Advanced Accounting CH 3

CHAPTER 3
SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS

MULTIPLE CHOICE QUESTIONS
1.
d
The major motivation for off-balance-sheet financing is to avoid the impact on leverage.
2.
b
The fair values of the entitys assets and liabilities are included with those of the U.S.
company on the consolidated balance sheet. The fair value of the net assets is owned by
outside parties, and is labeled noncontrolling interest.
3.
d
Cash
Flow
$156,000
46,800
31,200
Total
4.
5.
Present
Value
$150,000
45,000
30,000
Prob
0.65
0.20
0.15
Expected
PV
$ 97,500
9,000
4,500
$111,000
Investment
$111,000
111,000
111,000
Residual
Returns
$39,000
(66,000)
(81,000)
Expected
Gains
$25,350
_____
$25,350
Expected
Losses
$(13,200)
(12,150)
$ 25,350
The entry on PRs books is:

Investment in SX
Merger expenses
Cash
Capital stock
6.
50,000
200
10,600
39,600
a
Elimination (E) is:
Capital stock
Retained earnings
Accumulated OCI
Treasury stock
Investment in SX
Solutions Manual, Chapter 3
5,000
8,000
1,000
9,600
2,400
Cambridge Business Publishers, 2016

3-1
7.
c
Elimination (R) is:
Current assets
Identifiable intangible assets (1)
Long-term debt
Goodwill (2)
PP&E
Current liabilities
Investment in SX
(1)
(2)
8.
2,200
15,000
400
34,400
4,000
400
47,600
$(14,000 $4,000) + $4,000 + $1,000 = $15,000

$50,000 ($4,200 + $6,000 + $14,000 + $4,000 + $1,000 $2,000 $11,600) = $34,400
d
See elimination R above.
9.
10.
c
IFRS requires consolidation of a less-than-majority-owned equity investment if the
investor controls the investee. If PX owns 40% of SCs stock, and the other 60% is
spread among small investors, it is likely that PX controls SC. Alternative d is not correct
because PX does not have a majority vote and cannot make decisions unilaterally; other
investors owning 45% of the stock (= 85% shares voted - 40% shares voted by PX)
participate in the decision making process and influence decisions.

3-2
Advanced Accounting, 3rd Edition
EXERCISES
E3.1
Eliminating Entries, Acquisition at Book Value

(amounts in millions)
(E)
Capital stock
22
Retained earnings
15
Treasury stock
2
Investment in SSC
35
To eliminate SSCs stockholders equity accounts and the book value portion of the
investment account.
Note: Eliminating entry (R) is not required because the book values of SSCs assets and
liabilities approximate fair value.
E3.2
Eliminating Entries, Revaluation of Reported Net Assets

(amounts in thousands)
a.
Acquisition cost
Samsons book value
Excess of acquisition cost over book value
Excess of fair value over book value:
Accounts receivable
Inventories
Land, buildings and equipment, net
Trademarks
Noncurrent liabilities
Goodwill
$ 20,000
(72,000)
(52,000)
$
(100)
(10,000)
(170,000)
50,000
(10,000)
140,100
$ 88,100
Note that even though Petrel pays less than book value for Samsons stock, Petrel still
pays more than the fair value of Samsons identifiable net assets, and therefore goodwill
is recognized.

3-3
b.
(E)
Common stock
1,000
Additional paid-in capital
80,000
AOCI
500
Retained earnings
5,500
Treasury stock
4,000
Investment in Samson
72,000
To eliminate Samsons stockholders equity accounts and the book value portion of
the investment account.
(R)
Trademarks
50,000
Goodwill
88,100
Investment in Samson
52,000
Accounts receivable
100
Inventories
10,000
Land, buildings and equipment, net
170,000
10,000
To revalue Samsons assets and liabilities to fair value and eliminate the difference
between book value and fair value of Samsons net assets from the investment
account.
Note that because the acquisition cost is less than book value, eliminating entry (R)
requires a debit to the investment account to eliminate it.
E3.3
Eliminating Entries, Bargain Gain

a.
Acquisition cost
Skelton book value
Current assets
Noncurrent assets
Identifiable intangibles
Bargain gain
$ 8
(20)
(12)
$ (2)
(25)
17
10
$ (2)
The fair value of Skeltons identifiable net assets is $10 (= $3 + $20 + $17 $30).
Phelps paid only $8, and records a gain of $2 on acquisition
Investment in Skelton
Cash
Gain on acquisition
To record the bargain gain investment on Phelps books.
3-4
10
8
2
b. (E)
Capital stock
25
Retained earnings
5
20
To eliminate Skeltons stockholders equity accounts and the book value portion of
the investment account.
(R)
17
10
Current assets
2
Noncurrent assets
25
To revalue Skeltons assets and liabilities to fair value and eliminate the difference
between book value and fair value of Samsons net assets from the investment
account.
E3.4
Eliminating Entries with Previously Unreported Intangibles

(E)
Stockholders equitySenyo
6,000,000
Investment in Senyo
6,000,000
To eliminate Senyos equity and the book value portion of the investment account.
(R)
Land
500,000
In-process R&D
1,000,000
Goodwill
2,500,000
Investment in Senyo
4,000,000
To revalue Senyos identifiable net assets to fair value, recognize goodwill, and eliminate
the remainder of the investment account.
E3.5
Acquisition and Eliminating Entries, Acquisition Expenses

a.
Investment in Stengl
Merger expenses
Common stock
Cash
10,000,000
300,000
250,000
9,750,000
300,000

3-5
b. (E)
Capital stock
200,000
Retained earnings
1,800,000
2,000,000
To eliminate Stengls equity and the book value portion of the investment account.
(R)
Long-term debt
25,000
Identifiable intangible assets
500,000
Goodwill
8,275,000
Plant assets, net
600,000
Inventories
200,000
8,000,000
To revalue Stengls identifiable net assets to fair value, recognize goodwill, and
eliminate the remainder of the investment account.
Note: Acquisition costs are expensed separately on Pinnacles books and do not
affect consolidation eliminating entries.
E3.6
Acquisition and Eliminating Entries, Bargain Purchase

a. Publix acquisition entry:
Investment in Sherman
Merger expenses
Cash
Gain on acquisition
2,980
40
2,790
230
Calculation of gain on acquisition:

Fair value of Sherman = $2,500 + $100 + $100 + $250 + $30 = $2,980
$2,980 $2,750 = $230 gain
b. Consolidation working paper elimination entries:
(E)
Stockholders equitySherman
2,500
2,500
To eliminate Shermans equity and the book value portion of the investment account.

