Advanced Accounting 10th Edition By Fischer -Test Bank

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Advanced Accounting 10th Edition By Fischer -Test Bank

Chapter 6—Cash Flow, EPS, and Taxation

 

MULTIPLE CHOICE

 

  1. The cash purchase of 80% interest in a firm with no liabilities would be shown on the consolidated statement of cash flows as
a. an operating activity.
b. a financing activity.
c. an investing activity.
d. as all of the preceding.

 

 

ANS:  C                    DIF:    E                    OBJ:   6-1

 

  1. The cash purchase of a controlling interest in a firm requires disclosure on the consolidated statement of cash flows as a(n)
a. financing activity only.
b. financing activity and in the schedule of noncash financing and investing activity.
c. investing activity only.
d. investing activity and in the schedule of noncash financing and investing activity.

 

 

ANS:  D                    DIF:    E                    OBJ:   6-1

 

  1. In a noncash purchase of a controlling interest in a firm, disclosure is required on the consolidated  statement of cash flows as a(n)
a. financing activity only.
b. financing activity and in the schedule of noncash financing and investing activity.
c. investing activity only.
d. investing activity and in the schedule of noncash financing and investing activity.

 

 

ANS:  D                    DIF:    E                    OBJ:   6-1

 

  1. Amortization of excesses in periods subsequent to the purchase would affect which sections of a consolidated cash flow statement?
a. operating activity
b. financing activity
c. investing activity
d. all of the above

 

 

ANS:  A                    DIF:    E                    OBJ:   6-1

 

  1. The purchase of additional shares directly from a subsidiary by the parent results in disclosure in which section of a consolidated statement of cash flows?
a. operating activities
b. financing activities
c. investing activities
d. not reflected on the consolidated statement of cash flows

 

 

ANS:  D                    DIF:    E                    OBJ:   6-1

 

  1. The purchase of additional shares from the noncontrolling interest of a subsidiary by the parent results in disclosure in which section of a cash flow statement?
a. operating activities
b. financing activities
c. investing activities
d. not reflected on the statement of cash flows

 

 

ANS:  B                    DIF:    E                    OBJ:   6-1

 

  1. Dividends paid by a subsidiary have the following affect on the consolidated cash flow
a. all dividends to the parent and to noncontrolling stockholders appear on the statement.
b. only dividends to the parent appear on the statement.
c. only dividends to NCI appear on the statement.
d. neither dividends to the parent or to noncontrolling stockholders appear on the statement

 

 

ANS:  C                    DIF:    E                    OBJ:   6-1

 

  1. Which of the following statements is true about the consolidated statement of cash flows?
a. The purchase of intercompany bonds from parties outside the consolidated group is treated as a retirement of consolidated debt; the payment is reported as a cash outflow from financing activities.
b. The purchase of intercompany bonds from parties outside the consolidated group is treated as a retirement of consolidated debt; the payment is reported as a cash outflow from investing activities.
c. Intercompany interest payments and amortization of premiums and/or discounts on intercompany bonds are reported in the operating activities section of the statement.
d. Intercompany interest payments and amortization of premiums and/or discounts on intercompany bonds are reported in the investing activities section of the statement.

 

 

ANS:  A                    DIF:    E                    OBJ:   6-1

 

  1. Investor has a 40% ownership interest in the common stock of Investee. Investor paid $10,000 more than book value for its 40% interest and regards the excess as attributable to goodwill. If Investee reports income of $200,000 and pays dividends of $50,000, the operating activities of the consolidated statement of cash flows (indirect method) will reflect an adjustment of
a. $80,000
b. $70,000
c. $60,000
d. $20,000

 

 

ANS:  C                    DIF:    M                   OBJ:   6-1

 

  1. Ponti Company purchased the net assets of the Sorri Company for $800,000. The book value of the  net assets of Sorri Company were as follows on the acquisition date:

 

Cash $  50,000
Inventory 150,000
Land 150,000
Building (net) 400,000
Liabilities  (200,000)
     Net assets $550,000

 

The market values were as follows: Inventory, $160,000; Land, $170,000; Building, $450,000. The excess purchase price is allocated to goodwill. On the consolidated statement of cash flows, what is the amount that will appear as cash applied to investing as a result of this purchase?

a. $800,000
b. $720,000
c. $750,000
d. $670,000

 

 

ANS:  C                    DIF:    D                   OBJ:   6-1

 

  1. Company P acquired 80% of the outstanding common stock of the Company S by issuing common stock with a market value of $550,000. The balance sheet of Company S was as follows on the acquisition date:

 

Assets Liabilities and Equity
Cash $  50,000 Liabilities $120,000
Inventory 120,000 Common stock, $10 par 100,000
Land 100,000 Other paid-in capital 150,000
Building (net)   350,000 Retained earnings   250,000
     Total $620,000      Total $620,000

 

The market values were as follows: Inventory, $130,000; Land, $120,000; Building, $400,000. What is the amount that will appear as Cash Provided (Used) by Investing Activities on the consolidated statement of cash flows, as a result of this purchase?

a. $600,000
b. $500,000
c. $50,000
d. $0

 

 

ANS:  C                    DIF:    M                   OBJ:   6-1

 

  1. Company P acquired 75% of the outstanding common stock of the Company S by issuing common stock with a market value of $650,000 on January 1, 20X3. The balance sheet of Company S was as follows on the acquisition date:

 

Assets Liabilities and Equity
Cash $100,000 Liabilities $100,000
Inventory 90,000 Common stock, $10 par 100,000
Land 150,000 Other paid-in capital 200,000
Building (net)   500,000 Retained earnings   440,000
     Total $840,000      Total $840,000

 

The market values were as follows: Inventory, $180,000; Land, $150,000; Building, $600,000. What is the amount that will appear as Cash Provided (Used) by Financing Activities as a result of this purchase?

a. $560,000
b. $100,000
c. $75,000
d. $0

 

 

ANS:  D                    DIF:    D                   OBJ:   6-1

 

  1. Company P acquired 60% of the outstanding common stock of Company S by issuing common stock with a market value of $420,000 on January 1, 20X3. The balance sheet of Company S was as follows on the acquisition date:

 

Assets Liabilities and Equity
Cash $  50,000 Liabilities $  80,000
Inventory 100,000 Common stock, $10 par 100,000
Land 100,000 Other paid-in capital 120,000
Building (net)   250,000 Retained earnings   200,000
     Total $500,000      Total $500,000

 

The market values were as follows: Inventory, $130,000; Land, $150,000; Building, $400,000. The inventory was sold during 20X3, the building has a 10-year life, and any excess purchase price is attributed to goodwill. What adjustment is needed to consolidated net income to arrive at cash flow-operations for 20X4, under the indirect method, as a result of amortization of excesses from the purchase?

a. $1,000
b. $9,000
c. $14,800
d. $15,000

 

 

ANS:  D                    DIF:    D                   OBJ:   6-1

 

  1. Company P purchased an 80% interest in Company S on January 1, 20X3, at a price in excess of book value, such that a patent arises in the consolidation process. As a result of amortizing the patent on the consolidated income statement, an adjustment would be required in which section of the consolidated statement of cash flows?

 

Operating     Investing     Financing     No Adjustment

a. Yes           No            No            No
b. No            Yes           No            No
c. No            No            Yes           No
d. No            No            No            Yes

 

 

ANS:  A                    DIF:    E                    OBJ:   6-1

 

  1. A parent company purchased all the outstanding bonds of its subsidiary. This cash transaction will appear in which section of the consolidated statement of cash flows?

 

Operating     Investing     Financing      No Adjustment

a. Yes           No            No             No
b. No            Yes           No             No
c. No            No            Yes            No
d. No            No            No             Yes

 

 

ANS:  C                    DIF:    E                    OBJ:   6-1

 

  1. A parent company owns 80% of the common stock of its subsidiary. During the current year, the parent purchases an additional 10% interest from noncontrolling shareholders. This cash transaction will appear in which section of the consolidated statement of cash flows?

 

Operating     Investing     Financing     No Adjustment

a. Yes           No            No            No
b. No            Yes           No            No
c. No            No            Yes           No
d. No            No            No            Yes

 

 

ANS:  C                    DIF:    E                    OBJ:   6-1

 

  1. Consolidated Basic Earnings Per Share (BEPS) is calculated by dividing
a. consolidated net income by parent company outstanding stock.
b. consolidated net income by parent company outstanding stock and subsidiary outstanding stock.
c. consolidated net income by parent company outstanding stock and subsidiary noncontrolling outstanding stock.
d. none of the above

 

 

ANS:  D                    DIF:    E                    OBJ:   6-2

 

  1. When the acquisition of a subsidiary occurs during a reporting period, the computation of both BEPS and DEPS includes subsidiary income
a. and subsidiary securities for the entire period.
b. for the entire period and the number of subsidiary shares weighted for the partial period.
c. for the partial period and the number of subsidiary shares weighted for the partial period
d. for the partial period and the number of subsidiary shares entire period

 

 

ANS:  C                    DIF:    E                    OBJ:   6-2

 

  1. For two or more corporations to file a consolidated tax return, the parent must own what percentage of the voting power of all classes of stock and what percentage of the fair value of all the outstanding stock of the corporation?
a. 90%
b. 80%
c. 70%
d. 60%

 

 

ANS:  B                    DIF:    E                    OBJ:   6-3

 

  1. In calculating the voting power and market value for two or more corporations to file a consolidated tax return, preferred stock is included only if it
a. is entitled to vote.
b. is not limited and not preferred as to dividends.
c. does have redemption rights beyond its issue price plus a reasonable redemption or liquidation premium and is convertible into the other class of stock.
d. meets any of the above conditions.

 

 

ANS:  D                    DIF:    E                    OBJ:   6-3

 

  1. Consolidated firms that meet the tax law requirements to be an affiliated group
a. must file a consolidated return.
b. must receive permission of the Internal Revenue Service to file separately.
c. may elect to file as a single entity or as a consolidated group.
d. cannot change the method of filing in the future.

 

 

ANS:  C                    DIF:    E                    OBJ:   6-3

 

  1. When an affiliated group elects to be taxed as a single entity, taxable income is calculated based on
a. consolidated income as determined on the consolidated worksheet.
b. each firms separate income.
c. each firms separate income with adjustments for intercompany transactions.
d. none of the above.

 

 

ANS:  A                    DIF:    E                    OBJ:   6-3

 

  1. For companies that meet the requirements of an affiliated firm but elect to file separately, the parent may exclude how much of the dividends received from reported income?
a. 100%
b. 80%
c. 70%
d. 20%

 

 

ANS:  A                    DIF:    E                    OBJ:   6-4

 

  1. For ownership interest of at least 20% but less than 80%, the parent may exclude how much of the dividends received from its reported income when filing separately?
a. 100%
b. 80%
c. 70%
d. 20%

 

 

ANS:  B                    DIF:    E                    OBJ:   6-4

 

  1. For ownership interest of less than 20%, the parent may exclude how much of the dividends received from its reported income when filing separately?
a. 100%
b. 80%
c. 70%
d. 20%

 

 

ANS:  C                    DIF:    E                    OBJ:   6-4

 

Consolidated Return Scenario: Company P purchased an 80% interest in Company S on January 1, 20X3, for $800,000. On the purchase date, Company S stockholders’ equity was $800,000. Any excess of cost over book value was attributed to a patent with a 10-year remaining life. In 20X3, Company P reported internally generated net income before taxes of $150,000. Company S reported a net income before taxes of $70,000. The firms file a consolidated tax return at a 30% tax rate.

 

  1. Refer to the Consolidated Return scenario. The controlling share of consolidated net income is
a. $14,000
b. $12,000
c. $28,000
d. $36,000

 

 

ANS:  C

Controlling NCI Total
[1] Sub’s adjusted income ($70,000 – $20,000 amortization)  $       40,000  $   10,000  $   50,000
      Nondeduct NCI share of asset adjustments         4,000
      Taxable income           40,000       14,000
[2] 30% tax on taxable income           12,000         4,200       16,200
      Net-of-tax share of income [1] – [2]  $       28,000  $     5,800  $   33,800

 

 

DIF:    D                    OBJ:   6-3

 

  1. Refer to the Consolidated Return scenario. The consolidated net income is
a. $142,800
b. $121,800
c. $138,800
d. $152,000

 

 

ANS:  A

 

Parent internally generated net income  $      150,000
Subsidiary internally generated net income           70,000
Amort of excess          (20,000)
Consolidated income before income taxes        200,000
Nondeductable excess amortization             4,000
Adjusted consolidated IBIT         204,000
Tax rate 30%
Taxes $        61,200

 

Consolidated net income = $200,000 – 61,200 tax = $142,800

 

 

DIF:    D                    OBJ:   6-3

 

  1. Refer to the Consolidated Return scenario. The nondeductible portion of excess amortization is
a. $20,000
b. $15,000
c. $4,000
d. $0  (The amortization is fully deductible)

 

 

ANS:  C                    DIF:    E                    OBJ:   6-3

 

  1. Refer to the Consolidated Return scenario. The tax on subsidiary earnings is
a. $20,000
b. $16,200
c. $15,000
d. $10,000

 

 

ANS:  B

Subsidiary Tax Schedule: Controlling NCI Total
[1] Total adjusted income  $       40,000  $   10,000  $   50,000
[2] nondeduct NCI share of asset adjustments         4,000
[3] Taxable income           40,000       14,000
[4] 30% tax on taxable income [3]           12,000         4,200       16,200
Net-of-tax share of income [1]-[4]  $       28,000  $     5,800  $   33,800

 

 

DIF:    D                    OBJ:   6-3

 

Separate Return Scenario: Company P purchased an 75% interest in Company S on January 1, 20X3, for $675,000. On the purchase date, Company S stockholders’ equity was $800,000. Any excess of cost over book value was attributed to a patent with a 10-year life. In 20X3, Company P reported internally generated income before taxes of $80,000. Company S reported internally generated income before taxes of $40,000. The firms file separate tax returns at a 30% tax rate. Assume an 80% exclusion rate on intercompany income.

 

  1. Refer to the Separate Return scenario. The controlling share of consolidated net income is ____.
a. $81,200
b. $70,805
c. $78,480
d. $74,256

 

 

ANS:  B                    DIF:    D                   OBJ:   6-4

 

  1. Refer to the Separate Return scenario. The nondeductible portion of excess amortization is
a. $0  (The amortization is fully deductible)
b. $9,750
c. $2,500
d. $4,500

 

 

ANS:  C                    DIF:    D                   OBJ:   6-4

 

  1. Refer to the Separate Return scenario.  The tax applicable to Company S’s income is
a. $15,750
b. $9,750
c. $2,500
d. $4,500

 

 

ANS:  B                    DIF:    D                   OBJ:   6-4

 

  1. Refer to the Separate Return scenario.  The secondary tax on subsidiary income is
a. $5,000
b. $3,750
c. $2,155
d. $945

 

 

ANS:  D                    DIF:    D                   OBJ:   6-4

 

  1. Which of the following statements is true?
a. When an affiliated group elects separate taxation, an additional “secondary” tax needs to be calculated.
b. An affiliated group filing a consolidated tax return must record on its own books its share of the consolidated provision for income tax.
c. Nonaffiliated tax filing is less complex than filing a consolidated tax return since there is no impact of intercompany transactions when separate returns are filed.
d. When an affiliated group elects joint taxation, an additional “secondary” tax needs to be calculated.

