Consolidation Theories Push-Down Account

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Chapter 11
CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND

CORPORATE JOINT VENTURES
Answers to Questions
1 Parent company theory views consolidated financial statements from the viewpoint of the parent and entity
theory views consolidated financial statements from the viewpoint of the business entity under which all
resources are controlled by a single management team. By contrast, traditional theory sometimes reflects
the parent viewpoint and at other times it reflects the viewpoint of the business entity. A detailed
comparison of these theories is presented in Exhibit 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 controlling interest seems justified
conceptually when substantially all of the subsidiary stock is acquired by the parent. But the conceptual
support for this approach is less when only a slim majority of subsidiary stock is acquired. In addition, the
valuation of the noncontrolling interest based on the price paid by the parent has practical limitations
because noncontrolling interest does not represent equity ownership in the usual sense. The ability of
noncontrolling stockholders to participate in management is limited and noncontrolling shares do not
possess the usual marketability of equity securities.
4 Consolidated assets are equal to their fair values under entity theory only when the book values of parent
assets are equal to their fair values. Otherwise, consolidated assets are not equal to their fair values under
either parent company or entity theories.
5 The valuation of the noncontrolling interest at book value might overstate the equity of noncontrolling
shareholders because of the limited marketability of shares held by noncontrolling stockholders and
because of the limited ability of noncontrolling stockholders to share in management through their voting
rights. Valuation of the noncontrolling interest at book value also overstates or understates the
noncontrolling interest unless the subsidiary assets are recorded at fair values.
6 Consolidated net income under parent company theory and income to the controlling stockholders under
entity theory should be the same. This is illustrated in Exhibit 11–5, which shows different income
statement amounts for cost of sales, operating expenses, and income allocated to noncontrolling
stockholders, but the same income to controlling stockholders. Note that consolidated net income under
parent company and traditional theories reflects income to controlling stockholders.
7 Income to the parent stockholders under the equity method of accounting is the same as income to the
controlling stockholders under entity theory. But income to controlling stockholders is not identified as
consolidated net income as it would be under parent company or traditional theories.
8 Consolidated income statement amounts under entity theory are the same as under traditional theory when
subsidiary investments are made at book value because traditional theory follows entity theory in
eliminating the effects of intercompany transactions from consolidated financial statements.
© 2011 Pearson Education, Inc. publishing as Prentice Hall

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

Chapter 11 11-3
Solution E11-3 (continued)
4 a
Implied fair value — $1,680,000 = patents at acquisition
Book value of 100% of identifiable net assets $1,680,000
Add: Patents at acquisition ($108,000/90%) 120,000
Total implied value 1,800,000
Percent acquired 80%
Purchase price under entity theory $1,440,000
5 b
Purchase price — ($1,680,000  80%) = patents at acquisition
Book value $1,680,000  80% = underlying equity $1,344,000
Add: Patents at acquisition ($108,000/90%) 120,000
Purchase price (traditional theory) $1,464,000
Solution E11-4
1 Goodwill
Parent company theory
Cost of investment in Sad $ 500,000
Fair value acquired ($400,000  80%) 320,000
Goodwill $ 180,000
Entity theory
Implied value based on purchase price ($500,000/.8) $ 625,000
Fair value of Sad’s net assets 400,000
Goodwill $ 225,000
2 Noncontrolling interest
Book value of Sad’s net assets $ 260,000
Noncontrolling interest $ 52,000
Entity theory
Total valuation of Sad $ 625,000
3 Total assets
Pod Sad Adjustment Total
Current assets $520,000 $ 50,000 $ 40,000  80% $ 602,000
Plant assets — net 480,000 250,000 110,000  80% 818,000
Goodwill 180,000
$1,000,000 $300,000 $1,600,000
Entity theory
Current assets $ 520,000 $ 50,000 $ 40,000  100% $ 610,000
Plant assets — net 480,000 250,000 110,000  100% 840,000
Goodwill 225,000
$1,000,000 $300,000 $1,675,000