3-6
(R)
Inventories
100
Land
100
Other plant assets, net
250
Long-term debt
30
480
To revalue Shermans identifiable net assets to fair value and eliminate the remainder
of the investment account.
Note: Acquisition costs and the gain on acquisition are recorded separately as
expenses and gains, respectively, on Publix books, and do not affect consolidation
eliminating entries.
E3.7
Interpreting Eliminating Entries

a. The stockholders equity (book value) of Seaboard is $48,000,000, based on the first
eliminating entry.
b. The acquisition cost is $88,000,000, so the excess paid over book value is
$40,000,000.
c.
Acquisition cost
Book value
Fair value less book value:
Noncurrent assets (overvalued)
Goodwill
E3.8
$88,000,000
48,000,000
40,000,000
2,000,000
$42,000,000
Acquisition Entry and Consolidation Working Paper

a. Phoenix makes the following entry to record the acquisition (amounts in millions):
Investment in Spark
Merger expenses
Cash
Common stock
Additional paid-in capital (1)
(1) [($90 $10) x 25] $5 = $1,995
2,650
8
413
250
1,995
This entry is reflected in Phoenixs account balances in the consolidation working

paper below.

3-7
b.
Consolidation Working Paper (in millions)
Accounts Taken
From Books
Current assets
Plant and equipment, net
Investment in Spark
Phoenix
Dr(Cr)
$
587
3,500
2,650
Spark
Dr(Cr)
$ 200
700
--
Brand names and trademarks

Goodwill
Current liabilities
Long-term liabilities
Common stock, par value
Retained earnings
Total
--(500)
(2,000)
(550)
(2,595)
(1,092)
$
0
--(150)
(300)
(100)
(50)
(300)
$ 0
Eliminations
Dr
(R)
200
(R) 300
(R) 1,710
(E) 100
(E)
50
(E) 300
$ 2,660
Consolidated
Cr
Balances Dr(Cr)
10 (R)
$
777
4,400
450 (E)
-2,200 (R)
300
1,710
(650)
(2,300)
(550)
(2,595)
_______
(1,092)
$ 2,660
$
0
Goodwill may be separately calculated as follows:

Acquisition cost
Sparks book value
Current assets
Brand names and trademarks
Goodwill

3-8
$2,650
(450)
$2,200
$ (10)
200
300
(490)
$1,710
E3.9
Consolidation Working Paper, Simple Example

(in millions)
a.
Investment in Sylvan
Cash
40
40
b.
Cash
Other current assets
Property and equipment, net
Investment in Sylvan
Goodwill
Liabilities
Common stock
Retained earnings
Total
Accounts Taken
From Books
Princecraf
t
Sylvan
Dr(Cr)
Dr(Cr)
$ 20
$
2
20
8
70
15
40
--(30)
(15)
(45)
(60)
$
0
-(8)
(5)
(10)
(2)
$
0
Eliminations
Dr
(R) 23
(E) 5
(E) 10
(E) 2
$
40
Consolidated
Balances Dr(Cr)
$ 22
28
85
17 (E)
-23 (R)
23
(38)
(15)
(45)
____
(60)
$ 40
$ 0
Cr
Note for eliminating entry (R): Because there are no revaluations of Sylvans
identifiable assets and liabilities, the excess of acquisition cost over the book value of
the acquired company is attributed entirely to goodwill. Goodwill = acquisition cost
of $40 minus book value of $17 = $23. Eliminating entry (R) eliminates the
remainder of the investment account and recognizes the acquired goodwill.
c.
Princecraft Company and Subsidiary
Consolidated Balance Sheet
Date of Acquisition
Assets
Liabilities
Cash
$ 22
Total liabilities
Other current assets
28
85
Stockholders equity
Goodwill
23
Common stock
Retained earnings
_____
Total equity
Total assets
$ 158
Total liabilities and equity
$ 38
15
45
60
120
$ 158

3-9
E3.10 Consolidation with Revaluations of Recorded Net Assets

a.
Acquisition cost
Shelby book value
Cash and receivables
Inventory
Long term liabilities
Goodwill
$ 50
(15)
35
$
1
(3)
(10)
2
10
$ 45
b.
Accounts Taken
From Books
Panoz
Shelby
Dr(Cr)
Dr(Cr)
Inventory
Investment in Shelby
10
Eliminations
Dr
Cr
(R) 1
Consolidated
Balances Dr(Cr)
$
16
40
10
3 (R)
47
350
100
10 (R)
440
50
--
15 (E)
--
35 (R)
Goodwill
--
--
(60)
(20)
(200)
(80)
(R) 2
(278)
Capital stock
(120)
(10)
(E) 10
(120)
Retained earnings
(100)
(6)
(E) 6
(100)
AOCI
10
(1)
(E) 1
10
Treasury stock
20
____
$ 65
Current liabilities
Total

3-10
(R) 45
45
(80)
2 (E)
$ 65
20
$
c.
Panoz Corporation and Subsidiary
Date of Acquisition
Assets
Liabilities
$ 16
Current liabilities
Inventory
47
440
Total liabilities
Goodwill
45
Stockholders equity
Capital stock
Retained earnings
Accumulated other
comprehensive income
Treasury stock
____
Total equity
Total assets
$ 548
$ 80
278
358
120
100
(10)
(20)
190
$ 548
E3.11 Consolidation with Previously Unrecorded Intangibles and Goodwill (see related
E2.8)
(all amounts in thousands)
a.
Acquisition cost
Ciber book value
Current assets
Licenses and trademarks
Customer contracts
Brand names
Favorable leases
Developed technology
In-process R&D
Goodwill
$50,000
(6,600)
$43,400
$ (100)
(8,000)
2,000
(1,000)
1,000
5,000
400
1,500
300
(1,100)
$42,300

