SMCH 11 Beams

Chapter 11
CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND

CORPORATE JOINT VENTURES
Answers to Questions
1
Parent company theory views consolidated financial statements from the viewpoint of the parent and
entity theory views consolidated financial statements from the viewpoint of the business entity under
which all resources are controlled by a single management team. By contrast, traditional theory sometimes
reflects the parent viewpoint and at other times it reflects the viewpoint of the business entity. A detailed
comparison of these theories is presented in Exhibit 111 of the text.
Only contemporary theory is changed by current pronouncements of the Financial Accounting Standards
Board. While such pronouncements can and do change the current accounting and reporting practices,
they do not change the logic or the consistency of either parent company or entity theory.
The valuation of subsidiary assets on the basis of the price paid for the controlling interest seems justified
conceptually when substantially all of the subsidiary stock is acquired by the parent. But the conceptual
support for this approach is less when only a slim majority of subsidiary stock is acquired. In addition, the
valuation of the noncontrolling interest based on the price paid by the parent has practical limitations
because noncontrolling interest does not represent equity ownership in the usual sense. The ability of
noncontrolling stockholders to participate in management is limited and noncontrolling shares do not
possess the usual marketability of equity securities.
Consolidated assets are equal to their fair values under entity theory only when the book values of parent
assets are equal to their fair values. Otherwise, consolidated assets are not equal to their fair values under
either parent company or entity theories.
The valuation of the noncontrolling interest at book value might overstate the equity of noncontrolling
shareholders because of the limited marketability of shares held by noncontrolling stockholders and
because of the limited ability of noncontrolling stockholders to share in management through their voting
rights. Valuation of the noncontrolling interest at book value also overstates or understates the
noncontrolling interest unless the subsidiary assets are recorded at fair values.
Consolidated net income under parent company theory and income to the controlling stockholders under
entity theory should be the same. This is illustrated in Exhibit 115, which shows different income
statement amounts for cost of sales, operating expenses, and income allocated to noncontrolling
stockholders, but the same income to controlling stockholders. Note that consolidated net income under
parent company and traditional theories reflects income to controlling stockholders.
Income to the parent stockholders under the equity method of accounting is the same as income to the
controlling stockholders under entity theory. But income to controlling stockholders is not identified as
consolidated net income as it would be under parent company or traditional theories.
Consolidated income statement amounts under entity theory are the same as under traditional theory when
subsidiary investments are made at book value because traditional theory follows entity theory in
eliminating the effects of intercompany transactions from consolidated financial statements.
2011 Pearson Education, Inc. publishing as Prentice Hall

11-1
11-2
Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures
Traditional theory corresponds to entity theory in matters relating to unrealized and constructive gains
and losses from intercompany transactions. In other words, unrealized and constructive gains and losses
are allocated between controlling and noncontrolling interests in the same manner under these two
theories.
10
Push-down accounting simplifies the consolidation process. The push-down adjustments are recorded in
the subsidiarys separate books at the time of the business combination; thus, it is not necessary to allocate
the unamortized fair values in the consolidation working papers.
11
A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investorventurers to operate a business for the mutual benefit of the venturers. Some joint ventures are organized
as corporations, while others are organized as partnerships or undivided interests. Each venturer typically
participates in important decisions of a joint venture irrespective of ownership percentage.
12
Investors in corporate joint ventures use the equity method of accounting and reporting for their
investment earnings and investment balances as required by GAAP. The cost method would be used only
if the investor could not exercise significant influence over the corporate joint venture. Alternatively,
investors in unincorporated joint ventures use the equity method of accounting and reporting or
proportional consolidation for undivided interests specified as a special industry practice.
SOLUTIONS TO EXERCISES
Solution E11-1
1
2
3
4
A
A
C
A
5
6
7
B
C
D
4
5
D
C
Solution E11-2
1
2
3
B
B
D
Solution E11-3
1
c
Total value of Sit implied by purchase price
($1,440,000/.8)
Noncontrolling interest percentage
Noncontrolling interest
$1,800,000
20%
$360,000
a
Only the parents percentage of unrealized profits from upstream sales
is eliminated under parent company theory.
b
Subsidiarys income of $400,000 10% noncontrolling
interest
Less: Patent amortization ($140,000/10 years 10%)
Noncontrolling interest share
$ 40,000
(1,400)
$ 38,600
Chapter 11
11-3
Solution E11-3 (continued)

