Chapter 3 Adaptasi

CHAPTER 3
THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS
ANSWERS TO QUESTIONS
Q3-1 Underlying the preparation of consolidated financial statements is the notion that the
consolidated financial statements present the financial position and the results of operations
of a parent and its subsidiaries as if the related companies actually were a single company.
Q3-2 Without consolidated statements it often is very difficult for an investor to gain an
understanding of the total resources controlled by a company. A consolidated balance sheet
provides a much better picture of both the total assets under the control of the parent
company and the financing used in providing those resources. Similarly, the consolidated
income statement provides a better picture of the total revenue generated and the costs
incurred in generating the revenue. Estimates of future profit potential and the ability to meet
anticipated funds flows often can be more easily assessed by analyzing the consolidated
statements.
Q3-3 Parent company shareholders are likely to find consolidated statements more useful.
Noncontrolling shareholders may gain some understanding of the basic strength of the
overall economic entity by examining the consolidated statements; however, they have no
control over the parent company or other subsidiaries and therefore must rely on the assets
and earning power of the subsidiary in which they hold ownership. The separate statements
of the subsidiary are more likely to provide useful information to the noncontrolling
shareholders.
Q3-4 A parent company has the ability to exercise control over one or more other entities.
Under existing standards, a company is considered to be a parent company when it has
direct or indirect control over a majority of the common stock of another company. The
FASB has proposed adoption of a broader definition of control that would not be based
exclusively on stock ownership.
Q3-5 Creditors of the parent company have primary claim to the assets held directly by the
parent. Short-term creditors of the parent are likely to look only at those assets. Because
the parent has control of the subsidiaries, the assets held by the subsidiaries are potentially
available to satisfy parent company debts. Long-term creditors of the parent generally must
rely on the soundness and operating efficiency of the overall entity, which normally is best
seen by examining the consolidated statements. On the other hand, creditors of a
subsidiary typically have a priority claim to the assets of that subsidiary and generally
cannot lay claim to the assets of the other companies. Consolidated statements therefore
are not particularly useful to them.
Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e
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Chapter 3
Q3-6 When one company holds a majority of the voting shares of another company, the
investor should have the power to elect a majority of the board of directors of that company
and control its actions. Unless the investor holds controlling interest, there is always a
chance that another party may acquire a sufficient number of shares to gain control of the
company, or that the other shareholders may join together to take control.
Q3-7 The primary criterion for consolidation is the ability to directly or indirectly exercise
control. Control normally has been based on ownership of a majority of the voting common
stock of another company. The Financial Accounting Standards Board is currently working
on a broader definition of control. At present, consolidation should occur whenever majority
ownership is held unless other circumstances indicate that control is temporary or does not
rest with the parent.
Q3-8 Consolidation is not appropriate when control is temporary or when the parent cannot
exercise control. For example, if the parent has agreed to sell a subsidiary or plans to
reduce its ownership below 50 percent shortly after year-end, the subsidiary should not be
consolidated. Control generally cannot be exercised when a subsidiary is under the control
of the courts in bankruptcy or reorganization. While most foreign subsidiaries should be
consolidated, subsidiaries in countries with unstable governments or those in which there
are stringent barriers to funds transfers generally should not be consolidated.
Q3-9 Strict adherence to consolidation standards based on majority ownership of voting

common stock has made it possible for companies to use many different forms of control of
other entities without being forced to include them in their consolidated financial statements.
For example, contractual arrangements often have been used to provide control over
variable interest entities even though another party may hold a majority (or all) of the equity
ownership.
Q3-10 Special purpose entities generally have been created by companies to acquire
certain types of financial assets from the companies and hold them to maturity. The special
purpose entity typically purchases the financial assets from the company with money
received from issuing some form of collateralized obligation. If the company had borrowed
the money directly, its debt ratio would be substantially increased.
Q3-11 A variable purpose entity normally is not involved in general business activity such
as producing products and selling them to customers. They often are used to acquire
financial assets from other companies or to borrow money and channel it other companies.
A very large portion of the assets held by variable purpose entities typically is financed by
debt and a small portion financed by equity holders. Contractual agreements often give
effective control of the activities of the special purpose entity to someone other than the
equity holders.
Q3-12 FIN 46R provides a number of guidelines to be used in determining when a

company is a primary beneficiary of a variable interest entity. Generally, the primary
beneficiary will absorb a majority of the entitys expected losses or receive a majority of the
entitys expected residual returns.
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Chapter 3
Q3-13 Indirect control occurs when the parent controls one or more subsidiaries that, in
turn, hold controlling interest in another company. Company A would indirectly control
Company Z if Company A held 80 percent ownership of Company M and that company held
70 percent of the ownership of Company Z.
Q3-14 It is possible for a company to exercise control over another company without
holding a majority of the voting common stock. Contractual agreements, for example, may
provide a company with complete control of both the operating and financing decisions of
another company. In other cases, ownership of a substantial portion of a company's shares
and a broad based ownership of the other shares may give effective control to a company
even though it does not have majority ownership. There is no prohibition to consolidation
with less than majority ownership; however, few companies have elected to consolidate with
less than majority control.
Q3-15 Unless intercorporate receivables and payables are eliminated, there is an

