112

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

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 company 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,
contemporary theory sometimes reflects the parent company viewpoint and
at other times it reflects the viewpoint of the business entity. A detailed
comparison of these theories is presented in Exhibit 11-1 of the text.
2 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.
3 The valuation of subsidiary assets on the basis of the price paid for the
majority interest seems justified conceptually when substantially all of the
subsidiary stock is acquired by the parent. But the conceptual support for this
approach disappears when only a slim majority of subsidiary stock is acquired.
In addition, the valuation of the minority interest based on the price paid by
the parent company has practical limitations because minority interest does
not represent equity ownership in the usual sense. The ability of minority
stockholders to participate in management is limited and minority shares do
not possess the usual marketability of equity securities.
4 Consolidated assets are equal to their fair values under entity theory only
when the book values of parent company assets are equal to their fair values.
Otherwise, consolidated assets are not equal to their fair values under either
parent company or entity theories.
5 The valuation of the minority interest at book value might overstate the
equity of minority shareholders because of the limited marketability of shares
held by minority stockholders and because of the limited ability of minority
stockholders to share in management through their voting rights. Valuation of

113

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

the minority interest at book value also overstates or understates the minority
interest unless the subsidiary assets are recorded at their fair values.
6 Consolidated net income under parent company theory and income to the
majority stockholders under entity theory should be the same. This is
illustrated in Exhibit 11-5, which shows different income statement amounts
for cost of sales, operating expenses, and income allocated to minority
stockholders, but the same income to majority stockholders. Note that
consolidated net income under parent company and contemporary theories
reflects income to majority stockholders.
7 Income to the parent company 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 contemporary theories.
8 Consolidated income statement amounts under entity theory are the same
as under contemporary theory when subsidiary investments are made at book
value because contemporary theory follows entity theory in eliminating the
effects of intercompany transactions from consolidated financial statements.
But contemporary theory differs from entity theory in accounting for
differences between investment cost and book value acquired.
9 Contemporary 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 majority and minority interests in the same manner under these two
theories.
10 Push-down accounting simplifies the consolidation process. The pushdown adjustments are recorded in the subsidiary's separate books at the time
of the business combination; thus, it is not necessary to allocate the
unamortized cost-book value differentials in the consolidation working papers.
11 A joint venture is an entity that is owned, operated, and jointly controlled
by a small group of investor-venturers 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 APB Opinion No. 18. The cost method would be used only if the

114
investor could not exercise significant influence over the corporate joint
venture.
Chapter 11

Alternatively, investors in unincorporated joint ventures use the equity

method of accounting and reporting as explained in Interpretation No. 2 of
APB Opinion No. 18 or proportional consolidation for undivided interests
specified as a special industry practice.

115

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

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

Total value of Smith implied by purchase price ($720,000/.8)

Minority interest percentage
Minority interest
2

Only the parent's percentage of unrealized profits from

upstream sales is eliminated under parent company theory.

Subsidiary's income of $200,000 x 10% minority interest

Less: Patent amortization ($70,000/10 years x 10%)
Minority interest expense
4

$900,000
20%
$180,000

$ 20,000
(700)
$ 19,300

Implied fair value - $840,000 = patents at acquisition

Book value of 100% of identifiable net assets
Add: Patents at acquisition ($54,000/90%)
Total implied value
Percent acquired
Purchase price under entity theory
5

$840,000
60,000
900,000
80%
$720,000

Purchase price - ($840,000 x 80%) = patents at acquisition

Book value $840,000 x 80% = underlying equity
Add: Patents at acquisition ($54,000/90%)
Purchase price (contemporary theory)

$672,000
60,000
$732,000

116

Chapter 11

Solution E11-4
1

Goodwill

Parent company theory

Cost of investment in Staff
Fair value acquired ($400,000 x 80%)
Goodwill

$500,000
320,000
$180,000

Entity theory
Implied value based on purchase price ($500,000/.8)
Fair value of Staff's net assets
Goodwill