 

 

ANS:  A                    DIF:    M                   OBJ:   6-3 | 6-4

 

PROBLEM

 

  1. Company S has been an 80%-owned subsidiary of Company P since January 1, 20X7. The determination and distribution of excess schedule prepared at the time of purchase was as follows:

 

  Entity 80% Parent 20% NCI
Entity FV $ 712,500 $ 570,000 $ 142,500
Book value:
Pd-In Capt  300,000
RE 1/1/X1  300,000
Book value  600,000  480,000  120,000
Excess $ 112,500   $ 90,000 $   22,500
Equipment $   50,000          10 yr      5,000
Goodwill    62,500
Total $  112,500

 

On January 2, 20X9, Company P issued $120,000 of 8% bonds at face value to help finance the purchase of 25% of the outstanding common stock of Alpha Company for $200,000. No excess resulted from this transaction. Alpha earned $100,000 net income during 20X7 and paid $20,000 in dividends.

 

The only change in plant assets during 20X9 was that Company S sold a machine for $10,000. The machine had a cost of $60,000 and accumulated depreciation of $40,000. Depreciation expense recorded during 20X7 was as follows:

 

Company P Company S Alpha Company
Buildings $15,000 $  8,000 $12,000
Machinery 35,000 20,000 4,000

 

The 20X9 consolidated income was $180,000, of which the NCI was $10,000. Company P paid dividends of $12,000, and Company S paid dividends of $10,000.

 

Consolidated inventory was $287,000 in 20X8 and $223,000 in 20X9; consolidated current liabilities were $246,000 in 20X8 and $216,700 in 20X9. Cash increased by $205,700.

 

Required:

 

Using the indirect method and the information provided, prepare the 20X9 consolidated statement of cash flows for Company P. and its subsidiary, Company S.

 

ANS:

 

Company P and Subsidiary Company S
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X9
Cash flows from operating activities:
     Consolidated net income $180,000
     Adjustment to reconcile net income to net cash:
        Building depreciation 23,000
        Machine depreciation (includes $5,000 excess amort) 60,000
        Undistributed equity income from Alpha investment (20,000)
        Loss on sale of machinery 10,000
        Decrease in inventory 64,000
        Decrease in current liabilities     (29,300)
        Total adjustments    107,700
Net cash flows provided by operating activities $287,700
Cash flows from investing activities:
     Payment for purchase of Alpha Corp $(200,000)
     Proceeds from sale of machine      10,000
Net cash flows provided by investing activities (190,000)
Cash flows from financing activities:
     8% bond issuance $120,000
     Dividends paid by Company P (12,000)
     Dividends paid by Company S to unaffiliated owners       (2,000)
Net cash flows provided by financing activities    106,000
Net increase in cash $203,700

 

 

DIF:    M                   OBJ:   6-1

 

  1. The following comparative consolidated trial balances apply to Perella Company and its subsidiary Sherwood Company (80% control):

 

12/31/X4 12/31/X5
Cash $   275,000 $       300,800
Trading Securities Portfolio (at market)      160,000          120,000
Accts Rec      350,000          379,600
Inventories      316,000          268,000
Land        95,000          180,000
PPE      500,000          520,000
Accum Dep     (135,000)         (152,000)
Goodwill        60,000            60,000
Current Liabilities     (190,000)         (154,500)
Long-Term Notes Payable     (450,000)         (390,000)
NCI     (161,000)         (188,780)
Paid-in Capital (C Stk + APIC)     (660,000)         (670,000)
Retained Earnings     (195,000)         (288,120)
Treasury Stock     35,000      15,000
$     —      $     —     

 

The following is additional information for 20X5:

a) No trading securities were sold nor were any investments added to the portfolio.
b) Land was acquired by issuing a $40,000 note and giving cash for the balance.
c) Equipment (cost $50,000; accumulated depreciation $40,000) was sold for $3,000
d) Dividends declared and paid: Perella 50,000; Sherwood $40,000.
e) Consolidated net income amounted to $178,900.

 

Required:

 

Prepare the consolidated statement of cash flows for the year ended December 31, 20X5, for Perella and its subsidiary.

 

ANS:

 

Perella Company
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X5
Cash flows from operating activities:
Consolidated net income $       178,900
Adjustment to reconcile net income to net cash
Depreciation exp $     57,000
Unrealized loss on trading portfolio        40,000
Loss on sale of equipment          7,000
Decrease in inventory        48,000
Increase in accounts receivable       (29,600)
Decrease in current liabilities       (35,500)
Total adjustments        86,900
Net cash provided by operating activities          265,800
Cash flows from investing activities:
Proceeds – sale of equipment $       3,000
Downpayment for land       (45,000)
Purchase equipment     (70,000)
Net cash used by investing activities         (112,000)
Cash flows from financing activities:
Reissue treasury stock        30,000
Retire long-term debt     (100,000)
Dividends paid:
By Perella       (50,000)
By Sherwood, to noncontrolling interest         (8,000)
Net cash used by financing activities       (128,000)
Net change in cash            25,800
Cash at beginning of year        275,000
Cash at year end $      300,800
 

NONCASH FINANCING AND INVESTING ACTIVITIES:

Acquired land with $40,000 long-term note and $45,000 cash.

 

 

DIF:    M                   OBJ:   6-1

 

Dills & Sarada scenario:

 

Dills Company purchased an 80% interest in the common stock of Sarada Company for $140,000 on January 1, 20X7. On this date the book value of Sarada’s net identifiable assets totaled $100,000. Any excess was attributed to a patent with a 10-year life.

 

During 20X9, Dills Company and Sarada Company reported the following internally generated income before taxes:

 

Dills Co. Sarada Co.
Sales $300,000 $120,000
Cost of goods sold (200,000) (90,000)
Gain on machine 10,000
Expenses    (40,000)    (20,000)
Income before taxes $  70,000 $  10,000

 

Sarada Company routinely sells goods to Dills Company. This year those sales amounted to $60,000. Dills Company inventories included intercompany goods of $30,000 at the beginning of the year and $12,000 at the end of the year. Sarada Company sells goods to Dills Company at a gross profit of 16.67%.

 

On January 1, 20X9 Dills Company sold a new machine to Sarada Company, for $40,000. The cost of the machine was $30,000. It has a 5-year life.

 

  1. Refer to the Dills and Sarada scenario. The affiliated group files a consolidated tax return and is taxed at 30%.

 

Required:

 

Prepare a consolidated income statement for 20X9. Include income distribution for both firms.

 

ANS:

 

Dills Company and Sarada Company
Consolidated Income Statement
For the Year Ended December 31, 20X9
Sales $360,000
Cost of goods sold (227,000)
Expenses    (65,500)
Income before taxes $   67,500
Provision for income tax    (20,700)
Consolidated net income $   46,800
Distributed to:
NCI $       320
Controlling interest $   46,480

 

partial worksheet Eliminations Consol
Parent Sub Debit Credit Net Inc
Sales (300,000) (120,000) IS 60,000 (360,000)
COGS 200,000 90,000 EI 2,000 IS 60,000 227,000
BI 5,000
Gain on Sale (10,000) F 10,000        –
Expenses 40,000 20,000 A 7,500 F 2,000 65,500
(70,000) (10,000)
Consolidated income before income tax (67,500)

 

 

Subsidiary Tax Schedule      
Controlling NCI Total
[1] Total adjusted income  $        4,400  $     1,100  $     5,500
[2] NCI share of asset adjustments                          1,500
[3] Taxable income        4,400         2,600
[4] 30% tax on [3]           1,320            780         2,100
Net-of-tax share of income [1]-[4]  $        3,080  $        320  $     3,400

 

 

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory 2,000 Internally generated net income 10,000
Amortization of excess 7,500 Realized profit in beginning inventory 5,000
Adjusted income before taxes 5,500
Inc tax per Subsidiary tax schedule      (2,100)
Subsidiary net income 3,400
NCI Share 20%
NCI 320
Parent Company Income Distribution Schedule
Deferred gain on sale 10,000 Internally generated net income 70,000
Recognize 1/5 of gain 2,000
Adjusted income before taxes 62,000
30% income taxes (18,600)
Parent net income 43,400
80% × Sub’s net income 3,080
Controlling interest net income 46,480

 

 

DIF:    M                   OBJ:   6-3

 

  1. Refer to the Dills and Sarada scenario. The firms file separate tax returns. Both are subject to a 30% tax rate. Dills Company receives an 80% dividend deduction.

 

Required:

 

Prepare a consolidated income statement for 20X9. Include income distribution for both firms.

 

ANS:

 

Dills Company and Sarada Company
Consolidated Income Statement
For the Year Ended December 31, 20X9
Sales $360,000
Cost of goods sold (227,000)
Expenses    (65,500)
Income before taxes $   67,500
Provision for income tax    (20,885)
Consolidated net income $   46,615
Distributed to:
NCI $        320
Controlling interest $   46,295

 

partial worksheet Eliminations Consol
Parent Sub Debit Credit Net Inc
Sales (300,000) (120,000) IS 60,000 (360,000)
COGS 200,000 90,000 EI 2,000 IS 60,000 227,000
BI 5,000
Gain on Sale (10,000) F 10,000        –
Expenses 40,000 20,000 A 7,500 F 2,000 65,500
(70,000) (10,000)
Consolidated income before income tax (67,500)

 

Subsidiary Tax Schedule      
Controlling NCI Total
[1] Total adjusted income  $        4,400  $     1,100  $     5,500
[2] NCI share of asset adjustments                          1,500
[3] Taxable income        4,400         2,600
[4] 30% tax on [3]           1,320            780         2,100
Net-of-tax share of income [1]-[4]  $        3,080  $        320  $     3,400

 

 

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory 2,000 Internally generated net income 10,000
Amortization of excess 7,500 Realized profit in beginning inventory 5,000
Adjusted income before taxes 5,500
Inc tax per Subsidiary tax schedule      (2,100)
Subsidiary net income 3,400
NCI Share 20%
NCI 320
Parent Company Income Distribution Schedule
Deferred gain on sale 10,000 Internally generated net income 70,000
Recognize 1/5 of gain 2,000
Adjusted income before taxes 62,000
30% income taxes (18,600)
Parent net income 43,400
80% × Sub’s net income 3,080
Secondary tax (3,080 × .2 × .3)      (185)
Controlling interest net income 46,295

 

 

DIF:    M                   OBJ:   6-4

 

  1. On January 1, 20X8, Paul Company purchased 80% of the common stock of Smith Company for $300,000. On this date Smith had total owners’ equity of $350,000. Any excess of cost over book value is attributed to a patent, to be amortized over 10 years.

 

During 20X8, Paul has accounted for its investment in Smith using the simple equity method.

 

During 20X8, Paul sold merchandise to Smith for $50,000, of which $10,000 is held by Smith on December 31, 20X8. Paul’s gross profit on sales is 40%.

 

During 20X8, Smith sold some land to Paul at a gain of $10,000. Paul still holds the land at year end.

 

Paul and Smith qualify as an affiliated group for tax purposes and thus will file a consolidated tax return. Assume a 30% corporate income tax rate.

 

Required:

 

Complete the Figure 6-3 worksheet for consolidated financial statements for the year ended December 31, 20X8.

 

Figure 6-3
Trial Balance Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 50,000
Other Current Assets 168,000 250,000
Invest in Smith Company 348,000
Land 240,000 100,000
Buildings and Equipment 300,000 200,000
Accumulated Depreciation (80,000) (60,000)
Current Liabilities (150,000) (30,000)
Long-Term Liabilities (200,000) (100,000)
Common Stock – P Co. (100,000)
Other Paid-in Capital – P Co. (180,000)
Retained Earnings – P Co. (320,000)
Common Stock – S Co. (100,000)
Other Paid-in Capital – S Co. (100,000)
Retained Earnings – S Co. (150,000)
Net Sales (500,000) (300,000)
Cost of Goods Sold 300,000 160,000
Operating Expenses 100,000 80,000
Subsidiary Income (56,000)
Gain on Sale of Land (10,000)
Dividends Declared – P Co. 30,000
Dividends Declared – S Co. 10,000
0 0
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Invest in Smith Company
Land
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Paid-in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
Gain on Sale of Land
Dividends Declared – P Co.
Dividends Declared – S Co.

 

 

ANS:

For the worksheet solution, please refer to Answer 6-3.