overstatement of the true balances. The result is a distortion of the current asset ratio and
other ratios such as those that relate current assets to noncurrent assets or current liabilities
to noncurrent liabilities or to stockholders' equity balances.
Q3-16 The consolidated statements are prepared from the viewpoint of the parent company
shareholders and only the amounts assignable to parent company shareholders are
included in the consolidated stockholders' equity balances. Subsidiary shares held by the
parent are not owned by an outside party and therefore cannot be reported as shares
outstanding. Those held by the noncontrolling shareholders are included in the balance
assigned to noncontrolling shareholders in the consolidated balance sheet rather than being
shown as stock outstanding.
Q3-17 While it is not considered appropriate to consolidate if the fiscal periods of the parent
and subsidiary differ by more than 3 months, a difference in time periods cannot be used as
a means of avoiding consolidation. The fiscal period of one of the companies must be
adjusted to fall within an acceptable time period and consolidated statement prepared.
Q3-18 The noncontrolling interest, or minority interest, represents the claim on the net
assets of the subsidiary assigned to the shares not controlled by the parent company.
Q3-19 The procedures used in preparing consolidated and combined financial statements
may be virtually identical. In general, consolidated statements are prepared when a parent
company either directly or indirectly controls one or more subsidiaries. Combined financial
statements are prepared for a group of companies or business entities when there is no
parent-subsidiary relationship. For example, an individual who controls several companies
may gain a clearer picture of the financial position and operating results of the overall
operations under his or her control by preparing combined financial statements.
3-3
Chapter 3
Q3-20* Under the proprietary theory the parent company includes only a proportionate
share of the assets and liabilities and income statement items of a subsidiary in its financial
statements. Thus, if a subsidiary is 60 percent owned, the parent will include only 60
percent of the cash and accounts receivable of the subsidiary in its consolidated balance
sheet. Under current practice the full amount of the balance sheet and income statement
items of the subsidiary are included in the consolidated statements.
Q3-21* Under the entity theory the consolidated statements are not prepared from the
viewpoint of the parent company shareholders. The parent and subsidiary are viewed as a
single economic entity with a shareholder group that includes both controlling and
noncontrolling shareholders, each with an equity interest in the consolidated entity. As a
result, the assets and liabilities of the subsidiary are included in the consolidated statements
at 100 percent of their fair value at the date of acquisition and consolidated net income
includes the earnings to both controlling and noncontrolling shareholders. Current
accounting practice does not recognize the noncontrolling shareholders' portion of fair
value, nor is income assigned to noncontrolling shareholders included in consolidated net
income.
Q3-22* The parent company theory is closest to the procedures used in current practice.
The parent company theory reflects all assets under the control of the combined entity, yet
presents the net operating results and stockholders' equity portion of the consolidated
balance sheet from the viewpoint of the parent company shareholders.
Q3-23* Consolidated net income will include income to noncontrolling shareholders under
the FASB proposal.
Q3-24* The balance assigned to the noncontrolling interest will include its share of both
goodwill and the fair value increment related to identifiable net assets. Under current
standards only a proportionate share of the book value of the subsidiarys net assets is
assigned to the noncontrolling interest.
3-4
Chapter 3
SOLUTIONS TO CASES
C3-1 Computation of Total Asset Values
The relationship observed should always be true. Assets reported by the parent company
include its investment in the net assets of the subsidiaries. These totals must be eliminated
in the consolidation process to avoid double counting. There also may be intercompany
receivables and payables between the companies that must be eliminated when
consolidated statements are prepared. In addition, inventory or other assets reported by the
individual companies may be overstated as a result of unrealized profits on intercorporate
purchases and sales. The carrying value of the assets must be adjusted and the unrealized
profits eliminated in the consolidation process.
C3-2 Accounting Entity [AICPA Adapted]
a. (1) The conventional or traditional approach has been to define the accounting entity
in terms of a specific firm or enterprise unit that is separate and apart from the owner
or owners and from other enterprises. For example, partnerships and sole
proprietorships are accounted for separately from the owners although such a
distinction might not exist legally. Thus, it was recognized that the transactions of the
enterprise should be accounted for and reported on separately from those of the
owners.
An extension of this approach is to define the accounting entity in terms of an

economic unit that controls resources, makes and carries out commitments, and
conducts economic activity. In the broadest sense an accounting entity could be
established in any situation where there is an input-output relationship. Such an
accounting entity may be an individual, a profit-seeking or not-for-profit enterprise, or a
subdivision of a profit-seeking or not-for-profit enterprise for which a system of
accounts is maintained. This approach is oriented toward providing information to the
economic entity which it can use in evaluating its operating results and financial
position.
An alternative approach is to define the accounting entity in terms of an area of

economic interest to a particular individual, group, or institution. The boundaries of
such an economic entity would be identified by determining (a) the interested
individual, group, or institution and (b) the nature of that individual's, group's, or
institution's interest. In theory a number of separate legal entities or economic units
could be included in a single accounting entity. Thus, this approach is oriented to the
external users of financial reports.
3-5
Chapter 3
C3-2 (continued)
(2) The way in which an accounting entity is defined establishes the boundaries of the
possible objects, attributes, or activities that will be included in the accounting records
and reports. Knowledge as to the nature of the entity may aid in determining (1) what
information to include in reports of the entity and (2) how to best present information
about the entity so that relevant features are disclosed and irrelevant features do not
cloud the presentation.
The applicability of all other generally accepted concepts (or principles or postulates)
of accounting (for example, continuity, money measurement, and time periods)
depends on the established boundaries and nature of the accounting entity. The other
accounting concepts lack significance without reference to an entity. The entity must
be defined before the balance of the accounting model can be applied and the
accounting can begin. Thus, the accounting entity concept is so fundamental that it
pervades all accounting.
b. (1) Units created by or under law, such as corporations, partner-ships, and,

occasionally, sole proprietorships, probably are the most common types of accounting
entities.
(2) Product lines or other segments of an enterprise, such as a division, department,

