Advanced Accounting: Consolidation and Investment Analysis Homework

This assignment provides a detailed analysis of consolidation accounting principles, focusing on business combinations and the preparation of consolidated financial statements. The solution addresses various scenarios, including the acquisition of a subsidiary, calculation of goodwill, and the equity method of accounting. The assignment covers the preparation of journal entries for acquisition, consolidation entries, and the calculation of investment income, non-controlling interests, and the impact of intercompany transactions. It also explores the effects of undervalued or overvalued assets, and the allocation of purchase price differences. The assignment includes examples of pre-acquisition balance sheets, consolidated balance sheets, and the calculation of investment income. The solution also analyzes the impact of different ownership percentages and intercompany transactions, such as the sale of land and inventory, and the elimination of unrealized profits. The assignment provides step-by-step solutions, including journal entries, calculations, and explanations, making it a valuable resource for students studying advanced accounting and financial statement consolidation.

1. Haynes, Inc., obtained 100 percent of Turner Company’s common stock on
January 1, 2014, by issuing 9,000 shares of $10 par value common stock. Haynes’s
shares had a $20 per share fair value. On that date, Turner reported a net book
value of $100,000. However, its equipment (with a five-year remaining life) was
overvalued by $5,000 in the company’s accounting records. Also, Turner had
developed a customer list with an assessed value of $30,000, although no value had
been recorded on Turner’s books. The customer list had an estimated remaining
useful life of 10 years. Turner’s land was undervalued by 10,000. Turner’s patent,
which has 10 years of useful life remaining, was undervalued by 15,000.
The following figures come from the individual accounting records of these two
companies as of December 31, 2014
Haynes
Revenues $(700,000)
Expenses 460,000
Investment income Not
given
Dividends declared 90,000
The pre-acquisition balance sheets of the two companies are presented below:
Haynes Turner
Current Assets $100,000 $ 50,000
Land $200,000 $50,000
Equipment $300,000 $30,000
Patent $150,000 $20,000
Total Assets $750,000 $150,000
Liabilities $350,000 $50,000

Common Stock $50,000 $50,000
Additional Paind-in
Capital $150,000
Retained Earnings $200,000 $50,000
a. What is balance of the investment account of Haynes right after this acquisition?
Write down the relevant journal entries and the affected accounts (5 points).
Ans: The balance of the investment account of Haynes right after the acquisition is $180,000
(90,000 shares @ $20 each)
Investment in Turner Ltd. Dr. 180,000
To Common Stock Cr. 90,000
To Retained Earnings (1/1/14) Cr. 90,000
(To record investment in Turner)
b. What is the consolidated balance sheet numbers for Haynes and Turner on January 1,
2014? Please fill out the table below and write down the according journal entries
(10 points)
Haynes Turner Consolidated
Balance
Current Assets $ 100,00
0 $ 50,000
Land $200,00
0 $50,000
Equipment $300,00
0 $30,000
Patent $150,00
0 $20,000

Total Assets $750,00
0 $150,000
Liabilities $350,00
0 $50,000
Common Stock $50,000 $50,000
Additional Paind-in
Capital 150,000
Retained Earnings $200,00
0 $50,000
Ans: Consolidated Balance sheet Numbers as on January 1, 2014
Particulars Haynes Turner
Consolidated
Balance
Current Assets 100,000 50,000 180,000
Land 200,000 50,000 260,000
Equipment 300,000 30,000 325,000
Patent 150,000 20,000 185,000
Goodwill 30,000
Total Assets 750,000 150,000 980,000
Liabilities 350,000 50,000 400,000
Common Stock 50,000 50,000 140,000
Additional Paid-in Capital 150,000 150,000
Retained Earnings 200,000 50,000 290,000
Total Liabilities and equity 750,000 150,000 980,000

Journal Entries
Goodwill (refer WN-1) Dr. 30,000
Common Stock Dr. 50,000
Retained Earnings Dr. 50,000
Business Combination Valuation
Reserve Dr. 50,000
To Common stock Cr. 90,000
To Retained Earnings Cr. 90,000
(To record consolidation entry)
WN-1 Acquisition Analysis as on 1/1/14
Consideration Paid by Haynes 180,000
Book value of Turner's assets
Recorded Book value 100,000
Less: Equipment Overvalued (5,000)
Add: Customer List not recorded 30,000
Add: Land undervalued 10,000
Add: Patent undervalued 15,000 150,000
Goodwill on Acquisition 30,000
c. What should be the investment income of Haynes 2014? (5 points)
Ans: The investment income of Haynes 2014 is as below:
Net income of Turner 13,000
Less: Dividend declared (4,000)
Less: Excess Amortisation (refer WN-
2) (3,500)
Net investment income - 2014 5,500
WN-2 Amortisation Value
Undervalued / (overvalued) Life (years) Yearly amortisation
Equipment (5,000) 5 (1,000)
Customer List 30,000 10 3,000
Patent 15,000 10 1,500
Net excess amortisation 3,500