 

Answer  6-3
Trial Balance Eliminations and
Paul Smith Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 50,000 EI 4,000
Other Current Assets 168,000 250,000
Invest in Smith Company 348,000 CY 48,000
EL 280,000
D 20,000
Land 240,000 100,000 LA 10,000
Buildings and Equipment 300,000 200,000
Accumulated Depreciation (80,000) (60,000)
Patent D 25,000 A 2,500
Current Liabilities (150,000) (30,000)
Long-Term Liabilities (200,000) (100,000)
Common Stock – P Co. (100,000)
Other Paid-in Capital – P Co. (180,000)
Retained Earnings – P Co. (320,000)
Common Stock – S Co. (100,000) EL 80,000
Other Paid-in Capital – S Co. (100,000) EL 80,000
Retained Earnings – S Co. (150,000) EL 120,000 D 5,000
Net Sales (500,000) (300,000) IS 50,000
Cost of Goods Sold 300,000 160,000 EI 4,000 IS 50,000
Operating Expenses 100,000 80,000 A 2,500
Subsidiary Income (56,000) CY 56,000
Gain on Sale of Land (10,000) LA 10,000
Dividends Declared – P Co. 30,000
Dividends Declared – S Co. 10,000 CY 8,000
Consolidated Income before Tax
Provision for Income Tax T 46,200
Income Taxes Payable T 46,200
Consolidated Net Income
     To NCI
     To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 473,700 473,700
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 146,000
Other Current Assets 418,000
Invest in Smith Company 0
Land 330,000
Buildings and Equipment 500,000
Accumulated Depreciation (140,000)
Patent 22,500
Current Liabilities (180,000)
Long-Term Liabilities (300,000)
Common Stock – P Co. (100,000)
Other Paid-in Capital – P Co. (180,000)
Retained Earnings – P Co. (320,000)
Common Stock – S Co. (20,000)
Other Paid-in Capital – S Co. (20,000)
Retained Earnings – S Co. (35,000)
Net Sales (750,000)
Cost of Goods Sold 414,000
Operating Expenses 182,500
Subsidiary Income 0
Gain on Sale of Land 0
Dividends Declared – P Co. 30,000
Dividends Declared – S Co. 2,000
Consolidated Income before Tax (153,500)
Provision for Income Tax 46,200
Income Taxes Payable (46,200)
Consolidated Net Income (107,300)
     To NCI 7,900 (7,900)
     To Controlling Interest 99,400 (99,400)
Total NCI (80,900) (80,900)
Ret. Earn. Contr. Int. 12-31 (389,400) (389,400)
0

 

Eliminations and Adjustments:

 

CY Eliminate the current-year entries made in the investment account and in the subsidiary income account.
EL Eliminate 80% of Smith Company equity balances at the beginning of the year against the investment account.
D Distribute the $25,000 excess of cost over book value to the patent; allocate to Parent and Sub
A Amortize the patent over 10 years.
IS Eliminate the entire intercompany sales of $50,000.
EI Eliminate the $4,000 of gross profit in the ending inventory.
LA Eliminate the $10,000 gain on sale of land against the land account.
T Record provision for income tax, calculated as follows:
Consolidated income before tax $153,500
Add back NCI portion of excess amortization ($2,500 ´ 20%)       500
$154,000
Multiply by corporate tax rate        30%
Tax liability $  46,200

 

Subsidiary Tax Schedule Controlling NCI Total
[1] Total adjusted income  $   46,000  $11,500  $57,500
[2] NCI share of asset adjustments                     500
[3] Taxable income              46,000    12,000
[4] 30% tax on [3]         13,800      3,600    17,400
      Net-of-tax share of income [1]-[4]  $  32,200  $  7,900  $40,100

 

Subsidiary Company Income Distribution Schedule
Defer gain on sale of land 10,000 Internally generated net income 70,000
Amortization of patent 2,500
Adjusted income before taxes 57,500
Inc tax per Sub tax schedule      (17,400)
Subsidiary net income 40,100
NCI share per Sub tax schedule 7,900
Parent Company Income Distribution Schedule
Defer profit in ending inventory 4,000 Internally generated net income 100,000
Adjusted income before taxes 96,000
30% income taxes (28,800)
Parent net income 67,200
80% × Sub’s net income 32,200
Controlling interest net income 99,400

 

 

DIF:    D                    OBJ:   6-3

 

  1. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company in a stock exchange. On this date Subsidiary had total owners’ equity of $550,000 and book value approximated fair value.

 

During 20X1 and 20X2, Parent has accounted for its investment in Subsidiary using the simple equity method.

 

On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $75,000. During 20X2, Subsidiary sold merchandise to Parent for $100,000, of which $25,000 is held by Parent on December 31, 20X2. Subsidiary’s usual gross profit on affiliated sales is 50%.

 

On December 31, 20X1, Parent sold to Subsidiary some equipment with a cost of $75,000 and a book value of $30,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a 5-year life, assuming no salvage value and using the straight-line method.

 

Parent and Subsidiary qualify as an affiliated group for tax purposes and thus will file a consolidated tax return. Assume a 30% corporate income tax rate.

 

Required:

 

Complete the Figure 6-5 worksheet for consolidated financial statements for the year ended December 31, 20X2.

 

Figure 6-5
Trial Balance Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 60,000
Other Current Assets 374,000 520,000
Investment in Sub. Company 740,000
Land 240,000 120,000
Buildings and Equipment 515,000 380,000
Accumulated Depreciation (120,000) (140,000)
Current Liabilities (150,000) (50,000)
Long-Term Liabilities (200,000) (150,000)
Common Stock – P Co. (300,000)
Other Paid-in Capital – P Co. (300,000)
Retained Earnings – P Co. (679,000)
Common Stock – S Co. (50,000)
Other Paid-in Capital – S Co. (200,000)
Retained Earnings – S Co. (350,000)
Net Sales (600,000) (500,000)
Cost of Goods Sold 360,000 200,000
Operating Expenses 120,000 150,000
Subsidiary Income (150,000)
Dividends Declared – P Co. 50,000
Dividends Declared – S Co. 10,000
0 0
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company
Land
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Paid-in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
Dividends Declared – P Co.
Dividends Declared – S Co.

 

 

ANS:

For the worksheet solution, please refer to Answer 6-5.

 

Answer 6-5
Trial Balance Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 60,000 EI 12,500
Other Current Assets 374,000 520,000
Investment in Sub. Company 740,000 CY 140,000
EL 600,000
Land 240,000 120,000
Buildings and Equipment 515,000 380,000
Accumulated Depreciation (120,000) (140,000) F2 2,000 F1 10,000
Current Liabilities (150,000) (50,000)
Long-Term Liabilities (200,000) (150,000)
Common Stock – P Co. (300,000)
Other Paid-in Capital – P Co. (300,000)
Retained Earnings – P Co. (679,000) BI 37,500
F1 10,000
Common Stock – S Co. (50,000) EL 50,000
Other Paid-in Capital – S Co. (200,000) EL 200,000
Retained Earnings – S Co. (350,000) EL 350,000
Net Sales (600,000) (500,000) IS 100,000
Cost of Goods Sold 360,000 200,000 EI 12,500 BI 37,500
IS 100,000
Operating Expenses 120,000 150,000 F2 2,000
Subsidiary Income (150,000) CY 150,000
Dividends Declared – P Co. 50,000
Dividends Declared – S Co. 10,000 CY 10,000
Consolidated Income before Tax
Provision for Income Tax T 89,100
Income Taxes Payable T 89,100
Consolidated Net Income
     To NCI
     To Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 1,001,100 1,001,100
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 147,500
Other Current Assets 894,000
Investment in Sub. Company 0
Land 360,000
Buildings and Equipment 930,000
Accumulated Depreciation (305,000)
Current Liabilities (200,000)
Long-Term Liabilities (350,000)
Common Stock – P Co. (300,000)
Other Paid-in Capital – P Co. (300,000)
Retained Earnings – P Co. (631,500)
Common Stock – S Co.
Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales (1,000,000)
Cost of Goods Sold 435,000
Operating Expenses 268,000
Subsidiary Income 0
Dividends Declared – P Co. 50,000
Dividends Declared – S Co.
Consolidated Income before Tax (297,000)
Provision for Income Tax 89,100
Income Taxes Payable (89,100)
Consolidated Net Income (207,900)
     To NCI 0
     To Controlling Interest 207,900 (207,900)
Total NCI 0
Ret. Earn. Contr. Int. 12-31 (789,400) (789,400)
0

 

Eliminations and Adjustments:

 

CY Eliminate the current-year entries made in the investment account and in the subsidiary income account.
EL Eliminate 100% of Subsidiary Company equity balances at the beginning of the year against the investment account.
BI Eliminate the $37,500 of gross profit in the beginning inventory.
IS Eliminate the entire intercompany sales of $100,000.
EI Eliminate the $12,500 of gross profit in the ending inventory.
F1 Eliminate the $10,000 gain on sale of equipment against retained earnings of Parent.
F2 Eliminate the $2,000 of excess depreciation for 20X2 on the transferred equipment.
T Record provision for income tax, calculated as follows:
     Consolidated income before tax $297,000
     Corporate tax rate       30%
     Tax liability $  89,100

 

 

DIF:    M                   OBJ:   6-3

 

  1. Plaza Company acquires an 80% interest in Scenic Company for $200,000 cash on January 1, 20X1. On that date, Scenic’s equipment (remaining economic life of 5 years)  is undervalued by $25,000; any excess of cost over book value is attributed to goodwill. Scenic’s balance sheet on the date of the purchase is as follows:

 

Assets Liabilities and Equity
Cash $   30,000 Current liabilities $   30,000
Inventory 30,000 Long-term liabilities 40,000
Property, (net) 210,000 Common Stock (no par) 150,000
Retained Earnings     50,000
     Total assets $270,000      Total Liabilities & Equity $270,000

 

The controlling interest in consolidated net income for 20X1 is $97,900; the noncontrolling interest is $6,000. On December 31, 20X1, Plaza acquired a 15% interest in Adams, Inc. and, in an unrelated transaction, issued additional common stock.  Dividends declared and paid during the year by Plaza and Scenic were $30,000 and $15,000, respectively. There are no purchases or sales of property, plant, or equipment during the year. Based on the following information, prepare a statement of cash flows using the indirect method for Plaza Company and its subsidiary for the year ended December 31, 20X1.

 

Plaza

   1/1/X1  

Consolidated

12/31/X1

Cash   100,000    87,100
Inventory     50,000    84,300
Property (net)   600,000  772,000
Investment in Adams    57,500
Goodwill    25,000
Current Liabilities    (80,000) (115,000)
Long-term Liabilities  (100,000) (130,000)
NCI   (53,000
Paid-in Capital (C Stk + APIC)  (400,000) (490,000)
Retained Earnings  (170,000) (237,900)
        —            —   

 

Required:

 

Prepare the consolidated statement of cash flows for the year ended December 31, 20X1, for Plaza and its subsidiary.

 

ANS:

 

Plaza, Inc. and Subsidiary Scenic Company
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X1
Cash flows from operating activities:
Consolidated net income $     103,900
Adjustment to reconcile net income to net cash:
Depreciation expense [a] $       63,000
Inventory increase           (4,300)
Current liabilities increase          5,000
Total adjustments         63,700
Net cash provided by operating activities        167,600
Cash flows from investing activities:
Purchase of interest in Scenic, net of cash acquired $     (170,000)
Investment in Adams         (57,500)
Net cash used by investing activities       (227,500)
Cash flows from financing activities:
Issue common stock $       90,000
Payment of long-term debt         (10,000)
Dividends paid:
By Company P         (30,000)
By Company S, to noncontrolling interest           (3,000)
Net cash provided by financing activities         47,000
Net decrease in cash        (12,900)
Cash at beginning of year (Parent only)        100,000
Cash at year end (consolidated) $      87,100
NONCASH TRANSACTION DISCLOSURE:
Plaza acquired 80% of the common stock of Scenic for $200,000 cash. In conjunction with the acquisition, liabilities were assumed and a noncontrolling interest was created as follows:
Adjusted value of assets acquired $      270,000
Plus excess          50,000 $     320,000
Cash paid for common stock $     200,000
Liabilities assumed         70,000
Noncontrolling interest         50,000

 

[a] $600,000 + $210,000 + $25,000 excess compared to $772,000

 

DIF:    M                   OBJ:   6-1

 

  1. Plateau Company acquires an 80% interest in Seagull Company for $200,000 cash on January 1, 20X1. On that date, Seagull’s equipment is undervalued by $25,000; any excess of cost over book value is attributed to goodwill. Seagull’s balance sheet on the date of the purchase is as follows:

 

Assets Liabilities and Equity
Cash $   30,000 Current liabilities $   30,000
Inventory 30,000 Long-term liabilities 40,000
Property, (net) 210,000 Common Stock (no par) 150,000
Retained Earnings    50,000
     Total assets $270,000      Total liabilities & equity $270,000

 

The controlling interest in consolidated net income for 20X1 is $97,900; the noncontrolling interest is $6,000. During the year Plateau retired long-term debt by issuing common stock.  Dividends declared and paid during the year by Plateau and Seagull were $30,000 and $15,000, respectively. During the year Seagull sold equipment with a book value of $30,000 for a gain of $3,000; there were no purchases of property, plant, or equipment during the year.

 

Plateau

   1/1/X1  

Consolidated

12/31/X1

Cash   100,000    87,100
Inventory     50,000    73,000
Property (net)   600,000  772,000
Goodwill    25,000
Current Liabilities    (80,000) (126,200)
Long-term Liabilities  (100,000) (130,000)
NCI   (53,000
Paid-in Capital (C Stk + APIC)  (400,000) (410,000)
Retained Earnings  (170,000) (237,900)
        —            —   

 

 

Required:

 

Prepare a statement of cash flows using the indirect method for Plateau Company and its subsidiary for the year ended December 31, 20X1.

 

ANS:

 

Plateau, Inc. and Subsidiary Seagull Company
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X1
Cash flows from operating activities:
Consolidated net income $     103,900
Adjustments to reconcile net income to net cash:
Gain on sale of equipment $   ( 3,000)
Depreciation expense [a]        33,000
Inventory decrease           7,000
Current liabilities increase    16,200
Total adjustments      53,200
Net cash provided by operating activities        157,100
Cash flows from investing activities:
Purchase of interest in Seagull, net of cash acquired $  (170,000)
Proceeds from sale of equipment      33,000)
Net cash used by investing activities  (137,000)
Cash flows from financing activities:
Dividends paid:
By Company P  (30,000)
By Company S, to noncontrolling interest      (3,000)
Net cash used by financing activities      (33,000)
Net decrease in cash        (12,900)
Cash at beginning of year (Parent)      100,000
Cash at year end (consolidated) $     87,100
NONCASH TRANSACTION DISCLOSURE:
1) Issued common stock to retire long-term debt, $10,000
2) Plateau acquired 80% of the common stock of Seagull for $200,000 cash. In conjunction with the acquisition, liabilities were assumed and a noncontrolling interest was created as follows:
Book value of assets acquired $      270,000
Excess          50,000 $     320,000
Cash paid for common stock $     200,000
Liabilities assumed         70,000
Noncontrolling interest         50,000

 

[a] ($600,000 + $210,000 + $25,000 excess – $30,000 book value sold) compared to $772,000

 

DIF:    D                    OBJ:   6-1

 

  1. The following comparative consolidated trial balances apply to Pembina Company and its subsidiary Scranton Company (80% interest) for the fiscal year ended 12/31/X5:

 

12/31/X4 12/31/X5
Cash $   145,000 $   419,000
Trading Securities Portfolio (at market)      160,000       175,000
Accounts Receivable     440,000     384,000
Inventories      525,000     542,000
Land      130,000      105,000
Plant, Property, and Equipment     660,000     680,000
Accumulated Depreciation    (145,000)    (188,000)
Goodwill       60,000       60,000
Current Liabilities   (474,000)   (502,000)
Long-Term Notes Payable   (450,000)   (450,000)
Deferred Taxes      (35,000)     (33,000)
NCI     (161,000)    (199,800)
Paid-In Capital (C Stk + APIC)   (660,000)   (660,000)
Retained Earnings    (195,000)   (332,200)
$       —       $       —      

 

The following events occurred during the year:

a) No trading securities were sold nor were any investments added to the portfolio.
b) Sold land, book value $25,000, for $80,000.
c) Purchased equipment with a cost of $50,000 to replace equipment, book value $13,000, that was sold for $10,000.
d) Dividends declared and paid: Pembina $50,000; Scranton $40,000.
e) Consolidated net income: $234,000.