profit center, branch, or cost center, can be treated as accounting entities. For
example, financial reporting by segment was supported by investors, the Securities
and Exchange Commission, financial executives, and members of the accounting
profession.
(3) Most large corporations issue consolidated financial reports. These statements
often include the financial statements of a number of separate legal entities that are
considered to constitute a single economic entity for financial reporting purposes.
(4) Although the accounting entity often is defined in terms of a business enterprise
that is separate and distinct from other activities of the owner or owners, it also is
possible for an accounting entity to embrace all the activities of an owner or a group of
owners. Examples include financial statements for an individual (personal financial
statements) and the financial report of a person's estate.
(5) The entire economy of Indonesia also can be viewed as an accounting entity.
Consistent with this view, national income accounts are compiled by the Indonesian
Department of Commerce and regularly reported.
3-6
Chapter 3
C3-3 Need for Consolidation [AICPA Adapted]
a. All identifiable assets acquired and liabilities assumed in a business combination,

whether or not shown in the financial statements of PT Marina, should be recorded at their
fair values at the date of acquisition. Then, the excess of the cost of acquiring ownership of
PT Marina over the sum of the amounts assigned to the identifiable assets acquired less
liabilities assumed should be recorded as goodwill.
b. Consolidated financial statements should be prepared in order to present the financial

position and operating results for an economic entity in a manner more meaningful than if
separate statements are prepared.
c. The usual first necessary condition for consolidation is control. Under current accounting
standards, control is assumed to exist when one company, directly or indirectly, owns over
fifty percent of the outstanding voting shares of another company. Consolidated financial
statements should be prepared whether a business combination is accounted for as a
purchase or a pooling of interests. The critical test is whether or not control exists and is
independent of the method of accounting used in recording the business combination.
3-7
Chapter 3
C3-4 Subsidiaries and Core Businesses
Most of the information needed to answer this case can be obtained from articles available
in libraries, on the Internet, or through various online databases. Some of the information is
available in filings with the SEC (www.sec.gov).
a. General Electric was never able to turn Kidder, Peabody into a profitable subsidiary. In
fact, Kidder became such a drain on the resources of General Electric, that GE decided to
get rid of Kidder. Unfortunately, GE was unable to sell the company as a whole and
ultimately broke the company into pieces and sold the pieces that it could. GE suffered large
losses from its venture into the brokerage business.
b. Sears, Roebuck and Co. has been a major retailer for many decades. For a while, Sears
attempted to provide virtually all consumer needs so that customers could purchase
financial and related services at Sears in addition to goods. It owned more than 200 other
companies. During that time, Sears sold insurance (Allstate Insurance Group, consisting of
many subsidiaries), real estate (Coldwell Banker Real Estate Group, consisting of many
subsidiaries), brokerage and investment advisor services (Dean Witter), credit cards (Sears
and Discover Card), and various other related services through many different subsidiaries.
During the mid-nineties, Sears sold or spun off most of its subsidiaries that were unrelated
to its core business, including Allstate, Coldwell Banker, Dean Witter, and Discover. On
March 24, 2005, Sears Holding Corporation was established and became the parent
company for Sears, Roebuck and Co. and K Mart Holding Corporation. From an accounting
perspective, the merger was treated as a purchases business combination with Kmart
acquiring Sears, even though Kmart had just emerged from bankruptcy proceedings.
Following the merger the company now has approximately 2,300 full-line and 1,100
specialty retain stores in the United States and approximately 370 full-line and specialty
retail stores in Canada.
c. PepsiCo entered the restaurant business in 1977 with the purchase of Pizza Hut. By
1986, PepsiCo also owned Taco Bell and KFC (Kentucky Fried Chicken). In 1997, these
subsidiaries were spun off to a new company, Tricon Global Restaurants, with Tricon's
stock distributed to PepsiCo's shareholders. Tricon Global Restaurants changed its name to
YUM! Brands, Inc., in 2002. Although PepsiCo exited the restaurant business, it continued
in the snack-food business with its Frito-Lay subsidiary, the world's largest maker of salty
snacks.
3-8
Chapter 3
C3-4 (continued)
d. When consolidated financial statements are presented, financial statement users are
provided with information about the company's overall operations. Assessments can be
made about how the company as a whole has fared as a result of all its operations.
However, comparisons with other companies may be difficult because the operations of
other companies may not be similar. If a company operates in a number of different
industries, consolidated financial statements may not permit detailed comparisons with
other companies unless the other companies operate in all of the same industries, with
about the same relative mix. Thus, standard measures used in manufacturing and
merchandising, such as gross margin percentage, inventory and receivables turnover,
and the debt-to-asset ratio, may be useless or even misleading when significant
financial-services operations are included in the financial statements. Similarly, standard
measures used in comparing financial institutions might be distorted when financial
statement information includes data relating to manufacturing or merchandising
operations. A partial solution to the problem results from providing disaggregated
(segment or line-of-business) information along with the consolidated financial
statements, as required by the FASB.
3-9
Chapter 3
C3-5 International Consolidation Issues
The following answers are based on information in the PricewaterhouseCoopers publication