$625,000
400,000
$225,000

Minority interest

Parent company theory

Book value of Staff's net assets
Minority interest percentage
Minority interest

$260,000
20%
$ 52,000

Entity theory
Total valuation of Staff
Minority interest percentage
Minority interest

$625,000
20%
$125,000

Total assets

Parent company theory

Current assets
Plant assets-net
Goodwill
Entity theory
Current assets
Plant assets-net
Goodwill

Pond
$20,000
480,000

Staff
$ 50,000
250,000

$500,000

$300,000

$20,000
480,000

$ 50,000
250,000

$500,000

$300,000

Adjustment
$ 40,000 x 80%
110,000 x 80%

$ 40,000 x 100%
110,000 x 100%

Total
102,000
818,000
180,000
$1,100,000
$

110,000
840,000
225,000
$1,175,000

117

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Solution E11-5
Preliminary computations
Parent company theory
Cost of 80% interest
Fair value acquired ($350,000 x 80%)
Goodwill

$300,000
280,000
$ 20,000

Entity theory
Implied total value ($300,000 cost 80%)
Fair value of Shelly
Goodwill

$375,000
350,000
$ 25,000

Consolidated net income and minority interest expense for 2005:

Entity Theory

$550,000

$550,000

Combined separate incomes

Parent
Company Theory

Depreciation on excess allocated to equipment:

$75,000 excess x 80% acquired 5 years
$75,000 excess 5 years

(12,000)

Total consolidated income

538,000

Less: Minority interest expense

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

(10,000)

Consolidated net income

(15,000)
535,000

(7,000)
$528,000

$528,000

Goodwill at December 31, 2005:

$ 20,000

$ 25,000

118

Chapter 11

Solution E11-6
Preliminary computation
Interest acquired in Stahl:
1

72,000 shares 80,000 shares =

Stahl's net assets under entity theory

Implied value from purchase price:

2

Goodwill

Entity theory

$1,800,000/90% interest

Implied value
Less: Fair value and book value of net assets
Goodwill
b

90%

$2,000,000

$2,000,000
1,710,000
$ 290,000

Parent company theory

Cost of 90% interest

Fair values of net assets acquired ($1,710,000 x 90%)
Goodwill

$1,800,000
1,539,000
$ 261,000

Contemporary theory (same as parent company theory)

261,000

Investment income from Stahl

$

36,000

Income from Stahl ($80,000 x 1/2 year x 90% interest)

4

Minority interest under entity theory

Imputed value of Stahl at July 1, 2003

Add: Income for 1/2 year
Minority percentage
Minority interest

$2,000,000
40,000
2,040,000
10%
$ 204,000

Alternatively, $200,000 minority interest at July 1, plus $4,000 share of

reported income = $204,000

119

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Solution E11-7
1

Parent company theory

Combined separate incomes of Palumbo and Seal

Less: Palumbo's share of unrealized profits from upstream
inventory sales ($30,000 x 80%)
Less: Minority interest expense ($300,000 x 20%)
Consolidated net income
2

$800,000
(24,000)
(60,000)
$716,000

Entity theory

Combined separate incomes

Less: Unrealized profits from upstream sales
Total consolidated income

$800,000
(30,000)
$770,000

Income allocated to majority stockholders ($500,000 +

[$270,000 x 80%])

$716,000

Income allocated to minority stockholders

($300,000 - $30,000) x 20%

$ 54,000

Solution E11-8

Combined separate incomes

Less:

Contemporary
Theory

Parent
Company
Theory

Entity
Theory

$180,000

$180,000

$180,000

Unrealized inventory profits

from downstream sales

($60,000 - $30,000) x 50%
Less: Unrealized profit on upstream
sale of land
($96,000 - $70,000) x 100%
($96,000 - $70,000) x 80%
Less: Minority interest expense
($60,000 - $26,000) x 20%
$60,000 x 20%
Consolidated net income
Total consolidated income
Allocated to majority stockholders

(15,000)

(15,000)

(15,000)

(26,000)

(26,000)
(20,800)