d. What should be the balance of investment account of Haynes for 2014? (5 points)
Ans:
Balance of investment account of Haynes for
2014
Fair value of consideration Paid by Haynes 180,000
Net investment income - 2014 5,500
185,500

e. Had Haynes acquired 80% instead of 100% of Turner’s shares (Haynes issued 8,000
shares instead of 9,000 shares other conditions remain the same), what is the journal
entry to document the transaction? (2 points)
Ans:
Investment in Turner Ltd. (80%)
Dr
. 160,000
To Common Stock Cr. 80,000
To Retained Earnings (1/1/14) Cr. 80,000
(To record investment in Turner)
f. What should be the investment income of Haynes for 2014? (2 points)
Ans:
The investment income of Haynes 2014 is as below:
Net income of Turner 13,000
Less: Dividend declared (4,000)
Less: Excess Amortisation (refer WN-
2) (3,500)
Net investment income - 2014 5,500

g. What should be the balance of non-controlling interests on December 31, 2014? (2
point)
Ans:
Share in Fair value of assets 36,000
Share in income - 2014 1,100
Balance of NCI as on
31/12/2014 37,100
2. At the beginning of January 1st 2007, the financial position of company Z and B are as
follows:
1/1/2007
Company Z Company b
Asset L&E Asset L&E
Cash 3,000,000 1,500,000 Cash 5,000,000 2,500,000
1,500,000 300,000
5,000,000 Loan 5,000,000
5,000,000 Inventory 700,000 Total L. 7,500,000
Loan 5,000,000 PPE 1,000,000
Inventory 4,000,000 Total L. 11,500,000 Land 1,500,000
PPE 10,000,000 Equity Patent 3,000,000 Equity
Land 8,000,000 C/S 10,000,000 C/S 2,000,000
Patent 5,000,000 R/E 15,000,000 R/E 2,000,000
Total E. 25,000,000 Total E. 4,000,000
Total Assets 36,500,000 Total E & L 36,500,000 Total Assets 11,500,000 Total E & L 11,500,000
Accounts
Paylable Accounts
Paylable
Marketable
Securities Accounts
Receiveable
Notes
Payable
Accounts
Receiveable

On January 1st 2007, Z purchased 70% of B by issuing 700,000 shares of common stock (1
dollars face value and 8 dollars market price). Note that B’s PPE has a remaining life of 5 years
at the purchase date, and it was overvalued by $500,000, Land was undervalued by 800,000, and
patent has a remaining life of 10 years and undervalued by $1,000,000. Z also determines that
B’s brand name has market value of $1,000,000. Company Z records the investment in Company
B using equity method.
a. What are the journal entries of Z and B to book the transactions? (4 points)
Ans:
Acquisition Analysis as on 1/1/2007
Net fair value of B's assets 4,000,000
Less: PPE overvalued (500,000)
Add: Land undervalued 800,000
Add: Patent undervalued 1,000,000
Add: Brand name valuation 1,000,000
Total fair value of assets 6,300,000
Z's share of fair value @ 70% 4,410,000
Less: Consideration Paid 5,600,000
Goodwill 1,190,000
Journal Entries
Investment in B Ltd.
Dr
. 5,600,000
To Common Stock Cr. 700,000
To Retained Earnings Cr. 4,900,000
(To record investment in B)

b. What does the balance sheet of Company Z, and the consolidated balance sheet look like
right after the purchase？Fill out the table below (note that new accounts may be created
due to the consolidation) and write down the consolidation journal entries(10 points)
Ans:
01/01/2007 Mechanical Total Consolidated Total
Company Z
Company
b
Asset Asset
Cash 3,000,000 Cash 5,000,000 8,000,000 8,000,000
Marketable
Securities
1,500,
000 1,500,000 1,500,000
Accounts
Receiveable
5,000,
000
Accounts
Receiveabl
e 300,000 5,300,000 5,300,000
Inventory 4,000,000 Inventory 700,000 4,700,000 4,700,000
PPE 10,000,000 PPE 1,000,000 11,000,000 10,500,000
Land 8,000,000 Land 1,500,000 9,500,000 10,300,000
Patent 5,000,000 Patent 3,000,000 8,000,000 9,000,000
Brand Name 1,000,000
Goodwill 1,190,000
Total Assets 36,500,000
Total
Assets 11,500,000 48,000,000 51,490,000
L&E L&E
Accounts Paylable
1,500,
000
Accounts
Paylable
2,
500,000 4,000,000 4,000,000
Notes Payable
5,000,
000 5,000,000 5,000,000
Loan 5,000,000 Loan 5,000,000 10,000,000 10,000,000
Non-controlling
interest 1,890,000