Solution E11-5
Preliminary computations
Cost of 80% interest $300,000
Fair value acquired ($350,000  80%) 280,000
Goodwill $ 20,000
Entity theory
Implied total value ($300,000 cost ÷ 80%) $375,000
Fair value of Sal’s net identifiable assets 350,000
Goodwill $ 25,000
1 Consolidated net income and noncontrolling interest share for 2011:

Entity
Theory
Combined separate incomes $550,000

Depreciation on excess allocated to
equipment:
$75,000 excess ÷ 5 years (15,000)

Total consolidated income 535,000
Less: Noncontrolling interest share
($50,000 -15,000)  20% (7,000)

Controlling interest share of NI(Income $528,000
Attributable to controlling stockholders)
Parent
Company Theory
Depreciation on excess allocated to

equipment:
($75,000 excess x 80% acquired)/5 years (12,000)
($50,000 x 20%) (10,000)
Consolidated net income $528,000
2 Goodwill at December 31, 2011: $ 20,000 $ 25,000

Chapter 11 11-5
Solution E11-6
Preliminary computation
Interest acquired in Sal: 72,000 shares  80,000 shares = 90%
1 Sal’s net assets under entity theory
Implied value from purchase price: $1,800,000/90% interest $2,000,000
2 Goodwill
a Entity theory
Implied value $2,000,000
Less: Fair value and book value of net assets 1,710,000
Goodwill $ 290,000
b Parent company theory

Cost of 90% interest $1,800,000
Fair values of net assets acquired ($1,710,000  90%) 1,539,000
Goodwill $ 261,000
c Traditional theory (same as parent theory) $ 261,000
3 Investment income from Sal
Income from Sal ($80,000  1/2 year  90% interest) $ 36,000
4 Noncontrolling interest under entity theory
Implied value of Sal at July 1, 2011 $2,000,000

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

share of reported income = $204,000

Solution E11-7
1 Parent company theory
Combined separate incomes of Pal and Sal $800,000

Less: Pal’s share of unrealized profits from upstream
inventory sales ($30,000  80%) (24,000)
Less: Noncontrolling interest share ($300,000  20%) (60,000)
Consolidated net income $716,000
2 Entity theory

Less: Unrealized profits from upstream sales (30,000)
Total consolidated income $770,000
Income allocated to controlling stockholders ($500,000 +

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

($300,000 - $30,000)  20% $ 54,000
Solution E11-8
Parent
Traditional Company Entity
Theory Theory Theory
Combined separate incomes $180,000 $180,000 $180,000
Less: Unrealized inventory profits
from downstream sales
($60,000 - $30,000)  50% (15,000) (15,000) (15,000)
Less: Unrealized profit on upstream
sale of land
($96,000 - $70,000)  100% (26,000) (26,000)
($96,000 - $70,000)  80% (20,800)
($60,000 - $26,000)  20% (6,800)
$60,000  20% (12,000)
Consolidated net income $132,200 $132,200

Allocated to controlling stockholders $132,200
Allocated to noncontrolling
Stockholders
($60,000 - $26,000)  20% $ 6,800

Chapter 11 11-7
Solution E11-9 [Push-down accounting]
1 Push down under parent company theory

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

Inventories 100,000
Land 500,000
Goodwill 400,000
Equipment — net 200,000
Push down equity 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 Pin.
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 ($500,000  40%) $ 200,000
Investment in Sun ($8,500,000  40%) $3,400,000
The 15 percent venturer

Income from Sun ($500,000  15%) $ 75,000
Investment in Sun ($8,500,000  15%) $1,275,000
Solution E11-11 Field Code Changed
In general, VIE accounting follows normal consolidation principles.

Under that approach, the noncontrolling interest share would be 90% of VIE
earnings, or $900,000. However, the intercompany fees must be allocated to the
primary beneficiary, not to noncontrolling interests. Therefore, in this case,
noncontrolling interest share would be 90% of $920,000, or $828,000.

