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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.

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

11-2

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 investorventurers 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
2
3
4

A
A
C
A

5
6
7

B
C
D

4

5

D
C

Solution E11-2
1
2
3

B
B
D

Solution E11-3
1

c
Total value of Sit implied by purchase price
($1,440,000/.8)
Noncontrolling interest percentage
Noncontrolling interest

$1,800,000
20%
$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
interest
Less: Patent amortization ($140,000/10 years  10%)
Noncontrolling interest share

$ 40,000
(1,400)
$ 38,600

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Chapter 11

11-3

Solution E11-3 (continued)
4

5

a

Implied fair value — $1,680,000 = patents at acquisition
Book value of 100% of identifiable net assets
Add: Patents at acquisition ($108,000/90%)
Total implied value
Percent acquired
Purchase price under entity theory

$1,680,000
120,000
1,800,000
80%
$1,440,000

b
Purchase price — ($1,680,000  80%) = patents at acquisition
$1,344,000
Book value $1,680,000  80% = underlying equity
Add: Patents at acquisition ($108,000/90%)
120,000
Purchase price (traditional theory)
$1,464,000

Solution E11-4
1

2

3

Goodwill

Parent company theory
Cost of investment in Sad
Fair value acquired ($400,000  80%)
Goodwill
Entity theory
Implied value based on purchase price ($500,000/.8)
Fair value of Sad’s net assets
Goodwill
Noncontrolling interest
Parent company theory
Book value of Sad’s net assets
Noncontrolling interest percentage
Noncontrolling interest
Entity theory
Total valuation of Sad
Noncontrolling interest percentage
Noncontrolling interest
Total assets
Parent company theory
Pod
Current assets
$520,000
Plant assets — net 480,000
Goodwill
$1,000,000
Entity theory
Current assets
$ 520,000
Plant assets — net 480,000
Goodwill

$1,000,000

Sad
$ 50,000
250,000

$300,000

$
$
$

$
$
$
$

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

$300,000
$ 50,000
250,000

$

$ 40,000  100%
110,000  100%


500,000
320,000
180,000
625,000
400,000
225,000

260,000
20%
52,000
625,000
20%
125,000

Total
602,000
818,000
180,000
$1,600,000

$

$

610,000
840,000
225,000
$1,675,000

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

11-4

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

$300,000
280,000
$ 20,000

Entity theory
Implied total value ($300,000 cost ÷ 80%)
Fair value of Sal’s net identifiable assets
Goodwill

$375,000
350,000
$ 25,000

1


Consolidated net income and noncontrolling interest share for 2011:
Entity
Theory
$550,000

Combined separate incomes
Depreciation on excess allocated to
equipment:

(15,000)
535,000

$75,000 excess ÷ 5 years
Total consolidated income
Less: Noncontrolling interest share
($50,000 -15,000)  20%
Controlling interest share of NI(Income
Attributable to controlling stockholders)
Combined separate incomes

2

Depreciation on excess allocated to
equipment:
($75,000 excess x 80% acquired)/5 years
Less: Noncontrolling interest share
($50,000 x 20%)
Consolidated net income
Goodwill at December 31, 2011:


(7,000)
$528,000
Parent
Company Theory
$550,000

(12,000)
(10,000)
$528,000
$ 20,000

$ 25,000

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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

Goodwill
a

3

Entity theory
Implied value
Less: Fair value and book value of net assets
Goodwill

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

$

36,000

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

4

$2,000,000

Noncontrolling interest under entity theory
Implied value of Sal at July 1, 2011
Add: Income for 1/2 year
Noncontrolling percentage
Noncontrolling interest

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

Alternatively, $200,000 noncontrolling interest at July 1, plus $4,000
share of reported income = $204,000

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

11-6

Solution E11-7
1

Parent company theory
Combined separate incomes of Pal and Sal
Less: Pal’s share of unrealized profits from upstream
inventory sales ($30,000  80%)
Less: Noncontrolling interest share ($300,000  20%)
Consolidated net income