(6,800)
$132,200

(12,000)
$132,200
$139,000
$132,200

Allocated to minority stockholders

($60,000 - $26,000) x 20%

6,800

120

Chapter 11

Solution E11-9
1

[Push-down accounting]

Push down under parent company theory

Retained earnings
Inventories
Land
Buildings-net
Goodwill
Equipment
Other liabilities
Push down equity

800,000
90,000
450,000
270,000
360,000
$

180,000
90,000
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
Pioneer Corporation. Push down equity = ($600,000 fair value-book
value differential x 90%) + $360,000 goodwill + $800,000 retained
earnings.
2

Push down under entity theory

Retained earnings
Inventories
Land
Buildings-net
Goodwill
Equipment-net
Other liabilities
Push down equity

800,000
100,000
500,000
300,000
400,000
$

200,000
100,000
1,800,000

To record revaluation of 100% of the net assets and elimination of

retained earnings as a result of a business combination with
Pioneer. Push down equity = $600,000 fair value-book value
differential + $400,000 goodwill + $800,000 retained earnings.
Solution E11-10
Each of the investments should be accounted for by the equity method as
a one-line consolidation because the joint venture agreement requires consent
of each venturer for important decisions. Thus, each venturer is able to
exercise significant influence over its joint venture investment irrespective
of ownership interest.
The 40 percent venturer:
Income from Sun-Belt ($500,000 x 40%)
Investment in Sun-Belt ($8,500,000 x 40%)

$ 200,000
$3,400,000

The 15 percent venturer

Income from Sun-Belt ($500,000 x 15%)
Investment in Sun-Belt ($8,500,000 x 15%)

$
75,000
$1,275,000

121

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

SOLUTION TO PROBLEMS
Solution P11-1
Picody Corporation and Subsidiary
Comparative Consolidated Balance Sheets
at December 31, 2005
Parent
Company Theory
Assets
Cash
Receivables-net
Inventories
Plant assets-neta
Patentsb
Total assets
Liabilities
Accounts payable
Other liabilities
Minority interestc
Total liabilities
Capital stock
Retained earnings
Minority interestd
Total stockholders' equity
Total liabilities and
stockholders' equity

Entity Theory

52,000
300,000
450,000
1,998,000
64,000
$2,864,000

304,000
500,000
160,000
964,000
1,000,000
900,000

52,000
300,000
450,000
2,010,000
80,000
$2,892,000
304,000
500,000
_
804,000

1,900,000

1,000,000
900,000
188,000
2,088,000

$2,864,000

$2,892,000

Parent company theory: Combined plant assets of $1,950,000 + ($80,000 x

3/5 undepreciated excess)
Entity theory: Combined plant assets of $1,950,000 + ($100,000 x 3/5
undepreciated excess)

Parent company theory: $80,000 patents - $16,000 amortization

Entity theory: $100,000 patents - $20,000 amortization

Parent company theory:

$800,000 x 20%

Entity theory: [Scone's equity of $800,000 + ($60,000 undepreciated

plant assets + $80,000 unamortized patents)] x 20%

Minority interest equals Scone's equity of

122

Chapter 11

Solution P11-2
Preliminary computation
Implied value of Pisces based on purchase price ($160,000/.8)
Book value
Excess to undervalued equipment
1

$200,000
170,000
$ 30,000

Pisces Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2003

Sales
Less: Cost of sales
Gross profit
Other expenses
Depreciationa

$600,000
380,000
220,000
$ 80,000
79,500

Total consolidated net income

Allocation of income to:
Minority interestb
Majority interest

159,500
$ 60,500
$ 4,100
$ 56,400

$75,000 depreciation - $500 piecemeal recognition of gain on equipment

through depreciation + ($30,000 excess 6 years) excess depreciation
b
($30,000 reported income - $5,000 unrealized gain on equipment + $500
piecemeal recognition of gain on equipment - $5,000 excess depreciation)
x 20% interest
2

Pisces Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2003

Assets
Current assets
Plant and equipment-net ($595,000 - $199,500 + 25,000)
Total assets
Liabilities and equity
Liabilities
Capital stock
Retained earningsa
Minority interestb
Total liabilities and stockholders' equity
a

