SM AKL

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CHAPTER 1

INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES

SOLUTIONS TO EXERCISESE1-1 Multiple-Choice Questions on Complex Organizations1. b2. d3. a4. b5. d

E1-2 Multiple-Choice Questions on Recording Business Combinations[AICPA Adapted]

1. a2. c3. d4. d5. c

E1-3 Multiple-Choice Questions on Reported Balances [AICPA Adapted]1. d2. d3. c4. c

E1-4 Multiple-Choice Questions Involving Account Balances1. c2. c3. b4. b5. b

E1-5 Asset Transfer to Subsidiarya. Journal entry recorded by Pale Company for transfer of assets to Bright Company:

Investment in Bright Company Common Stock 408,000Accumulated Depreciation – Buildings 24,000Accumulated Depreciation – Equipment 36,000

Cash 21,000Inventory 37,000Land 80,000Buildings 240,000Equipment 90,000

b. Journal entry recorded by Bright Company for receipt of assets from Pale Company:Cash 21,000Inventory 37,000Land 80,000Buildings 240,000Equipment 90,000

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Accumulated Depreciation – Buildings 24,000Accumulated Depreciation – Equipment 36,000Common Stock 60,000Additional Paid-In Capital 348,000

E1-6 Creation of New Subsidiary

a. Journal entry recorded by Lester Company for transfer of assets to Mumby Corporation:

Investment in Mumby Corporation Common Stock 498,000Allowance for Uncollectible Accounts Receivable 7,000Accumulated Depreciation – Buildings 35,000Accumulated Depreciation – Equipment 60,000

Cash 40,000Accounts Receivable 75,000Inventory 50,000Land 35,000Buildings 160,000Equipment 240,000

b. Journal entry recorded by Mumby Corporation for receipt of assets from Lester Company:


Allowance for UncollectibleAccounts Receivable 7,000

Accumulated Depreciation – Buildings 35,000Accumulated Depreciation – Equipment 60,000Common Stock 120,000Additional Paid-In Capital 378,000

E1-7 Balance Sheet Totals of Parent Company

a. Journal entry recorded by Foster Corporation for transfer of assets and accounts payable toKline Company:

Investment in Kline Company Common Stock 66,000Accumulated Depreciation 28,000Accounts Payable 22,000

Cash 15,000Accounts Receivable 24,000Inventory 9,000Land 3,000Depreciable Assets 65,000

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b. Journal entry recorded by Kline Company for receipt of assets and accounts payable fromFoster Corporation:

Cash 15,000Accounts Receivable 24,000Inventory 9,000Land 3,000Depreciable Assets 65,000

Accumulated Depreciation 28,000Accounts Payable 22,000Common Stock 48,000Additional Paid-In Capital 18,000

E1-8 Creation of Partnership

a. Journal entry recorded by Glover Corporation for transfer of assets to G&RPartnership:

Investment in G&R Partnership 450,000Accumulated Depreciation – Buildings 60,000Accumulated Depreciation – Equipment 40,000


b. Journal entry recorded by Renfro Company for the transfer of cash to G&RPartnership:

Investment in G&R Partnership 50,000Cash 50,000

c. Journal entry recorded by G&R Partnership for receipt of assets from GloverCorporation and Renfro Company:


Accumulated Depreciation – Buildings 60,000Accumulated Depreciation – Equipment 40,000Capital, Glover Corporation 450,000Capital, Renfro Company 50,000

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E1-9 Acquisition of Net Assets

Sun Corporation will record the following journal entries:

(1) Assets 71,000Goodwill 9,000

Liabilities 20,000Cash 60,000

(2) Merger Expense 4,000Cash 4,000

E1-10 Reporting Goodwill

a. Goodwill: $120,000 = $310,000 - $190,000Investment: $310,000

b. Goodwill: $6,000 = $196,000 - $190,000Investment: $196,000

c. Goodwill: $0; no goodwill is recorded when the purchase price is below the fairvalue of the net identifiable assets.

Investment: $190,000; recorded at the fair value of the net identifiable assets.

E1-11 Stock Acquisition

Journal entry to record the purchase of Tippy Inc., shares:

Investment in Tippy Inc., Common Stock 986,000Common Stock 425,000Additional Paid-In Capital 561,000

$986,000 = $58 x 17,000 shares$425,000 = $25 x 17,000 shares$561,000 = ($58 - $25) x 17,000 shares

E1-12 Balances Reported Following Combinationa. Stock Outstanding: $200,000 + ($10 x 8,000 shares) $280,000

b. Cash and Receivables: $150,000 + $40,000 190,000

c. Land: $100,000 + $85,000 185,000

d. Buildings and Equipment (net): $300,000 + $230,000 530,000

e. Goodwill: ($50 x 8,000) - $355,000 45,000

f. Additional Paid-In Capital:$20,000 + [($50 - $10) x 8,000] 340,000

g. Retained Earnings 330,000

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E1-13 Goodwill Recognition

Journal entry to record acquisition of Spur Corporation net assets:

Cash and Receivables 40,000Inventory 150,000Land 30,000Plant and Equipment 350,000Patent 130,000Goodwill 55,000

Accounts Payable 85,000Cash 670,000

Computation of goodwill

Fair value of consideration given $670,000Fair value of assets acquired $700,000Fair value of liabilities assumed (85,000)Fair value of net assets acquired 615,000Goodwill $ 55,000

E1-14 Acquisition Using Debentures

Journal entry to record acquisition of Sorden Company net assets:

Cash and Receivables 50,000Inventory 200,000Land 100,000Plant and Equipment 300,000Discount on Bonds Payable 17,000Goodwill 8,000

Accounts Payable 50,000Bonds Payable 625,000


Fair value of consideration given $608,000Fair value of assets acquired $650,000Fair value of liabilities assumed (50,000)Fair value of net assets acquired 600,000Goodwill $ 8,000

E1-15 Bargain Purchase

Journal entry to record acquisition of Sorden Company net assets:

Cash and Receivables 50,000Inventory 200,000Land 100,000

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Plant and Equipment 300,000Discount on Bonds Payable 16,000

Accounts Payable 50,000Bonds Payable 580,000Gain on Bargain Purchase of Subsidiary 36,000

The gain represents the excess of the $600,000 fair value of the net assetsacquired ($650,000 - $50,000) over the $564,000 paid to purchase ownership.

E1-16 Impairment of Goodwill

a. Goodwill of $80,000 will be reported. The fair value of the reporting unit ($340,000) isgreater than the carrying amount of the investment ($290,000) and the goodwilldoes not need to be tested for impairment.

b. Goodwill of $35,000 will be reported (fair value of reporting unit of $280,000 - fair valueof net assets of $245,000). An impairment loss of $45,000 ($80,000 - $35,000) willbe recognized.

c. Goodwill of $15,000 will be reported (fair value of reporting unit of $260,000 - fair valueof net assets of $245,000). An impairment loss of $65,000 ($80,000 - $15,000) willbe recognized.

E1-17 Assignment of Goodwill

a. No impairment loss will be recognized. The fair value of the reporting unit ($530,000) isgreater than the carrying value of the investment ($500,000) and goodwill does notneed to be tested for impairment.

b. An impairment of goodwill of $15,000 will be recognized. The implied value of goodwillis $45,000 ($485,000 - $440,000), which represents a $15,000 decrease from theoriginal $60,000.

c. An impairment of goodwill of $50,000 will be recognized. The implied value of goodwillis $10,000 ($450,000 - $440,000), which represents a $50,000 decrease from theoriginal $60,000.

E1-18 Goodwill Assigned to Reporting Units

Goodwill of $158,000 ($60,000 + $48,000 + $0 + $50,000) should be reported, computedas follows:

Reporting Unit A: Goodwill of $60,000 should be reported. The implied value ofgoodwill is $90,000 ($690,000 - $600,000) and the carrying amount of goodwill is$60,000.

Reporting Unit B: Goodwill of $48,000 should be reported. The fair value of thereporting unit ($335,000) is greater than the carrying value of the investment($330,000).

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Reporting Unit C: No goodwill should be reported. The fair value of the net assets($400,000) exceeds the fair value of the reporting unit ($370,000).

Reporting Unit D: Goodwill of $50,000 should be reported. The fair value of thereporting unit ($585,000) is greater than the carrying value of the investment($520,000).

E1-19 Goodwill Measurement

a. Goodwill of $150,000 will be reported. The fair value of the reporting unit ($580,000) isgreater than the carrying value of the investment ($550,000) and goodwill does notneed to be tested for impairment.

b. Goodwill of $50,000 will be reported. The implied value of goodwill is $50,000 (fairvalue of reporting unit of $540,000 - fair value of net assets of $490,000). Thus, animpairment of goodwill of $100,000 ($150,000 - $50,000) must be recognized.

c. Goodwill of $10,000 will be reported. The implied value of goodwill is $10,000 (fair valueof reporting unit of $500,000 - fair value of net assets of $490,000). Thus, animpairment loss of $140,000 ($150,000 - $10,000) must be recognized.

d. No goodwill will be reported. The fair value of the net assets ($490,000) exceeds thefair value of the reporting unit ($460,000). Thus, the implied value of goodwill is $0and an impairment loss of $150,000 ($150,000 - $0) must be recognized.

E1-20 Computation of Fair Value

Amount paid $517,000Book value of assets $624,000Book value of liabilities (356,000)Book value of net assets $268,000Adjustment for research and development costs (40,000)Adjusted book value $228,000Fair value of patent rights 120,000Goodwill recorded 93,000 (441,000)Fair value increment of buildings and equipment $ 76,000Book value of buildings and equipment 341,000Fair value of buildings and equipment $417,000

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E1-21 Computation of Shares Issued and Goodwill

a. 15,600 shares were issued, computed as follows:

Par value of shares outstanding following merger $327,600Paid-in capital following merger 650,800Total par value and paid-in capital $978,400Par value of shares outstanding before merger $218,400Paid-in capital before merger 370,000

(588,400)Increase in par value and paid-in capital $390,000Divide by price per share ÷ $25Number of shares issued 15,600

b. The par value is $7, computed as follows:

Increase in par value of shares outstanding($327,600 - $218,400)

Divide by number of shares issued $109,200Par value ÷ 15,600

$ 7.00

c. Goodwill of $34,000 was recorded, computed as follows:

Increase in par value and paid-in capital $390,000Fair value of net assets ($476,000 - $120,000) (356,000)Goodwill $ 34,000

E1-22 Combined Balance Sheet

Adam Corporation and Best CompanyCombined Balance Sheet

January 1, 20X2

Cash and Receivables $ 240,000 Accounts Payable $ 125,000Inventory 460,000 Notes Payable 235,000Buildings and Equipment 840,000 Common Stock 244,000Less: Accumulated Depreciation (250,000) Additional Paid-In Capital 556,000Goodwill 75,000 Retained Earnings 205,000

$1,365,000 $1,365,000


Fair value of compensation given $480,000Fair value of net identifiable assets($490,000 - $85,000) (405,000)

Goodwill $ 75,000

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E1-23 Recording a Business Combination

Merger Expense 54,000Deferred Stock Issue Costs 29,000

Cash 83,000

Cash 70,000Accounts Receivable 110,000Inventory 200,000Land 100,000Buildings and Equipment 350,000Goodwill (1) 30,000

Accounts Payable 195,000Bonds Payable 100,000Bond Premium 5,000Common Stock 320,000Additional Paid-In Capital (2) 211,000Deferred Stock Issue Costs 29,000


Fair value of consideration given (40,000 x $14) $560,000Fair value of assets acquired $830,000Fair value of liabilities assumed (300,000)Fair value of net assets acquired (530,000)Goodwill $ 30,000

Computation of additional paid-in capital

Number of shares issued 40,000Issue price in excess of par value ($14 - $8) x $6Total $240,000Less: Deferred stock issue costs (29,000)Increase in additional paid-in capital $211,000

E1-24 Reporting Income

20X2: Net income = $6,028,000 [$2,500,000 + $3,528,000]Earnings per share = $5.48 [$6,028,000 / (1,000,000 + 100,000*)]

20X1: Net income = $4,460,000 [previously reported]Earnings per share = $4.46 [$4,460,000 / 1,000,000]

* 100,000 = 200,000 shares x ½ year

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SOLUTIONS TO PROBLEMS

P1-25 Assets and Accounts Payable Transferred to Subsidiary

a. Journal entry recorded by Tab Corporation for its transfer ofassets and accounts payable to Collon Company:

Investment in Collon Company Common Stock 320,000Accounts Payable 45,000Accumulated Depreciation – Buildings 40,000Accumulated Depreciation – Equipment 10,000


b. Journal entry recorded by Collon Company for receipt of assetsand accounts payable from Tab Corporation:


Accounts Payable 45,000Accumulated Depreciation – Buildings 40,000Accumulated Depreciation – Equipment 10,000Common Stock 180,000Additional Paid-In Capital 140,000

P1-26 Creation of New Subsidiary

a. Journal entry recorded by Eagle Corporation for transfer of assetsand accounts payable to Sand Corporation:

Investment in Sand Corporation Common Stock 400,000Allowance for Uncollectible Accounts Receivable 5,000Accumulated Depreciation 40,000Accounts Payable 10,000

Cash 30,000Accounts Receivable 45,000Inventory 60,000Land 20,000Buildings and Equipment 300,000

b. Journal entry recorded by Sand Corporation for receipt of assets andaccounts payable from Eagle Corporation:

Cash 30,000Accounts Receivable 45,000

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Inventory 60,000Land 20,000Buildings and Equipment 300,000

Allowance for Uncollectible Accounts Receivable 5,000Accumulated Depreciation 40,000Accounts Payable 10,000Common Stock 50,000Additional Paid-In Capital 350,000

P1-27 Incomplete Data on Creation of Subsidiary

a. The book value of assets transferred was $152,000 ($3,000 + $16,000 + $27,000 + $9,000 +$70,000 + $60,000 - $21,000 - $12,000).

b. Thumb Company would report its investment in New Company equal to the book value of netassets transferred of $138,000 ($152,000 - $14,000).

c. 8,000 shares ($40,000/$5).

d. Total assets declined by $14,000 (book value of assets transferred of $152,000 - investmentin New Company of $138,000).

e. No effect. The shares outstanding reported by Thumb Company are not affected by thecreation of New Company.

P1-28 Establishing a Partnership

a. Journal entry recorded by K&D partnership for receipt of assets andaccounts payable:


Accumulated Depreciation – Buildings 50,000Accumulated Depreciation – Equipment 30,000Accounts Payable 50,000Capital, Krantz Company 300,000Capital, Dull Corporation 200,000

b. Journal entry recorded by Krantz Company for transfer of assets andaccounts payable to K&D Partnership:

Investment in K&D Partnership 300,000Accumulated Depreciation – Buildings 50,000Accumulated Depreciation – Equipment 30,000Accounts Payable 50,000

Cash 10,000Inventory 30,000

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Land 70,000Buildings 200,000Equipment 120,000

Journal entry recorded by Dull Corporation for cash transferred toK&D Partnership:

Investment in K&D Partnership 200,000Cash 200,000

P1-29 Balance Sheet Data for Companies Establishing a Partnership

a. Journal entry recorded by Good Corporation for assets transferred toG&W Partnership:

Investment in G&W Partnership 150,000Accumulated Depreciation – Buildings 30,000Accumulated Depreciation – Equipment 20,000


b. Journal entry recorded by Nevall Company for assets transferred toG&W Partnership:

Investment in G&W Partnership 50,000Accumulated Depreciation – Equipment 14,000

Cash 3,000Inventory 25,000Equipment 36,000

c. Journal entry recorded by G&W Partnership for assets received fromGood Corporation and Nevall Company:


Accumulated Depreciation – Buildings 30,000Accumulated Depreciation – Equipment 34,000Capital, Good Corporation 150,000Capital, Nevall Company 50,000

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P1-30 Acquisition in Multiple Steps

Deal Corporation will record the following entries:

(1) Investment in Mead Company Stock 85,000Common Stock - $10 Par Value 40,000Additional Paid-In Capital 45,000

(2) Merger Expense 3,500Additional Paid-In Capital 2,000

Cash 5,500

(3) Investment in Mead Company Stock 6,000Gain on Increase in Value of Mead Company Stock 6,000

P1-31 Journal Entries to Record a Business Combination

Journal entries to record acquisition of TKK net assets:


Record payment of legal fees.

(2) Deferred Stock Issue Costs 28,000Cash 28,000

Record costs of issuing stock.

(3) Cash and Receivables 28,000Inventory 122,000Buildings and Equipment 470,000Goodwill 12,000

Accounts Payable 41,000Notes Payable 63,000Common Stock 96,000Additional Paid-In Capital 404,000Deferred Stock Issue Costs 28,000

Record purchase of TKK Corporation.


Fair value of consideration given (24,000 x $22) $528,000Fair value of net assets acquired

($620,000 - $104,000) (516,000)Goodwill $ 12,000



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P1-32 Recording Business Combinations

Merger Expense 38,000Deferred Stock Issue Costs 22,000

Cash 60,000

Cash and Equivalents 41,000Accounts Receivable 73,000Inventory 144,000Land 200,000Buildings 1,500,000Equipment 300,000Goodwill 127,000

Accounts Payable 35,000Short-Term Notes Payable 50,000Bonds Payable 500,000Common Stock $2 Par 900,000Additional Paid-In Capital 878,000Deferred Stock Issue Costs 22,000


Fair value of consideration given (450,000 x $4) $1,800,000Fair value of net assets acquired ($41,000

+ $73,000 + $144,000 + $200,000 + $1,500,000+ $300,000 - $35,000 - $50,000 - $500,000)

(1,673,000)Goodwill $ 127,000



P1-33 Business Combination with Goodwill

a. Journal entry to record acquisition of Zink Company net assets:

Cash 20,000Accounts Receivable 35,000Inventory 50,000Patents 60,000Buildings and Equipment 150,000Goodwill 38,000

Accounts Payable 55,000Notes Payable 120,000Cash 178,000

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b. Balance sheet immediately following acquisition:

Anchor Corporation and Zink CompanyCombined Balance Sheet

February 1, 20X3

Cash $ 82,000 Accounts Payable $140,000Accounts Receivable 175,000 Notes Payable 270,000Inventory 220,000 Common Stock 200,000Patents 140,000 Additional Paid-InBuildings and Equipment 530,000 Capital 160,000Less: Accumulated Retained Earnings 225,000Depreciation (190,000)

Goodwill 38,000$995,000 $995,000

c. Journal entry to record acquisition of Zink Company stock:

Investment in Zink Company Common Stock 178,000Cash 178,000


Fair value of consideration given $178,000Fair value of net assets acquired

($20,000 + $35,000 + $50,000 + $60,000+ $150,000 - $55,000 -$120,000) (140,000)

Goodwill $ 38,000

P1-34 Bargain Purchase

Journal entries to record acquisition of Lark Corporation net assets:

Merger Expense 5,000Cash 5,000

Cash and Receivables 50,000Inventory 150,000Buildings and Equipment (net) 300,000Patent 200,000

Accounts Payable 30,000Cash 625,000Gain on Bargain Purchase of Lark Corporation 45,000

Computation of gain

Fair value of consideration given $625,000Fair value of net assets acquired

($700,000 - $30,000) (670,000)Gain on bargain purchase $ 45,000

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P1-35 Computation of Account Balances

a. Liabilities reported by the Aspro Division at year-end:

Fair value of reporting unit at year-end $930,000Acquisition price of reporting unit

($7.60 x 100,000) $760,000Fair value of net assets at acquisition

($810,000 - $190,000) (620,000)Goodwill at acquisition $140,000Impairment in current year (30,000)Goodwill at year-end (110,000)Fair value of net assets at year-end $820,000

Fair value of assets at year-end $950,000Fair value of net assets at year-end (820,000)Fair value of liabilities at year-end $130,000

b. Required fair value of reporting unit:Fair value of assets at year-end $ 950,000Fair value of liabilities at year-end (given) (70,000)Fair value of net assets at year-end $ 880,000Original goodwill balance 140,000Required fair value of reporting unit to avoid recognition of

impairment of goodwill $1,020,000

P1-36 Goodwill Assigned to Multiple Reporting Units

a. Goodwill to be reported by Rover Company:

Reporting UnitA B C

Carrying value of goodwill $70,000 $80,000 $40,000Implied goodwill at year-end 90,000 50,000 75,000Goodwill to be reported at year-end 70,000 50,000 40,000

Total goodwill to be reported at year-end:Reporting unit A $ 70,000Reporting unit B 50,000Reporting unit C 40,000Total goodwill to be reported $160,000

Computation of implied goodwillReporting unit AFair value of reporting unit $400,000Fair value of identifiable assets $350,000Fair value of accounts payable (40,000)Fair value of net assets (310,000)Implied goodwill at year-end $ 90,000

Reporting unit B

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Fair value of reporting unit $440,000Fair value of identifiable assets $450,000Fair value of accounts payable (60,000)Fair value of net assets (390,000)Implied goodwill at year-end $ 50,000

Reporting unit CFair value of reporting unit $265,000Fair value of identifiable assets $200,000Fair value of accounts payable (10,000)Fair value of net assets (190,000)Implied goodwill at year-end $ 75,000

b. Goodwill impairment of $30,000 ($80,000 - $50,000) must be reported in thecurrent period for reporting unit B.

P1-37 Journal Entries

Journal entries to record acquisition of Light Steel net assets:


Record finder's fee and transfer costs.

(2) Deferred Stock Issue Costs 9,000Cash 9,000

Record audit fees and stock registration fees.

(3) Cash 60,000Accounts Receivable 100,000Inventory 115,000Land 70,000Buildings and Equipment 350,000Bond Discount 20,000Goodwill 95,000

Accounts Payable 10,000Bonds Payable 200,000Common Stock 120,000Additional Paid-In Capital 471,000Deferred Stock Issue Costs 9,000

Record merger with Light Steel Company.


Fair value of consideration given (12,000 x $50) $600,000Fair value of net assets acquired ($695,000 - $10,000

- $180,000) (505,000)Goodwill $ 95,000


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P1-38 Purchase at More than Book Value

a. Journal entry to record acquisition of Stafford Industries netassets:

Cash 30,000Accounts Receivable 60,000Inventory 160,000Land 30,000Buildings and Equipment 350,000Bond Discount 5,000Goodwill 125,000

Accounts Payable 10,000Bonds Payable 150,000Common Stock 80,000Additional Paid-In Capital 520,000

b. Balance sheet immediately following acquisition:

Ramrod Manufacturing and Stafford IndustriesCombined Balance Sheet

January 1, 20X2

Cash $ 100,000 Accounts Payable $ 60,000Accounts Receivable 160,000 Bonds Payable $450,000Inventory 360,000 Less: Discount (5,000) 445,000Land 80,000 Common Stock 280,000Buildings and Equipment 950,000 AdditionalLess: Accumulated Paid-In Capital 560,000

Depreciation (250,000) Retained Earnings 180,000Goodwill 125,000

$1,525,000 $1,525,000


Fair value of consideration given (4,000 x $150) $600,000Fair value of net assets acquired ($630,000 - $10,000

- $145,000) (475,000)Goodwill $125,000

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P1-39 Business Combination

Journal entry to record acquisition of Toot-Toot Tuba net assets:

Cash 300Accounts Receivable 17,000Inventory 35,000Plant and Equipment 500,000Other Assets 25,800Goodwill 86,500

Allowance for Uncollectibles 1,400Accounts Payable 8,200Notes Payable 10,000Mortgage Payable 50,000Bonds Payable 100,000Capital Stock ($10 par) 90,000Premium on Capital Stock 405,000

Computation of fair value of net assets acquired

Cash $300Accounts Receivable 17,000Allowance for Uncollectible Accounts (1,400)Inventory 35,000Plant and Equipment 500,000Other Assets 25,800Accounts Payable (8,200)Notes Payable (10,000)Mortgage Payable (50,000)Bonds Payable (100,000)Fair value of net assets acquired $408,500


Fair value of consideration given (9,000 x $55) $495,000Fair value of net assets acquired (408,500)Goodwill $86,500

P1-40 Combined Balance Sheet

a. Balance sheet:Bilge Pumpworks and Seaworthy Rope Company

Combined Balance SheetJanuary 1, 20X3

Cash and Receivables $110,000 Current Liabilities $ 100,000Inventory 142,000 Capital Stock 214,000Land 115,000 Capital in ExcessPlant and Equipment 540,000 of Par Value 216,000Less: Accumulated Retained Earnings 240,000

Depreciation (150,000)Goodwill 13,000

$770,000 $ 770,000

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Fair value of consideration given (700 x $300) $210,000Fair value of net assets acquired ($217,000 – $20,000) (197,000)Goodwill $13,000

b. (1) Stockholders' equity with 1,100 shares issued:

Capital Stock [$200,000 + ($20 x 1,100 shares)] $ 222,000Capital in Excess of Par Value

[$20,000 + ($300 - $20) x 1,100 shares] 328,000Retained Earnings 240,000

$ 790,000

(2) Stockholders' equity with 1,800 shares issued:



$1,000,000

(3) Stockholders' equity with 3,000 shares issued:



$1,360,000

P1-41 Incomplete Data Problem

a. 5,200 = ($126,000 - $100,000)/$5b. $208,000 = ($126,000 + $247,000) - ($100,000 + $65,000)c. $46,000 = $96,000 - $50,000d. $130,000 = ($50,000 + $88,000 + $96,000 + $430,000 - $46,000 -

$220,000 - $6,000) - ($40,000 + $60,000 + $50,000 + $300,000 -$32,000 - $150,000 - $6,000)

e. $78,000 = $208,000 - $130,000f. $97,000 (as reported by End Corporation)g. $13,000 = ($430,000 - $300,000)/10 years

P1-42 Incomplete Data Following Purchasea. 14,000 = $70,000/$5b. $8.00 = ($70,000 + $42,000)/14,000c. 7,000 = ($117,000 - $96,000)/$3

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d. $24,000 = $65,000 + $15,000 - $56,000e. $364,000 = ($117,000 + $553,000 + $24,000) – ($96,000 + $234,000)f. $110,000 = $320,000 - $210,000g. $306,000 = ($15,000 + $30,000 + $110,000 + $293,000) -($22,000 + $120,000)h. $58,000 = $364,000 - $306,000

P1-43 Comprehensive Business Combination Problem

a. Journal entries on the books of Bigtime Industries to record the combination:

Merger Expense 135,000Cash 135,000

Deferred Stock Issue Costs 42,000Cash 42,000

Cash 28,000Accounts Receivable 251,500Inventory 395,000Long-Term Investments 175,000Land 100,000Rolling Stock 63,000Plant and Equipment 2,500,000Patents 500,000Special Licenses 100,000Discount on Equipment Trust Notes 5,000Discount on Debentures 50,000Goodwill 109,700

Current Payables 137,200Mortgages Payable 500,000Premium on Mortgages Payable 20,000Equipment Trust Notes 100,000Debentures Payable 1,000,000Common Stock 180,000Additional Paid-In Capital — Common 2,298,000Deferred Stock Issue Costs 42,000


Value of stock issued ($14 x 180,000) $2,520,000Fair value of assets acquired $4,112,500Fair value of liabilities assumed (1,702,200)Fair value of net identifiable assets (2,410,300)Goodwill $ 109,700

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P1-43 (continued)

b. Journal entries on the books of HCC to record the combination:

Investment in Bigtime Industries Stock 2,520,000Allowance for Bad Debts 6,500Accumulated Depreciation 614,000Current Payables 137,200Mortgages Payable 500,000Equipment Trust Notes 100,000Debentures Payable 1,000,000

Discount on Debentures Payable 40,000Cash 28,000Accounts Receivable 258,000Inventory 381,000Long-Term Investments 150,000Land 55,000Rolling Stock 130,000Plant and Equipment 2,425,000Patents 125,000Special Licenses 95,800Gain on Sale of Assets and Liabilities 1,189,900

Record sale of assets and liabilities.

Common Stock 7,500Additional Paid-In Capital — Common Stock 4,500

Treasury Stock 12,000Record retirement of Treasury Stock:*$7,500 = $5 x 1,500 shares$4,500 = $12,000 - $7,500

Common Stock 592,500Additional Paid-In Capital — Common 495,500Additional Paid-In Capital — Retirement

of Preferred 22,000Retained Earnings 1,410,000

Investment in BigtimeIndustries Stock 2,520,000

Record retirement of HCC stock anddistribution of Integrated Industries stock:

$592,500 = $600,000 - $7,500$495,500 = $500,000 - $4,5001,410,000 = $220,100 + $1,189,900

*Alternative approaches exist.

23

CHAPTER 2

REPORTING INTERCORPORATE INVESTMENTS AND CONSOLIDATION OF WHOLLY OWNEDSUBSIDIARIES WITH NO DIFFERENTIAL

SOLUTIONS TO EXERCISESE2-1 Multiple-Choice Questions on Use of Cost and Equity Methods

[AICPA Adapted]1. a2. a3. d4. a5. b6. d7. d

E2-2 Multiple-Choice Questions on Intercorporate Investments1. b2. c

E2-3 Multiple-Choice Questions on Applying Equity Method[AICPA Adapted]

1. c (Preferred stock is not accounted for under the equity method, thus dividends are income.)2. d $250,000 + ($100,000 x 0.30) – ($10,000 x 0.30)3. c4. d5. d

E2-4 Cost versus Equity Reportinga. Winston Corporation net income – cost method:20X2 $100,000 + .40($30,000) $112,00020X3 $ 60,000 + .40($60,000) 84,00020X4 $250,000 + .40($20,000 + $25,000)a 268,000

aDividends paid from undistributed earnings of prior years($70,000 + $40,000 - $30,000 - $60,000 = $20,000)and $25,000 earnings of current period.

b. Winston Corporation net income – equity method:20X2 $100,000 + .40($70,000) $128,00020X3 $ 60,000 + .40($40,000) 76,00020X4 $250,000 + .40($25,000) 260,000

E2-5 Acquisition PriceBalance at date of acquisition:a. Cost method $54,000 + $2,800 = $56,800b. Equity method $54,000 - $2,000 = $52,000

Change in Investment AccountYear Net Income Dividends Cost Method Equity Method20X1 $ 8,000 $15,000 $(2,800) $(2,800)20X2 12,000 10,000 80020X3 20,000 10,000 ______ 4,000

Change in account balance $(2,800) $ 2,000

24

E2-6 Investment Income

a. (1) Ravine Corporation net income under Cost Method:20X6 $140,000 + 0.30($20,000) = $146,00020X7 $ 80,000 + 0.30($40,000) = $ 92,00020X8 $220,000 + 0.30($20,000 + $10,000)a = $229,00020X9 $160,000 + 0.30($20,000) = $166,000

aDividends paid from undistributed earnings of prior years($30,000 + $50,000 - $20,000 - $40,000= $20,000) and $10,000earnings of current period.

(2) Ravine Corporation net income under Equity Method:20X6 $140,000 + 0.30($30,000) = $149,00020X7 $ 80,000 + 0.30($50,000) = $ 95,00020X8 $220,000 + 0.30($10,000) = $223,00020X9 $160,000 + 0.30($40,000) = $172,000

b. Journal entries recorded by Ravine Corporation in 20X8:(1) Cost method:

Cash 12,000Dividend Income 9,000Investment in Valley Stock 3,000

(2) Equity method:Cash 12,000

Investment in Valley Stock 12,000

Investment in Valley Stock 3,000Income from Valley 3,000

E2-7 Investment ValueThe following amounts would be reported as the carrying value of Port’s investment in Sund:20X2 $184,500 = $180,000 + ($40,000 x 0.30) - ($25,000 x 0.30)20X3 $193,500 = $184,500 + ($30,000 x 0.30)20X4 $195,000 = $193,500 + ($5,000 x 0.30)

E2-8* Income ReportingJournal entry recorded by Grandview Company:

Investment in Spinet Corporation Stock 36,000Income from Spinet Corporation 24,000Extraordinary Gain (from Spinet Corporation) 12,000

E2-9 Fair Value Methoda. Cost method:

Operating income reported by Mock $90,000Dividend income from Small ($15,000 x 0.20) 3,000Net income reported by Mock $93,000

b. Equity method:Operating income reported by Mock $90,000Income from investee ($40,000 x 0.20) 8,000Net income reported by Mock $98,000

25

b. Fair value method:

Operating income reported by Mock $90,000Unrealized gain on increase in value of Small stock 16,000Dividend income from Small ($15,000 x 0.20) 3,000Net income reported by Mock $ 109,000

E2-10 Fair Value Recognitiona. Journal entries under the equity method:

(1) Investment in Lomm Company Stock 140,000Cash 140,000

Record purchase of Lomm Company stock.

(2) Cash 7,000Investment in Lomm Company Stock 7,000

Record dividends from Lomm Company: $20,000 x 0.35

(3) Investment in Lomm Company Stock 28,000Income from Lomm Company 28,000

Record equity-method income: $80,000 x 0.35

b. Journal entries under fair value method:(1) Investment in Lomm Company Stock 140,000

Cash 140,000Record purchase of Lomm Company stock.

(2) Cash 7,000Dividend Income 7,000

Record dividends from Lomm Company: $20,000 x 0.35

(3) Investment in Lomm Company Stock 34,000Urealized Gain on Increase in Value of Lomm Stock 34,000

Record increase in value of Lomm stock: $174,000 - $140,000

E2-11* Investee with Preferred Stock OutstandingJournal entries recorded by Reden Corporation:

(1) Investment in Montgomery Co. Stock 288,000Cash 288,000

Record purchase of Montgomery Co. stock.

(2) Cash 6,750Investment in Montgomery Co. Stock 6,750

Record dividend from Montgomery Co.: [$40,000 - ($250,000 x .10)] x 0.45

(3) Investment in Montgomery Co. Stock 31,500Income from Montgomery Co. 31,500

Record equity-method income: [$95,000 - ($250,000 x .10)] x 0.45

26

E2-12* Other Comprehensive Income Reported by InvesteeJournal entries recorded by Callas Corp. during 20X9:

(1) Investment in Thinbill Co. Stock 380,000Cash 380,000

Record purchase of Thinbill Company

(2) Cash 3,600Investment in Thinbill Co. Stock 3,600

Record dividend from Thinbill: $9,000 x 0.40

(3) Investment in Thinbill Co. Stock 22,000Income from Thinbill Co. 22,000

Record equity-method income: $22,000 = ($45,000 + $10,000) x 0.40

(4) Investment in Thinbill Co. Stock 8,000Unrealized Gain on Investments of Investee (OCI) 8,000

Record share of OCI reported by Thinbill: $8,000 = $20,000 x 0.40

Closing entries recorded at December 31, 20X9:

(5) Income from Thinbill Co. 22,000Retained Earnings 22,000

(6) Unrealized Gain on Investments of Investee (OCI) 8,000Accumulated Other Comprehensive Income fromInvestee-Unrealized Gain on Investments 8,000

E2-13* Other Comprehensive Income Reported by InvesteeInvestment account balance reported by Baldwin Corp. $67,000

Add decrease in account recorded in 20X8:Equity-method loss ($20,000 x .25) $ (5,000)Dividend received ($10,000 x .25) (2,500) 7,500

Deduct increase in account recorded in 20X9:Equity-method income ($68,000 x .25) $17,000Dividend received ($16,000 x .25) (4,000)Other comprehensive income reported by Gwin Company

($12,000 x .25) 3,000 (16,000)Purchase price $58,500

E2-14 Basic Elimination Entry

Common Stock – Broadway Corporation 200,000Additional Paid-In Capital 300,000Retained Earnings 100,000

Investment in Broadway Common Stock 600,000

27

E2-15 Balance Sheet Worksheeta.

Equity Method Entries on Blank's Books:Investment in Faith 150,000

Cash 150,000Record the initial investment in Faith

12/31/X2

Goodwill = 0

Identifiableexcess = 0

$150,000Initial

investment inFaith

Book value =CS + RE =150,000

Book Value Calculations:Total

Book Value= Common

Stock+ Retained

EarningsEnding book value 150,000 60,000 90,000

Basic Elimination EntryCommon stock 60,000Retained earnings 90,000

Investment in Faith 150,000

Optional accumulated depreciation elimination entryAccumulated depreciation 30,000

Building & equipment 30,000

(Since the buildings and equipment are reported net of accumulated depreciation on the balance sheet,this entry will not affect the worksheet. However, if sufficient information had been given, this entry wouldhave made a difference in the worksheet balances for Buildings and Equipment and AccumulatedDepreciation.)

28

E2-15 (continued)b.