As primary beneficiary, Pal must include Pot in its consolidated

financial staements. Additionally, Pal must make the following disclosures:
(a) the nature, purpose, size, and activities of the variable interest entity,
(b) the carrying amount and classification of consolidated assets that are
collateral for the variable interest entity’s obligations, and (c) lack of
recourse if creditors (or beneficial interest holders) of a consolidated
variable interest entity have no recourse to the general credit of the primary
beneficiary.
Den will not consolidate Pot, since they are not the primary beneficiary. As
in traditional consolidations, only one firm consolidates a subsidiary.
However, since Den has a significant interest in Pot, they must disclose: (a)
the nature of its involvement with the variable interest entity and when that
involvement began, (b) the nature, purpose, size, and activities of the
variable interest entity, and (c) the enterprise’s maximum exposure to loss as
a result of its involvement with the variable interest entity. Den accounts
for the investment using the equity method.
According to GAAP, if an enterprise absorbs a majority of a variable

interest entity’s expected losses and another receives a majority of expected
residual returns, the enterprise absorbing the losses is the primary
beneficiary and if condition one is also met. Laura meets condition one, since
as CEO, she had the power over economic decisions. Laura must consolidate the
variable interest entity. The contractual arrangement makes Laura the primary
beneficiary.

Chapter 11 11-9
SOLUTION TO PROBLEMS
Solution P11-1
Pin Corporation and Subsidiary

Comparative Consolidated Balance Sheets
at December 31, 2012
(in thousands)
Parent
Company Theory Entity Theory
Assets
Cash $ 52 $ 52
Receivables — net 300 300
Inventories 450 450
Plant assets — neta 1,998 2,010
Patentsb 64 80
Total assets $2,864 $2,892
Liabilities
Accounts payable $ 304 $ 304
Other liabilities 500 500
Noncontrolling interestc 160
Total liabilities 964 804
Capital stock 1,000 1,000
Retained earnings 900 900
Noncontrolling interestd 0 188
Total stockholders’ equity 1,900 2,088
Total liabilities and
stockholders’ equity $2,864 $2,892
a Parent company theory: Combined plant assets of $1,950 + ($80  3/5 undepreciated
excess)
Entity theory: Combined plant assets of $1,950 + ($100  3/5 undepreciated excess)
b Parent company theory: $80 patents - $16 amortization
Entity theory: $100 patents - $20 amortization
c Parent company theory: Noncontrolling interest equals Son’s equity of $800  20%
d Entity theory: [Son’s equity of $800 + ($60 undepreciated plant assets + $80
unamortized patents)]  20%

Solution P11-2
Preliminary computation
Implied value of Sip based on purchase price ($320,000/.8) $400,000
Book value 340,000
Excess to undervalued equipment $ 60,000
1 Par Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2011
Sales $1,200,000
Less: Cost of sales 760,000
Gross profit 440,000
Other expenses $ 160,000
Depreciationa 159,000 319,000
Total consolidated net income $ 121,000
Allocation of income to:

Noncontrolling interestb $ 8,200
Controlling interest $ 112,800
a $150,000 depreciation - $1,000 piecemeal recognition of gain on equipment
through depreciation + ($60,000 excess  6 years) excess depreciation
b ($60,000 reported income - $10,000 unrealized gain on equipment + $1,000
piecemeal recognition of gain on equipment - $10,000 excess depreciation) 
20% interest
2 Par Corporation and Subsidiary

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

interest share - $4,000 noncontrolling interest dividends = $84,200

Chapter 11 11-11
Solution P11-3

1a Income from Sin for 2011 ($90,000  70%) $ 63,000
1b Goodwill at December 31, 2011 $ 70,000

($595,000 cost - $525,000 fair value)
1c Consolidated net income for 2011
Pal’s separate income $300,000