entitled Similarities and Differences A Comparison of IFRS and US GAAP, available at
http://www.pwc.com/extweb/pwcpublications.nsf/docid/74d6c09e0a4ee610802569a100335
4c8. PWC updates the site regularly, and more current information may be available.
a. Parent companies must prepare consolidated financial statements that include all
subsidiaries. However, if the parent itself is wholly owned by another entity, the company
may be exempt from this requirement. For the company to be exempt, the owners of the
minority interest must have been informed and they must indicate that they do not object to
omitting the consolidated statements. Additionally, the parents securities must not be
publicly traded and the parent must not be in the process of issuing such securities. Further,
the immediate or ultimate parent must still publish consolidated financial statements that
comply with IFRS.
b. According to IFRS, if any excess of fair value over the purchase price arises, the
acquiring company must reassess the acquired identifiable assets, liabilities and contingent
liabilities to determine that they have been properly identified and valued. The acquiring
company must also reassess the cost of the combination. If there is still a differential after
reassessment, this amount is recognized immediately in the income statement. This
treatment is consistent with the FASBs proposed standard on business combinations.
3 - 10
Chapter 3
C3-6 Off-Balance Sheet Financing and SPEs
a. Off-balance sheet financing refers to techniques that allow companies to borrow while
keeping the debt, and related assets, from being reported in the companys balance sheet.
b. (1) Funds to acquire new assets for a company may be borrowed by a third party such
as a SPE, with the acquired assets then leased to the company.
(2) A company may sell assets such as accounts receivable instead of using them as
collateral.
(3) A company may create a new SPE and transfer assets to the new entity in exchange
for cash.
c. SPEs may serve a genuine business purpose, such as risk sharing among investors and
isolation of project risk from company risk.
d. SPEs may be structured to avoid consolidation. To the extent that standards for
consolidation are rule-based, it is possible to structure a SPE so that it is not consolidated
even if the underlying economic substance of the entity would indicate that it should be
consolidated. By artificially removing debt, assets, and expenses from the financial reports
of the sponsoring company, the financial position of a company and the results of its
operations can be distorted. The FASB has been working to ensure that rule-based
consolidation standards result in financial statements that reflect the underlying economic
substance.
3 - 11
Chapter 3
SOLUTIONS TO EXERCISES
E3-1 Multiple-Choice Questions on Consolidation Overview

[AICPA Adapted]
1. d
2. c
3. b
4. a
5. b
E3-2 Multiple-Choice Questions on Variable Interest Entities
1. c
2. d
3. a
4. b
5. b
E3-3 Multiple-Choice Questions on Consolidated Balances [AICPA Adapted]
1. a
2. b
3. b
4. c
5. a
3 - 12
Chapter 3
E3-4 Multiple-Choice Questions on Consolidation Overview

[AICPA Adapted]
1. d
2. b
3. b
4. d
E3-5 Balance Sheet Consolidation with Intercompany Transfer
a. Rp645,000,000 = Rp510,000,000 + Rp135,000,000
b. Rp845,000,000 = Rp510,000,000 + Rp350,000,000 - Rp15,000,000
c. Rp655,000,000 = (Rp320,000,000 + Rp135,000,000) + Rp215,000,000 -

Rp15,000,000
d. Rp190,000,000 (as reported by PT Prima)
E3-6 Intercompany Transfers
a. Consolidated current assets will be overstated by Rp37,000,000 if no eliminations are

made. Inventory will be overstated by Rp25,000,000 and accounts receivable will be
overstated by Rp12,000,000.
b. Net working capital will be overstated by Rp25,000,000 due to unrealized intercompany

inventory profits. The overstatement of accounts payable and accounts receivable will
offset.
c. Net income of the period following will be understated by Rp25,000,000 as a result of

overstating cost of goods sold by that amount.
3 - 13
Chapter 3
E3-7 Subsidiary Acquired for Cash
PT Pensil and Subsidiary

Consolidated Balance Sheet
January 2, 20X3
Cash (Rp200,000,000 - Rp150,000,000 + Rp50,000,000) Rp100,000,000

Other Assets (Rp400,000,000 + Rp180,000,000) 580,000,000
Total Assets Rp680,000,000
Current Liabilities (Rp100,000,000 + Rp80,000,000) Rp180,000,000

Common Stock 300,000,000
Retained Earnings 200,000,000
Total Liabilities and Stockholders' Equity Rp680,000,000
E3-8 Subsidiary Acquired with Bonds
PT Bina Komputer and Subsidiary

January 2, 20X3
Cash (Rp200,000,000 + Rp50,000,000) Rp250,000,000

Current Liabilities Rp180,000,000

Bonds Payable Rp140,000,000
Bond Premium 10,000,000 150,000,000
E3-9 Subsidiary Acquired by Issuing Preferred Stock
PT Bina Komputer and Subsidiary

January 2, 20X3
Cash (Rp200,000,000 + Rp50,000,000) Rp250,000,000

Current Liabilities (Rp100,000,000 + Rp80,000,000) Rp180,000,000

Preferred Stock (Rp6 x 15,000,000) 90,000,000
Additional Paid-In Capital (Rp4 x 15,000,000) 60,000,000
3 - 14
Chapter 3
E3-10 Incomplete Consolidation
a. PT Berlian Motor apparently owns 100 percent of the stock of PT Premium since the
balance in the investment account reported by PT Berlian Motor is equal to the net book
value of PT Premium.
b. Accounts Payable Rp 60,000,000 Accounts receivable were reduced by

Rp10,000,000, presumably as a
reduction of receivables and payables.
There is no indication of intercorporate

Bonds Payable 600,000,000 ownership.
Common stock of PT Premium must be

Common Stock 200,000,000 eliminated.
Retained earnings of PT Premium also

Retained Earnings 260,000,000 must be eliminated in preparing
consolidated statements.
Rp1,120,000,000
E3-11 Noncontrolling Interest
a. The total noncontrolling interest reported in the consolidated balance sheet at January
1, 20X7, is Rp126,000,000 (Rp420,000,000 x .30).
b. The stockholders' equity section of the subsidiary is eliminated when the consolidated
balance sheet is prepared. Thus, the stockholders' equity section of the consolidated
balance sheet is that of the parent company:
Common Stock Rp400,000,000