Blank FaithElimination EntriesDR CR Consolidated

Balance SheetCash 65,000 18,000 83,000Accounts Receivable 87,000 37,000 124,000Inventory 110,000 60,000 170,000Buildings & Equipment (net) 220,000 150,000 370,000Investment in Faith 150,000 150,000 0

Total Assets 632,000 265,000 0 150,000 747,000

Accounts Payable 92,000 35,000 127,000Bonds Payable 150,000 80,000 230,000Common Stock 100,000 60,000 60,000 100,000Retained Earnings 290,000 90,000 90,000 290,000

Total Liabilities & Equity 632,000 265,000 150,000 0 747,000

29

E2-16 Consolidation Entries for Wholly Owned Subsidiary

a.Equity Method Entries on Trim Corp.'s Books:

Investment in Round Corp. 400,000Cash 400,000

Record the initial investment in Round Corp.

Investment in Round Corp. 80,000Income from Round Corp. 80,000

Record Trim Corp.'s 100% share of Round Corp.'s 20X2 income

Cash 25,000Investment in Round Corp. 25,000

Record Trim Corp.'s 100% share of Round Corp.'s 20X2 dividend

b.Book Value Calculations:

TotalBook Value

= CommonStock

+ RetainedEarnings

Original bookvalue 400,000 120,000 280,000+ Net Income 80,000 80,000- Dividends (25,000) (25,000)Ending book value 455,000 120,000 335,000

30

1/1/X2

Goodwill = 0

Identifiableexcess = 0 $400,000

Initialinvestmentin RoundCorp.Book value =

CS + RE =400,000

12/31/X2

Goodwill = 0

Excess = 0$455,000

Netinvestment inRound Corp.


E2-17 Basic Consolidation Entries for Fully Owned Subsidiarya.Equity Method Entries on Purple Co.'s Books:

Investment in Amber Corp. 500,000Cash 500,000

Record the initial investment in Amber Corp.

Investment in Amber Corp. 50,000Income from Amber Corp. 50,000

Record Purple Co.'s 100% share of Amber Corp.'s 20X7 income

Cash 20,000Investment in Amber Corp. 20,000

Record Purple Co.'s 100% share of Amber Corp.'s 20X7 dividend

E2-16 (continued)

Basic Elimination EntryCommon stock 120,000Retained earnings 280,000Income from Round Corp. 80,000

Dividends declared 25,000Investment in Round Corp. 455,000

31


TotalBook Value

= CommonStock

+ RetainedEarnings

Original bookvalue 500,000 300,000 200,000+ Net Income 50,000 50,000- Dividends (20,000) (20,000)Ending book value 530,000 300,000 230,000

32

1/1/X7

Goodwill = 0


Initialinvestmentin AmberCorp.Book value =

CS + RE =500,000

12/31/X7

Goodwill = 0

Excess = 0$530,000

Netinvestment inAmber Corp.


33

E2-17 (continued)

Investment in Income fromAmber Corp. Amber Corp.

AcquisitionPrice 500,000

Net Income 50,000 50,000 Net Income20,000 Dividends

Ending Balance 530,000 50,000 Ending Balance530,000 Basic 50,000

0 0

Basic Elimination EntryCommon stock 300,000Retained earnings 200,000Income from Amber Corp. 50,000

Dividends declared 20,000Investment in Amber Corp. 530,000

34

SOLUTIONS TO PROBLEMSP2-18 Retroactive Recognition

Journal entries recorded by Idle Corporation:

(1) Investment in Fast Track Enterprises Stock 34,000Cash 34,000

Record purchase of Fast Track stock.

(2) Investment in Fast Track Enterprises Stock 11,000Retained Earnings 11,000

Record pick-up of difference betweencost and equity income:20X2 .10($40,000 - $20,000) $ 2,00020X3 .10($60,000 / 2) $3,000

.15[($60,000 / 2) - $20,000] 1,500 4,50020X4 .15($40,000 - $10,000) 4,500Amount of increase $11,000

(3) Cash 5,000Investment in Fast Track Enterprises Stock 5,000

Record dividend from Fast Track Enterprises: $20,000 x .25

(4) Investment in Fast Track Enterprises Stock 12,500Income from Fast Track Enterprises 12,500

Record equity-method income: $50,000 x .25

P2-19 Fair Value Method

20X6 20X7 20X8a. Cost method:

Dividend income $ 3,000 $ 6,000 $ 4,000

Balance in investment account $70,000 $70,000 $70,000

b. Equity method:

Investment income:$40,000 x .20 $ 8,000$35,000 x .20 $ 7,000$60,000 x .20 $12,000

Balance in investment account:Balance at January 1 $70,000 $75,000 $76,000Investment income 8,000 7,000 12,000Dividends received (3,000) (6,000) (4,000)Balance at December 31 $75,000 $76,000 $84,000

35

c. Fair value method:20X6 20X7 20X8

Investment income:Dividends received $ 3,000 $ 6,000 $ 4,000Gain (loss) on fair value 19,000 (3,000) 11,000Total income reported $22,000 $ 3,000 $15,000

Balance in investment account $89,000 $86,000 $97,000

P2-20 Fair Value Journal Entries

Journal entries under fair value method for 20X8:

(1) Investment in Brown Company Stock 85,000Cash 85,000

Record purchase of Brown Company stock.


Record dividends from Brown Company: $10,000 x .40

(3) Investment in Brown Company Stock 12,000Unrealized Gain on Increase in Value of BrownCompany Stock 12,000

Record increase in value of Brown stock: $97,000 - $85,000

Journal entries under fair value method for 20X9:


Record dividends from Brown Company: $15,000 x .40

(2) Unrealized Loss on Decrease in Value of BrownCompany Stock 5,000Investment in Brown Company Stock 5,000

Record decrease in value of Brown stock: $97,000 - $92,000

P2-21* Other Comprehensive Income Reported by Investeea. Equity-method income reported by Dewey Corporation in 20X5:

Amounts reported by Jimm Co. for 20X5:Operating income $70,000Dividend income 7,000Gain on investment in trading securities 18,000Net income $95,000Ownership held by Dewey x .30Investment income reported by Dewey $28,500

b. Computation of amount added to investment account in 20X5:

36

Balance in investment account reported by Dewey:December 31, 20X5 $276,800January 1, 20X5 (245,000)

Increase in investment account in 20X5 $ 31,800Dividends received by Dewey during 20X5 6,000Amount added to investment account in 20X5 $ 37,800

c. Computation of other comprehensive income reported by Jimm Co.:

Amount added to investment account in 20X5 $ 37,800Investment income reported by Dewey in 20X5 (28,500)Increase due to other comprehensive income reported by Jimm Co. $ 9,300Proportion of ownership held by Dewey ÷ 0.30Other comprehensive income reported by Jimm Co. $ 31,000

d. Computation of market value of securities held by Jimm Co.

Amount paid by Jimm Co. to purchase securities $130,000Increase in market value reported as other comprehensive income in 20X5 31,000Market value of available-for-sale securities at December 31, 20X5 $161,000

P2-22* Equity-Method Income Statement

a.Diversified Products Corporation

Income StatementYear Ended December 31, 20X8

Net Sales $400,000Cost of Goods Sold (320,000)Gross Profit $ 80,000Other Expenses $(25,000)Gain on Sale of Truck 10,000 (15,000)Income from Continuing Operations $ 65,000Discontinued Operations:Operating Loss from Discontinued Division $(15,000)Gain on Sale of Division 44,000 29,000

Income before Extraordinary Item $ 94,000Extraordinary Item:Loss on Volcanic Activity (5,000)

Net Income $ 89,000

37

Diversified Products CorporationRetained Earnings Statement

Year Ended December 31, 20X8

Retained Earnings, January 1, 20X8 $240,000 (1)20X8 Net Income 89,000

$329,000Dividends Declared, 20X8 (10,000)Retained Earnings, December 31, 20X8 $319,000

(1) The Retained Earnings balance on January 1, 20X8, has been reduced by the $20,000cumulative adjustment for change in inventory method on January 1, 20X8.

b.Wealthy Manufacturing Company

Income StatementYear Ended December 31, 20X8

Net Sales $850,000Cost of Goods Sold (670,000)Gross Profit $180,000Other Expenses $(90,000)Income from Continuing Operations ofDiversified Products Corporation 26,000 (64,000)Income from Continuing Operations $116,000Discontinued Operations:Share of Operating Loss Reported byDiversified Products on DiscontinuedDivision $ (6,000)

Share of Gain on Sale of DivisionReported by Diversified Products 17,600 11,600

Income before Extraordinary Item $127,600Extraordinary Item:Share of Loss on Volcanic ActivityReported by Diversified Products (2,000)

Net Income $125,600

Wealthy Manufacturing CompanyRetained Earnings Statement


Retained Earnings, January 1, 20X8 $412,000 (1)20X8 Net Income 125,600


(1) The Retained Earnings balance of Wealthy Manufacturing Company on January 1, 20X8,has been reduced by $8,000 to reflect its proportionate share of the $20,000 cumulativeadjustment for the change in inventory method recorded by Diversified Products Corporation onJanuary 1, 20X8 ($20,000 x 0.40 = $8,000).

38

P2-23 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)a.Equity Method Entries on Peanut Co.'s Books:Investment in Snoopy Co. 300,000

Cash 300,000Record the initial investment in Snoopy Co.

Investment in Snoopy Co. 75,000Income from Snoopy Co. 75,000

Record Peanut Co.'s 100% share of Snoopy Co.'s 20X8 income

Cash 20,000Investment in Snoopy Co. 20,000

Record Peanut Co.'s 100% share of Snoopy Co.'s 20X8 dividend


TotalBookValue

= CommonStock

+ RetainedEarnings

Original book value 300,000 200,000 100,000+ Net Income 75,000 75,000- Dividends (20,000) (20,000)Ending book value 355,000 200,000 155,000

39

1/1/X8

Goodwill = 0


Initialinvestmentin Snoopy

Co.Book value =CS + RE =300,000

12/31/X8

Goodwill = 0

Excess = 0$355,000

Netinvestment inSnoopy Co.


P2-23 (continued)Basic Elimination EntryCommon stock 200,000Retained earnings 100,000Income from Snoopy Co. 75,000

Dividends declared 20,000Investment in Snoopy Co. 355,000



Investment in Income fromSnoopy Co. Snoopy Co.



Ending Balance 355,000 75,000EndingBalance

355,000 Basic 75,0000 0

40

P2-23 (continued)

PeanutCo.

SnoopyCo.

Elimination EntriesDR CR Consolidated

Income StatementSales 800,000 250,000 1,050,000Less: COGS (200,000) (125,000) (325,000)Less: Depreciation Expense (50,000) (10,000) (60,000)Less: Other Expenses (225,000) (40,000) (265,000)Income from Snoopy Co. 75,000 75,000 0

Net Income 400,000 75,000 75,000 0 400,000

Statement of RetainedEarningsBeginning Balance 225,000 100,000 100,000 225,000Net Income 400,000 75,000 75,000 0 400,000Less: Dividends Declared (100,000) (20,000) 20,000 (100,000)

Ending Balance 525,000 155,000 175,000 20,000 525,000

Balance SheetCash 130,000 80,000 210,000Accounts Receivable 165,000 65,000 230,000Inventory 200,000 75,000 275,000Investment in Snoopy Co. 355,000 355,000 0Land 200,000 100,000 300,000Buildings & Equipment 700,000 200,000 10,000 890,000Less: Accumulated Depreciation (450,000) (20,000) 10,000 (460,000)

Total Assets 1,300,000 500,000 10,000 365,000 1,445,000

Accounts Payable 75,000 60,000 135,000Bonds Payable 200,000 85,000 285,000Common Stock 500,000 200,000 200,000 500,000Retained Earnings 525,000 155,000 175,000 20,000 525,000

Total Liabilities & Equity 1,300,000 500,000 375,000 20,000 1,445,000

41

P2-24 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)a.Equity Method Entries on Peanut Co.'s Books:Investment in Snoopy Co. 80,000

Income from Snoopy Co. 80,000Record Peanut Co.'s 100% share of Snoopy Co.'s 20X9 income



b.1/1/X9

Goodwill = 0

Excess = 0$355,000

Netinvestmentin Snoopy


12/31/X9

Goodwill = 0

Excess = 0$405,000



Book Value Calculations:Total

Book Value= Common

Stock+ RetainedEarnings

Beg. book value 355,000 200,000 155,000+ Net Income 80,000 80,000- Dividends (30,000) (30,000)Ending book value 405,000 200,000 205,000

42

P2-24 (continued)Basic Elimination EntryCommon stock 200,000Retained earnings 155,000Income from Snoopy Co. 80,000

Dividends declared 30,000Investment in Snoopy Co. 405,000




BeginningBalance 355,000



0 0

43

P2-24 (continued)

PeanutCo.

SnoopyCo.



Net Income 380,000 80,000 80,000 0 380,000


Ending Balance 680,000 205,000 235,000 30,000 680,000


Total Assets 1,405,000 525,000 10,000 415,000 1,525,000



44

P2-25 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)a.Equity Method Entries on Paper Co.'s Books:Investment in Scissor Co. 370,000

Cash 370,000Record the initial investment in Scissor Co.

Investment in Scissor Co. 93,000Income from Scissor Co. 93,000

Record Paper Co.'s 100% share of Scissor Co.'s 20X8 income

Cash 25,000Investment in Scissor Co. 25,000

Record Paper Co.'s 100% share of Scissor Co.'s 20X8 dividend


TotalBook Value

= CommonStock

+ RetainedEarnings


45

1/1/X8

Goodwill = 0


Initialinvestmentin Scissor


12/31/X8

Goodwill = 0

Excess = 0$438,000

Netinvestment inScissor Co.


46

P2-25 (continued)Basic Elimination EntryCommon stock 250,000Retained earnings 120,000Income from Scissor Co. 93,000

Dividends declared 25,000Investment in Scissor Co. 438,000



Investment in Income fromScissor Co. Scissor Co.

Acquisition Price 370,000Net Income 93,000 93,000 Net Income

25,000 DividendsEnding Balance 438,000 93,000 Ending Balance

438,000 Basic 93,0000 0

47

P2-25 (continued)

PaperCo.

ScissorCo.


Income StatementSales 800,000 310,000 1,110,000Less: COGS (250,000) (155,000) (405,000)Less: Depreciation Expense (65,000) (12,000) (77,000)Less: Other Expenses (280,000) (50,000) (330,000)Income from Scissor Co. 93,000 93,000 0

Net Income 298,000 93,000 93,000 0 298,000


Ending Balance 498,000 188,000 213,000 25,000 498,000

Balance SheetCash 122,000 46,000 168,000Accounts Receivable 140,000 60,000 200,000Inventory 190,000 120,000 310,000Investment in Scissor Co. 438,000 438,000 0Land 250,000 125,000 375,000Buildings & Equipment 875,000 250,000 24,000 1,101,000Less: Accumulated Depreciation (565,000) (36,000) 24,000 (577,000)

Total Assets 1,450,000 565,000 24,000 462,000 1,577,000



48

P2-26 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)a.Equity Method Entries on Paper Co.'s Books:






TotalBookValue

= CommonStock

+ RetainedEarnings

Beg. book value 438,000 250,000 188,000+ Net Income 107,000 107,000- Dividends (30,000) (30,000)Ending book value 515,000 250,000 265,000

1/1/X9

Goodwill = 0

Excess = 0$438,000

Netinvestmentin Scissor


12/31/X9

Goodwill = 0

Excess = 0$515,000

Netinvestment inScissor Co.


49

P2-26 (continued)Basic Elimination EntryCommon stock 250,000Retained earnings 188,000Income from Scissor Co. 107,000

Dividends declared 30,000Investment in Scissor Co. 515,000







0 0

50

P2-26 (continued)

PaperCo.

ScissorCo.

Elimination Entries

DR CRConsolidate

dIncome StatementSales 880,000 355,000 1,235,000

Less: COGS (278,000)(178,000

) (456,000)Less: Depreciation Expense (65,000) (12,000) (77,000)Less: Other Expenses (312,000) (58,000) (370,000)

Income from Scissor Co. 107,000107,00

0 0

Net Income 332,000 107,000107,00

0 0 332,000

Statement of RetainedEarnings

Beginning Balance 498,000 188,000188,00

0 498,000

Net Income 332,000 107,000107,00

0 0 332,000Less: Dividends Declared (90,000) (30,000) 30,000 (90,000)

Ending Balance 740,000 265,000295,00

0 30,000 740,000

Balance SheetCash 232,000 116,000 348,000Accounts Receivable 165,000 97,000 262,000Inventory 193,000 115,000 308,000

Investment in Scissor Co. 515,000515,00

0 0Land 250,000 125,000 375,000Buildings & Equipment 875,000 250,000 24,000 1,101,000Less: AccumulatedDepreciation (630,000) (48,000) 24,000 (654,000)

Total Assets1,600,00

0 655,000 24,000539,00

0 1,740,000

Accounts Payable 85,000 40,000 125,000Bonds Payable 150,000 100,000 250,000

Common Stock 625,000 250,000250,00

0 625,000

Retained Earnings 740,000 265,000295,00

0 30,000 740,000

Total Liabilities & Equity1,600,00

0 655,000545,00

0 30,000 1,740,000

51

P2-27 * Consolidated Worksheet at End of the First Year of Ownership (Cost Method)a.Cost Method Entries on Peanut Co.'s Books:

Investment in Snoopy Co. 300,000Cash 300,000

Record the initial investment in Snoopy Co.

Cash 20,000Dividend Income 20,000



TotalBook Value

= CommonStock

+ RetainedEarnings

Original book value 300,000 200,000 100,000

1/1/X8

Goodwill = 0




12/31/X8

Goodwill = 0

Excess = 0$300,000



52

P2-27 (continued)Investment elimination entryCommon stock 200,000Retained earnings 100,000

Investment in Snoopy Co. 300,000

Dividend eliminationDividend income 20,000

Dividends declared 20,000



Investment inSnoopy Co.

DividendIncome

Acquisition Price 300,00020,000 Dividends


0 0

53

P2-27 (continued)

PeanutCo.

SnoopyCo.


Income StatementSales 800,000 250,000 1,050,000Less: COGS (200,000) (125,000) (325,000)Less: Depreciation Expense (50,000) (10,000) (60,000)Less: Other Expenses (225,000) (40,000) (265,000)Dividend Income 20,000 20,000 0

Net Income 345,000 75,000 20,000 0 400,000


Ending Balance 470,000 155,000 120,000 20,000 525,000


Total Assets 1,245,000 500,000 10,000 310,000 1,445,000



54

P2-28 * Consolidated Worksheet at End of the Second Year of Ownership (Cost Method)a.Cost Method Entries on Peanut Co.'s Books:




TotalBook Value

= CommonStock

+ RetainedEarnings


1/1/X9

Goodwill = 0

Excess = 0$300,000

Netinvestmentin Snoopy


12/31/X9

Goodwill = 0

Excess = 0$300,000



55

P2-28 (continued)Investment elimination entryCommon stock 200,000Retained earnings 100,000

Investment in Snoopy Co. 300,000

Dividend eliminationDividend income 30,000

Dividends declared 30,000




DividendIncome

Acquisition Price 300,00020,000 Dividends


0 0

56

P2-28 (continued)

PeanutCo.

SnoopyCo.

Elimination Entries

DR CRConsolidate

dIncome StatementSales 850,000 300,000 1,150,000

Less: COGS (270,000)(150,000

) (420,000)Less: Depreciation Expense (50,000) (10,000) (60,000)Less: Other Expenses (230,000) (60,000) (290,000)Divident Income 30,000 30,000 0

Net Income 330,000 80,000 30,000 0 380,000

Statement of RetainedEarnings

Beginning Balance 470,000 155,000100,00

0 525,000Net Income 330,000 80,000 30,000 0 380,000Less: Dividends Declared (225,000) (30,000) 30,000 (225,000)

Ending Balance 575,000 205,000130,00

0 30,000 680,000

Balance SheetCash 230,000 75,000 305,000Accounts Receivable 190,000 80,000 270,000Inventory 180,000 100,000 280,000

Investment in Snoopy Co. 300,000300,00

0 0Land 200,000 100,000 300,000Buildings & Equipment 700,000 200,000 10,000 890,000Less: AccumulatedDepreciation (500,000) (30,000) 10,000 (520,000)


0 525,000 10,000310,00

0 1,525,000

Accounts Payable 75,000 35,000 110,000Bonds Payable 150,000 85,000 235,000

Common Stock 500,000 200,000200,00

0 500,000


0 30,000 680,000


0 525,000330,00

0 30,000 1,525,000

57

CHAPTER 3

THE REPORTING ENTITY AND CONSOLIDATION OF LESS-THAN-WHOLLY-OWNEDSUBSIDIARIES WITH NO DIFFERENTIAL

SOLUTIONS TO EXERCISES

E3-1 Multiple-Choice Questions on Consolidation Overview[AICPA Adapted]

1. d2. c3. b4. a5. b

E3-2 Multiple-Choice Questions on Variable Interest Entities1. c2. d3. a4. b

E3-3 Multiple-Choice Questions on Consolidated Balances [AICPA Adapted]1. a2. b3. b4. c5. a

E3-4 Multiple-Choice Questions on Consolidation Overview[AICPA Adapted]1. d2. The wording of this question is somewhat confusing. Since Aaron owns 80% of Belle, it has

to consolidate Belle. There is no “choice” about whether or not to consolidate. A more clearwording of the question would say to compare Aaron’s parent company earnings (Y) to theconsolidated earnings (X). The question also assumes both companies have positiveearnings.

a (if Aaron accounts for the investment under the cost method)b (if Aaron accounts for the investment under the equity method)

3. b4. d

E3-5 Balance Sheet Consolidationa. $470,000 = $470,000 - $44,000 + $44,000b. $616,000 = ($470,000 - $44,000) + $190,000c. $405,000 = $270,000 + $135,000d. $211,000

Acquisition price $ 44,000÷ percent purchased 80%

58

Total fair value of Bristol Corporation's NA $ 55,000NCI in NA of Bristol Corporation $ 11,000

Guild Corporation's Stockholder’s Equity 200,000Total Consolidated Stockholder's Equity $ 211,000

E3-6 Balance Sheet Consolidation with Intercompany Transfera. $631,500 = $510,000 + $121,500b. $845,000 = $510,000 + $350,000 - $15,000c. $641,500 = ($320,000 + $121,500) + $215,000 - $15,000d. $203,500

Acquisition price $ 121,500÷ percent purchased 90%Total fair value of Stately Corporation's NA $ 135,000NCI in NA of Stately Corporation $ 13,500

Potter Company's Stockholder’s Equity 190,000Total Consolidated Stockholder's Equity $ 203,500

E3-7 Subsidiary Acquired for Cash

Equity Method Entries on Fineline Pencil's Books:Investment in Smudge Eraser 72,000

Cash 72,000Record the initial investment in Smudge Eraser

Book Value Calculations:

NCI20%

+FinelinePencil80%

= CommonStock

+ RetainedEarnings

Original book value 18,000 72,000 50,000 40,000

1/1/X3

Goodwill = 0


Initialinvestmentin SmudgeEraser

80%Book value =

72,000

59


Investment in Smudge Eraser 72,000NCI in NA of Smudge Eraser 18,000

Investment inSmudge Eraser

Acquisition Price 72,00072,000 Basic Entry

0

E3-7 (continued)

FinelinePencil

SmudgeEraser

EliminationEntries

DR CR ConsolidatedBalance SheetCash 128,000 50,000 178,000Other Assets 400,000 120,000 520,000Investment in Smudge Eraser 72,000 72,000 0

Total Assets 600,000 170,000 0 72,000 698,000

Current Liabilities 100,000 80,000 180,000Common Stock 300,000 50,000 50,000 300,000Retained Earnings 200,000 40,000 40,000 200,000NCI in NA of Smudge Eraser 18,000 18,000

Total Liabilities & Equity 600,000 170,000 90,000 18,000 698,000

Fineline Pencil Company and SubsidiaryConsolidated Balance Sheet

January 2, 20X3

Cash ($128,000 + $50,000) $178,000Other Assets ($400,000 + $120,000) 520,000Total Assets $698,000

Current Liabilities ($100,000 + $80,000) $180,000Common Stock 300,000Retained EarningsNoncontrolling Interest in Net Assets of Smudge Eraser

200,00018,000

Total Liabilities and Stockholders' Equity $698,000

60

E3-8 Subsidiary Acquired with Bonds

Equity Method Entries on Byte Computer's Books:Investment in Nofail Software 67,500

Cash 67,500Record the initial investment in Nofail Software


NCI25%

+Byte

Computer75%

= CommonStock

+ RetainedEarnings


1/1/X3

Goodwill = 0


Initialinvestmentin NofailSoftware75%

Book value =67,500


Investment in Nofail Software 67,500NCI in NA of Nofail Software 22,500

Investment inNofail Software


0

61

E3-8 (continued)

ByteComputer

NofailSoftware

EliminationEntries

DR CR ConsolidatedBalance SheetCash 200,000 50,000 250,000Other Assets 400,000 120,000 520,000Investment in Nofail Software 67,500 67,500 0

Total Assets 667,500 170,000 0 67,500 770,000

Current Liabilities 100,000 80,000 180,000Bonds Payable 50,000 50,000Bond Premium 17,500 17,500Common Stock 300,000 50,000 50,000 300,000Retained Earnings 200,000 40,000 40,000 200,000NCI in NA of Nofail Software 22,500 22,500


Byte Computer Corporation and SubsidiaryConsolidated Balance Sheet

January 2, 20X3


Current Liabilities $180,000Bonds Payable $50,000Bond Premium 17,500 67,500Common Stock 300,000Retained EarningsNoncontrolling Interest in Net Assets of Smudge Eraser

200,00022,500


E3-9 Subsidiary Acquired by Issuing Preferred StockEquity Method Entries on Byte Computer's Books:Investment in Nofail Software 81,000

Preferred Stock 60,000Additional Paid-In Capital 21,000

Record the initial investment in Nofail Software

62


NCI10%

+Byte

Computer90%

= CommonStock

+ RetainedEarnings


1/1/X3

Goodwill = 0


Initialinvestmentin NofailSoftware90%

Book value =81,000


Investment in Nofail Software 81,000NCI in NA of Nofail Software 9,000

Investment inNofail Software


0

63

E3-9 (continued)

ByteComputer

NofailSoftware


Balance SheetCash 200,000 50,000 250,000Other Assets 400,000 120,000 520,000Investment in Nofail Software 81,000 81,000 0

Total Assets 681,000 170,000 0 81,000 770,000

Current Liabilities 100,000 80,000 180,000Preferred Stock 60,000 60,000Additional Paid-In Capital 21,000 21,000Common Stock 300,000 50,000 50,000 300,000Retained Earnings 200,000 40,000 40,000 200,000NCI in NA of Nofail Software 9,000 9,000


Byte Computer Corporation and SubsidiaryConsolidated Balance Sheet

January 2, 20X3


Current Liabilities ($100,000 + $80,000) $180,000Preferred Stock ($6 x 10,000) 60,000Additional Paid-In Capital ($2.10 x 10,000) 21,000Common Stock 300,000Retained EarningsNoncontrolling Interest in Net Assets of Nofail

200,0009,000


E3-10 Reporting for a Variable Interest Entity

Gamble CompanyConsolidated Balance Sheet

Cash $ 18,600,000(a)Buildings and Equipment $370,600,000(b)Less: Accumulated Depreciation (10,100,000) 360,500,000Total Assets $379,100,000

Accounts Payable $ 5,000,000Bonds Payable 20,300,000Bank Notes Payable 140,000,000

64

Noncontrolling Interest 5,600,000Common Stock $103,000,000Retained Earnings 105,200,000 208,200,000Total Liabilities and Equities $379,100,000

(a) $18,600,000 = $3,000,000 + $5,600,000 + ($140,000,000 – $130,000,000)(b) $370,600,000 = $240,600,000 + $130,000,000

E3-11 Consolidation of a Variable Interest Entity

Teal CorporationConsolidated Balance Sheet

Total Assets $682,500(a)

Total Liabilities $550,000(b)Noncontrolling Interest 22,500(c)Common Stock $15,000Retained Earnings 95,000 110,000Total Liabilities and Equities $682,500

(a) $682,500 = $500,000 + $190,000 - $7,500(b) $550,000 = $470,000 + $80,000(c) $22,500 = ($500,000 - $470,000) x 0.75

E3-12 Computation of Subsidiary Net Income

Messer Company reported net income of $60,000 ($18,000 / 0.30) for 20X9.

E3-13 Incomplete Consolidation

a. Belchfire apparently owns 100 percent of the stock of Premium Body Shop since thebalance in the investment account reported by Belchfire is equal to the net book value ofPremium Body Shop.

b. Accounts Payable

Bonds Payable

Common Stock

Retained Earnings

$ 60,000

600,000

200,000

260,000

Accounts receivable were reduced by$10,000, presumably as a reductionof receivables and payables.

There is no indication of intercorporateownership.

Common stock of Premium must beeliminated.

Retained earnings of Premium also mustbe eliminated in preparingconsolidated statements.

65

$1,120,000

E3-14 Noncontrolling Interest

a. The total noncontrolling interest reported in the consolidated balance sheet at January 1,20X7, is $126,000 ($420,000 x .30).

b. The stockholders' equity section of the consolidated balance sheet includes the claim of thenoncontrolling interest and the stockholders' equity section of the subsidiary is eliminatedwhen the consolidated balance sheet is prepared:

Controlling Interest:Common Stock $ 400,000Additional Paid-In Capital 222,000Retained Earnings 358,000Total Controlling Interest $ 980,000

Noncontrolling Interest 126,000Total Stockholders’ Equity $1,106,000

c. Sanderson is mainly interested in assuring a steady supply of electronic switches. It cancontrol the operations of Kline with 70 percent ownership and can use the money that wouldbe needed to purchase the remaining shares of Kline to finance additional operations orpurchase other investments.

E3-15 Computation of Consolidated Net Income

a. Ambrose should report income from its subsidiary of $15,000 ($20,000 x .75) rather thandividend income of $9,000.

b. A total of $5,000 ($20,000 x .25) should be assigned to the noncontrolling interest in the20X4 consolidated income statement.

c. Consolidated net income of $70,0000 should be reported for 20X4, computed as follows:

Reported net income of Ambrose $59,000Less: Dividend income from Kroop (9,000)Operating income of Ambrose $50,000Net income of Kroop 20,000Consolidated net income $70,000

d. Income of $79,000 would be attained by adding the income reported by Ambrose ($59,000)to the income reported by Kroop ($20,000). However, the dividend income from Krooprecorded by Ambrose must be excluded from consolidated net income.

E3-16 Computation of Subsidiary Balances

a. Light's net income for 20X2 was $32,000 ($8,000 / 0.25).

b. Common Stock Outstanding (1) $120,000Additional Paid-In Capital (given) 40,000

66

Retained Earnings ($70,000 + $32,000) 102,000Total Stockholders' Equity $262,000

(1) Computation of common stock outstanding:

Total stockholders' equity ($65,500 / 0.25) $262,000Additional paid-in capital (40,000)Retained earnings (102,000)Common stock outstanding $120,000

E3-17 Subsidiary Acquired at Net Book Value

Equity Method Entries on Banner Corp.'s Books:Investment in Dwyer Co. 36,000

Cash 136,000Record the initial investment in Dwyer Co.


NCI20%

+BannerCorp.80%

= CommonStock

+ RetainedEarnings


1/1/X8

Goodwill = 0


Initialinvestmentin Dwyer

Co.80%Book value =

136,000


Investment in Dwyer Co. 136,000NCI in NA of Dwyer Co. 34,000

Investment inDwyer Co.

67


0

E3-17 (continued)

BannerCorp.

DwyerCo.


Balance SheetCash 74,000 20,000 94,000Accounts Receivable 120,000 70,000 190,000Inventory 180,000 90,000 270,000Fixed Assets (net) 350,000 240,000 590,000Investment in Dwyer Co. 136,000 136,000 0

Total Assets 860,000 420,000 0 136,000 1,144,000

Accounts Payable 65,000 30,000 95,000Notes Payable 350,000 220,000 570,000Common Stock 150,000 90,000 90,000 150,000Retained Earnings 295,000 80,000 80,000 295,000NCI in NA of Dwyer Co. 34,000 34,000

Total Liabilities & Equity 860,000 420,000 170,000 34,000 1,144,000

Banner Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X8

Cash ($74,000 + $20,000) $ 94,000Accounts Receivable ($120,000 + $70,000) 190,000Inventory ($180,000 + $90,000) 270,000Fixed Assets (net) ($350,000 + $240,000) 590,000Total Assets $1,144,000

Accounts Payable ($65,000 + $30,000) $ 95,000Notes Payable ($350,000 + $220,000) 570,000Common Stock 150,000Retained EarningsNoncontrolling Interest in Net Assets of Dwyer Co.

295,00034,000

Total Liabilities and Stockholders' Equity $1,144,000

E3-18 Applying Alternative Accounting Theories

a. Proprietary theory:

Total revenue [$400,000 + ($200,000 x .75)] $550,000Total expenses [$280,000 + ($160,000 x .75)] 400,000Consolidated net income [$120,000 + ($40,000 x .75)] 150,000

68

b. Parent company theory:

Total revenue ($400,000 + $200,000) $600,000Total expenses ($280,000 + $160,000) 440,000

Consolidated net income [$120,000 + ($40,000 x .75)] 150,000

c. Entity theory:

Total revenue ($400,000 + $200,000) $600,000Total expenses ($280,000 + $160,000) 440,000Consolidated net income ($120,000 + $40,000) 160,000

d. Current accounting practice:

Total revenue ($400,000 + $200,000) $600,000Total expenses ($280,000 + $160,000) 440,000Consolidated net income ($120,000 + $40,000) 160,000

E3-19 Measurement of Goodwill

a. $240,000 = computed in the same manner as under the parent companyapproach.

b. $400,000 = $240,000 / 0.60

c. $400,000 = computed in the same manner as under the entity theory.

E3-20 Valuation of Assets under Alternative Accounting Theories

a. Entity theory:Book Value ($240,000 x 1.00) $240,000Fair Value Increase ($50,000 x 1.00) 50,000

$290,000

b. Parent company theory:Book Value ($240,000 x 1.00) $240,000Fair Value Increase ($50,000 x 0.75) 37,500

$277,500

c. Proprietary theory:Book Value ($240,000 x 0.75) $180,000Fair Value Increase ($50,000 x 0.75) 37,500

$217,500

d. Current accounting practice:Book Value ($240,000 x 1.00) $240,000Fair Value Increase ($50,000 x 1.00) 50,000

$290,000

69

E3-21 Reported Income under Alternative Accounting Theories

a. Entity theory:

Total revenue ($410,000 + $200,000) $610,000Total expenses ($320,000 + $150,000) 470,000Consolidated net income [$90,000 + ($50,000 x 1.00)] 140,000


Total revenue ($410,000 + $200,000) $610,000Total expenses ($320,000 + $150,000) 470,000Consolidated net income [$90,000 + ($50,000 x 0.80)] 130,000

c. Proprietary theory:

Total revenue [$410,000 + ($200,000 x 0.80)] $570,000Total expenses [$320,000 + ($150,000 x 0.80)] 440,000Consolidated net income [$90,000 + ($50,000 x 0.80)] 130,000


Total revenue ($410,000 + $200,000) $610,000Total expenses ($320,000 + $150,000) 470,000Consolidated net income [$90,000 + (50,000 x 1.00)] 140,000

E3-22 Acquisition of Majority Ownership

a. Net identifiable assets: $720,000 = $520,000 + $200,000

b. Noncontrolling interest: $50,000 = $200,000 x 0.25

SOLUTIONS TO PROBLEMSP3-23 Multiple-Choice Questions on Consolidated and Combined Financial Statements

[AICPA Adapted]

1. d2. c3. b4. c

P3-24 Determining Net Income of Parent CompanyConsolidated net income $164,300Income of subsidiary ($15,200 / 0.40) (38,000)Income from Tally's operations $126,300

P3-25 Reported Balancesa. The investment balance reported by Roof will be $192,000.

70

b. Total assets will increase by $310,000.

c. Total liabilities will increase by $95,000.

d. The amount of goodwill for the entity as a whole will be $25,000[($192,000 + $48,000) - ($310,000 - $95,000)].

e. Noncontrolling interest will be reported at $48,000 ($240,000 x 0.20).