4
a
Implied fair value $1,680,000 = patents at acquisition
Book value of 100% of identifiable net assets
Add: Patents at acquisition ($108,000/90%)
Total implied value
Percent acquired
Purchase price under entity theory
$1,680,000
120,000
1,800,000
80%
$1,440,000
b
Purchase price ($1,680,000 80%) = patents at acquisition
$1,344,000
Book value $1,680,000 80% = underlying equity
Add: Patents at acquisition ($108,000/90%)
120,000
Purchase price (traditional theory)
$1,464,000
Solution E11-4
1
Goodwill
Parent company theory
Cost of investment in Sad
Fair value acquired ($400,000 80%)
Goodwill
Entity theory
Implied value based on purchase price ($500,000/.8)
Fair value of Sads net assets
Goodwill
Book value of Sads net assets
Entity theory
Total valuation of Sad
Total assets
Pod
Current assets
$520,000
Plant assets net 480,000
Goodwill
$1,000,000
Entity theory
Current assets
$ 520,000
Plant assets net 480,000
Goodwill
$1,000,000
Sad
$ 50,000
250,000
$300,000
$
$
$
$
$
$
$
Adjustment
$ 40,000 80%
110,000 80%
$300,000
$ 50,000
250,000
$ 40,000 100%
110,000 100%
500,000
320,000
180,000
625,000
400,000
225,000
260,000
20%
52,000
625,000
20%
125,000
Total
602,000
818,000
180,000
$1,600,000
$
610,000
840,000
225,000
$1,675,000
11-4
Solution E11-5
Preliminary computations
Cost of 80% interest
Fair value acquired ($350,000 80%)
Goodwill
$300,000
280,000
$ 20,000
Entity theory
Implied total value ($300,000 cost 80%)
Fair value of Sals net identifiable assets
Goodwill
$375,000
350,000
$ 25,000
Consolidated net income and noncontrolling interest share for 2011:

Entity
Theory
Combined separate incomes
Depreciation on excess allocated to
equipment:
$550,000
$75,000 excess 5 years

Total consolidated income
Less: Noncontrolling interest share
(15,000)
535,000
($50,000 -15,000) 20%

Controlling interest share of NI(Income
Attributable to controlling stockholders)
Depreciation on excess allocated to

equipment:
($75,000 excess x 80% acquired)/5 years
($50,000 x 20%)
Consolidated net income
Goodwill at December 31, 2011:
(7,000)
$528,000
Parent
Company Theory
$550,000
(12,000)
(10,000)
$528,000
$ 20,000
$ 25,000
Chapter 11
11-5
Solution E11-6
Preliminary computation
Interest acquired in Sal: 72,000 shares 80,000 shares = 90%
1
Sals net assets under entity theory

Implied value from purchase price: $1,800,000/90% interest
Goodwill
a
Entity theory
Implied value
Less: Fair value and book value of net assets
Goodwill
$2,000,000
1,710,000
$ 290,000

Cost of 90% interest
$1,800,000
Fair values of net assets acquired ($1,710,000 90%) 1,539,000
Goodwill
$ 261,000
Traditional theory (same as parent theory)
261,000
36,000
Investment income from Sal

Income from Sal ($80,000 1/2 year 90% interest)
$2,000,000
Noncontrolling interest under entity theory

Implied value of Sal at July 1, 2011
Add: Income for 1/2 year
Noncontrolling percentage
$2,000,000
40,000
2,040,000
10%
$ 204,000
Alternatively, $200,000 noncontrolling interest at July 1, plus $4,000

share of reported income = $204,000
11-6
Solution E11-7
1

Combined separate incomes of Pal and Sal
Less: Pals share of unrealized profits from upstream
inventory sales ($30,000 80%)
Less: Noncontrolling interest share ($300,000 20%)
$800,000
(24,000)
(60,000)
$716,000
Entity theory
Less: Unrealized profits from upstream sales
$800,000
(30,000)
$770,000
Income allocated to controlling stockholders ($500,000 +

[$270,000 80%])
$716,000
Income allocated to noncontrolling stockholders

($300,000 - $30,000) 20%
$ 54,000
Solution E11-8

Less: Unrealized inventory profits
from downstream sales
($60,000 - $30,000) 50%
Less: Unrealized profit on upstream
sale of land
($96,000 - $70,000) 100%
($96,000 - $70,000) 80%
($60,000 - $26,000) 20%
$60,000 20%
Traditional
Theory
$180,000