$241,600
420,500
$662,100
$150,000
300,000
170,000
42,100
$662,100

Pisces beginning retained earnings $163,600 + Pisces net income $56,400 Pisces dividends of $50,000
b
($190,000 stockholders' equity + $25,000 excess - $4,500 unrealized gain on
equipment) x 20%
Check: $40,000 beginning minority interest + $4,100 minority interest expense
- $2,000 minority interest dividends = $42,100

123

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Solution P11-3
Parent company theory
1a
Income from Sign for 2003 ($90,000 x 70%)

$ 63,000

1b

Goodwill at December 31, 2003

($595,000 cost- $525,000 fair value)

$ 70,000

1c

Consolidated net income for 2003

Palace's separate income
Add: Income from Sign

1d

$300,000
63,000

Minority interest income for 2003

Net income of Sign of $90,000 x 30%

1e

$363,000

$ 27,000

Minority interest December 31, 2003

Sign's stockholders' equity $790,000 x 30%

$237,000

Entity theory
2a

Income from Sign for 2003

($90,000 x 70%)

2b

Goodwill at December 31, 2003

Imputed value ($595,000/70%)
Fair value of Sign's net assets
Goodwill

2c

$ 63,000

$850,000
750,000
$100,000

Total consolidated income for 2003

Income to majority stockholders ($300,000 + $63,000)
Add: Minority interest income ($90,000 x 30%)
Total consolidated income

$363,000
27,000
$390,000

2d

Minority interest income

$ 27,000

2e

Minority interest at December 31, 2003

(computed in 2c above)

(Book equity $790,000 + $100,000 goodwill) x 30%

$267,000

124

Chapter 11

Solution P11-4
Preliminary computations
Parent company theory
Investment in Smedley
Fair value of 80% interest acquired ($240,000 x 80%)
Goodwill

$224,000
192,000
$ 32,000

Entity Theory
Implied value of Smedley ($224,000/.8)
Fair value of net assets
Goodwill

$280,000
240,000
$ 40,000

Pierre used an incomplete equity method in accounting for its investment in

Smedley. It ignored the intercompany upstream sales of inventory. Income
from Smedley on an equity basis would be:
Share of Smedleys income ($50,000 x .8)
$ 40,000
Less: Unrealized profits in ending inventory from
upstream sale ($8,000 x 50% x 80%)
(3,200)
Income from Smedley
$ 36,800
Pierre Corporation and Subsidiary
Comparative Consolidated Income Statements
for the year ended December 31, 2004
Contemporary
Theory
Sales
Less:

Cost of sales

Gross profit
Expenses
Less: Unrealized profit on
upstream sale of inventory
($23,000 - $15,000) x 50% x 100%
($23,000 - $15,000) x 50% x 80%
Minority interest expense
($50,000 - $4,000) x 20%
$50,000 x 20%
Consolidated net income
Total consolidated income

Parent
Company
Theory

Entity
Theory

$1,000,000 $1,000,000 $1,000,000

(575,000)
(575,000)
(575,000)
425,000

425,000

425,000

(200,000)

(200,000)

(200,000)

(4,000)

(4,000)
(3,200)

(9,200)
(10,000)
$211,800

$211,800
$221,000

Allocated to majority stockholders

$211,800

Allocated to minority stockholders

($50,000 - $4,000) x 20%

9,200

125

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Pierre Corporation and Subsidiary

Comparative Statements of Retained Earnings
for the year ended December 31, 2004

Retained earnings December 31, 2003

Add: Consolidated net income
Add: Net income to majority stockholders
Less:

Solution P11-4

Parent
Company
Theory

$360,000
211,800

$360,000
211,800

Entity
Theory
$360,000
211,800

Dividends to majority stockholders

Retained earnings December 31, 2004

Contemporary
Theory

571,800
(120,000)

571,800
(120,000)

571,800
(120,000)

$451,800

$451,800

$451,800

(continued)
Pierre Corporation and Subsidiary
Comparative Consolidated Balance Sheets
at December 31, 2004
Contemporary
Theory

