000) $ (1,235,000) $(2,480,000) Try again!

Parentheses indicate a credit balance.

Student Name:Class:

Problem 03-25

Part b. Equity method - What account balances would be altered on Mitchell's financial statements?

NewAccount Balance

Part c. Equity method - What changes would be necessary in the consolidation entries in the December 31, 2004 Consolidation Worksheet?

Part d. Equity method - What changes would be created in the consolidation figures to be reported by this combination.

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Given Data P03-25:

Andrews Company outstanding common stock 100% acquired by Mitchell CompanyMitchell Company's $30 par common stock issued 9,000 for acquisition - number of sharesFair market value of Mitchell stock - per share $ 50 Fees paid by Lee for arranging acquisition 20,000 Andrews' reported retained earnings at date of purchase 230,000 Book value for Andrews at date of purchase 360,000 Andrews' buildings and equipment undervalued by 60,000 Remaining life of Andrews' buildings and equipment - years 6 Fair value of Andrews' trademark $ 50,000 Remaining life of Andrews' trademark - years 10

Mitchell AndrewsCompany Company

12/31/2004 12/31/2004Revenues $ (610,000) $ (370,000)Cost of goods sold 270,000 140,000 Depreciation expense 115,000 80,000 Dividend income (5,000) - Net income $ (230,000) $ (150,000)

Retained earnings, 1/1/04 (880,000) (490,000)Net income (230,000) (150,000)Dividends paid 90,000 5,000 Retained earnings, 12/31/04 $ (1,020,000) $ (635,000)

Cash $ 110,000 $ 15,000 Receivables 380,000 220,000 Inventory 560,000 280,000 Investment in Andrews 470,000 - Land 460,000 340,000 Buildings and equipment (net) 920,000 380,000 Total assets $ 2,900,000 $ 1,235,000

Liabilities $ (780,000) $ (470,000)Preferred Stock (300,000) - Common stock (500,000) (100,000)Additional paid-in capital (300,000) (30,000)Retained earnings, 12/31/04 (1,020,000) (635,000)Total liabilities and equity $ (2,900,000) $ (1,235,000)

Student Name:Class:

Problem 03-26

a. How was $135,000 Equity in Income of Small balance computed?

Life ExcessPurchase price allocations (years) Amortizations Land Equipment Goodwill Total

b. Totals to be reported by business combination for year ending December 31, 2006

Account Name Balance ExplanationRevenues

Cost of goods sold

Depreciation expense

Equity in Income of Small

Net income

Retained earnings, 1/1/06

Dividends paid

Retained earnings, 12/31/06

Current assets

Investment in Small

Land

Buildings

Student Name:Class:

Problem 03-26

Equipment

Goodwill

Total assets

Liabilities

Common stock

Retained earnings

Total liabilities & equity

Student Name:Class:

Problem 03-26

Part c. Consolidated Worksheet

GIANT COMPANY AND SMALL COMPANYConsolidation Worksheet

For Year Ending December 31, 2006

Giant Small Consolidation Entries ConsolidatedAccounts Company Company Debit Credit Totals

Revenues $ (1,175,000) $ (360,000) $(1,535,000) Correct!Costs of goods sold 550,000 90,000 640,000 Correct!Depreciation expense 172,000 130,000 302,000 Try again!Equity income of Small (135,000) - (135,000) Try again!

Net income $ (588,000) $ (140,000) $ (728,000) Try again!

Retained earnings, 1/1/06 (1,417,000) (620,000) $(2,037,000) Try again!Net income (588,000) (140,000)Dividends paid 310,000 110,000 420,000 Try again!

Retained earnings, 12/31/06 $ (1,695,000) $ (650,000) $(1,617,000) Try again!

Current assets $ 398,000 $ 318,000 $ 716,000 Try again!Investment in Small 995,000 - 995,000 Try again!

Land 440,000 165,000 605,000 Try again!Buildings (net) 304,000 419,000 723,000 Correct!Equipment (net) 648,000 286,000 934,000 Try again!Goodwill - - - Try again!

Total assets $ 2,785,000 $ 1,188,000 $ 3,973,000 Try again!

Liabilities (840,000) (368,000) (1,208,000) Try again!Common stock (250,000) (170,000) (420,000) Try again!Retained earnings, 12/31/06 (1,695,000) (650,000) (1,617,000) Try again!

Total liabilities and equity $ (2,785,000) $ (1,188,000) $(3,245,000) Try again!