3-11
b.
Consolidation Working Paper (in thousands)
Accounts Taken
From Books
Current assets
Investment in Ciber
Brightcove
Dr(Cr)
$ 70,000
200,000
-50,000
Ciber
Dr(Cr)
$
400
12,000
5,000
--
Customer contracts
Brand names
Favorable leases
In-process R&D
Goodwill
Current liabilities
Capital stock
Retained earnings
Total
------(80,000)
(150,000)
(35,000)
(55,000)
$
0
------(800)
(10,000)
(8,000)
1,400
$
0
Eliminations
Dr
(R) 2,000
(R) 1,000
(R) 5,000
(R) 400
(R) 1,500
(R) 300
(R) 42,300
(E) 8,000
_______
$ 60,500
Consolidated
Cr
Balances Dr(Cr)
100 (R)
$ 70,300
8,000 (R)
204,000
7,000
6,600 (E)
-43,400 (R)
1,000
5,000
400
1,500
300
42,300
(80,800)
1,000 (R)
(161,000)
(35,000)
1,400 (E)
(55,000)
$ 60,500
$
0
c.
Brightcove, Inc. and Subsidiary
Date of Acquisition
Assets
Liabilities
Current assets
$ 70,300
Current liabilities
204,000
7,000
Total liabilities
Other identifiable intangible
assets
8,200
Goodwill
42,300
Stockholders equity
Capital stock
Retained earnings
________
Total equity
Total assets
$ 331,800

3-12
$ 80,800
161,000
241,800
35,000
55,000
90,000
$ 331,800
E3.12 Reconstructing Eliminating Entries and Book Value

(all numbers in millions)
a. Consolidated total assets
Less: Coves current assets ($75 $65)
Less: Coves noncurrent assets
Fair value of Bays total assets
Less: Goodwill
Fair value of Bays identifiable assets
$ 111
(10)
(25)
$ 76
(37)
$ 39
b. Acquisition cost
Less: Goodwill
Fair value of Bays identifiable net assets
Fair value of Bays identifiable assets (from a. above)
Less: Fair value of Bays identifiable net assets
Fair value of Bays liabilities
$ 65
(37)
$ 28
$ 39
(28)
$ 11
c. Fair value of Bays identifiable net assets (from b. above)

Less: Fair value of previously unreported intangibles
Book value of Bays net assets
$ 28
(16)
$ 12
d.
(E)
Stockholders equityBay
Investment in Bay
12
(R)
Goodwill
Investment in Bay
16
37
12
53
E3.13 Identifying and Analyzing Variable Interest Entities

a. Minority shareholder C guarantees 92% of As debt, which is most of As capital,
providing evidence that A cannot obtain financing on its own, and indicating that As
owners lack the usual characteristics of equity. Therefore A is likely to be classified
as a VIE. C has decision-making power through its majority representation on the
board. C has the obligation to absorb As significant losses and benefits through its
equity interest and guarantee of As bank loans, and will likely be designated as As
primary beneficiary. Therefore C will consolidate A.

3-13
b. Without any other information, B is not a VIE. D is the sole owner of B through its
100% equity ownership, and should consolidate B under ASC Topic 810. Although
contractual and other arrangements may suggest that B is a VIE, the problem is silent
on these matters. The point here is that a small proportion of equity does not
automatically lead to the conclusion that the equity holders are not exposed to the
usual risks and rewards of stock ownership.
c. The 15% equity could be enough to avoid identifying A as a VIE, if there is evidence
that A can obtain financing on its own, has a level of equity comparable to other
entities who can obtain financing on their own, or that its equity is deemed adequate
to absorb As expected losses. In that case, E is the controlling investor and C does not
consolidate A.
If A cannot obtain financing on its own, or its equity is not sufficient to absorb
expected losses, A is a VIE. C has the decision making power, and by agreeing to
compensate E for any of As losses, C absorbs significant losses. Therefore C is likely
As primary beneficiary and should consolidate A.
d. Bs stockholders equity is insulated from losses by the guarantees provided by C and
D. Moreover, Ds unsecured loan to B provides additional subordinated financial
support. These factors indicate that B is a VIE. D has decision making power
through its control of Bs board. Losses in guaranteed residual values on Ds
specialized property, and its unsecured loan to B, require D to absorb a potentially
significant amount of Bs losses. Therefore it is likely that D is Bs primary
beneficiary and must consolidate B.
E3.14 Identification of Variable Interest Entity and Primary Beneficiary
a.
If qualitative factors are inconclusive, the answer to this question depends on a

quantitative analysis of the ability of the equity interest to absorb Starteks potential losses.
Using the quantitative analysis presented in the chapter (and illustrated in ASC para. 810-10-5553), expected gains and losses are computed as follows (in millions):
Expected
Cash Flow
Present
Value
Prob.
$ 11
33
55
$ 10
30
50
0.40
0.20
0.40
Expected
PV
$
4
6
20
$ 30
Investment
Fair Value
Residual
Returns
$ 30
30
30
$ (20)
-20
Expected
Gains
Expected
Losses
$
$
$
8
8
(8)
_____
$ (8)
Because the $4,000,000 equity interest is insufficient to absorb the expected losses of
$8,000,000 computed above, the quantitative analysis indicates that Startek is a VIE.

3-14
b.
Softek must have (1) the power to direct Starteks activities that most significantly
affect its economic performance, and (2) be exposed to the losses and benefits that are potentially
significant to Startek. Because Softek guarantees Starteks debt, it probably meets requirement
(2). However, we dont have enough information to assess Softeks decision making power over
Startek.
E3.15 Consolidation Policy: U.S. GAAP and IFRS
a. Randolph owns 64% of the voting rights [0.64 = (0.8 x 0.60) + (0.4 x 0.40)], and
meets the majority ownership test for consolidation of ASC Topic 810.
b. IFRS also recognizes the legal control signified by ownership of 64% of the voting
rights and consolidation would occur.
c. Randolphs ownership of the Class A shares produces 48% (= 0.8 x .60) of the voting
interest. U.S. GAAP emphasizes majority ownership of the voting stock, so
consolidation is unlikely. IFRS looks for control, regardless of equity ownership.
The other investor owns 40% of the voting rights. Thus Randolph does not control
the voting rights and decision-making authority appears to be shared. However, the
influence of the other 12% of the Class A shares voting rights must be examined. If
Randolph can demonstrate sufficient influence over that other 12% to dominate
Marshalls governing board, effective control may exist, requiring consolidation
under IFRS.
d. Now Randolph owns 42% (= 0.7 x 0.60) of the voting interest and all other interests
are dispersed. These facts suggest that Randolph can dominate Marshalls governing
board thereby possessing unshared decision-making power and consolidation would
be required under IFRS. Randolph does not have majority ownership, and
consolidation under U.S. GAAP is unlikely.