Add: Income from Sin 63,000 $363,000
1d Noncontrolling interest share for 2011
Net income of Sin of $90,000  30% $ 27,000
1e Noncontrolling interest December 31, 2011
Sin’s stockholders’ equity $790,000  30% $237,000
Entity theory
2a Income from Sin for 2011 ($90,000  70%) $ 63,000
2b Goodwill at December 31, 2011
Imputed value ($595,000/70%) $850,000

Fair value of Sin’s net assets 750,000
Goodwill $100,000
2c Total consolidated income for 2011
Income to controlling stockholders ($300,000 + $63,000) $363,000

Add: Noncontrolling interest share ($90,000  30%) 27,000
2d Noncontrolling interest share (computed in 2c above) $ 27,000
2e Noncontrolling interest at December 31, 2011
(Book equity $790,000 + $100,000 goodwill)  30% $267,000

Solution P11-4
Preliminary computations
Investment in Sam $224,000
Fair value of 80% interest acquired ($240,000  80%) 192,000
Goodwill $ 32,000
Entity Theory
Implied value of Sam ($224,000/.8) $280,000
Fair value of identifiable net assets 240,000
Goodwill $ 40,000
Pit used an incomplete equity method in accounting for its investment in Sam.
It ignored the intercompany upstream sales of inventory. Income from Sam on an
equity basis would be:
Share of Sam’s income ($50,000  .8) $ 40,000
Less: Unrealized profits in ending inventory from
upstream sale ($8,000  50%  80%) (3,200)
Income from Sam $ 36,800
Pit Corporation and Subsidiary

Comparative Consolidated Income Statements
Parent
Sales $1,000,000 $1,000,000 $1,000,000
Less: Cost of sales (575,000) (575,000) (575,000)
Gross profit 425,000 425,000 425,000
Expenses (200,000) (200,000) (200,000)
Less: Unrealized profit on

upstream sale of inventory
($23,000 - $15,000)  50%  100% (4,000) (4,000)
($23,000 - $15,000)  50%  80% (3,200)
Noncontrolling interest share
($50,000 - $4,000)  20% (9,200)
$50,000  20% (10,000)
Consolidated net income $ 211,800 $ 211,800
Total consolidated income $ 221,000
Allocated to controlling
Stockholders $ 211,800
Allocated to noncontrolling
Stockholders
($50,000 - $4,000)  20% $ 9,200

Chapter 11 11-13
Solution P11-4 (continued)

Comparative Statements of Retained Earnings
Parent
Retained earnings December 31, 2011 $360,000 $360,000 $ 360,000
Add: Consolidated net income 211,800 211,800
Add: Net income to controlling 211,800
stockholders
571,800 571,800 571,800
Less: Dividends to controlling (120,000) (120,000) (120,000)
stockholders
Retained earnings December 31, 2012 $ 451,800 $ 451,800 $ 451,800

Comparative Consolidated Balance Sheets
Parent
Assets
Cash $ 110,800 $ 110,800 $ 110,800
Accounts receivable 120,000 120,000 120,000
Inventory 196,000 196,800 196,000
Land 280,000 280,000 280,000
Buildings — net 840,000 840,000 840,000
Goodwill 32,000 32,000 40,000
Total assets $1,578,800 $1,579,600 $1,586,800
Liabilities
Accounts payable $ 275,800 $ 275,800 $ 275,800
Noncontrolling interest 52,000
Total liabilities 275,800 327,800 275,800
Stockholders’ equity
Capital stock 800,000 800,000 800,000
Retained earnings 451,800 451,800 451,800
Noncontrolling interest 51,200 59,200
Total stockholders’ equity 1,303,000 1,251,800 1,311,000
Total equities $1,578,800 $1,579,600 $1,586,800

Solution P11-5
Pad Corporation and Subsidiary

Comparative Balance Sheets
Traditional Entity
Theory Theory
Assets
Cash $ 70,000 $ 70,000
Receivables — net 110,000 110,000
Inventories 120,000 120,000
Plant assets — net 300,000 300,000
Goodwill 40,000 50,000
Total assets $640,000 $650,000
Liabilities
Accounts payable $ 95,000 $ 95,000
Other liabilities 25,000 25,000
Total liabilities 120,000 120,000
Stockholders’ equity
Retained earnings 194,000 194,000
Noncontrolling interest
($150,000 - $20,000)  20% 26,000
($150,000 + $50,000 - $20,000)  20% 36,000
Total stockholders’ equity 520,000 530,000
Total equities $640,000 $650,000
Supporting computations Traditional Entity