Additional Paid-In Capital 222,000,000
Total Stockholders' Equity Rp980,000,000
c. PT Surakarta is mainly interested in assuring a steady supply of electronic switches. It

can control the operations of PT Karimun with 70 percent ownership and can use the
money that would be needed to purchase the remaining shares of PT Karimun to
finance additional operations or purchase other investments.
3 - 15
Chapter 3
E3-12 Computation of Consolidated Net Income
a. PT Ambar should report income from its subsidiary of Rp15,000,000 (Rp20,000,000 x

.75) rather than dividend income of Rp9,000,000.
b. A total of Rp5,000 (Rp20,000,000 x .25) should be assigned to the noncontrolling

interest in the 20X4 consolidated income statement.
c. Consolidated net income of Rp65,000 should be reported for 20X4, computed as follows:
Reported net income of PT Ambar Rp59,000,000

Less: Dividend income from PT Kilang (9,000,000)
Operating income of PT Ambar Rp50,000,000
Net income of PT Kilang 20,000,000
Total income Rp70,000,000
Income assigned to noncontrolling interest (5,000,000)
Consolidated net income Rp65,000,000
d. Income of Rp79,000,000 would be attained by adding the income reported by PT Ambar

(Rp59,000,000) to the income reported by PT Kilang (Rp20,000,000). However, the
dividend income from PT Kilang recorded by PT Ambar must be deleted and a
proportionate share of PT Kilang's net income (Rp5,000,000) needs to be set aside for
the noncontrolling shareholders and excluded from consolidated net income.
E3-13 Computation of Subsidiary Balances
a. PT Lintas' net income for 20X2 was Rp32,000,000 (Rp8,000,000 / .25).
b. Common Stock Outstanding (1) Rp120,000,000

Additional Paid-In Capital (given) 40,000,000
Retained Earnings (Rp70,000,000 + Rp32,000,000) 102,000,000
Total Stockholders' Equity Rp262,000,000
(1) Computation of common stock outstanding:
Total stockholders' equity (Rp65,500,000 / .25) Rp262,000,000

Additional paid-in capital (40,000,000)
Retained earnings (102,000,000)
Common stock outstanding Rp120,000,000
3 - 16
Chapter 3
E3-14 Subsidiary Acquired at Net Book Value
PT Bintang and Subsidiary

December 31, 20X8
Cash (Rp40,000,000 + Rp20,000,000) Rp 60,000,000

Accounts Receivable (Rp120,000,000 + Rp70,000,000) 190,000,000
Inventory (Rp180,000,000 + Rp90,000,000) 270,000,000
Fixed Assets (net) (Rp350,000,000 + Rp240,000,000) 590,000,000
Total Assets Rp1,110,000,000
Accounts Payable (Rp65,000,000 + Rp30,000,000) Rp 95,000,000

Notes Payable (Rp350,000,000 + Rp220,000,000) 570,000,000
Total Liabilities and Stockholders' Equity Rp1,110,000,000
E3-15 Applying Alternative Accounting Theories
a. Proprietary theory:
Total revenue [Rp400,000,000 + (Rp200,000,000 x .75)] Rp550,000,000

Total expenses [Rp280,000,000 + (Rp160,000,000 x .75)] 400,000,000
Consolidated net income [Rp120,000,000 + (Rp40,000,000 x 150,000,000
.75)]
b. Parent company theory:
Total revenue (Rp400,000,000 + Rp200,000,000) Rp600,000,000

Total expenses (Rp280,000,000 + Rp160,000,000) 440,000,000
.75)]
c. Entity theory:

Consolidated net income (Rp120,000,000 + Rp40,000,000) 160,000,000
d. Current accounting practice:

.75)]
3 - 17
Chapter 3
E3-16* Measurement of Goodwill
a. Rp240,000,000 = computed in the same manner as under the parent company

approach.
b. Rp400,000,000 = Rp240,000,000 / .60
c. Rp240,000,000 = computed in the same manner as under the parent company

approach.
E3-17* Valuation of Assets under Alternative Accounting Theories
a. Entity theory:
Book Value (Rp240,000,000 x 1.00) Rp240,000,000
Fair Value Increase (Rp50,000,000 x 1.00) 50,000,000
Rp290,000,000

Book Value (Rp240,000,000 x 1.00) Rp240,000,000
Fair Value Increase (Rp50,000,000 x .75) 37,500,000
Rp277,500,000
c. Proprietary theory:
Book Value (Rp240,000,000 x .75) Rp180,000,000
Rp217,500,000

Book Value (Rp240,000,000 x 1.00) Rp240,000,000
Rp277,500,000
3 - 18
Chapter 3
E3-18* Reported Income under Alternative Accounting Theories
a. Entity theory:

1.00)]

Consolidated net income [Rp90,000,000 + (Rp50,000,000 x .80)] 130,000,000
c. Proprietary theory:
Total revenue [Rp410,000,000 + (Rp200,000,000 x .80)] Rp570,000,000

Total expenses [Rp320,000,000 + (Rp150,000,000 x .80)] 440,000,000

3 - 19
Chapter 3
E3-19* Acquisition of Majority Ownership
Current Practice FASB Proposal

a. Net identifiable assets Rp677,500,000 Rp690,000,000
Rp677,500,000 = Rp520,000,000 + Rp120,000,000 + .75(Rp170,000,000 -
Rp120,000,000)
Rp690,000,000 = Rp520,000,000 + Rp170,000,000
b. Goodwill 22,500,000 30,000,000

Rp22,500,000 = Rp150,000,000 (Rp170,000,000 x .75)
Rp30,000,000 = Rp200,000,000 - Rp170,000,000
c. Noncontrolling interest 30,000,000 50,000,000

Rp30,000,000 = Rp120,000,000 x .25
Rp50,000,000 = Rp200,000,000 x .25
E3-20* Consolidated Net Income
a. (1) Revenues Rp900,000,000

Operating expenses (630,000,000)
Rp270,000,000
Income to noncontrolling interest (36,000,000)
(2) Revenues Rp900,000,000

Expenses (630,000,000)
Less consolidated net income attributable to
noncontrolling interest in subsidiary (36,000,000)
Consolidated net income attributable to
controlling interest Rp234,000,000
b. (1) No change will occur under current reporting standards.