Total L. 11,500,000 Total L. 7,500,000 19,000,000 20,890,000
Equity Equity
C/S 10,000,000 C/S 2,000,000 12,000,000 10,700,000
R/E 15,000,000 R/E 2,000,000 17,000,000 19,900,000
Total E. 25,000,000 Total E. 4,000,000 29,000,000 30,600,000
Total E & L 36,500,000
Total E &
L 11,500,000 48,000,000 51,490,000

Journal Entry
Common Stock Dr. 2,000,000
Retained Earnings Dr. 2,000,000
Business Combination Valuation
Reserve Dr. 2,300,000
Goodwill Dr. 1,190,000
To Investment in B Ltd. Cr. 5,600,000
To NCI Cr. 1,890,000
(To record acquisition of B)
During 2007, the following transactions took place
1. Z sold a piece of land with cost of $1,500,000 to B for 2,000,000.
2. In 2006, Z sold inventory to B for $4,500,000, which cost Z 3,600,000, by the end of
2006, 20% of the inventory was not sold to outsiders and remained in B’s warehouse.
3. Z sold products to B for $5,000,000, which cost Z $4,000,000. By the end of 2007, 70
percent of the products were sold for $4,900,000.
4. Z reported income (not taking investment income from B into consideration) of
$10,000,000 and announced and paid dividend in the amount of $2,000,000.
5. B reported net income of $3,000,000 and announced and paid dividend in the amount
of 1,000,000.
c. Please write down the adjusting journal entries for the internal transactions for 2007 (22
points)
Ans:
1 Gain on sale of Land
Dr
. 500,000
Land Cr. 500,000
(To record elimination of profit on sale of land)
2 Sales
Dr
. 900,000
To Cost of Sales Cr. 720,000
To Inventory Cr. 180,000
(To eliminated profit in closing inventory)
3 Sales Dr 1,500,000

.
To Cost of Sales Cr. 1,200,000
To Inventory Cr. 300,000
(To eliminated profit in closing products)
d. What is the investment income of Z for 2007? What is the balance of investment account
by the end of 2007 for Z? (4 points)
Ans:
Investment income of Z for 2007
Share in income of B 2,100,000
Less: Gain on sale of Land (350,000)
Less: Dividend declared (700,000)
Less: Excess amortisation (Refer WN-2) -
Net investment income of Z 1,050,000

WN-
2 Amortisation Value
Undervalued /
(overvalued) Life (years) Yearly amortisation
PPE (500,000) 5 (100,000)
Patent 1,000,000 10 100,000
Net excess amortisation -
Balance of Investment account of Z in 2007
Net investment 5,600,000
Add: Investment income of
2007 1,050,000
Balance of Investment account of Z in 2007 6,650,000
e. What is the amount of income that goes to non-controlling interests? What is the amount
of consolidated net income? What is the balance of non-controlling interests by the end of
2008? (4 points)
Ans:
30% of the amount goes to NCI

Amount of income of 2007 belonging to NCI is $600,000
Share in income of B 900,000
Less: Gain on sale of Land (150,000)
Less: Dividend declared (300,000)
Net investment income of Z 450,000
Balance of NCI at the end of 2007
Net investment 1,890,000
Add: Investment income of 2007 450,000
Balance of NCI in 2007 2,340,000
f. For year 2008, 2009, 2010, 2011, 2012 and 2013, B reported net income of $2,500,000,
$2,500,000, $3,500,000, $3,000,000, $4,000,000. 3,500,000, assuming no upstream sales,
what should the non-controlling interests’ income be for the 6 years respectively? (4
points)
Ans:
Year Net income of B NCI income @ 30%
2008 2,500,000 750,000
2009 2,500,000 750,000
2010 3,500,000 1,050,000
2011 3,000,000 900,000
2012 4,000,000 1,200,000