 

Required:

 

Prepare the consolidated statement of cash flows for the year ended December 31, 20X5, for Pembina and its subsidiary.

 

ANS:

 

Pembina, Inc. and Subsidiary Scranton Company
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X5
Cash flows from operating activities:
Consolidated net income $  234,000
Adjustment to reconcile net income to net cash:
Depreciation expense [see Note A]       60,000
Mark-to-market adjustment of trading portfolio       (15,000)
Deferred income tax change        (2,000)
Loss on sale of property          3,000
Gain on sale of land      (55,000)
Increase in inventory       (17,000)
Decrease in accounts receivable        56,000
Increase in current liabilities       28,000
Total adjustments      58,000
Net cash provided by operating activities 292,000
Cash flows from investing activities:
Proceeds from sale of equipment        10,000
Proceeds from sale of land       80,000
Purchase equipment      (50,000)
Net cash provided by investing activities 40,000
Cash flows from financing activities:
Dividends paid:
By Company P   (50,000)
By Company S, to noncontrolling interest       (8,000)
Net cash used by financing activities  (58,000)
Change in cash 274,000
Cash at beginning of year   145,000
Cash at year end $  419,000

[Note A] 660,000 – 145,000 + 50,000 – 13,000 compared to 680,000 – 188,000

 

DIF:    D                    OBJ:   6-1

 

  1. Plymouth Company holds a 90% interest in Savannah, Inc., which was acquired in a previous year. As of the end of the current fiscal period, the following information is available:

 

Plymouth Savannah
Company     Inc.  
Internally generated net income $80,000 $60,000
Weighted average common shares outstanding 25,000 12,000
Warrants to acquire sub’s common stock:
    Held by unaffiliated investors 2,000
Warrants to acquire parent’s common stock:
    Held by Savannah 1,000
    Held by unaffiliated investors 2,000
Preferred shares 5% convertible, par $100 1,000
Preferred shares 10% nonconvertible, par $2 5,000

 

Additional information:

· The warrants to acquire Savannah stock were issued July 1 of the current year. Exercise price is $9; stock price is $12.
· The warrants to acquire Plymouth stock were issued in a previous fiscal period. Exercise price is $12; stock price is $18.
· Each share of convertible preferred can be converted into 5 shares of Savannah common stock. Plymouth owns 60% of the convertible preferred stock.

 

Required:

 

Compute consolidated basic and diluted earnings per share for the current year. Ignore any tax effects.

 

ANS:

BASIC EARNINGS PER SHARE SUBSIDIARY CONSOLIDATED
numerator denom-

inator

  numerator denom-

inator

Income  $  60,000  $   80,000
W Avg Shares O/S 12,000        25,000
Preferred dividends    (5,000)              (1,000)
 $   55,000 12,000
 $4.58 [a]      49,464             
 $  128,464        25,000
 $5.14
DILUTED EARNINGS PER SHARE
Internal BEPS  numerator and denominator  $   55,000 12,000 [b]  $    79,000        25,000
Exercise of Sub Stock warrants 250
Exercise of Par  Stock warrants           1,000
Convert preferred to common         5,000 5,000
 $  60,000 17,250
 $3.48 [c]        48,024             
 $  127,024       26,000
 $4.89
[a] parent-owned equivalent sub shares ´ Sub BEPS = (12,000 ´ 90%) ´ $4.58
[b] $80,000 – $1,000 preferred dividends
[c] (equivalent shares common held + equivalent shares from converted preferred) ´ Sub DEPS =

(10,800 + 3,000) ´ $3.48

 

 

DIF:    M                   OBJ:   6-2

 

  1. Plymouth Company holds a 90% interest in Savannah, Inc., which was acquired in a previous year. As of the end of the current fiscal period, the following information is available:

 

Plymouth Savannah
Company     Inc.  
Internally generated net income $20,000 $7,000
Weighted average common shares outstanding 10,000 4,000
Subsidiary common stock warrants to
    acquire 200 shares parent common stock 200
Dilutive convertible bonds:
    Dilutive convertible bonds: 4,000
    Parent common stock issued on conversion 2,500

Assume a 50% treasury stock method effect on the stock warrants

 

Required:

Compute consolidated basic and diluted earnings per share for the current year; ignore income taxes.

 

ANS:

BASIC EARNINGS PER SHARE SUBSIDIARY CONSOLIDATED
numerator denom-

inator

  numerator denom-

inator

Income  $  7,000  $   20,000
W Avg Shares O/S                 4,000        10,000
 $   7,000 4,000
 $1.75 [a]      6,300                
 $  26,300     10,000
 $2.63
DILUTED EARNINGS PER SHARE
Internal BEPS  numerator and denominator  $   7,000 4,000  $    20,000        10,000
Conversion of bonds 4,000 2,500
Exercise of Sub warrants for Parent common stock                                                           100
 $  11,000 6,500
 $1.69 [b]        6,084             
 $  26,084       10,100
 $2.58
[a] parent-owned equivalent sub shares ´ Sub BEPS = (4,000 ´ 90%) ´ $1.75
[b] parent-owned equivalent sub shares ´ Sub DEPS = (4,000 ´ 90%) ´ $1.69

 

 

DIF:    M                   OBJ:   6-2

 

Chapter 7—Special Issues in Accounting for an Investment in a Subsidiary

 

MULTIPLE CHOICE

 

  1. A new subsidiary is being formed. The parent company purchased 70% of the shares for $20 per share. The remaining shares were sold to a variety of outside interests for an average of $22 per share. The consolidated statements will show
a. a gain.
b. a loss.
c. only cash and related equity.
d. goodwill.

 

 

ANS:  A                    DIF:    E                    OBJ:   7-1

 

  1. A new subsidiary is being formed. The parent company purchased 70% of the shares for $20 per share. The remaining shares were sold to a variety of outside interests for an average of $18 per share. The consolidated statements will show
a. a gain.
b. a loss.
c. only cash and related equity.
d. goodwill.

 

 

ANS:  D                    DIF:    E                    OBJ:   7-1

 

  1. Control of a subsidiary was achieved with the initial investment in subsidiary stock. When a subsequent block of subsidiary’s stock is purchased
a. the parent must change from the cost method to the equity method.
b. the parent must change from the equity method to the cost method.
c. no change in accounting methods is required.
d. none of the above.

 

 

ANS:  C                    DIF:    E                    OBJ:   7-2

 

Pine & Scent scenario:

 

Pine Company purchased a 60% interest in the Scent Company on January 1, 20X1 for $360,000. On that date, the stockholders’ equity of Scent Company was $450,000. Any excess cost on 1/1/X1 was attributable to goodwill. Pine purchased another 20% interest on January 1, 20X4 for $200,000. On January 1, 20X4, Scent Company’s stockholders’ equity was $700,000, the entire increase due to retained earnings.

 

  1. Refer to the Pine and Scent scenario. The goodwill balance on the December 31, 20X4, balance sheet is ____.
a. $100,000
b. $60,000
c. $0
d. $150,000

 

 

ANS:  D                    DIF:    M                   OBJ:   7-2

 

  1. Refer to the Pine and Scent scenario. The excess of cost over book on the new block of stock is ____.
a. $60,000
b. $50,000
c. $48,000
d. $20,000

 

 

ANS:  A                    DIF:    M                   OBJ:   7-2

 

  1. Refer to the Pine and Scent scenario. As part of the consolidation process, the excess of cost over book on the new block of shares is treated as
a. additional goodwill
b. a loss on acquisition of additional subsidiary shares
c. an increase to Pine’s Investment in Scent account
d. a reduction in parent’s paid-in capital in excess of par

 

 

ANS:  D                    DIF:    M                   OBJ:   7-2

 

  1. Which of the following statements is incorrect regarding a parent’s purchase of additional subsidiary shares?
a. There can never be an income statement gain or loss.
b. Due to the constraints of conservatism, there can never be an income statement gain but a loss should be recognized if so indicated.
c. If the price paid to reacquire the shares exceeds their book value, the debit first is used to reduce existing paid-in capital in excess of par from retirement and the balance is a debit to Retained Earnings.
d. If the price paid to reacquire the shares is less than their book value, there is a credit to paid-in capital in excess of par from retirement.

 

 

ANS:  B                    DIF:    M                   OBJ:   7-2

 

  1. When a subsequent block of an existing subsidiary’s stock is purchased,
a. the determination and distribution of excess schedule incorporates the identifiable net asset values from previous acquisitions.
b. the determination and distribution of excess schedule is completely independent of the identifiable net asset values from previous acquisitions.
c. additional goodwill is recognized for any excess of cost over book value
d. none of the above.

 

 

ANS:  A                    DIF:    E                    OBJ:   7-2

 

  1. Parent has purchased additional shares of subsidiary stock. If the original investment blocks are carried at cost, the conversion to simple equity is based upon
a. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the first block was acquired.
b. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the block giving a controlling interest was acquired.
c. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings of each block at its acquisition.
d. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the last block was acquired.

 

 

ANS:  C                    DIF:    E                    OBJ:   7-2

 

  1. When a parent sells its subsidiary interest, a gain (loss) is recognized if the parent

sells its          sells part but      sells part and

entire investment      retains control     loses control

a.   Yes                    Yes                 No
b.   Yes                    No                  Yes
c.   No                     No                  No
d.   No                     No                  Yes

 

 

ANS:  B                    DIF:    E                    OBJ:   7-3

 

Partridge & Sparrow scenario:

 

Partridge purchased a 60% interest in Sparrow on January 1, 20X1, for $240,000. At the time of the purchase, Sparrow had the following stockholders’ equity:

 

Common stock ($10 par) $  80,000
Retained earnings   120,000
     Total stockholders’ equity $200,000

 

Any excess is attributable to equipment with a 10-year life. On January 1, 20X6, the retained earnings of Sparrow was $175,000.

 

  1. Refer to Partridge and Sparrow. During the first 6 months of 20X6, $25,000 was earned by Company S. The entire investment was sold for $300,000 on July 1, 20X6. The gain (loss) was ____.
a. $87,000
b. $78,000
c. $12,000
d. $60,000

 

 

ANS:  B                    DIF:    M                   OBJ:   7-3

 

  1. Refer to Partridge and Sparrow. The entire investment was sold for $300,000 on January 1, 20X6. The gain was ____.
a. $87,000
b. $90,000
c. $27,000
d. $78,000

 

 

ANS:  A                    DIF:    M                   OBJ:   7-3

 

  1. A parent company owns a 90% interest in a subsidiary at the start of the year and during the year sells a 10% interest to reduce its ownership percentage to 80%. The most popular view of the transaction under current consolidations theory is that
a. it is a sale of an investment at a gain or a loss.
b. it is likened to a treasury stock transaction that may not result in a gain or a loss.
c. it is a transaction between the controlling and noncontrolling ownership interests and has no effect on consolidated income. The transaction would impact only paid-in capital.
d. the increase or decrease in equity as a result of the sale is an adjustment to donated capital.

 

 

ANS:  C                    DIF:    E                    OBJ:   7-3

 

  1. In the year a parent sells its subsidiary investment, the results of subsidiary operations prior to the sale date are
a. consolidated to the point of sale.
b. shown on the balance sheet in the stockholders’ equity section as an adjustment to retained earnings.
c. not reflected on any of the parent’s statements.
d. not consolidated.

 

 

ANS:  D                    DIF:    E                    OBJ:   7-3

 

Patten and Salty scenario:

Patten Company purchased an 80% interest in Salty Inc. on January 1, 20X1, for $500,000 when the stockholders’ equity of Salty was $500,000. Any excess of cost was attributed to a building with a 20-year life. On July 1, 20X4, Patten sold part of its investment and reduced its ownership interest to 60%. Salty earned $62,000, evenly, during 20X4.

 

  1. Refer to the Patten and Salty scenario. The NCI share of 20X4 consolidated income is
a. $10,000
b. $12,400
c. $16,725
d. $43,400

 

 

ANS:  C                    DIF:    M                   OBJ:   7-3

 

Page & Seed scenario:

Page Company purchased an 80% interest in the common stock of the Seed Company for $600,000 on January 1, 20X4, when Seed Company had the following stockholders’ equity:

 

Common stock, $10 par $300,000
Cumulative preferred stock, 10%, $10 par 100,000
Paid-in excess of par, common 50,000
Retained earnings 200,000

 

Any excess of cost over book value on the common stock purchase was attributed to goodwill. Page does not hold any of Seed’s preferred stock. Seed had net income of $40,000 during 20X4 and paid no dividends.

 

  1. Refer to Page and Seed. The preferred stock is 1 year in arrears on January 1, 20X4. The goodwill that will appear on the consolidated balance sheet prepared on January 1, 20X4, is ____.
a. $80,000
b. $88,000
c. $210,000
d. $168,000

 

 

ANS:  C                    DIF:    E                    OBJ:   7-4

 

  1. Refer to Page and Seed. The preferred stock is 2 years in arrears on January 1, 20X4. The noncontrolling interest share of 20X4 net income was ____.
a. $3,200
b. $6,000
c. $8,000
d. $16,000

 

 

ANS:  D                    DIF:    M                   OBJ:   7-4

  1. Refer to Page and Seed. The preferred stock is 2 years in arrears on January 1, 20X4. The controlling interest’s share of Seed’s 20X4 net income is ____.
a. $24,000
b. $23,360
c. $25,600
d. $32,000

 

ANS:  A                    DIF:    M                   OBJ:   7-4

 

  1. Plant company owns 80% of the common stock of Surf Company. Surf Company also has outstanding preferred stock. Plant Company owned none of the preferred stock prior to January 1, 20X5. Plant Company purchased 100% of the outstanding preferred stock on January 1, 20X5, at a price in excess of book value. The result of this transaction with regard to the consolidated statements is that
a. there will be added goodwill.
b. there will be a loss recorded in the year of the purchase.
c. the preferred stock will not appear on the balance sheet and there will be a decrease in retained earnings as a result of the purchase.
d. the investment in preferred stock will appear on the balance sheet.

 

ANS:  C                    DIF:    E                    OBJ:   7-4

 

  1. Company P has consistently sold merchandise for resale to its subsidiary at a gross profit of 20%. There were intercompany goods in both the subsidiary’s beginning and ending inventory. As a result of these sales, which of the following amounts must be adjusted for when preparing only a consolidated balance sheet?

Sales Profit            Beginning                 Ending

by Co. P during          Inventory               Inventory

    the Year               Profit                  Profit

a. Yes                     Yes                      Yes
b. Yes                     No                       Yes
c. No                      No                       Yes
d. No                      No                       No

 

ANS:  C                    DIF:    E                    OBJ:   A1

 

  1. Company P owns an 90% interest in Company S. Company S has outstanding $100,000 of 10% bonds that were sold at face value and have 6 years to maturity as of the balance sheet date. Company P owns $70,000 of the bonds and has a remaining unamortized book value of $66,000. Company S bonds will be presented on the consolidated balance sheet as
a. bonds payable, $30,000.
b. bonds payable, $34,000.
c. bonds payable, $100,000.
d. bonds payable will not appear.