P3-26 Acquisition Price

a. $57,000 = ($120,000 - $25,000) x 0.60

b. $81,000 = ($120,000 - $25,000) + $40,000 - $54,000

c. $48,800 = ($120,000 - $25,000) + $27,000 - $73,200

P3-27 Consolidation of a Variable Interest Entity

Stern CorporationConsolidated Balance Sheet

January 1, 20X4

Cash $ 8,150,000 (a)Accounts Receivable $12,200,000 (b)Less: Allowance for Uncollectibles (610,000) (c) 11,590,000Other Assets 5,400,000

Total Assets $25,140,000

Accounts Payable $ 950,000Notes Payable 7,500,000Bonds Payable 9,800,000Stockholders’ Equity:

Controlling Interest:Common Stock $ 700,000Retained Earnings 6,150,000

Total Controlling Interest $ 6,850,000Noncontrolling Interest 40,000

Total Stockholders’ Equity 6,890,000Total Liabilities and Stockholders’ Equity $25,140,000

(a) $ 8,150,000 = $7,960,000 + $190,000(b) $12,200,000 = $4,200,000 + $8,000,000(c) $ 610,000 = $210,000 + $400,000

71

P3-28 Reporting for Variable Interest Entities

Purified Oil CompanyConsolidated Balance Sheet

Cash $ 640,000Drilling Supplies 420,000Accounts Receivable 640,000Equipment (net) 8,500,000Land 5,100,000Total Assets $15,300,000

Accounts Payable $ 590,000Bank Loans Payable 11,800,000Stockholders’ Equity:

Controlling Interest:Common Stock $ 560,000Retained Earnings 2,150,000

Total Controlling Interest $2,710,000Noncontrolling Interest 200,000

Total Stockholders’ Equity 2,910,000Total Liabilities and Stockholders’ Equity $15,300,000

P3-29 Consolidated Income Statement Data

a. Sales: ($300,000 + $200,000 - $50,000) $450,000

b. Investment income from LoCal Bakeries: $ -0-

c. Cost of goods sold: ($200,000 + $130,000 - $35,000) $295,000

d. Depreciation expense: ($40,000 + $30,000) $ 70,000

P3-30 Parent Company and Consolidated Amounts

a. Common stock of Tempro Companyon December 31, 20X5 $ 90,000

Retained earnings of Tempro CompanyJanuary 1, 20X5 $130,000Sales for 20X5 195,000Less: Expenses (160,000)

Dividends paid (15,000)Retained earnings of Tempro Companyon December 31, 20X5 150,000

Net book value on December 31, 20X5 $240,000Proportion of stock acquired by Quoton x 0.80Purchase price $192,000

72

b. Net book value on December 31, 20X5 $240,000Proportion of stock held bynoncontrolling interest x 0.20

Balance assigned to noncontrolling interest $ 48,000

c. Consolidated net income is $143,000. None of the 20X5 net income of Tempro Companywas earned after the date of purchase and, therefore, none can be included in consolidatednet income.

d. Consolidate net income would be $178,000 [$143,000 + ($195,000 - $160,000)].

P3-31 Parent Company and Consolidated Balances

a. Balance in investment account, December 31, 20X7 $259,800Cumulative earnings since acquisition 110,000Cumulative dividends since acquisition (46,000)Total $64,000Proportion of stock held by True Corporation x 0.75Total Amount Debited to Investment Account (48,000)Purchase Amount $211,800

b. $282,400 ($211,800 / 0.75) is the fair value of net assets on January 1, 20X5

b. c. $70,600 ($282,400 x 0.25) is the value assigned to the NCI shareholders on January1, 20X5.

c.d. d. $86,600 = ($259,800 / 0.75) x 0.25 will be assigned to noncontrolling interest in the

consolidated balance sheet prepared at December 31, 20X7.

P3-32 Indirect OwnershipThe following ownership chain exists:

Purple

.60

.10.40

.70

Green

Yellow Orange

Blue

73

The earnings of Blue Company and Orange Corporation are included under cost methodreporting due to the 10 percent ownership level of Orange Corporation.

Net income of Green Company:Reported operating income $ 20,000Dividend income from Orange ($30,000 x 0.10) 3,000Equity-method income from Yellow ($60,000 x 0.40) 24,000Green Company net income $ 47,000

Consolidated net income:Operating income of Purple $ 90,000Net income of Green 47,000Consolidated net income $137,000

Purple company net income (Not Required):Operating income of Purple $ 90,000Purple's share of Green's net income ($47,000 x 0.70) 32,900Purple’s net income $122,900

P3-33 Balance Sheet Amounts under Alternative Accounting Theories

a. Proprietary theory:

Cash and inventory [$300,000 + ($80,000 x 0.75)] $360,000Buildings and Equipment (net)[$400,000 + ($180,000 x 0.75)] 535,000Goodwill [$210,000 - ($260,000 x 0.75)] 15,000


Cash and inventory ($300,000 + $80,000) $380,000Buildings and Equipment (net)[$400,000 + $120,000 + ($60,000 x 0.75)] 565,000Goodwill [$210,000 – ($260,000 x 0.75)] 15,000

c. Entity theory:

Cash and inventory ($300,000 + $80,000) $380,000Buildings and Equipment (net)($400,000 + $180,000) 580,000Goodwill [($210,000 / 0.75) - $260,000] 20,000


Cash and inventory ($300,000 + $80,000) $380,000Buildings and Equipment (net)($400,000 + $180,000) 580,000Goodwill [($210,000 / 0.75) - $260,000] 20,000

74

P3-34 Consolidated Worksheet and Balance Sheet on the Acquisition Date (EquityMethod)a.Equity Method Entries on Peanut Co.'s Books:Investment in Snoopy Co. 270,000



NCI10%

+PeanutCo.90%

= CommonStock

+ RetainedEarnings


1/1/X8

Goodwill = 0



Co.90%Book value =

270,000


Investment in Snoopy Co. 270,000NCI in NA of Snoopy Co. 30,000





0

75

P3-34 (continued)

PeanutCo.

SnoopyCo.



Total Assets 1,000,000 400,000 10,000 280,000 1,130,000

Accounts Payable 75,000 25,000 100,000Bonds Payable 200,000 75,000 275,000Common Stock 500,000 200,000 200,000 500,000Retained Earnings 225,000 100,000 100,000 225,000NCI in NA of Snoopy Co. 30,000 30,000


c.Peanut Co.

Consolidated Balance Sheet1/1/20X8

Cash 75,000Accounts Receivable 80,000Inventory 160,000Land 325,000Buildings & Equipment 890,000Less: Accumulated Depreciation (400,000)Total Assets 1,130,000

Accounts Payable 100,000Bonds Payable 275,000Common Stock 500,000Retained Earnings 225,000NCI in NA of Snoopy Co. 30,000Total Liabilities & Equity 1,130,000

76

P3-35 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)a.Equity Method Entries on Peanut Co.'s Books:Investment in Snoopy Co. 270,000


Investment in Snoopy Co. 67,500Income from Snoopy Co. 67,500

Record Peanut Co.'s 90% share of Snoopy Co.'s 20X8 income




NCI10%

+PeanutCo.90%

= CommonStock

+ RetainedEarnings

Original book value 30,000 270,000 200,000 100,000+ Net Income 7,500 67,500 75,000- Dividends (2,000) (18,000) (20,000)Ending book value 35,500 319,500 200,000 155,000

1/1/X8

Goodwill = 0



Co.90%Book value =

270,000

12/31/X8

Goodwill = 0

Excess = 0 $319,500Net

investmentin Snoopy

Co.90%Book value =

319,500

77

P3-35 (continued)Basic Elimination EntryCommon stock 200,000Retained earnings 100,000Income from Snoopy Co. 67,500NCI in NI of Snoopy Co. 7,500

Dividends declared 20,000Investment in Snoopy Co. 319,500NCI in NA of Snoopy Co. 35,500




Acquisition Price 270,00090% Net Income 67,500 67,500 90% Net Income

18,000 90% DividendsEnding Balance 319,500 67,500 Ending Balance

319,500 Basic 67,5000 0

78

P3-35 (continued)

PeanutCo.

SnoopyCo.



Consolidated Net Income 392,500 75,000 67,500 400,000NCI in Net Income 7,500 (7,500)Controlling Interest in NetIncome 392,500 75,000 75,000 0 392,500

Statement of Retained EarningsBeginning Balance 225,000 100,000 100,000 225,000Net Income 392,500 75,000 75,000 0 392,500Less: Dividends Declared (100,000) (20,000) 20,000 (100,000)

Ending Balance 517,500 155,000 175,000 20,000 517,500


Total Assets 1,292,500 500,000 10,000 329,500 1,473,000

Accounts Payable 75,000 60,000 135,000Bonds Payable 200,000 85,000 285,000Common Stock 500,000 200,000 200,000 500,000Retained Earnings 517,500 155,000 175,000 20,000 517,500NCI in NA of Snoopy Co. 35,500 35,500


79

P3-36 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)a.Equity Method Entries on Peanut Co.'s Books:Investment in Snoopy Co. 72,000

Income from Snoopy Co. 72,000Record Peanut Co.'s 90% share of Snoopy Co.'s 20X9 income




NCI10%

+PeanutCo.90%

= CommonStock

+ RetainedEarnings

Beginning book value 35,500 319,500 200,000 155,000+ Net Income 8,000 72,000 80,000- Dividends (3,000) (27,000) (30,000)Ending book value 40,500 364,500 200,000 205,000

1/1/X9

Goodwill = 0


investmentin Snoopy

Co.90%Book value =

319,500

12/31/X9

Goodwill = 0


investmentin Snoopy

Co.90%Book value =

364,500

80

P3-36 (continued)Basic Elimination EntryCommon stock 200,000Retained earnings 155,000Income from Snoopy Co. 72,000NCI in NI of Snoopy Co. 8,000

Dividends declared 30,000Investment in Snoopy Co. 364,500NCI in NA of Snoopy Co. 40,500




Beginning Balance 319,50090% Net Income 72,000 72,000 90% Net Income


364,500 Basic 72,0000 0

81

P3-36 (continued)

PeanutCo.

SnoopyCo.





Ending Balance 664,500 205,000 235,000 30,000 664,500


Total Assets 1,389,500 525,000 10,000 374,500 1,550,000

Accounts Payable 75,000 35,000 110,000Bonds Payable 150,000 85,000 235,000Common Stock 500,000 200,000 200,000 500,000Retained Earnings 664,500 205,000 235,000 30,000 664,500NCI in NA of Snoopy Co. 40,500 40,500


82

P3-37 Consolidated Worksheet and Balance Sheet on the Acquisition Date (EquityMethod)a.Equity Method Entries on Paper Co.'s Books:Investment in Scissor Co. 296,000



NCI20%

+PaperCo.80%

= CommonStock

+ RetainedEarnings


1/1/X8

Goodwill = 0



Co.80%Book value =

296,000


Investment in Scissor Co. 296,000NCI in NA of Scissor Co. 74,000


Building & equipment 24,000Investment inScissor Co.


0

83

P3-37 (continued)

PaperCo.

ScissorCo.



Total Assets 1,250,000 500,000 24,000 320,000 1,454,000

Accounts Payable 95,000 30,000 125,000Bonds Payable 250,000 100,000 350,000Common Stock 625,000 250,000 250,000 625,000Retained Earnings 280,000 120,000 120,000 280,000NCI in NA of Scissor Co. 74,000 74,000


c.Paper Co.

Consolidated Balance Sheet1/1/20X8

Cash 134,000Accounts Receivable 102,000Inventory 212,000Land 405,000Buildings & Equipment 1,101,000Less: Accumulated Depreciation (500,000)Total Assets 1,454,000

Accounts Payable 125,000Bonds Payable 350,000Common Stock 625,000Retained Earnings 280,000NCI in NA of Scissor Co. 74,000Total Liabilities & Equity 1,454,000

84

P3-38 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)a.Equity Method Entries on Paper Co.'s Books:Investment in Scissor Co. 296,000







NCI20%

+PaperCo.80%

= CommonStock

+ RetainedEarnings


1/1/X9

Goodwill = 0



Co.80%Book value =

296,000

12/31/X9

Goodwill = 0


investmentin Scissor

Co.80%Book value =

350,400

85

P3-38 (continued)Basic Elimination EntryCommon stock 250,000Retained earnings 120,000Income from Scissor Co. 74,400NCI in NI of Scissor Co. 18,600

Dividends declared 25,000Investment in Scissor Co. 350,400NCI in NA of Scissor Co. 87,600





20,00080%

DividendsEnding Balance 350,400 74,400 Ending Balance

350,400 Basic 74,4000 0

86

P3-38 (continued)

PaperCo.

ScissorCo.





Ending Balance 479,400 188,000 213,000 25,000 479,400


Total Assets 1,431,400 565,000 24,000 374,400 1,646,000

Accounts Payable 77,000 27,000 104,000Bonds Payable 250,000 100,000 350,000Common Stock 625,000 250,000 250,000 625,000Retained Earnings 479,400 188,000 213,000 25,000 479,400NCI in NA of Scissor Co. 87,600 87,600


87

P3-39 Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)a.Equity Method Entries on Paper Co.'s Books:Investment in Scissor Co. 85,600

Income from Scissor Co. 85,600Record Paper Co.'s 80% share of Scissor Co.'s 20X9 income




NCI20%

+PaperCo.80%

= CommonStock

+ RetainedEarnings

Beginning book value 87,600 350,400 250,000 188,000+ Net Income 21,400 85,600 107,000- Dividends (6,000) (24,000) (30,000)Ending book value 103,000 412,000 250,000 265,000

1/1/X9

Goodwill = 0



Co.80%Book value =

350,400

12/31/X9

Goodwill = 0



Co.80%Book value =

412,000

88

P3-39 (continued)

Basic Elimination EntryCommon stock 250,000Retained earnings 188,000Income from Scissor Co. 85,600NCI in NI of Scissor Co. 21,400

Dividends declared 30,000Investment in Scissor Co. 412,000NCI in NA of Scissor Co. 103,000






412,000 Basic 85,6000 0

89

P3-39 (continued)

PaperCo.

ScissorCo.





Ending Balance 700,000 265,000 295,000 30,000 700,000


Total Assets 1,560,000 655,000 24,000 436,000 1,803,000

Accounts Payable 85,000 40,000 125,000Bonds Payable 150,000 100,000 250,000Common Stock 625,000 250,000 250,000 625,000Retained Earnings 700,000 265,000 295,000 30,000 700,000NCI in NA of Scissor Co. 103,000 103,000


90

CHAPTER 4

CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES ACQUIRED AT MORE THANBOOK VALUE

SOLUTIONS TO EXERCISESE4-1 Cost versus Equity Reportinga. Cost-method journal entries recorded by Roller Corporation:

20X5 Investment in Steam Company Stock 270,000Cash 270,000

Record purchase of Steam Company stock.


Record dividend income from Steam Company

20X6 Cash 15,000Dividend Income 15,000

Record dividend income from Steam Company


Record dividend income from Steam CompanyNote: Cumulative dividends do not exceed cumulative earnings to date.

b. Equity-method journal entries recorded by Roller Corporation:

20X5 Investment in Steam Company Stock 270,000Cash 270,000

Record purchase of Steam Company stock.

Cash 5,000Investment in Steam Company Stock 5,000

Record dividend from Steam Company.

Investment in Steam Company Stock 20,000Income from Steam Company 20,000

Record equity-method income.

Income from Steam Company 7,000Investment in Steam Company Stock 7,000

Amortize differential: ($270,000 - $200,000) / 10 years

20X6 Cash 15,000Investment in Steam Company Stock 15,000




91


Amortize differential.

20X7 Cash 35,000Investment in Steam Company Stock 35,000






E4-2 Differential Assigned to Patents

Journal entries recorded by Power Corporation:

20X2 Investment in Snow Corporation Stock 1,080,000Common Stock 270,000Additional Paid-In Capital 810,000

Record purchase of Snow Corporation stock

Cash 20,000Investment in Snow Corporation Stock 20,000

Record dividend from Snow Corporation

Investment in Snow Corporation Stock 56,000Income from Snow Corporation 56,000

Record equity-method income

Income from Snow Corporation 12,500Investment in Snow Corporation Stock 12,500

Amortize differential: ($1,080,000 - $980,000) / 8 years

20X3 Cash 10,000Investment in Snow Corporation Stock 10,000

Record dividend from Snow Corporation


Record equity-method loss


Amortize differential

92

E4-3 Differential Assigned to Copyrights

Journal entries recorded by Best Corporation:

20X7 Investment in Flair Company Stock 694,000Cash 24,000Bonds Payable 670,000

Record purchase of Flair Company stock.

Cash 24,000Investment in Flair Company Stock 24,000

Record dividend from Flair Company

Income from Flair Company 88,000Investment in Flair Company Stock 88,000

Record equity-method loss


Amortize differential:Book value of assets $740,000Book value of liabilities (140,000)Net book value $600,000Land fair value increment 16,000Fair value of net assets $616,000Amount paid 694,000Differential $ 78,000Period of amortization (years) ÷ 8Amortization per period $ 9,750

20X8 Cash 24,000Investment in Flair Company Stock 24,000

Record dividend from Flair Company

Investment in Flair Company Stock 120,000Income from Flair Company 120,000




93

E4-4 Differential Attributable to Depreciable Assets

a. Journal entries recorded by Capital Corporation using the equity method:

20X4 Investment in Cook Company Stock 340,000Cash 340,000

Record purchase of Cook Company Stock.

Cash 6,000Investment in Cook Company Stock 6,000

Record dividend from Cook Company

Investment in Cook Company Stock 10,000Income from Cook Company 10,000


Income from Cook Company 4,000Investment in Cook Company Stock 4,000

Amortize differential: (340,000 – 300,000) / 10 years

20X5 Cash 9,000Investment in Cook Company Stock 9,000

Record dividend from Cook Company

Investment in Cook Company Stock 20,000Income from Cook Company 20,000


Income from Cook Company 4,000Investment in Cook Company Stock 4,000


b. Journal entries recorded by Capital Corporation using the cost method:

20X4 Investment in Cook Company Stock 340,000Cash 340,000

Record purchase of Cook Company Stock.


Record dividend income from Cook Company.


Record dividend income from Cook Company.

94

E4-5 Investment Income

Brindle Company reported equity-method income of $52,000, computed as follows:

Proportionate share of reported income $68,000Amortization of differential:Land ($108,000: not amortized) $ -0-Equipment ($80,000 / 5 years) 16,000Goodwill ($0: not amortized) -0- (16,000)

Investment Income $52,000

Assignment of differentialPurchase price $648,000Proportionate share of book value of net assets

($690,000 - $230,000) (460,000)Differential $ 188,000Differential assigned to land (108,000)Differential assigned to equipment (80,000)Differential assigned to goodwill $ 0

E4-6 Determination of Purchase Price

Investment account balance December 31, 20X6 $161,000

Increase in account balance during 20X5:Proportionate share of income $ 33,000Amortize differential ($28,000 / 8 years) (3,500)Dividend received (15,000) (14,500)

Decrease in account balance during 20X6:Proportionate share of income $ 6,000Amortize differential ($28,000 / 8 years) (3,500)Dividend received (12,000) 9,500

Investment account balance at date of purchase $156,000

95

E4-7 Correction of Error

Required correcting entry:Investment in Case Products Stock 44,000Dividend Income 8,000

Income from Case Products 30,000Retained Earnings 22,000

Computation of correction of investment accountAddition to account for investment income:20X6: $16,000 $16,00020X7: $24,000 24,00020X8: $32,000 32,000 $72,000

Deduction for dividends received:20X6: $6,000 $ 6,00020X7: $8,000 8,00020X8: $8,000 8,000 (22,000)

Amortization of differential:Purchase price $56,000Proportionate share of book value of net assets

($10,000 + $30,000) (40,000)Amount of differential $16,000

Amortization for 3 years [($16,000 / 8) x 3] (6,000)Required correction of investment account $44,000

Computation of correction of retained earnings of Grand CorporationDividend income recorded in 20X6: $6,000 $ 6,000

20X7: $8,000 8,000 ($14,000)

Equity-method income in 20X6: ($16,000 - $2,000) $14,00020X7: ($24,000 - $2,000) 22,000 36,000

Required correction of retained earnings $22,000

E4-8 Differential Assigned to Land and Equipment

Journal entries recorded by Rod Corporation:

(1) Investment in Stafford Corporation Stock 65,000Cash 65,000

Record purchase of Stafford Stock.

(2) Cash 4,500Investment in Stafford Corporation Stock 4,500

Record dividend from Stafford

(3) Investment in Stafford Corporation Stock 12,000Income from Stafford 12,000


(4) Income from Stafford 1,000Investment in Stafford Corporation Stock 1,000

96

Amortize differential assigned to equipment.E4-9 Equity Entries with Goodwill

Journal entries recorded following purchase:

(1) Investment in Turner Corporation Stock 437,500Cash 437,500

Record purchase of Turner stock.

(2) Cash 3,200Investment in Turner Corporation Stock 3,200

Record dividend from Turner

(3) Investment in Turner Corporation Stock 16,000Income from Turner Corporation 16,000


(4) Income from Turner Corporation Stock 10,000Investment in Turner Corporation 10,000

Write off differential assigned to inventory carried on FIFO basis

(5) Income from Turner Corporation Stock 9,000Investment in Turner Corporation 9,000

Amortize differential assigned to buildings and equipment:[$240,000 - ($300,000 - $150,000)] / 10 years

E4-10 Multiple-Choice Questions on Consolidation Process

1. c2. d [AICPA Adapted]3. d4. b5. a

E4-11 Multiple-Choice Questions on Consolidation [AICPA Adapted]1. c2. a3. d4. c $400,000 = $1,700,000 - $1,300,000

E4-12 Eliminating Entries with Differentiala.Equity Method Entries on Tower Corp.'s Books:Investment in Brown Co. 100,000

Cash 100,000Record the initial investment in Brown Co.

Book Value Calculations:Total BookValue

= CommonStock

+ RetainedEarnings

97


1/1/X8

Goodwill = 18,000

Identifiable excess= 25,000 $100,000

Initialinvestmentin Brown

Co.100%Book value =

57,000


Investment in Brown Co. 57,000

Excess Value (Differential) Calculations:

Total = Inventory +Buildings &Equipment + Goodwill

Balances 43,000 5,000 20,000 18,000

Excess value (differential) reclassification entry:Inventory 5,000Buildings & Equipment 20,000Goodwill 18,000

Investment in Brown Co. 43,000

98

E4-12 (continued)

Investment inBrown Co.

Acquisition Price 100,000

57,000 Basic43,000 Excess Reclass.

0

b. Journal entries used to record transactions, adjust account balances, and close incomeand revenue accounts at the end of the period are recorded in the company's books andchange the reported balances. On the other hand, eliminating entries are entered only inthe consolidation worksheet to facilitate the preparation of consolidated financialstatements. As a result, they do not change the balances recorded in the company'saccounts and must be reentered each time a consolidation worksheet is prepared.

E4-13 Balance Sheet Consolidation

Equity Method Entries on Reed Corp.'s Books:Investment in Thorne Corp. 395,000

Cash 395,000


= CommonStock

+ RetainedEarnings

Original bookvalue 360,000 120,000 240,000

1/1/X4

Goodwill = 19,000


Initialinvestmentin ThorneCorp.100%

Book value =360,000

99


Investment in Thorne Corp. 360,000

Excess Value (Differential) Calculations:Total = Buildings + Inventory + Goodwill

Balances 35,000 (20,000) 36,000 19,000

Excess value (differential) reclassification entry:Inventory 36,000Goodwill 19,000

Buildings 20,000Investment in Thorne Corp. 35,000

Investment inThorne Corp.

Acquisition Price 395,000360,000 Basic35,000 Excess Reclass.

0

E4-14 Acquisition with Differential

a. Goodwill is $60,000, computed as follows:

Book value of Conger's net assets:Common stock outstanding $ 80,000Retained earnings 130,000 $210,000

Fair value increment:Land ($100,000 - $80,000 $ 20,000Buildings ($400,000 - $220,000) 180,000 200,000

Fair value of net assets $410,000Fair value of consideration given (470,000)Goodwill $ 60,000

b.Equity Method Entries on Road Corp.'s Books:Investment in Conger Corp. 470,000

Cash 470,000Record the initial investment in Conger Corp.

100


= CommonStock

+ RetainedEarnings


1/1/X2

Goodwill = 60,000


Initialinvestmentin CongerCorp.100%

Book value =210,000


Investment in Conger Corp. 210,000

Excess Value (Differential) Calculations:Total = Land + Buildings + Goodwill

Balances 260,000 20,000 180,000 60,000

Excess value (differential) reclassification entry:Land 20,000Buildings 180,000Goodwill 60,000

Investment in Conger Corp. 260,000

101

E4-15 Balance Sheet Worksheet with Differentiala.Equity Method Entries on Blank Corp.'s Books:Investment in Faith Corp. 189,000

Cash 189,000Record the initial investment in Faith Corp.


= CommonStock

+ RetainedEarnings


1/1/X2

Goodwill = 0


Initialinvestmentin FaithCorp.100%

Book value =150,000


Investment in Faith Corp. 150,000


Total = Inventory +Buildings &Equipment

Balances 39,000 24,000 15,000

Excess value (differential) reclassification entry:Inventory 24,000Buildings & Equipment 15,000

Investment in Faith Corp. 39,000

102

E4-15 (continued)

Investment inFaith Corp.


0

b.

BlankCorp.

FaithCorp.


Balance SheetCash 26,000 18,000 44,000Accounts Receivable 87,000 37,000 124,000Inventory 110,000 60,000 24,000 194,000Buildings & Equipment (net) 220,000 150,000 15,000 385,000Investment in Faith Corp. 189,000 150,000 0

39,000Goodwill 0

Total Assets 632,000 265,000 39,000 189,000 747,000

Accounts Payable 92,000 35,000 127,000Notes Payable 150,000 80,000 230,000Common Stock 100,000 60,000 60,000 100,000Retained Earnings 290,000 90,000 90,000 290,000


E4-16 Worksheet for Wholly Owned Subsidiarya.Equity Method Entries on Gold Enterprises’ Books:Investment in Premium Builders 167,000

Cash 167,000Record the initial investment in Premium Builders


= CommonStock

+ RetainedEarnings


103

1/1/X5

Goodwill = 0


Initialinvestmentin PremiumBuilders100%

Book value =150,000


Investment in Premium Builders 150,000


Total =Cash andReceivables + Inventory +

Buildings &Equipment

Balances 17,000 (2,000) 7,000 12,000


Cash and Receivables 2,000Investment in Premium Builders 17,000

104

E4-16 (continued)

b.

GoldEnterprises

PremiumBuilders


Balance SheetCash and Receivables 80,000 30,000 2,000 108,000Inventory 150,000 350,000 7,000 507,000Buildings & Equipment (net) 430,000 80,000 12,000 522,000Investment in Premium Builders 167,000 150,000 0

17,000

Total Assets 827,000 460,000 19,000 169,000 1,137,000

Current Liabilities 100,000 110,000 210,000Long-Term Debt 400,000 200,000 600,000Common Stock 200,000 140,000 140,000 200,000Retained Earnings 127,000 10,000 10,000 127,000

Total Liabilities & Equity 827,000 460,000 150,000 0 1,137,000

c. Gold Enterprises and SubsidiaryConsolidated Balance Sheet

January 1, 20X5

Cash and Receivables $ 108,000 Current Liabilities $ 210,000Inventory 507,000 Long-Term Debt 600,000Buildings and Common Stock $200,000Equipment (net) 522,000 Retained Earnings 127,000 327,000

Total Liabilities &Total Assets $1,137,000 Stockholders' Equity $1,137,000

E4-17 Computation of Consolidated Balances

a. Inventory $ 140,000

b. Land $ 60,000

c. Buildings and Equipment $ 550,000

Investment inPremium Builders


0

105

d. Goodwill: Fair value of consideration given $ 576,000Book value of net assetsat acquisition $450,000Fair value increment for:Inventory 20,000Land (10,000)Buildings and equipment 70,000

Fair value of net assetsat acquisition (530,000)Balance assigned to goodwill $ 46,000

e. Investment in Astor Corporation: Nothing would be reported; the balance in theinvestment account is eliminated.

E4-18 Multiple-Choice Questions on Balance Sheet Consolidation

1. d $215,000 = $130,000 + $85,000

2. b $23,000 = $198,000 – ($405,000 - $265,000 + $15,000 + $20,000)

3. c $1,109,000 = Total Assets of Top Corp. $ 844,000Less: Investment in Sun Corp. (198,000)Book value of assets of Top Corp. $ 646,000Book value of assets of Sun Corp. 405,000Total book value $1,051,000Payment in excess of book value($198,000 - $140,000) 58,000

Total assets reported $1,109,000

4. c $701,500 = ($61,500 + $95,000 + $280,000) + ($28,000 + $37,000+ $200,000)

5. d $257,500 = The amount reported by Top Corporation

6. a $407,500 = The amount reported by Top Corporation

E4-19 Wholly Owned Subsidiary with Differentiala.Equity Method Entries on Winston Corp.'s Books:Investment in Canton Corp. 178,000

Cash 178,000Record the initial investment in Canton Corp.

Investment in Canton Corp. 30,000Income from Canton Corp. 30,000

Record Winston Corp.'s 100% share of Canton Corp.'s 20X3 income

Cash 12,000Investment in Canton Corp. 12,000

106

Record Winston Corp.'s 100% share of Canton Corp.'s 20X3 dividend

Income from Canton Corp. 4,000Investment in Canton Corp. 4,000

Record amortization of excess acquisition price


Total BookValue

= CommonStock

+ RetainedEarnings


1/1/X3

Goodwill = 0


Initialinvestmentin CantonCorp.100%

Book value =150,000

12/31/X3

Goodwill = 0

Excess = 24,000$192,000

Netinvestment inCanton Corp.

100%Book value =

168,000

107

E4-19 (continued)

Basic Elimination EntryCommon stock 60,000Retained earnings 90,000Income from Canton Corp. 30,000

Dividends declared 12,000Investment in Canton Corp. 168,000


Total = Equipment +Acc.Depr.

Beginning Balances 28,000 28,000Changes (4,000) (4,000)Ending Balances 24,000 28,000 (4,000)

Amortized excess value reclassification entry:Depreciation expense 4,000

Income from Canton Corp. 4,000

Excess value (differential) reclassification entry:Equipment 28,000

Accumulated depreciation 4,000Investment in Canton Corp. 24,000

Investment in Income fromCanton Corp. Canton Corp.


12,000 100% Dividends4,000 Excess Val. Amort. 4,000


24,000 Excess Reclass. 4,0000 0

108

E4-20 Basic Consolidation Worksheeta.Equity Method Entries on Blake Corp.'s Books:Investment in Shaw Corp. 150,000

Cash 150,000Record the initial investment in Shaw Corp.

Investment in Shaw Corp. 30,000Income from Shaw Corp. 30,000

Record Blake Corp.'s 100% share of Shaw Corp.'s 20X3 income

Cash 10,000Investment in Shaw Corp. 10,000

Record Blake Corp.'s 100% share of Shaw Corp.'s 20X3 dividend


= CommonStock

+ RetainedEarnings


1/1/X3

Goodwill = 0

Identifiable excess= 0 $150,000

Initialinvestmentin ShawCorp.

100%Book value =

150,000

12/31/X3

Goodwill = 0

Excess = 0$170,000

Netinvestment inShaw Corp.

100%Book value =

170,000

109

E4-20 (continued)Basic Elimination EntryCommon stock 100,000Retained earnings 50,000Income from Shaw Corp. 30,000

Dividends declared 10,000Investment in Shaw Corp. 170,000

Investment in Income fromShaw Corp. Shaw Corp.

Acquisition Price 150,000

100% Net Income 30,000 30,000 100% Net Income

10,000100%

Dividends


0 0

110

E4-20 (continued)

b.

BlakeCorp.

ShawCorp.


Income StatementSales 200,000 120,000 320,000Less: Depreciation Expense (25,000) (15,000) (40,000)Less: Other Expenses (105,000) (75,000) (180,000)Income from Shaw Corp. 30,000 30,000 0

Net Income 100,000 30,000 30,000 0 100,000


Ending Balance 290,000 70,000 80,000 10,000 290,000

Balance SheetCurrent Assets 145,000 105,000 250,000Depreciable Assets (net) 325,000 225,000 550,000Investment in Shaw Corp. 170,000 170,000 0

Total Assets 640,000 330,000 0 170,000 800,000

Current Liabilities 50,000 40,000 90,000Long-Term Debt 100,000 120,000 220,000Common Stock 200,000 100,000 100,000 200,000Retained Earnings 290,000 70,000 80,000 10,000 290,000


111

E4-21 Basic Consolidation Worksheet for Second Yeara.Equity Method Entries on Blake Corp.'s Books:

Investment in Shaw Corp. 35,000Income from Shaw Corp. 35,000

Record Blake Corp.'s 100% share of Shaw Corp.'s 20X4 income

Cash 15,000Investment in Shaw Corp. 15,000

Record Blake Corp.'s 100% share of Shaw Corp.'s 20X4 dividend


= CommonStock

+ RetainedEarnings


1/1/X4

Goodwill = 0


Netinvestmentin ShawCorp.100%

Book value =170,000

12/31/X4

Goodwill = 0

Excess = 0$190,000

Netinvestment inShaw Corp.

100%Book value =

190,000

112

E4-21 (continued)Basic elimination entryCommon stock 100,000Retained earnings 70,000Income from Shaw Corp. 35,000

Dividends declared 15,000Investment in Shaw Corp. 190,000

Investment in Income fromShaw Corp. Shaw Corp.


15,000100%

DividendsEnding Balance 190,000 35,000 Ending Balance

190,000 Basic 35,0000 0

113

E4-21 (continued)b.

BlakeCorp.

ShawCorp.

Elimination Entries

DR CRConsolidate

dIncome StatementSales 230,000 140,000 370,000

Less: Depreciation Expense (25,000)(15,000

) (40,000)

Less: Other Expenses(150,000

)(90,000

) (240,000)Income from Shaw Corp. 35,000 35,000 0

Net Income 90,000 35,000 35,000 0 90,000

Statement of RetainedEarningsBeginning Balance 290,000 70,000 70,000 290,000Net Income 90,000 35,000 35,000 0 90,000

Less: Dividends Declared (50,000)(15,000

) 15,000 (50,000)

Ending Balance 330,000 90,000105,00

0 15,000 330,000

Balance SheetCurrent Assets 210,000 150,000 360,000Depreciable Assets (net) 300,000 210,000 510,000

Investment in Shaw Corp. 190,000190,00

0 0

Total Assets 700,000 360,000 0190,00

0 870,000

Current Liabilities 70,000 50,000 120,000Long-Term Debt 100,000 120,000 220,000

Common Stock 200,000 100,000100,00

0 200,000


0 15,000 330,000

Total Liabilities & Equity 700,000 360,000205,00

0 15,000 870,000

114

E4-22 Consolidation Worksheet with Differentiala.Equity Method Entries on Kennelly Corp.'s Books:Investment in Short Co. 180,000

Cash 180,000Record the initial investment in Short Co.

Investment in Short Co. 30,000Income from Short Co. 30,000

Record Kennelly Corp.'s 100% share of Short Co.'s 20X5 income

Cash 10,000Investment in Short Co. 10,000

Record Kennelly Corp.'s 100% share of Short Co.'s 20X5dividend

Income from Short Co. 5,000Investment in Short Co. 5,000



= CommonStock

+ RetainedEarnings


115

1/1/X5

Goodwill = 0

Identifiable excess= 30,000

$180,000Initial

investmentin Short Co.

100%Book value =

150,000

12/31/X5

Goodwill = 0

Excess = 25,000$195,000

Netinvestment inShort Co.

100%Book value =

170,000

Basic elimination entryCommon stock 100,000Retained earnings 50,000Income from Short Co. 30,000

Dividends declared 10,000Investment in Short Co. 170,000


Total =DepreciableAssets +

Acc.Depr.

Beginning balance 30,000 30,000 0Changes (5,000) (5,000)Ending balance 25,000 30,000 (5,000)


Income from Short Co. 5,000

Excess value (differential) reclassification entry:Depreciable Assets 30,000

Accumulated depreciation 5,000Investment in Short Co. 25,000

116

Investment in Income fromShort Co. Short Co.


100% NetIncome 30,000 30,000

100% NetIncome




117

E4-22 (continued)b.

KennellyCorp.

ShortCo.