2

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

Entity theory
Combined separate incomes
Less: Unrealized profits from upstream sales
Total consolidated income


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

Income allocated to controlling stockholders ($500,000 +
[$270,000  80%])

$716,000

Income allocated to noncontrolling stockholders
($300,000 - $30,000)  20%

$ 54,000

Solution E11-8

Combined separate incomes
Less: Unrealized inventory profits
from downstream sales
($60,000 - $30,000)  50%
Less: Unrealized profit on upstream
sale of land
($96,000 - $70,000)  100%
($96,000 - $70,000)  80%
Less: Noncontrolling interest share
($60,000 - $26,000)  20%
$60,000  20%
Consolidated net income
Total consolidated income
Allocated to controlling stockholders

Allocated to noncontrolling
Stockholders
($60,000 - $26,000)  20%

Traditional
Theory
$180,000
(15,000)

Parent
Company
Theory
$180,000
(15,000)

(26,000)

Entity
Theory
$180,000
(15,000)

(26,000)
(20,800)

(6,800)
$132,200

(12,000)
$132,200

$139,000
$132,200
$

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Chapter 11

11-7

Solution E11-9

[Push-down accounting]

1

Push down under parent company theory
800,000
Retained earnings
Inventories
90,000
450,000
Land
270,000
Buildings — net

360,000
Goodwill
180,000
Equipment
Other liabilities
90,000
1,700,000
Push down equity
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
800,000
Retained earnings
Inventories
100,000
500,000
Land
300,000
Buildings — net
400,000
Goodwill
200,000
Equipment — net
Other liabilities

100,000
1,800,000
Push down equity
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 oneline 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%)
Investment in Sun ($8,500,000  40%)

$ 200,000
$3,400,000

The 15 percent venturer
Income from Sun ($500,000  15%)
Investment in Sun ($8,500,000  15%)

$
75,000
$1,275,000

Solution E11-11
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.

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

11-8

Solution E11-12

Field Code Changed

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.
Solution E11-13
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.

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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
Assets
Cash
Receivables — net
Inventories
Plant assets — neta
Patentsb
Total assets
Liabilities
Accounts payable
Other liabilities
Noncontrolling interestc
Total liabilities
Capital stock
Retained earnings
Noncontrolling interestd
Total stockholders’ equity
Total liabilities and
stockholders’ equity
a

b
c
d

Entity Theory


$

52
300
450
1,998
64
$2,864

52
300
450
2,010
80
$2,892

$

$

304
500
160
964
1,000
900
0
1,900

$2,864


$

304
500

804
1,000
900
188
2,088
$2,892

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)
Parent company theory: $80 patents - $16 amortization
Entity theory: $100 patents - $20 amortization
Parent company theory: Noncontrolling interest equals Son’s equity of $800  20%
Entity theory: [Son’s equity of $800 + ($60 undepreciated plant assets + $80
unamortized patents)]  20%

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11-10


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

$400,000
340,000
$ 60,000

Par Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2011
$1,200,000
760,000
440,000

Sales
Less: Cost of sales
Gross profit
Other expenses
Depreciationa

$ 160,000
159,000

Total consolidated net income
Allocation of income to:

Noncontrolling interestb
Controlling interest
a
b

2

319,000
$

121,000

$
$

8,200
112,800

$150,000 depreciation - $1,000 piecemeal recognition of gain on equipment
through depreciation + ($60,000 excess  6 years) excess depreciation
($60,000 reported income - $10,000 unrealized gain on equipment + $1,000
piecemeal recognition of gain on equipment - $10,000 excess depreciation) 
20% interest

Par Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2011
Assets
Current assets
Plant and equipment — net

($1,190,000 - $399,000 + 50,000)
Total assets
Liabilities and equity
Liabilities
Capital stock
Retained earningsa
Noncontrolling interestb
Total liabilities and stockholders’ equity
a
b