Theory Theory
Cost or imputed value $128,000 $160,000
Book value of 80% 88,000
Book value of 100% 110,000
Goodwill $ 40,000 $ 50,000
Investment cost $128,000

Add: 80% of retained earnings increase
($50,000 - $10,000)  80% 32,000
Less: 80% of $20,000 unrealized profits (16,000)
Investment balance $144,000

Chapter 11 11-15
Solution P11-6 [AICPA adapted]
1 P carries its investment in S on a cost basis. This is evidenced by the

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

determined by the relationship of P Company’s dividend revenues and S
Company’s dividends paid ($11,200/$16,000). S has 2,000 outstanding
shares ($200,000/$100) and P holds 70% of these, or 1,400 shares.
3 S Company’s retained earnings at acquisition were $100,000.
Imputed value of S ($245,000 cost/70%) $ 350,000

Less: Patents (applicable to 100%) (50,000)
Book value and fair value of S’s identifiable net assets 300,000
Less: Capital stock (200,000)
Retained earnings $ 100,000
4 The nonrecurring loss is a constructive loss on the purchase of P bonds

by S Company.
Working paper entry:

Mortgage bonds payable (5%) 100,000
Loss on retirement of P bonds 3,000
P bonds owned 103,000
To eliminate intercompany bond investment and bonds payable and to
recognize a loss on the constructive retirement of P bonds.
5 Intercompany sales P to S are $240,000 computed as follows:
Combined sales ($600,000 + $400,000) $1,000,000

Less: Consolidated sales 760,000
Intercompany sales $ 240,000
6 Yes, there are other intercompany debts:

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

owes S Company $5,600 dividends.

7 Adjustment to determine consolidated cost of goods sold:
Consolidated Cost of Goods Sold

Combined cost of goods $640,000 $240,000 Intercompany purchases
Sold
Unrealized profit in Unrealized profit in
ending inventory 8,000 5,000 beginning inventory
403,000 To balance
$648,000 $648,000
Consolidated cost of
goods sold $403,000
Unrealized profit in ending inventory is equal to the combined less

consolidated inventories ($130,000 - $122,000).
Unrealized profit in beginning inventory is plugged as follows:
($640,000 + $8,000) - ($240,000 + $403,000) = $5,000
8 Noncontrolling interest share of $8,700 is computed as follows:
Net income of S $ 34,000

Less: Patent amortization ($50,000/10 years) 5,000
Adjusted income of S 29,000
Noncontrolling interest share $ 8,700
9 Noncontrolling interest of $117,000 at the balance sheet date is

computed:
Stockholders’ equity of S Company $360,000

Add: Unamortized patents 30,000
Equity of S plus unamortized patents 390,000
Noncontrolling interest on balance sheet date $117,000
10 Consolidated retained earnings
Retained earnings of P at end of year $200,000

Add: P’s share of increase in S’s retained earnings since
acquisition ($160,000 - $100,000)  70% 42,000
Less: Unrealized profit in S’s ending inventory (8,000)
Less: P’s patent amortization since acquisition
$20,000  70% (14,000)
Less: Loss on constructive retirement of P’s bonds (3,000)
Consolidated retained earnings — end of year $217,000

Chapter 11 11-17
Solution P11-7
1 Entry on Sap’s books at acquisition
Inventories 20,000
Land 25,000
Goodwill 70,000
Push-down capital 280,000
To push down fair value — book value differentials.
2 Sap Corporation
Balance Sheet
at January 1, 2012
Assets
Cash $ 30,000
Accounts receivable — net 70,000
Inventories 80,000
Total current assets $180,000
Land $ 75,000
Total plant assets 340,000
Goodwill 70,000
Total assets $590,000
Liabilities And Stockholders’ Equity

Accounts payable $ 50,000
Total liabilities $110,000
Capital stock $200,000
Total stockholders’ equity 480,000
Total liabilities and stockholders’
Equity $590,000
3 If Sap reports net income of $90,000 under the new push-down system for
the calendar year 2012, Pay’s income from Sap will also be $90,000 under
a one-line consolidation.