(2) Income to noncontrolling interest will be reduced by Rp600,000
[(Rp20,000,000 / 10 years) x .30].
3 - 20
Chapter 3
SOLUTIONS TO PROBLEMS
P3-21 Multiple-Choice Questions on Consolidated and Combined Financial

Statements [AICPA Adapted]
1. d
2. c
3. b
4. c
5. c
P3-22 Intercompany Sales
a. Net income will be overstated by Rp30,000,000 (Rp50,000,000 - Rp20,000,000) if no

adjustment is made to eliminate the effects of the intercompany transfer.
b.
PT Kintamani and Subsidiary
Consolidated Income Statement
Year Ended December 31, 20X6
Sales Rp300,000,000
Cost of goods sold (200,000,000)
c.
PT Kintamani and Subsidiary
Consolidated Income Statement
Year Ended December 31, 20X6
Sales Rp250,000,000
Cost of goods sold (180,000,000)
Consolidated net income Rp 70,000,000
d. Each of the three income statement items is changed when the effects of the
intercompany sale are eliminated.
3 - 21
Chapter 3
P3-23 Intercompany Inventory Transfer
a. Inventory on January 1, 20X3:

Balance reported by PT Rinjani Rp25,000,000
Unrealized profits recognized by PT Cendana (15,000,000)
Consolidated inventory Rp10,000,000
b. Cost of Goods Sold for 20X2:

Cost of goods sold recorded by PT Cendana Rp10,000,000
Cost of goods sold recorded on intercompany sale (10,000,000)
Cost of goods sold recorded on sales to outsiders Rp -0-
c. Cost of Goods Sold for 20X3:

Cost of goods sold recorded by PT Rinjani Rp25,000,000
Profit recorded on intercompany sale by PT Cendana (15,000,000)
Consolidated cost of goods sold Rp10,000,000
d. Sales for 20X2:

Sales recognized by PT Cendana Rp25,000,000
Intercompany sale recorded by PT Cendana (25,000,000)
Consolidated sales Rp -0-
e. Sales for 20X3:

Sales recognized by PT Rinjani Rp55,000,000
Intercompany sales during 20X3 (-0-)
Consolidated sales Rp55,000,000
P3-24 Determining Net Income of Consolidated Entity
Net income reported by PT Plasa Rp110,000,000

Dividend income from PT Makinta (Rp14,000,000 x .75) (10,500,000)
Operating income of PT Plasa Rp 99,500,000
Placer's share of PT Makinta's income (Rp24,000,000 x .75) 18,000,000
Amortization of purchase differential (Rp20,000,000 / 8 years) (2,500,000)
Consolidated net income (equal to PT Plasa's
net income computed on equity-method basis) Rp115,000,000
3 - 22
Chapter 3
P3-25 Determining Net Income of Parent Company

PT Talenta's share of subsidiary income:
Income of subsidiary (Rp15,200,000 / .40) Rp38,000,000
Proportion of stock held by PT Talenta x .60
Subsidiary income included in consolidated net
income (22,800,000)
Income from PT Talenta's operations Rp141,500,000
P3-26 Consolidated Income Statement Data
a. Sales: (Rp300,000,000 + Rp200,000,000 - Rp50,000,000) Rp450,000,000
b. Investment income from PT Lezat Bakery: Rp -0-
c. Cost of goods sold: (Rp200,000,000 + Rp130,000,000 - Rp295,000,000

Rp35,000,000)
d. Depreciation expense: (Rp40,000,000 + Rp30,000,000 + Rp 75,000,000

Rp5,000,000)
3 - 23
Chapter 3
P3-27 Incomplete Company and Consolidated Data
a. A total of Rp210,000,000 (Rp120,000,000 + Rp90,000,000) should be reported.
b. As shown in the investment account balance, PT Berdikari paid Rp110,000,000 for the
ownership of PT Mantili. The amount paid was Rp30,000,000 greater than the book value
of the net assets of PT Mantili and is reported as goodwill in the consolidated balance
sheet at January 1, 20X5.
c. In determining the amount to be reported for land in the consolidated balance sheet,
Rp15,000,000 (Rp70,000,000 + Rp50,000,000 - Rp105,000,000) was eliminated. PT
Berdikari apparently sold the land to PT Mantili for Rp25,000,000 (Rp10,000,000 +
Rp15,000,000).
d. Accounts payable of Rp120,000,000 (Rp75,000,000 + Rp55,000,000 - Rp10,000,000)

will be reported in the consolidated balance sheet. A total of Rp10,000,000 was deducted
in determining the balance reported for accounts receivable (Rp90,000,000 +
Rp50,000,000 - Rp130,000,000). The elimination of an intercompany receivable must be
offset by the elimination of an intercompany payable.
e. The par value of PT Berdikari's stock outstanding is Rp100,000,000.
3 - 24
Chapter 3
P3-28 Consolidation Following Intercompany Sale of Equipment
PT Pontia and Subsidiary