3-15
PROBLEMS
P3.1
Eliminating Entries, Goodwill

a.
Acquisition cost
Book value (deficit)
Fair value less book value:
Fixed assets, net
Liabilities
Customer lists
Brand names
Goodwill
$ 400
25
$ 425
$ (35)
(1)
65
100
129
$ 296
b.
(E)
Common stock
5
15
Investment in Sherwood
25
Retained earnings
Accumulated other comprehensive loss
Treasury stock
To eliminate Sherwoods equity accounts and the book value portion of the
investment account.
40
2
3
(R)
Customer lists
65
Brand names
100
Goodwill
296
Fixed assets, net
35
Liabilities
1
Investment in Sherwood
425
To revalue Sherwoods assets and liabilities to fair value and eliminate the remainder
of the investment account.

3-16
P3.2
Consolidation Working Paper, Identifiable Intangibles, Goodwill

a. (in millions)
Investment in GOC
Merger expenses
Common stock
Additional paid-in capital (1)
Contingent consideration liability
Cash
112
5
2
55
2
58
(1) APIC = fair value of shares issued par value of shares issued registration fees:
$55 = $60 $2 $3
b.
Current assets
Property, plant and
equipment, net
Investment in GOC
Accounts Taken
From Books
ITI
GOC
Dr (Cr)
Dr (Cr)
$
142
$
10
Identifiable intangible assets
Goodwill
Current liabilities
Common stock, par
Retained earnings
Accumulated other
Treasury stock
Total
500
112
130
1,300
20
(150)
(1,202)
(22)
(605)
(95)
(20)
(100)
(4)
(60)
25
15
5
0
(3)
2
0
Eliminations
Dr
(R) 5
Consolidated
Balances Dr (Cr)
$ 157
Cr
60 (R)
40 (E)
72 (R)
(R) 10
(R) 5
(R) 25
(R) 90
1,360
3 (R)
(E) 4
(E) 60
25 (E)
(E) 3
_____
$ 202
570
--
2 (E)
$ 202
90
(170)
(1,305)
(22)
(605)
(95)
15
5
0

3-17
P3.3
Stock Acquisition and Consolidation Working Paper Eliminating Entries

a.
Investment in Pharmacia (1)
Merger expenses
Common stock
Cash
55,873
101
91
55,782
101
(1) $55,873 = 1,817 x $30.75
b.
Acquisition cost
Pharmacia book value
Inventory
Long-term investments
Property, plant and equipment
In-process R&D
Developed technology rights
Long-term debt
Other assets
Goodwill
c. (E)
Stockholders equityPharmacia
Investment in Pharmacia
(R)
Inventory
In-process R&D
Developed technology rights
Goodwill
Long-term debt
Other assets
Investment in Pharmacia

3-18
$55,873
(7,236)
$48,637
$
2,939
40
(317)
5,052
37,066
(1,841)
(15,606)
27,333
$21,304
7,236
7,236
2,939
40
5,052
37,066
21,304
317
1,841
15,606
48,637
P3.4
Consolidated Balance Sheet Working Paper, Bargain Purchase

a. Calculation of gain on acquisition:
Acquisition cost
Book value
Inventory
Land
Buildings and equipment
Long-term debt
Gain on acquisition
$ 1,800
(1,295)
$ 505
$ 100
(50)
245
300
110
$
705
200
b.
Consolidation Working Paper

Inventory
Investment in Saxon
Accounts Taken
From Books
Paxon
Saxon
Dr (Cr)
Dr (Cr)
$ 1,060
$ 720
1,700
900
-300
2,000
Land
Buildings and equipment
Accumulated depreciation
Current liabilities
Long-term debt
Retained earnings
Total
650
3,400
(1,000)
(1,500)
(2,000)
(500)
(1,200)
(2,610)
$
0
175
600
-(1,000)
(400)
(100)
(350)
(845)
$
0
Eliminations
Dr
(R) 100
(R) 245
(R) 300
(R) 110
(E) 100
(E) 350
(E) 845
$ 2,050
Consolidated
Balances Dr (Cr)
$ 1,780
2,700
50 (R)
250
1,295 (E)
-705 (R)
1,070
4,300
(1,000)
(2,500)
(2,290)
(500)
(1,200)
______
(2,610)
$ 2,050
$
0
Cr

3-19
c.
Paxon Corporation and Subsidiary
January 1, 2016
Assets
Liabilities
$ 1,780
Current liabilities
Inventory
2,700
Long-term debt
250
Total liabilities
Land
1,070
Buildings and equipment, net
of $1,000 accumulated
depreciation
3,300
Stockholders equity
Retained earnings
_______
Total equity
Total assets
$ 9,100
P3.5
$ 2,500
2,290
4,790
500
1,200
2,610
4,310
$ 9,100
Consolidated Balance Sheet Working Paper, Previously Reported Goodwill

(amounts in thousands)
a.
Investment in Static
Merger expenses
Common stock
Cash
15,000
60
200
14,400
460
b.
Acquisition cost
Statics book value
Inventory
Equity method investments
Plant assets, net
Copyrights
Goodwill (1)
Goodwill
$ 15,000
(4,000)
$ 11,000
$ (200)
(400)
2,400
(2,100)
2,800
(500)
100
$
2,100
8,900
(1) All pre-existing goodwill is eliminated, even though it may be deemed to have a non-zero fair value.

3-20
c.