Assets
Cash
Accounts receivable
Inventory
Land
Buildings-net
Goodwill
Total assets
Liabilities
Accounts payable
Minority interest
Total liabilities

110,800
120,000
196,000
280,000
840,000
32,000

Parent
Company
Theory
$

110,800
120,000
196,800
280,000
840,000
32,000

Entity
Theory
$

110,800
120,000
196,000
280,000
840,000
40,000

$1,578,800

$1,579,600

$1,586,800

275,800

275,800
52,000

275,800

275,800

327,800

275,800

800,000
451,800
51,200

800,000
451,800

800,000
451,800
59,200

1,303,000

1,251,800

1,311,000

$1,578,800

$1,579,600

$1,586,800

Stockholders' equity
Capital stock
Retained earnings
Minority interest
Total stockholders' equity
Total equities

Chapter 11

126

127

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Solution P11-5
Packard Corporation and Subsidiary
Comparative Balance Sheets
at December 31, 2004
Contemporary
Theory

Entity
Theory

Assets
Cash
Receivables-net
Inventories
Plant assets-net
Goodwill

$ 70,000
110,000
120,000
300,000
40,000

$ 70,000
110,000
120,000
300,000
50,000

Total assets

$640,000

$650,000

$ 95,000
25,000
120,000

$ 95,000
25,000
120,000

300,000
194,000

300,000
194,000

Liabilities
Accounts payable
Other liabilities
Total liabilities
Stockholders' equity
Capital stock
Retained earnings
Minority interest
($150,000 - $20,000) x 20%
($150,000 + $50,000 - $20,000) x 20%
Total stockholders' equity

26,000
520,000

36,000
530,000

$640,000

$650,000

Contemporary
Theory

Entity
Theory

Cost or imputed value

Book value of 80%
Book value of 100%
Goodwill

$128,000
88,000

$160,000

Investment cost
Add: 80% of retained earnings increase
($50,000 - $10,000) x 80%
Less: 80% of $20,000 unrealized profits
Investment balance

$128,000

Total equities
Supporting computations

$ 40,000

32,000
(16,000)
$144,000

110,000
$ 50,000

128

Chapter 11

Solution P11-6

[AICPA adapted]

X carries its investment in Y on a cost basis. This is evidenced by the

appearance of dividend revenue in X Company's income statement and by the
absence of income from subsidiary.

X holds 1,400 shares of Y. X Company's percentage ownership is 70%, as

determined by the relationship of X Company's dividend revenues and Y
Company's dividends paid ($11,200/$16,000). Y has 2,000 outstanding
shares ($200,000/$100) and X holds 70% of these, or 1,400 shares.

Y Company's retained earnings at acquisition were $100,000.

Imputed value of Y ($245,000 cost/70%)

Less: Patents (applicable to 100%)
Book value and fair value of Y's identifiable net assets
Less: Capital stock
Retained earnings
4

$350,000
(50,000)
300,000
(200,000)
$100,000

The nonrecurring loss is a constructive loss on the purchase of X bonds by

Y Company.

Working paper entry:

Mortgage bonds payable (5%)
Loss on retirement of X bonds
X bonds owned

$100,000
3,000
$103,000

To eliminate intercompany bond investment and bonds payable and to

recognize a loss on the constructive retirement of X bonds.
5

Intercompany sales X to Y are $240,000 computed as follows:

Combined sales ($600,000 + $400,000)

Less: Consolidated sales
Intercompany sales
6

$1,000,000
760,000
$ 240,000

Yes, there are other intercompany debts:

Combined

Consolidated

Intercompany
Balances

$143,000

$97,400

$45,600

Current payables

93,000

53,000

40,000

Dividends payable

18,000

12,400

5,600

Cash and receivables

Y Company owes X Company $40,000 on intercompany purchases and X Company owes

Y Company $5,600 dividends.