Parentheses indicate a credit balance.

Part d. If goodwill was impaired, how would the parent accounts reflect this? How would the worksheet process change? What impact does impairment loss have on consolidated financial statements?

GIANT COMPANYGeneral Journal

Account Debit CreditGoodwill impairment loss Investment in Small

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Given Data P03-26:

Small outstanding common stock purchased by Giant 100%Portion of purchase price applied to undervalued land $ 90,000 Portion of purchase price applied to equipment with 10-year life 50,000 Portion of unallocated purchase price allocated to goodwill 60,000 Amount Small owes Giant on December 31, 2006 10,000

Giant Small12/31/2006 12/31/2006

Revenues $ (1,175,000) $ (360,000)Cost of goods sold 550,000 90,000 Depreciation expense 172,000 130,000 Equity in income of Small (135,000) - Net income $ (588,000) $ (140,000)

Retained earnings, 1/1/06 (1,417,000) (620,000)Net income (588,000) (140,000)Dividends paid 310,000 110,000 Retained earnings, 12/31/06 $ (1,695,000) $ (650,000)

Current assets $ 398,000 $ 318,000 Investment in Small 995,000 - Land 440,000 165,000 Buildings 304,000 419,000 Equipment 648,000 286,000 Goodwill - - Total assets $ 2,785,000 $ 1,188,000

Liabilities $ (840,000) $ (368,000)Common stock (250,000) (170,000)Retained earnings, 12/31/06 (1,695,000) (650,000)Total liabilities and equity $ (2,785,000) $ (1,188,000)

Student Name:Class:

Problem 03-27

a. Mergaronite's consolidated totals after 5 years (December 31, 2004)Annual

Life ExcessPurchase price allocations (years) Amortizations Land Buildings Equipment Customer list Total

Account Name Balance ExplanationRevenues

Cost of goods sold

Depreciation expense

Amortization expense

Buildings (net)

Equipment (net)

Customer list

Common stock

Additional paid-in capital

Student Name:Class:

Problem 03-27

Part b. Why can consolidated totals be determined without knowing the consolidation method used?

Part c. If the equity method is used by the parent, what consolidation entries would be used?

MERGARONITE COMPANYGeneral Journal

Account Debit Credit

Consolidation Entry SCommon stock (Hill)Additional paid-in capital (Hill)Retained earnings, 1/1/04 Investment in Hill(To eliminate beginning stockholders' equity of subsidiary)

Consolidation Entry ALandEquipment (net)Customer list (net) Buildings (net) Investment in Hill(To record unamortized allocation balances as of beginning of current year)

Consolidation Entry IInvestment income Investment in Hill(To remove equity income recognized during year-equity method accrual [based on subsidiary's income] less amortization for the year)

Consolidation Entry DInvestment in Hill Dividends paid(To remove intercompany dividend payments)

Consolidation Entry EAmortization expenseDepreciation expenseBuildings Equipment Customer list(To recognize excess amortizations for period)

Given Data P03-27:

Mergaronite Hill12/31/2004 12/31/2004

Revenues $ 600,000 $ 250,000 Cost of goods sold 280,000 100,000 Depreciation expense 120,000 50,000 Investment income not given Retained earnings, 1/1/04 900,000 600,000 Dividends paid 130,000 40,000 Current assets 200,000 690,000 Land 300,000 90,000 Buildings (net) 500,000 140,000 Equipment (net) 200,000 250,000 Liabilities 400,000 310,000 Common stock 300,000 40,000 Additional paid-in capital 50,000 160,000

Mergaronite's $10 par common stock issued 7,000 for acquisition of Hill - number of sharesFair market value of Mergaronite stock - per share $ 100 Hill's land undervalued by 20,000 Hill's buildings overvalued by 30,000 Hill's equipment undervalued by 60,000 Remaining life of buildings - years 10 Remaining life of equipment - years 5 Appraised value of Hill's customer list $ 100,000 Remaining life of Hill's customer list - years 20

Student Name:Class:

Problem 03-30

a. Consolidation worksheet entries - cost method

Purchase price initialBook value of subsidiaryCost in excess of book valueExcess cost assigned to equipment-fair market valueExcess cost not assigned to specific accounts-goodwillExcess amortization expenses: Equipment Goodwill Total