Allocated to controlling stockholders
Allocated to noncontrolling
Stockholders
($60,000 - $26,000) 20%
(15,000)
Parent
Company
Theory
$180,000
(15,000)
(26,000)
Entity
Theory
$180,000
(15,000)
(26,000)
(20,800)
(6,800)
$132,200
(12,000)
$132,200
$139,000
$132,200
$
6,800
Chapter 11
11-7
Solution E11-9
[Push-down accounting]
Push down under parent company theory

Retained earnings
800,000
Inventories
90,000
Land
450,000
270,000
Buildings net
Goodwill
360,000
Equipment
180,000
Other liabilities
90,000
Push down equity
1,700,000
To record revaluation of 90% of the net assets and elimination of
retained earnings as a result of a business combination with Pin
Corporation. Push down equity = ($600,000 fair value/book value
differential 90%) + $360,000 goodwill + $800,000 retained
earnings.
Push down under entity theory

Retained earnings
Inventories
Land
Buildings net
Goodwill
Equipment net
Other liabilities
Push down equity
To record revaluation of 100% of
of retained earnings as a result
Pin. Push down equity = $600,000
differential + $400,000 goodwill
800,000
100,000
500,000
300,000
400,000
200,000
100,000
1,800,000
the net assets and elimination
of a business combination with
fair value/book value
+ $800,000 retained earnings.
Solution E11-10
Each of the investments should
one-line consolidation because
of each venturer for important
exercise significant influence
of ownership interest.
be accounted for by the equity method as a

the joint venture agreement requires consent
decisions. Thus, each venturer is able to
over its joint venture investment irrespective
The 40 percent venturer:

Income from Sun ($500,000 40%)
Investment in Sun ($8,500,000 40%)
$ 200,000
$3,400,000
The 15 percent venturer

Income from Sun ($500,000 15%)
Investment in Sun ($8,500,000 15%)
$
75,000
$1,275,000
1Solution E11-11
In general, VIE accounting follows normal consolidation principles.
Under that approach, the noncontrolling interest share would be 90% of VIE
earnings, or $900,000. However, the intercompany fees must be allocated to
11-8
the primary beneficiary, not to noncontrolling interests. Therefore, in this

case, noncontrolling interest share would be 90% of $920,000, or $828,000.
Chapter 11
11-9
1Solution E11-12
As primary beneficiary, Pal must include Pot in its consolidated
financial staements. Additionally, Pal must make the following disclosures:
(a) the nature, purpose, size, and activities of the variable interest
entity, (b) the carrying amount and classification of consolidated assets
that are collateral for the variable interest entitys obligations, and (c)
lack of recourse if creditors (or beneficial interest holders) of a
consolidated variable interest entity have no recourse to the general credit
of the primary beneficiary.
Den will not consolidate Pot, since they are not the primary beneficiary. As
in traditional consolidations, only one firm consolidates a subsidiary.
However, since Den has a significant interest in Pot, they must disclose: (a)
the nature of its involvement with the variable interest entity and when that
involvement began, (b) the nature, purpose, size, and activities of the
variable interest entity, and (c) the enterprises maximum exposure to loss
as a result of its involvement with the variable interest entity. Den
accounts for the investment using the equity method.
1Solution E11-13
According to GAAP, if an enterprise absorbs a majority of a variable
interest entitys expected losses and another receives a majority of expected
residual returns, the enterprise absorbing the losses is the primary
beneficiary and if condition one is also met. Laura meets condition one,
since as CEO, she had the power over economic decisions. Laura must
consolidate the variable interest entity. The contractual arrangement makes
Laura the primary beneficiary.
11-10
SOLUTION TO PROBLEMS
Solution P11-1
Pin Corporation and Subsidiary
Comparative Consolidated Balance Sheets
at December 31, 2012
(in thousands)
Parent
Company Theory
Assets
Cash
Receivables net
Inventories
Plant assets neta
Patentsb
Total assets
Liabilities
Accounts payable
Other liabilities
Noncontrolling interestc
Total liabilities
Capital stock
Retained earnings
Noncontrolling interestd
Total stockholders equity
Total liabilities and
stockholders equity
a
b
c
d
Entity Theory
52
300
450
1,998
64
$2,864
52
300
450
2,010
80
$2,892
304
500
160
964
1,000
900
0
1,900
$2,864
304
500
804
1,000
900
188
2,088
$2,892
Parent company theory: Combined plant assets of $1,950 + ($80 3/5 undepreciated
excess)
Entity theory: Combined plant assets of $1,950 + ($100 3/5 undepreciated
excess)
Parent company theory: $80 patents - $16 amortization
Entity theory: $100 patents - $20 amortization
Parent company theory: Noncontrolling interest equals Sons equity of $800 20%
Entity theory: [Sons equity of $800 + ($60 undepreciated plant assets + $80
unamortized patents)] 20%
Chapter 11
11-11
Solution P11-2
Preliminary computation
Implied value of Sip based on purchase price ($320,000/.8)
Book value
Excess to undervalued equipment
1
$400,000
340,000
$ 60,000
Par Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2011
Sales
Less: Cost of sales
Gross profit
Other expenses
Depreciationa
$1,200,000
760,000
440,000
$ 160,000
159,000
Total consolidated net income