Elimination Entries

DR CRConsolidate


Less: Depreciation Expense (25,000)(15,000

) 5,000 (45,000)

Less: Other Expenses(105,000

)(75,000

) (180,000)

Income from Short Co. 25,000 30,000 5,000 0

Net Income 95,000 30,000 35,000 5,000 95,000

Statement of Retained EarningBeginning Balance 230,000 50,000 50,000 230,000Net Income 95,000 30,000 35,000 5,000 95,000

Less: Dividends Declared (40,000)(10,000

) 10,000 (40,000)

Ending Balance 285,000 70,000 85,000 15,000 285,000

Balance SheetCash 15,000 5,000 20,000Accounts Receivable 30,000 40,000 70,000Inventory 70,000 60,000 130,000Depreciable Assets (net) 325,000 225,000 30,000 5,000 575,000

Investment in Short Co. 195,000170,00

0 025,000

Total Assets 635,000 330,000 30,000200,00

0 795,000

Accounts Payable 50,000 40,000 90,000Notes Payable 100,000 120,000 220,000Common Stock 200,000 100,000 100,000 200,000Retained Earnings 285,000 70,000 85,000 15,000 285,000


118

E4-23 Consolidation Worksheet for Subsidiarya.Equity Method Entries on Land Corp.'s Books:Investment in Growth Co. 170,000

Cash 170,000Record the initial investment in Growth Co.

Investment in Growth Co. 35,000Income from Growth Co. 35,000

Record Land Corp.'s 100% share of Growth Co.'s 20X4 income

Cash 15,000Investment in Growth Co. 15,000

Record Land Corp.'s 100% share of Growth Co.'s 20X4 dividend


= CommonStock

+ RetainedEarnings


1/1/X4

Goodwill = 0


Initialinvestmentin Growth

Co.100%Book value =

170,000

12/31/X4

Goodwill = 0

Excess = 0$190,000

Netinvestment inGrowth Co.

100%Book value =

190,000

119

E4-23 (continued)Basic Elimination EntryCommon stock 100,000Retained earnings 70,000Income from Growth Co. 35,000

Dividends declared 15,000Investment in Growth Co. 190,000



Investment in Income fromGrowth Co. Growth Co.


100% NetIncome 35,000 35,000

100% NetIncome


190,000 Basic 35,0000 0

120

E4-23 (continued)b.

LandCorp.

GrowthCo.


Income StatementSales 230,000 140,000 370,000Less: Depreciation Expense (25,000) (15,000) (40,000)Less: Other Expenses (150,000) (90,000) (240,000)Income from Growth Co. 35,000 35,000 0

Net Income 90,000 35,000 35,000 0 90,000


Ending Balance 358,000 90,000 105,000 15,000 358,000

Balance SheetCurrent Assets 238,000 150,000 388,000Depreciable Assets 500,000 300,000 75,000 725,000Less: Accumulated Depreciation (200,000) (90,000) 75,000 (215,000)Investment in Growth Co. 190,000 190,000 0

Total Assets 728,000 360,000 75,000 265,000 898,000

Current Liabilities 70,000 50,000 120,000Long-Term Debt 100,000 120,000 220,000Common Stock 200,000 100,000 100,000 200,000Retained Earnings 358,000 90,000 105,000 15,000 358,000


121

E4-24 Push-Down Accounting

a. Entry to record acquisition of Louis stock on books of Jefferson:

Investment in Louis Corporation Stock 789,000Cash 789,000

b. Entry to record revaluation of assets on books of Louis Corporation:

Land 15,000Buildings 50,000Equipment 20,000

Revaluation Capital 85,000

c. Investment elimination entry in consolidation worksheet (no other entries needed):

Common Stock – Louis Corporation 200,000Additional Paid-In Capital 425,000Retained Earnings 79,000Revaluation Capital 85,000

Investment in Louis Corporation Stock 789,000

Book Value Calculations:TotalBookValue

= CommonStock

+ AdditionalCapital

+ RetainedEarnings

+ RevaluationCapital

Orig. book value 789,000 200,000 425,000 79,000 85,000

122


P4-25 Assignment of Differential in Worksheeta.Equity Method Entries on Teresa Corp.'s Books:Investment in Sally Enterprises 290,000

Cash 290,000Record the initial investment in Sally Enterprises


= CommonStock

+ RetainedEarnings


1/1/X4

Goodwill = 30,000


Initialinvestmentin Sally

Enterprises100%Book value =

250,000


Investment in Sally Enterprises 250,000

Excess Value (Differential) Calculations:Total = Buildings & Equipment + Goodwill

Balances 40,000 10,000 30,000

123

Excess value (differential) reclassification entry:Buildings & Equipment 10,000Goodwill 30,000

Investment in Sally Enterprises 40,000P4-25 (continued)



Investment inSally Enterprises


0

TeresaCorp.

SallyEnterprises

Elimination Entries

DR CR Consolidated

Balance SheetCash and Receivables 40,000 20,000 60,000Inventory 95,000 40,000 135,000Land 80,000 90,000 170,000Buildings & Equipment 400,000 230,000 10,000 65,000 575,000Less: Accumulated Depreciation (175,000) (65,000) 65,000 (175,000)Investment in Sally Enterprises 290,000 250,000 0

40,000Goodwill 30,000 30,000

Total Assets 730,000 315,000 75,000 355,000 795,000

Accounts Payable 60,000 15,000 75,000Notes Payable 100,000 50,000 150,000Common Stock 300,000 100,000 100,000 300,000Retained Earnings 270,000 150,000 150,000 270,000


124

P4-25 (continued)

b. Teresa Corporation and SubsidiaryConsolidated Balance Sheet

January 1, 20X4

Cash and Receivables $ 60,000Inventory 135,000Land 170,000Buildings and Equipment $575,000Less: Accumulated Depreciation (175,000) 400,000Goodwill 30,000Total Assets $795,000

Accounts Payable $ 75,000Notes Payable 150,000Common Stock $300,000Retained Earnings 270,000 570,000Total Liabilities andStockholders' Equity $795,000

P4-26 Computation of Consolidated Balances

a. Inventories ($110,000 + $170,000) $280,000

b. Buildings and Equipment (net) ($350,000 + $375,000) $725,000

c. Investment in Decibel stock will be fully eliminated and will notappear in the consolidated balance sheet.

d. Goodwill Fair value of consideration given $280,000Fair value of Decibel's net assets:Cash and receivables $ 40,000Inventory 170,000Buildings and equipment (net) 375,000Accounts payable (90,000)Notes payable (250,000)

Fair value of net identifiableassets (245,000)

Goodwill to be reported $ 35,000

Note: Goodwill on books of Decibel is not an identifiable asset and thereforeis not included in the computation of Decibel's net identifiable assets at thedate of acquisition.

e. Common Stock $400,000

f. Retained Earnings $105,000

125

P4-27 Balance Sheet Consolidation [AICPA Adapted]

We note that the printer moved the stockholder’s equity table item #5 refers to. It appearsbelow the balance sheets on p. 199.

Equity Method Entries on Case Inc.'s Books:Investment in Frey Inc. 2,260,000

Cash 2,260,000Record the initial investment in Frey Inc.

Investment in Frey Inc. 580,000Income from Frey Inc. 580,000

Record Case Inc.'s 100% share of Frey Inc.'s 20X4 income

Cash 160,000Investment in Frey Inc. 160,000

Record Case Inc.'s 100% share of Frey Inc.'s 20X4 dividend

Book Value Calculations:TotalBookValue

= CommonStock

+ RetainedEarnings

+AdditionalPaid-InCapital

Original book value 2,010,000 1,000,000 820,000 190,000+ Net Income 580,000 580,000- Dividends (160,000) (160,000)Ending book value 2,430,000 1,000,000 1,240,000 190,000

1/1/X4

Goodwill = 0


$2,260,000Initial

investmentin Frey Inc.

100%Book value =2,010,000

12/31/X4

Goodwill = 0

Excess = 250,000$2,680,000

Netinvestment in

Frey Inc.100%

Book value =2,430,000

126

P4-27 (continued)Basic elimination entryCommon stock 1,000,000Retained earnings 820,000Income from Frey Inc. 580,000Additional Paid-In Capital 190,000

Dividends declared 160,000Investment in Frey Inc. 2,430,000

Excess Value (Differential) Calculations:Total = Land

Beginning balance 250,000 250,000Changes 0 0Ending balance 250,000 250,000

Excess value (differential) reclassification entry:Land 250,000

Investment in Frey Inc. 250,000

Investment in Income fromFrey Inc. Frey Inc.

Acquisition Price 2,260,000100% Net Income 580,000 580,000 100% Net Income

160,000 100% DividendsEnding Balance 2,680,000 580,000 Ending Balance

2,430,000 Basic 580,000250,000 Excess Reclass.

0 0

127

P4-27 (continued)

Case Inc. Frey Inc.Elimination EntriesDR CR Consolidated

Balance SheetCash 825,000 330,000 1,155,000Accounts and Other Receivables 2,140,000 835,000 2,975,000Inventory 2,310,000 1,045,000 3,355,000Land 650,000 300,000 250,000 1,200,000Depreciable Assets (net) 4,575,000 1,980,000 6,555,000Investment in Frey Inc. 2,680,000 2,430,000 0

250,000Long-Term Investments & Other

Assets 865,000 385,000 1,250,000

Total Assets 14,045,000 4,875,000 250,000 2,680,000 16,490,000

Accounts Payable and Other Cur.Liabilities 2,465,000 1,145,000 3,610,000

Long-Term Debt 1,900,000 1,300,000 3,200,000Common Stock 3,200,000 1,000,000 1,000,000 3,200,000Additional Paid-In Capital 2,100,000 190,000 190,000 2,100,000Retained Earnings 4,380,000 1,240,000 820,000 4,380,000

580,000160,000

Total Liabilities & Equity 14,045,000 4,875,000 2,590,000 0 16,490,000

128

P4-28 Consolidated Balance Sheet

a.Basic elimination entryCommon Stock 100,000Retained Earnings 120,000

Investment in Lake Corp. 220,000

Excess value (differential) reclassification entry:Buildings & Equipment 40,000

Accumulated Depreciation 8,000Investment in Lake Corp. 32,000



b.

ThompsonCo.

LakeCorp.


Balance SheetCash 30,000 20,000 50,000Accounts Receivable 100,000 40,000 140,000Land 60,000 50,000 110,000Buildings & Equipment 500,000 350,000 40,000 75,000 815,000Less: Accumulated Depreciation (230,000) (75,000) 75,000 8,000 (238,000)Investment in Lake Corporation 252,000 220,000 0

32,000

Total Assets 712,000 385,000 115,000 303,000 877,000

Accounts Payable 80,000 10,000 90,000Taxes Payable 40,000 70,000 110,000Notes Payable 100,000 85,000 185,000Common Stock 200,000 100,000 100,000 200,000Retained Earnings 292,000 120,000 120,000 292,000


129

P4-29 Comprehensive Problem: Consolidation in Subsequent Period

a.Equity Method Entries on Thompson Co.'s Books:

Investment in Lake Corp. 32,000Income from Lake Corp. 32,000

Record Thompson Co.'s 100% share of Lake Corp.'s 20X4income

Cash 12,000Investment in Lake Corp. 12,000

Record Thompson Co.'s 100% share of Lake Corp.'s 20X4dividend

Income from Lake Corp. 4,000Investment in Lake Corp. 4,000



Total BookValue

= CommonStock

+ RetainedEarnings


1/1/X4

Goodwill = 0


Netinvestmentin LakeCorp.100%

Book value =220,000

12/31/X4

Goodwill = 0

Excess = 28,000$268,000

Netinvestment inLake Corp.

100%Book value =

240,000

130

P4-29 (continued)

Basic elimination entryCommon stock 100,000Retained earnings 120,000Income from Lake Corp. 32,000

Dividends declared 12,000Investment in Lake Corp. 240,000


Total =Buildings &Equipment +

Acc.Depr.

Beginning balance 32,000 40,000 (8,000)Changes (4,000) (4,000)Ending balance 28,000 40,000 (12,000)


Income from Lake Corp. 4,000


Accumulated depreciation 12,000Investment in Lake Corp. 28,000

Eliminate intercompany accounts:Accounts Payable 2,500

Accounts Receivable 2,500

Investment in Income fromLake Corp. Lake Corp.


100% Net Income 32,000 32,000 100% Net Income12,000 100% Dividends4,000 Excess Val. Amort. 4,000



131

P4-29 (continued)c.

ThompsonCo.

LakeCorp.


Income StatementService Revenue 610,000 240,000 850,000

Less: Cost of Services (470,000) (130,000) (600,000)

Less: Depreciation Expense (35,000) (18,000) 4,000 (57,000)

Less: Other Expenses (57,000) (60,000) (117,000)

Income from Lake Corp. 28,000 32,000 4,000 0

Net Income 76,000 32,000 36,000 4,000 76,000

Statement of Retained EarningsBeginning Balance 292,000 120,000 120,000 292,000Net Income 76,000 32,000 36,000 4,000 76,000Less: Dividends Declared (30,000) (12,000) 12,000 (30,000)

Ending Balance 338,000 140,000 156,000 16,000 338,000

Balance SheetCash 74,000 42,000 116,000Accounts Receivable 130,000 53,000 2,500 180,500Land 60,000 50,000 110,000Buildings & Equipment 500,000 350,000 40,000 890,000Less: Accumulated Depreciation (265,000) (93,000) 12,000 (370,000)Investment in Lake Corp. 268,000 240,000 0

28,000

Total Assets 767,000 402,000 40,000 282,500 926,500

Accounts Payable 71,000 17,000 2,500 85,500Taxes Payable 58,000 60,000 118,000Notes Payable 100,000 85,000 185,000Common Stock 200,000 100,000 100,000 200,000Retained Earnings 338,000 140,000 156,000 16,000 338,000


132

P4-30 Acquisition at Other than Fair Value of Net Assets

a. Ownership acquired for $280,000:Equity Method Entries on Mason Corp.'s Books:Investment in Best Co. 280,000

Cash 280,000Record the initial investment in Best Co.


= CommonStock

+ RetainedEarnings


1/1/X9

Goodwill = 12,000


$280,000Initial

investmentin Best Co.

100%Book value =

255,000


Investment in Best Co. 255,000

Excess Value (Differential) Calculations:Total = Land + Inventories + Goodwill

Balances 25,000 20,000 (7,000) 12,000

Excess value (differential) reclassification entry:Land 20,000Goodwill 12,000

Inventories 7,000Investment in Best Co. 25,000

133

P4-30 (continued)

Investment inBest Co.


0

b. Ownership acquired for $251,000:

Equity Method Entries on Mason Corp.'s Books:Investment in Best Co. 251,000



= CommonStock

+ RetainedEarnings



Investment in Best Co. 255,000Excess Value (Differential) Calculations:

Total = Land + Inventories - GainBalances (4,000) 20,000 (7,000) (17,000)

Excess value (differential) reclassification entry:Land 20,000Investment in Best Co. 4,000

Inventories 7,000Gain on Bargain Purchase 17,000

Investment inBest Co.

Acquisition Price 251,000255,000 Basic

Excess Reclass. 4,0000

134

P4-31 Intercorporate Receivables and Payables

a. Eliminating entries:

Equity Method Entries on Kim Corp.'s Books:Investment in Normal Co. 305,000

Cash 305,000Record the initial investment in Normal Co.


= CommonStock

+ AdditionalPIC

+ RetainedEarnings

Original book value 285,000 150,000 140,000 (5,000)

1/1/X7

Goodwill = 20,000


Initialinvestmentin Normal

Co.100%Book value =

285,000

Basic Elimination EntryCommon stock 150,000Paid-in capital in excess of par 140,000

Retained earnings 5,000Investment in Normal Co. 285,000

Excess Value (Differential) Calculations:Total = Goodwill

Balances 20,000 20,000

Excess value (differential) reclassification entry:Goodwill 20,000

Investment in Normal Co. 20,000

135

P4-31 (continued)Eliminate intercompany accounts:Bonds Payable 50,000

Investment in Normal Co. Bonds 50,000

Accounts Payable 10,000Accounts Receivable 10,000



Investment inNormal Co.


0b.

KimCorp.

NormalCo.


Balance SheetCash 70,000 35,000 105,000Accounts Receivable 90,000 65,000 10,000 145,000Inventory 84,000 80,000 164,000Buildings & Equipment 400,000 300,000 75,000 625,000Less: Accumulated Depreciation (160,000) (75,000) 75,000 (160,000)Investment in Normal Company Stock 305,000 285,000 0

20,000Investment in Normal Company Bonds 50,000 50,000 0Goodwill 20,000 20,000

Total Assets 839,000 405,000 75,000 85,000 899,000

Accounts Payable 50,000 20,000 10,000 60,000Bonds Payable 200,000 100,000 50,000 250,000Common Stock 300,000 150,000 150,000 300,000Capital in Excess of Par 140,000 140,000Retained Earnings 289,000 (5,000) 5,000 289,000


136

P4-31 (continued)

c. Kim Corporation and SubsidiaryConsolidated Balance Sheet

January 1, 20X7

Cash $105,000Accounts Receivable 145,000Inventory 164,000Buildings and Equipment $625,000Less: Accumulated Depreciation (160,000) 465,000Goodwill 20,000Total Assets $899,000

Accounts Payable $ 60,000Bonds Payable 250,000Common Stock $300,000Retained Earnings 289,000 589,000Total Liabilities and Stockholders' Equity $899,000

137

P4-32 Balance Sheet Consolidation

a.Equity Method Entries on Primary Corp.'s Books:Investment in Street Co. 650,000

Bonds Payable 650,000Record the initial investment in Street Co.


Total BookValue

= CommonStock

+ Add’l Paid-In-Capital

+ RetainedEarnings


1/1/X8

Goodwill = 48,000


Initialinvestmentin Street

Co.100%Book value =

478,000

Basic Elimination EntryCommon stock 200,000Additional paid-in capital 130,000Retained earnings 148,000

Investment in Street Co. 478,000

138

P4-32 (continued)

Total = Inventory + Land +

Buildings&

Equipment + Patent +

Disc. onBondsPayable + Goodwill

Balances 172,000 4,000 20,000 50,000 40,000 10,000 48,000

Excess value (differential) reclassification entry:Inventory 4,000Land 20,000Buildings & Equipment 50,000Patent 40,000Discount on Bonds Payable 10,000Goodwill 48,000

Investment in StreetCo. 172,000

Eliminate intercompany accounts:Current Payables 6,500

Receivables 6,500

The FASB now requires that no allowance accounts be carried forward from theacquiree in a business combination. However, because of immateriality and the short-lived nature of the carry forward subsequent to the date of combination, the allowance inthis problem has not been offset against the receivable. If such an offset is desired, thefollowing elimination entry would be made:

Allowance for Bad Debts 1,000Receivables 1,000

However, since receivables are reported net of the allowance, the entry is not shown in theworksheet.



Investment inStreet Co.


0

139

P4-32 (continued)c.

PrimaryCorp.

StreetCo.

Elimination Entries

DR CRConsolidate

dBalance SheetCash 12,000 9,000 21,000Receivables (net) 39,000 30,000 6,500 62,500Inventory 86,000 68,000 4,000 158,000Land 55,000 50,000 20,000 125,000

Buildings & Equipment 960,000 670,000 50,000220,00

0 1,460,000Less: AccumulatedDepreciation (411,000)

(220,000)

220,000 (411,000)

Investment in Street Co. 650,000478,00

0 0172,00

0Patents 40,000 40,000Goodwill 48,000 48,000Discount on Bonds Payable 10,000 10,000


0 607,000294,00

0226,50

0 1,513,500

Current Payables 38,000 29,000 6,500 60,500Bonds Payable 850,000 100,000 950,000

Common Stock 300,000 200,000200,00

0 300,000

Additional Paid-In Capital 100,000 130,000130,00

0 100,000


0 103,000


0 607,000484,50

0 0 1,513,500

140

P4-32 (continued)

d. Primary Corporation and SubsidiaryConsolidated Balance Sheet

January 2, 20X8

Cash $ 21,000Receivables $ 65,500Less: Allowance for Bad Debts (3,000) 62,500Inventory 158,000Land 125,000Buildings and Equipment $1,460,000Less: Accumulated Depreciation (411,000) 1,049,000Patent 40,000Goodwill 48,000Total Assets $1,503,500

Current Payables $ 60,500Bonds Payable $ 950,000Less: Discount on Bonds Payable (10,000) 940,000Stockholders’ EquityCommon Stock $ 300,000Additional Paid-In Capital 100,000Retained Earnings 103,000 503,000

Total Liabilities andStockholders' Equity $1,503,500

P4-33 Consolidation Worksheet at End of First Year of Ownership

a.Equity Method Entries on Mill Corp.'s Books:Investment in Roller Co. 128,000

Cash 128,000Record the initial investment in Roller Co.

Investment in Roller Co. 24,000Income from Roller Co. 24,000

Record Mill Corp.'s 100% share of Roller Co.'s 20X8 income

Cash 16,000Investment in Roller Co. 16,000

Record Mill Corp.'s 100% share of Roller Co.'s 20X8 dividend

Income from Roller Co. 7,500Investment in Roller Co. 7,500


141


= CommonStock

+ RetainedEarnings


1/1/X8

Goodwill = 8,000


Initialinvestmentin Roller

Co.100%Book value =

100,000

12/31/X8

Goodwill = 2,500

Excess = 18,000$128,500

Netinvestment inRoller Co.

100%Book value =

108,000

Basic elimination entryCommon stock 60,000Retained earnings 40,000Income from Roller Co. 24,000

Dividends declared 16,000Investment in Roller Co. 108,000



Acc.Depr. + Goodwill

Beginning balance 28,000 20,000 0 8,000Changes (7,500) (2,000) (5,500)Ending balance 20,500 20,000 (2,000) 2,500

142

Amortized excess value reclassificationentry:Depreciation expense 2,000Goodwill impairment loss 5,500

Income from Roller Co. 7,500

P4-33 (continued)


Accumulated depreciation 2,000Investment in Roller Co. 20,500



Investment in Income fromRoller Co. Roller Co.





143

P4-33 (continued)b.

MillCorp.

RollerCo.

Elimination Entries

DR CRConsolidate


Less: COGS(125,000

)(110,000

) (235,000)

Less: Wage Expense (42,000) (27,000) (69,000)


Less: Interest Expense (12,000) (4,000) (16,000)


Less: Impairment Loss 5,500 (5,500)

Income from Roller Co. 16,500 24,000 7,500 0

Net Income 59,000 24,000 31,500 7,500 59,000

Statement of RetainedEarningsBeginning Balance 102,000 40,000 40,000 102,000Net Income 59,000 24,000 31,500 7,500 59,000Less: Dividends Declared (30,000) (16,000) 16,000 (30,000)

Ending Balance 131,000 48,000 71,500 23,500 131,000

Balance SheetCash 19,500 21,000 40,500Accounts Receivable 70,000 12,000 82,000Inventory 90,000 25,000 115,000Land 30,000 15,000 45,000Buildings & Equipment 350,000 150,000 20,000 30,000 490,000Less: AccumulatedDepreciation

(145,000) (40,000) 30,000 2,000 (157,000)

Investment in Roller Co. 128,500108,00

0 020,500

Goodwill 2,500 2,500

Total Assets 543,000 183,000 50,000 32,000 618,000

Accounts Payable 45,000 16,000 61,000Wages Payable 17,000 9,000 26,000Notes Payable 150,000 50,000 200,000Common Stock 200,000 60,000 60,000 200,000Retained Earnings 131,000 48,000 71,500 23,500 131,000


0 23,500 618,000

144

P4-34 Consolidation Worksheet at End of Second Year of Ownershipa.Equity Method Entries on Mill Corp.'s Books:Investment in Roller Co. 36,000

Income from Roller Co. 36,000Record Mill Corp.'s 100% share of Roller Co.'s 20X9 income

Cash 20,000Investment in Roller Co. 20,000

Record Mill Corp.'s 100% share of Roller Co.'s 20X9 dividend

Income from Roller Co. 2,000Investment in Roller Co. 2,000



= CommonStock

+ RetainedEarnings


1/1/X9

Goodwill = 2,500


Netinvestmentin Roller

Co.100%Book value =

108,000

12/31/X9

Goodwill = 2,500

Excess = 16,000$142,500

Netinvestment inRoller Co.

100%Book value =

124,000

145

P4-34 (continued)Basic elimination entryCommon stock 60,000Retained earnings 48,000Income from Roller Co. 36,000

Dividends declared 20,000Investment in Roller Co. 124,000




Beginning balance 20,500 20,000 (2,000) 2,500Changes (2,000) (2,000)Ending balance 18,500 20,000 (4,000) 2,500


Income from Roller Co. 2,000


Accumulated depreciation 4,000Investment in Roller Co. 18,500



Investment in Income fromRoller Co. Roller Co.





146

P4-34 (continued)b.

MillCorp.

RollerCo.


Income StatementSales 290,000 200,000 490,000Less: COGS (145,000) (114,000) (259,000)

Less: Wage Expense (35,000) (20,000) (55,000)


Less: Interest Expense (12,000) (4,000) (16,000)


Income from Roller Co. 34,000 36,000 2,000 0

Net Income 84,000 36,000 38,000 2,000 84,000


Ending Balance 185,000 64,000 86,000 22,000 185,000

Balance SheetCash 45,500 32,000 77,500Accounts Receivable 85,000 14,000 99,000Inventory 97,000 24,000 121,000Land 50,000 25,000 75,000Buildings & Equipment 350,000 150,000 20,000 30,000 490,000Less: Accumulated Depreciation (170,000) (50,000) 30,000 4,000 (194,000)Investment in Roller Co. 142,500 124,000 0

18,500Goodwill 2,500 2,500

Total Assets 600,000 195,000 50,000 34,000 671,000

Accounts Payable 51,000 15,000 66,000Wages Payable 14,000 6,000 20,000Notes Payable 150,000 50,000 200,000Common Stock 200,000 60,000 60,000 200,000Retained Earnings 185,000 64,000 86,000 22,000 185,000


147

P4-34 (continued)

c. Mill Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X9

Cash $ 77,500Accounts Receivable 99,000Inventory 121,000Land 75,000Buildings and Equipment $490,000Less: Accumulated Depreciation (194,000) 296,000Goodwill 2,500Total Assets $671,000

Accounts Payable $ 66,000Wages Payable 20,000Notes Payable 200,000Common Stock $200,000Retained Earnings 185,000 385,000Total Liabilities and Stockholders' Equity $671,000

Mill Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X9

Sales $490,000Cost of Goods Sold $259,000Wage Expense 55,000Depreciation Expense 37,000Interest Expense 16,000Other Expenses 39,000Total Expenses (406,000)Consolidated Net Income $ 84,000

Mill Corporation and SubsidiaryConsolidated Retained Earnings Statement


Retained Earnings, January 1, 20X9 $131,00020X9 Net Income 84,000


148

P4-35 Comprehensive Problem: Wholly Owned Subsidiarya.Equity Method Entries on Power Corp.'s Books:Investment in Upland Products 30,000

Income from Upland Products 30,000Record Power Corp.'s 100% share of Upland Products' 20X5 income

Cash 10,000Investment in Upland Products 10,000

Record Power Corp.'s 100% share of Upland Products' 20X5 dividend

Income from Upland Products 5,000Investment in Upland Products 5,000

Record amortization of excess acquisition priceb.Basic elimination entryCommon stock 100,000Retained earnings 90,000Income from Upland Products 30,000

Dividends declared 10,000Investment in Upland Products 210,000



Acc.Depr.

Beginning balance 30,000 50,000 (20,000)Changes (5,000) (5,000)Ending balance 25,000 50,000 (25,000)

Amortized excess value reclassification entry:Depreciation Expense 5,000

Income from Upland Products 5,000

Excess value (differential) reclassification entry:Building 50,000

Accumulated Depreciation 25,000Investment in Upland Products 25,000


Cash and Receivables 10,000

149

P4-35 (continued)c.

PowerCorp.

UplandProducts


Income StatementSales 200,000 100,000 300,000

Less: COGS (120,000) (50,000) (170,000)


Less: Inventory Losses (15,000) (5,000) (20,000)

Income from Upland Products 25,000 30,000 5,000 0

Net Income 65,000 30,000 35,000 5,000 65,000


Ending Balance 353,000 110,000 125,000 15,000 353,000

Balance SheetCash and Receivables 43,000 65,000 10,000 98,000Inventory 260,000 90,000 350,000Land 80,000 80,000 160,000Buildings & Equipment 500,000 150,000 50,000 700,000Less: Accumulated Depreciation (205,000) (105,000) 25,000 (335,000)Investment in Upland Products 235,000 210,000 0

25,000Goodwill 0

Total Assets 913,000 280,000 50,000 35,000 973,000

Accounts Payable 60,000 20,000 10,000 70,000Notes Payable 200,000 50,000 250,000

Common Stock 300,000 100,000 100,000 300,000Retained Earnings 353,000 110,000 125,000 15,000 353,000


150

P4-36 Comprehensive Problem: Differential Apportionmenta.Equity Method Entries on Jersey Corp.'s Books:Investment in Lime Co. 203,000

Cash 203,000Record the initial investment in Lime Co.

Investment in Lime Co. 60,000Income from Lime Co. 60,000

Record Jersey Corp.'s 100% share of Lime Co.'s 20X7 income

Cash 20,000Investment in Lime Co. 20,000

Record Jersey Corp.'s 100% share of Lime Co.'s 20X7 dividend

Income from Lime Co. 3,000Investment in Lime Co. 3,000



Total BookValue

= CommonStock

+ RetainedEarnings


1/1/X7

Goodwill = 20,000


$203,000Initial

investmentin Lime Co.

100%Book value =

150,000

12/31/X7

Goodwill = 20,000

Excess = 30,000$240,000

Netinvestment inLime Co.

100%Book value =

190,000

151

P4-36 (continued)Basic elimination entryCommon stock 50,000Retained earnings 100,000Income from Lime Co. 60,000

Dividends declared 20,000Investment in Lime Co. 190,000




Beginning balance 53,000 33,000 0 20,000Changes (3,000) (3,000) 0Ending balance 50,000 33,000 (3,000) 20,000


Income from Lime Co. 3,000


Accumulated depreciation 3,000Investment in Lime Co. 50,000





152

Investment in Income fromLime Co. Lime Co.

Acquisition Price203,000


Ending Balance240,000 57,000 Ending Balance

190,000 Basic 60,000


153

P4-36 (continued)c.

JerseyCorp. Lime Co.


Income StatementSales 700,000 400,000 1,100,000

Less: COGS (500,000) (250,000) (750,000)



Income from Lime Co. 57,000 60,000 3,000 0

Net Income 157,000 60,000 63,000 3,000 157,000


Ending Balance 397,000 140,000 163,000 23,000 397,000

Balance SheetCash 82,000 25,000 107,000Accounts Receivable 50,000 55,000 16,000 89,000Inventory 170,000 100,000 270,000Land 80,000 20,000 100,000Buildings & Equipment 500,000 150,000 33,000 60,000 623,000Less: Accumulated Depreciation (155,000) (75,000) 60,000 3,000 (173,000)Investment in Lime Co. 240,000 190,000

50,000Goodwill 20,000 20,000

Total Assets 967,000 275,000 93,000 79,000 1,036,000

Accounts Payable 70,000 35,000 16,000 89,000Mortgages Payable 200,000 50,000 250,000Common Stock 300,000 50,000 50,000 300,000Retained Earnings 397,000 140,000 163,000 23,000 397,000


154

P4-37 Push-Down Accounting

a. Entry to record acquisition of Lindy stock on books of Greenly:

Investment in Lindy Company Stock 935,000Cash 935,000

b. Entry to record revaluation of assets on books of Lindy Company at date ofcombination:

Inventory 5,000Land 85,000Buildings 100,000Equipment 70,000

Revaluation Capital 260,000Revalue assets to reflect fair values at date of combination.

c. Investment elimination entry in consolidation worksheet prepared December 31,20X6 (no other entries needed):

Common Stock — Lindy Company 100,000Additional Paid-In Capital 400,000Retained Earnings 175,000Revaluation Capital 260,000

Investment in Lindy Company Stock 935,000

d. Equity-method entries on the books of Greenly during 20X7:

Cash 50,000Investment in Lindy Company Stock 50,000

Record dividend from Lindy Company.

Investment in Lindy Company Stock 88,000Income from Lindy Company 88,000


155

P4-37 (continued)

e. Eliminating entries in consolidation worksheet prepared December 31, 20X7(no other entries needed):

Common Stock — Lindy Company 100,000Additional Paid-In Capital 400,000Retained Earnings, January 1 175,000Revaluation Capital 260,000Income from Lindy Company 88,000

Dividends Declared 50,000Investment in Lindy Company Stock 973,000

Eliminate beginning investment balance.$973,000 = $935,000 + $88,000 - $50,000

f. Eliminating entries in consolidation worksheet prepared December 31, 20X8 (noother entries needed):

Common Stock — Lindy Company 100,000Additional Paid-In Capital 400,000Retained Earnings, January 1 213,000Revaluation Capital 260,000Income from Lindy Company 90,000

Dividends Declared 50,000Investment in Lindy Company Stock 1,013,000

Eliminate beginning investment balance:$213,000 = $175,000 + $88,000 - $50,000$1,013,000 = $973,000 + $90,000 - $50,000

156

CHAPTER 5

CONSOLIDATION OF LESS-THAN-WHOLLY-OWNED SUBSIDIARIES ACQUIRED ATMORE THAN BOOK VALUE


E5-1 Multiple-Choice Questions on Consolidation Process1. d2. d3. b4. d [AICPA Adapted]

E5-2 Multiple-Choice Questions on Consolidation [AICPA Adapted]1. b2. c3. a $650,000 = $500,000 + $200,000 - $50,0004. c $95,000 = ($956,000 / 0.80) - $1,000,000 - $100,0005. c $251,000 = .20[($956,000 + $239,000) + ($190,000 - $5,000 - $125,000)]

E5-3 Eliminating Entries with Differentiala.Equity Method Entries on Game Corp.'s Books:

Investment in Amber Corp. 49,200Cash 49,200

Record the initial investment in Amber Corp.

Book Value Calculations:NCI40%

+ Game Corp.60%

= CommonStock

+ RetainedEarnings

Ending book value 22,800 34,200 20,000 37,000

6/10/X8

Goodwill = 0


$49,200Initial

investment inAmber Corp.

60%Book value =

34,200

157

Basic elimination entryCommon stock 20,000Retained earnings 37,000

Investment in Amber Corp. 34,200NCI in NA of Amber Corp. 22,800

Excess Value (Differential) Calculations:NCI40% +

Game Corp.60% = Inventory +


Beginning balances 10,000 15,000 5,000 20,000


Investment in Amber Corp. 15,000NCI in NA of Amber Corp. 10,000

E5-3 (continued)Investment inAmber Corp.



0

b. Journal entries used to record transactions, adjust account balances, and close incomeand revenue accounts at the end of the period are recorded in the company's books andchange the reported balances. On the other hand, eliminating entries are entered only inthe consolidation worksheet to facilitate the preparation of consolidated financialstatements. As a result, they do not change the balances recorded in the company'saccounts and must be reentered each time a consolidation worksheet is prepared.

E5-4 Computation of Consolidated Balances

a. Inventory $140,000

b. Land $ 60,000

c. Buildings and Equipment $550,000

d. Fair value of consideration given by Ford $470,000Fair value of noncontrolling interest 117,500Total fair value $587,500

158

Book value of Slim’s net assets $450,000Fair value increment for:Inventory 20,000Land (10,000)Buildings and equipment (net) 70,000

Fair value of identifiable net assets (530,000)Goodwill $ 57,500

e. Investment in Slim Corporation: None would be reported;the balance in the investment account is eliminated.

f. Noncontrolling Interest ($587,500 x .20) $117,500

159

E5-5 Balance Sheet Worksheet

Cash and Receivables 900Retained Earnings 900

Accrued interest earned by Power Co.

Equity Method Entries on Power Co.'s Books:Investment in Pleasantdale Dairy 270,000

Cash 270,000Record the initial investment in Pleasantdale Dairy


+ Power Co.90%

= CommonStock

+ RetainedEarnings


Goodwill = 0


Initialinvestment inPleasantdale

Dairy90%Book value =

252,000


Investment in Pleasantdale Dairy 252,000NCI in NA of Pleasantdale Dairy 28,000

160

E5-5 (continued)Excess Value (Differential) Calculations:

NCI10% +

Power Co.90% = Land

Beginning balances 2,000 18,000 20,000


Investment in Pleasantdale Dairy 18,000NCI in NA of Pleasantdale Dairy 2,000

Eliminate intercompany accounts:Current Payables 8,900

Cash and Receivables 8,900

Investment inPleasantdale Dairy



0

PowerCo.

