Ch4-Handout-Solution

In-Class-Practice Question
Par Corporation acquired a 70 percent interest in Sol Corporation’s outstanding voting
common stock on January 1, 2011, for $490,000 cash. The stockholders’ equity of Sol on this date
consisted of $500,000 capital stock and $100,000 retained earnings. The difference between the
fair value of Sol and the underlying equity acquired in Sol was assigned $5,000 to Sol’s
undervalued inventory, $14,000 to undervalued building, $21,000 to undervalued equipment, and
$60,000 to goodwill.
The undervalued inventory items were sold during 2011, and the undervalued buildings and
equipment had remaining useful lives of seven years and three years, respectively. Depreciation is
straight line.
At December 31, 2011, Sol’s accounts payable include $10,000 owed to Par. This $10,000
accounts payable is due on January 15, 2012. Par sold equipment with a book value of $15,000
for $25,000 on June 1, 2011. This is not an intercompany sale transaction. Separate financial
statements for Par and Sol for 2011 are summarized as follows (in next page).
Required: Prepare consolidation workpapers for Par Corporation and Sol for the year ended
December 31, 2011. Use an unamortized excess account and write all elimination entries.

Preliminary computations
Allocation of excess fair value over book value
Cost of 70% interest January 1 $490,000
Implied fair value of Sol ($490,000 / 70%) $700,000
Book value of Sol (600,000)
Excess fair value over book value $100,000

Excess allocated
Undervalued inventory items sold in 2011 $ 5,000
Undervalued buildings (7 year life) 14,000
Undervalued equipment (3 year life) 21,000
Remainder to goodwill 60,000
Excess fair value over book value $100,000

Calculation of income from Sol

Sol’s reported net income $100,000
Less: Undervalued inventories sold in 2011 (5,000)
Less: Depreciation on building ($14,000/7 years) (2,000)
Less: Depreciation on equipment ($21,000/3 years) (7,000)
Adjusted income from Sol $ 86,000
Par’s 70% controlling share $ 60,200
30% Noncontrolling interest share $ 25,800

Workpaper entries for 2011

a Income from Sol 60,200
Dividends (Sol) 35,000
Investment in Sol 25,200

b Capital stock (Sol) 500,000

Retained earnings (Sol) - January 1 100,000
Unamortized excess 100,000
Investment in Sol 490,000
Noncontrolling interest - January 1 210,000

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Ch4-Handout-Solution

c Cost of sales (for inventory items) 5,000

Buildings — net 14,000
Equipment — net 21,000
Goodwill 60,000
Unamortized excess 100,000

d Depreciation expense 2,000

Buildings — net 2,000

e Depreciation expense 7,000

Equipment — net 7,000

f Noncontrolling Interest Share 25,800

Dividends — Sol 15,000
Noncontrolling Interest 10,800

g Accounts payable 10,000

Accounts receivable 10,000

h Dividends payable 14,000

Dividends receivable 14,000

Our normal 7 steps for consolidation would put entry f after a, this solution shows that if you
make changes to some step sequence, the consolidation results are the same as long as you do
not miss them. For entry c, we can choose the following alternative:

c Inventory 5,000
Buildings — net 14,000
Equipment — net 21,000
Goodwill 60,000
Unamortized excess 100,000

C1. COGS 5,000

Inventory 5000

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Ch4-Handout-Solution

Par Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2011
(in thousands)
Adjustments and Consolidated
Par Sol 70% Eliminations Statements
Income Statement
Sales $ 800 $ 700 $1,500
Income from Sol 60.2 a 60.2
Gain on equipment 10 10

Cost of sales 300* 400* c 5 705*

Depreciation expense 155* 60* d 2 224*
e 7
Other expenses 160* 140* 300*
Consolidated NI $ 281
Noncontrolling share ________ _____ f 25.8 25.8*
Controlling share of NI $ 255.2 $ 100 $ 255.2
Retained Earnings
Retained earnings — Par $ 300 $ 300
Retained earnings — Sol $ 100 b 100
Controlling share of NI 255.2 100 255.2
Dividends 200* 50* a 35
f 15 200*
Retained earnings – Dec 31 $ 355.2 $ 150 $ 355.2
Balance Sheet
Cash $ 96 $ 60 $ 156
Accounts receivable 100 70 g 10 160
Dividends receivable 14 h 14
Inventories 150 100 250
Other current assets 70 30 100
Land 50 100 150
Buildings — net 140 160 c 14 d 2 312
Equipment — net 570 330 c 21 e 7 914
Investment in Sun 515.2 a 25.2
b 490
Goodwill c 60 60
Unamortized excess ________ _____ b 100 c 100 ______
$1,705.2 $ 850 $2,102
Accounts payable $ 200 $ 85 g 10 $ 275
Dividends payable 100 20 h 14 106
Other liabilities 50 95 145
Capital stock, $10 par 1,000 500 b 500 1,000
Retained earnings 355.2 150 355.2
$1,705.2 $ 850
Noncontrolling interest January 1 b 210
Noncontrolling interest December 31 _________ f 10.8 220.8
919 919 $2,102
*Deduct