Inventory
Investment in Static
Plant assets, net
Copyrights
Goodwill
Current liabilities
Common stock, par
Retained earnings
Total

Accounts Taken
From Books
Eliminations
Progressive
Static
Consolidated
Dr (Cr)
Dr (Cr)
Dr
Cr
Balances Dr (Cr)
$ 7,540
$ 2,000
200 (R)
$ 9,340
7,000
2,400
400 (R)
9,000
-600
(R) 2,400
3,000
15,000
-4,000 (E)
-11,000(R)
10,000
3,600
2,100 (R)
11,500
1,000
200
(R) 2,800
4,000
-500
(R) 8,900
500 (R)
8,900
(6,000)
(2,000)
(8,000)
(4,000)
(3,300)
(R) 100
(7,200)
(300)
(100)
(E) 100
(300)
(15,300)
(400)
(E) 400
(15,300)
(14,940)
(3,500)
(E) 3,500
_____
(14,940)
$
0
$
0
$ 18,200
$ 18,200
$
0
d.
Progressive Corporation and Subsidiary
June 30, 2016
Assets
Liabilities
$ 9,340
Current liabilities
Inventory
9,000
Long-term debt
3,000
Total liabilities
Plant assets, net
11,500
Copyrights
4,000
Stockholders equity
Goodwill
8,900
Common stock, par
Retained earnings
_______
Total equity
Total assets
$ 45,740
$ 8,000
7,200
15,200
300
15,300
14,940
30,540
$ 45,740

3-21
P3.6
Consolidated Balances, Different Acquirers

a.
Current assets
Property, plant and
equipment, net
Investment in Webnet

Accounts Taken
From Books
Eliminations
Webnet
Microtech
Solutions
Dr (Cr)
Dr (Cr)
Dr
Cr
$ 10
$ 10
50
50
200
--
Consol.
Balances Dr (Cr)
$
20
100
41 (E)
--
159 (R)
Patents
Goodwill
Current liabilities
Long-term debt
Common stock, par
Retained earnings
Total
5
-(4)
(20)
(3)
(224)
(14)
$
0
5
-(4)
(20)
(2)
(25)
(14)
$
0
(R) 159
(E) 2
(E) 25
(E) 14
$ 200
_____
$ 200
10
159
(8)
(40)
(3)
(224)
(14)
$
0
b.
Current assets
Property, plant and
equipment, net
Investment in Microtech
Patents
Client relationships
Goodwill
Current liabilities
Long-term debt
Common stock, par
Retained earnings
Total

3-22

Accounts Taken
From Books
Eliminations
Webnet
Solutions
Microtech
Dr (Cr)
Dr (Cr)
Dr
Cr
$ 10
$ 10
50
50
200
--
5
---(4)
(20)
(3)
(224)
(14)
$
0
5
---(4)
(20)
(2)
(25)
(14)
$
0
(R) 20
Consol.
Balances Dr (Cr)
$
20
120
41 (E)
159 (R)
(R) 10
(R) 100
(R) 29
(E)
2
(E) 25
(E) 14
_____
$
200 $ 200
-20
100
29
-(8)
(40)
(3)
(224)
(14)
$
0
c. The consolidated balance sheets are compared below.

Microtech
acquires
Webnet
Assets
Current assets
Property, plant and equipment, net
Goodwill
Total assets
Liabilities
Current liabilities
Long-term debt
Total liabilities
Stockholders equity
Common stock, par
Retained earnings
Total equity
Webnet
acquires
Microtech
20
100
10
159
$ 289
8
40
48
3
224
14
241
$ 289
20
120
149
-$ 289
8
40
48
3
224
14
241
$ 289
Both sets of consolidated balances report the same total assets and the same
individual liabilities and equities. However, the individual asset accounts differ. The
acquirers assets are not revalued to fair value, nor are previously unreported assets
recognized. Microtech has understated property, plant and equipment and patents, as
well as unreported identifiable intangible assets. Webnet Solutions assets and
liabilities are reported at amounts approximating fair value, and there are no
identifiable intangibles. When Microtech is the acquirer, the difference between
Webnet Solutions acquisition price and reported book value is reported as goodwill,
and the difference between book and fair value of Microtechs assets is not
recognized. When Webnet Solutions is the acquirer, its goodwill is not recognized,
but Microtechs property and patents are reported at fair value, and its identifiable
intangibles are recognized.
Does management want the $159 million excess of acquisition cost over book value
to be reported as the unspecified asset goodwill, or distributed among several
identifiable assets (property, plant and equipment, patents, client relationships)? If
Webnet Solutions is the acquirer, Microtechs previously unreported identifiable
assets will come to light. To the extent that the existence of identifiable intangibles
such as developed technology and client relationships indicate favorable future

3-23
earnings potential, investors may view the new disclosures as a positive signal,
increasing stock price. If Microtech is the acquirer, no identifiable intangibles are
recognized, and investors may wonder if Webnet Solutions will sustain its value in
the future, as these assets would seem to be the lifeblood of a technology company.
Management will also consider the implications for future income. Identifiable assets
usually have limited lives and are depreciated or amortized over time, reducing
earnings on a regular basis. Goodwill is tested for impairment loss, and may never be
written off. If Microtech is the acquirer, future reported income may be higher
because there are no identifiable intangibles to be amortized.
Note to instructor: This problem illustrates the games companies can play to choose
between different financial statement displays of the same transaction economics.
P3.7
Tangible and Intangible Asset Revaluations

(in thousands)
a.
Consideration paid
Previously unrecorded intangibles
acquired:
Customer contracts and related
relationships
Trade name, trademark, and domain
name
Goodwill
Fair value of tangible net assets
acquired
interclick
$ 258,501
$ 42,700
35,600
600
171,641
Tumblr
$ 990,211
$182,400
23,700
(250,541)
$ 7,960
56,500
751,765
(1,014,365)
$
(24,154)
b. The fair values of Tumblrs liabilities are greater than the fair values of their tangible
assets. Since net book values are positive, and book values of liabilities are generally
close to fair value, the cause is likely to be a decline in the fair value of tangible
assets. For technology companies, tangible assets such as equipment are likely to
lose resale value quickly. Yahoo lists identifiable intangibles acquired as customer
contracts, developed technology, trade names, trademarks, and domain names. Value
is derived almost exclusively from the future earnings potential of these intangible
assets, not the tangible assets.

