SMch04Beams

8/12/2019 SMch04Beams

1/51

Chapter 4

CONSOLIDATION TECHNIQUES AND PROCEDURES

Answers to Questions

1 Under the equity method, a parent amortie! patent! "rom it! !u#!idiary in$e!tment! #y ad%u!tin& it!!u#!idiary in$e!tment and in'ome a''ount!( Sin'e patent! and patent amortiation a''ount! are notre'orded on the parent)! #oo*!, they are 'reated "or 'on!o+idated !tatement purpo!e! throu&h or*paperentrie!(

2 Non'ontro++in& intere!t !hare i! entered in the 'on!o+idation or*paper! #y preparin& a or*paperad%u!tin& entry in hi'h non'ontro++in& intere!t !hare i! de#ited, non'ontro++in& intere!t)! !hare o"di$idend! i! 'redited and non'ontro++in& intere!t i! 'redited( The non'ontro++in& intere!t !hare -de#it. i!'arried to the 'on!o+idated in'ome !tatement a! a dedu'tion, and the 'redit to non'ontro++in& intere!t "ornon'ontro++in& intere!t !hare i! added to the #e&innin& non'ontro++in& intere!t( The non'ontro++in&intere!t !hare i! 'a+'u+ated #a!ed on the !u#!idiary)! reported net in'ome ad%u!ted to re"+e't "air $a+uethrou&h the amortiation o" the e/'e!! o" "air $a+ue o$er #oo* $a+ue( Thi! i! the approa'h i++u!trated

throu&hout thi! te/t(

3 0or*paper pro'edure! "or the in$e!tment in !u#!idiary, in'ome "rom !u#!idiary, and !u#!idiary equitya''ount! are a+i*e in re&ard to the o#%e'ti$e! o" 'on!o+idation( Re&ard+e!! o" the 'on"i&uration o" theor*paper entrie!, the "ina+ re!u+t o" ad%u!tment! "or the!e item! i! to e+iminate them throu&h or*paperentrie!( In other ord!, the in$e!tment in !u#!idiary, in'ome "rom !u#!idiary, and the 'apita+ !to'*,additiona+ paid1in 'apita+, retained earnin&!, and other !to'*ho+der!) equity a''ount! o" the !u#!idiaryne$er appear in 'on!o+idated "inan'ia+ !tatement!(

4 0hen the parent doe! not amortie "air $a+ue2#oo* $a+ue di""erentia+! on it! !eparate #oo*!, the parent)!in'ome "rom !u#!idiary and in$e!tment in !u#!idiary a''ount! are o$er!tated in the year o" a'qui!ition( In!u#!equent year!, the in'ome "rom the !u#!idiary, in$e!tment in !u#!idiary, and parent)! #e&innin&retained earnin&! i++ #e o$er!tated( -Thi! a!!ume! that the a!!et i! under$a+ued.(The error may #e'orre'ted in the or*paper! ith the "o++oin& entrie!3

Year of acquisitionIn'ome "rom !u#!idiary 444

In$e!tment in !u#!idiary 444Subsequent year

In'ome "rom !u#!idiary 444Retained earnin&! 5 parent 444

In$e!tment in !u#!idiary 444

67899 Pear!on Edu'at ion, In'( pu#+i !hin& a! Prenti'e Ha++

:1 9


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4-2 Consolidation Techniques and Procedures

;y enterin& a 'orre'tin& entry, a++ other or*paper entrie! are the !ame a! i" the parent pro$ided "oramortiation on it! !eparate #oo*!(

I" the error! are not 'orre'ted throu&h the or*paper entrie! !u&&e!ted a#o$e, the entry toe+iminate the in'ome "rom !u#!idiary in the year o" a'qui!ition i! prepared in the u!ua+ manner ithout"urther 'omp+i'ation! #e'au!e neither the #e&innin& in$e!tment nor retained earnin&! a''ount! area""e'ted #y the omi!!ion( In !u#!equent year! the entry to e+iminate in'ome "rom !u#!idiary and di$idend!