January 1, 20X7
Cash (Rp50,000,000 + Rp35,000,000) Rp 85,000,000

Accounts Receivable (Rp110,000,000 + Rp60,000,000 - 153,000,000
Rp17,000,000)
Merchandise Inventory (Rp95,000,000 + Rp75,000,000) 170,000,000
Equipment (net) (Rp230,000,000 + Rp105,000,000 - Rp25,000,000) 310,000,000
Accounts Payable (Rp82,000,000 + Rp28,000,000 - Rp17,000,000) Rp 93,000,000

Notes Payable (Rp200,000,000 + Rp107,000,000) 307,000,000
Retained Earnings (Rp163,000,000 - Rp25,000,000) 138,000,000
Note: The Rp25,000,000 (Rp110,000,000 - Rp85,000,000) profit recorded by PT Pontia on

the sale of equipment to PT Banjar must be eliminated by reducing the amount
reported as equipment and the retained earnings balance reported by PT Pontia.
A total of Rp17,000,000 (Rp110,000,000 - Rp93,000,000) remains as an account

receivable on the books of PT Pontia and a payable on the books of PT Banjar at
January 1, 20X7. These amounts must be eliminated in preparing the consolidated
balance sheet.
3 - 25
Chapter 3
P3-29 Parent Company and Consolidated Amounts
a. Common stock of PT Timika

on December 31, 20X5 Rp 90,000,000
Retained earnings of PT Timika
January 1, 20X5 Rp130,000,000
Sales for 20X5 195,000,000
Less: Expenses (160,000,000)
Dividends paid (15,000,000)
Retained earnings of PT Timika
on December 31, 20X5 150,000,000
Net book value on December 31, 20X5 Rp240,000,000
Proportion of stock acquired by PT Quantum x .80
Purchase price Rp192,000,000
b. Net book value on December 31, 20X5 Rp240,000,000

Proportion of stock held by
noncontrolling interest x .20
Balance assigned to noncontrolling interest Rp 48,000,000
c. Consolidated net income is Rp143,000,000. None of the 20X5 net income of PT Timika
was earned after the date of purchase and, therefore, none can be included in
consolidated net income.
d. Consolidate net income would be Rp171,000,000 [Rp143,000,000 + (Rp195,000,000 -

Rp160,000,000) x .80]
3 - 26
Chapter 3
P3-30 Parent Company and Consolidated Balances
a. Balance in investment account, December 31, 20X7 Rp 259,800,000

PT Entrojaya net assets on date of acquisition Rp260,000,00
0
Cumulative earnings since acquisition 110,000,000
Cumulative dividends since acquisition (46,000,000)
Net assets on December 31, 20X7 Rp324,000,00
0
Proportion of stock held by PT Tridaya x .75
Book value of claim by PT Tridaya (243,000,000)
Unamortized differential December 31, 20X7 Rp 16,800,000
Number of years remaining for amortization 7
Annual amortization Rp 2,400,000
Total years of amortization x 10
Amount paid in excess of book value Rp 24,000,000
b. Rp24,000,000 will be added to buildings and equipment each year.
c. Rp7,200,000 (Rp2,400,000 x 3 years) will be added to accumulated depreciation at

December 31, 20X7.
d. Rp81,000,000 (Rp324,000,000 x .25) will be assigned to noncontrolling interest in the

consolidated balance sheet prepared at December 31, 20X7.
3 - 27
Chapter 3
P3-31 Indirect Ownership
The following ownership chain exists:
Ungu
.7
Hijau
.40 .1
Kuning Oranye
.60
Biru
The earnings of PT Biru and PT Oranye are included under cost method reporting due to
the 10 percent ownership level of PT Oranye.
Net income of PT Hijau:
Reported operating income Rp 20,000,000

Dividend income from Oranye (Rp30,000,000 x .10) 3,000,000
Equity-method income from Kuning (Rp60,000,000 x .40) 24,000,000
PT Hijau net income Rp 47,000,000
Consolidated net income:
Operating income of Ungu Rp 90,000,000

Ungu's share of Hijau's net income (Rp47,000,000 x .70) 32,900,000
3 - 28
Chapter 3
P3-32 Comprehensive Problem: Consolidated Financial Statements
a. Cash: Rp71,000,000 + Rp33,000,000 = Rp104,000,000
b. Receivables (net): Rp431,000,000 + Rp122,000,000 - Rp45,000,000 = Rp508,000,000
c. Inventory: Rp909,000,000 + Rp370,000,000 - (Rp45,000,000 - Rp34,000,000) =

Rp1,268,000,000
d. Investment in PT Mantili Stock: Not reported in consolidated statements
e. Equipment (net): Rp1,528,000,000 + Rp475,000,000 + Rp25,000,000 - Rp5,000,000 =

Rp2,023,000,000
f. Goodwill: (Rp55,000,000 - Rp25,000,000) = Rp30,000,000
g. Current Payables: Rp227,000,000 + Rp95,000,000 - Rp45,000,000 = Rp277,000,000
h. Common Stock (par): Rp1,000,000,000
i. Sales Revenue: Rp8,325,000,000 + Rp2,980,000,000 - Rp45,000,000 = Rp11,260,000,000
j. Cost of Goods Sold: Rp5,150,000,000 + Rp2,010,000,000 - Rp34,000,000 =

Rp7,126,000,000
k. Depreciation Expense: Rp302,000,000 + Rp85,000,000 + Rp5,000,000 = Rp392,000,000
3 - 29
Chapter 3
P3-33* Balance Sheet Amounts under Alternative Accounting Theories
a. Proprietary theory:
Cash and inventory [Rp300,000,000 + (Rp80,000,000 x .75)] Rp360,000,000

Buildings and Equipment (net)
[Rp400,000,000 + (Rp180,000,000 x .75)] 535,000,000
Goodwill [Rp210,000,000 - (Rp260,000,000 x .75)] 15,000,000
Cash and inventory (Rp300,000,000 + Rp80,000,000) Rp380,000,000