Allocation of income to:
Noncontrolling interestb
Controlling interest
a
b
319,000
$
121,000
$
$
8,200
112,800
$150,000 depreciation - $1,000 piecemeal recognition of gain on equipment

through depreciation + ($60,000 excess 6 years) excess depreciation
($60,000 reported income - $10,000 unrealized gain on equipment + $1,000
piecemeal recognition of gain on equipment - $10,000 excess depreciation)
20% interest
Par Corporation and Subsidiary

Consolidated Balance Sheet
Assets
Current assets
Plant and equipment net
($1,190,000 - $399,000 + 50,000)
Total assets
Liabilities and equity
Liabilities
Capital stock
Retained earningsa
Noncontrolling interestb
Total liabilities and stockholders equity
a
b
483,200
841,000
$1,324,200
$
300,000
600,000
340,000
84,200
$1,324,200
Sip beginning retained earnings $327,200 + Sip net income $112,800 - Sip
dividends of $100,000
($380,000 stockholders equity + $50,000 excess - $9,000 unrealized gain
on equipment) 20%
Check: $80,000 beginning noncontrolling interest + $8,200

noncontrolling interest share - $4,000 noncontrolling interest
dividends = $84,200
11-12
Solution P11-3
1a
Income from Sin for 2011 ($90,000 70%)
$ 63,000
1b
Goodwill at December 31, 2011

($595,000 cost - $525,000 fair value)
$ 70,000
1c
Consolidated net income for 2011

Pals separate income
Add: Income from Sin
1d
$300,000
63,000
Noncontrolling interest share for 2011

Net income of Sin of $90,000 30%
1e
$363,000
$ 27,000
Noncontrolling interest December 31, 2011

Sins stockholders equity $790,000 30%
$237,000
Entity theory
2a
Income from Sin for 2011 ($90,000 70%)
2b
Goodwill at December 31, 2011

Imputed value ($595,000/70%)
Fair value of Sins net assets
Goodwill
2c
$ 63,000
$850,000
750,000
$100,000
Total consolidated income for 2011

Income to controlling stockholders ($300,000 + $63,000)
Add: Noncontrolling interest share ($90,000 30%)
$363,000
27,000
$390,000
2d
Noncontrolling interest share (computed in 2c above)
$ 27,000
2e
Noncontrolling interest at December 31, 2011

(Book equity $790,000 + $100,000 goodwill) 30%
$267,000
Chapter 11
11-13
Solution P11-4
Preliminary computations
Investment in Sam
Fair value of 80% interest acquired ($240,000 80%)
Goodwill
$224,000
192,000
$ 32,000
Entity Theory
Implied value of Sam ($224,000/.8)
Fair value of identifiable net assets
Goodwill
$280,000
240,000
$ 40,000
Pit used an incomplete equity method in accounting for its investment in Sam.
It ignored the intercompany upstream sales of inventory. Income from Sam on
an equity basis would be:
$ 40,000
Share of Sams income ($50,000 .8)
Less: Unrealized profits in ending inventory from
(3,200)
upstream sale ($8,000 50% 80%)
Income from Sam
$ 36,800
Pit Corporation and Subsidiary
Comparative Consolidated Income Statements
Sales
Less: Cost of sales
Gross profit
Traditional
Theory
$1,000,000
(575,000)
425,000
Parent
Company
Theory
$1,000,000
(575,000)
425,000
Entity
Theory
$1,000,000
(575,000)
425,000
(200,000)
(200,000)
(200,000)
Expenses
Less: Unrealized profit on
upstream sale of inventory
($23,000 - $15,000) 50% 100%
($23,000 - $15,000) 50% 80%
($50,000 - $4,000) 20%
$50,000 20%
Allocated to controlling
Stockholders
Allocated to noncontrolling
Stockholders
($50,000 - $4,000) 20%
(4,000)
(4,000)
(3,200)
(9,200)
$
211,800
(10,000)
211,800
$
221,000
211,800
9,200
11-14
Solution P11-4 (continued)