129

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Solution P11-6
7

(continued)

Adjustment to determine consolidated cost of goods sold:

Consolidated Cost of Goods

|
Combined cost of goods sold
$640,000 | $240,000
Unrealized profit in
|
5,000
ending inventory
8,000 |
| 403,000
$648,000 | $648,000
Consolidated cost of
|
goods sold
$403,000 |

Sold
Intercompany purchases
Unrealized profit in beginning
inventory
To balance

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
8

Minority interest expense of $8,700 is computed as follows:

Net income of Y
Less: Patent amortization ($50,000/10 years)
Adjusted income of Y
Minority interest percentage
Minority interest expense
9

Minority interest of $117,000 at the balance sheet date is computed:

Stockholders' equity of Y Company

Add: Unamortized patents
Equity of Y plus unamortized patents
Minority interest percentage
Minority interest on balance sheet date
10

$34,000
5,000
29,000
30%
$ 8,700

$360,000
30,000
390,000
30%
$117,000

Consolidated retained earnings

Retained earnings of X end of year

Add: X's share of increase in Y's retained earnings since
acquisition ($160,000 - $100,000) x 70%
Less: Unrealized profit in Y's ending inventory
Less: X's patent amortization since acquisition
$20,000 x 70%
Less: Loss on constructive retirement of X's bonds
Consolidated retained earnings-end of year

$200,000
42,000
(8,000)
(14,000)
(3,000)
$217,000

130

Chapter 11

Solution P11-7
1

Entry on Splash's books at acquisition

Inventories
Land
Buildings-net
Other liabilities
Goodwill
Retained earnings
Equipment-net
Push-down capital

$ 20,000
25,000
50,000
10,000
20,000
90,000
$ 15,000
200,000

To push down fair value-book value differentials.

Splash Corporation
Balance Sheet
at January 1, 2004
ASSETS

Cash
Accounts receivable-net
Inventories
Total current assets

$ 30,000
70,000
80,000

Land
Buildings-net
Equipment-net
Total plant assets

$ 75,000
150,000
75,000

$180,000

300,000

Goodwill
Total assets

20,000
$500,000
LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable
Other liabilities
Total liabilities

$ 40,000
60,000

Capital stock
Push-down capital
Total stockholders' equity
Total liabilities and stockholders' equity

$200,000
200,000

$100,000

400,000
$500,000

If Splash reports net income of $90,000 under the new push-down system
for the calendar year 2004, Played's income from Splash will also be
$90,000 under a one-line consolidation.

131

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Solution P11-8
1

Parent company theory

Preliminary computation:
Cost of 80% interest in Sanue
Book value acquired ($2,000,000 x 80%)
Excess cost over book value acquired
Excess allocated to:
Inventories
$1,600,000 x 80%
Equipment-net
$(500,000) x 80%
Goodwill for the remainder
Excess cost over book value acquired

$3,000,000
1,600,000
$1,400,000
$1,280,000
(400,000)
520,000
$1,400,000

Entry on Sanue's books to reflect 80% push down:

Inventories
Goodwill
Retained earnings
Equipment-net
Push-down capital
2

$1,280,000
520,000
1,200,000
$

400,000
2,600,000

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

$3,750,000
2,000,000
$1,750,000
$1,600,000
(500,000)
650,000
$1,750,000

Entry on Sanue's books to reflect 100% push down:

Inventories
Goodwill
Retained earnings
Equipment
Push-down capital
3

500,000
2,950,000

Minority interest (Parent company theory)

Sanue's stockholders' equity $2,000,000 x 20%

4

$1,600,000
650,000
1,200,000

400,000

Minority interest (Entity theory)

Capital stock
Push-down capital
Stockholders' equity
Minority interest percentage
Minority interest

800,000
2,950,000
3,750,000
20%
$ 750,000

132

Chapter 11

Solution P11-9
1

Push down under parent company theory

Buildings-net
Equipment-net
Goodwill
Retained earnings
Inventories
Push-down capital

$ 18,000
27,000
36,000
20,000
$

9,000
92,000

To record revaluation of 90% of net assets and elimination of

retained earnings as a result of a business combination with Power
Corporation.
2