Pleas-antdaleDairy


Balance SheetCash and Receivables 130,900 70,000 8,900 192,000Inventory 210,000 90,000 300,000Land 70,000 40,000 20,000 130,000Buildings & Equipment (net) 390,000 220,000 610,000Investment in Pleasantdale Dairy 270,000 252,000 0

18,000

Total Assets 1,070,900 420,000 20,000 260,900 1,232,000

Current Payables 80,000 40,000 8,900 111,100Long-Term Liabilities 200,000 100,000 300,000Common Stock 400,000 60,000 60,000 400,000Retained Earnings 390,900 220,000 220,000 390,900NCI in NA of Pleasantdale Dairy 28,000 30,000

2,000


161

E5-6 Majority-Owned Subsidiary Acquired at Greater than Book Value

a.Equity Method Entries on Zenith Corp.'s Books:Investment in Down Corp. 102,200

Cash 102,200Record the initial investment in Down Corp.


NCI30%

+ZenithCorp.70%

= CommonStock

+ RetainedEarnings


12/31/X4

Goodwill = 0


$102,200Initial

investment inDown Corp.

70%Book value =

87,500


Investment in Down Corp. 87,500NCI in NA of Down Corp. 37,500


Zenith Corp.70% = Inventory +



162

E5-6 (continued)


Investment in Down Corp. 14,700NCI in NA of Down Corp. 6,300





Investment inDown Corp.



0

b.ZenithCorp.

DownCorp.


Balance SheetCash 50,300 21,000 71,300Accounts Receivable 90,000 44,000 12,500 121,500Inventory 130,000 75,000 6,000 211,000Land 60,000 30,000 90,000Buildings & Equipment 410,000 250,000 15,000 80,000 595,000Less: Accumulated Depreciation (150,000) (80,000) 80,000 (150,000)Investment in Down Corp. 102,200 87,500 0

14,700Total Assets 692,500 340,000 101,000 180,000 938,800

Accounts Payable 152,500 35,000 12,500 175,000Mortgage Payable 250,000 180,000 430,000Common Stock 80,000 40,000 40,000 80,000Retained Earnings 210,000 85,000 85,000 210,000NCI in NA of Down Corp. 37,500 43,800

6,300Total Liabilities & Equity 692,500 340,000 137,500 37,500 938,800

163

E5-6 (continued)

c. Zenith Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X4

Cash $ 71,300Accounts Receivable 121,500Inventory 211,000Land 90,000Buildings and Equipment $595,000Less: Accumulated Depreciation (150,000) 445,000Total Assets $938,800

Accounts Payable $175,000Mortgage Payable 430,000Stockholders’ Equity:Controlling Interest:Common Stock $ 80,000Retained Earnings 210,000

Total Controlling Interest $290,000Noncontrolling Interest 43,800

Total Stockholders’ Equity 333,800Total Liabilities and Stockholders' Equity $938,800

164

E5-7 Consolidation with Minority Interest

Equity Method Entries on Temple Corp.'s Books:Investment in Dynamic Corp. 390,000

Cash 390,000Record the initial investment in Dynamic Corp.


NCI25%

+TempleCorp.75%

= CommonStock

+ RetainedEarnings


12/31/X4

Goodwill = 33,000


Initialinvestment in

DynamicCorp.75%

Book value =270,000


Investment in Dynamic Corp. 270,000NCI in NA of Dynamic Corp. 90,000


Temple Corp.75% = Buildings + Inventories + Goodwill

Beginning balances 40,000 120,000 80,000 36,000 44,000

Excess value (differential) reclassification entry:Buildings 80,000Inventories 36,000Goodwill 44,000

Investment in Dynamic Corp. 120,000NCI in NA of Dynamic Corp. 40,000

165

E5-8 Worksheet for Majority-Owned Subsidiary

a.Equity Method Entries on Glitter Enterprises's Books:Investment in Lowtide Builders 90,000

Cash 90,000Record the initial investment in Lowtide Builders


NCI40%

+Glitter

Enterprises60%

= CommonStock

+ RetainedEarnings


1/1/X5

Goodwill = 0



LowtideBuilders60%

Book value =90,000


Investment in Lowtide Builders 90,000NCI in NA of Lowtide Builders 60,000

Investment inLowtide Builders

Acquisition Price 90,00090,000 Basic

0

166

E5-8 (continued)

b.

GlitterEnterprises

LowtideBuilders


Balance SheetCash and Receivables 80,000 30,000 110,000Inventory 150,000 350,000 500,000Buildings & Equipment (net) 430,000 80,000 510,000Investment in Lowtide Builders 90,000 90,000 0

Total Assets 750,000 460,000 0 90,000 1,120,000

Current Liabilities 100,000 110,000 210,000Long-Term Debt 400,000 200,000 600,000Common Stock 200,000 140,000 140,000 200,000Retained Earnings 50,000 10,000 10,000 50,000NCI in NA of Lowtide Builders 60,000 60,000


c. Glitter Enterprises and SubsidiaryConsolidated Balance Sheet

January 1, 20X5

Cash and Receivables $ 110,000Inventory 500,000Buildings and Equipment (net) 510,000Total Assets $1,120,000

Current Liabilities $ 210,000Long-Term Debt 600,000Stockholders’ Equity:Controlling Interest:Common Stock $200,000Retained Earnings 50,000


Total Stockholders’ Equity 310,000Total Liabilities and Stockholders' Equity $1,120,000

167

E5-9 Multiple-Choice Questions on Balance Sheet Consolidation

1. d $215,000 = $130,000 + $70,000 + ($85,000 - $70,000)

2. c $40,000 = ($150,500 + $64,500) - ($405,000 - $28,000 - $37,000- $200,000) - $15,000 - $20,000

3. b $1,121,000 = Total Assets of Power Corp. $ 791,500Less: Investment in Silk Corp. (150,500)

$ 641,000Book value of assets of Silk Corp. 405,000Book value reported by Power andSilk $1,046,000

Increase in inventory ($85,000 - $70,000) 15,000Increase in land ($45,000 - $25,000) 20,000Goodwill 40,000Total assets reported $1,121,000

4. d $701,500 = ($61,500 + $95,000 + $280,000) + ($28,000 + $37,000+ $200,000)

5. d $64,500

6. d $205,000 = The amount reported by Power Corporation

7. c $419,500 = ($150,000 + $205,000) + $64,500

168

E5-10 Basic Consolidation Entries for Majority-Owned Subsidiary

a.Equity Method Entries on Horrigan Corp.'s Books:Investment in Farmstead Co. 210,000

Cash 210,000Record the initial investment in Farmstead Co.

Investment in Farmstead Co. 14,000Income from Farmstead Co. 14,000

Record Horrigan Corp.'s 70% share of Farmstead Co.'s 20X9 income

Cash 3,500Investment in Farmstead Co. 3,500

Record Horrigan Corp.'s 70% share of Farmstead Co.'s 20X9 dividend


NCI30%

+HorriganCorp.70%

= CommonStock

+ RetainedEarnings


1/1/X9

Goodwill = 0


Initialinvestment inFarmstead

Co.70%Book value =

210,000

12/31/X9

Goodwill = 0


investmentin

FarmsteadCo.70%

Book value =220,500

169

E5-10 (continued)

Basic elimination entryCommon stock 200,000Retained earnings 100,000Income from Farmstead Co. 14,000NCI in NI of Farmstead Co. 6,000

Dividends declared 5,000Investment in Farmstead Co. 220,500NCI in NA of Farmstead Co. 94,500

Investment in Income fromFarmstead Co. Farmstead Co.



220,500 Basic 14,0000 0

170

E5-11 Majority-Owned Subsidiary with Differentiala.Equity Method Entries on West Corp.'s Books:Investment in Canton Corp. 133,500

Cash 133,500Record the initial investment in Canton Corp.

Investment in Canton Corp. 22,500Income from Canton Corp. 22,500

Record West Corp.'s 75% share of Canton Corp.'s 20X3 income

Cash 9,000Investment in Canton Corp. 9,000

Record West Corp.'s 75% share of Canton Corp.'s 20X3 dividend

Income from Canton Corp. 3,000Investment in Canton Corp. 3,000



NCI25%

+WestCorp.75%

= CommonStock

+ RetainedEarnings


1/1/X3

Goodwill = 0


$133,500Initial

investment inCanton Corp.75%

Book value =112,500

12/31/X3

Goodwill = 0

Excess = 18,000$144,000

Netinvestment in

CantonCorp.75%

Book value =126,000

171

E5-11 (continued)Basic elimination entryCommon stock 60,000Retained earnings 90,000Income from Canton Corp. 22,500NCI in NI of Canton Corp. 7,500

Dividends declared 12,000Investment in Canton Corp. 126,000NCI in NA of Canton Corp. 42,000


West Corp.75% = Equipment + Acc. Depr.

Beginning balance 7,000 21,000 28,000 0Changes (1,000) (3,000) (4,000)Ending balance 6,000 18,000 28,000 (4,000)


Income from Canton Corp. 3,000NCI in NI of Canton Corp. 1,000

Excess value (differential) reclassification entry:Equipment 28,000

Acc. Depr. 4,000Investment in Canton Corp. 18,000NCI in NA of Canton Corp. 6,000

Investment in Income fromCanton Corp. Canton Corp.





172

E5-12 Differential Assigned to Amortizable Asset

a. Lancaster Company’s common stock, January 1, 20X1 $120,000Lancaster Company’s retained earnings, January 1, 20X1 380,000Book value of Lancaster’s net assets $500,000Proportion of stock acquired x .90Book value of Lancaster's shares purchasedby Major Corporation $450,000

Excess of acquisition price over book value 36,000Fair value of consideration given $486,000Add: Share of Lancaster's net income ($60,000 x .90) 54,000Less: Amortization of patents ($40,000 / 5) x .90 (7,200)

Dividends paid by Lancaster ($20,000 x .90) (18,000)Balance in investment account, December 31, 20X1 $514,800

b.Equity Method Entries on Major Corp.'s Books:Investment in Lancaster Co. 486,000

Cash 486,000Record the initial investment in Lancaster Co.

Investment in Lancaster Co. 54,000Income from Lancaster Co. 54,000

Record Major Corp.'s 90% share of Lancaster Co.'s 20X1 income

Cash 18,000Investment in Lancaster Co. 18,000

Record Major Corp.'s 90% share of Lancaster Co.'s 20X1 dividend

Income from Lancaster Co. 7,200Investment in Lancaster Co. 7,200



NCI10%

+MajorCorp.90%

= CommonStock

+ RetainedEarnings


173

E5-12 (continued)

1/1/X1

Goodwill = 0


Initialinvestment inLancaster

Co.90%Book value =

450,000

12/31/X1

Goodwill = 0

Excess = 28,800$514,800

Netinvestment inLancaster

Co.90%Book value =

486,000

Basic elimination entryCommon stock 120,000Retained earnings 380,000Income from Lancaster Co. 54,000NCI in NI of Lancaster Co. 6,000

Dividends declared 20,000Investment in Lancaster Co. 486,000NCI in NA of Lancaster Co. 54,000


Major Corp.90% = Patents

Beginningbalance 4,000 36,000 40,000Changes (800) (7,200) (8,000)Ending balance 3,200 28,800 32,000

Amortized excess value reclassification entry:Patents 8,000

Income from Lancaster Co. 7,200NCI in NI of Lancaster Co. 800

174

E5-12 (continued)

Excess value (differential) reclassification entry:Patents 32,000

Investment in Lancaster Co. 28,800NCI in NA of Lancaster Co. 3,200

Investment in Income fromLancaster Co. Lancaster Co.





175

E5-13 Consolidation after One Year of Ownershipa.Equity Method Entries on Pioneer Corp.'s Books:Investment in Lowe Corp. 190,000

Cash 190,000Record the initial investment in Lowe Corp.


+ Pioneer Corp.80%

= CommonStock

+ RetainedEarnings


1/1/X2

Goodwill = 4,400


$190,000Initial

investment inLowe Corp.

80%Book value =

160,000


Investment in Lowe Corp. 160,000NCI in NA of Lowe Corp. 40,000


Pioneer Corp.80% = Buildings + Goodwill


176

E5-13 (continued)Excess value (differential) reclassification entry:Buildings 32,000Goodwill 5,500


Investment inLowe Corp.


0

b.Equity Method Entries on Pioneer Corp.'s Books:Investment in Lowe Corp. 190,000

Cash 190,000Record the initial investment in Lowe Corp.

Investment in Lowe Corp. 32,000Income from Lowe Corp. 32,000

Record Pioneer Corp.'s 80% share of Lowe Corp.'s 20X2 income

Income from Lowe Corp. 3,200Investment in Lowe Corp. 3,200



NCI20%

+PioneerCorp.80%

= CommonStock

+ RetainedEarnings

Original book value 40,000 160,000 120,000 80,000+ Net Income 8,000 32,000 40,000- Dividends 0 0 0Ending book value 48,000 192,000 120,000 120,000

177

E5-13 (continued)1/1/X2

Goodwill = 4,400


$190,000Initial

investment inLowe Corp.

80%Book value =

160,000

12/31/X2

Goodwill = 4,400

Excess = 22,400$218,800

Netinvestment inLowe Corp.

80%Book value =

192,000

Basic elimination entryCommon stock 120,000Retained earnings 80,000Income from Lowe Corp. 32,000NCI in NI of Lowe Corp. 8,000



PioneerCorp. 80% = Buildings + Acc. Depr. + Goodwill

Beginning balance 7,500 30,000 32,000 0 5,500Changes (800) (3,200) (4,000) 0Ending balance 6,700 26,800 32,000 (4,000) 5,500


Income from Lowe Corp. 3,200NCI in NI of Lowe Corp. 800

Excess value (differential)reclassification entry:Buildings 32,000Goodwill 5,500

Acc. Depr. 4,000

178


E5-13 (continued)

Investment in Income fromLowe Corp. Lowe Corp.


3,200 Excess Val. Amort. 3,200Ending Balance 218,800 28,800 Ending Balance

192,000 Basic 32,000


E5-14 Consolidation Following Three Years of Ownership

a. Computation of increase in value of patents:

Fair value of consideration given by Knox $277,500Fair value of noncontrolling interest 185,000Total fair value $462,500Book value of Conway stock (400,000)Excess of fair value over book value $ 62,500Increase in value of land ($30,000 - $22,500) (7,500)Increase in value of equipment ($360,000 - $320,000) (40,000)Increase In value of patents $ 15,000

b.Equity Method Entries on Knox Corp.'s Books:Investment in Conway Corp. 277,500

Cash 277,500Record the initial investment in Conway Corp.


NCI40%

+KnoxCorp.60%

= CommonStock

+ RetainedEarnings


179

1/1/X7

Goodwill = 0


Netinvestment in

ConwayCorp.60%

Book value =240,000


Investment in Conway Corp. 240,000NCI in NA of Conway Corp. 160,000


Knox Corp.60% = Land + Equipment + Patent

Beginningbalances 25,000 37,500 7,500 40,000 15,000

Excess value (differential) reclassificationentry:Land 7,500Equipment 40,000Patent 15,000

Investment in Conway Corp. 37,500NCI in NA of Conway Corp. 25,000

Investment inConway Corp.



0

180

E5-14 (continued)

c.

Computation of investment account balance at January 1, 20X9:

Fair value of consideration given $277,500Undistributed income since acquisition($100,000 - $60,000) x .60 24,000

Amortization of differential assigned to:Equipment ($40,000 / 8) x .60 x 2 years (6,000)Patents ($15,000 / 10) x .60 x 2 years (1,800)

Account balance at January 1, 20X9 $293,700

d.Equity Method Entries on Knox Corp.'s Books:Investment in Conway Corp. 18,000

Income from Conway Corp. 18,000Record Knox Corp.'s 60% share of Conway Corp.'s 20X7 income

Cash 6,000Investment in Conway Corp. 6,000

Record Knox Corp.'s 60% share of Conway Corp.'s 20X7 dividend

Income from Conway Corp. 3,900Investment in Conway Corp. 3,900


e.Book Value Calculations:

NCI40%

+KnoxCorp.60%

= CommonStock

+ RetainedEarnings


181

E5-14 (continued)

1/1/X7

Goodwill = 0



ConwayCorp.60%

Book value =264,000

12/31/X7

Goodwill = 0

Excess = 25,800$301,800

Netinvestment in

ConwayCorp.60%

Book value =276,000

Basic elimination entryCommon stock 250,000Retained earnings 190,000Income from Conway Corp. 18,000NCI in NI of Conway Corp. 12,000

Dividends declared 10,000Investment in Conway Corp. 276,000NCI in NA of Conway Corp. 184,000


NCI40% +

KnoxCorp.60% = Land + Equipment + Patent +

Acc.Depr.

Beginningbalance 19,800 29,700 7,500 40,000 12,000 (10,000)Changes (2,600) (3,900) 0 (1,500) (5,000)Ending balance 17,200 25,800 7,500 40,000 10,500 (15,000)

Amortized excess value reclassification entry:Amortization Expense 1,500Depreciation expense 5,000

Income from Conway Corp. 3,900NCI in NI of Conway Corp. 2,600

182

Excess value (differential) reclassification entry:Land 7,500Equipment 40,000Patent 10,500

Acc. Depr. 15,000Investment in Conway Corp. 25,800NCI in NA of Conway Corp. 17,200

E5-15 Consolidation Worksheet for Majority-Owned Subsidiary

a.Equity Method Entries on Proud Corp.'s Books:Investment in Stergis Co. 120,000

Cash 120,000Record the initial investment in Stergis Co.

Investment in Stergis Co. 24,000Income from Stergis Co. 24,000

Record Proud Corp.'s 80% share of Stergis Co.'s 20X3 income

Cash 8,000Investment in Stergis Co. 8,000

Record Proud Corp.'s 80% share of Stergis Co.'s 20X3 dividend


+ Proud Corp.80%

= CommonStock

+ RetainedEarnings


183

E5-15 (continued)

1/1/X3

Goodwill = 0

Identifiable excess= 0

$120,000Initial

investment inStergis Co.

80%Book value =

120,000

12/31/X3

Goodwill = 0

Excess = 0$136,000

Netinvestment inStergis Co.

80%Book value =

136,000

Basic elimination entryCommon stock 100,000Retained earnings 50,000Income from Stergis Co. 24,000NCI in NI of Stergis Co. 6,000

Dividends declared 10,000Investment in Stergis Co. 136,000NCI in NA of Stergis Co. 34,000

Investment in Income fromStergis Co. Stergis Co.



136,000 Basic 24,0000 0


Depreciable Assets 60,000E5-15 (continued)b.

184

ProudCorp.

StergisCo.


Income StatementSales 200,000 120,000 320,000Less: Depreciation Expense (25,000) (15,000) (40,000)Less: Other Expenses (105,000) (75,000) (180,000)Income from Stergis Co. 24,000 24,000 0



Ending Balance 284,000 70,000 80,000 10,000 284,000

Balance SheetCurrent Assets 173,000 105,000 278,000Depreciable Assets 500,000 300,000 60,000 740,000Less: Accumulated Depreciation (175,000) (75,000) 60,000 (190,000)Investment in Stergis Co. 136,000 136,000 0

Total Assets 634,000 330,000 60,000 60,000 828,000

Current Liabilities 50,000 40,000 90,000Long-Term Debt 100,000 120,000 220,000Common Stock 200,000 100,000 100,000 200,000Retained Earnings 284,000 70,000 80,000 10,000 284,000NCI in NA of Stergis Co. 34,000 34,000


185

E5-15 (continued)c. Proud Corporation and Subsidiary

Consolidated Balance SheetDecember 31, 20X3

Current Assets $278,000Depreciable Assets $740,000Less: Accumulated Depreciation (190,000) 550,000Total Assets $828,000

Current Liabilities $ 90,000Long-Term Debt 220,000Stockholders’ Equity:Controlling Interest:Common Stock $200,000Retained Earnings 284,000

Total Controlling Interest $484,000Noncontrolling Interest 34,000Total Stockholders’ Equity 518,000Total Liabilities and Stockholders' Equity $828,000

Proud Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X3

Sales $320,000Depreciation $ 40,000Other Expenses 180,000Total Expenses (220,000)Consolidated Net Income $100,000Income to Noncontrolling Interest (6,000)Income to Controlling Interest $ 94,000

Proud Corporation and SubsidiaryConsolidated Retained Earnings Statement


Retained Earnings, January 1, 20X3 $230,000Income to Controlling Interest, 20X3 94,000


186

E5-16 Consolidation Worksheet for Majority-Owned Subsidiary for Second Year

a.Equity Method Entries on Proud Corp.'s Books:Investment in Stergis Co. 28,000

Income from Stergis Co. 28,000Record Proud Corp.'s 80% share of Stergis Co.'s 20X4 income

Cash 12,000Investment in Stergis Co. 12,000

Record Proud Corp.'s 80% share of Stergis Co.'s 20X4 dividend


+ Proud Corp.80%

= CommonStock

+ RetainedEarnings


1/1/X4

Goodwill = 0


$136,000Net

investment inStergis Co.

80%Book value =

136,000

12/31/X4

Goodwill = 0

Excess = 0$152,000

Netinvestment inStergis Co.

80%Book value =

152,000

187

E5-16 (continued)

Basic elimination entryCommon stock 100,000Retained earnings 70,000Income from Stergis Co. 28,000NCI in NI of Stergis Co. 7,000

Dividends declared 15,000Investment in Stergis Co. 152,000NCI in NA of Stergis Co. 38,000

Investment in Income fromStergis Co. Stergis Co.



152,000 Basic 28,0000 0


Depreciable Assets 60,000

188

E5-16 (continued)

b.

ProudCorp.

StergisCo.


Income StatementSales 230,000 140,000 370,000Less: Depreciation Expense (25,000) (15,000) (40,000)Less: Other Expenses (150,000) (90,000) (240,000)Income from Stergis Co. 28,000 28,000 0

Consolidated Net Income 83,000 35,000 28,000 90,000NCI in Net Income 7,000 (7,000)

Controlling Interest in Net Income 83,000 35,000 35,000 0 83,000


Ending Balance 317,000 90,000 105,000 15,000 317,000

Balance SheetCurrent Assets 235,000 150,000 385,000Depreciable Assets 500,000 300,000 60,000 740,000Less: Accumulated Depreciation (200,000) (90,000) 60,000 (230,000)Investment in Stergis Co. 152,000 152,000 0

Total Assets 687,000 360,000 60,000 60,000 895,000

Current Liabilities 70,000 50,000 120,000Long-Term Debt 100,000 120,000 220,000Common Stock 200,000 100,000 100,000 200,000Retained Earnings 317,000 90,000 105,000 15,000 317,000NCI in NA of Stergis Co. 38,000 38,000


189

E5-17 Preparation of Stockholders' Equity Section with Other Comprehensive Income

a. Consolidated net income:20X8 20X9

Operating income of Broadmore $120,000 $ 140,000Net income of Stem 40,000 60,000Amortization of differential ($580,000 - $500,000) / 10

Years (8,000) (8,000)Consolidated net income $152,000 $ 192,000Comprehensive gain reported by Stem 10,000 5,000Consolidated comprehensive income $162,000 $ 197,000

b. Comprehensive income attributable to controlling interest:20X8 20X9

Consolidated comprehensive income $162,000 $ 197,000Comprehensive income attributable toNoncontrolling interest($50,000 - $8,000) x .25 (10,500)($65,000 - $8,000) x .25 (14,250)

Comprehensive income attributable to controlling interest $151,500 $ 182,750

c. Consolidated stockholders' equity:20X8 20X9

Controlling Interest:Common Stock $320,000 $ 320,000Retained Earnings 504,000 613,000Accumulated Other Comprehensive Income 7,500 11,250

Total Controlling Interest 831,500 944,250Noncontrolling Interest 151,750 158,500Total Stockholders’ Equity $983,250 $1,102,750

190

E5-18 Eliminating Entries for Subsidiary with Other Comprehensive Incomea.Equity Method Entries on Palmer Corp.'s Books:Investment in Krown Corp. 140,000

Cash 140,000Record the initial investment in Krown Corp.

Investment in Krown Corp. 21,000Income from Krown Corp. 21,000

Record Palmer Corp.'s 70% share of Krown Corp.'s 20X8 income

Cash 17,500Investment in Krown Corp. 17,500

Record Palmer Corp.'s 70% share of Krown Corp.'s 20X8 dividend

Investment in Krown Corp. 4,200Other Comprehensive Income from Krown Corp. 4,200

Record Palmer Corp.'s proportionate share of OCI from Krown Corp.


+ Palmer Corp.70%

= CommonStock

+ RetainedEarnings


1/1/X8

Goodwill = 0


$140,000Initial

investment inKrown Corp.

70%Book value =

140,000

12/31/X8

Goodwill = 0

Excess = 0$147,700

Netinvestment inKrown Corp.

70%Book value =

147,700

191

E5-18 (continued)Basic elimination entryCommon stock 120,000Retained earnings 80,000Income from Krown Corp. 21,000NCI in NI of Krown Corp. 9,000

Dividends declared 25,000Investment in Krown Corp. 143,500NCI in NA of Krown Corp. 61,500

Other Comprehensive Income Entry:OCI from Krown Corp. 4,200OCI to the NCI 1,800

Investment in Krown Corp. 4,200NCI in NA of Krown Corp. 1,800

Investment in Income fromKrown Corp. Krown Corp.

Acquisition Price 140,00070% Net Income 21,000 21,000

17,500 70% Dividends4,200 70% OCI

Ending Balance 147,700 21,000143,500 Basic 21,0004,200 OCI Entry

0 0

192

E5-19* Consolidation of Subsidiary with Negative Retained EarningsEquity Method Entries on General Corp.'s Books:Investment in Strap Co. 138,000

Cash 138,000Record the initial investment in Strap Co.


NCI20%

+GeneralCorp.80%

= CommonStock

+ Add. Paid-in Capital

+ RetainedEarnings

Ending book value 29,000 116,000 100,000 75,000 (30,000)

1/1/X4

Goodwill = 22,000


$138,000Initial

investment inStrap Co.

80%Book value =

116,000

Basic elimination entryCommon stock 100,000Additional Paid-in Capital 75,000

Retained earnings 30,000Investment in Strap Co. 116,000NCI in NA of Strap Co. 29,000

193

E5-19* (continued)Excess Value (Differential) Calculations:

NCI20% +

General Corp.80% = Goodwill

Beginning balances 5,500 22,000 27,500


Investment in Strap Co. 22,000NCI in NA of Strap Co. 5,500

Investment inStrap Co.



0

E5-20* Complex Assignment of Differentiala.Equity Method Entries on Worth Corp.'s Books:Investment in Brinker Inc. 864,000

Cash 864,000Record the initial investment in Brinker Inc.

Investment in Brinker Inc. 135,000Income from Brinker Inc. 135,000

Record Worth Corp.'s 90% share of Brinker Inc.'s 20X5 income

Income from Brinker Inc. 82,350Investment in Brinker Inc. 82,350


194


NCI10%

+WorthCorp.90%

= CommonStock

+Premiumon Com.Stock

+ RetainedEarnings

Original book value 72,000 648,000 500,000 100,000 120,000+ Net Income 15,000 135,000 150,000- Dividends 0 0 0

Ending book value 87,000 783,000 500,000 100,000 270,000

E5-20* (continued)

12/1/X5

Goodwill = 45,000


$864,000Initial

investment inBrinker Inc.

90%Book value =

648,000

12/31/X5

Goodwill = 45,000

Excess = 88,650$916,650

Netinvestment inBrinker Inc.

90%Book value =

783,000

Basic elimination entryCommon stock 500,000Premium on common stock 100,000Retained earnings 120,000Income from Brinker Inc. 135,000NCI in NI of Brinker Inc. 15,000

Investment in Brinker Inc. 783,000NCI in NA of Brinker Inc. 87,000

195


NCI10% +

WorthCorp.90% =

Inven-tory + Land +

Equip-ment +

Disc.onnotespayable +

Acc.Depr. +

Good-will

Beg.balance 24,000 216,000 5,000 75,000 60,000 50,000 0 50,000

Changes (9,150) (82,350) (5,000) (75,000) (7,500) (4,000) 0End.balance 14,850 133,650 0 0 60,000 42,500 (4,000) 50,000

Amortized excess value reclassification entry:Cost of goods sold 5,000Gain on sale of land 75,000Interest expense 7,500Depreciation expense 4,000

Income from Brinker Inc. 82,350NCI in NI of Brinker Inc. 9,150

E5-20* (continued)

Excess value (differential) reclassification entry:Equipment 60,000Discount on notes payable 42,500Goodwill 50,000

Acc. Depr. 4,000Investment in Brinker Inc. 133,650NCI in NA of Brinker Inc. 14,850

SOLUTIONS TO PROBLEMSP5-21 Multiple-Choice Questions on Applying the Equity Method [AICPA Adapted]1. a2. a3. c4. d

P5-22 Amortization of Differential

Journal entries recorded by Ball Corporation:

Equity Method Entries on Ball Corp.'s Books:Investment in Krown Corp. 120,000

Preferred Stock 50,000Additional Paid-in Capital 70,000

Record the initial investment in Krown Corp.

196

Investment in Krown Corp. 12,000Income from Krown Corp. 12,000

Record Ball Corp.'s 30% share of Krown Corp.'s 20X5 income

Cash 3,000

Investment in Krown Corp. 3,000Record Ball Corp.'s 30% share of Krown Corp.'s 20X5 dividend

Income from Krown Corp. 4,575Investment in Krown Corp. 4,575


P5-22 (continued)

Amortization of differential assigned to buildings and equipment:Fair value of buildings and equipment $360,000Book value of buildings and equipment 300,000Differential $60,000Portion of stock held by Ball x 0.30Differential assigned to buildings and equipment $18,000Remaining life ÷ 15Yearly amortization $1,200

Amortization of differential assigned to copyrights:Purchase price $120,000Fair value of Krown's:Total assets $560,000Total liabilities (250,000)

$310,000Proportion of stock held by Ball x .30 (93,000)Amount assigned to copyrights $27,000Remaining life ÷ 8Yearly amortization $3,375

197

P5-23 Computation of Account Balances

a. Easy Chair Company 20X1 equity-method income:

Proportionate share of reported income ($30,000 x .40) $ 12,000Amortization of differential assigned to:Buildings and equipment [($35,000 x .40) / 5 years] (2,800)Goodwill ($8,000: not impaired) -0-

Investment Income $ 9,200

Assignment of differentialPurchase price $150,000Proportionate share of book value of

net assets ($320,000 x .40) (128,000)Proportionate share of fair value increase in

buildings and equipment ($35,000 x .40) (14,000)Goodwill $ 8,000

b. Dividend income, 20X1 ($9,000 x .40) $ 3,600

c. Cost-method account balance (unchanged): $150,000

Equity-method account balance:Balance, January 1, 20X1 $150,000Investment income 9,200Dividends received (3,600)Balance, December 31, 20X1 $155,600

P5-24 Multistep Acquisition

Journal entries recorded by Jackson Corp. in 20X9:

(1) Investment in Phillips Corp. Stock 70,000Cash 70,000

Record purchase of Phillips stock.

(2) Investment in Phillips Corp. Stock 14,500Retained Earnings 14,500

Record pick-up of difference betweencost and equity income.

Computation of equity pick-up20X6 .10($70,000 - $20,000) $ 5,00020X7 .10($70,000 - $20,000) 5,00020X8 .15($70,000 - $20,000) 7,50020X6 amortization of differential (1,000)20X7 amortization of differential (1,000)20X8 amortization of differential (1,000)Amount of increase $14,500

198

Amortization of differential20X6 purchase [$25,000 - ($200,000 x .10)]

5 years $1,00020X8 purchase [$15,000 - ($300,000 x .05)] 020X9 purchase [$70,000 - ($350,000 x .20)] 0Total annual amortization $1,000

(3) Cash 7,000Investment in Phillips Corp. Stock 7,000

Record dividend from Phillips Corp:$20,000 x .35

(4) Investment in Phillips Corp. Stock 24,500Income from Phillips Corp. 24,500

Record equity-method income:$70,000 x .35

(5) Income from Phillips Corp. 1,000Investment in Phillips Corp. Stock 1,000


P5-25 Complex Differential

a. Essex Company 20X2 equity-method income:

Proportionate share of reported net income($80,000 x .30) $24,000Deduct increase in cost of goods sold for purchasedifferential assigned to inventory ($30,000 x .30) (9,000)

Deduct amortization of differential assigned to:Buildings and equipment[($320,000 - $260,000) x .30] / 12 years] (1,500)

Patent [($25,000 x .30) / 10 years] (750)Equity-method income for 20X2 $12,750

b. Computation of investment account balance on December 31, 20X2:

Purchase Price $165,000Investment income for 20X2 $12,750Dividends received in 20X2 ($9,000 x .30) (2,700) 10,050Investment account balance on December 31, 20X2 $175,050

P5-26 Equity Entries with Differential

a. Journal entry recorded by Hunter Corporation:

Investment in Arrow Manufacturing 210,000Common Stock 60,000Additional Paid-In Capital 150,000

199

Record acquisition of Arrow Manufacturing stock.

b. Equity-method journal entries recorded by Hunter Corporation in 20X0:

(1) Investment in Arrow Manufacturing Stock 210,000Common Stock 60,000Additional Paid-In Capital 150,000

Record acquisition of Arrow Manufacturing stock.

(2) Cash 9,000Investment in Arrow Manufacturing Stock 9,000

Record dividends from Arrow Manufacturing: $20,000 x 0.45

(3) Investment in Arrow Manufacturing Stock 36,000Income from Arrow Manufacturing 36,000


(4) Income from Arrow Manufacturing 1,350Investment in Arrow Manufacturing Stock 1,350

Amortize differential assigned to buildings and equipment:($30,000 x .45) / 10 years

P5-26 (continued)

Equity-method journal entries recorded by Hunter Corporation in 20X1:

(1) Cash 18,000Investment in Arrow Manufacturing Stock 18,000

Record dividends from Arrow Manufacturing: $40,000 x 0.45

(2) Investment in Arrow Manufacturing Stock 22,500Income from Arrow Manufacturing 22,500

Record equity-method income for period: $50,000 x 0.45

(3) Income from Arrow Manufacturing 1,350Investment in Arrow Manufacturing Stock 1,350Amortize differential assigned to buildings and equipment.

c. Investment account balance, December 31, 20X1:

Purchase price on January 1, 20X0 $210,00020X0: Income from Arrow Manufacturing

($36,000 - $1,350) $34,650Dividends received (9,000) 25,650

20X1: Income from Arrow Manufacturing($22,500 - $1,350) $21,150

Dividends received (18,000) 3,150Investment account balance, December 31, 20X1 $238,800

200

P5-27 Equity Entries with Differential

a. Equity-method journal entries recorded by Ennis Corporation:

(1) Investment in Jackson Corporation Stock 200,000Common Stock 50,000Additional Paid-In Capital 150,000

Record acquisition of Jackson Corporation stock.

(2) Cash 3,500Investment in Jackson Corporation Stock 3,500

Record dividend from Jackson Corporation: $10,000 x 0.35

(3) Investment in Jackson Corporation Stock 24,500Income from Jackson Corporation 24,500


(4) Income from Jackson Corporation 7,000Investment in Jackson Corporation Stock 7,000

Record expiration of differential assigned to inventory: $20,000 x 0.35

(5) Income from Jackson Corporation 1,400Investment in Jackson Corporation Stock 1,400

Record amortization of differential assigned to buildings and equipment (net):($80,000 x .35) / 20 years

b. $212,600 = $200,000 + $24,500 - $3,500 - $7,000 - $1,400

P5-28 Additional Ownership Level

a. Operating income of Amber for 20X3 $220,000Operating income of Blair for 20X3 $100,000Add: Equity income from Carmen[($50,000 - $6,000) x .25) 11,000

Blair net income for 20X3 $111,000Proportion of stock held by Amber x 0.40 44,400Amortization of differential:Equipment [($30,000 x .40) / 8 years] (1,500)Patents [($25,000 x .40) / 5 years) (2,000)

Net income of Amber for 20X3 $260,900

201

b. Investment in Blair Corporation Stock 130,000Common Stock 40,000Additional paid-In Capital 90,000

Purchase of Blair Corporation Stock.