"rom !u#!idiary i++ ha$e to #e 'han&ed to 'orre't the #e&innin&1o"1the1period retained earnin&! a!"o++o!3

In'ome "rom !u#!idiary 444Retained earnin&! 5 parent 444

Di$idend! -!u#!idiary. 444In$e!tment in !u#!idiary 444

5 No( 0or*paper ad%u!tment! are not entered in the &enera+ +ed&er o" the parent or any other entity( Theyare u!ed in the preparation o" 'on!o+idated "inan'ia+ !tatement! "or a 'on'eptua+ entity "or hi'h there areno "orma+ a''ountin& re'ord!(

6 0or*paper! are too+! o" the a''ountant that "a'i+itate the 'on!o+idation o" parent and !u#!idiary "inan'ia+!tatement!(


3/51

Chapter 4 4-3

1 d 6 d

2 c 7 b

3 a 8 b

4 d 9 a

5 b 10 b

Solution E4-2Preliminary computations (in thousands)

Investment cost January 2 !00

Implied total "air value o" #al $!00 % &0'( )*0

+ess -oo value $*00(

E/cess "air value over boo value 2*0

Excess allocated to

Inventory 2*

emainder to goodill 22*

E/cess "air value over boo value 2*0

1 Income from Sal

#als reported net income 130

+ess E/cess allocated to inventory $sold in 2011( $2*(#al ad4usted income 11*

Pans &0' share 52

2 Noncontrolling interest share

#als ad4usted income 11* 20' noncontrolling interest 26

3 Noncontrolling interest December 31

#als e7uity boo value *20

8dd 9namorti:ed e/cess $;oodill( 22*

#als e7uity "air value )3*

20' noncontrolling interest 135

4 Inestment in Sal December 31

Investment cost January 2 !00

8dd Income "rom #al $given(< 100

+ess =ividends $120 &0'( $5!(

Investment in #al =ecember 61 !03

< 8ssumes this is based on #als ad4usted income

5 >onsolidated net income

?oncontrolling interest share

>ontrolling interest share e7uals Parent ?I under e7uity

method.

6&6.3

26

6!0.3

2011 Pearson Education, Inc. publishing as Prentice Hall


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Solution E4-3

1 )00,000 $600,000 @ 330,000 A 30,000 intercompany(

Preliminary computations for ! and 3

Investment cost on January 1, 2011 2&,000

Implied total "air value o" #ar $2&,000 % )0'( 30,000

-oo value o" #ar 60,000E/cess allocated entirely to ;oodill 10,000

2 Pim"s separate income for !#13 23,000

+oss "rom investment in #ar $1,000 )0'( $)00(

>ontrolling share o" consolidated net income 26,600

?oncontrolling share @ $600(

>onsolidated net income 26,000

3 Investment cost January 1, 2011 2&,000

8dd #hare o" income less dividends 20115 2016

$1,300 income A 1,000 dividends( )0' 2&0

Investment balance =ecember 61, 2016 2&,2&0

Solution E4-4

Preliminary computations

Investment cost *&0,000

Implied total "air value o" #in $*&0,000 % &0'( )2*,000

-oo value !00,000

Botal e/cess "air value over boo value 12*,000

Excess allocated to$

E7uipment $*Ayear li"e( *0,000

Patents $10Ayear amorti:ation period( )*,000

Botal e/cess "air value over boo value 12*,000

Income from Sin 2011 2012#ins reported net income 120,000 1*0,000

+ess =epreciation o" e/cess allocated to e7uipment $10,000( $10,000(

+ess 8morti:ation o" patents $),*00( $),*00(

#ins ad4usted income 102,*00 162,*00

Income "rom #in $&0'( &2,000 10!,000

1a %onsolidated net income for !#11

Pens net income C controlling share o" consolidated net

income under e7uity method 630,000

8dd ?oncontrolling interest share 20,*00

>onsolidated net income 6!0,*00

1b Inestment in Sin December 31& !#11

>ost January 1 *&0,000

8dd Income "rom #in5 2011 &2,000

+ess =ividends "rom #in5 2011 $&0,000 &0'( $!3,000(

Investment in #in =ecember 61 *5&,000

1 Noncontrolling interest share !#11

$102,*00 ad4usted income 20'( 20,*00

1! Noncontrolling interest December 31& !#1!