 

ANS:  A                    DIF:    E                    OBJ:   A1

 

  1. Saddle Corporation is an 80%-owned subsidiary of Paso Company. On January 1, 20X1, Saddle sold Paso a machine for $50,000. Saddle’s cost was $60,000 and the book value was $40,000. The machine had a 5-year remaining life at the time of the sale. A consolidated balance sheet only is being prepared on December 31, 20X3. The retained earnings of the controlling interest requires which of the following adjustments?
a. Debit $4,000
b. Debit $6,000
c. Debit $3,200
d. Debit $4,800

 

ANS:  C                    DIF:    M                   OBJ:   A1

PROBLEM

  1. Pilatte Company acquired a 90% interest in the common stock of Sweet Company for $630,000 on January 1, 20X3, when Sweet Company had the following stockholders’ equity:

 

Preferred stock (5% cumulative, $100 par) $  80,000
Common stock ($10 par) 350,000
Paid-in capital in excess of par, common stock 75,000
Retained earnings   150,000
     Total $655,000

 

The preferred stock dividends are 2 years in arrears. Any excess is attributable to equipment with a 6-year life, which is undervalued by $40,000, and to goodwill.

 

Required:

 

Prepare a determination and distribution of excess schedule for the investment in Sweet Company.

 

ANS:

D&D Schedule Entity Parent NCI
Entity FV $ 700,000 $ 630,000 $ 70,000
Book value:
Pd-In Capt C Stk   425,000
RE   150,000
Preferred Div arrears*   (8,000)
Book value:   567,000  510,300  56,700
Excess   133,000 $119,700 $ 13,300
Equipment    40,000 5 year life
Goodwill $ 93,000

*$80,000 ´ 5% ´ 2 years = $8,000

 

DIF:    M                   OBJ:   7-4

 

  1. On January 1, 20X1, Company P purchased a 90% interest in Company S for $360,000. Company P prepared the following determination and distribution of excess schedule at that time:

 

D&D Schedule Entity Parent NCI
Entity FV $  400,000  360,000  40,000
Book value:
Pd-In Capt C Stk       200,000
RE  100,000
Book value:  300,000  270,000  30,000
Excess    100,000    90,000  10,000
Building      60,000 20 years    3,000
Goodwill    40,000
Total     100,000

 

Company S had income of $30,000 for 20X1 and $40,000 for 20X2. No dividends were paid. Company P sold its entire investment in Company S on January 1, 20X3, for $340,000.

Required:

Prepare Company P’s entries to record the sale assuming that Company P used the

a. simple equity method to reflect its investment in Company S.
b. cost method to reflect its investment in Company S.

 

 

ANS:

a. Parent journal entries assuming simple equity
Retained Earnings–Company P   5,400
      Investment in Company S   5,400
To adjust investment account and Company P Retained Earnings for the additional depreciation made on consolidated statement for 20X1 and 20X2 ($3,000 ´ 2 year ´ 90%).
Cash 340,000
Loss on Disposal of Subsidiary 77,600
      Investment in Company S 417,600
Calculation of Investment in Company S:    
      Original Cost   $360,000
      Controlling Share of Subsidiary Income    
           (90% × $70,000)   63,000
      Less: Additional building depreciation        (5,400)
Investment in Company S   $417,600
b. Parent journal entries assuming cost method
Investment in Company S   57,600
      Retained Earnings– Company P   57,600
To record parent share of subsidiary income as shown on prior years’ consolidated statements, less additional building depreciation

($63,000  $5,400).

Cash 340,000
Loss on Disposal of Subsidiary 77,600
      Investment in Company S 417,600
To record the sale of the 80% interest in Company S.

 

 

DIF:    E                    OBJ:   7-3

 

  1. Company P Industries purchased a 70% interest in Company S on January 1, 20X1, and prepared the following determination and distribution of excess schedule:

 

D&D Schedule Entity Parent NCI
Entity FV $   300,000  210,000  90,000
Book value:
Pd-In Capt C Stk       200,000
RE      80,000
Book value:    280,000  196,000  84,000
Excess $     20,000    14,000    6,000
Patent $     20,000 20 years    1,000

 

Since the purchase, there have been the following intercompany transactions:

(1) On January 1, 20X2, Company P sold a piece of equipment with a net book value of $40,000 to Company S for $50,000. The equipment had a five-year remaining life.
(2) Each year, starting in 20X3, Company S has sold merchandise for resale to Company P at a gross profit of 20%. A summary of transactions shows the following:
Ending
Dollar Sales Inventory
Year with Mark-up with Mark-up
20X3 $110,000 $30,000
20X4 $120,000 $40,000
20X5 $140,000 $60,000
(3) On January 1, 20X5, Company P purchased Company S’s 8%, $100,000 face value bonds for $98,000, which were issued at par value. The bonds have five years to maturity.

 

Required:

 

Complete the following schedule to adjust the retained earnings of the noncontrolling and controlling interest on the December 31, 20X5, worksheet for a consolidated balance sheet only. Company P uses the simple equity method to account for its investment.

 

Adjustment to RE of:
Item Calculation NCI Controlling
Patent
Equipment
Merchandise
Bonds
Total

 

 

ANS:

(DR)   CR

Adjustment to RE of:

Item Calculation NCI Controlling
Patent Distribute NCI’s share of excess   6,000
Patent $1,000 × 5 years to-date amortization (1,500) (  3,500)
Equipment $2,000 × 1 year (unearned gain) (  2,000)
Merchandise $60,000 × 20% split 30:70 (3,600) (  8,400)
Bonds $2,000 gain  $400 amortization

split 30:70

(   480) (  1,120)
Total   3,984  (15,020)

 

 

DIF:    E                    OBJ:   A1

 

Patrick & Solomon scenario:

On January 1, 20X1, Patrick Company purchased 60% of the common stock of Solomon Company for $180,000. On this date, Solomon had common stock, other paid-in capital, and retained earnings of $20,000, $60,000, and $120,000 respectively.

 

On January 1, 20X1, the only tangible asset of Solomon that was undervalued was land, which was worth $15,000 more than book value.

 

On January 1, 20X2, Patrick Company purchased an additional 30% of the common stock of Solomon Company for $140,000.

 

Net income and dividends for 2 years for Solomon Company were:

 

20X1 20X2
Net income for year $50,000 $80,000
Dividends, paid-in December 0 50,000

 

In the last quarter of 20X2, Solomon sold $80,000 of goods to Patrick, at a gross profit rate of 30%. On December 31, 20X2, $20,000 of these goods are in Patrick’s ending inventory.

 

  1. Refer to Patrick and Solomon. In both 20X1 and 20X2, Patrick has accounted for its investment in Solomon using the cost method.

 

Required:

 

a. Using the information above or on the separate worksheet, prepare necessary determination and distribution of excess schedules for the two purchases.
b. Complete the Figure 7-2 worksheet for consolidated financial statements for 20X2.

 

Figure 7-2
Trial Balance Eliminations and
Patrick Solomon Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 80,000 50,000
Other Current Assets 135,000 0
Invest in Solomon Co. 320,000
Other Long-Term Investments 100,000
Land 70,000 50,000
Buildings and Equipment 300,000 220,000
Accumulated Depreciation (100,000) (60,000)
Goodwill
Current Liabilities (70,000) (30,000)
Long-Term Liabilities (80,000) (50,000)
Common Stock – P Co. (100,000)
Other Pd-in Capt – P Co. (200,000)
Retained Earnings – P Co. (250,000)
Common Stock – S Co. (20,000)
Other Pd-in Capt  – S Co. (60,000)
Retained Earnings – S Co. (170,000)
Net Sales (520,000) (450,000)
Cost of Goods Sold 300,000 270,000
Operating Expenses 120,000 100,000
Dividend Income (45,000)
Div Declared – P Co 40,000
Div Declared – S Co 50,000
Consolidated Net Income
     To NCI
     To Controlling Interest
Total NCI
Controlling RE 12/31
0 0
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Invest in Solomon Co.
Other Long-Term Investments
Land
Buildings and Equipment
Accumulated Depreciation
Goodwill
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Pd-in Capt – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Pd-in Capt  – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Dividend Income
Div Declared – P Co
Div Declared – S Co
Consolidated Net Income
     To NCI
     To Controlling Interest
Total NCI
Controlling RE 12/31

 

 

ANS:

D&D schedule for first acquisition:

  Entity Parent NCI
Entity FV  300,000    180,000  120,000
Book value:
Pd-In Capt C Stk    80,000
RE  120,000
Book value:  200,000    120,000    80,000
Excess  100,000      60,000    40,000
Adjustments:
Land    15,000
Goodwill    85,000
Total  100,000

 

Analysis of second acquisition:

Price paid for additional block $  140,000
Book value of NCI purchased:
Pd-In Capt $   80,000
R/E on 1/1/X2  170,000
$ 250,000
  ´    30%     75,000
Excess of cost over book     65,000
Excess attrib to NCI change:
Original excess*  100,000
  ´    30%     30,000
Balance, adjust to Par addn’l pd-in capital $  35,000

*excess is attributable to assets that are not subject to amortization

 

b. For the worksheet solution, please refer to Answer 7-2.

 

Answer 7-2
Trial Balance Eliminations and
Patrick Solomon Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 80,000 50,000 EI 6,000
Other Current Assets 135,000 0
Invest in Solomon Co. 320,000 CV 30,000 EL 225,000
D1 60,000
D2 65,000
Other Long-Term Investments 100,000
Land 70,000 50,000 D1 15,000
Buildings and Equipment 300,000 220,000
Accumulated Depreciation (100,000) (60,000)
Goodwill D1 85,000
Current Liabilities (70,000) (30,000)
Long-Term Liabilities (80,000) (50,000)
Common Stock – P Co. (100,000)
Other Pd-in Capt – P Co. (200,000)
Retained Earnings – P Co. (250,000) D2 35,000 CV 30,000
Common Stock – S Co. (20,000) EL 18,000
Other Pd-in Capt  – S Co. (60,000) EL 54,000
Retained Earnings – S Co. (170,000) EL 153,000 D1 40,000
D2 30,000
Net Sales (520,000) (450,000) IS 80,000
Cost of Goods Sold 300,000 270,000 EI 6,000 IS 80,000
Operating Expenses 120,000 100,000
Dividend Income (45,000) CY 45,000
Div Declared – P Co 40,000
Div Declared – S Co 50,000 CY 45,000
Consolidated Net Income
     To NCI
     To Controlling Interest
Total NCI
Controlling RE 12/31
0 0 551,000 551,000
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 124,000
Other Current Assets 135,000
Invest in Solomon Co. 0
Other Long-Term Investments 100,000
Land 135,000
Buildings and Equipment 520,000
Accumulated Depreciation (160,000)
Goodwill 85,000
Current Liabilities (100,000)
Long-Term Liabilities (130,000)
Common Stock – P Co. (100,000)
Other Pd-in Capt – P Co. (200,000)
Retained Earnings – P Co. (245,000)
Common Stock – S Co. (2,000)
Other Pd-in Capt  – S Co. (6,000)
Retained Earnings – S Co. (27,000)
Net Sales (890,000)
Cost of Goods Sold 496,000
Operating Expenses 220,000
Dividend Income 0
Div Declared – P Co 40,000
Div Declared – S Co 5,000
Consolidated Net Income (174,000)
     To NCI 7,400 (7,400)
     To Controlling Interest 166,600 (166,600)
Total NCI (37,400) (37,400)
Controlling RE 12/31 (371,600) (371,600)
0

 

Eliminations and Adjustments:

 

CV Convert to simple equity method as of January 1, 20X2 (60% of $50,000 increase in retained earnings from January 1, 20X1 to January 1, 20X2).
CY Eliminate the current-year dividend income of Patrick against dividends declared by Solomon.
EL Eliminate 90% of Solomon Company equity balances at the beginning of the year against the investment account.
D1 Distribute the $100,000 excess cost as required by the determination and distribution of excess schedule.
D2 Distribute the excess of cost over book value on the 1/1/X2 investment
IS Eliminate the intercompany sale and purchase.
EI Eliminate the $6,000 of gross profit in the ending inventory.

 

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory 6,000 Internally generated net income 80,000
Adjusted income 74,000
NCI Share 10%
NCI 7,400
Parent Company Income Distribution Schedule
Internally generated net income 100,000
90% × Sub’s adjusted income 66,600
Controlling interest 166,600

 

 

DIF:    D                    OBJ:   7-2

 

  1. Refer to Patrick and Solomon. In both 20X1 and 20X2, Patrick has accounted for its investment in Solomon using the simple equity method.

 

Required:

 

a. Using the information from the scenario or on the separate worksheet, prepare necessary determination and distribution of excess schedules for the two purchases.
b. Complete the Figure 7-3 worksheet for consolidated financial statements for 20X2.

 

Figure 7-3
Trial Balance Eliminations and
Patrick Solomon Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 80,000 50,000
Other Current Assets 135,000
Invest in Solomon. Co 377,000
Other Long-Term Investments 100,000
Land 70,000 50,000
Buildings and Equipment 300,000 220,000
Accumulated Depreciation (100,000) (60,000)
Goodwill
Current Liabilities (70,000) (30,000)
Long-Term Liabilities (80,000) (50,000)
Common Stock – P Co. (100,000)
Other Pd-in Capt – P Co. (200,000)
Retained Earnings – P Co. (280,000)
Common Stock – S Co. (20,000)
Other Pd-in Capt – S C (60,000)
Retained Earnings – S Co. (170,000)
Net Sales (520,000) (450,000)
Cost of Goods Sold 300,000 270,000
Operating Expenses 120,000 100,000
Subsidiary Income (72,000)
Div Declared – P Co. 40,000
Div Declared – S Co. 50,000
Consolidated Net Income
     To NCI
     To Controlling Interest
Total NCI
Controlling RE 12/31
0 0
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Invest in Solomon. Co
Other Long-Term Investments
Land
Buildings and Equipment
Accumulated Depreciation
Goodwill
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Pd-in Capt – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Pd-in Capt – S C
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
Div Declared – P Co.
Div Declared – S Co.
Consolidated Net Income
     To NCI
     To Controlling Interest
Total NCI
Controlling RE 12/31

 

 

ANS:

D&D schedule for first acquisition:

  Entity Parent NCI
Entity FV  300,000    180,000  120,000
Book value:
Pd-In Capt C Stk    80,000
RE  120,000
Book value:  200,000    120,000    80,000
Excess  100,000      60,000    40,000
Adjustments:
Land    15,000
Goodwill    85,000
Total  100,000

 

Analysis of second acquisition:

Price paid for additional block $  140,000
Book value of NCI purchased:
Pd-In Capt $   80,000
R/E on 1/1/X2  170,000
$ 250,000
  ´    30%     75,000
Excess of cost over book     65,000
Excess attrib to NCI change:
Original excess*  100,000
  ´    30%     30,000
Balance, adjust to Par addn’l pd-in capital $  35,000

*excess is attributable to assets that are not subject to amortization

 

b. For the worksheet solution, please refer to Answer 7-3.