Comparative Statements of Retained Earnings
Retained earnings December 31, 2011

Add: Consolidated net income
Add: Net income to controlling
stockholders
Less: Dividends to controlling
stockholders
Retained earnings December 31, 2012
Parent
Company
Theory
$360,000
211,800
Traditional
Theory
$360,000
211,800
Entity
Theory
$ 360,000
211,800
571,800
(120,000)
$
451,800
571,800
(120,000)
$
451,800
571,800
(120,000)
$
451,800

Comparative Consolidated Balance Sheets
Parent
Company
Theory
Traditional
Theory
Assets
Cash
Accounts receivable
Inventory
Land
Buildings net
Goodwill
Total assets
Liabilities
Accounts payable
Total liabilities
Stockholders equity
Capital stock
Retained earnings
Total equities
Entity
Theory
110,800
120,000
196,000
280,000
840,000
32,000
$1,578,800
110,800
120,000
196,800
280,000
840,000
32,000
$1,579,600
275,800
52,000
327,800
800,000
451,800
800,000
451,800
59,200
1,311,000
$1,586,800
275,800
275,800
800,000
451,800
51,200
1,303,000
$1,578,800
1,251,800
$1,579,600
110,800
120,000
196,000
280,000
840,000
40,000
$1,586,800
275,800
275,800
Chapter 11
11-15
Solution P11-5
Pad Corporation and Subsidiary
Comparative Balance Sheets
Traditional
Theory
Entity
Theory
Assets
Cash
Receivables net
Inventories
Plant assets net
Goodwill
Total assets
$ 70,000
110,000
120,000
300,000
40,000
$640,000
$ 70,000
110,000
120,000
300,000
50,000
$650,000
Liabilities
Accounts payable
Other liabilities
Total liabilities
$ 95,000
25,000
120,000
$ 95,000
25,000
120,000
300,000
194,000
300,000
194,000
Stockholders equity
Capital stock
Retained earnings
($150,000 - $20,000) 20%
($150,000 + $50,000 - $20,000) 20%
Total equities
Supporting computations
Cost or imputed value
Book value of 80%
Book value of 100%
Goodwill
Investment cost
Add: 80% of retained earnings increase
($50,000 - $10,000) 80%
Less: 80% of $20,000 unrealized profits
Investment balance
26,000
520,000
$640,000
Traditional
Theory
$128,000
88,000
$ 40,000
36,000
530,000
$650,000
Entity
Theory
$160,000
110,000
$ 50,000
$128,000
32,000
(16,000)
$144,000
11-16
Solution P11-6 [AICPA adapted]

1
P carries its investment in S on a cost basis. This is evidenced by the

appearance of dividend revenue in P Companys income statement and by
the absence of income from subsidiary.
P holds 1,400 shares of S. P Companys percentage ownership is 70%, as

determined by the relationship of P Companys dividend revenues and S
Companys dividends paid ($11,200/$16,000). S has 2,000 outstanding
shares ($200,000/$100) and P holds 70% of these, or 1,400 shares.
S Companys retained earnings at acquisition were $100,000.

Imputed value of S ($245,000 cost/70%)
Less: Patents (applicable to 100%)
Book value and fair value of Ss identifiable net assets
Less: Capital stock
Retained earnings
350,000
(50,000)
300,000
(200,000)
$ 100,000
The nonrecurring loss is a constructive loss on the purchase of P bonds

by S Company.
Working paper entry:
Mortgage bonds payable (5%)
100,000
Loss on retirement of P bonds
3,000
P bonds owned
103,000
To eliminate intercompany bond investment and bonds payable and
to recognize a loss on the constructive retirement of P bonds.
Intercompany sales P to S are $240,000 computed as follows:

Combined sales ($600,000 + $400,000)
Less: Consolidated sales
Intercompany sales
$1,000,000
760,000
$ 240,000
Yes, there are other intercompany debts:

Cash and receivables
Current payables
Dividends payable
Combined
$143,000
93,000
18,000
Consolidated
$97,400
53,000
12,400
Intercompany
Balances
$
45,600
40,000
5,600
S Company owes P Company $40,000 on intercompany purchases and P

Company owes S Company $5,600 dividends.
Chapter 11
11-17

7
Adjustment to determine consolidated cost of goods sold:

Consolidated Cost of Goods Sold
Combined cost of goods $640,000
$240,000
Intercompany purchases
Sold
Unrealized profit in
Unrealized profit in
ending inventory
8,000
5,000
beginning inventory
403,000
To balance
$648,000
$648,000
Consolidated cost of
goods sold
$403,000
Unrealized profit in ending inventory is equal to the combined less
consolidated inventories ($130,000 - $122,000).
Unrealized profit in beginning inventory is plugged as follows:
($640,000 + $8,000) - ($240,000 + $403,000) = $5,000
Noncontrolling interest share of $8,700 is computed as follows:

Net income of S
Less: Patent amortization ($50,000/10 years)
Adjusted income of S
$ 34,000
5,000
29,000
30%
$ 8,700
9
Noncontrolling interest of $117,000 at the balance sheet date is
computed:
Stockholders equity of S Company
Add: Unamortized patents
Equity of S plus unamortized patents
Noncontrolling interest on balance sheet date
10
$360,000
30,000
390,000
30%
$117,000
Consolidated retained earnings

Retained earnings of P at end of year
Add: Ps share of increase in Ss retained earnings since
acquisition ($160,000 - $100,000) 70%
Less: Unrealized profit in Ss ending inventory
Less: Ps patent amortization since acquisition
$20,000 70%
Less: Loss on constructive retirement of Ps bonds
Consolidated retained earnings end of year
$200,000
42,000
(8,000)
(14,000)
(3,000)
$217,000
11-18
Solution P11-7
1
Entry on Saps books at acquisition

Inventories
Land
Buildings net
Other liabilities
Goodwill
Retained earnings
Equipment net
Push-down capital
20,000
25,000
90,000
10,000
70,000
80,000
15,000
280,000
To push down fair value book value differentials.

2
Sap Corporation
Balance Sheet
at January 1, 2012
Assets
Cash
Accounts receivable net
Inventories
Total current assets
Land
Buildings net
Equipment net
Total plant assets
Goodwill
Total assets
Liabilities And Stockholders Equity
Accounts payable
Other liabilities
Total liabilities
Capital stock
Push-down capital
Total liabilities and stockholders
Equity
$ 30,000
70,000
80,000
$180,000
$ 75,000
190,000
75,000
340,000
70,000
$590,000
$ 50,000
60,000
$110,000
$200,000
280,000
480,000
$590,000
If Sap reports net income of $90,000 under the new push-down system for
the calendar year 2012, Pays income from Sap will also be $90,000
under a one-line consolidation.
Chapter 11
11-19
Solution P11-8
1

Preliminary computation:
Cost of 80% interest in Son
Book value acquired ($2,000,000 80%)
Excess cost over book value acquired
Excess allocated to:
Inventories $1,600,000 80%
Equipment net $(500,000) 80%
Goodwill for the remainder
Excess fair value over book value acquired
Entry on Sons books to reflect 80% push down:
Inventories
Goodwill
Retained earnings
Equipment net
Push-down capital
1,280,000
520,000
1,200,000
400,000
2,600,000
$3,750,000
2,000,000
$1,750,000
$1,600,000
(500,000)
650,000
$1,750,000
1,600,000
650,000
1,200,000
500,000
2,950,000
Noncontrolling interest (Parent company theory)

Sons stockholders equity $2,000,000 20%
$1,280,000
(400,000)
520,000
$1,400,000
Entity theory
Preliminary computation:
Implied value of net assets ($3,000,000/.8)
Book value of net assets
Total excess
Excess allocated to:
Inventories
Equipment net
Goodwill for remainder
Total excess
Entry on Sons books to reflect 100% push down:
Inventories
Goodwill
Retained earnings
Equipment
Push-down capital
$3,000,000
1,600,000
$1,400,000
400,000
Noncontrolling interest (Entity theory)

Capital stock
Push-down capital
Stockholders equity
800,000
2,950,000
3,750,000
20%
$ 750,000
11-20
Solution P11-9
1
Push down under parent company theory