#ins e7uity boo value at ac7uisition date !00,000



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Chapter 4 4-5

8dd Income less dividends "or 2011 and 2012 $see note( 100,000

#ins e7uity boo value at =ecember 61, 2012 )00,000

9namorti:ed e/cess at =ecember 61, 2012 50,000

#ins e7uity "air value at =ecember 61, 2012 )50,000

?oncontrolling interest percentage 20'

?oncontrolling interest =ecember 61, 2012 1*&,000

Solution E4-4 "ontinu#!$

?ote #ins income less dividends

2011 ?et Income 120,000

2011 =ividends $&0,000(

2012 ?et Income 1*0,000

2012 =ividends $50,000(

Botal 100,000

Solution E4-5

1 c2 a

3 b

4 c

5 d

Solution E4-6

%at Co&'o&ation an! Sub(i!ia&)

Partial >onsolidated >ash Dlos #tatement

"or the year ended =ecember 61,

%ash 'los from perating *ctiities

>ontrolling interest share o" consolidated net income 100,000*d+ustments to reconcile net income to cash

proided by operating actiities$

?oncontrolling interest share *0,000

9ndistributed income o" e7uity investees $*,000(

+oss on sale o" land 100,000

=epreciation e/pense 120,000

Patents amorti:ation 1!,000

Increase in accounts receivable $10*,000(

Increase in inventories $3*,000(

=ecrease in accounts payable $20,000( 111,000

Net cash flos from operating actiities 211,000

Solution E4-7

%&o Co&'o&ation an! Sub(i!ia&)

Partial >onsolidated >ash Dlos #tatement

"or the year ended =ecember 61,


>ash received "rom customers 622,*00

=ividends received "rom e7uity investees ),000

+ess >ash paid to suppliers 1&2,*00



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>ash paid to employees 2),000

>ash paid "or other operating items 26,*00

>ash paid "or interest e/pense 12,000 23*,000

Net cash flos from operating actiities &3,*00



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Chapter 4 4-7

SOLUTIONS TO %RO*LE+S

Solution %4-1 $in thousands o" (


Investment in #en $)*'( January 1, 2011 2,300

Implied "air value o" #en $2,300 % )*'( 6,200-oo value o" #en $2,300(

Botal e/cess o" "air value over boo value &00

E/cess allocated

10' to inventories $sold in 2011( &0

30' to plant assets $use"ul li"e & years( 620

*0' to goodill 300

Botal e/cess o" "air value over boo value &00

1 ;oodill at =ecember 61, 201* $not amorti:ed( 300

2 Noncontrolling interest share for !#1,

?et income $1,000 sales A !00 e/penses( 300

+ess 8morti:ation o" e/cess Plant assets $620 % & yrs.( $30(

8d4usted #en income 6!0

2*' #hare 50

3 %onsolidated retained earnings December 31& !#1-

E7ual to Peas =ecember 61, 2013 retained earnings

#ince this a trial balance, reported retained earnings

e7uals beginning o" 201* retained earnings. 1,!)0

4 %onsolidated retained earnings December 31& !#1,

Peas retained earnings =ecember 61, 2013 1,!)0

8dd Peas net income "or 201* 1,0&*

+ess Peas dividends "or 201* $*00(

>onsolidated retained earnings =ecember 61 2,2**

5 %onsolidated net income for !#1,

>onsolidated sales *,000

+ess >onsolidated e/penses $6,)&* @ 30 depreciation( $6,&2*(

Botal consolidated income 1,1)*

+ess ?oncontrolling interest share $50(

>ontrolling share o" consolidated net income "or 201* 1,0&*

6 Noncontrolling interest December 31& !#1-

#ens stocholders e7uity at boo value 2,300

9namorti:ed e/cess a"ter "our years

Inventory 0

Plant assets $620 A 1!0( 1!0 ;oodill 300

#ens stocholders e7uity at "air value 2,5!0

2*' #ens stocholders e7uity at "air value )30

7 Noncontrolling interest December 31& !#1,

#ens stocholders e7uity at boo value 2,!00

9namorti:ed e/cess a"ter "ive years

Inventory 0



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Plant assets $620 A 200( 120

;oodill 300

#ens stocholders e7uity at "air value 6,120

2*' #ens stocholders e7uity at "air value )&0



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Chapter 4 4-9

Solution %4-2

1 %al Co&'o&ation an! Sub(i!ia&)>onsolidation orpapers

"or the year ended =ecember 61, 2011

$in thousands(

Pal

&0'

#al

8d4ustments and

Eliminations

>onsolidated

#tatements

Income Statement

#ales !20 200 &20

Income "rom #al 21 a 21

>ost o" goods sold 300< 160< *60onsolidated Income #tatement


$in thousands(

#ales &20+ess >ost o" goods sold *60

;ross pro"it 250

Fperating e/penses 153

>onsolidated net income 5!