Cash 12,000Investment in Blair Corporation Stock 12,000

Record dividend from Blair: $30,000 x 0.40

Investment in Blair Corporation Stock 44,400Income from Blair Corporation 44,400


Income from Blair Corporation 3,500Investment in Blair Corporation Stock 3,500

Amortize differential: $3,500 = $1,500 + $2,000

P5-29 Correction of Error

Required correcting entry:

Retained Earnings 17,000Income from Dale Company 11,500

Investment in Dale Company Stock 28,500

Adjustments to current books of Hill Company:Dale Company

Item

RetainedEarnings1/1/20X4 20X4 Income

InvestmentBalance

12/31/20X4Adjustment to remove dividendsincluded in investment income and notremoved from investment account $(14,000) $(10,000) $(24,000)

Adjustment to annual amortizationof differential:20X2 and 20X3 (3,000) (3,000)20X4 (1,500) (1,500)

Required adjustment to account balance $(17,000) $(11,500) $(28,500)

Computation of adjustment to annual amortization of differential

Correct amortization of differential assigned to:Equipment [($120,000 - $70,000) x 0.40] / 5 years $4,000Patents:Amount paid $164,000Fair value of identifiable net assets($300,000 + $50,000) x 0.40 (140,000)

Amount assigned $ 24,000

202

Number of years to be amortized ÷ 8Annual amortization 3,000

Correct amount to be amortized annually $7,000Amount amortized by Hill[($164,000 - ($300,000 x 0.40)] / 8 years (5,500)

Adjustment to annual amortization $1,500

P5-30 Majority-Owned Subsidiary Acquired at Book Value

a.Equity Method Entries on Cameron Corp.'s Books:Investment in Darla Corp. 87,500

Cash 87,500Record the initial investment in Darla Corp.


NCI30%

+CameronCorp.70%

= CommonStock

+ RetainedEarnings


12/31/X4

Goodwill = 0


$87,500Initial

investment inDarla Corp.

70%Book value =

87,500


Investment in Darla Corp. 87,500NCI in NA of Darla Corp. 37,500

Investment in

203

Darla Corp.Acquisition Price 87,500

87,500 Basic0

204

Eliminate intercompany accounts:Accounts payable 12,500

Accounts receivable 12,500P5-30 (continued)



b.

CameronCorp.

DarlaCorp.


Balance SheetCash 65,000 21,000 86,000Accounts Receivable 90,000 44,000 12,500 121,500Inventory 130,000 75,000 205,000Land 60,000 30,000 90,000Buildings & Equipment 410,000 250,000 80,000 580,000Less: Accumulated Depreciation (150,000) (80,000) 80,000 (150,000)Investment in Darla Corp. 87,500 87,500 0

Total Assets 692,500 340,000 80,000 180,000 932,500

Accounts Payable 152,500 35,000 12,500 175,000Mortage Payable 250,000 180,000 430,000Common Stock 80,000 40,000 40,000 80,000Retained Earnings 210,000 85,000 85,000 210,000NCI in NA of Darla Corp. 37,500 37,500


205

c. Cameron Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X4




Total Stockholder’s equity 327,500Total Liabilities and Stockholders' Equity $932,500

P5-31 Majority-Owned Subsidiary Acquired at Greater than Book Value

a.Equity Method Entries on Porter Corp.'s Books:Investment in Darla Corp. 102,200

Cash 102,200Record the initial investment in Darla Corp.


NCI30%

+PorterCorp.70%

= CommonStock

+ RetainedEarnings


206

1/1/X4

Goodwill = 0


$102,200Initial

investment inDarla Corp.

70%Book value =

87,500




Porter Corp.70% = Inventory +



207

P5-31 (continued)







Investment inDarla Corp.


0

208

P5-31 (continued)

PorterCorp.

DarlaCorp.

Elimination Entries

DR CRConsolidate

dBalance SheetCash 50,300 21,000 71,300Accounts Receivable 90,000 44,000 12,500 121,500Inventory 130,000 75,000 6,000 211,000Land 60,000 30,000 90,000Buildings & Equipment 410,000 250,000 15,000 80,000 595,000Less: AccumulatedDepreciation

(150,000)

(80,000) 80,000 (150,000)

Investment in Darla Corp. 102,200 87,500 014,700

Total Assets 692,500 340,000101,00

0180,00

0 938,800

Accounts Payable 152,500 35,000 12,500 175,000Mortgage Payable 250,000 180,000 430,000Common Stock 80,000 40,000 40,000 80,000Retained Earnings 210,000 85,000 85,000 210,000NCI in NA of Darla Corp. 37,500 43,800

6,300


0 37,500 938,800

209

c. Porter Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X4





P5-32 Balance Sheet Consolidation of Majority-Owned Subsidiary

a.Equity Method Entries on Total Corp.'s Books:Investment in Ticken Tie Co. 510,000

Bonds Payable 500,000Bond Premium 10,000

Record the initial investment in Ticken Tie Co.

210


NCI25%

+TotalCorp.75%

= CommonStock


+ RetainedEarnings

Ending book value 119,500 358,500 200,000 130,000 148,000

1/1/X8

Goodwill = 66,000


Initialinvestment inTicken Tie

Co.75%Book value =

358,500

Basic elimination entryCommon stock 200,000Additional Paid-in Capital 130,000Retained earnings 148,000

Investment in Ticken Tie Co. 358,500NCI in NA of Ticken Tie Co. 119,500

211

P5-32 (continued)


NCI25% +

TotalCorp.75% =

Inven-tory + Land +

Building &Equipment + Patent + Goodwill

Beg.balances 50,500 151,500 4,000 20,000 50,000 40,000 88,000

Excess value (differential) reclassification entry:Inventory 4,000Land 20,000Building & Equipment 50,000Patent 40,000Goodwill 88,000

Investment in Ticken Tie Co. 151,500NCI in NA of Ticken Tie Co. 50,500

Eliminate intercompany accounts:Current payables 6,500

Receivables 6,500



Investment inTicken Tie Co.


0

212

P5-32 (continued)c.

TotalCorp.

TickenTie Co.


Balance SheetCash 12,000 9,000 21,000Receivables 39,000 30,000 6,500 62,500Inventory 86,000 68,000 4,000 158,000Land 55,000 50,000 20,000 125,000Buildings & Equipment 960,000 670,000 50,000 220,000 1,460,000Less: Accumulated Depreciation (411,000) (220,000) 220,000 (411,000)Investment in Ticken Tie Co. 510,000 358,500 0

151,500Patent 40,000 40,000Goodwill 88,000 88,000Total Assets 1,251,000 607,000 294,000 585,000 1,543,500

Current Payables 38,000 29,000 6,500 60,500Bonds Payable 700,000 100,000 800,000Bond Premium 10,000 10,000Common Stock 300,000 200,000 200,000 300,000Additional Paid-in Capital 100,000 130,000 130,000 100,000Retained Earnings 103,000 148,000 148,000 103,000NCI in NA of Ticken Tie Co. 119,500 170,000

50,500Total Liabilities & Equity 1,251,000 607,000 484,500 119,500 1,543,500

d. Total Corporation and SubsidiaryConsolidated Balance Sheet

January 2, 20X8

Cash $ 21,000Receivables $ 65,500Less: Allowance for Bad Debts (3,000) 62,500Inventory 158,000Land 125,000Buildings and Equipment $1,460,000Less: Accumulated Depreciation (411,000) 1,049,000Patent 40,000Goodwill 88,000Total Assets $1,543,500

Current Payables $ 60,500Bonds Payable $ 800,000Premium on Bonds Payable 10,000 810,000Stockholders’ Equity:Controlling Interest:Common Stock $ 300,000Additional Paid-In Capital 100,000Retained Earnings 103,000

Total Controlling Interest $ 503,000Noncontrolling Interest 170,000

Total Stockholders’ Equity 673,000Total Liabilities and

213

Stockholders' Equity $1,543,500P5-33 Incomplete Data

a. $15,000 = ($115,000 + $46,000) - $146,000

b. $65,000 = ($148,000 - $98,000) + $15,000

c. Skyler: $24,000 = $380,000 - ($46,000 + $110,000+ $75,000 + $125,000)

Blue: $70,000 = $94,000 - $24,000

d. Fair value of Skyleras a whole:

$200,000 Book value of Skyler shares10,000 Differential assigned to inventory

($195,000 - $105,000 - $80,000)40,000 Differential assigned to buildings and equipment

($780,000 - $400,000 - $340,000)9,000 Differential assigned to goodwill

$259,000 Fair value of Skyler

e. 65 percent = 1.00 – ($90,650 / $259,000)

f. Capital Stock = $120,000Retained Earnings = $115,000

.

214

P5-34 Income and Retained Earnings

a. Net income for 20X9:

Quill NorthOperating income $ 90,000 $35,000Income from subsidiary 24,500Net income $114,500 $35,000

b. Consolidated net income is $125,000 ($90,000 + $35,000).

c. Retained earnings reported at December 31, 20X9:

Quill NorthRetained earnings, January 1, 20X9 $290,000 $40,000Net income for 20X9 114,500 35,000Dividends paid in 20X9 (30,000) (10,000)Retained earnings, December 31, 20X9 $374,500 $65,000

d. Consolidated retained earnings at December 31, 20X9, is equal to the $374,500 retainedearnings balance reported by Quill.

e. When the cost method is used, the parent's proportionate share of the increase in retainedearnings of the subsidiary subsequent to acquisition is not included in the parent's retainedearnings. Thus, this amount must be added to the total retained earnings reported by theparent in arriving at consolidated retained earnings.

215

P5-35 Consolidation Worksheet at End of First Year of Ownership

a.Equity Method Entries on Power Corp.'s Books:Investment in Best Co. 96,000


Investment in Best Co. 18,000Income from Best Co. 18,000

Record Power Corp.'s 75% share of Best Co.'s 20X8 income

Cash 12,000Investment in Best Co. 12,000

Record Power Corp.'s 75% share of Best Co.'s 20X8 dividend

Income from Best Co. 5,625Investment in Best Co. 5,625



+ Power Corp.75%

= CommonStock

+ RetainedEarnings


1/1/X8

Goodwill = 6,000


$96,000Initial

investment inBest Co.

75%Book value =

75,000

12/31/X8

Goodwill = 1,875

Excess = 13,500$96,375

Netinvestmentin Best Co.

75%Book value =

81,000

216

P5-35 (continued)

Basic elimination entryCommon stock 60,000Retained earnings 40,000Income from Best Co. 18,000NCI in NI of Best Co. 6,000

Dividends declared 16,000Investment in Best Co. 81,000NCI in NA of Best Co. 27,000


Power Corp.75% =

Buildings &Equipment +


Beginning balance 7,000 21,000 20,000 0 8,000Changes (1,875) (5,625) (2,000) (5,500)Ending balance 5,125 15,375 20,000 (2,000) 2,500

Amortized excess value reclassification entry:Depreciation expense 2,000Goodwill impairment loss 5,500

Income from Best Co. 5,625NCI in NI of Best Co. 1,875


Acc. Depr. 2,000Investment in Best Co. 15,375NCI in NA of Best Co. 5,125



Investment in Income fromBest Co. Best Co.





217

P5-35 (continued)

b.PowerCorp. Best Co.


Income StatementSales 260,000 180,000 440,000Less: COGS (125,000) (110,000) (235,000)Less: Wage Expense (42,000) (27,000) (69,000)Less: Depreciation Expense (25,000) (10,000) 2,000 (37,000)Less: Interest Expense (12,000) (4,000) (16,000)Less: Other Expenses (13,500) (5,000) (18,500)Less: Impairment Loss 5,500 (5,500)Income from Best Co. 12,375 18,000 5,625 0Consolidated Net Income 54,875 24,000 25,500 5,625 59,000NCI in Net Income 6,000 1,875 (4,125)Controlling Interest in NetIncome 54,875 24,000 31,500 7,500 54,875

Statement of RetainedEarningsBeginning Balance 102,000 40,000 40,000 102,000Net Income 54,875 24,000 31,500 7,500 54,875Less: Dividends Declared (30,000) (16,000) 16,000 (30,000)Ending Balance 126,875 48,000 71,500 23,500 126,875

Balance SheetCash 47,500 21,000 68,500Accounts Receivable 70,000 12,000 82,000Inventory 90,000 25,000 115,000Land 30,000 15,000 45,000Buildings & Equipment 350,000 150,000 20,000 30,000 490,000Less: Accumulated Depreciation (145,000) (40,000) 30,000 2,000 (157,000)Investment in Best Co. 96,375 81,000 0

15,375Goodwill 2,500 2,500Total Assets 538,875 183,000 50,000 128,375 646,000

Accounts Payable 45,000 16,000 61,000Wages Payable 17,000 9,000 26,000Notes Payable 150,000 50,000 200,000Common Stock 200,000 60,000 60,000 200,000Retained Earnings 126,875 48,000 71,500 23,500 126,875NCI in NA of Best Co. 27,000 32,125


218

P5-36 Consolidation Worksheet at End of Second Year of Ownership

a.Equity Method Entries on Power Corp.'s Books:Investment in Best Co. 27,000

Income from Best Co. 27,000Record Power Corp.'s 75% share of Best Co.'s 20X9 income

Cash 15,000Investment in Best Co. 15,000

Record Power Corp.'s 75% share of Best Co.'s 20X9 dividend

Income from Best Co. 1,500Investment in Best Co. 1,500



NCI25%

+PowerCorp.75%

= CommonStock

+ RetainedEarnings


1/1/X9

Goodwill = 1,875


$96,375Net

investment inBest Co.

75%Book value =

81,000

12/31/X9

Goodwill = 1,875

Excess = 12,000$106,875

Netinvestmentin Best Co.

75%Book value =

93,000

219

P5-36 (continued)

Basic elimination entryCommon stock 60,000Retained earnings 48,000Income from Best Co. 27,000NCI in NI of Best Co. 9,000

Dividends declared 20,000Investment in Best Co. 93,000NCI in NA of Best Co. 31,000


NCI25% +

PowerCorp. 75% =

Buildingsand

Equipment +Acc.Depr. + Goodwill

Beginning balance 5,125 15,375 20,000 (2,000) 2,500Changes (500) (1,500) (2,000) 0Ending balance 4,625 13,875 20,000 (4,000) 2,500


Income from Best Co. 1,500NCI in NI of Best Co. 500

Excess value (differential) reclassification entry:Buildings and Equipment 20,000Goodwill 2,500

Acc. Depr. 4,000Investment in Best Co. 13,875NCI in NA of Best Co. 4,625



Investment in Income fromBest Co. Best Co.





220

P5-36 (continued)

b.PowerCorp. Best Co.


Income StatementSales 290,000 200,000 490,000Less: COGS (145,000) (114,000) (259,000)Less: Wage Expense (35,000) (20,000) (55,000)Less: Depreciation Expense (25,000) (10,000) 2,000 (37,000)Less: Interest Expense (12,000) (4,000) (16,000)Less: Other Expenses (23,000) (16,000) (39,000)Income from Best Co. 25,500 27,000 1,500 0Consolidated Net Income 75,500 36,000 29,000 1,500 84,000NCI in Net Income 9,000 500 (8,500)Controlling Interest in Net Income 75,500 36,000 38,000 2,000 75,500

Statement of Retained EarningsBeginning Balance 126,875 48,000 48,000 126,875Net Income 75,500 36,000 38,000 2,000 75,500Less: Dividends Declared (30,000) (20,000) 20,000 (30,000)Ending Balance 172,375 64,000 86,000 22,000 172,375

Balance SheetCash 68,500 32,000 100,500Accounts Receivable 85,000 14,000 99,000Inventory 97,000 24,000 121,000Land 50,000 25,000 75,000Buildings & Equipment 350,000 150,000 20,000 40,000 480,000Less: Accumulated Depreciation (170,000) (50,000) 40,000 4,000 (184,000)Investment in Best Co. 106,875 93,000 0


Accounts Payable 51,000 15,000 66,000Wages Payable 14,000 6,000 20,000Notes Payable 150,000 50,000 200,000Common Stock 200,000 60,000 60,000 200,000Retained Earnings 172,375 64,000 86,000 22,000 172,375NCI in NA of Best Co. 31,000 35,625


221

P5-36 (continued)

c. Power Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X9Cash $100,500Accounts Receivable 99,000Inventory 121,000Land 75,000Buildings and Equipment $480,000Less: Accumulated Depreciation (184,000) 296,000Goodwill 2,500Total Assets $694,000

Accounts Payable $ 66,000Wages Payable 20,000Notes Payable 200,000Stockholders’ Equity:Controlling Interest:Common Stock $200,000Retained Earnings 172,375



Power Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X9

Sales $490,000Cost of Goods Sold $259,000Wage Expense 55,000Depreciation Expense 37,000Interest Expense 16,000Other Expenses 39,000Total Expenses (406,000)Consolidated Net Income $ 84,000Income to Noncontrolling Interest (8,500)Income to Controlling Interest $ 75,500

Power Corporation and SubsidiaryConsolidated Retained Earnings Statement




222

P5-37 Comprehensive Problem: Majority-Owned Subsidiary

a.Equity Method Entries on Master Corp.'s Books:Investment in Stanley Wood Co. 24,000

Income from Stanley Wood Co. 24,000Record Master Corp.'s 80% share of Stanley Wood Co.'s 20X5 income

Cash 8,000Investment in Stanley Wood Co. 8,000

Record Master Corp.'s 80% share of Stanley Wood Co.'s 20X5dividend

Income from Stanley Wood Co. 4,000Investment in Stanley Wood Co. 4,000



NCI20%

+ Master Corp.80%

= CommonStock

+ RetainedEarnings


223

1/1/X5

Goodwill = 0


Netinvestment in

StanleyWood Co.80%

Book value =152,000

12/31/X5

Goodwill = 0

Excess = 20,000$188,000

Netinvestment in

StanleyWood Co.80%

Book value =168,000

224

P5-37 (continued)

Basic elimination entryCommon stock 100,000Retained earnings 90,000Income from Stanley Wood Co. 24,000NCI in NI of Stanley Wood Co. 6,000

Dividends declared 10,000Investment in Stanley Wood Co. 168,000NCI in NA of Stanley Wood Co. 42,000


Master Corp.80% =

Buildings &Equipment + Acc. Depr.

Beginning balance 6,000 24,000 50,000 (20,000)Changes (1,000) (4,000) (5,000)Ending balance 5,000 20,000 50,000 (25,000)


Income from Stanley Wood Co. 4,000NCI in NI of Stanley Wood Co. 1,000


Acc. Depr. 25,000Investment in Stanley Wood Co. 20,000NCI in NA of Stanley Wood Co. 5,000


Cash and receivables 10,000

Investment in Income fromStanley Wood Co. Stanley Wood Co.





225

P5-37 (continued)

c.

MasterCorp.

StanleyWoodCo.


Income StatementSales 200,000 100,000 300,000

Less: COGS (120,000) (50,000) (170,000)


Less: Inventory Losses (15,000) (5,000) (20,000)

Income from Stanley Wood Co. 20,000 24,000 4,000 0

Consolidated Net Income 60,000 30,000 29,000 4,000 65,000

NCI in Net Income 6,000 1,000 (5,000)

Controlling Interest in Net Income 60,000 30,000 35,000 5,000 60,000


Ending Balance 344,000 110,000 125,000 15,000 344,000

Balance SheetCash and Receivables 81,000 65,000 10,000 136,000Inventory 260,000 90,000 350,000Land 80,000 80,000 160,000Buildings & Equipment 500,000 150,000 50,000 700,000Less: Accumulated Depreciation (205,000) (105,000) 25,000 (335,000)Investment in Stanley Wood Co. 188,000 168,000 0

20,000

Total Assets 904,000 280,000 50,000 35,000 1,011,000

Accounts Payable 60,000 20,000 10,000 70,000Notes Payable 200,000 50,000 250,000Common Stock 300,000 100,000 100,000 300,000Retained Earnings 344,000 110,000 125,000 15,000 344,000NCI in NA of Stanley Wood Co. 42,000 47,000

5,000


226

P5-38 Comprehensive Problem: Differential Apportionmenta.Equity Method Entries on Mortar Corp.'s Books:Investment in Granite Co. 173,000

Cash 173,000Record the initial investment in Granite Co.

Investment in Granite Co. 48,000Income from Granite Co. 48,000

Record Mortar Corp.'s 80% share of Granite Co.'s 20X7 income

Cash 16,000Investment in Granite Co. 16,000

Record Mortar Corp.'s 80% share of Granite Co.'s 20X7 dividend

Income from Granite Co. 3,000Investment in Granite Co. 3,000

Record amortization of excess acquisition priceb.Book Value Calculations:

NCI20%

+MortarCorp.80%

= CommonStock

+ RetainedEarnings


1/1/X7

Goodwill = 20,000


$173,000Initial

investment inGranite Co.80%

Book value =120,000

12/31/X7

Goodwill = 20,000

Excess = 30,000$202,000

Netinvestment inGranite Co.

80%Book value =

152,000

227

P5-38 (continued)Basic elimination entryCommon stock 50,000Retained earnings 100,000Income from Granite Co. 48,000NCI in NI of Granite Co. 12,000

Dividends declared 20,000Investment in Granite Co. 152,000NCI in NA of Granite Co. 38,000


MortarCorp. 80% =



Beginning balance 13,250 53,000 41,250 0 25,000Changes (750) (3,000) (3,750) 0Ending balance 12,500 50,000 41,250 (3,750) 25,000


Income from Granite Co. 3,000NCI in NI of Granite Co. 750


Acc. Depr. 3,750Investment in Granite Co. 50,000NCI in NA of Granite Co. 12,500


Accounts receivable 16,000



Investment in Income fromGranite Co. Granite Co.



Ending Balance 202,000 45,000 Ending Balance152,000 Basic 48,00050,000 Excess Reclass. 3,000

0 0

228

P5-38 (continued)

c.MortarCorp.

GraniteCo.


Income StatementSales 700,000 400,000 1,100,000Less: COGS (500,000) (250,000) (750,000)Less: Depreciation Expense (25,000) (15,000) 3,750 (43,750)Less: Other Expenses (75,000) (75,000) (150,000)Income from Granite Co. 45,000 48,000 3,000 0Consolidated Net Income 145,000 60,000 51,750 3,000 156,250NCI in Net Income 12,000 750 (11,250)Controlling Interest in NetIncome 145,000 60,000 63,750 3,750 145,000


Balance SheetCash 38,000 25,000 63,000Accounts Receivable 50,000 55,000 16,000 89,000Inventory 240,000 100,000 340,000Land 80,000 20,000 100,000Buildings & Equipment 500,000 150,000 41,250 60,000 631,250Less: Accumulated Depreciation (155,000) (75,000) 60,000 3,750 (173,750)Investment in Granite Co. 202,000 152,000 0

50,000Goodwill 25,000 25,000Total Assets 955,000 275,000 101,250 79,750 1,074,500

Accounts Payable 70,000 35,000 16,000 89,000Mortgage Payable 200,000 50,000 250,000Common Stock 300,000 50,000 50,000 300,000Retained Earnings 385,000 140,000 163,750 23,750 385,000NCI in NA of Granite Co. 38,000 50,500

12,500Total Liabilities & Equity 955,000 275,000 229,750 61,750 1,074,500

229

P5-39 Comprehensive Problem: Differential Apportionment in Subsequent Period.

a.Equity Method Entries on Mortar Corp.'s Books:Investment in Granite Co. 36,000

Income from Granite Co. 36,000Record Mortar Corp.'s 80% share of Granite Co.'s 20X8 income

Cash 20,000Investment in Granite Co. 20,000

Record Mortar Corp.'s 80% share of Granite Co.'s 20X8 dividend

Income from Granite Co. 11,800Investment in Granite Co. 11,800

Record amortization of excess acquisition priceb.Book Value Calculations:

NCI20%

+ Mortar Corp.80%

= CommonStock

+ RetainedEarnings


1/1/X8

Goodwill = 20,000


Netinvestment inGranite Co.80%

Book value =152,000

12/31/X8

Goodwill = 11,200

Excess = 27,000 $206,200Net

investmentin Granite

Co.80%Book value =

168,000

230

P5-39 (continued)Basic elimination entryCommon stock 50,000Retained earnings 140,000Income from Granite Co. 36,000NCI in NI of Granite Co. 9,000

Dividends declared 25,000Investment in Granite Co. 168,000NCI in NA of Granite Co. 42,000


MortarCorp. 80% =



Beginning balance 12,500 50,000 41,250 (3,750) 25,000Changes (2,950) (11,800) (3,750) (11,000)Ending balance 9,550 38,200 41,250 (7,500) 14,000


Income from Granite Co. 11,800NCI in NI of Granite Co. 2,950


Acc. Depr. 7,500Investment in Granite Co. 38,200NCI in NA of Granite Co. 9,550





Investment in Income fromGranite Co. Granite Co.



Ending Balance 206,200 24,200 Ending Balance168,000 Basic 36,00038,200 Excess Reclass. 11,800

0 0

231

P5-39 (continued)

c.MortarCorp.

GraniteCo.


Income StatementSales 650,000 470,000 1,120,000Less: COGS (490,000) (310,000) (800,000)Less: Depreciation Expense (25,000) (15,000) 3,750 (43,750)Less: Other Expenses (62,000) (100,000) (162,000)Less: Goodwill Impairment 11,000 (11,000)Income from Granite Co. 24,200 36,000 11,800 0Consolidated Net Income 97,200 45,000 50,750 11,800 103,250NCI in Net Income 9,000 2,950 (6,050)Controlling Interest in NetIncome 97,200 45,000 59,750 14,750 97,200

Statement of RetainedEarningsBeginning Balance 385,000 140,000 140,000 385,000Net Income 97,200 45,000 59,750 14,750 97,200Less: Dividends Declared (45,000) (25,000) 25,000 (45,000)Ending Balance 437,200 160,000 199,750 39,750 437,200

Balance SheetCash 59,000 31,000 90,000Accounts Receivable 83,000 71,000 9,000 145,000Inventory 275,000 118,000 393,000Land 80,000 30,000 110,000Buildings & Equipment 500,000 150,000 41,250 60,000 631,250Less: AccumulatedDepreciation (180,000) (90,000) 60,000 7,500 (217,500)Investment in Granite Co. 206,200 168,000 0

38,200Goodwill 14,000 14,000Total Assets 1,023,200 310,000 101,250 76,500 1,165,750

Accounts Payable 86,000 30,000 9,000 107,000Mortgage Payable 200,000 70,000 270,000Common Stock 300,000 50,000 50,000 300,000Retained Earnings 437,200 160,000 199,750 39,750 437,200NCI in NA of Granite Co. 42,000 51,550

9,550Total Liabilities & Equity 1,023,200 310,000 258,750 81,750 1,165,750

232

P5-40 Subsidiary with Other Comprehensive Income in Year of Acquisitiona.Equity Method Entries on Amber Corp.'s Books:Investment in Sparta Co. 96,000

Cash 96,000Record the initial investment in Sparta Co.

Investment in Sparta Co. 15,000Income from Sparta Co. 15,000

Record Amber Corp.'s 60% share of Sparta Co.'s 20X8 income

Cash 9,000Investment in Sparta Co. 9,000

Record Amber Corp.'s 60% share of Sparta Co.'s 20X8 dividend

Investment in Sparta Co. 6,000Other Comprehensive Income from Sparta Co. 6,000

Record share of increase in value of securities held by Sparta Co.


+ Amber Corp.60%

= CommonStock

+ RetainedEarnings


1/1/X8

Goodwill = 0


$96,000Initial

investment inSparta Co.

60%Book value =

96,000

12/31/X8

Goodwill = 0

Excess = 0$108,000

Netinvestment inSparta Co.

60%Book value =

108,000

233

P5-40 (continued)

Basic elimination entryCommon stock 100,000Retained earnings 60,000Income from Sparta Co. 15,000NCI in NI of Sparta Co. 10,000

Dividends declared 15,000Investment in Sparta Co. 102,000NCI in NA of Sparta Co. 68,000

Other Comprehensive Income Entry:OCI from Sparta Co. 6,000OCI to the NCI 4,000

Investment in Sparta Co. 6,000NCI in NA of Sparta Co. 4,000

Investment in Income fromSparta Co. Sparta Co.


9,000 60% Dividends6,000 OCI Entry

Ending Balance 108,000 15,000 Ending Balance102,000 Basic 15,0006,000 OCI

0 0

234

P5-40 (continued)

b.AmberCorp.

SpartaCo.


Income StatementSales 220,000 148,000 368,000Less: COGS (150,000) (110,000) (260,000)Less: Depreciation Expense (30,000) (10,000) (40,000)Less: Interest Expense (8,000) (3,000) (11,000)Income from Sparta Co. 15,000 15,000 0Consolidated Net Income 47,000 25,000 15,000 57,000NCI in Net Income 10,000 (10,000)Controlling Interest in Net Income 47,000 25,000 25,000 0 47,000

Statement of Retained EarningsBeginning Balance 208,000 60,000 60,000 208,000Net Income 47,000 25,000 25,000 0 47,000Less: Dividends Declared (24,000) (15,000) 15,000 (24,000)Ending Balance 231,000 70,000 85,000 15,000 231,000

Balance SheetCash 27,000 8,000 35,000Accounts Receivable 65,000 22,000 87,000Inventory 40,000 30,000 70,000Buildings & Equipment 500,000 235,000 75,000 660,000Less: Accumulated Depreciation (140,000) (85,000) 75,000 (150,000)Investment in Row Company 40,000 40,000Investment in Sparta Co. 108,000 102,000 0

6,000Total Assets 600,000 250,000 75,000 75,000 742,000

Accounts Payable 63,000 20,000 83,000Bonds Payable 100,000 50,000 150,000Common Stock 200,000 100,000 100,000 200,000Retained Earnings 231,000 70,000 85,000 15,000 231,000Accumulated OCI 6,000 10,000 10,000 6,000NCI in NA of Sparta Co. 68,000 72,000


Other Comprehensive IncomeAccumulated Other Comprehensive

Income, 1/1/20X8 0Other Comprehensive Income from

Sparta Co. 6,000 6,000 0Unrealized Gain on Investments 10,000 10,000Other Comprehensive Income to NCI 4,000 (4,000)Accumulated Other ComprehensiveIncome, 12/31/20X8 6,000 10,000 10,000 0 6,000

235

P5-40 (continued)

c. Amber Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X8

Cash $ 35,000Accounts Receivable 87,000Inventory 70,000Buildings and Equipment $660,000Less: Accumulated Depreciation (150,000) 510,000Investment in Marketable Securities 40,000Total Assets $742,000

Accounts Payable $ 83,000Bonds Payable 150,000Stockholders’ Equity:Controlling Interest:Common Stock $200,000Retained Earnings 231,000Accumulated Other Comprehensive Income 6,000



Amber Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X8

Sales $368,000Cost of Goods Sold $260,000Depreciation Expense 40,000Interest Expense 11,000Total Expenses (311,000)Consolidated Net Income $ 57,000Income to Noncontrolling Interest (10,000)Income to Controlling Interest $ 47,000

Amber Corporation and SubsidiaryConsolidated Statement of Comprehensive Income


Consolidated Net Income $57,000Other Comprehensive Income:Unrealized Gain on Investments Held by Subsidiary 10,000

Total Consolidated Comprehensive Income $67,000Less: Comprehensive Income Attributable toNoncontrolling Interest (14,000)

Comprehensive Income Attributable to ControllingInterest $53,000

236

P5-41 Subsidiary with Other Comprehensive Income in Year FollowingAcquisition

a.Equity Method Entries on Amber Corp.'s Books:Investment in Sparta Co. 108,000

Cash 108,000Record the initial investment in Sparta Co.

Investment in Sparta Co. 18,000Income from Sparta Co. 18,000

Record Amber Corp.'s 60% share of Sparta Co.'s 20X9 income

Cash 12,000Investment in Sparta Co. 12,000

Record Amber Corp.'s 60% share of Sparta Co.'s 20X9 dividend

Investment in Sparta Co. 2,400Other Comprehensive Income from Sparta Co. 2,400

Record share of increase in value of securities held by Sparta Co.


+ Amber Corp.60%

= CommonStock

+ RetainedEarnings

+OCI

Original book value 72,000 108,000 100,000 70,000 10,000+ Net Income 12,000 18,000 30,000- Dividends (8,000) (12,000) (20,000)Ending book value 76,000 114,000 100,000 80,000 10,000

1/1/X9

Goodwill = 0

Excess = 0$108,000


60%Book value =

108,000

12/31/X9

Goodwill = 0

Excess = 0$116,400


60%Book value =

116,400

237

P5-41 (continued)

Basic elimination entryCommon stock 100,000Retained earnings 70,000Accumulated OCI 10,000Income from Sparta Co. 18,000NCI in NI of Sparta Co. 12,000

Dividends declared 20,000Investment in Sparta Co. 114,000NCI in NA of Sparta Co. 76,000

Other Comprehensive Income Entry:OCI from Sparta Co. 2,400OCI to the NCI 1,600

Investment in Sparta Co. 2,400NCI in NA of Sparta Co. 1,600

Investment in Income fromSparta Co. Sparta Co.


12,000 60% Dividends2,400 OCI Entry

Ending Balance 116,400 18,000 Ending Balance114,000 Basic 18,0002,400 OCI

0 0

238

P5-41 (continued)b.

AmberCorp.

SpartaCo.


Income StatementSales 250,000 140,000 390,000Less: COGS (170,000) (97,000) (267,000)Less: Depreciation Expense (30,000) (10,000) (40,000)Less: Interest Expense (8,000) (3,000) (11,000)Income from Sparta Co. 18,000 18,000 0Consolidated Net Income 60,000 30,000 18,000 72,000NCI in Net Income 12,000 (12,000)Controlling Interest in NetIncome 60,000 30,000 30,000 0 60,000

Statement of Retained EarningsBeginning Balance 231,000 70,000 70,000 231,000Net Income 60,000 30,000 30,000 0 60,000Less: Dividends Declared (40,000) (20,000) 20,000 (40,000)Ending Balance 251,000 80,000 100,000 20,000 251,000

Balance SheetCash 18,000 11,000 29,000Accounts Receivable 45,000 21,000 66,000Inventory 40,000 30,000 70,000Buildings & Equipment 585,000 257,000 75,000 767,000Less: Accumulated Depreciation (170,000) (95,000) 75,000 (190,000)Investment in Row Company 44,000 44,000Investment in Sparta Co. 116,400 114,000 0

2,400Total Assets 634,400 268,000 75,000 75,000 786,000

Accounts Payable 75,000 24,000 99,000Bonds Payable 100,000 50,000 150,000Common Stock 200,000 100,000 100,000 200,000Retained Earnings 251,000 80,000 100,000 20,000 251,000Accumulated OCI 8,400 14,000 14,000 8,400NCI in NA of Sparta Co. 76,000 77,600


Other Comprehensive IncomeAccumulated Other Comprehensive

Income, 1/1/20X9 6,000 10,000 10,000 6,000Other Comprehensive Income from

Sparta Co. 2,400 2,400 0Unrealized Gain on Investments 4,000 4,000Other Comprehensive Income to NCI 1,600 (1,600)Accumulated Other ComprehensiveIncome, 12/31/20X9 8,400 14,000 14,000 0 8,400

239

CHAPTER 6

INTERCOMPANY INVENTORY TRANSACTIONS


E6-1 Multiple-Choice Questions on Intercompany Inventory Transfers[AICPA Adapted]

1. a2. c3. a4. c5. c Net assets reported $320,000

Profit on intercompany sale $48,000Proportion of inventory unsold at year end($60,000 / $240,000) x 0.25

Unrealized profit at year end (12,000)Amount reported in consolidated statements $308,000

6. c Inventory reported by Banks ($175,000 + $60,000) $235,000Inventory reported by Lamm 250,000Total inventory reported $485,000Unrealized profit at year end[$50,000 x ($60,000 / $200,000)] (15,000)

Amount reported in consolidated statements $470,000

E6-2 Multiple-Choice Questions on the Effects of Inventory Transfers[AICPA Adapted]

1. b Cost of goods sold reported by Park $ 800,000Cost of goods sold reported by Small 700,000Total cost of goods sold reported $1,500,000Cost of goods sold reported by Park onsale to Small ($500,000 x 0.40) (200,000)

Reduction of cost of goods sold reported bySmall for profit on intercompany sale[($500,000 x 4 / 5) x 0.60] (240,000)

Cost of goods sold for consolidated entity $1,060,000

Note: Answer b in the actual CPA examination question was$1,100,000, requiring candidates to select the closestanswer.

