Chapter 4

Case 1
Peterpan Corporation purchased 80 percent of the outstanding voting common stock of Sophia Corporation on January 2,
2011, for $600,000 cash. Sal’s balance sheets on this date and on December 31, 2011, are as follows:
SOPHIA CORPORATION BALANCE SHEETS
January 2 December 31
Inventory $100,000 $ 40,000
Other current assets 100,000 160,000
Plant assets—net 400,000 440,000
Total assets $600,000 $640,000
Liabilities $100,000 $120,000
Capital stock 300,000 300,000
Retained earnings 200,000 220,000
Total equities $600,000 $640,000

ADDITIONAL INFORMATION
1. Peterpan uses the equity method of accounting for its investment in Sophia
2. Sophias 2011 net income and dividends were $140,000 and $120,000, respectively.
3. Sophia’s inventory, which was sold in 2011, was undervalued by $25,000 at January 2, 2011.

REQUIRED
1. What is Peterpan’s income from Sophia for 2011?
2. What is the noncontrolling interest share for 2011?
3. What is the total noncontrolling interest at December 31, 2011?
4. What will be the balance of Peterpan’s Investment in Sophia account at December 31, 2011, if investment income from
Sophia is $100,000? Ignore your answer to 1.
5. What is consolidated net income for Peterpan Corporation and Subsidiary if Peterpan’s net income for 2011 is $360,400?
(Assume investment income from subsidiary is $100,000, and it is included in the $360,400.)

Case 2
Peterpan Corporation acquired a 75 percent interest in Sophia Corporation on January 1, 2011. Financial
statements of Peterpan and Sophia Corporations for the year 2011 are as follows (in thousands):
Peterpan Sophia
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $800 $200
Income from Sophia 27.6 —
Cost of sales (500) (100)
Other expenses (194) (52)
Net income 133.6 48
Add: Retained earnings January 1 360 68
Deduct: Dividends (100) (32)
Retained earnings December 31 $393.6 $ 84

Balance Sheet at December 31

Cash $ 106 $ 30
Accounts receivable—net 172 40
Dividends receivable from Sophia 12 —
Inventories 190 20
Note receivable from peterpan — 10
Land 130 60
Buildings—net 340 160
Equipment—net 260 100
Investment in Sophia 363.6 —
Total assets $1,573.6 $420
Accounts payable $ 170 $ 20
Note payable to Sophia 10 —
Dividends payable — 16
Capital stock, $10 par 1,000 300
Retained earnings 393.6 84
Total equities $1,573.6 $420

REQUIRED:
Prepare consolidation workpapers for Peterpan Corporation and Subsidiary for the year ended December 31, 2011. Only the
information provided in the financial statements is available; accordingly, your solution will require some standard
assumptions. Sophia owned unrecorded patents having a fair value of $112,000, and a useful life of 10 years.
Answer :
Case 1
Preliminary computations (in thousands)
Investment cost January 2 $600,000
Implied total fair value of Sophia ($600,000/ 80%) $750,000
Less: Book value (500,000)
Excess fair value over book value $250,000
Excess allocated to:
Inventory $ 25,000
Remainder to goodwill 225,000
Excess fair value over book value $250,000

1 Income from Sophia

Sophia’s reported net income $140,000
Less: Excess allocated to inventory (sold in 2011) (25,000)
Sophia adjusted income $115,000
PeterPan’s 80% share $ 92,000

2 Noncontrolling interest share

Sophia’s adjusted income $115 x20% noncontrolling interest $ 23,000

3 Noncontrolling interest December 31

Sophia’s equity book value $520,000
Add: Unamortized excess (Goodwill) 225,000
Sophia’s equity fair value $745,000
20% noncontrolling interest $149,000

4 Investment in Sophia December 31

Investment cost January 2 $600,000
Add: Income from Sophia (given)* 100,000
Less: Dividends ($120 x 80%) (96,000)
Investment in Sophia December 31 $604,000
* Assumes this is based on Sal’s adjusted income

5 Consolidated net income $383,400

Noncontrolling interest share $ 23,000
Controlling interest share equals Parent NI under equity
method. $360,400
Case 2