+ess ?oncontrolling interest share 5

>ontrolling share o" consolidated net income &)

%al Co&'o&ation an! Sub(i!ia&)

>onsolidated etained Earnings #tatement


>onsolidated retained earnings January 1 160

8dd >ontrolling share o" onsolidated net income &)

+ess =ividends o" Pal $!0(>onsolidated retained earnings =ecember 61 1*)


>onsolidated -alance #heet

at =ecember 61, 2011

*ssets

>urrent assets

>ash 121

eceivables5 net 1&0

Inventories && 6&5

Plant assets5 net 610

Botal assets !55

2iabilities and Stocholders" Euity

+iabilities

8ccounts payable 5!

Fther liabilities !3 1!0

#tocholders e7uity

>apital stoc, 10 par 600

Fther paidAin capital 30

>onsolidated retained earnings 1*)

35)

8dd ?oncontrolling interest 32 *65

Botal liabilities and stocholders e7uity !55



11/51

Chapter 4 4-11

Solution %4-3

%an Co&'o&ation an! Sub(i!ia&)

>onsolidation orpapers


$in thousands(

Pan #a" )*'8d4ustments andEliminations

>onsolidated#tatements

Income Statement

#ales &00 200 1,000

Income "rom #a" 2).! a 2).!

>ost o" sales *00< 100< !00apital stoc, 10 par 1,000 600 b 600 1,000

etained earnings 656.! &3 656.!

1,*)6.! 320

?oncontrolling interest January 1 b 120

?oncontrolling interest =ecember 61 " 1.2 121.2

**0 **0 1,)0&.&


12/51


Solution %4-3$continued(

Supporting %alculations

Saf"s alue at acuisition

-oo value at =ecember 61, 2011 6&3

+ess 2011 ?et income $3&(8dd 2011 =ividends 62

-oo value on January 1, 2011 6!&

Dair value o" patents 112

#a"s "air value on January 1, 2011 3&0

Purchase price $"air value( o" Pans )*' share 6!0

?oncontrolling interest $2*'( 120

Patents have a tenAyear li"e, so amorti:ation is 11,200 per year.

Saf"s *d+usted Income

#a"s net income 3&

+ess 8morti:ation o" Patents $11.2(#a"s ad4usted income 6!.&

Pans )*' share 2).!

?oncontrolling interest 2*' share 5.2



13/51

Chapter 4 4-13

Solution %4-4




$in thousands(

Pal #un )*'8d4ustments andEliminations


Income Statement

#ales &00 200 1,000

Income "rom #un 6! a 6!

>ost o" sales *00< 100< !00apital stoc, 10 par 1,000 600 b 600 1,000

etained earnings 302 &3 302

1,*&2 320


?oncontrolling interest =ecember 61 c 3 123

**0 **0 1,)20

< =educt



14/51



Supporting %alculations

Sun"s alue at acuisition$

-oo value at =ecember 61, 2011 6&3

+ess 2011 ?et income $3&(

8dd 2011 =ividends 62-oo value on January 1, 2011 6!&

Purchase price o" Pals )*' share 6!0

Implied "air value o" #un $6!0 % )*'( 3&0

#uns boo value 6!&

E/cess allocated to ;oodill 112

?oncontrolling interest $2*' / 3&0( 120

Sun"s*d+usted Income

#a"s net income 3&

+ess 8morti:ation o" ;oodill $0(

#uns ad4usted income 3&

Pals )*' share 6!