18,000
Buildings net
27,000
Equipment net
Goodwill
36,000
Retained earnings
20,000
Inventories
9,000
Push-down capital
92,000
To record revaluation of 90% of net assets and elimination of
retained earnings as a result of a business combination with Paw
Corporation.
Push down under entity theory

Buildings net
Equipment net
Goodwill
Retained earnings
Inventories
Push-down capital
To record revaluation of net assets imputed
of 90% interest acquired by Paw Corporation
retained earnings.
20,000
30,000
40,000
20,000
10,000
100,000
from purchase price
and eliminate
Sun Corporation
Comparative Balance Sheets
at January 1, 2012
Parent Company Theory
Entity Theory
Assets
Cash
Accounts receivable net
Inventories
Land
Buildings net
Equipment net
Goodwill
Total assets
$ 20,000
50,000
31,000
15,000
48,000
97,000
36,000
$297,000
$ 20,000
50,000
30,000
15,000
50,000
100,000
40,000
$305,000
Liabilities and stockholders equity

Accounts payable
Other liabilities
Capital stock
Push-down capital
Retained earnings
Total equities
$ 45,000
60,000
100,000
92,000
0
$297,000
$ 45,000
60,000
100,000
100,000
0
$305,000
Chapter 11
11-21
Solution P11-10
a
Paw Corporation and Subsidiary

Consolidation Working Papers
Push down 90% parent company theory
90%
Sun
Power
Adjustments and
Eliminations
Income Statement
Sales
$ 310,800 $ 110,000
Income from Sun
37,800
b
Cost of sales
140,000 *
33,000 *
Depreciation expense
29,000 *
24,200 *
Other operating
expenses
45,000 *
11,000 *
Consolidated NI
Noncontrolling share
e
Controlling share of NI $ 134,600 $ 41,800
Retained Earnings
Retained earnings Paw
$
134,600
60,000 *
31,800
Balance Sheet
Cash
27,000
40,000
Buildings net
Equipment net
Investment in Sun
9,000
20,000
40,000
140,000
35,000
15,000
43,200
165,000
77,600
$ 736,600
Accounts payable
Dividends payable
Other liabilities
Capital stock
Push-down capital
Retained earnings
$ 125,000
15,000
75,000
300,000
147,000
4,000
134,600
b
e
9,000
1,000
8,000
208,800
Goodwill
56,000 *
138,600
4,000 *
134,600
$ 221,600
63,800
90,000
420,800
173,000 *
53,200 *
41,800
10,000 *
Retained earnings
December 31
Accounts receivable
net
Dividends receivable
Inventories
Land
$
37,800
$ 147,000
Retained earnings Sun

Controlling share of NI
Dividends
Consolidated
Statements
8,000
9,000
60,000 *
$
221,600
98,800
122,000
55,000
55,000
183,200
242,600
b 28,800
c 180,000
36,000
$ 273,800
20,000
10,000 d
9,000
20,000
100,000 c 100,000
92,000 c 92,000
221,600
31,800
$ 736,600 $ 273,800
36,000
792,600
145,000
16,000
95,000
300,000
221,600
11-22

Noncontrolling interest January 1
Noncontrolling interest December 31
c
e
12,000
3,000
$
Deduct
15,000
792,600
Chapter 11
11-23

b
Paw Corporation and Subsidiary
Consolidation Working Papers
Push down 100% entity theory
90%
Sun
Paw
Adjustments and
Eliminations
Income Statement
Sales
$ 310,800 $ 110,000
Income from Sun
37,800
b
Cost of sales
140,000 *
32,000 *
29,000 *
25,000 *
Other operating
expenses
45,000 *
11,000 *
Consolidated NI
Noncontrolling share
e
Controlling share of NI $ 134,600 $ 42,000
Retained Earnings
Retained earnings Paw
$
134,600
60,000 *
32,000
Balance Sheet
Cash
27,000
40,000
Buildings net
Equipment net
Investment in Sun
147,000
4,200
134,600
b
e
9,000
1,000
8,000
a
8,000
9,000
60,000 *
$
221,600
98,800
122,000
9,000
20,000
40,000
140,000
35,000
15,000
45,000
55,000
55,000
185,000
165,000
80,000
245,000
208,800
Goodwill
$ 736,600
Accounts payable
Dividends payable
Other liabilities
Capital stock
Push-down capital
Retained earnings
56,000 *
138,800
4,200 *
134,600
$ 221,600
63,800
90,000
420,800
172,000 *
54,000 *
42,000
10,000 *
Retained earnings
December 31
Accounts receivable
net
Dividends receivable
Inventories
Land
$
37,800
$ 147,000
Retained earnings Sun