[Rp400,000,000 + Rp120,000,000 + (Rp60,000,000 x .75)] 565,000,000
Goodwill [Rp210,000,000 - (Rp260,000,000 x .75)] 15,000,000
c. Entity theory:

(Rp400,000,000 + Rp180,000,000) 580,000,000
Goodwill [Rp210,000,000 - (Rp260,000,000 x .75)] / .75 20,000,000

[Rp400,000,000 + Rp120,000,000 + (Rp60,000,000 x .75)] 565,000,000
Goodwill [Rp210,000,000 - (Rp260,000,000 x .75)] 15,000,000
3 - 30
Chapter 3
P3-34* Reported Balances
a. The investment balance reported by PT Realita will be Rp192,000,000 in both

cases.
b. Increase in assets under current reporting

standards
Book value of identifiable assets Rp220,000,000
Fair value of identifiable assets Rp310,000,000
Book value of identifiable assets (220,000,000)
Fair value increment Rp 90,000,000
PT Realitas proportionate share x .80
Increase attributable to PT Realita 72,000,000
Increase in assets reported Rp292,000,000
Increase in assets under the FASB proposal Rp310,000,000
c. Total liabilities will increase by Rp95,000,000 in both cases.
d. Goodwill under current reporting standards:

Purchase price paid by PT Realita Rp192,000,000
Fair value of PT Gambirs net assets Rp215,000,000
PT Realitas proportionate share x .80 (172,000,000)
Goodwill reported Rp 20,000,000
The amount of goodwill for the entity as a whole will be Rp25,000,000

[Rp240,000,000 - (Rp310,000,000 - Rp95,000,000)] under the
FASB proposal
e. Noncontrolling interest will be reported at Rp25,000,000 under current reporting

standards [(Rp220,000,000 - Rp95,000,000) x .20].
Noncontrolling interest will be reported at Rp48,000,000 under the FASB

proposal (Rp240,000,000 x .20).
P3-35* Acquisition Price
a. 57,000,000 = (Rp120,000,000 - Rp25,000,000) x .60
b. Rp75,000,000 = [(Rp120,000,000 - Rp25,000,000) x .60] + Rp18,000,000
c. Rp81,000,000 = Rp135,000,000 x .60
d. Rp48,800,000 = [(Rp120,000,000 - Rp25,000,000) + Rp27,000,000] x .40
3 - 31

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CHAPTER 3

THE REPORTING ENTITY AND CONSOLIDATED FINANCIAL STATEMENTS

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

Q3-9 Strict adherence to consolidation standards based on majority ownership of voting

Q3-12 FIN 46R provides a number of guidelines to be used in determining when a

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

Q3-15 Unless intercorporate receivables and payables are eliminated, there is an

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

C3-1 Computation of Total Asset Values

C3-2 Accounting Entity [AICPA Adapted]

An extension of this approach is to define the accounting entity in terms of an

An alternative approach is to define the accounting entity in terms of an area of

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

b. (1) Units created by or under law, such as corporations, partner-ships, and,

(2) Product lines or other segments of an enterprise, such as a division, department,

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

C3-3 Need for Consolidation [AICPA Adapted]

a. All identifiable assets acquired and liabilities assumed in a business combination,

b. Consolidated financial statements should be prepared in order to present the financial

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

C3-4 Subsidiaries and Core Businesses

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

C3-5 International Consolidation Issues

The following answers are based on information in the PricewaterhouseCoopers publication

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

C3-6 Off-Balance Sheet Financing and SPEs

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

E3-1 Multiple-Choice Questions on Consolidation Overview

E3-2 Multiple-Choice Questions on Variable Interest Entities

E3-3 Multiple-Choice Questions on Consolidated Balances [AICPA Adapted]

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

E3-4 Multiple-Choice Questions on Consolidation Overview

E3-5 Balance Sheet Consolidation with Intercompany Transfer

a. Rp645,000,000 = Rp510,000,000 + Rp135,000,000

b. Rp845,000,000 = Rp510,000,000 + Rp350,000,000 - Rp15,000,000

c. Rp655,000,000 = (Rp320,000,000 + Rp135,000,000) + Rp215,000,000 -

d. Rp190,000,000 (as reported by PT Prima)

E3-6 Intercompany Transfers

a. Consolidated current assets will be overstated by Rp37,000,000 if no eliminations are

b. Net working capital will be overstated by Rp25,000,000 due to unrealized intercompany

c. Net income of the period following will be understated by Rp25,000,000 as a result of

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

E3-7 Subsidiary Acquired for Cash

PT Pensil and Subsidiary

Cash (Rp200,000,000 - Rp150,000,000 + Rp50,000,000) Rp100,000,000

Current Liabilities (Rp100,000,000 + Rp80,000,000) Rp180,000,000

E3-8 Subsidiary Acquired with Bonds

PT Bina Komputer and Subsidiary

Cash (Rp200,000,000 + Rp50,000,000) Rp250,000,000

Current Liabilities Rp180,000,000

E3-9 Subsidiary Acquired by Issuing Preferred Stock

PT Bina Komputer and Subsidiary

Cash (Rp200,000,000 + Rp50,000,000) Rp250,000,000

Current Liabilities (Rp100,000,000 + Rp80,000,000) Rp180,000,000

Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e

E3-10 Incomplete Consolidation

b. Accounts Payable Rp 60,000,000 Accounts receivable were reduced by

There is no indication of intercorporate

Common stock of PT Premium must be

Retained earnings of PT Premium also

E3-11 Noncontrolling Interest

Common Stock Rp400,000,000