$

483,200

841,000
$1,324,200
$

300,000
600,000
340,000
84,200
$1,324,200

Sip beginning retained earnings $327,200 + Sip net income $112,800 - Sip
dividends of $100,000
($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

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Chapter 11

11-11

Solution P11-3
Parent company theory
1a
Income from Sin for 2011 ($90,000  70%)
1b

Goodwill at December 31, 2011
($595,000 cost - $525,000 fair value)

1c

Consolidated net income for 2011
Pal’s separate income
Add: Income from Sin

1d

$ 63,000

$ 70,000

$300,000
63,000

Noncontrolling interest share for 2011
Net income of Sin of $90,000  30%

1e

$363,000

$ 27,000

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%)

2b

Goodwill at December 31, 2011
Imputed value ($595,000/70%)
Fair value of Sin’s net assets
Goodwill


2c

$ 63,000

$850,000
750,000
$100,000

Total consolidated income for 2011
Income to controlling stockholders ($300,000 + $63,000)
Add: Noncontrolling interest share ($90,000  30%)
Total consolidated income

$363,000
27,000
$390,000

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


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

11-12

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

$224,000
192,000
$ 32,000

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

$280,000
240,000
$ 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:
$ 40,000
Share of Sam’s income ($50,000  .8)
Less: Unrealized profits in ending inventory from
(3,200)
upstream sale ($8,000  50%  80%)
Income from Sam
$ 36,800
Pit Corporation and Subsidiary
Comparative Consolidated Income Statements
for the year ended December 31, 2012

Sales
Less: Cost of sales
Gross profit

Traditional
Theory
$1,000,000
(575,000)
425,000

Parent
Company
Theory
$1,000,000
(575,000)
425,000


Entity
Theory
$1,000,000
(575,000)
425,000

(200,000)

(200,000)

(200,000)

Expenses
Less: Unrealized profit on
upstream sale of inventory
($23,000 - $15,000)  50%  100%
($23,000 - $15,000)  50%  80%
Noncontrolling interest share
($50,000 - $4,000)  20%
$50,000  20%
Consolidated net income
Total consolidated income
Allocated to controlling
Stockholders
Allocated to noncontrolling
Stockholders
($50,000 - $4,000)  20%

(4,000)


(4,000)
(3,200)

(9,200)
$

211,800

$

(10,000)
211,800
$

221,000

$

211,800

$

9,200

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Chapter 11

11-13

Solution P11-4 (continued)
Pit Corporation and Subsidiary
Comparative Statements of Retained Earnings
for the year ended December 31, 2012

Retained earnings December 31, 2011
Add: Consolidated net income
Add: Net income to controlling
stockholders
Less: Dividends to controlling
stockholders
Retained earnings December 31, 2012

Parent
Company
Theory
$360,000
211,800

Traditional
Theory
$360,000
211,800

Entity
Theory

$ 360,000
211,800

571,800
(120,000)
$

451,800

571,800
(120,000)
$

451,800

571,800
(120,000)
$

451,800

Pit Corporation and Subsidiary
Comparative Consolidated Balance Sheets
at December 31, 2012
Parent
Company
Theory

Traditional
Theory

Assets
Cash
Accounts receivable
Inventory
Land
Buildings — net
Goodwill
Total assets
Liabilities
Accounts payable
Noncontrolling interest
Total liabilities
Stockholders’ equity
Capital stock
Retained earnings
Noncontrolling interest
Total stockholders’ equity
Total equities

$

Entity
Theory

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

$1,578,800

$

110,800
120,000
196,800
280,000
840,000
32,000
$1,579,600

$

$

$

275,800
52,000
327,800

$

800,000
451,800

800,000
451,800
59,200

1,311,000
$1,586,800

275,800
275,800

800,000
451,800
51,200
1,303,000
$1,578,800

1,251,800
$1,579,600

110,800
120,000
196,000
280,000
840,000
40,000
$1,586,800
275,800
275,800

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

11-14

Solution P11-5
Pad Corporation and Subsidiary
Comparative Balance Sheets
at December 31, 2012
Traditional
Theory