Push down under entity theory

Buildings-net
Equipment-net
Goodwill
Retained earnings
Inventories
Push-down capital

$ 20,000
30,000
40,000
20,000
$ 10,000
100,000

To record revaluation of net assets imputed from purchase price of

90% interest acquired by Power Corporation.
3

Swing Corporation
Comparative Balance Sheets
at January 1, 2004
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

133

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Solution P11-10
a

Power Corporation and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2004

Push down 90% - parent company theory

|
|
90%
| Adjustments and |Consolidated
| Power | Swing |
Eliminations
| Statements
|
|
|
|
Income Statement
|
|
|
|
Sales
|$310,800 |$110,000 |
| $420,800
Income from Swing
| 37,800 |
|b 37,800
|
Cost of sales
| 140,000*| 33,000*|
|
173,000*
Depreciation expense
| 29,000*| 24,200*|
|
53,200*
Other operating
|
|
|
|
expenses
| 45,000*| 11,000*|
|
56,000*
Minority expense
|
|
|e 4,000
|
4,000*
Net income
|$134,600 |$ 41,800 |
| $134,600
|
|
|
|
Retained Earnings
|
|
|
|
Retained earnings -Power|$147,000 |
|
| $147,000
Retained earnings -Swing|
|$
0 |
|
Net income
| 134,600 | 41,800 |
|
134,600
Dividends
| 60,000*| 10,000*|
b
9,000|
e
1,000|
60,000*
Retained earnings
|
|
|
|
December 31, 2004
|$221,600 |$ 31,800 |
| $221,600
|
|
|
|
Balance Sheet
|
|
|
|
Cash
|$ 63,800 |$ 27,000 |a
8,000
| $ 98,800
Accounts receivable -net| 90,000 | 40,000 |
a
8,000|
122,000
Dividends receivable
|
9,000 |
|
d
9,000|
Inventories
| 20,000 | 35,000 |
|
55,000
Land
| 40,000 | 15,000 |
|
55,000
Buildings -net
| 140,000 | 43,200 |
|
183,200
Equipment -net
| 165,000 | 77,600 |
|
242,600
Investment in Swing
| 208,800 |
|
b 28,800|
|
|
|
c 180,000|
Goodwill
|
| 36,000 |
|
36,000
|$736,600 |$273,800 |
| $792,600
|
|
|
|
Accounts payable
|$125,000 |$ 20,000 |
| $145,000
Dividends payable
| 15,000 | 10,000 |d
9,000
|
16,000
Other liabilities
| 75,000 | 20,000 |
|
95,000
Capital stock
| 300,000 | 100,000 |c 100,000
|
300,000
Push-down capital
|
| 92,000 |c 92,000
|
Retained earnings
| 221,600 | 31,800 |
|
221,600
|$736,600 |$273,800 |
|
|
|
Minority interest January 1, 2004
|
c 12,000|
Minority interest December 31, 2004
|
e
3,000|
15,000
|
| $792,600
|
|
*Deduct