2. d $32,000 = ($200,000 + $140,000) – $308,000

3. b $6,000 = ($26,000 + $19,000) – $39,000

240

4. c $9,000 = Inventory held by Spin($32,000 x 0.375)

$12,000

Unrealized profit on sale[($30,000 + $25,000) – $52,000] (3,000)

Carrying cost of inventory forPower $ 9,000

5. b 0.20 = $14,000 / [(Stockholders’ Equity $50,000) +(Patent $20,000)]

6. b 14 years = ($28,000 / [(28,000 - $20,000) / 4 years]

E6-3 Multiple Choice – Consolidated Income Statement

1. c

2. b

3. c Total income ($86,000 - $47,000) $39,000Income assigned to noncontrollinginterest [0.40($86,000 - $60,000)] (10,400)

Consolidated net income assignedto controlling interest $28,600

6-4 Multiple-Choice Questions — Consolidated Balances

1. c

2. a Amount paid by Lorn Corporation $120,000Unrealized profit (45,000)Actual cost $ 75,000Portion sold x 0.80Cost of goods sold $ 60,000

3. e Consolidated sales $140,000Cost of goods sold (60,000)Consolidated net income $ 80,000Income to Dresser’s noncontrollinginterest:Sales $120,000Reported cost of sales (75,000)Report income $ 45,000Portion realized x 0.80Realized net income $ 36,000Portion to NoncontrollingInterest x 0.30

Income to noncontrollingInterest (10,800)

Income to controlling interest $ 69,200

241

4. a Inventory reported by Lorn $ 24,000Unrealized profit ($45,000 x .20) (9,000)Ending inventory reported $ 15,000

E6-5 Multiple-Choice Questions — Consolidated Income Statement

1. a $20,000 = $30,000 x [($48,000 - $16,000) / $48,000]

2. d Sales reported by Movie Productions Inc. $67,000Cost of goods sold ($30,000 x 2/3) (20,000)Consolidated net income $47,000

3. a $7,000 = [($67,000 - $32,000) x 0.20]

242

E6-6 Realized Profit on Intercompany Sale

a. Journal entries recorded by Nordway Corporation:

(1) Inventory 960,000Cash (Accounts Payable) 960,000

(2) Cash (Accounts Receivable) 750,000Sales 750,000

(3) Cost of Goods Sold 600,000Inventory 600,000

b. Journal entries recorded by Olman Company:


(2) Cash (Accounts Receivable) 1,125,000Sales 1,125,000


c. Eliminating entry:

Sales 750,000Cost of Goods Sold 750,000

243

E6-7 Sale of Inventory to Subsidiary

a. Journal entries recorded by Nordway Corporation:




b. Journal entries recorded by Olman Company:





Sales 750,000Cost of Goods Sold 708,000Inventory 42,000

Calculations

Total = Re-Sold +EndingInventory

Sales 750,000 540,000 210,000COGS 600,000 432,000 168,000Gross Profit 150,000 108,000 42,000Gross Profit % 20%

244

E6-8 Inventory Transfer between Parent and Subsidiary

a. Karlow Corporation reported cost of goods sold of $820,000 ($82 x 10,000 desks)and Draw Company reported cost of goods sold of $658,000 ($94 x 7,000 desks).

b. Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks).



Calculations

Total = Re-sold +EndingInventory

Sales 940,000 658,000 282,000COGS 820,000 574,000 246,000Gross Profit 120,000 84,000 36,000Gross Profit % 12.77%

d. Eliminating entry:

Investment in Draw Company 36,000Cost of Goods Sold 36,000

e. Eliminating entry:

Investment in Draw Company 21,600NCI in NA of Draw Company 14,400

Cost of Goods Sold 36,000

245

E6-9 Income Statement Effects of Unrealized Profit

a. Sale price to Holiday Bakery per bag ($900,000 / 100,000) $ 9.00Profit per bag [$9.00 - ($9.00 / 1.5)] (3.00)Cost per bag $ 6.00Bags sold by Holiday Bakery (100,000 - 20,000) x 80,000Consolidated cost of goods sold $480,000

b. Sales 900,000Cost of Goods Sold 840,000Inventory ($3.00 x 20,000 bags) 60,000

Calculations


Sales 900,000 720,000 180,000COGS 600,000 480,000 120,000Gross Profit 300,000 240,000 60,000Gross Profit% 33.33%

Required Adjustment to Cost of Goods Sold:

Cost of goods sold — Farmco ($900,000 / 1.5) $ 600,000Cost of goods sold — Holiday ($9.00 x 80,000 units) 720,000

$1,320,000Consolidated cost of goods sold ($6.00 x 80,000 units) (480,000)Required adjustment $ 840,000

c. Operating income of Holiday Bakery $400,000Net income of Farmco Products 150,000

$550,000Less: Unrealized inventory profits (60,000)Consolidated net income $490,000Less: Income assigned to noncontrolling interest

($150,000 - $60,000 unrealized profit) x 0.40 (36,000)Income assigned to controlling interest $454,000

Alternate computation:Operating income of Holiday Bakery $400,000Net income of Farmco Products $150,000Unrealized profits ($3.00 x 20,000 units) (60,000)Realized net income $ 90,000Ownership held by Holiday Bakery x 0.60

54,000Income assigned to controlling interest $454,000

246

E6-10 Prior-Period Unrealized Inventory Profit

a. Cost per bag of flour ($9.00 / 1.5) $ 6.00Bags sold x 20,000Cost of goods sold from inventory held, January 1, 20X9 $120,000

b.Investment in Farmco 36,000NCI in NA of Farmco 24,000

Cost of Goods Sold 60,000$60,000 = 20,000 bags x $3.00

c. Operating income of Holiday Bakery $300,000Net income of Farmco Products 250,000

$550,000Add: Inventory profits realized in 20X9 60,000Consolidated net income $610,000Less: Income assigned to noncontrolling shareholders

($250,000 + $60,000) x 0.40 (124,000)Income assigned to controlling interest $486,000

Alternate computation:Operating income of Holiday Bakery $300,000Net income of Farmco Products $250,000Inventory profits realized in 20X9 60,000Realized net income $310,000Ownership held by Holiday Bakery x 0.60

186,000Income assigned to controlling interest $486,000

247

E6-11 Computation of Consolidated Income Statement Data

Downstream Transaction Calculations



Worksheet Entry (not requested in problem)Sales 30,000

Cost of Goods Sold 28,000Inventory 2,000

Upstream Transaction Calculations



Worksheet Entry (not requested in problem)Sales 80,000


a. Reported sales of Prem Company $400,000Reported sales of Cooper Company 200,000

$600,000Intercompany sales by Prem Company in 20X5 $ 30,000Intercompany sales by Cooper Company in 20X5 80,000 (110,000)Sales reported on consolidated income statement $490,000

248

E6-11 (continued)

b. Cost of goods sold reported by Prem Company $250,000Cost of goods sold reported by Cooper Company 120,000

$370,000Adjustment due to intercompany sales (100,500)Consolidated cost of goods sold $269,500

Adjustment to cost of goods sold:

CGS charged by Prem on sale to Cooper $ 20,000CGS charged by Cooper ($30,000 - $6,000) 24,000Total charged to CGS $ 44,000CGS for consolidated entity$20,000 x ($24,000 / $30,000) (16,000)

Required adjustment to CGS $ 28,000

CGS charged by Cooper on sale to Prem $ 50,000CGS charged by Prem ($80,000 - $20,000) 60,000Total charged to CGS $110,000CGS for consolidated entity$50,000 x ($60,000 / $80,000) (37,500)

Required adjustment to CGS 72,500Total adjustment required $100,500

c. Reported net income of Cooper Company $ 45,000Unrealized profit on sale to Prem Company$30,000 x ($20,000 / $80,000) (7,500)

Realized net income $ 37,500Noncontrolling interest's share x 0.40Income assigned to noncontrolling interest $ 15,000

d. Reported net income of Pem Company $100,500Less: Income from Cooper (20,500) $ 80,000Net income of Cooper Company 45,000Operating income $125,000Less: Unrealized inventory profits of Prem

Company [$10,000 x ($6,000 / $30,000)] $ 2,000Unrealized inventory profits of CopperCompany [$30,000 x ($20,000 / $80,000)] 7,500

Income assigned to noncontrollinginterest 15,000 (24,500)

Income assigned to controlling interest $ 100,500

249

E6-12 Sale of Inventory at a Loss

a. Entries recorded by Trent Company:

Inventory 400,000Cash 400,000

Purchase inventory.

Cash 300,000Sales 300,000

Sale of inventory to Gord Corporation.


Record cost of goods sold.

Entries recorded by Gord Corporation


Purchase of inventory from Trent.

Cash 360,000Sales 360,000

Sale of inventory to nonaffiliates.


Record cost of goods sold: $180,000 = $300,000 x .60

b. Consolidated cost of goods sold for 20X8 should be reportedas $240,000 ($400,000 x 0.60).

c. Operating income reported by Gord $230,000Net income reported by Trent $ 80,000Unrealized loss on intercorporate sale($400,000 - $300,000) x 0.40 40,000 120,000

Consolidated net income $350,000Income to assigned to noncontrolling interest($120,000 x 0.25) (30,000)

Income assigned to controlling interest $320,000

250

E6-12 (continued)

d. Eliminating entry, December 31, 20X8:

Sales 300,000Inventory 40,000


Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Trent $400,000Cost of goods sold recorded by Gord 180,000Total recorded $580,000Consolidated cost of goods sold (240,000)Required elimination $340,000

Intercompany Transaction Calculations


Sales 300,000 180,000 120,000COGS 400,000 240,000 160,000Gross Profit (100,000) (60,000) (40,000)Gross Profit % -33.33%

251

E6-13 Intercompany Sales

20X4 Calculations:



Worksheet Entry (not required in problem)Sales 180,000


20X5 Calculations:

20X5 Upstream



20X5 Downstream



Worksheet Elimination Entries (not required in problem):

Eliminate Upstream TransactionsSales 135,000


Eliminate Downstream TransactionsSales 280,000


Reversal of 20X4 Upstream DeferralInvestment in Surg 10,500NCI in NA of Surg 4,500


252

E6-13 (continued)

a. Consolidated net income for 20X4:

Operating income of Hollow Corporation $160,000Net income of Surg Corporation 90,000

$250,000Less: Unrealized profit — Surg Corporation (15,000)Consolidated net income $235,000

b. Inventory balance, December 31, 20X5:

Inventory reported by Hollow Corporation $ 30,000Unrealized profit on books of SurgCorporation($135,000 - $90,000) x ($30,000/$135,000) (10,000) $20,000

Inventory reported by Surg Corporation $110,000Unrealized profit on books of HollowCorporation($280,000 - $140,000) x ($110,000/$280,000) (55,000) 55,000

Inventory, December 31, 20X5 $75,000

c. Consolidated cost of goods sold for 20X5:

COGS on sale of inventory on hand January 1, 20X5$45,000 x ($120,000 / $180,000) $ 30,000

COGS on items purchased from Surg in 20X5($135,000 - $30,000) x ($90,000 / $135,000) 70,000

COGS on items purchased from Hollow in 20X5($280,000 - $110,000) x ($140,000 / $280,000) 85,000

Total cost of goods sold $185,000

d. Income assigned to controlling interest:

Operating income of Hollow Corporation $220,000Net income of Surg Corporation 85,000

$305,000Add: Inventory profit of prior year realized in 20X5 15,000Less: Unrealized inventory profit — Surg Corporation (10,000)

Unrealized inventory profit — Hollow Corporation (55,000)Income to noncontrolling interest($85,000 + $15,000 - $10,000) x 0.30 (27,000)

Income assigned to controlling interest $228,000

253

E6-14 Consolidated Balance Sheet Worksheet

a.Equity Method Entries on Doorst Corp.'s Books:Investment in Hingle Co. 49,000

Income from Hingle Co. 49,000Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 income

Cash 9,800Investment in Hingle Co. 9,800

Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 dividend

Income from Hingle Co. 10,000Investment in Hingle Co. 10,000

Eliminate the deferred gross profit from downstream sales in 20X8

Income from Hingle Co. 28,000Investment in Hingle Co. 28,000

Eliminate the deferred gross profit from upstream sales in 20X8


NCI30%

+DoorstCorp.70%

= CommonStock

+ RetainedEarnings


Reversal/Deferred GP Calculations:

Total =

DoorstCorp.'sshare + NCI's share

Downstream Deferred GP (10,000) (10,000) 0

Upstream Deferred GP (40,000) (28,000) (12,000)Total (50,000) (38,000) (12,000)

254

E6-14 (continued)

Basic elimination entryCommon stock 150,000 ← Original amount invested (100%)Retained earnings 194,000 ← Beginning balance in retained earningsIncome from Hingle Co. 11,000 ← Doorst’s % of NI - Deferred GP + ReversalNCI in NI of Hingle Co. 9,000 ← NCI share of NI - Deferred GP + Reversal

Dividends declared 14,000 ← 100% of Hingle Co.'s dividends declaredInvestment in Hingle Co. 242,000 ← Net book value - Deferred GP + ReversalNCI in NA of Hingle Co. 108,000 ← NCI share of BV - Deferred GP + Reversal

Deferral of this year's unrealized profits on inventory transfersSales 400,000


20X8 Downstream Transactions


Sales 100,000 75,000 25,000COGS 60,000 45,000 15,000

Gross Profit 40,000 30,000 10,000

Gross Profit % 40.00%

20X8 Upstream Transactions


Sales 300,000 205,000 95,000COGS 173,684 118,684 55,000

Gross Profit 126,316 86,316 40,000


Investment in Income fromHingle Co. Hingle Co.


9,800 70% Dividends38,000 Deferred GP 38,000


0 0

255

E6-14 (continued)

b.

DoorstCorp.

HingleCo.

Elimination Entries

DR CRConsolidate

dBalance SheetCash and Receivables 98,000 40,000 138,000Inventory 150,000 100,000 50,000 200,000Buildings & Equipment (net) 310,000 280,000 590,000Investment in Hingle Co. 242,000 242,000 0Total Assets 800,000 420,000 0 292,000 928,000

Accounts Payable 70,000 20,000 90,000Common Stock 200,000 150,000 150,000 200,000Retained Earnings 530,000 250,000 194,000 14,000 530,000

11,000 350,0009,000

400,000NCI in NA of Hingle Co. 108,000 108,000Total Liabilities & Equity 800,000 420,000 764,000 472,000 928,000

256

E6-15* Multiple Transfers between Affiliates

a. Entries recorded by Klon Corporation

Cash 150,000Sales 150,000

Sale of inventory to Brant Company.



Entries recorded by Brant Company


Purchase of inventory from Klon.

Cash 150,000Sales 150,000

Sale of inventory to Torkel Company.



Entries recorded by Torkel Company


Purchase of inventory from Brant.

Cash 120,000Sales 120,000

Sale of inventory to nonaffiliates.



b. Cost of goods sold for 20X8 should be reported as $60,000[$90,000 x ($100,000 / $150,000)].

c. Inventory at December 31, 20X8, should be reported at $40,000[$60,000 x ($100,000 / $150,000)].

257

E6-15* (continued)

d. Eliminating entry for inventory:


Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Klon $100,000Cost of goods sold recorded by Brant 150,000Cost of goods sold recorded by Torkel 90,000Total recorded $340,000Consolidated cost of goods sold (60,000)Required elimination $280,000

Computation of reduction to carrying value of inventory

Inventory reported by Torkel $60,000Inventory balance to be reported (40,000)Required elimination $20,000

258

E6-16 Inventory Sales

a. Journal entries recorded by Spice Company:


Record purchases from nonaffiliate.


Record sale to Herb Corporation.


Record cost of goods sold to HerbCorporation.

Journal entries recorded by Herb Corporation:


Record purchases from Spice Company.


Record sale of items to nonaffiliates.



(4) Income from Herb 5,000Investment in Herb 5,000

Eliminate unrealized gross profit on inventory purchases from Herb.

b. Eliminating entry:




Eliminate intercompany sale of inventory.

259

E6-17 Prior-Period Inventory Profits

a.20X8 Sale:



20X9 Sale:



Investment in Level Brothers 7,500NCI in NA of Level Brothers 2,500

Cost of goods sold 10,000Reversal of 20X8 gross profit deferral


Eliminate 20X9 intercompany sale of inventory.

b. 20X8 20X9Reported net income of Level Brothers $350,000 $420,000Unrealized profit, December 31, 20X8 (10,000) 10,000Unrealized profit, December 31, 20X9 (50,000)Realized net income $340,000 $380,000Noncontrolling interest's share of ownership x 0.25 x 0.25Income assigned to noncontrolling interest $ 85,000 $ 95,000

260


P6-18 Consolidated Income Statement Data

a. $180,000 = $550,000 + $450,000 - $820,000

b. January 1, 20X2: $25,000 = $75,000 - $50,000December 31, 20X2: $15,000 = $180,000 + $210,000 - $375,000

c. Investment in Bitner 15,000NCI in NA of Bitner 10,000

Cost of Goods Sold 25,000Eliminate beginning inventory profit.



d. Reported net income of Bitner Company $ 90,000Prior-period profit realized in 20X2 25,000Unrealized profit on 20X2 sales (15,000)Realized income $100,000Proportion held by noncontrolling interest x 0.40Income assigned to noncontrolling interest $ 40,000

261

P6-19 Unrealized Profit on Upstream Sales

20X2



20X3



20X4



20X2 20X3 20X4

Operating income reported by Pacific $150,000 $240,000 $300,000Net income reported by Carroll 100,000 90,000 160,000

$250,000 $330,000 $460,000Inventory profit, December 31, 20X2$70,000 - ($70,000 / 1.25) (14,000) 14,000

Inventory profit, December 31, 20X3$105,000 - ($105,000 / 1.25) (21,000) 21,000

Inventory profit, December 31, 20X4$120,000 - ($120,000 / 1.25) (24,000)

Consolidated net income $236,000 $323,000 $457,000Income to noncontrolling interest:

($100,000 - $14,000) x 0.40 (34,400)($90,000 + $14,000 - $21,000) x 0.40 (33,200)($160,000 + $21,000 - $24,000) x 0.40 (62,800)

Income to controlling interest $201,600 $289,800 $394,200

262

P6-20 Net Income of Consolidated Entity

Operating income of Master for 20X5 $118,000Net income of Crown for 20X5 65,000

$183,000Add: Prior year profits realized by Master 25,000

Prior year profits realized by Crown 40,000Less: Unrealized profits for 20X5 by Master (14,000)

Unrealized profits for 20X5 by Crown (55,000)Amortization of differential($45,000 / 15 years) (3,000)

Consolidated net income, 20X5 $176,000Less: Income to noncontrolling interest

($65,000 + $40,000 - $55,000 - $3,000) x 0.30 (14,100)Income to controlling interest $161,900

P6-21 Correction of Eliminating Entries

a. Proportion of intercompany inventory purchases resold during 20X5:Unrealized profit at year end $ 12,000Intercompany transfer price $140,000Cost of inventory sold ($140,000 / 1.40) (100,000)Total Profit ÷ 40,000Proportion of intercompany sale held byBolger at year end 0.30

Proportion of intercompany purchases resoldby Bolger during 20X5 (1.00 - 0.30) 0.70

b. Eliminating entries, December 31, 20X5:

Intercompany Transactions




Eliminate intercompany receivable/payable.



263

P6-22 Incomplete Data

a. Increase in fair value of buildings and equipment:

Consolidated total $ 680,000Balance reported by Lever (400,000)Balance reported by Tropic (240,000)Increase in value $ 40,000

b. Accumulated depreciation for consolidated entity:

Accumulated depreciation reported by Lever $180,000Accumulated depreciation reported by Tropic 110,000Cumulative write-off of differential($5,000 x 6 years) 30,000

Accumulated depreciation for consolidated entity $320,000

c. Amount paid by Lever to acquire ownership in Tropic:

Common stock outstanding $ 60,000Retained earnings at acquisition 30,000Total book value at acquisition $ 90,000Increase in value of buildings and equipment 40,000Fair value of net assets acquired $130,000Proportion of ownership acquired x 0.75Amount paid by Lever $ 97,500

d. Investment in Tropic Company stock reported at December 31, 20X6:

Tropic's common stock outstanding December 31, 20X6 $ 60,000Tropic's retained earnings reported December 31, 20X6 112,000Total book value $172,000Proportion of ownership held by Lever x 0.75Lever's share of net book value $129,000Unamortized differential ($5,000 x 2 years) x 0.75 7,50020X6 Gross Profit Deferral on Downstream Sale (3,000)Investment in Tropic Company stock $133,500

e. Intercorporate sales of inventory in 20X6:

Sales reported by Lever $420,000Sales reported by Tropic 260,000Total sales $680,000Sales reported in consolidated income statement (650,000)Intercompany sales during 20X6 $ 30,000

264

P6-22 (continued)

f. Unrealized inventory profit, December 31, 20X6:

Inventory reported by Lever $125,000Inventory reported by Tropic 90,000Total inventory $215,000Inventory reported in consolidated balance sheet (211,000)Unrealized inventory profit, December 31, 20X6 $ 4,000

g. Eliminating entry to remove the effects of intercompany inventorysales during 20X6:


h. Unrealized inventory profit at January 1, 20X6:

Cost of goods sold reported by Lever $310,000Cost of goods sold reported by Tropic 170,000Reduction of cost of goods sold for intercompanysales during 20X6 (26,000)

Adjusted cost of goods sold $454,000Cost of goods sold reported in consolidatedincome statement (445,000)

Additional adjustment to cost of goods solddue to unrealized profit in beginning inventory $ 9,000

i. Accounts receivable reported by Lever at December 31, 20X6:

Accounts receivable reported for consolidated entity $145,000Accounts receivable reported by Tropic (55,000)Difference $ 90,000Adjustment for intercompany receivable/payable:Accounts payable reported by Lever $ 86,000Accounts payable reported by Tropic 20,000Total reported accounts payable $106,000Accounts payable reported for consolidatedentity (89,000)

Adjustment for intercompany receivable/payable 17,000Accounts receivable reported by Lever $107,000

265

P6-23 Eliminations for Upstream Salesa.Equity Method Entries on Clean Air's Books:Investment in Special Filter 32,000

Income from Special Filter 32,000Record Clean Air's 80% share of Special Filter's 20X8 income

Investment in Special Filter 16,000Income from Special Filter 16,000

Reverse of the deferred gross profit from upstream sales in 20X7

Income from Special Filter 12,000Investment in Special Filter 12,000



+ Clean Air80%

= CommonStock

+ RetainedEarnings

Original book value 62,000 248,000 90,000 220,000+ Net Income 8,000 32,000 40,000Ending book value 70,000 280,000 90,000 260,000


Total =

CleanAir'sshare + NCI's share

Downstream Reversal 0 0Upstream Reversal 20,000 16,000 4,000Downstream Deferred GP 0 0Upstream Deferred GP (15,000) (12,000) (3,000)Total 5,000 4,000 1,000

Basic elimination entry:Common stock 90,000 ← Original amount invested (100%)Retained earnings 220,000 ← Beginning balance in REIncome from Special Filter 36,000 ← Parent’s % of NI - Def. GP + ReversalNCI in NI of Special Filter 9,000 ← NCI share of NI - Def. GP + Reversal

Investment in Special Filter 284,000 ← Net book value - Def. GP + ReversalNCI in NA of Special Filter 71,000 ← NCI share of BV - Def. GP + Reversal

266

P6-23 (continued)

20X7 Upstream Transactions20X8Beg.

InventorySales 60,000COGS 40,000Gross Profit 20,000Gross Profit % 33.33%




Deferral of this year's unrealized profits on inventory transfers


Reversal of last year's deferral:Investment in Special Filter 16,000NCI in NA of Special Filter 4,000


267

P6-23 (continued)

b. Computation of consolidated net income and income assignedto controlling interest:

Operating income reported by Clean Air Products($250,000 - $175,000 - $30,000) $ 45,000

Net income of Superior Filter($200,000 - $140,000 - $20,000) 40,000

$ 85,000Inventory profit realized from 20X7 20,000Unrealized inventory profit for 20X8 (15,000)Consolidated net income $ 90,000Income assigned to noncontrolling interest($40,000 + $20,000 - $15,000) x 0.20 (9,000)

Income assigned to controlling interest $ 81,000

c. Noncontrolling interest, December 31, 20X8:

Common stock $ 90,000Retained earnings ($220,000 + $40,000) 260,000Less: Unrealized inventory profit (15,000)

$335,000Proportion of stock held by noncontrolling interest x 0.20Noncontrolling interest $ 67,000

268

P6-24 Multiple Inventory Transfers

a. Consolidated net income for 20X8:

Operating income of Ajax Corporation $80,000Unrealized profit, December 31, 20X8($35,000 - $15,000) x ($7,000 / $35,000) (4,000) $ 76,000

Net income of Beta Corporation $37,500Profit realized from 20X7($30,000 - $24,000) x ($10,000 / $30,000) 2,000

Unrealized profit, December 31, 20X8($72,000 - $63,000) x ($12,000 / $72,000) (1,500) 38,000

Net income of Cole Corporation $20,000Profit realized from 20X7($72,000 - $60,000) x ($18,000 / $72,000) 3,000

Unrealized profit, December 31, 20X8($45,000 - $27,000) x ($15,000 / $45,000) (6,000) 17,000

Consolidated net income $131,000

b. Inventory balance, December 31, 20X8:

Balance per Beta Corporation $ 7,000Less: Unrealized profit (4,000) $ 3,000

Balance per Cole Corporation $12,000Less: Unrealized profit (1,500) 10,500

Balance per Ajax Corporation $15,000Less: Unrealized profit (6,000) 9,000Inventory balance per consolidated statement $22,500

c. Income assigned to noncontrolling interest in 20X8:

Realized income of Beta Corporation $38,000Proportion of stock held bynoncontrolling interest x 0.30 $11,400

Realized income of Cole Corporation $17,000Proportion of stock held bynoncontrolling interest x 0.10 1,700

Income to noncontrolling interest $13,100

269

P6-25 Consolidation with Inventory Transfers and Other Comprehensive Income


Total = Re-sold +Ending

InventorySales 108,000 60,000 48,000COGS 90,000 50,000 40,000Gross Profit 18,000 10,000 8,000Gross Profit % 16.67%










Investment in Income fromTall Corp. Tall Corp.

Beg. Balance 1,246,60090% Net Income 81,000 81,000 90% Net Income

54,000 90% Dividends

18,00090% of OCIGain

20X4 Reversal 13,400 14,600 Deferred GP 14,600 13,400 20X4 ReversalEnding Balance 1,290,400 79,800 Ending Balance

Reversal 13,400 1,285,800 Basic 79,80018,000 OCI Entry

0 0

270

P6-25 (continued)

a. Balance in investment account at December 31, 20X5:

Proportionate share of Tall's net assets,January 1 ([$1,400,000 x .90] – 8,000 – [6,000 x 0.90]) $1,246,600

Proportionate share of 20X5 net income($90,000 x 0.90) 81,000

Proportionate share of other comprehensiveincome for 20X5 ($20,000 x 0.90) 18,000

Proportionate share of dividends received($60,000 x 0.90) (54,000)

Reversal of deferred gain from 20X4 downstream transaction 8,000Reversal of deferred gain from 20X4 upstream transaction($6,000 x .090)

5,400

Deferred gain from downstream transaction (2,000)Proportionate share of deferred gain from upstreamtransaction ($14,000 x 0.90) (12,600)

Balance in investment account December 31, 20X5 $1,290,400

b. Investment income for 20X5:

Net income reported by Tall $90,000Proportion of ownership held by Priority x 0.90Priority’s share of reported income from Tall 81,000Reversal of deferred gain from 20X4 downstream transaction 8,000Reversal of deferred gain from 20X4 upstream transaction($6,000 x 0.90)

5,400

Deferred gain from downstream transaction (2,000)Proportionate share of deferred gain from upstreamtransaction ($14,000 x 0.90) (12,600)

Investment income for 20X5 $79,800

c. Income to noncontrolling interests for 20X5:

Net income reported by Tall $90,00020X4 inventory profits realized in 20X5($15,000 x 0.40) 6,000

20X5 unrealized inventory profits$30,000 - [$30,000 x ($48,000 / $90,000)] (14,000)

Realized net income $82,000Proportion of ownership held by noncontrolling interest x 0.10Income to noncontrolling interest $ 8,200

271

P6-25 (continued)

d. Balance assigned to noncontrolling interest in consolidated balance sheet:

Net assets reported by Tall, January 1 $1,400,000Net income for 20X5 90,000Dividends paid in 20X5 (60,000)Net assets reported, December 31, 20X5 $1,430,000Unrealized inventory profits atDecember 31, 20X5 (14,000)

Other comprehensive income in 20X5 20,000Adjusted net assets, December 31, 20X5 $1,436,000Proportion of ownership held by noncontrollinginterest x 0.10

Net assets assigned to noncontrolling interest $ 143,600

e. Inventory reported in consolidated balance sheet:

Inventory held by Priority $120,000Less: Unrealized profit (14,000) $106,000

Inventory held by Tall $100,000Less: Unrealized profit

$6,000 - [$6,000 x ($24,000 / $36,000)] (2,000) 98,000Inventory $204,000

f. Consolidated net income for 20X5:

Operating income of Priority $240,000Net income of Tall 90,000Total unadjusted income $330,00020X4 inventory profits realized in 20X5($6,000 + $8,000) 14,000

Unrealized inventory profits on 20X5 sales($14,000 + $2,000) (16,000)

Consolidated net income $328,000

g. Eliminating entries, December 31, 20X5


NCI10%

+PriorityCorp.90%

= Comm.Stock

+Add.Paid-InCapital

+ RetainedEarnings

+ Acc.OCI

Original book value 140,000 1,260,000 400,000 200,000 790,000 10,000+ Net Income 9,000 81,000 90,000- Dividends (6,000) (54,000) (60,000)Ending book value 143,000 1,287,000 400,000 200,000 820,000 10,000

273

P6-25 (continued)


Total =

PriorityCorp.'sshare +

NCI'sshare

Downstream Reversal 8,000 8,000Upstream Reversal 6,000 5,400 600Downstream Deferred GP (2,000) (2,000)Upstream Deferred GP (14,000) (12,600) (1,400)Total (2,000) (1,200) (800)

Basic elimination entryCommon stock 400,000 ← Original amount invested (100%)

Additional paid-in capital 200,000 ← Beginning balance in APIC

Retained earnings 790,000 ← Beginning balance in RE

Accumulated OCI 10,000 ← Beginning balance in Acc. OCI

Income from Tall Corp. 79,800 ← PC.’s % of NI - Def. GP + Reversal

NCI in NI of Tall Corp. 8,200 ← NCI share of NI - Def. GP + Reversal

Investment in Tall Corp. 1,285,800 ← Net book value - Def. GP + Reversal

NCI in NA of Tall Corp. 142,200 ← NCI share of BV - Def. GP + Reversal

Other Comprehensive Income Entry:OCI from Tall Corp. 18,000OCI to the NCI 2,000

Investment in Tall Corp. 18,000NCI in NA of Tall Corp. 2,000

Reversal of last year's deferral:Investment in Tall Corp. 13,400NCI in NA of Tall Corp. 600




274

P6-26 Multiple Inventory Transfers between Parent and Subsidiary

20X5 Downstream

Total = Re-sold +

EndingInventory,

20X5Sales 150,000 90,000 60,000COGS 100,000 60,000 40,000Gross Profit 50,000 30,000 20,000Gross Profit % 33.33%

20X5 Upstream

Total = Re-sold +

EndingInventory,


BegInventory,

20X6 = Re-sold +

EndingInventory,


20X6 Downstream

Total = Re-sold +

EndingInventory,


20X6 Upstream

Total = Re-sold +

EndingInventory,


275

a. Eliminating entries:

Investment in Slinky 20,000Cost of goods sold 20,000

Eliminate beginning inventory profit of Proud Company.

Investment in Slinky 12,600NCI in NA of Slinky 8,400

Cost of goods sold 15,000Inventory 6,000

Eliminate beginning inventory profit of Slinky Company.

Sales 60,000Cost of goods sold 58,000Inventory 2,000

Eliminate intercompany sale of inventory by Proud Company.

Sales 240,000Cost of goods sold 210,000Inventory 30,000

Eliminate intercompany sale of inventory by Slinky Company.

b. Computation of cost of goods sold for consolidated entity:

Inventory produced by Proud in 20X5($100,000 x 0.40) $ 40,000

Inventory produced by Slinky in 20X5($70,000 x 0.50) 35,000

Inventory produced by Proud in 20X6($40,000 x 0.90) 36,000

Inventory produced by Slinky in 20X6($200,000 x 0.25) 50,000

Cost of goods sold reported inconsolidated income statement $161,000

276

P6-27 Consolidation following Inventory Transactionsa.Equity Method Entries on Bell Co.'s Books:Investment in Troll Corp. 18,000

Income from Troll Corp. 18,000Record Bell Co.'s 60% share of Troll Corp.'s 20X2 income

Cash 6,000Investment in Troll Corp. 6,000

Record Bell Co.'s 60% share of Troll Corp.'s 20X2 dividend

Income from Troll Corp. 6,500Investment in Troll Corp. 6,500


Investment in Troll Corp. 2,040Income from Troll Corp. 2,040


Income from Troll Corp. 2,520Investment in Troll Corp. 2,520



NCI40%

+ Bell Co.60%

= CommonStock

+ RetainedEarnings



Total =Bell Co.'s

share + NCI's shareDownstream Reversal 0 0Upstream Reversal 3,400 2,040 1,360Downstream Deferred GP (6,500) (6,500)Upstream Deferred GP (4,200) (2,520) (1,680)Total (7,300) (6,980) (320)

277

P6-27 (continued)



Income from Troll Corp. 11,020 ← Bell’s % of NI - Def. GP + Reversal

NCI in NI of Troll Corp. 11,680 ← NCI share of NI - Def. GP + Reversal

Dividends declared 10,000 ← 100% of Troll Corp.'s dividends

Investment in Troll Corp. 95,020 ← Net book value - Def. GP + Reversal

NCI in NA of Troll Corp. 67,680 ← NCI share of BV - Def. GP + Reversal


Bell Co.60% = Land

Beginning balance 7,200 10,800 18,000Changes 0 0 0Ending balance 7,200 10,800 18,000


Investment in Troll Corp. 10,800NCI in NA of Troll Corp. 7,200



Reversal of last year's deferral:Investment in Troll Corp. 2,040NCI in NA of Troll Corp. 1,360




278

P6-27 (continued)

20X2 DownstreamTransactions


Sales 28,000 15,000 13,000COGS 14,000 7,500 6,500

Gross Profit 14,000 7,500 6,500Gross Profit % 50.00%



Sales 42,500 34,000 8,500COGS 25,500 20,400 5,100




Sales 35,000 24,500 10,500COGS 21,000 14,700 6,300


Investment in Income fromTroll Corp. Troll Corp.


60% Net Income 18,000 18,000 60% Net Income6,000 60% Dividends

20X1 Reversal 2,040 9,020 Deferred GP 9,020 2,040 20X1 ReversalEnding Balance 103,780 11,020 Ending Balance

Reversal 2,040 95,020 Basic 11,02010,800 Excess Reclass.

0 0

279

P6-27 (continued)

c.

Bell Co.TrollCorp.