Entity
Theory

Assets
Cash
Receivables — net
Inventories
Plant assets — net
Goodwill
Total assets

$ 70,000
110,000
120,000
300,000
40,000
$640,000

$ 70,000

110,000
120,000
300,000
50,000
$650,000

Liabilities
Accounts payable
Other liabilities
Total liabilities

$ 95,000
25,000
120,000

$ 95,000
25,000
120,000

300,000
194,000

300,000
194,000

Stockholders’ equity
Capital stock
Retained earnings
Noncontrolling interest
($150,000 - $20,000)  20%

($150,000 + $50,000 - $20,000)  20%
Total stockholders’ equity
Total equities
Supporting computations
Cost or imputed value
Book value of 80%
Book value of 100%
Goodwill
Investment cost
Add: 80% of retained earnings increase
($50,000 - $10,000)  80%
Less: 80% of $20,000 unrealized profits
Investment balance

26,000
520,000
$640,000
Traditional
Theory
$128,000
88,000
$ 40,000

36,000
530,000
$650,000
Entity
Theory
$160,000
110,000

$ 50,000

$128,000
32,000
(16,000)
$144,000

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

4

$

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

The nonrecurring loss is a constructive loss on the purchase of P bonds
by S Company.
Working paper entry:
100,000
Mortgage bonds payable (5%)
Loss on retirement of P bonds
3,000
103,000
P bonds owned
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)
Less: Consolidated sales
Intercompany sales

6

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

Yes, there are other intercompany debts:
Cash and receivables
Current payables
Dividends payable

Combined
$143,000
93,000
18,000

Consolidated
$97,400
53,000
12,400

Intercompany

Balances
$
45,600
40,000
5,600

S Company owes P Company $40,000 on intercompany purchases and P Company
owes S Company $5,600 dividends.

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

11-16

Solution P11-6 (continued)
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
To balance
403,000
$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
Less: Patent amortization ($50,000/10 years)
Adjusted income of S
Noncontrolling interest percentage
Noncontrolling interest share

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


9
Noncontrolling interest of $117,000 at the balance sheet date is
computed:
Stockholders’ equity of S Company
Add: Unamortized patents
Equity of S plus unamortized patents
Noncontrolling interest percentage
Noncontrolling interest on balance sheet date
10

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

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

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

(3,000)
$217,000

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Chapter 11

11-17

Solution P11-7
1

Entry on Sap’s books at acquisition
Inventories
Land
Buildings — net
Other liabilities
Goodwill
Retained earnings
Equipment — net
Push-down capital

20,000
25,000
90,000
10,000
70,000

80,000
15,000
280,000

To push down fair value — book value differentials.
2

Sap Corporation
Balance Sheet
at January 1, 2012
Assets
Cash
Accounts receivable — net
Inventories
Total current assets
Land
Buildings — net
Equipment — net
Total plant assets
Goodwill
Total assets
Liabilities And Stockholders’ Equity
Accounts payable
Other liabilities
Total liabilities
Capital stock
Push-down capital
Total stockholders’ equity
Total liabilities and stockholders’
Equity


3

$ 30,000
70,000
80,000
$180,000
$ 75,000
190,000
75,000
340,000
70,000
$590,000
$ 50,000
60,000
$110,000
$200,000
280,000
480,000
$590,000

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.