 

Answer 7-3
Trial Balance Eliminations and
Patrick Solomon Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 80,000 50,000 EI 6,000
Other Current Assets 135,000
Invest in Solomon. Co 377,000 CY 27,000
EL 225,000
D1 60,000
D2 65,000
Other Long-Term Investments 100,000
Land 70,000 50,000 D1 15,000
Buildings and Equipment 300,000 220,000
Accumulated Depreciation (100,000) (60,000)
Goodwill D1 85,000
Current Liabilities (70,000) (30,000)
Long-Term Liabilities (80,000) (50,000)
Common Stock – P Co. (100,000)
Other Pd-in Capt – P Co. (200,000)
Retained Earnings – P Co. (280,000) D2 35,000
Common Stock – S Co. (20,000) EL 18,000
Other Pd-in Capt – S C (60,000) EL 54,000
Retained Earnings – S Co. (170,000) EL 153,000 D1 40,000
D2 30,000
Net Sales (520,000) (450,000) IS 80,000
Cost of Goods Sold 300,000 270,000 EI 6,000 IS 80,000
Operating Expenses 120,000 100,000
Subsidiary Income (72,000) CY 72,000
Div Declared – P Co. 40,000
Div Declared – S Co. 50,000 CY 45,000
Consolidated Net Income
     To NCI
     To Controlling Interest
Total NCI
Controlling RE 12/31
0 0 548,000 548,000
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 124,000
Other Current Assets 135,000
Invest in Solomon. Co 0
Other Long-Term Investments 100,000
Land 135,000
Buildings and Equipment 520,000
Accumulated Depreciation (160,000)
Goodwill 85,000
Current Liabilities (100,000)
Long-Term Liabilities (130,000)
Common Stock – P Co. (100,000)
Other Pd-in Capt – P Co. (200,000)
Retained Earnings – P Co. (245,000)
Common Stock – S Co. (2,000)
Other Pd-in Capt – S C (6,000)
Retained Earnings – S Co. (27,000)
Net Sales (890,000)
Cost of Goods Sold 496,000
Operating Expenses 220,000
Subsidiary Income 0
Div Declared – P Co. 40,000
Div Declared – S Co. 5,000
Consolidated Net Income (174,000)
     To NCI 7,400 (7,400)
     To Controlling Interest 166,600 (166,600)
Total NCI (37,400) (37,400)
Controlling RE 12/31 (371,600) (371,600)
0

 

Eliminations and Adjustments:

 

CY Eliminate the current-year entries made for investment income and dividends
EL Eliminate 90% of Solomon Company equity balances at the beginning of the year against the investment account.
D1 Distribute the $100,000 excess cost as required by the determination and distribution of excess schedule.
D2 Distribute the excess of cost over book value on the 1/1/X2 investment
IS Eliminate the intercompany sale and purchase.
EI Eliminate the $6,000 of gross profit in the ending inventory.

 

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory 6,000 Internally generated net income 80,000
Adjusted income 74,000
NCI Share 10%
NCI 7,400
Parent Company Income Distribution Schedule
Internally generated net income 100,000
90% × Sub’s adjusted income 66,600
Controlling interest 166,600

 

 

DIF:    D                    OBJ:   7-2

 

Poplar & Sequoia scenario:

 

On January 1, 20X1, Poplar Company acquired 80% of the common stock of Sequoia Company for $400,000. On this date, Sequoia had total owners’ equity of $400,000. The excess of cost over book value was due to a patent with remaining life of 10 years. Poplar adopted the simple equity method to account for its investment in Sequoia.

 

Sequoia’s income for the three years 20X1 through 20X3 is $80,000, $60,000, and $100,000 respectively. All income is earned evenly throughout the year; Sub has paid no dividends.

 

On July 1, 20X3, Poplar Company sold 10% of the total stock of Sequoia for $70,000, reducing its investment percentage to 70%.

 

  1. Refer to Poplar and Sequoia. Prepare Poplar’s general journal entries for 20X3.

 

ANS:

7/1/X3:  
  Retained Earnings-Poplar 2,000
  Investment in Sequoia 2,000
  record 10% of the $10,000 amortization for X1 and X2
  2 years @ $10,000 ´ 10% = $2,000
   
  Investment in Sequoia 4,500
  Investment Revenue (or Sub Income) 4,500
  recognize sophisticated equity income on 10%
  ($100,000 – $10,000) ´ 1/2 year ´ 10% = $4,500
   
  Cash 70,000
  Investment in Sequoia 66,500
  Paid-in Capital in Excess of Par-Poplar 3,500
  record sale of 10% interest in subsidiary
  ($512,000 ´ 1/8) – 2,000 + 4,500 = $66,500
   
12/31/X3:  
  Investment in Sequoia 70,000
  Investment Revenue (or Sub Income) 70,000
  recognize simple equity method income for the year
  $100,000 ´ 70% interest of parent at year-end

 

 

DIF:    M                   OBJ:   7-3

 

  1. On January 1, 20X1, Pepper Company purchased 90% of the common stock of Salt Company for $360,000 when Salt had total shareholders’ equity as follows:

 

8% Preferred Stock, $100 par $100,000
Common Stock, $10 par 50,000
Other Paid-in Capital 120,000
Retained Earnings   180,000
     Total $450,000

 

Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years. The 8% preferred stock is cumulative, non-participating, and has a liquidating value of par plus dividends in arrears. There were no preferred dividends in arrears on January 1, 20X1. Pepper elected to account for its investment in Salt using the simple equity method.

 

During 20X1, Salt had a net loss of $10,000 and paid no dividends. In 20X2, Salt had net income of $100,000 and paid dividends totaling $36,000.

 

During 20X2, Salt sold merchandise to Pepper for $40,000, of which $20,000 is still held by Pepper on December 31, 20X2. Salt’s usual gross profit is 40%.

 

Required:

 

Complete the Figure 7-8 worksheet for consolidated financial statements for the year ended December 31, 20X2.

 

Figure 7-8
Trial Balance Eliminations and
Pepper Salt Adjustments
Account Titles Company Company Debit Credit
Inventory 60,000 40,000
Other Current Assets 154,200 174,000
Invest in Salt Company 408,600
Land 120,000 80,000
Buildings and Equipment 450,000 370,000
Accumulated Depreciation (200,000) (80,000)
Current Liabilities (80,000) (60,000)
Long-Term Liabilities (100,000) (20,000)
Common Stock – P Co. (200,000)
Other Pd-in Capt – P Co. (100,000)
Retained Earnings – P Co. (400,000)
Preferred Stk, 8% – S Co. (100,000)
RE to Pref Stk – S Co.
Common Stock – S Co. (50,000)
Other Pd-In Capt – S Co. (120,000)
Retained Earnings – S Co. (170,000)
Net Sales (500,000) (450,000)
Cost of Goods Sold 300,000 270,000
Operating Expenses 120,000 80,000
Investment Income (82,800)
Div. Declared – P Co. 50,000
Div. on Pref Stk – S Co 16,000
Div. on Comm Stk – S Co. 20,000
Consolidated Net Income
Allocated to:
     NCI-Preferred
     NCI-Common
     Controlling Interest
Total NCI
Controlling RE 12/31
0 0
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory
Other Current Assets
Invest in Salt Company
Land
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Pd-in Capt – P Co.
Retained Earnings – P Co.
Preferred Stk, 8% – S Co.
RE to Pref Stk – S Co.
Common Stock – S Co.
Other Pd-In Capt – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Investment Income
Div. Declared – P Co.
Div. on Pref Stk – S Co
Div. on Comm Stk – S Co.
Consolidated Net Income
Allocated to:
     NCI-Preferred
     NCI-Common
     Controlling Interest
Total NCI
Controlling RE 12/31

 

 

ANS:

For the worksheet solution, please refer to Answer 7-8.

 

Answer 7-8
Trial Balance Eliminations and
Pepper Salt Adjustments
Account Titles Company Company Debit Credit
Inventory 60,000 40,000 EI 8,000
Other Current Assets 154,200 174,000
Invest in Salt Company 408,600 CY 64,800
EL 298,800
D 45,000
Land 120,000 80,000
Buildings and Equipment 450,000 370,000
Accumulated Depreciation (200,000) (80,000)
Patent D 50,000 A 10,000
Current Liabilities (80,000) (60,000)
Long-Term Liabilities (100,000) (20,000)
Common Stock – P Co. (200,000)
Other Pd-in Capt – P Co. (100,000)
Retained Earnings – P Co. (400,000) A 4,500
Preferred Stk, 8% – S Co. (100,000)
RE to Pref Stk – S Co. PS 8,000
Common Stock – S Co. (50,000) EL 45,000
Other Pd-In Capt – S Co. (120,000) EL 108,000
Retained Earnings – S Co. (170,000) PS 8,000 D 5,000
EL 145,800
A 500
Net Sales (500,000) (450,000) IS 40,000
Cost of Goods Sold 300,000 270,000 EI 8,000 IS 40,000
Operating Expenses 120,000 80,000 A 5,000
Investment Income (82,800) CY 82,800
Div. Declared – P Co. 50,000
Div. on Pref Stk – S Co 16,000
Div. on Comm Stk – S Co. 20,000 CY 18,000
Consolidated Net Income
Allocated to:
     NCI-Preferred
     NCI-Common
     Controlling Interest
Total NCI
Controlling RE 12/31
0 0 497,600 497,600
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory 92,000
Other Current Assets 328,200
Invest in Salt Company 0
Land 200,000
Buildings and Equipment 820,000
Accumulated Depreciation (280,000)
Patent 40,000
Current Liabilities (140,000)
Long-Term Liabilities (120,000)
Common Stock – P Co. (200,000)
Other Pd-in Capt – P Co. (100,000)
Retained Earnings – P Co. (395,500)
Preferred Stk, 8% – S Co. (100,000)
RE to Pref Stk – S Co. (8,000)
Common Stock – S Co. (5,000)
Other Pd-In Capt – S Co. (12,000)
Retained Earnings – S Co. (20,700)
Net Sales (910,000)
Cost of Goods Sold 538,000
Operating Expenses 205,000
Investment Income 0
Div. Declared – P Co. 50,000
Div. on Pref Stk – S Co 16,000
Div. on Comm Stk – S Co. 2,000
Consolidated Net Income (167,000)
Allocated to:
     NCI-Preferred 8,000 (8,000)
     NCI-Common 7,900 (7,900)
     Controlling Interest 151,100 (151,100)
Total NCI (143,600) (143,600)
Controlling RE 12/31 (496,600) (496,600)
0

 

Eliminations and Adjustments:

 

PS Allocate the 8,000 of preferred dividends in arrears on January 1, 20X2 to the preferred equity.
CY Eliminate the current-year entries made in the investment account and in the investment income account.
EL Eliminate 90% of Salt’s common equity balances at the beginning of the year against the investment account.
D Allocate the $50,000 excess of cost over book value to the patent.
A Amortize the patent over 10 years, with $5,000 for 20X1 charged to retained earnings, and $5,000 for 20X2 to operating expenses.
IS Eliminate the entire intercompany sales of $40,000.
EI Eliminate the $8,000 of gross profit in the ending inventory.

 

Subsidiary Company Income Distribution Schedule
Pref stk cumulative claim, NCI 10% 8,000 Internally generated net income 100,000
Deferred profit in ending inventory 8,000 Common stock income 92,000
1 year amortization on patent 5,000
Adjusted common stock income 79,000
NCI Share 10%
NCI 7,900
Parent Company Income Distribution Schedule
Internally generated net income 80,000
90% × Sub’s adj common stk inc 71,100
Controlling interest 151,100

 

 

DIF:    D                    OBJ:   7-4                 MSC:  simple equity method

 

  1. On January 1, 20X1, Pepper Company purchased 90% of the common stock of Salt Company for $360,000 when Salt had total shareholders’ equity as follows:

 

8% Preferred Stock, $100 par $100,000
Common Stock, $10 par 50,000
Other Paid-in Capital 120,000
Retained Earnings   180,000
     Total $450,000

 

Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years. The 8% preferred stock is cumulative, non-participating, and has a liquidating value of par plus dividends in arrears. There were no preferred dividends in arrears on January 1, 20X1. Pepper elected to account for its investment in Salt using the cost method.

 

During 20X1, Salt had a net loss of $10,000 and paid no dividends. In 20X2, Salt had net income of $100,000 and paid dividends totaling $36,000.

 

During 20X2, Salt sold merchandise to Pepper for $40,000, of which $20,000 is still held by Pepper on December 31, 20X2. Salt’s usual gross profit is 40%.

 

Required:

 

Complete the Figure 7-8 worksheet for consolidated financial statements for the year ended December 31, 20X2.

 

Figure 7-8
Trial Balance Eliminations and
Pepper Salt Adjustments
Account Titles Company Company Debit Credit
Inventory 60,000 40,000
Other Current Assets 154,200 174,000
Invest in Salt Co. 360,000
Land 120,000 80,000
Buildings and Equipment 450,000 370,000
Accumulated Depreciation (200,000) (80,000)
Current Liabilities (80,000) (60,000)
Long-Term Liabilities (100,000) (20,000)
Common Stock – P Co. (200,000)
Other Pd-in Capt – P Co. (100,000)
Retained Earnings – P Co. (416,200)
Preferred Stk, 8% – S Co. (100,000)
RE to Pref Stk – S Co.
Common Stock – S Co. (50,000)
Other Pd-In Capt – S Co. (120,000)
Retained Earnings – S Co. (170,000)
Net Sales (500,000) (450,000)
Cost of Goods Sold 300,000 270,000
Operating Expenses 120,000 80,000
Investment Income (18,000)
Div. Declared – P Co. 50,000
Div. on Pref Stk – S Co 16,000
Div. on Comm Stk – S Co. 20,000
Consolidated Net Income
Allocated to:
     NCI-Preferred
     NCI-Common
     Controlling Interest
Total NCI
Controlling RE 12/31
0 0
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory
Other Current Assets
Invest in Salt Co.
Land
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Pd-in Capt – P Co.
Retained Earnings – P Co.
Preferred Stk, 8% – S Co.
RE to Pref Stk – S Co.
Common Stock – S Co.
Other Pd-In Capt – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Investment Income
Div. Declared – P Co.
Div. on Pref Stk – S Co
Div. on Comm Stk – S Co.
Consolidated Net Income
Allocated to:
     NCI-Preferred
     NCI-Common
     Controlling Interest
Total NCI
Controlling RE 12/31

 

 

ANS:

For the worksheet solution, please refer to Answer 7-8.