BROOMEGeneral Journal

Account Debit Credit

Consolidation Entry *CInvestment in subsidiary Retained earnings(To record income of subsidiary for 2002 and 2003 in excess of dividends paid)

Consolidation Entry SCommon stock-CharlotteRetained earnings, 1/1/04 Investment in subsidiary(To eliminate beginning stockholders' equity of subsidiary)

Consolidation Entry AEquipmentGoodwillGoodwill Investment in subsidiary(To recognize allocations after 2 years amortization. Separate figures are for clarification only. Normally goodwill balances would be combined)

Consolidation Entry IDividend income Dividends paid(To remove intercompany dividend payments recorded by parent as income)

Consolidation Entry EDepreciation expense Equipment(To recognize excess amortizations for year)

Student Name:Class:

Problem 03-30

b. Consolidation worksheet entries - equity method

BROOMEGeneral Journal

Account Debit Credit

Consolidation Entry *CRetained earnings, 1/1/04 (parent) Investment in subsidiary(To record income of subsidiary for 2002 and 2003)

Consolidation Entry SCommon stock-CharlotteRetained earnings, 1/1/04 - Charlotte Investment in subsidiary(To eliminate beginning stockholders' equity of subsidiary)

Consolidation Entry AEquipmentGoodwillGoodwill Investment in subsidiary(To recognize allocations after 2 years amortization. Separate figures are for clarification only. Normally goodwill balances would be combined)

Consolidation Entry IIncome of subsidiary Investment of subsidiary(To remove intercompany equity accrual recorded by parent as income)

Consolidation Entry DInvestment in subsidiary Dividends paid(To eliminate impact of intercompany dividend payment recorded as reduction in investment in subsidiary account)

Consolidation Entry EDepreciation expense Equipment(To recognize excess amortizations for year)

Given Data P03-30:

Broom paid cash for all outstanding common stock $ 430,000 of Charlotte, Inc.Charlotte's book value at date of acquisition 340,000 Book value of Charlotte's common stock 20,000 Book value of Charlotte's retained earnings 140,000 Book value of Charlotte's equipment 40,000 Market value of Charlotte's equipment 70,000 Remaining life of Charlotte's equipment 5 Additional cash paid to previous owners of Charlotte $ 20,000

Charlotte's balances during subsequent years:

Net DividendsIncome Paid

2002 $65,000 $ 25,000 2003 75,000 35,000 2004 80,000 40,000

Student Name:Class:

Problem 03-32

a. Investment in Jasmine Company

Schedule 1 - Purchase Price Allocation and AmortizationPurchase priceBook value of JasmineCost in excess of book value

AnnualAllocation to specific accounts Life Excess based on fair market value: (years) Amortizations Equipment Buildings (overvalued) Goodwill Total

Investment in Jasmine Company - 12/31/04

Purchase price2002 Increase in book value of subsidiary2002 Excess amortizations2003 Increase in book value of subsidiary2003 Excess amortizations2004 Increase in book value of subsidiary2004 Excess amortizations Investment in Jasmine

Student Name:Class:

Problem 03-32

b. Equity in subsidiary earnings - 2004

Income accrual - 2004Excess amortizations Equity in subsidiary earnings

c. Consolidated net income - 2004

Consolidated revenuesConsolidated expensesExcess amortization expenses Consolidated net income

d. Consolidated equipment - 12/31/04

Book values added togetherAllocation of purchase priceExcess depreciation 2002 - 2004 Consolidated equipment

e. Consolidated buildings - 12/31/04

Book values added togetherAllocation of purchase priceExcess depreciation 2002 - 2004 Consolidated buildings

f. Consolidated goodwill - 12/31/04

Allocation of purchase priceAmortization 2002 - 2004 Consolidated goodwill

g. Consolidated common stock - 12/31/04

h. Consolidated retained earnings - 12/31/04

Given Data P03-32:

Tyler paid cash for all outstanding stock $ 206,000 of JasmineJasmine's book value at date of acquisition 140,000 Jasmine's equipment was undervalued 54,400 Remaining life of Jasmine's equipment 8 Jasmine's building was overvalued $ 10,000 Remaining life of Jasmine's building 20

Jasmine's balances during subsequent years:

Net DividendsIncome Paid

2002 $ 50,000 $ 10,000 2003 60,000 40,000 2004 30,000 20,000

Financial records as of December 31, 2004:

Tyler JasmineRevenues-operating $310,000 $ 104,000 Expenses 198,000 74,000 Equipment (net) 320,000 50,000 Buildings (net) 220,000 68,000 Common stock 290,000 50,000 Retained earnings, 12/31/04 410,000 160,000

Student Name:Class:

Problem 03-34

a. Picante 12/31/04 Investment in Salsa account balance

CostIncome 2002In-process R&D write-offAmortization 2002Income 2003Dividends paidAmortization 2003Investment balance 12/31/04

Part b. Consolidated Worksheet

PICANTE CORPORATION AND SALSA CORPORATIONConsolidation Worksheet

For Year Ending December 31, 2004

Picante Salsa Adjustments ConsolidatedAccounts Corporation Corporation Debit Credit Totals

Sales $ (3,500,000) $ (1,000,000) $ (4,500,000) Correct!Cost of goods sold 1,600,000 630,000 2,230,000 Correct!Deprecation expense 540,000 160,000 700,000 Try again!Subsidiary income (203,000) (203,000) Try again!Net income $ (1,563,000) $ (210,000) (1,773,000) Try again!

Retained earnings, 1/1/04 $ (3,000,000) $ (800,000) $ (3,800,000) Try again!Net income (1,563,000) (210,000)Dividends paid 200,000 25,000 225,000 Try again!Retained earnings, 12/31/04 $ (4,363,000) $ (985,000)

Cash $ 228,000 $ 50,000 $ 278,000 Correct!Accounts receivable 840,000 155,000 995,000 Correct!Inventory 900,000 580,000 1,480,000 Correct!Investment in Salsa 2,042,000 2,042,000 Try again!

Land 3,500,000 700,000 4,200,000 Correct!Equipment (net) 5,000,000 1,700,000 6,700,000 Try again!Goodwill 290,000 290,000 Try again! Total assets $ 12,800,000 $ 3,185,000 $ 15,985,000 Try again!

Accounts payable $ (193,000) $ (400,000) (593,000) Correct!Long-term debt (3,094,000) (800,000) (3,894,000) Correct!Common stock - Picante (5,150,000) (5,150,000) Correct!Common stock - Salsa (1,000,000) (1,000,000) Try again!Retained earnings, 12/31/04 (4,363,000) (985,000) Total liabilities and equity $ (12,800,000) $ (3,185,000) $ (10,637,000) Try again!

Parentheses indicate a credit balance.

Student Name:Class:

Problem 03-34

Part c. Cost method - *C entry to convert Picante's 1/1/04 retained earnings

PICANTE CORPORATIONGeneral Journal

Account Debit Credit

Consolidation Entry *CInvestment in Salsa Retained earnings - Picante

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Given Data P03-34:

Picante paid cash for all outstanding voting stock $ 1,765,000 of Salsa

Salsa's balance sheet at 1/1/03:

Cash $ 14,000 Accounts Receivable 100,000 Land 700,000 Equipment 1,886,000

$ 2,700,000

Accounts Payable $ 120,000 Long-term Debt 930,000 Common Stock 1,000,000 Retained Earnings 650,000

$ 2,700,000

Cost allocation at purchase date:

Purchase price $ 1,765,000 Book value acquired 1,650,000 Excess cost 115,000 to in-process research and development $ 44,000 to equipment (8 year remaining life) 56,000 100,000 to goodwill (indefinite life) $ 15,000

Financial records as of December 31, 2004:

December 31, 2004 Picante SalsaSales $ (3,500,000) $ (1,000,000)Cost of goods sold 1,600,000 630,000 Deprecation expense 540,000 160,000 Subsidiary income (203,000)Net income $ (1,563,000) $ (210,000)

Retained earnings, 1/1/04 $ (3,000,000) $ (800,000)Net income (1,563,000) (210,000)Dividends paid 200,000 25,000 Retained earnings, 12/31/04 $ (4,363,000) $ (985,000)

Cash $ 228,000 $ 50,000 Accounts receivable 840,000 155,000 Inventory 900,000 580,000 Investment in Salsa 2,042,000 Land 3,500,000 700,000 Equipment (net) 5,000,000 1,700,000 Goodwill 290,000 Total assets $ 12,800,000 $ 3,185,000

Accounts payable $ (193,000) $ (400,000)Long-term debt (3,094,000) (800,000)Common stock (5,150,000) (1,000,000)Retained earnings, 12/31/04 (4,363,000) (985,000)Total liabilities and equities $ (12,800,000) $ (3,185,000)