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

11-18

Solution P11-8
1

Parent company theory
Preliminary computation:
Cost of 80% interest in Son
Book value acquired ($2,000,000  80%)
Excess cost over book value acquired
Excess allocated to:
Inventories $1,600,000  80%
Equipment — net $(500,000)  80%
Goodwill for the remainder
Excess fair value over book value acquired
Entry on Son’s books to reflect 80% push down:
Inventories
Goodwill
Retained earnings
Equipment — net
Push-down capital

2

1,280,000
520,000
1,200,000
400,000

2,600,000

$3,750,000
2,000,000
$1,750,000
$1,600,000
(500,000)
650,000
$1,750,000
1,600,000
650,000
1,200,000
500,000
2,950,000

Noncontrolling interest (Parent company theory)
Son’s stockholders’ equity $2,000,000  20%

4

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

Entity theory
Preliminary computation:
Implied value of net assets ($3,000,000/.8)
Book value of net assets
Total excess

Excess allocated to:
Inventories
Equipment — net
Goodwill for remainder
Total excess
Entry on Son’s books to reflect 100% push down:
Inventories
Goodwill
Retained earnings
Equipment
Push-down capital

3

$3,000,000
1,600,000
$1,400,000

$

400,000

Noncontrolling interest (Entity theory)
Capital stock
Push-down capital
Stockholders’ equity
Noncontrolling interest percentage
Noncontrolling interest

$ 800,000

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

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Chapter 11

11-19

Solution P11-9
1

Push down under parent company theory
18,000
Buildings — net
27,000
Equipment — net
36,000
Goodwill
Retained earnings
20,000
9,000
Inventories
Push-down capital
92,000

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
20,000
Buildings — net
30,000
Equipment — net
Goodwill
40,000
20,000
Retained earnings
Inventories
10,000
100,000
Push-down capital
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
Accounts receivable — net
Inventories
Land
Buildings — net
Equipment — net
Goodwill
Total assets

$ 20,000
50,000
31,000
15,000
48,000
97,000
36,000
$297,000

$ 20,000
50,000
30,000
15,000
50,000
100,000
40,000
$305,000


Liabilities and stockholders’ equity
Accounts payable
Other liabilities
Capital stock
Push-down capital
Retained earnings
Total equities

$ 45,000
60,000
100,000
92,000
0
$297,000

$ 45,000
60,000
100,000
100,000
0
$305,000

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

11-20


Solution P11-10
a

Paw Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2012
Push down 90% — parent company theory
90%
Sun

Power

Adjustments and
Eliminations

Income Statement
$ 310,800 $ 110,000
Sales
Income from Sun
37,800
b
Cost of sales
140,000*
33,000*
Depreciation expense
29,000*
24,200*
Other operating
11,000*

expenses
45,000*
Consolidated NI
Noncontrolling share
e
Controlling share of NI $ 134,600 $ 41,800

Consolidated
Statements
$

420,800

37,800
173,000*
53,200*

$

56,000*
138,600
4,000*
134,600

$

147,000

$
4,000


Retained Earnings
Retained earnings — Paw

$ 147,000
$

Retained earnings — Sun
Controlling share of NI
Dividends

134,600
60,000*

0

Retained earnings
December 31

$ 221,600

$

31,800

Balance Sheet
Cash

$


$

27,000
40,000

Accounts receivable — net
Dividends receivable
Inventories
Land

63,800
90,000

Buildings — net

9,000
20,000
40,000
140,000

35,000
15,000
43,200

Equipment — net
Investment in Sun

165,000

77,600


208,800

Goodwill
$ 736,600
Accounts payable
Dividends payable
Other liabilities
Capital stock
Push-down capital
Retained earnings

$ 125,000
15,000
75,000
300,000

134,600

41,800
10,000*

b
e

a

9,000
1,000


8,000
a

8,000

d

9,000

$

221,600

$

98,800
122,000
55,000
55,000
183,200
242,600

b 28,800
c 180,000
36,000
$ 273,800

$

$


$

20,000
10,000 d
9,000
20,000
100,000 c 100,000
92,000 c 92,000
221,600
31,800
$ 736,600 $ 273,800