?oncontrolling interest 2*' share 12

Solution %4-5


*llocation of excess fair alue oer boo alue

>ost o" )0' interest January 1 350,000

Implied "air value o" #ul $350,000 % )0'( )00,000

-oo value o" #ul $!00,000(

E/cess "air value over boo value 100,000

?oncontrolling interest 60' o" "air value at ac7uisition 210,000

Excess allocated

9ndervalued inventory items sold in 2011 *,000

9ndervalued buildings $) year li"e( 13,000

9ndervalued e7uipment $6 year li"e( 21,000

Patents 30,000

emainder to ;oodill 20,000


%alculation of income from Sul

#uls net income 100,000

+ess 9ndervalued inventories sold in 2011 $*,000(

+ess 8dditional =epreciation on building $13,000%) years( $2,000(

+ess 8dditional =epreciation on e7uipment $21,000%6 years( $),000(+ess Patent amorti:ation $30,000%30 years( $1,000(

#uls ad4usted income &*,000

Pars )0' controlling interest share *5,*00

?oncontrolling interests 60' share 2*,*00



15/51

Chapter 4 4-15


0orpaper entries for !#11

a Income "rom #ul *5,*00

=ividends $#ul( 6*,000

Investment in #ul 23,*00

b >apital stoc $#ul( *00,000

etained earnings $#ul( January 1 100,000

9namorti:ed e/cess 100,000

Investment in #ul 350,000

?oncontrolling interest January 1 210,000

c >ost o" sales $"or inventory items( *,000

-uildings5 net 13,000

E7uipment5 net 21,000

Patents 30,000

;oodill 20,000

9namorti:ed e/cess 100,000

d =epreciation e/pense 2,000

-uildings5 net 2,000

e =epreciation e/pense ),000

E7uipment5 net ),000

" Fther e/penses 1,000

Patents 1,000

g 8ccounts payable 10,000

8ccounts receivable 10,000

h =ividends payable 13,000

=ividends receivable 13,000

i ?oncontrolling Interest #hare 2*,*00

=ividends5 #ul 1*,000

?oncontrolling Interest 10,*00



16/51



%a& Co&'o&ation an! Sub(i!ia&)



$in thousands(

Par #ul )0'

8d4ustments and

Eliminations

>onsolidated

#tatementsIncome Statement

#ales &00 )00 1,*00

Income "rom #ul *5.* a *5.*

>ost o" sales 600< 300< c * )0*onsolidated#tatements

Income Statement

#ales 300 100 *00

Income "rom #yn 1& a 1&

>ost o" sales 2*0< *0< 600onsolidated#tatements

Income Statement

#ales &00 )00 1,*00

Income "rom #ol !0.2 a !0.2

;ain on e7uipment 10 10

>ost o" sales 600< 300< c * )0*ontrolling share o" ?I 2**.2 100 2**.2

=ividends 200< *0< a 6*

" 1* 200ash 5! !0 1*!

8ccounts receivable 100 )0 g 10 1!0

=ividends receivable 13 h 13

Inventories 1*0 100 2*0

Fther current assets )0 60 100

+and *0 100 1*0

-uildings 5 net 130 1!0 c 13 d 2 612

E7uipment 5 net *)0 660 c 21 e ) 513

Investment in #ol *1*.2 a 2*.2

b 350

;oodill c !0 !0

9namorti:ed e/cess b 100 c 100

1,)0*.2 &*0 2,1028ccounts payable 200 &* g 10 2)*

=ividends payable 100 20 h 13 10!

Fther liabilities *0 5* 13*

>apital stoc, 10 par 1,000 *00 b *00 1,000

etained earnings 6**.2 1*0 6**.2

1,)0*.2 &*0




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Chapter 4 4-23

?oncontrolling interest =ecember 61 " 10.& 220.&

515 515 2,102

< =educt



24/51


Solution %4-8

Supporting computations

Fnership percentage 16,*00%1*,000 shares C 50'

Investment cost $16,*00 shares 1*( 202,*00Implied "air value o" #on $202,*00 % 50'( 22*,000

-oo value o" #on 1!*,000

E/cess "air value over boo value !0,000

Excess allocated to

+and 20,000

emainder to goodill 30,000

E/cess "air value over boo value !0,000

Income from Son

Puns controlling share o" #ons income $23,000 50'( 21,!00

Inestment in Son December 31& !#1!>ost January 1, 2011 202,*00

Puns share o" the change in #ons retained earnings

$32,000 A 1*,000( 50' 23,600

Investment in #on =ecember 61 22!,&00

?oncontrolling interest at =ecember 61, 2012 $10' o" "air value(

$$22*,000 @ 32,000 A 1*,000( / 10'(

2*,200



25/51

Chapter 4 4-25


%un Co&'o&ation an! Sub(i!ia&)



$in thousands(

Pun 50' #on8d4ustments andEliminations


Income Statement

#ales 300 100 *00

Income "rom #on 21.! a 21.!