Income StatementSales 200,000 120,000 63,000 257,000Less: COGS (99,800) (61,000) 52,300 (105,100)

3,400Less: Depreciation Expense (25,000) (15,000) (40,000)Less: Interest Expense (6,000) (14,000) (20,000)Income from Troll Corp. 11,020 11,020 0Consolidated Net Income 80,220 30,000 74,020 55,700 91,900NCI in Net Income 11,680 (11,680)Controlling Interest in NetIncome 80,220 30,000 85,700 55,700 80,220


Balance SheetCash and Accounts Receivable 69,400 51,200 120,600Inventory 60,000 55,000 10,700 104,300Land 40,000 30,000 18,000 88,000Buildings & Equipment 520,000 350,000 45,000 825,000Less: Accumulated Depreciation (175,000) (75,000) 45,000 (205,000)Investment in Troll Corp. 103,780 2,040 95,020 0

10,800Total Assets 618,180 411,200 65,040 161,520 932,900

Accounts Payable 68,800 41,200 110,000Bonds Payable 80,000 200,000 280,000Bonds Premium 1,200 1,200Common Stock 200,000 100,000 100,000 200,000Retained Earnings 268,180 70,000 135,700 65,700 268,180NCI in NA of Troll Corp. 1,360 67,680 73,520


280

P6-28 Consolidation Worksheet

a.Equity Method Entries on Crow Corp.'s Books:Investment in West Co. 14,000

Income from West Co. 14,000Record Crow Corp.'s 70% share of West Co.'s 20X9 income

Cash 3,500Investment in West Co. 3,500

Record Crow Corp.'s 70% share of West Co.'s 20X9 dividend

Investment in West Co. 15,000Income from West Co. 15,000

Reverse of the deferred gross profit from downstream sales in 20X8

Income from West Co. 8,000Investment in West Co. 8,000


Investment in West Co. 21,000Income from West Co. 21,000


Income from West Co. 17,500Investment in West Co. 17,500



NCI30%

+CrowCorp.70%

= CommonStock

+ RetainedEarnings

Original bookvalue 120,000 280,000 150,000 250,000+ Net Income 6,000 14,000 20,000- Dividends (1,500) (3,500) (5,000)Ending book value 124,500 290,500 150,000 265,000

281

P6-28 (continued)


Total =

CrowCorp.'sshare + NCI's share

Downstream Reversal 15,000 15,000Upstream Reversal 30,000 21,000 9,000Downstream Deferred GP (8,000) (8,000)Upstream Deferred GP (25,000) (17,500) (7,500)Total 12,000 10,500 1,500

Basic elimination entryCommon stock 150,000 ← Original amount invested (100%)Retained earnings 250,000 ← Beginning balance in REIncome from West Co. 24,500 ← Crow’s % of NI - Def. GP + ReversalNCI in NI of West Co. 7,500 ← NCI share of NI - Def. GP + Reversal

Dividends declared 5,000 ← 100% of West Co.'s dividendsInvestment in West Co. 301,000 ← Net book value - Def. GP + ReversalNCI in NA of West Co. 126,000 ← NCI share of BV - Def. GP + Reversal


Crow Corp.70% = Land + Goodwill

Beginningbalance 10,800 25,200 14,000 22,000Changes 0 0 0 0Ending balance 10,800 25,200 14,000 22,000

Excess value (differential) reclassification entry:Land 14,000Goodwill 22,000

Investment in West Co. 25,200NCI in NA of West Co. 10,800

Reversal of last year's deferral:Investment in West Co. 36,000NCI in NA of West Co. 9,000




282

P6-28 (continued)



InventorySales 90,000 70,000 20,000COGS 54,000 42,000 12,000

Gross Profit 36,000 28,000 8,000




InventorySales 62,000 0 62,000COGS 37,000 0 37,000

Gross Profit 25,000 0 25,000


Investment in Income fromWest Co. West Co.


70% Net Income 14,000 14,000 70% Net Income3,500 70% Dividends


Reversal 36,000 301,000 Basic 24,50025,200 Excess Reclass.

0 0

283

P6-28 (continued)

b.CrowCorp. West Co.



45,000Less: Depreciation Expense (40,000) (30,000) (70,000)Income from West Co. 24,500 24,500 0Consolidated Net Income 84,500 20,000 176,500 164,000 92,000NCI in Net Income 7,500 (7,500)Controlling Interest in Net Income 84,500 20,000 184,000 164,000 84,500


Balance SheetCash and Receivable 81,300 85,000 166,300Inventory 200,000 110,000 33,000 277,000Land, Buildings, and Equipment (net) 270,000 250,000 14,000 534,000Investment in West Co. 290,200 36,000 301,000 0


Accounts Payable 60,000 30,000 90,000Common Stock 200,000 150,000 150,000 200,000Retained Earnings 581,500 265,000 434,000 169,000 581,500NCI in NA of West Co. 9,000 126,000 127,800


c. Retained earnings reconciliation, December 31, 20X9:Retained earnings, Crow Corporation $581,500Retained earnings, West Company 265,000Elimination of West’s beginning RE (250,000)Elimination debits in income statement (184,000)Elimination credits in income statement 164,000Remove West’s dividends 5,000Consolidated retained earnings $581,500

284

P6-29 Computation of Consolidated Totals

a. Consolidated sales for 20X8:Bunker Harrison Consol-Corp. Co. idated

Sales reported $660,000 $510,000Intercorporate sales (140,000) (240,000)Sales to nonaffiliates $520,000 $270,000 $790,000

b. Consolidated cost of goods sold:

Total sales reported $660,000 $510,000Ratio of cost to sales price ÷ 1.4 ÷ 1.2Cost of goods sold $471,429 $425,000Amount to be eliminated(see entry) (128,000) (232,000)

Cost of goods sold adjusted $343,429 $193,000 $536,429

Downstream:



Upstream:



Eliminating entries:


Elimination of sales by Bunker to Harrison:


Elimination of sales by Harrison to Bunker:

285

P6-29 (continued)

c. Operating income of Bunker Corporation (excludingincome from Harrison Company) $70,000

Net income of Harrison Company 20,000$90,000

Less: Unrealized inventory profits of Bunker (12,000)Unrealized inventory profits of Harrison (8,000)

Consolidated net income $70,000Less: Income assigned to noncontrolling interest

($20,000 - $8,000) x 0.20 (2,400)Income to controlling interest 20X8 $67,600

d. Inventory balance in consolidated balance sheet:

Inventory reported by Bunker Corporation $48,000Unrealized profits (8,000) $40,000

Inventory reported by Harrison Company $42,000Unrealized profits (12,000) 30,000Inventory balance, December 31, 20X8 $70,000

286

P6-30 Intercompany Transfer of Inventory and Landa.Equity Method Entries on Pine Corp.'s Books:Investment in Bock Co. 17,500

Income from Bock Co. 17,500Record Pine Corp.'s 70% share of Bock Co.'s 20X3 income

Cash 10,500Investment in Bock Co. 10,500

Record Pine Corp.'s 70% share of Bock Co.'s 20X3 dividend

Income from Bock Co. 6,300Investment in Bock Co. 6,300




Investment in Bock Co. 6,300Income from Bock Co. 6,300




Book Value Calculations:NCI30% + Pine Corp.

70% = CommonStock + Retained

EarningsOriginal book value 39,000 91,000 70,000 60,000+ Net Income 7,500 17,500 25,000- Dividends (4,500) (10,500) (15,000)Ending book value 42,000 98,000 70,000 70,000


Total =

PineCorp.'sshare + NCI's share

Upstream Reversal 9,000 6,300 2,700Downstream Deferred GP (3,800) (3,800)Upstream Deferred GP (8,000) (5,600) (2,400)Total (2,800) (3,100) 300

287

P6-30 (continued)



Income from Bock Co. 14,400 ← Pine’s % of NI - Def. GP + Reversal

NCI in NI of Bock Co. 7,800 ← NCI share of NI - Def. GP + Reversal

Dividends declared 15,000 ← 100% of Bock Co.'s dividends

Investment in Bock Co. 94,900 ← Net book value - Def. GP + Reversal

NCI in NA of Bock Co. 42,300 ← NCI share of BV - Def. GP + Reversal


Pine Corp.70% =

Buildings andEquipment + Patents +

Acc.Depr.

Beginningbalance 13,800 32,200 20,000 28,000 (2,000)Changes (2,700) (6,300) (7,000) (2,000)Ending balance 11,100 25,900 20,000 21,000 (4,000)

Amortized excess value reclassification entry:Amortization expense 7,000Depreciation expense 2,000

Income from Bock Co. 6,300NCI in NI of Bock Co. 2,700

Excess value (differential) reclassification entry:Buildings and Equipment 20,000Patents 21,000

Accumulated depreciation 4,000Investment in Bock Co. 25,900NCI in NA of Bock Co. 11,100

Optional accumulated depreciation elimination entry:Accumulated depreciation 50,000


Reversal of last year's deferral:Investment in Bock Co. 6,300NCI in NA of Bock Co. 2,700


288

P6-30 (continued)

Deferral of this year's unrealized profits on inventory transfersInvestment in Bock Co. 4,900NCI in NA of Bock Co. 2,100

Inventory 7,000



Investment in Income fromBock Co. Bock Co.

Beg. Balance 112,00070% Net Income 17,500 17,500 70% Net Income



Reversal 6,300 94,900 Basic 14,40020X2 Deferred

GP 4,900 25,900 Excess Reclass. 6,3000 0

20X3 Downstream Transactions:



20X2 Upstream Transactions:

Ending Inventory,20X2 =

Re-sold,20X3 +

EndingInventory,





289

P6-30 (continued)

b.PineCorp.

BockCo.


Income StatementSales 260,000 125,000 120,000 265,000Other Income 13,600 13,600Less: COGS (186,000) (79,800) 108,200 (148,600)

9,000Less: Depreciation Expense (20,000) (15,000) 2,000 (37,000)Less: Interest Expense (16,000) (5,200) (21,200)Less: Amortization Expense 7,000 (7,000)Income from Bock Co. 8,100 14,400 6,300 0Consolidated Net Income 59,700 25,000 143,400 123,500 64,800NCI in Net Income 7,800 2,700 (5,100)Controlling Interest in Net Income 59,700 25,000 151,200 126,200 59,700


Balance SheetCash and Accounts Receivable 15,400 21,600 37,000Inventory 165,000 35,000 11,800 181,200

7,000Land 80,000 40,000 120,000Buildings & Equipment 340,000 260,000 20,000 50,000 570,000Less: Accumulated Depreciation (140,000) (80,000) 50,000 4,000 (174,000)Investment in Bock Co. 109,600 6,300 94,900 0

4,900 25,900Patents 21,000 21,000Total Assets 570,000 276,600 102,200 193,600 755,200

Accounts Payable 92,400 35,000 127,400Bonds Payable 200,000 100,000 300,000Bonds Premium 1,600 1,600Common Stock 120,000 70,000 70,000 120,000Retained Earnings 157,600 70,000 211,200 141,200 157,600NCI in NA of Bock Co. 2,700 42,300 48,600

2,100 11,100Total Liabilities & Equity 570,000 276,600 286,000 194,600 755,200

290

P7-30 (continued)

Note: Financial statements are not required.

Pine Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X3

Cash and Accounts Receivable $ 37,000Inventory 181,200Land 120,000Buildings and Equipment $570,000Less: Accumulated Depreciation (174,000) 396,000Patent 21,000Total Assets $755,200

Accounts Payable $127,400Bonds Payable $300,000Bond Premium 1,600 301,600Stockholders’ Equity:Controlling Interest:Common Stock $120,000Retained Earnings 157,600



Pine Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X3

Sales $265,000Other Income 13,600Total Income $278,600Cost of Goods Sold $148,600Depreciation Expense 37,000Interest Expense 21,200Amortization Expense 7,000Total Expenses (213,800)Consolidated Net Income $ 64,800Income to Noncontrolling Interest (5,100)Income to Controlling Interest $ 59,700

Pine Corporation and SubsidiaryConsolidated Retained Earnings Statement




291

P6-31 Consolidation Using Financial Statement Data

a.Equity Method Entries on Bower Corp.'s Books:Investment in Concerto Co. 21,000

Income from Concerto Co. 21,000Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 income

Cash 12,000Investment in Concerto Co. 12,000

Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 dividend

Income from Concerto Co. 6,000Investment in Concerto Co. 6,000


Investment in Concerto Co. 4,000Income from Concerto Co. 4,000




Investment in Concerto Co. 4,800Income from Concerto Co. 4,800





NCI40%

+BowerCorp.60%

= CommonStock

+ RetainedEarnings


292

P6-31 (continued)


Total =

BowerCorp.'sshare + NCI's share

Downstream Reversal 4,000 4,000Upstream Reversal 8,000 4,800 3,200Downstream Deferred GP (2,000) (2,000)Upstream Deferred GP (9,000) (5,400) (3,600)Total 1,000 1,400 (400)

Basic elimination entryCommon stock 50,000 ← Original amount invested (100%)Retained earnings 150,000 ← Beginning balance in REIncome from Concerto Co. 22,400 ← Bower’s % of NI - Def. GP + ReversalNCI in NI of Concerto Co. 13,600 ← NCI share of NI - Def. GP + Reversal

Dividends declared 20,000 ← 100% of Concerto Co.'s dividendsInvestment in Concerto Co. 130,400 ← Net book value - Def. GP + ReversalNCI in NA of Concerto Co. 85,600 ← NCI share of BV - Def. GP + Reversal


Bower Corp.60% = Goodwill

Beginning balance 16,000 24,000 40,000Changes (4,000) (6,000) (10,000)Ending balance 12,000 18,000 30,000

Amortized excess value reclassification entry:Goodwill impairment loss 10,000

Income from Concerto Co. 6,000NCI in NI of Concerto Co. 4,000


Investment in Concerto Co. 18,000NCI in NA of Concerto Co. 12,000



293

P6-31 (continued)

Reversal of last year's deferral:Investment in Concerto Co. 8,800NCI in NA of Concerto Co. 3,200





Ending Inv.,20X5

Sales 14,000COGS 10,000Gross Profit 4,000Gross Profit % 28.57%





Ending Inv.,20X5





P6-31 (continued)Investment in Income fromConcerto Co. Concerto Co.

294

P6-31 (continued)Beg. Balance 135,200



Reversal 8,800 130,400 Basic 22,400


b.BowerCorp.

ConcertoCo.



101,000Less: Depreciation & Amort. Expense (25,000) (15,000) (40,000)Less: Other Expenses (35,000) (30,000) (65,000)Less: Goodwill Impairment Loss 10,000 (10,000)Income from Concerto Co. 16,400 22,400 6,000 0Consolidated Net Income 76,400 35,000 144,400 119,000 86,000NCI in Net Income 13,600 4,000 (9,600)Controlling Interest in Net Income 76,400 35,000 158,000 123,000 76,400


Balance SheetCash 26,800 35,000 61,800Accounts Receivable 80,000 40,000 120,000Inventory 120,000 90,000 11,000 199,000Land 70,000 20,000 90,000Buildings & Equipment 340,000 200,000 25,000 515,000Less: Accumulated Depreciation (165,000) (85,000) 25,000 (225,000)Investment in Concerto Co. 139,600 8,800 130,400 0


Accounts Payable 80,000 15,000 95,000Bonds Payable 120,000 70,000 190,000Common Stock 100,000 50,000 50,000 100,000Retained Earnings 311,400 165,000 308,000 143,000 311,400NCI in NA of Concerto Co. 3,200 85,600 94,400


295

P6-32 Intercorporate Transfers of Inventory and Equipment

a. Consolidated cost of goods sold for 20X9:

Amount reported by Foster Company $593,000Amount reported by Block Corporation 270,000Adjustment for unrealized profit inbeginning inventory sold in 20X9 (15,000)

Adjustment for inventory purchased fromsubsidiary and resold during 20X9:

CGS recorded by Foster ($30,000 x 0.60) $18,000CGS recorded by Block 20,000Total recorded $38,000CGS based on Block's cost ($20,000 x 0.60) (12,000)Required adjustment (26,000)

Cost of goods sold $822,000

b. Consolidated inventory balance:

Amount reported by Foster $137,000Amount reported by Block 130,000Total inventory reported $267,000Unrealized profit in ending inventory held byFoster [($30,000 - $20,000) x 0.40] (4,000)

Consolidated balance $263,000

c. Income assigned to noncontrolling interest:

Net income reported by Block Corporation $70,000Adjustment for realization of profit on inventorysold to Foster in 20X8 15,000

Adjustment for unrealized profit on inventory soldto Foster in 20X9 (4,000)

Realized net income of Block for 20X9 $81,000Proportion of ownership held by noncontrolling interest x 0.10Income assigned to noncontrolling interest $ 8,100

296

P6-32 (continued)

d. Amount assigned to noncontrolling interest in consolidated balancesheet:

Block Corporation common stock outstanding $ 50,000Block Corporation retained earnings, January 1, 20X9 165,000Net income for 20X9 70,000Dividends paid in 20X9 (20,000)Book value, December 31, 20X9 $265,000Adjustment for unrealized profit on inventorysold to Foster (4,000)

Realized book value of Block Corporation $261,000Proportion of ownership held by noncontrollinginterest x 0.10

Balance assigned to noncontrolling interest $ 26,100

e. Consolidated retained earnings at December 31, 20X9:

Balance reported by Foster Company, January 1, 20X9 $235,000Net income for 20X9 180,900Dividends paid in 20X9 (40,000)Balance reported by Foster Company, December 31, 20X9 $375,900

f. Eliminating entries:


NCI10%

+ Foster Co.90%

=CommonStock

+ RetainedEarnings


297

P6-32 (continued)


Total =

FosterCo.'sshare + NCI's share

Downstream Reversal 0 0Upstream Reversal 15,000 13,500 1,500Downstream Deferred GP 0 0Upstream Deferred GP (4,000) (3,600) (400)Total 11,000 9,900 1,100

Basic elimination entryCommon stock 50,000 ← Original amount invested (100%)Retained earnings 165,000 ← Beginning balance in REIncome from Block Corp. 72,900 ← Foster’s % of NI - Def. GP + ReversalNCI in NI of Block Corp. 8,100 ← NCI share of NI - Def. GP + Reversal

Dividends declared 20,000 ← 100% of Block Corp.'s dividendsInvestment in Block Corp. 248,400 ← Net book value - Def. GP + ReversalNCI in NA of Block Corp. 27,600 ← NCI share of BV - Def. GP + Reversal

Reversal of last year's deferral:Investment in Block Corp. 13,500NCI in NA of Block Corp. 1,500





EndingInventory





298

P6-32 (continued)

Investment in Income fromBlock Corp. Block Corp.

Beg. Balance 180,00090% Net Income 63,000 63,000 90% Net Income

18,000 90% Dividends20X8 Reversal 13,500 3,600 Deferred GP 3,600 13,500 20X8 ReversalEnding Balance 234,900 72,900 Ending Balance

Reversal 13,500 248,400 Basic 72,9000 0

g.FosterCo.

BlockCorp.


Income StatementSales 815,000 415,000 30,000 1,200,000Other Income 26,000 15,000 41,000Less: COGS (593,000) (270,000) 15,000 (822,000)

26,000Less: Depreciation Expense (45,000) (15,000) (60,000)Less: Other Expenses (95,000) (75,000) (170,000)Income from Block Corp. 72,900 72,900 0Consolidated Net Income 180,900 70,000 102,900 41,000 189,000NCI in Net Income 8,100 (8,100)Controlling Interest in NetIncome 180,900 70,000 111,000 41,000 180,900


Balance SheetCash 187,000 57,400 244,400Accounts Receivable 80,000 90,000 170,000Other Receivables 40,000 10,000 50,000Inventory 137,000 130,000 4,000 263,000Land 80,000 60,000 140,000Buildings & Equipment 500,000 250,000 750,000Less: Accumulated Depreciation (155,000) (75,000) (230,000)Investment in Block Corp. 234,900 13,500 248,400 0Total Assets 1,103,900 522,400 13,500 252,400 1,387,400

Accounts Payable 63,000 35,000 98,000Other Payables 95,000 20,000 115,000Bonds Payable 250,000 200,000 450,000Bond Premium 2,400 2,400Common Stock 210,000 50,000 50,000 210,000Additional Paid-in Capital 110,000 110,000Retained Earnings 375,900 215,000 276,000 61,000 375,900NCI in NA of Block Corp. 1,500 27,600 26,100Total Liabilities & Equity 1,103,900 522,400 327,500 88,600 1,387,400

299

P6-33 Consolidated Balance Sheet Worksheet [AICPA Adapted]

Book Value Calculations:NCI10% + Pine Corp.

90% = CommonStock + Retained

EarningsOriginal book value 80,000 720,000 200,000 600,000+ Net Income 10,100 90,900 101,000- Dividends (100) (900) (1,000)Ending book value 90,000 810,000 200,000 700,000


Total =

PineCorp.'sshare + NCI's share

Downstream Reversal 0 0Upstream Reversal 0 0 0Downstream Deferred GP -3,000 -3,000Upstream Deferred GP 0 0 0Total (3,000) (3,000) 0



Income from Slim Corp. 87,900 ← Pine’s % of NI - Def. GP + Reversal

NCI in NI of Slim Corp. 10,100 ← NCI share of NI - Def. GP + Reversal

Dividends declared 1,000 ← 100% of Slim Corp.'s dividends

Investment in Slim Corp. 807,000 ← Net book value - Def. GP + Reversal

NCI in NA of Slim Corp. 90,000 ← NCI share of BV - Def. GP + Reversal


Pine Corp.90% = Goodwill

Beginning balance 50,000 450,000 500,000Changes 0 0 0Ending balance 50,000 450,000 500,000


Investment in Slim Corp. 450,000NCI in NA of Slim Corp. 50,000

300

P6-33 (continued)

Intercompany TransactionsDividends Payable 900

Dividends Receivable 900


Note Payable 100,000Note Receivable 100,000

Interest Payable 5,000Interest Receivable 5,000






Gross Profit 60,000 57,000 3,000


Investment in Income fromSlim Corp. Slim Corp.

AcquisitionPrice 1,170,000

90% Net Income 90,900 90,900 90% Net Income900 90% Dividends3,000 Deferred GP 3,000

Ending Balance 1,257,000 87,900 Ending Balance807,000 Basic 87,900450,000 Excess Reclass.

0 0

301

P6-33 (continued)

PineCorp.

SlimCorp.


Balance SheetCash 105,000 15,000 120,000AR & Other Receivables 410,000 120,000 900 334,100

90,000100,000

5,000Merchandise Inventory 920,000 670,000 3,000 1,587,000Plant & Equipment (net) 1,000,000 400,000 1,400,000Investment in Slim Corp. 1,257,000 807,000 0

450,000Goodwill 500,000 500,000Total Assets 3,692,000 1,205,000 500,000 1,455,900 3,941,100

AP & Other Liabilities 140,000 305,000 900 249,10090,000

100,0005,000

Common Stock 500,000 200,000 200,000 500,000Retained Earnings 3,052,000 700,000 600,000 1,000 3,052,000

87,900 297,00010,100

300,000NCI in NA of Slim Corp. 90,000 140,000

50,000Total Liabilities & Equity 3,692,000 1,205,000 1,393,900 438,000 3,941,100

302

P6-34 Comprehensive Worksheet Problem

a.Equity Method Entries on Randall Corp.'s Books:Investment in Sharp Co. 320,000

Cash 320,000Record the initial investment in Sharp Co.

Investment in Sharp Co. 32,000Income from Sharp Co. 32,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income

Cash 20,000Investment in Sharp Co. 20,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend

Income from Sharp Co. 4,000Investment in Sharp Co. 4,000










303

6-34 (continued)


NCI20%

+RandallCorp.80%

= CommonStock


+ RetainedEarnings



Total =

RandallCorp.'sshare + NCI's share

Downstream Reversal 2,000 2,000Upstream Reversal 8,000 6,400 1,600Downstream DeferredGP (3,000) (3,000)Upstream Deferred GP (10,000) (8,000) (2,000)Total (3,000) (2,600) (400)




Income from Sharp Co. 29,400 ← Randall’s % of NI - Def. GP + Reversal

NCI in NI of Sharp Co. 7,600 ← NCI share of NI - Def. GP + Reversal

Dividends declared 25,000 ← 100% of Sharp Co.'s dividends

Investment in Sharp Co. 277,400 ← Net book value - Def. GP + Reversal

NCI in NA of Sharp Co. 69,600 ← NCI share of BV - Def. GP + Reversal


RandallCorp. 80% =

Buildings &equipment + Acc. Depr.


304

P6-34 (continued)


Income from Sharp Co. 4,000NCI in NI of Sharp Co. 1,000

Excess value (differential) reclassification entry:Buildings & equipment 50,000

Accumulated depreciation 20,000Investment in Sharp Co. 24,000NCI in NA of Sharp Co. 6,000





Reversal of last year's deferral:Investment in Sharp Co. 8,400NCI in NA of Sharp Co. 1,600









InventorySales 12,000 0 12,000COGS 9,000 0 9,000Gross Profit 3,000 0 3,000Gross Profit % 25.00%

305

P6-34 (continued)




Gross Profit 20,000 12,000 8,000





Gross Profit 15,000 5,000 10,000


Investment in Income fromSharp Co. Sharp Co.


20,000 80% Dividends

4,000Excess Val.Amort. 4,000


Reversal 8,400 277,400 Basic 29,400


306

P6-34 (continued)

RandallCorp.

SharpCo.


Income StatementSales 500,000 250,000 57,000 693,000Other Income 20,400 30,000 50,400Less: COGS (416,000) (202,000) 10,000 (564,000)

44,000Less: Depreciation & Amortization Exp. (30,000) (20,000) 5,000 (55,000)Less: Other Expenses (24,000) (18,000) (42,000)Income from Sharp Co. 25,400 29,400 4,000 0Consolidated Net Income 75,800 40,000 91,400 58,000 82,400NCI in Net Income 7,600 1,000 (6,600)Controlling Interest in NetIncome 75,800 40,000 99,000 59,000 75,800


Balance SheetCash 130,300 10,000 140,300Accounts Receivable 80,000 70,000 10,000 140,000Inventory 170,000 110,000 13,000 267,000Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000Less: Accumulated Depreciation (310,000) (120,000) 40,000 20,000 (410,000)Investment in Sharp Co. 293,000 8,400 277,400 0

24,000Total Assets 963,300 470,000 98,400 384,400 1,147,300

Accounts Payable 100,000 15,200 10,000 105,200Bonds Payable 300,000 100,000 400,000Bond Premium 4,800 4,800Common Stock 200,000 100,000 100,000 200,000Additional Paid-in Capital 20,000 20,000 0Retained Earnings 363,300 230,000 314,000 84,000 363,300NCI in NA of Sharp Co. 1,600 69,600 74,000


307

P6-34 (continued)

d. Randall Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X7

Cash $ 140,300Accounts Receivable 140,000Inventory 267,000Total Current Assets $ 547,300Buildings and Equipment $1,010,000Less: Accumulated Depreciation (410,000) 600,000Total Assets $1,147,300

Accounts Payable $ 105,200Bonds Payable $ 400,000Bond Premium 4,800 404,800Stockholders’ Equity:Controlling Interest:Common Stock $ 200,000Retained Earnings 363,300

Total Controlling Interest $ 563,300Noncontrolling Interest 74,000

Total Stockholders’ Equity 637,300Total Liabilities and Stockholders' Equity $1,147,300

Randall Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X7

Sales $ 693,000Other Income 50,400

$ 743,400Cost of Goods Sold $ 564,000Depreciation and Amortization Expense 55,000Other Expenses 42,000 (661,000)Consolidated Net Income $ 82,400Income to Noncontrolling Interest (6,600)Income to Controlling Interest $ 75,800

Randall Corporation and SubsidiaryConsolidated Statement of Retained Earnings


Retained Earnings, January 1, 20X7 $ 337,500Income to Controlling Interest, 20X7 75,800

$ 413,300Dividends Declared, 20X7 (50,000)Retained Earnings, December 31, 20X7 $ 363,300

308

P6-35 Comprehensive Consolidation Worksheet; Equity Method [AICPA Adapted]

Equity Method Entries on Fran Corp.'s Books:Investment in Brey Inc. 750,000

Cash 750,000Record the initial investment in Brey Inc.

Investment in Brey Inc. 190,000Income from Brey Inc. 190,000

Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 income

Cash 40,000Investment in Brey Inc. 40,000

Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 dividend

Income from Brey Inc. 44,000Investment in Brey Inc. 44,000


Income from Brey Inc. 18,000Investment in Brey Inc. 18,000


Fran Corp.100%

= CommonStock


+ RetainedEarnings

Original book value 636,000 400,000 80,000 156,000+ Net Income 190,000 190,000- Dividends (40,000) (40,000)Ending book value 786,000 400,000 80,000 306,000


Total =Fran Corp.'sshare

Upstream Deferred GP (18,000) (18,000)Total (18,000) (18,000)

309

P6-35 (continued)




Income from Brey Inc. 172,000 ← Fran’s % of NI - Def. GP

Dividends declared 40,000 ← 100% of Brey Inc.'s dividends

Investment in Brey Inc. 768,000 ← Net book value - Def. GP

Fran Corp.100% = Machinery + Acc. Depr. + Goodwill

Beginning balance 114,000 54,000 0 60,000Changes (44,000) (9,000) (35,000)Ending balance 70,000 54,000 (9,000) 25,000


Income from Brey Inc. 44,000

Excess value (differential) reclassification entry:Machinery 54,000Goodwill 25,000

Accumulated depreciation 9,000Investment in Brey Inc. 70,000





310

P6-35 (continued)



Sales 180,000 144,000 36,000

COGS 90,000 72,000 18,000

Gross Profit 90,000 72,000 18,000


Investment in Income fromBrey Inc. Brey Inc.


40,000 100% Dividends44,000 Excess Val. Amort. 44,00018,000 Deferred GP 18,000



311

P6-35 (continued)

Note that in the 8th edition, the sale of the warehouse was an intercompany transaction and needed to beeliminated. We changed the problem in the 9th edition to assume that the sale was to a non-affiliated thirdparty. Thus, the gain on the sale of the warehouse is not eliminated in this problem.

Fran Corp. Brey Inc.Elimination EntriesDR CR Consolidated

Income StatementNet Sales 3,800,000 1,500,000 180,000 5,120,000Gain on Sale of Warehouse 30,000 30,000Less: COGS (2,360,000) (870,000) 162,000 (3,068,000)Less: Operating Expenses (1,100,000) (440,000) 9,000 (1,549,000)Less: Goodwill Impairment 35,000 (35,000)Income from Brey Inc. 128,000 172,000 44,000 0Net Income 498,000 190,000 396,000 206,000 498,000

Statement of RetainedEarningsBeginning Balance 440,000 156,000 156,000 440,000Net Income 498,000 190,000 396,000 206,000 498,000Less: Dividends Declared (40,000) 40,000 0Ending Balance 938,000 306,000 552,000 246,000 938,000

Balance SheetCash 570,000 150,000 720,000Accounts Receivable (net) 860,000 350,000 86,000 1,124,000Inventories 1,060,000 410,000 18,000 1,452,000Land, Plant, and Equipment 1,320,000 680,000 54,000 2,054,000Less: Accumulated Depreciation (370,000) (210,000) 9,000 (589,000)Investment in Brey Inc. 838,000 768,000 0

70,000Goodwill 25,000 25,000Total Assets 4,278,000 1,380,000 79,000 951,000 4,786,000

Accounts Payable & AccruedExpenses 1,340,000 594,000 86,000 1,848,000

Common Stock 1,700,000 400,000 400,000 1,700,000Additional Paid-in Capital 300,000 80,000 80,000 300,000Retained Earnings 938,000 306,000 552,000 246,000 938,000Total Liabilities & Equity 4,278,000 1,380,000 1,118,000 246,000 4,786,000

312

P6-36A Fully Adjusted Equity Method

a. Adjusted trial balance:

Randall Corporation Sharp CompanyItem Debit Credit Debit Credit

Cash $ 130,300 $ 10,000Accounts Receivable 80,000 70,000Inventory 170,000 110,000Buildings and Equipment 600,000 400,000Investment in SharpCompany Stock 304,000Cost of Goods Sold 416,000 202,000Depreciation and Amortization 30,000 20,000Other Expenses 24,000 18,000Dividends Declared 50,000 25,000Accumulated Depreciation $ 310,000 $120,000Accounts Payable 100,000 15,200Bonds Payable 300,000 100,000Bond Premium 4,800Common Stock 200,000 100,000Additional Paid-In Capital 20,000Retained Earnings 345,900 215,000Sales 500,000 250,000Other Income 20,400 30,000Income from Subsidiary 28,000

$1,804,300 $1,804,300 $855,000 $855,000

b.Equity Method Entries on Randall Corp.'s Books:Investment in Sharp Co. 32,000

Income from Sharp Co. 32,000Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income

Cash 20,000Investment in Sharp Co. 20,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend



313

P6-36A (continued)

c.Book Value Calculations:

NCI20%

+RandallCorp.80%

=Common

Stock+ Add. Paid-

in Capital+RetainedEarnings



Total =

RandallCorp.'sshare + NCI's share

Downstream Reversal 2,000 2,000Upstream Reversal 8,000 6,400 1,600Downstream Deferred GP (3,000) (3,000)Upstream Deferred GP (10,000) (8,000) (2,000)Total (3,000) (2,600) (400)




Income from Sharp Co. 32,000 ← Randall Corp.’s % of NI

NCI in NI of Sharp Co. 7,600 ← NCI share of NI - Def. GP + Reversal

Dividends declared 25,000 ← 100% of Sharp Co.'s dividends

Investment in Sharp Co. 280,000 ← Net book value

NCI in NA of Sharp Co. 69,600 ← NCI share of BV - Def. GP + Reversal


Randall Corp.80% =

Buildings &equipment + Acc. Depr.


314

P6-36A (continued)


Income from Sharp Co. 4,000NCI in NI of Sharp Co. 1,000


Accumulated depreciation 20,000Investment in Sharp Co. 24,000NCI in NA of Sharp Co. 6,000





Reversal of last year's deferral:Retained earnings 8,400NCI in NA of Sharp Co. 1,600




(See Problem 6-34 for unrealized profit calculations.)

315

P6-36A (continued)

d.RandallCorp.

SharpCo.


Income StatementSales 500,000 250,000 57,000 693,000Other Income 20,400 30,000 50,400Less: COGS (416,000) (202,000) 44,000 (564,000)

10,000Less: Depreciation & Amortization Exp. (30,000) (20,000) 5,000 (55,000)Less: Other Expenses (24,000) (18,000) (42,000)Income from Sharp Co. 28,000 32,000 4,000 0Consolidated Net Income 78,400 40,000 94,000 58,000 82,400NCI in Net Income 7,600 1,000 (6,600)Controlling Interest in NetIncome 78,400 40,000 101,600 59,000 75,800

Statement of Retained EarningsBeginning Balance 345,900 215,000 215,000 337,500

8,400Net Income 78,400 40,000 101,600 59,000 75,800Less: Dividends Declared (50,000) (25,000) 25,000 (50,000)Ending Balance 374,300 230,000 325,000 84,000 363,300

Balance SheetCash 130,300 10,000 140,300Accounts Receivable 80,000 70,000 10,000 140,000Inventory 170,000 110,000 13,000 267,000Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000Less: Accumulated Depreciation (310,000) (120,000) 40,000 20,000 (410,000)Investment in Sharp Co. 304,000 280,000 0

24,000Total Assets 974,300 470,000 90,000 387,000 1,147,300



316

P6-37A Cost Method

a.Equity Method Entries on Randall Corp.'s Books:Investment in Sharp Co. 20,000

Income from Sharp Co. 20,000Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income

b.Investment elimination entry:Common stock 100,000Additional paid-in capital 20,000Retained earnings 180,000

Investment in Sharp Co. 240,000NCI in NA of Sharp Co. 60,000

Dividend elimination entry:Dividend Income 20,000NCI in NI of Sharp Co. 5,000

Dividends Declared 25,000


Investment in Sharp Co. 40,000NCI in NA of Sharp Co. 10,000

Amortize differential from previous years:Retained earnings 12,000NCI in NA of Sharp Co. 3,000

Accumulated Depreciation 15,000

Amortize differential for 20X7Depreciation Expense 5,000

Accumulated Depreciation 5,000

Assign Sharp's undistributed income to NCINCI in NA of Sharp Co. 1,600Retained Earnings 7,000

NCI in NA of Sharp Co. 8,600

317

P6-37A (continued)





Reversal of last year's deferral:Retained Earnings 8,400NCI in NA of Sharp Co. 1,600




(See Problem 6-34 for unrealized profit calculations.)

318

P6-37A (continued)

RandallCorp.

SharpCo.


Income StatementSales 500,000 250,000 57,000 693,000Other Income 20,400 30,000 50,400Dividend Income 20,000 20,000 0Less: COGS (416,000) (202,000) 10,000 (564,000)

44,000Less: Depreciation & Amortization Exp. (30,000) (20,000) 5,000 (55,000)Less: Other Expenses (24,000) (18,000) (42,000)Consolidated Net Income 50,400 60,000 82,000 54,000 82,400NCI in Net Income of Sharp Co. 5,000 (6,600)

1,600Controlling Interest in NetIncome 50,400 60,000 88,600 54,000 75,800

Statement of Retained EarningsBeginning Balance 329,900 215,000 180,000 337,500

8,40012,0007,000

Net Income 50,400 60,000 88,600 54,000 75,800Less: Dividends Declared (50,000) (25,000) 25,000 (50,000)Ending Balance 330,300 250,000 296,000 79,000 363,300

Balance SheetCash 130,300 10,000 140,300Accounts Receivable 80,000 70,000 10,000 140,000Inventory 170,000 110,000 13,000 267,000Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000Less: Accumulated Depreciation (310,000) (120,000) 40,000 5,000 (410,000)

15,000Investment in Sharp Co. 280,000 240,000 0

40,000Total Assets 950,300 470,000 90,000 363,000 1,147,300


3,000 10,0008,600


SM AKL

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