134

Chapter 11

Solution P11-10
b

(continued)
Power Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2004

Push down 100% - entity theory

|
|
90%
| Adjustments and |Consolidated
| Power | Swing |
Eliminations
| Statements
|
|
|
|
Income Statement
|
|
|
|
Sales
|$310,800 |$110,000 |
| $420,800
Income from Swing
| 37,800 |
|b 37,800
|
Cost of sales
| 140,000*| 32,000*|
|
172,000*
Depreciation expense
| 29,000*| 25,000*|
|
54,000*
Other operating
|
|
|
|
expenses
| 45,000*| 11,000*|
|
56,000*
Minority expense
|
|
|e
4,200
|
4,200*
Net income
|$134,600 |$ 42,000 |
| $134,600
|
|
|
|
Retained Earnings
|
|
|
|
Retained earnings -Power|$147,000 |
|
| $147,000
Retained earnings -Swing|
|$
0 |
|
Net income
| 134,600 | 42,000 |
|
134,600
Dividends
| 60,000*| 10,000*|
b
9,000|
e
1,000|
60,000*
Retained earnings
|
|
|
|
December 31, 2004
|$221,600 |$ 32,000 |
| $221,600
|
|
|
|
Balance Sheet
|
|
|
|
Cash
|$ 63,800 |$ 27,000 |a
8,000
| $ 98,800
Accounts receivable -net| 90,000 | 40,000 |
a
8,000|
122,000
Dividends receivable
|
9,000 |
|
d
9,000|
Inventories
| 20,000 | 35,000 |
|
55,000
Land
| 40,000 | 15,000 |
|
55,000
Buildings -net
| 140,000 | 45,000 |
|
185,000
Equipment -net
| 165,000 | 80,000 |
|
245,000
Investment in Swing
| 208,800 |
|
b 28,800|
|
|
|
c 180,000|
Goodwill
|
| 40,000 |
|
40,000
|$736,600 |$282,000 |
| $800,800
|
|
|
|
Accounts payable
|$125,000 |$ 20,000 |
| $145,000
Dividends payable
| 15,000 | 10,000 |d
9,000
|
16,000
Other liabilities
| 75,000 | 20,000 |
|
95,000
Capital stock
| 300,000 | 100,000 |c 100,000
|
300,000
Push-down capital
|
| 100,000 |c 100,000
|
Retained earnings
| 221,600 | 32,000 |
|
221,600
|$736,600 |$282,000 |
|
|
|
Minority interest January 1, 2004
|
c 20,000|
Minority interest December 31, 2004
|
e
3,200|
23,200
|
| $800,800
|
|
*Deduct

135

Consolidation Theories, Push-down Accounting, and

Corporate Joint Ventures

Solution P11-11
Pepper Corporation and Subsidiary
Proportionate Consolidation Working Papers
for the year ended December 31, 2003
|
|
| Adjustments and |Consolidated
|
Pepper |Jerry 40%|
Eliminations
| Statements
|
|
|
|
Income Statement
|
|
|
|
Sales
|$ 800,000 |$300,000 |b 180,000
| $ 920,000
Income from Jerry
|
20,000 |
|a 20,000
|
Cost of sales
|
400,000*| 150,000*|
b 90,000|
460,000*
Depreciation expense
|
100,000*| 40,000*|
b 24,000|
116,000*
Other expenses
|
120,000*| 60,000*|
b 36,000|
144,000*
Net income
|$ 200,000 |$ 50,000 |
| $ 200,000
|
|
|
|
Retained Earnings
|
|
|
|
Retained earnings-Pepper|$ 300,000 |
|
| $ 300,000
Venture equity-Jerry
|
|$250,000 |b 250,000
|
Net income
|
200,000 | 50,000|
|
200,000
Dividends
|
100,000*|
|
|
100,000*
Retained earnings/
|
|
|
|
Venture equity
|$ 400,000 |$300,000 |
| $ 400,000
|
|
|
|
Balance Sheet
|
|
|
|
Cash
|$ 100,000 |$ 50,000 |
b 30,000| $ 120,000
Receivables-net
|
130,000 | 30,000 |
b 18,000|
142,000
Inventories
|
110,000 | 40,000 |
b 24,000|
126,000
Land
|
140,000 | 60,000 |
b 36,000|
164,000
Buildings-net
|
200,000 | 100,000 |
b 60,000|
240,000
Equipment-net
|
300,000 | 180,000 |
b 108,000|
372,000
Investment in Jerry
|
120,000 |
|
a 20,000|
|
|
|
b 100,000|
|$1,100,000 |$460,000 |
| $1,164,000
|
|
|
|
Accounts payable
|$ 120,000 |$100,000 |b 60,000
| $ 160,000
Other liabilities
|
80,000 | 60,000 |b 36,000
|
104,000
Common stock, $10 par
|
500,000 |
|
|
500,000
Retained earnings
|
400,000 |
|
|
400,000
Venture equity-Jerry
|
| 300,000 |
|
|$1,100,000 |$460,000 |
| $1,164,000
|
|
|
|
*Deduct