Controlling share of NI
Dividends
Consolidated
Statements
$ 125,000
15,000
75,000
300,000
b 28,800
c 180,000
40,000
$ 282,000
20,000
10,000 d
9,000
20,000
100,000 c 100,000
100,000 c 100,000
221,600
32,000
$ 736,600 $ 282,000
Noncontrolling interest January 1
40,000
800,800
145,000
16,000
95,000
300,000
221,600
20,000
11-24

Noncontrolling interest December 31
3,200
$
Deduct
23,200
800,800
Chapter 11
11-25
Solution P11-11
Pep Corporation and Subsidiary
Proportionate Consolidation Working Papers
Pep
Income Statement
Sales
Income from Jay
Cost of sales
Other expenses
Net income
Retained Earnings
Retained earnings Pep
800,000 $
20,000
400,000 *
100,000 *
120,000 *
200,000 $
300,000
300,000
400,000
300,000
Balance Sheet
Cash
100,000
130,000
50,000
30,000
110,000
140,000
200,000
300,000
$
200,000
100,000 *
Buildings net
Equipment net
Investment in Jay
Consolidated
Statements
$
920,000
460,000 *
116,000 *
144,000 *
200,000
300,000
90,000
24,000
36,000
b 250,000
50,000
200,000
100,000 *
$
400,000
b
b
30,000 $
18,000
120,000
142,000
40,000
60,000
100,000
b
b
b
24,000
36,000
60,000
126,000
164,000
240,000
180,000
b 108,000
372,000
a 20,000
b 100,000
$
460,000
120,000 $
80,000
500,000
400,000
100,000
60,000
Venture equity Jay
$1,164,000
b
b
60,000
36,000
160,000
104,000
500,000
400,000
300,000
$1,100,000
250,000
b
b
b
120,000
$1,100,000
Accounts payable
Other liabilities
Common stock, $10 par
Retained earnings
b 180,000
a 20,000
150,000 *
40,000 *
60,000 *
50,000
Venture equity Jay

Net income
Dividends
Retained earnings/
Venture equity
Receivables net
Inventories
Land
Adjustments and
Eliminations
Jay 40%
460,000
$1,164,000
Deduct

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Chapter 11

CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

2011 Pearson Education, Inc. publishing as Prentice Hall

Solution E11-3 (continued)

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Consolidated net income and noncontrolling interest share for 2011:

$75,000 excess 5 years

($50,000 -15,000) 20%

Depreciation on excess allocated to

2011 Pearson Education, Inc. publishing as Prentice Hall

Sals net assets under entity theory

Parent company theory

Traditional theory (same as parent theory)

Investment income from Sal

Noncontrolling interest under entity theory

Alternatively, $200,000 noncontrolling interest at July 1, plus $4,000

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Parent company theory

Income allocated to controlling stockholders ($500,000 +

Income allocated to noncontrolling stockholders

Combined separate incomes

Total consolidated income

2011 Pearson Education, Inc. publishing as Prentice Hall

Push down under parent company theory

Push down under entity theory

be accounted for by the equity method as a

The 40 percent venturer:

The 15 percent venturer

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

the primary beneficiary, not to noncontrolling interests. Therefore, in this

2011 Pearson Education, Inc. publishing as Prentice Hall

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

2011 Pearson Education, Inc. publishing as Prentice Hall

Par Corporation and Subsidiary

Total consolidated net income

$150,000 depreciation - $1,000 piecemeal recognition of gain on equipment

Par Corporation and Subsidiary

Check: $80,000 beginning noncontrolling interest + $8,200

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Goodwill at December 31, 2011

Consolidated net income for 2011

Noncontrolling interest share for 2011

Noncontrolling interest December 31, 2011

Income from Sin for 2011 ($90,000 70%)

Goodwill at December 31, 2011

Total consolidated income for 2011

Noncontrolling interest share (computed in 2c above)

Noncontrolling interest at December 31, 2011

2011 Pearson Education, Inc. publishing as Prentice Hall

2011 Pearson Education, Inc. publishing as Prentice Hall

Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution P11-4 (continued)

Retained earnings December 31, 2011

Pit Corporation and Subsidiary

2011 Pearson Education, Inc. publishing as Prentice Hall