3-24
c. interclick eliminations:
(E)
Stockholders equityinterclick
Investment in interclick
10,000
10,000
(R)
Customer contracts and related relationships
Trade name, trademark, and domain name
Goodwill
Tangible net assets (1)
Investment in interclick
42,700
35,600
600
171,641
2,040
248,501
(1) $10,000 $7,960 = $2,040. The fair value of tangible net assets is $2,040 less than book value,
requiring a credit of $2,040 to revalue them to fair value.
Tumblr eliminations:
(E)
Stockholders equityTumblr
Investment in Tumblr
50,000
50,000
(R)
Customer contracts and related relationships
Trade name, trademark, and domain name
Goodwill
Tangible net assets (2)
Investment in Tumblr
182,400
23,700
56,500
751,765
74,154
940,211
(2) $50,000 + $24,154 = $74,154. The fair value of tangible net assets is $(24,154), while book value
is $50,000. Therefore the fair value of tangible net assets is $74,154 less than book value, requiring a
credit of $74,154 to revalue them to fair value.
P3.8
Eliminating Entries, Subsidiarys Separate Balance Sheet

a. (E)
Stockholders equitySonara
Investment in Sonara
(R)
Current assets
Goodwill
Plant assets
Investment in Sonara
8,000,000
8,000,000
2,000,000
6,000,000
28,000,000
4,000,000
32,000,000

3-25
b.
Current assets (1)

Plant assets, net (2)
Total assets
Sonara Company
Balance Sheet, Date of Acquisition
$ 1,000,000
Liabilities (3)
24,000,000
Stockholders equity
Total liabilities and
$ 25,000,000
equity
$ 17,000,000
8,000,000
$ 25,000,000
(1) $1,000,000 = $8,000,000 - $2,000,000 - $5,000,000

(2) $24,000,000 = $45,000,000 + $4,000,000 - $25,000,000
(3) $17,000,000 = $56,000,000 - $39,000,000
P3.9
Stock Acquisition, Previous Equity Interest and Goodwill, Merger-Related Costs,

Deferred Taxes
a.
Investment in Grupo Modelo
Merger expenses
Cash (1)
Investment in associates
34,008
100
20,203
13,905
(1) $20,103 + $100 = $20,203
b. Goodwill reported on an acquired companys books is not an identifiable asset and is

not separately reported. The difference between acquisition cost and the fair value of
net identifiable assets acquired is reported as goodwill on the consolidated balance
sheet.
c. This acquisition must be nontaxable; the acquiree does not pay taxes on any gain.
Therefore the tax basis of the acquired net assets remains at Grupo Modelos tax
basis, which is typically lower than fair value at the date of acquisition. AB InBev
reports net assets acquired at fair value on its books, and writes them off over time.
Therefore the book write-offs are higher than the tax deductions, causing cash paid
for taxes to be greater than tax expense. The discrepancy is payment of deferred tax
liabilities, created at the date of acquisition. The acquiring company reports a
deferred tax liability for the additional taxes it will pay in excess of the tax expense it
reports on its books, as these intangible assets are written off.

3-26
d.
Acquisition cost (see a. above)
Grupo Modelos book value
Excess of fair value over book value (2):
Goodwill
Intangible assets
Investment securities
Current assets
Employee benefits
Trade and other payables
Deferred tax liabilities
Current liabilities
Goodwill
$ 34,008
(9,203)
$ 24,805
$
99
(796)
4,454
(4)
-4,333
-(509)
(714)
(1,650)
(5,213)
$ 19,592
(2) Difference between fair and book value amounts.
e. (E)
Stockholders equityGrupo Modelo
(R)
Intangible assets
Current assets
Goodwill (new)
Goodwill (old)
Trade and other payables
Deferred tax liabilities
Current liabilities
9,203
9,203
99
4,454
4,333
19,592
796
4
509
714
1,650
24,805

3-27
P3.10 Consolidation of Variable Interest Entities

(dollar amounts in millions)
a. U.S. GAAP requires a 2-step process to determine if SPEs should be consolidated.
First, determine if the SPE is a variable interest entity. The SPE is a VIE if its equity
does not have the usual equity characteristics, in terms of risk and return. These
factors must be considered:
(1) Does the equity interest have the power to make decisions?
(2) Is the equity interest exposed to the risks and rewards connected with the SPE?
(3) Is the equity interest sufficient to allow the SPE to obtain financing on its own?
Limitations on the voting power of the equity interest, and caps on the amount of
losses the equity interest may incur, are indicators of VIE status. If the SPEs
business activities are predominantly conducted on behalf of an entity that has few
voting rights, the SPEs equity interest may not be exposed to the normal risks and
returns of stock ownership.
To determine the sufficiency of the SPEs equity, qualitative factors include whether
the SPE is in fact able to obtain financing on its own, or has equity equivalent to other
entities who are able to obtain financing on their own. If qualitative factors are not
conclusive, a quantitative analysis may be done to determine if the SPEs equity level
is sufficient to absorb expected future losses.
Once the SPE is classified as a VIE, GM consolidates it if it is the VIEs primary
beneficiary. GM determines if it has the power to direct the decisions that
significantly affect the VIEs performance, and is exposed to the risks and returns
connected with that performance.
GM likely classified the SPEs as VIEs because GM Financial provides the assets that
are used to repay the debt. It seems unlikely that the SPEs could obtain financing on
their own, since they exist to securitize these assets. GM Financial is the primary
beneficiary of the VIEs because it services the securitized assets, and therefore has
the power to direct the VIEs major decisions. GM Financial also apparently has
exposure to the VIEs risks and returns.
b. Consolidation of the VIEs adds $1,523 and $23,584 to consolidated assets, and
$19,448 to consolidated liabilities. The remainder of $5,659 (= $1,523 + $23,584
$19,448) is the VIEs equity interest, which is included as noncontrolling interest in
the equity section of GMs consolidated balance sheet.