 

Answer 7-8
Trial Balance Eliminations and
Pepper Salt Adjustments
Account Titles Company Company Debit Credit
Inventory 60,000 40,000 EI 8,000
Other Current Assets 184,200 174,000
Invest in Salt Co. 360,000 CV 16,200
EL 298,800
D 45,000
Land 120,000 80,000
Buildings and Equipment 450,000 370,000
Accumulated Depreciation (200,000) (80,000)
Patent D 50,000 A 10,000
Current Liabilities (80,000) (60,000)
Long-Term Liabilities (100,000) (20,000)
Common Stock – P Co. (200,000)
Other Pd-in Capt – P Co. (100,000)
Retained Earnings – P Co. (416,200) A 4,500
CV 16,200
Preferred Stk, 8% – S Co. (100,000)
RE to Pref Stk – S Co. PS 8,000
Common Stock – S Co. (50,000) EL 45,000
Other Pd-In Capt – S Co. (120,000) EL 108,000
Retained Earnings – S Co. (170,000) PS 8,000 D 5,000
EL 145,800
A 500
Net Sales (500,000) (450,000) IS 40,000
Cost of Goods Sold 300,000 270,000 EI 8,000 IS 40,000
Operating Expenses 120,000 80,000 A 5,000
Investment Income (18,000) CY 18,000
Div. Declared – P Co. 50,000
Div. on Pref Stk – S Co 16,000
Div. on Comm Stk – S Co. 20,000 CY 18,000
Consolidated Net Income
Allocated to:
     NCI-Preferred
     NCI-Common
     Controlling Interest
Total NCI
Controlling RE 12/31
0 0 449,000 449,000
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory 92,000
Other Current Assets 328,200
Invest in Salt Co. 0
Land 200,000
Buildings and Equipment 820,000
Accumulated Depreciation (280,000)
Patent 40,000
Current Liabilities (140,000)
Long-Term Liabilities (120,000)
Common Stock – P Co. (200,000)
Other Pd-in Capt – P Co. (100,000)
Retained Earnings – P Co. (395,500)
Preferred Stk, 8% – S Co. (100,000)
RE to Pref Stk – S Co. (8,000)
Common Stock – S Co. (5,000)
Other Pd-In Capt – S Co. (12,000)
Retained Earnings – S Co. (20,700)
Net Sales (910,000)
Cost of Goods Sold 538,000
Operating Expenses 205,000
Investment Income 0
Div. Declared – P Co. 50,000
Div. on Pref Stk – S Co 16,000
Div. on Comm Stk – S Co. 2,000
Consolidated Net Income (167,000)
Allocated to:
     NCI-Preferred 8,000 (8,000)
     NCI-Common 7,900 (7,900)
     Controlling Interest 151,100 (151,100)
Total NCI (143,600) (143,600)
Controlling RE 12/31 (496,600) (496,600)
0

Eliminations and Adjustments:

CV Convert from cost to simple equity
PS Allocate the 8,000 of preferred dividends in arrears on January 1, 20X2 to the preferred equity.
CY Eliminate the current-year entries made in the investment account and in the Salt income account.
EL Eliminate 90% of Salt’s common equity balances at the beginning of the year against the investment account.
D Allocate the $50,000 excess of cost over book value to the patent.
A Amortize the patent over 10 years, with $5,000 for 20X1 charged to retained earnings, and $5,000 for 20X2 to operating expenses.
IS Eliminate the entire intercompany sales of $40,000.
EI Eliminate the $8,000 of gross profit in the ending inventory.

 

Subsidiary Company Income Distribution Schedule
Pref stk cumulative claim, NCI 10% 8,000 Internally generated net income 100,000
Deferred profit in ending inventory 8,000 Common stock income 92,000
1 year amortization on patent 5,000
Adjusted common stock income 79,000
NCI Share 10%
NCI 7,900
Parent Company Income Distribution Schedule
Internally generated net income 80,000
90% × Sub’s adj common stk inc 71,100
Controlling interest 151,100

 

 

DIF:    D                    OBJ:   7-4                 MSC:  cost method

 

  1. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $300,000. Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years.

 

On this date, Subsidiary had total shareholders’ equity as follows:

 

8% Preferred Stock, $100 par $100,000
Common Stock, $10 par 50,000
Other Paid-in Capital 120,000
Retained Earnings   180,000
Total $450,000

 

The 8% preferred stock is cumulative, non-participating, and has a liquidating value of par plus dividends in arrears. There were no preferred dividends in arrears on January 1, 20X1.

 

During 20X1, Subsidiary had a net loss of $10,000 and paid no dividends. In 20X2, Subsidiary had net income of $100,000 and paid dividends, on preferred and common, totaling $40,000.

 

On January 1, 20X2, Parent purchased $50,000 par value of Subsidiary’s preferred stock for $52,000. At year end, the preferred is still held as an investment.

 

In 20X1 and 20X2, Parent has accounted for its investments in Subsidiary’s preferred and common using the simple equity method.

 

During 20X2, Subsidiary sold merchandise to Parent for $40,000, of which $15,000 is still held by Parent on December 31, 20X2. Subsidiary’s usual gross profit is 40%.

 

Required:

Complete the Figure 7-10 worksheet for consolidated financial statements for the year ended December 31, 20X2.

 

Figure 7-10
Trial Balance Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory 60,000 40,000
Other Current Assets 169,600 170,000
Invest in Sub. Common 340,000
Invest in Sub. Preferred 48,000
Land 120,000 80,000
Buildings and Equipment 450,000 370,000
Accumulated Depreciation (200,000) (80,000)
Current Liabilities (80,000) (60,000)
Long-Term Liabilities (100,000) (20,000)
Common Stock – P Co. (200,000)
Other Pd-In Capt – P Co. (100,000)
Retained Earnings – P Co. (400,000)
Pref Stk, 8% – S Co. (100,000)
RE to Pref Stk – S Co.
Common Stock – S Co. (50,000)
Other Pd-In Capt – S Co. (120,000)
Retained Earnings – S Co. (170,000)
Net Sales (500,000) (450,000)
Cost of Goods Sold 300,000 270,000
Operating Expenses 120,000 80,000
Subsidiary Inc – Common (73,600)
Subsidiary Inc – Preferred (4,000)
Div Declared – P Co. 50,000
Div. on Pref Stk – S Co. 16,000
Div. on Comm Stk – S Co. 24,000
Consolidated Net Income
Allocated to:
   NCI – Preferred
   NCI – Common
   Controlling Interest
Total NCI
Controlling RE 12/31
0 0
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory
Other Current Assets
Invest in Sub. Common
Invest in Sub. Preferred
Land
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Pd-In Capt – P Co.
Retained Earnings – P Co.
Pref Stk, 8% – S Co.
RE to Pref Stk – S Co.
Common Stock – S Co.
Other Pd-In Capt – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Inc – Common
Subsidiary Inc – Preferred
Div Declared – P Co.
Div. on Pref Stk – S Co.
Div. on Comm Stk – S Co.
Consolidated Net Income
Allocated to:
   NCI – Preferred
   NCI – Common
   Controlling Interest
Total NCI
Controlling RE 12/31

 

 

ANS:

For the worksheet solution, please refer to Answer 7-10.

 

Answer 7-10
Trial Balance Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory 60,000 40,000 EI 6,000
Other Current Assets 169,600 170,000
Invest in Sub. Common 340,000 CY 54,400
EL 265,600
D 20,000
Invest in Sub. Preferred 48,000 CYP 4,000 ELP 52,000
Land 120,000 80,000
Buildings and Equipment 450,000 370,000
Accumulated Depreciation (200,000) (80,000)
D 25,000 A 5,000
Current Liabilities (80,000) (60,000)
Long-Term Liabilities (100,000) (20,000)
Common Stock – P Co. (200,000)
Other Pd-In Capt – P Co. (100,000) ELP 2,000
Retained Earnings – P Co. (400,000) A 2,000
Pref Stk, 8% – S Co. (100,000) ELP 50,000
RE to Pref Stk – S Co. ELP 4,000 PS 8,000
Common Stock – S Co. (50,000) EL 40,000
Other Pd-In Capt – S Co. (120,000) EL 96,000
Retained Earnings – S Co. (170,000) PS 8,000 D 5,000
EL 129,600
A 500
Net Sales (500,000) (450,000) IS 40,000
Cost of Goods Sold 300,000 270,000 EI 6,000 IS 40,000
Operating Expenses 120,000 80,000 A 2,500
Subsidiary Inc – Common (73,600) CY 73,600
Subsidiary Inc – Preferred (4,000) CYP 4,000
Div Declared – P Co. 50,000
Div. on Pref Stk – S Co. 16,000 CYP 8,000
Div. on Comm Stk – S Co. 24,000 CY 19,200
Consolidated Net Income
Allocated to:
   NCI – Preferred
   NCI – Common
   Controlling Interest
Total NCI
Controlling RE 12/31
0 0 485,200 485,200
(continued)

 

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory 94,000
Other Current Assets 339,600
Invest in Sub. Common 0
Invest in Sub. Preferred 0
Land 200,000
Buildings and Equipment 820,000
Accumulated Depreciation (280,000)
20,000
Current Liabilities (140,000)
Long-Term Liabilities (120,000)
Common Stock – P Co. (200,000)
Other Pd-In Capt – P Co. (102,000)
Retained Earnings – P Co. (398,000)
Pref Stk, 8% – S Co. (50,000)
RE to Pref Stk – S Co. (4,000)
Common Stock – S Co. (10,000)
Other Pd-In Capt – S Co. (24,000)
Retained Earnings – S Co. (36,900)
Net Sales (910,000)
Cost of Goods Sold 536,000
Operating Expenses 202,500
Subsidiary Inc – Common 0
Subsidiary Inc – Preferred
Div Declared – P Co. 50,000
Div. on Pref Stk – S Co. 8,000
Div. on Comm Stk – S Co. 4,800
Consolidated Net Income (171,500)
Allocated to:
   NCI – Preferred 4,000 (4,000)
   NCI – Common 16,700 (16,700)
   Controlling Interest 150,800 (150,800)
Total NCI 132,800 (132,800)
Controlling RE 12/31 498,800 (498,800)
0

 

Eliminations and Adjustments:

 

PS Allocate the $8,000 of preferred dividends in arrears on January 1, 20X2 to the preferred equity.
CY Eliminate the current-year entries made in the investment in common and the subsidiary income accounts.
EL Eliminate 80% of Subsidiary’s common equity balances at the beginning of the year against the investment in common.
D Allocate the $25,000 excess of cost over book value to the patent.
A Amortize the patent over 10 years, with $2,500 for 20X1 charged to retained earnings, and $2,500 for 20X2 to operating expenses.
IS Eliminate the entire intercompany sales of $40,000.
EI Eliminate the $6,000 of gross profit in the ending inventory.
CYP Eliminate the current-year entries made in the investment in preferred and the subsidiary income accounts.
ELP Eliminate 50% of Subsidiary’s preferred equity balances at the beginning of the year against the investment in preferred. The difference is credited to controlling paid-in capital since it results from a transaction with the consolidated firm’s shareholders.

 

Joint income distribution schedule NCI Claim Controlling

Claim

Sub internally gen net inc $  100,000
Preferred stock cumulative claim      (8,000) $     4,000 $    4,000
Common stock income      92,000
Amort 1 year on patent       (2,500)
Defer ending inventory profit      (6,000)
Sub’s adjusted internally generated net income distributed 20% to NCI; 80% to controlling interest $   83,500    16,700     66,800
NCI Interest $   20,700
Parent internally generated net income   80,000
Controlling interest $ 150,800

 

 

DIF:    D                    OBJ:   7-4

 

  1. On January 1, 20X1, Parent Company acquired 90% of the common stock of Subsidiary Company for $360,000. On this date, Subsidiary had total owners’ equity of $270,000, including retained earnings of $100,000.

 

On January 1, 20X1, any excess of cost over book value is attributable to the undervaluation of land, building, and goodwill. Land is worth $20,000 more than cost. Building is worth $60,000 more than book value. It has a remaining useful life of 6 years and is depreciated using the straight-line method.

 

During 20X1, Parent has accounted for its investment in Subsidiary using the cost method.

 

During 20X1, Subsidiary sold merchandise to Parent for $70,000, of which $20,000 is held by Parent on December 31, 20X1. Subsidiary’s usual gross profit on affiliated sales is 50%.

 

On December 31, 20X1, Parent still owes Subsidiary $5,000 for merchandise acquired in December.

 

On July 1, 20X1, Parent sold to Subsidiary some equipment with a cost of $40,000 and a book value of $18,000. The sales price was $30,000. Subsidiary is depreciating the equipment over a 4-year life, assuming no salvage value and using the straight-line method.

Required:

Prepare a determination and distribution of excess schedule. Next, complete the Figure 7-13 worksheet for a consolidated balance sheet as of December 31, 20X1.

 

Figure 7-13
Balance Sheet Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Assets:
Accounts Receivable 60,000 50,000
Inventory 110,000 90,000
Other Current Assets 87,000 160,000
Invest in Sub. Company 360,000
Land 100,000 30,000
Buildings and Equipment 400,000 280,000
Accumulated Depreciation (200,000) (100,000)
Total 917,000 510,000
Liabilities and Equity:
Accounts Payable 91,000 50,000
Other Current Liabilities 86,000 100,000
Long-Term Liabilities 150,000 50,000
Common Stock – P Co. 100,000
Other Pd-In Capt – P Co. 150,000
Retained Earnings – P Co. 340,000
Common Stock – S Co. 50,000
Other Pd-In Capt – S Co. 120,000
Retained Earnings – S Co. 140,000
NCI to Consol Bal Sheet
   Total 917,000 510,000
(continued)

 

Consolidated
Balance  Sheet
Account Titles NCI Debit Credit
Assets:
Accounts Receivable
Inventory
Other Current Assets
Invest in Sub. Company
Land
Buildings and Equipment
Accumulated Depreciation
Total
Liabilities and Equity:
Accounts Payable
Other Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Pd-In Capt – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Pd-In Capt – S Co.
Retained Earnings – S Co.
NCI to Consol Bal Sheet
Total

 

 

ANS:

Determination and Distribution of Excess Schedule:

 

1/1/X1 90% 10%
  Entity Parent NCI
Entity FV $   400,000 $ 360,000 $ 40,000
Book value:
Pd-In Capt C Stk       170,000
RE    100,000
Book value: $   270,000  243,000  27,000
Excess $   130,000 $ 117,000 $ 13,000
Adjustments:
Land $     20,000
Building 60,000 6 yrs  10,000
Goodwill     50,000
Total $   130,000

 

For the worksheet solution, please refer to Answer 7-13.