Solution P11-8
1 Parent company theory

Preliminary computation:
Cost of 80% interest in Son $3,000,000
Book value acquired ($2,000,000  80%) 1,600,000
Excess cost over book value acquired $1,400,000
Excess allocated to:
Inventories $1,600,000  80% $1,280,000
Equipment — net $(500,000)  80% (400,000)
Goodwill for the remainder 520,000
Excess fair value over book value acquired $1,400,000
Entry on Son’s books to reflect 80% push down:

Inventories 1,280,000
Goodwill 520,000
Retained earnings 1,200,000
Push-down capital 2,600,000
2 Entity theory
Preliminary computation:
Implied value of net assets ($3,000,000/.8) $3,750,000
Book value of net assets 2,000,000
Total excess $1,750,000
Excess allocated to:
Inventories $1,600,000
Equipment — net (500,000)
Goodwill for remainder 650,000
Total excess $1,750,000
Entry on Son’s books to reflect 100% push down:

Inventories 1,600,000
Goodwill 650,000
Retained earnings 1,200,000
Equipment 500,000
3 Noncontrolling interest (Parent company theory)
Son’s stockholders’ equity $2,000,000  20% $ 400,000
4 Noncontrolling interest (Entity theory)
Capital stock $ 800,000

Stockholders’ equity 3,750,000

Chapter 11 11-19
Solution P11-9
1 Push down under parent company theory

Goodwill 36,000
Inventories 9,000
To record revaluation of 90% of net assets and elimination of
retained earnings as a result of a business combination with Paw
Corporation.
2 Push down under entity theory

Goodwill 40,000
Inventories 10,000
To record revaluation of net assets imputed from purchase price of
90% interest acquired by Paw Corporation and eliminate retained
earnings.
3 Sun Corporation
Comparative Balance Sheets
at January 1, 2012
Parent Company Theory Entity Theory

Assets
Cash $ 20,000 $ 20,000
Accounts receivable — net 50,000 50,000
Inventories 31,000 30,000
Land 15,000 15,000
Buildings — net 48,000 50,000
Equipment — net 97,000 100,000
Goodwill 36,000 40,000
Total assets $297,000 $305,000
Liabilities and stockholders’ equity

Accounts payable $ 45,000 $ 45,000
Other liabilities 60,000 60,000
Push-down capital 92,000 100,000
Retained earnings 0 0
Total equities $297,000 $305,000

Solution P11-10
a Paw Corporation and Subsidiary

Consolidation Working Papers
Push down 90% — parent company theory
90% Adjustments and Consolidated
Power Sun Eliminations Statements
Income Statement
Sales $ 310,800 $ 110,000 $ 420,800
Income from Sun 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*
Consolidated NI $ 138,600
Noncontrolling share e 4,000 4,000*
Controlling share of NI $ 134,600 $ 41,800 $ 134,600
Retained Earnings
Retained earnings — Paw $ 147,000 $ 147,000
Retained earnings — Sun $ 0
Controlling share of NI 134,600 41,800 134,600
Dividends 60,000* 10,000* b 9,000
e 1,000 60,000*
Retained earnings
December 31 $ 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 Sun 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
Noncontrolling interest January 1 c 12,000