3-28
P3.11 Identifiable Intangibles and Goodwill (see related P2.5)

a. Prince makes the following entry to record the acquisition on its own books (in
thousands):
Investment in Squire
Merger expenses
Capital stock
Cash
35,000
1,200
34,400
1,800
The account balances for Prince, shown in the working paper below, reflect the above
entry. Merger expenses reduce retained earnings, a component of stockholders
equity.
Accounts Taken
From Books
Cash
Accounts receivable
Parts inventory
Vehicle inventory
Equipment, net
Investment in Squire
Intangible: Lease
Intangible: Service
contracts
Intangible: Trade name
Goodwill
Current liabilities
Stockholders equity
Total
Eliminations
Prince
Dr (Cr)
$ 1,000
6,000
-15,000
40,000
35,000
Squire
Dr (Cr)
$
300
2,700
5,200
-17,600
--
--
--
---(5,000)
(25,000)
(67,000)
$
0
---(3,100)
(8,600)
(14,100)
$
0
Dr
(R)
Consolidated
Balances Dr (Cr)
$
1,300
100 (R)
8,600
6,000
15,000
59,500
14,100 (E)
-20,900(R)
1,250
Cr
800
(R) 1,900
(R) 1,250
(R) 2,000
(R) 200
(R)14,250
(R) 600
(E)14,100
$ 35,100
_______
$ 35,100
2,000
200
14,250
(8,100)
(33,000)
(67,000)
$
0

3-29
b. If Prince records the acquisition as a statutory merger, Prince makes the following
entry (in thousands):
Cash
Accounts receivable
Parts inventory
Equipment, net
Intangible: Lease
Intangible: Service contracts
Intangible: Trade name
Goodwill
Merger expenses
Cash
Current liabilities
Capital stock
300
2,600
6,000
19,500
1,250
2,000
200
14,250
1,200
1,800
3,100
8,000
34,400
When the above entry is reflected in Princes account balances, Princes balance sheet
account balances are identical to those shown in the consolidated column of the
working paper for a stock acquisition.
P3.12 Consolidation Policy for Equity Investments: U.S. GAAP and IFRS
Case
(1)
(2)
(3)
(4)
(5)
(6)
U.S. GAAP
Do not consolidate
Do not consolidate
Do not consolidate
Do not consolidate
Do not consolidate
Do not consolidate
IFRS
Consolidate
Consolidate
Consolidate
Possibly consolidate
There is no evidence that Benson is a VIE. Therefore the consolidation standards for
equity investments apply. Under ASC Topic 810, consolidation is generally not
appropriate, as no case has majority ownership and there is little guidance to determine
control when the investor holds a minority of the stock. Under IFRS, there is guidance to
determine if control exists with minority stock ownership.

3-30
In cases (1), (2) and (3),

1. Andrews owns a large minority interest (40 to 49%) and the remaining ownership
is widely dispersed (no single party holds more than 3 percent).
2. A recent election has shown that Andrews is able to cast a majority of the votes
cast (53 to 58%).
Absent evidence to the contrary, either one of these is sufficient per IFRS to presume that
Andrews has effective control, and that consolidated statements should be prepared.
In cases (4), (5) and (6), the conclusion is less clear. While Andrews owns a fairly large
minority interest (25 to 35 percent) and other ownership is widely dispersed, it is a matter
of judgment as to whether Andrews' interest leads to control. Andrews was able to
nominate its director candidates, solicit some proxies, and convince other stockholders to
vote for its nominees in order to obtain a majority of the votes. While a conclusion of
effective control seems likely, it is not automatic.
P3.13 Working BackwardsReconstruct Balance Sheet and Eliminating Entries
(in thousands)
a. Piedmonts entry to record the acquisition was as follows:
Investment in Stearns
Merger expenses
Capital stock (1)
Cash (2)
Earnings contingency liability
220,000
500
119,300
96,200
5,000
(1) $120,000 $700 = $119,300

(2) $95,000 + $500 + $700 = $96,200
Reversing this entry out of Piedmonts balance sheet produces its balance sheet just
prior to the acquisition:
Piedmont Corporation
Balance Sheet, Immediately Prior to Date of Acquisition
Current assets (3)
$ 136,200
Liabilities (4)
Plant assets, net
360,000
Capital stock (5)
________
Retained earnings (6)
Total assets
$ 496,200
$ 215,000
180,700
100,500
$ 496,200
(3) $40,000 + $96,200 = $136,200

(4) $220,000 - $5,000 = $215,000
(5) $300,000 - $119,300 = $180,700
(6) $100,000 + $500 = $100,500

3-31
b. (E)
Capital stock
Retained earnings
(R)
Goodwill
Plant assets, net (7)
40,000
25,000
15,000
100,000
135,000
30,000
205,000
(7) $470,000 $360,000 $140,000 = $(30,000)
c.
Acquisition cost
Stearns book value
Plant assets, net
Goodwill
$ 220,000
(15,000)
$ 205,000
$ (30,000)
100,000
(70,000)
$ 135,000
P3.14 Consolidated Balance Sheet Working Paper, Identifiable Intangibles

a.
Acquisition cost (1)
GPs book value (2)
Current assets
Fixed assets, net
Trademarks
Licensing agreements
Order backlogs
Goodwill
$ 41,250
(5,000)
36,250
$ 200
(7,000)
2,600
2,400
5,000
1,000
(4,200)
$ 32,050
(1) $5,000 + $36,000 + $250 = $41,250

(2) $500 + $8,500 $2,000 $1,400 $600 = $5,000
Note: The skilled workforce and future synergies are not capitalized separately but
are included in goodwill.