Answer 7-13
Balance Sheet Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Assets:
Accounts Receivable 60,000 50,000 IA 5,000
Inventory 110,000 90,000 EI 10,000
Other Current Assets 87,000 160,000
Invest in Sub Company 360,000 CV 36,000 EL 279,000
D 117,000
Land 100,000 30,000 D 20,000
Buildings and Equipment 400,000 280,000 D 60,000 F1 12,000
Accumulated Depreciation (200,000) (100,000) F2 1,500 A 10,000
Goodwill D 50,000
Total 917,000 510,000
Liabilities and Equity:
Accounts Payable 91,000 50,000 IA 5,000
Other Current Liabilities 86,000 100,000
Long-Term Liabilities 150,000 50,000
Common Stock – P Co. 100,000
Other Pd-In Capt – P Co. 150,000
Retained Earnings – P Co. 340,000 A 9,000 CV 36,000
EI 9,000 F2 1,500
F1 12,000
Common Stock – S Co. 50,000 EL 45,000
Other Pd-In Capt – S Co. 120,000 EL 108,000
Retained Earnings – S Co. 140,000 EL 126,000 D 13,000
EI 1,000
A 1,000
NCI to Consol Bal Sheet
Total 917,000 510,000 483,500 483,500
(continued)

 

Consolidated
Balance Sheet
Account Titles NCI Debit Credit
Assets:
Accounts Receivable 105,000
Inventory 190,000
Other Current Assets 247,000
Invest in Sub. Company 0
Land 150,000
Buildings and Equipment 728,000
Accumulated Depreciation 308,500
Goodwill 50,000
Total
Liabilities and Equity:
Accounts Payable 136,000
Other Current Liabilities 186,000
Long-Term Liabilities 200,000
Common Stock – P Co. 100,000
Other Pd-In Capt – P Co. 150,000
Retained Earnings – P Co. 347,500
Common Stock – S Co. 5,000
Other Pd-In Capt – S. Co. 12,000
Retained Earnings – S Co. 25,000
NCI to Consol Bal Sheet (42,000) 42,000
   Total 0 1,470,000 1,470,000

 

Eliminations and Adjustments:

 

CV Convert to the simple equity method as of December 31, 20X1, (90% of $40,000 increase in retained earnings from January 1, 20X1, to December 31, 20X1).
EL Eliminate 90% of the subsidiary equity accounts against the investment in subsidiary account.
D Distribute the excess of cost over book value to net assets as required by the determination and distribution of excess schedule.
A Amortize the excess write-up to building over 6 years.
EI Eliminate the intercompany gross profit in the ending inventory.
IA Eliminate the intercompany receivable and payable.
F1 Eliminate the gain on sale of equipment from the Retained Earnings of Parent.
F2 Eliminate the excess depreciation on the equipment sold from Parent to Subsidiary. $12,000  4 years  $3,000  1/2 year  $1,500

 

 

DIF:    D                    OBJ:   A1

 

  1. On January 1, 20X1, Parent Company acquired 90% of the common stock of Subsidiary Company for $360,000. On this date, Subsidiary had total owners’ equity of $270,000, including retained earnings of $100,000.

 

On January 1, 20X1, any excess of cost over book value is due to the undervaluation of land, building, and goodwill. Land is worth $10,000 more than cost. Building is worth $50,000 more than book value, has a remaining life of 10 years, and is depreciated using the straight-line method.

 

During 20X1 and 20X2, Parent accounted for its investment in Subsidiary using the simple equity method.

 

During 20X2, Subsidiary sold merchandise to Parent for $50,000, of which $10,000 is held by Parent on December 31, 20X2. Subsidiary’s gross profit on sales is 40%. On December 31, 20X2, Parent still owes Subsidiary $7,000 for merchandise acquired in December.

 

On July 1, 20X0, Subsidiary sold $100,000 par value of 10%, 10-year bonds for $104,000. The bonds pay interest semiannually on January 1 and July 1. Straight-line amortization of premium is used. On January 1, 20X2, Parent repurchased one-half of the bonds at par.

 

On January 1, 20X2, Parent purchased equipment for $104,610 and immediately leased the equipment to Subsidiary on a 4-year lease. The minimum lease payments of $30,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 10%. The useful life of the equipment is 4 years. The lease has been capitalized by both companies. Subsidiary is depreciating the equipment using the straight-line method and assuming a salvage value of $4,610.

 

A partial lease amortization schedule, applicable to either company, is presented below:

 

Carrying Carrying Interest Principal
Value on      Value      Rate   Interest Payment Reduction
1-1-20X2 $104,610
–   30,000
1-1-20X2 $  74,610 10% $7,461 $30,000 $22,539
–   22,539
1-1-20X3 $  52,071

 

Required:

 

Prepare a determination and distribution of excess schedule. Next, complete the Figure 7-14 worksheet for a consolidated balance sheet as of December 31, 20X2. Round all computations to the nearest dollar.

 

Figure 7-14
Balance Sheet Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Assets:
Accounts Receivable 45,429 40,000
Bond Interest Receivable 2,500
Min. Lease Payments Rec. 90,000
Unearned Interest Income (7,929)
Inventory 110,000 90,000
Other Current Assets 66,000 160,000
Invest in Sub. Common 387,000
Investment in Sub. Bonds 50,000
Land 60,000 50,000
Buildings and Equipment 250,000 175,390
Accumulated Depreciation (80,000) (75,000)
Equip. under Cap Lease 104,610
A/D-Equip under Cap Lse (25,000)
Total 973,000 520,000
Liabilities and Equity:
Accounts Payable 87,000 20,000
Bond Interest Payable 5,000
Lease Interest Payable 7,461
Other Current Liabilities 86,000 9,929
Lease Obligation Payable 74,610
Bonds Payable 300,000 100,000
Premium on Bonds 3,000
Common Stock – P Co. 100,000
Other Pd-In Capt – P Co. 150,000
Retained Earnings – P Co. 250,000
Common Stock – S Co. 50,000
Other Pd-In Capt – S Co. 120,000
Retained Earnings – S Co. 130,000
NCI to Consol Bal Sheet
     Total 973,000 520,000
(continued)

 

Consolidated
Balance Sheet
Account Titles NCI Debit Credit
Assets:
Accounts Receivable
Bond Interest Receivable
Min. Lease Payments Rec.
Unearned Interest Income
Inventory
Other Current Assets
Invest in Sub. Common
Investment in Sub. Bonds
Land
Buildings and Equipment
Accumulated Depreciation
Equip. under Cap Lease
A/D-Equip under Cap Lse
Total
Liabilities and Equity:
Accounts Payable
Bond Interest Payable
Lease Interest Payable
Other Current Liabilities
Lease Obligation Payable
Bonds Payable
Premium on Bonds
Common Stock – P Co.
Other Pd-In Capt – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Pd-In Capt – S Co.
Retained Earnings – S Co.
NCI to Consol Bal Sheet
     Total

 

 

ANS:

Determination and Distribution of Excess Schedule:

1/1/X1 90% 10%
  Entity Parent NCI
Entity FV       400,000    360,000  40,000
Book value:
Pd-In Capt C Stk       170,000
RE       100,000
Book value:       270,000    243,000  27,000
Excess       130,000    117,000  13,000
Adjustments:
Land         10,000
Building         50,000 10 years    5,000
Goodwill         70,000
Total       130,000

 

For the worksheet solution, please refer to Answer 7-14.

Answer 7-14
Balance Sheet Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Assets:
Accounts Receivable 45,429 40,000 IA 7,000
Bond Interest Receivable 2,500 B1 2,500
Min. Lease Payments Rec. 90,000 CL1 90,000
Unearned Interest Income (7,929) CL1 7,929
Inventory 110,000 90,000 EI 4,000
Other Current Assets 66,000 160,000
Invest in Sub. Common 387,000 EL 270,000
D 117,000
Investment in Sub. Bonds 50,000 B2 50,000
Land 60,000 50,000 D 10,000
Buildings and Equipment 250,000 175,390 CL2 104,610
D 50,000
Accumulated Depreciation (80,000) (75,000) A 10,000
CL3 25,000
Equip. under Cap Lease 104,610 CL2 104,610
A/D-Equip under Cap Lse (25,000) CL3 25,000
D 70,000
Total 973,000 520,000
Liabilities and Equity:
Accounts Payable 87,000 20,000 IA 7,000
Bond Interest Payable 5,000 B1 2,500
Lease Interest Payable 7,461 CL1 7,461
Other Current Liabilities 86,000 9,929
Lease Obligation Payable 74,610 CL1 74,610
Bonds Payable 300,000 100,000 B2 50,000
Premium on Bonds 3,000 B2 1,500
Common Stock – P Co. 100,000
Other Pd-In Capt – P Co. 150,000
Retained Earnings – P Co. 250,000 A 9,000 B2 1,350
EI 3,600
Common Stock – S Co. 50,000 EL 45,000
Other Pd-In Capt – S Co. 120,000 EL 108,000
Retained Earnings – S Co. 130,000 EL 117,000 B2 150
EI 400 D 13,000
A 1,000
NCI to Consol Bal Sheet
     Total 973,000 520,000 694,610 694,610
(continued)

 

Consolidated
Balance Sheet
Account Titles NCI Debit Credit
Assets:
Accounts Receivable 78,429
Bond Interest Receivable 0
Min. Lease Payments Rec. 0
Unearned Interest Income 0
Inventory 196,000
Other Current Assets 226,000
Invest in Sub. Common 0
Investment in Sub. Bonds 0
Land 120,000
Buildings and Equipment 580,000
Accumulated Depreciation 190,000
Equip. under Cap Lease 0
A/D-Equip under Cap Lse 0
70,000
Total
Liabilities and Equity:
Accounts Payable 100,000
Bond Interest Payable 2,500
Lease Interest Payable 0
Other Current Liabilities 95,929
Lease Obligation Payable 0
Bonds Payable 350,000
Premium on Bonds 1,500
Common Stock – P Co. 100,000
Other Pd-In Capt – P Co. 150,000
Retained Earnings – P Co. 238,750
Common Stock – S Co. 5,000
Other Pd-In Capt – S Co. 12,000
Retained Earnings – S Co. 24,750
NCI to Consol Bal Sheet (41,750) 41,750
     Total 0 1,270,429 1,270,429

Eliminations and Adjustments:

EL Eliminate 90% of the subsidiary equity accounts against the investment in subsidiary account.
D Distribute the excess of cost over book value to net assets as required by the determination and distribution of excess schedule.
A Amortize the excess write-up to building over 10 years, charging $5,000  2 or $10,000 to Accumulated Depreciation and allocating to RE-Parent and RE-Sub.
EI Eliminate the intercompany gross profit in the ending inventory.
IA Eliminate the intercompany receivable and payable.
B1 Eliminate bond interest receivable against 50% of bond interest payable.
B2 Eliminate the bond investment against 50% of bonds payable and premium on bonds.
The resulting gain of $1,500 is allocated 90% and 10% to retained earnings of Parent and Subsidiary.
CL1 Eliminate the lease payable (lease obligation payable plus lease interest payable) against the lease receivable (minimum lease payments receivable less unearned interest income).
CL2 Reclassify the leased equipment.
CL3 Reclassify the accumulated depreciation on the leased equipment.

 

 

DIF:    D                    OBJ:   A1

ESSAY

  1. A subsidiary company may have preferred stock as part of its equity structure. Further, suppose that the preferred stock is cumulative and in arrears on dividends.

Required:

a. What is the impact of the preferred stock on the excess of cost over book value on the original controlling investment in common stock?
b. What is the impact of the preferred stock on the annual distribution of income?
c. What is the theory followed in consolidated reporting when the parent purchases a portion of the subsidiary’s preferred stock?

 

 

ANS:

a. That portion of retained earnings applicable to the preferred stock equal to the arrearage is subtracted from retained earnings in the determination and distribution of excess schedule to arrive at retained earnings applicable to the common stock.
b. The NCI would be awarded the preferred share of current income equal to the annual dividend requirement. The balance of income available to common shareholders would be allocated between the controlling and noncontrolling interests.
c. From a consolidated viewpoint, the shares of preferred stock purchased by the parent are treated as retired. The difference between the book value (adjusted for dividend arrearage) and the price paid is treated as an increment to paid-in excess if the shares are purchased below book value or as a reduction of previous paid-in from retirement or retained earnings if the price paid exceeds book value.

 

 

DIF:    M                   OBJ:   7-4

 

  1. It is common for a parent firm to record its investment in a subsidiary under either the cost or simple equity method to expedite the elimination process. This does create some complications, however, when all or a portion of the investment is sold. Assume that in each of the following cases, the parent sells its investment midway through its fiscal year.

 

(1) The parent owned an 80% interest and sold all of its holdings.
(2) The parent owned an 80% interest and sold a 20% interest to reduce its ownership percentage to 60%.
(3) The parent owned an 80% interest and sold a 60% interest to reduce its ownership percentage to 20%.

 

Required:

 

a. For each of the above cases, comment on the procedures necessary to record the sale, where the investment is carried under simple equity, and the impact on consolidated income of the sale.
b. For each of the above cases, state the added procedures that would be necessary if the investment was recorded under the cost method.

 

 

ANS:

(a) Simple equity–A simple equity adjustment is made to record current year income to the date of sale. Amortization of excess must be made for all prior periods and the current partial period. This will bring the entire investment to its sophisticated equity balance and will adjust retained earnings for prior years’ amortization, which, in the past, were made on the consolidated worksheet. The gain or loss on the sale may qualify as a discontinued operation.
Cost–This is the same as equity except that an additional adjustment is needed to convert from cost to simple equity for prior periods. An equity adjustment is also needed for the current partial period. Once the equity adjustment is made, amortization would be adjusted for as it would under the simple equity method.
(b) Simple equity–Amortization of excess adjustments for the prior and current periods are made only on the 20% investment sold. Amortization applicable to the 60% controlling interest will still be made on the consolidated worksheet. A gain or loss on the sale of the investment will appear in the paid-in capital section of the consolidated balance sheet. The noncontrolling share of income will be 20% for the first half year and 40% for the second half year. The controlling interest will receive 80% and 60%, respectively.
Cost–This is the same as simple equity except that an additional adjustment is needed to convert only the 20% interest sold from cost to the simple equity method for both the prior periods and the current partial period.
(c) Simple equity–The recording adjustments are the same as those for the sale of the entire interest. The 20% investment that remains will now be accounted for under the sophisticated equity method and thus needs to be brought to this amount. The gain or loss on the sale will be shown in the “other gains and losses” section of the income statement. There will no longer be a consolidation, and the 20% interest will be listed on the balance sheet as a long-term investment.
Cost–Again, all recording adjustments are the same as those for the sale of the entire interest.

 

 

DIF:    M                   OBJ:   7-3