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In this project, you are to provide an analysis of alternative accounting methods for controlling interest investments and subsequent effects on...

In this project, you are to provide an analysis of alternative accounting methods for controlling interest
investments and subsequent effects on consolidated reporting. The project requires the use of a computer
and a spreadsheet software package (e.g., Microsoft Excel®, etc.). The use of these tools allows you to
assess the sensitivity of alternative accounting methods on consolidated financial reporting without preparing several similar worksheets by hand. Also, by modeling a worksheet process, you can develop a better understanding of accounting for combined reporting entities.

Consolidated Worksheet Preparation
You will be creating and entering formulas to complete four worksheets. The first objective is to demonstrate
the effect of different methods of accounting for the investments (equity, initial value, and partial
equity) on the parent company’s trial balance and on the consolidated worksheet subsequent to acquisition.
The second objective is to show the effect on consolidated balances and key financial ratios of recognizing
a goodwill impairment loss.
The project requires preparation of the following four separate worksheets:
a. Consolidated information worksheet (follows).
b. Equity method consolidation worksheet.
c. Initial value method consolidation worksheet.
d. Partial equity method consolidation worksheet.
If your spreadsheet package has multiple worksheet capabilities (e.g., Excel), you can use separate
worksheets; otherwise, each of the four worksheets can reside in a separate area of a single
spreadsheet.
In formulating your solution, each worksheet should link directly to the first worksheet. Also,
feel free to create supplemental schedules to enhance the capabilities of your worksheet.

Project Scenario
Pecos Company acquired 100 percent of Suaro’s outstanding stock for $1,450,000 cash on January 1,
2011, when Suaro had the following balance sheet:
Assets Liabilities and Equity
Cash . . . . . . . . . . . . . . . . $ 37,000 Liabilities . . . . . . . . . . . . . . . . $(422,000)
Receivables . . . . . . . . . . . 82,000
Inventory . . . . . . . . . . . . . 149,000 Common stock . . . . . . . . . . . (350,000)
Land . . . . . . . . . . . . . . . . 90,000 Retained earnings . . . . . . . . . (126,000)
Equipment (net) . . . . . . . . 225,000
Software . . . . . . . . . . . . . 315,000
Total assets . . . . . . . . . . $898,000 Total liabilities and equity . . $(898,000)

At the acquisition date, the fair values of each identifiable asset and liability that differed from book
value were as follows:
Land $ 80,000
Brand name 60,000 (indefinite life—unrecognized on Suaro’s books)
Software 415,000 (2-year estimated useful life)
In-Process R&D 300,000

Additional Information
• Although at acquisition date Pecos expected future benefits from Suaro’s in-process research and
development (R&D), by the end of 2011, it became clear that the research project was a failure with
no future economic benefits.
• During 2011, Suaro earns $75,000 and pays no dividends.
• Selected amounts from Pecos and Suaro’s separate financial statements at December 31, 2012, are
presented in the consolidated information worksheet. All consolidated worksheets are to be prepared
as of December 31, 2012, two years subsequent to acquisition.
• Pecos’s January 1, 2012, Retained Earnings balance—before any effect from Suaro’s 2011 income—
is $(930,000) (credit balance).
• Pecos has 500,000 common shares outstanding for EPS calculations and reported $2,943,100 for consolidated
assets at the beginning of the period.

Following is the consolidated information worksheet.
A B C D
1 December 31, 2012, trial balances
2
3 Pecos Suaro
4 Revenues ($1,052,000) ($427,000)
5 Operating expenses $ 821,000 $262,000
6 Goodwill impairment loss ?
7 Income of Suaro ?
8 Net income ? ($165,000)
9
10 Retained earnings—Pecos 1/1/12 ?
11 Retained earnings—Suaro 1/1/12 ($201,000)
12 Net income (above) ? ($165,000)
13 Dividends paid $ 200,000 $ 35,000
14 Retained earnings 12/31/12 ? ($331,000)
15
16 Cash $ 195,000 $ 95,000
17 Receivables $ 247,000 $143,000
18 Inventory $ 415,000 $197,000
19 Investment in Suaro ?
20
21
22
23 Land $ 341,000 $ 85,000
24 Equipment (net) $ 240,100 $100,000
25 Software $312,000
26 Other intangibles $ 145,000
27 Goodwill
28 Total assets ? $932,000
29
30 Liabilities ($1,537,100) ($251,000)
31 Common stock ($ 500,000) ($350,000)
32 Retained earnings (above) ? ($331,000)
33 Total liabilities and equity ? ($932,000)
34
35 Fair value allocation schedule
36 Price paid $1,450,000
37 Book value $ 476,000
38 Excess initial value $ 974,000 Amortizations
39 to land ($ 10,000) 2011 2012
40 to brand name $ 60,000 ? ?
41 to software $ 100,000 ? ?
42 to IPR&D $ 300,000 ? ?
43 to goodwill $ 524,000 ? ?
44
45 Suaro’s RE changes Income Dividends
46 2011 $ 75,000 $ 0
47 2012 $ 165,000 $ 35,000

Project Requirements
Complete the four worksheets as follows:
1. Input the consolidated information worksheet provided and complete the fair value allocation
schedule by computing the excess amortizations for 2011 and 2012.
2. Using separate worksheets, prepare Pecos’s trial balances for each of the indicated accounting methods
(equity, initial value, and partial equity). Use only formulas for the Investment in Suaro, the Income
of Suaro, and Retained Earnings accounts.
3. Using references to other cells only (either from the consolidated information worksheet or from
the separate method sheets), prepare for each of the three consolidation worksheets:
• Adjustments and eliminations.
• Consolidated balances.
4. Calculate and present the effects of a 2012 total goodwill impairment loss on the following ratios for
the consolidated entity:
• Earnings per share (EPS).
• Return on assets.
• Return on equity.
• Debt to equity.
Your worksheets should have the capability to adjust immediately for the possibility that all acquisition
goodwill can be considered impaired in 2012.
5. Prepare a word-processed report that describes and discusses the following worksheet results:
a. The effects of alternative investment accounting methods on the parent’s trial balances and the final
consolidation figures.
b. The relation between consolidated retained earnings and the parent’s retained earnings under each
of the three (equity, initial value, partial equity) investment accounting methods.
c. The effect on EPS, return on assets, return on equity, and debt-to-equity ratios of the recognition
that all acquisition-related goodwill is considered impaired in 2012.
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