Student Name:

Class:
Problem 06-42

FRED, INC. AND Herman CORPORATION

- Allocation of acquisition price 1/1/09

Consideration transferred $ 312,000

Noncontrolling interest fair value 208,000
Acquisition date fair value $ 520,000 Correct!
Book value acquired 300,000
Fair value in excess of book value $ 220,000
Annual
Excess cost allocated to accounts Life Excess
based on fair value: (years) Amortizations
Patents 90,000 12 $ 7,500
Customer list $ 130,000 10 13,000
Total Correct! $ 20,500
Correct!

a. Consolidation entries

*TL Investment in Herman 7,000

Correct! Land 7,000
(To eliminate unrealized gain created by previous intercompany transfer)

*G Retained earnings, 1/1/11 8,000

Correct! Cost of goods sold 8,000
(To remove unrealized inventory gain from prior year so it can be
realized in current year)

S Common stock (Herman) 100,000

Correct! Retained earnings, 1/1/11 (Herman) 292,000
Investment in Herman 235,200
Noncontrolling interest in Herman 156,800
(To eliminate Herman's stockholders' equity accounts and record beginning
year balance for noncontrolling interest)

A Patents 75,000
Correct! Customer list 104,000
Investment in Herman 107,400
Noncontrolling interest 71,600
(To recognize unamortized balances as of 1/1/11 of amounts allocated
within original acquisition price)

I Equity income of Herman 3,000

Correct! Investment in Herman 3,000
(To eliminate intercompany equity income accrual

D Investment in Herman 2,400

Correct! Dividends paid 2,400
(To eliminate intercompany dividend payments)

E Amortization expense 20,500

Correct! Patents 7,500
Customer list 13,000
 Student Name:
Class:
Problem 06-42

(To record current year amortization expense)

 Student Name:
Class:
Problem 06-42

P Accounts payable 60,000

Correct! Accounts receivable 60,000
(To remove intercompany debt created by inventory transfers)

B Bonds payable 20,000

Correct! Premium on bonds payable 1,069
Interest income 1,873
Investment in parent bonds 19,005
Interest expense 1,283
Extraordinary gain on retirement of bond 2,654
(To eliminate intercompany balances created by acquisition of
bond and to recognize the gain created by the repurchase)

TI Sales 120,000
Correct! Cost of goods sold (or purchases) 120,000
(To eliminate intercompany transfers made during year)

G Cost of goods sold 7,500

Correct! Inventory 7,500
(To defer recognition of inventory transfer gains until subsequent year)

b. Calculations

Herman's reported income for 2011 $ 25,000

Excess fair value amortization (20,500)
2010 unrealized gain recognized in 2011 8,000
2011 unrealized gain (7,500)
Herman's realized income for 2011 $ 5,000
Noncontrolling interest ownership 40%
Noncontrolling interest's share of subsidiary's income $ 2,000

Noncontrolling interest, 1/1/11 $ 156,800

Noncontrolling interest's share of Herman's income 2,000
Noncontrolling interest's share of Herman's dividends (1,600)
Noncontrolling interest, 12/31/11 $ 157,200

c. Consolidation worksheet adjustments - intercompany bonds

Original gain on retirement $ 2,654

Interest income recorded on investment 2011 $ 1,873
Interest expense recorded on liability in 2011 1,283 590
Required increase as of January 1, 2012 $ 2,064

B Bonds payable 20,000

Correct! Premium on bonds payable 733
Interest income 1,901
Investment in Herman 2,064
Investment in parent bonds 19,306
Interest expense 1,264
(To remove accounts pertaining to intercompany bonds. "Investment in Herman" is
adjusted here rather than retained earnings because equity method is used)
Given P06-45:

Herman Corporation common stock purchased by Fred, Inc. 60%

Cash paid for stock purchase $ 312,000
Book value of Herman's assets and liabilities $ 300,000
Life Amortization
Fair value of noncontrolling interest $ 208,000 Expense
Herman patents (12-year remaining life) were undervalued by $ 90,000 12 $ 7,500
Customer list acquisition date fair value $ 130,000 10 $ 13,000
Life of customer list in years 10

Intercompany transfers:

Original Transfer Ending

Cost to Price Balance at
Gross %Gross
Year Herman to Fred Transfer Price Profit Profit
2009 $ 80,000 $ 100,000 $ 20,000 $ 20,000 20%
2010 100,000 125,000 40,000 $ 25,000 20%
2011 90,000 120,000 30,000 $ 30,000 25%
TI
2011 inventory transfers not paid for by Fred at year end 50% P (Payable)
Book value of land sold by Fred to Herman $ 15,000 Land BV Land FV
Sale price of land sold by Fred to Herman 22,000 $ 15,000 $ 22,000
Face value of Fred's bonds purchased by Herman 20,000
Book Value
Cash interest rate of bonds purchased by Herman 8%
Fred's book value of bond liability at repurchase date $ 21,386 Liability $ 21,386
Effective yield of bonds 6%
Herman's bond acquisition price based on effective rate of 10% $ 18,732 $ 21,069.16
Herman's reported accounts for 2011:
Net income $ 25,000 Investment $ 18,732
Beginning retained earnings 300,000
Dividends paid 4,000 $ 19,005.20
Common stock 100,000
Amortization Remains
2009-2010
$ 15,000 $ 75,000.00 A
$ 26,000 $ 104,000.00 A

Unrealized
Gain
$ 4,000
$ 8,000 *G
$ 7,500 G

Gain
$ 7,000

Effective Cash Interest Excess Year-End Round

Interest Amortization Book Value
$ 1,283.16 $ 1,600.00 $ 316.84 $ 21,069.16 $21,069.00
$ 1,283.00
$ 1,264.15 $ 1,600.00 $ 335.85 $ 20,733.31 $20,733.00
$ 1,264.00
$ 1,873.20 $ 1,600.00 $ (273.20) $ 19,005.20 $19,005.00
$ 1,873.00
$ 1,900.52 $ 1,600.00 $ (300.52) $ 19,305.72 $19,306.00
$ 1,901.00