Noncontrolling interest January 1
Noncontrolling interest December 31

60,000*

36,000
792,600
145,000
16,000
95,000
300,000
221,600

c
e

12,000

3,000
$

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15,000
792,600


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Chapter 11
*

11-21
Deduct

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

11-22

Solution P11-10 (continued)
b
Paw Corporation and Subsidiary
Consolidation Working Papers

for the year ended December 31, 2012
Push down 100% — entity theory
90%
Sun

Paw

Adjustments and
Eliminations

Income Statement
$ 310,800 $ 110,000
Sales
Income from Sun
37,800
b
Cost of sales
140,000*
32,000*
Depreciation expense
29,000*
25,000*
Other operating
expenses
45,000*
11,000*
Consolidated NI
Noncontrolling share
e
Controlling share of NI $ 134,600 $ 42,000


Consolidated
Statements
$

420,800

37,800
172,000*
54,000*

$

56,000*
138,800
4,200*
134,600

$

147,000

$
4,200

Retained Earnings
Retained earnings — Paw

$ 147,000
$


Retained earnings — Sun
Controlling share of NI
Dividends

134,600
60,000*

0

Retained earnings
December 31

$ 221,600

$

32,000

Balance Sheet
Cash

$

$

27,000
40,000

Accounts receivable — net

Dividends receivable
Inventories
Land

63,800
90,000

Buildings — net

9,000
20,000
40,000
140,000

35,000
15,000
45,000

Equipment — net
Investment in Sun

165,000

80,000

208,800

Goodwill
$ 736,600
Accounts payable

Dividends payable
Other liabilities
Capital stock
Push-down capital
Retained earnings

$ 125,000
15,000
75,000
300,000

134,600

42,000
10,000*

b
e

a

9,000
1,000

8,000
a

8,000

d


9,000

$

221,600

$

98,800
122,000
55,000
55,000
185,000
245,000

b 28,800
c 180,000
40,000
$ 282,000

$

$

$

20,000
10,000 d
9,000

20,000
100,000 c 100,000
100,000 c 100,000
221,600
32,000
$ 736,600 $ 282,000

Noncontrolling interest January 1
Noncontrolling interest December 31

60,000*

145,000
16,000
95,000
300,000
221,600

c
e

20,000
3,200
$

*

40,000
800,800


Deduct

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23,200
800,800


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Chapter 11

11-23

Solution P11-11
Pep Corporation and Subsidiary
Proportionate Consolidation Working Papers
for the year ended December 31, 2011
Pep
Income Statement
Sales
Income from Jay
Cost of sales
Depreciation expense
Other expenses
Net income

$

Adjustments and

Eliminations

Jay 40%

$

800,000 $
20,000
400,000*
100,000*
120,000*
200,000 $

$

300,000

300,000

b 180,000
a 20,000

150,000*
40,000*
60,000*
50,000

b
b
b


Consolidated
Statements
$

920,000

$

460,000*
116,000*
144,000*
200,000

$

300,000

90,000
24,000
36,000

Retained Earnings
Retained earnings — Pep

$

250,000

b 250,000


Venture equity — Jay
Net income
Dividends
Retained earnings/
Venture equity

$

400,000

$

300,000

Balance Sheet
Cash

$

100,000
130,000

$

50,000
30,000

b
b


30,000
18,000

Buildings — net

110,000
140,000
200,000

40,000
60,000
100,000

b
b
b

24,000
36,000
60,000

126,000
164,000
240,000

Equipment — net
Investment in Jay

300,000


180,000

b 108,000

372,000

120,000

200,000
100,000*

Receivables — net
Inventories
Land

$1,100,000
Accounts payable
Other liabilities
Common stock, $10 par
Retained earnings

$

$

400,000

$


120,000
142,000

a 20,000
b 100,000
$

460,000

120,000 $
80,000
500,000
400,000

100,000
60,000

$1,164,000
b
b

60,000
36,000

$

160,000
104,000
500,000
400,000


300,000

Venture equity — Jay
$1,100,000
*

200,000
100,000*

50,000

$

460,000

$1,164,000

Deduct

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