3-32
b.
Accounts Taken
From Books
Current assets
Fixed assets, net
Investment in GP
Trademarks
Other identifiable
intangibles
Goodwill
Current liabilities
Common stock, par
Retained earnings
AOCI
Treasury stock
Total
International
Auto
Dr (Cr)
$ 22,900
420,000
41,250
Eliminations
Genuine
Parts
Dr (Cr)
$ 1,000
27,000
--
Dr
(R) 200
89,000
3,400
(R) 2,600
--
--
(R) 2,400
(R) 5,000
(R)32,050
-(25,000)
(350,250)
(10,000)
(143,100)
(43,800)
(4,000)
3,000
$
0
-(400)
(26,000)
(500)
(8,500)
2,000
1,400
600
$
0
Consolidated
Balances
Cr
Dr (Cr)
$
24,100
7,000 (R)
440,000
5,000 (E)
-36,250 (R)
95,000
7,400
(R) 1,000
(E) 500
(E) 8,500
_______
$ 52,250
2,000 (E)
1,400 (E)
600 (E)
$ 52,250
32,050
(25,400)
(375,250)
(10,000)
(143,100)
(43,800)
(4,000)
3,000
$
0
Note: International Autos trial balance at the date of acquisition is determined by

combining its trial balance just prior to the acquisition with this acquisition journal
entry:
Investment in GP
Merger expenses
Common stock, par
Cash
Earnings contingency liability
41,250
1,200
2,000
33,100
7,100
250

3-33
c.
International Auto and Subsidiary
Consolidated Balance Sheet, Date of Acquisition
Assets
Current assets
Fixed assets, net
Trademarks
Other identifiable intangibles
Goodwill
Total assets
$ 24,100
440,000
95,000
7,400
32,050
________
$ 598,550
Liabilities
Current liabilities
Total liabilities
Stockholders equity
Common stock, par
Retained earnings
Accumulated other
Treasury stock
Total stockholders equity
25,400
375,250
400,650
10,000
143,100
43,800
4,000
(3,000)
197,900
$ 598,550
P3.15 Consolidated Balance Sheet Working Paper, Bargain Gain, Special Issues
(in thousands)
a.
Acquisition cost
Steamobiles book value
Excess of book value over acquisition cost
Current assets
Fixed assets, net (1)
Goodwill (old)
Liabilities
Bargain gain
$ 20,000
(30,000)
(10,000)
$ (2,000)
30,000
6,000
(35,000)
(1,000)
2,000
$ 8,000
(1) $140,000 ($150,000 $40,000) = $30,000

3-34
b.
Accounts Taken
From Books
Packard
Dr (Cr)
$ 15,000
500,000
(160,000)
28,000
--(215,000)
(90,000)
(78,500)
500
$
0
Current assets
Fixed assets
Accumulated depreciation
Investment in Steamobile
Goodwill
Liabilities
Capital stock
Retained earnings
AOCI
Total
Eliminations
Steamobile
Dr (Cr)
$ 5,000
150,000
(40,000)
-35,000
(120,000)
(35,000)
5,800
(800)
$
0
Dr
(R) 30,000
(R) 40,000
(R) 2,000
(R) 6,000
Cr
2,000(R)
40,000(R)
30,000(E)
35,000(R)
1,000(R)
(E )35,000
5,800(E)
(E)
800 _______
$ 113,800 $ 113,800
Consolidated
Balances
Dr (Cr)
$ 18,000
640,000
(160,000)
-6,000
-(336,000)
(90,000)
(78,500)
500
$
0
Note 1: Packards trial balance at the date of acquisition is determined by combining

its trial balance just prior to the acquisition with this acquisition journal entry:
Investment in Steamobile
Cash
Bargain gain
28,000
20,000
8,000
Note 2: An additional eliminating entry removes Steamobiles accumulated

depreciation account and nets it against the fixed assets account.
c.
Packard and Subsidiary
Consolidated Balance Sheet, Date of Acquisition
Assets
Current assets
Fixed assets, net of $160,000
accumulated depreciation
Total assets
18,000
480,000
6,000
________
$ 504,000
Liabilities
Liabilities
Stockholders equity
Capital stock
Retained earnings
Accumulated other
Total stockholders equity
$ 336,000
90,000
78,500
(500)
168,000
$ 504,000

3-35

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CHAPTER 3

SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS

The entry on PRs books is:

Solutions Manual, Chapter 3

Cambridge Business Publishers, 2016

$(14,000 $4,000) + $4,000 + $1,000 = $15,000

Cambridge Business Publishers, 2016

Advanced Accounting, 3rd Edition

Eliminating Entries, Acquisition at Book Value

Eliminating Entries, Revaluation of Reported Net Assets

Solutions Manual, Chapter 3

Cambridge Business Publishers, 2016

Eliminating Entries, Bargain Gain

Advanced Accounting, 3rd Edition

Eliminating Entries with Previously Unreported Intangibles

Acquisition and Eliminating Entries, Acquisition Expenses

Solutions Manual, Chapter 3

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Acquisition and Eliminating Entries, Bargain Purchase

Calculation of gain on acquisition:

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Advanced Accounting, 3rd Edition

Interpreting Eliminating Entries

Acquisition Entry and Consolidation Working Paper

This entry is reflected in Phoenixs account balances in the consolidation working

Solutions Manual, Chapter 3

Cambridge Business Publishers, 2016

Brand names and trademarks

Goodwill may be separately calculated as follows:

Cambridge Business Publishers, 2016

Advanced Accounting, 3rd Edition

Consolidation Working Paper, Simple Example

Solutions Manual, Chapter 3

Cambridge Business Publishers, 2016

E3.10 Consolidation with Revaluations of Recorded Net Assets

Long term liabilities

Cambridge Business Publishers, 2016

Advanced Accounting, 3rd Edition

Solutions Manual, Chapter 3

Cambridge Business Publishers, 2016

Cambridge Business Publishers, 2016

Advanced Accounting, 3rd Edition

E3.12 Reconstructing Eliminating Entries and Book Value

c. Fair value of Bays identifiable net assets (from b. above)

E3.13 Identifying and Analyzing Variable Interest Entities

Solutions Manual, Chapter 3

Cambridge Business Publishers, 2016

If qualitative factors are inconclusive, the answer to this question depends on a

Cambridge Business Publishers, 2016

Advanced Accounting, 3rd Edition

Solutions Manual, Chapter 3

Cambridge Business Publishers, 2016

Eliminating Entries, Goodwill

Cambridge Business Publishers, 2016

Advanced Accounting, 3rd Edition

Consolidation Working Paper, Identifiable Intangibles, Goodwill

Identifiable intangible assets

Solutions Manual, Chapter 3

Cambridge Business Publishers, 2016

Stock Acquisition and Consolidation Working Paper Eliminating Entries

(1) $55,873 = 1,817 x $30.75

Cambridge Business Publishers, 2016

Advanced Accounting, 3rd Edition