Noncontrolling interest December 31 e 3,000 15,000
$ 792,600

Chapter 11 11-21
* Deduct


b Paw Corporation and Subsidiary
Consolidation Working Papers
Push down 100% — entity theory
90% Adjustments and Consolidated
Paw Sun Eliminations Statements
Income Statement
Sales $ 310,800 $ 110,000 $ 420,800
Income from Sun 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*
Consolidated NI $ 138,800
Noncontrolling share e 4,200 4,200*
Controlling share of NI $ 134,600 $ 42,000 $ 134,600
Retained Earnings
Retained earnings — Paw $ 147,000 $ 147,000
Retained earnings — Sun $ 0
Controlling share of NI 134,600 42,000 134,600
Dividends 60,000* 10,000* b 9,000
e 1,000 60,000*
Retained earnings
December 31 $ 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 Sun 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
Noncontrolling interest January 1 c 20,000

Noncontrolling interest December 31 e 3,200 23,200
$ 800,800
* Deduct

Chapter 11 11-23
Solution P11-11
Pep Corporation and Subsidiary

Proportionate Consolidation Working Papers
Adjustments and Consolidated

Pep Jay 40% Eliminations Statements
Income Statement
Sales $ 800,000 $ 300,000 b 180,000 $ 920,000
Income from Jay 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 — Pep $ 300,000 $ 300,000
Venture equity — Jay $ 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 Jay 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 — Jay 300,000
$1,100,000 $ 460,000 $1,164,000
* Deduct

Consolidation Theories Push-Down Account

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Consolidation Theories Push-Down Account

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Find more slides, ebooks, solution manual and testbank on www.downloadslide.

CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND

© 2011 Pearson Education, Inc. publishing as Prentice Hall

11-2 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

© 2011 Pearson Education, Inc. publishing as Prentice Hall

© 2011 Pearson Education, Inc. publishing as Prentice Hall

11-4 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

1 Consolidated net income and noncontrolling interest share for 2011:

Combined separate incomes $550,000

$75,000 excess ÷ 5 years (15,000)

($50,000 -15,000)  20% (7,000)

Depreciation on excess allocated to

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Interest acquired in Sal: 72,000 shares  80,000 shares = 90%

1 Sal’s net assets under entity theory

Implied value from purchase price: $1,800,000/90% interest $2,000,000

b Parent company theory

c Traditional theory (same as parent theory) $ 261,000

3 Investment income from Sal

Income from Sal ($80,000  1/2 year  90% interest) $ 36,000

4 Noncontrolling interest under entity theory

Implied value of Sal at July 1, 2011 $2,000,000

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

© 2011 Pearson Education, Inc. publishing as Prentice Hall

11-6 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

1 Parent company theory

Combined separate incomes of Pal and Sal $800,000

Combined separate incomes $800,000

Income allocated to controlling stockholders ($500,000 +

Income allocated to noncontrolling stockholders

Total consolidated income $139,000

© 2011 Pearson Education, Inc. publishing as Prentice Hall

1 Push down under parent company theory

2 Push down under entity theory

The 40 percent venturer:

The 15 percent venturer

Solution E11-11 Field Code Changed

In general, VIE accounting follows normal consolidation principles.

© 2011 Pearson Education, Inc. publishing as Prentice Hall

11-8 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

Solution E11-12 Field Code Changed

As primary beneficiary, Pal must include Pot in its consolidated

Solution E11-13 Field Code Changed

According to GAAP, if an enterprise absorbs a majority of a variable

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Pin Corporation and Subsidiary

© 2011 Pearson Education, Inc. publishing as Prentice Hall

11-10 Consolidation Theories, Push-down Accounting, and Corporate Joint Ventures

1 Par Corporation and Subsidiary

Total consolidated net income $ 121,000

Allocation of income to:

2 Par Corporation and Subsidiary

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

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Parent company theory

1b Goodwill at December 31, 2011 $ 70,000

1c Consolidated net income for 2011

Pal’s separate income $300,000

1d Noncontrolling interest share for 2011

Net income of Sin of $90,000  30% $ 27,000

1e Noncontrolling interest December 31, 2011

Sin’s stockholders’ equity $790,000  30% $237,000

2a Income from Sin for 2011 ($90,000  70%) $ 63,000