>ost o" sales 2*0< *0< 600apital stoc *00 1*0 b 1*0 *00

etained earnings 202 32 202

)52 210

?oncontrolling interest January 1 b 23.3

?oncontrolling interest =ecember 61 c .& 2*.2

2&*.2 2&*.2 &1&

< =educt



26/51


Solution %4-9

%a( Co&'o&ation an! Sub(i!ia&)


"or the year ended =ecember 61, 2011$in thousands(

Pas &0' #el8d4ustments andEliminations


Income Statement

#ales 200 110 610

Income "rom #el 1) a 1)

>ost o" sales &0< 30< b 12.* 162.*apital stoc 600 1*0 b 1*0 600

etained earnings 10!.* )0 10!.*

*5!.* 600

?oncontrolling interest January 1 b *2.*

?oncontrolling interest =ecember 61 c .2* *2.)*

602 602 )1).2*

< =educt



27/51

Chapter 4 4-27



Investment cost January 1, 2011 210,000

Implied "air value o" #el $210,000 % &0'( 2!2,*00

-oo value o" #el 200,000

E/cess "air value over boo value !2,*00E/cess allocated

9ndervalued inventory 12,*00

9ndervalued e7uipment 2*,000

emainder to patents 2*,000

E/cess "air value over boo value !2,*00



28/51


Solution %4-10

%i, Co&'o&ation an! Sub(i!ia&)



$in thousands(

Pi&0'#el

8d4ustments andEliminations


Income Statement

#ales 200 110 610

Income "rom #el 1& a 1&

>ost o" sales &0< 30< b 12.* 162.*apital stoc 600 1*0 b 1*0 600

etained earnings 10).* )0 10).*

*5).* 600

?oncontrolling interest January 1 b *2.*

?oncontrolling interest =ecember 61 c .* *6

602 602 )1&.*

< =educt



29/51

Chapter 4 4-29



Investment cost January 1, 2011 210,000

Implied "air value o" #el $210,000 % &0'( 2!2,*00

-oo value o" #el 200,000

E/cess "air value over boo value !2,*00E/cess allocated

9ndervalued inventory 12,*00

9ndervalued e7uipment 2*,000

emainder to goodill 2*,000


Income from Sel

#els reported net income 30,000

+ess amorti:ation o" e/cess "air value

Inventory $12,*00(

=epreciation $2*,000 % * years( $ *,000(

#els ad4usted income 22,*00

Pis &0' controlling share 1&,000

20' ?oncontrolling interest share 3,*00



30/51


Solution %4-11


Investment cost =ecember 61, 2011 1)0,000

Implied "air value o" #tu $1)0,000 % &0'( 212,*00

-oo value o" #tu 1*0,000


8llocation

o" E/cess

8morti:ation

20125 201*

9namorti:ed

E/cess

=ecember 61, 201*

Inventories &,)*0 &,)*0 AAA

Plant assets5 net 22,*00 10,000 12,*00

Patents 61,2*0 2*,000 !,2*0

!2,*00 36,)*0 1&,)*0

%il Co&'o&ation an! Sub(i!ia&)

>onsolidated -alance #heet orpapers

on =ecember 61, 201*

Pil #tu &0'

8d4ustments and

Eliminations

>onsolidated

-alance #heet

*ssets

>ash 31,000 6*,000 )!,000

Brade receivables !0,000 **,000 c *,000 110,000

=ividends receivable &,000 d &,000

8dvance to #tu 2*,000 e 2*,000

Inventories 12*,000 6*,000 1!0,000

Plant assets5 net 600,000 1)*,000 b 12,*00 3&),*00

Investment in #tu 151,000 a 151,000

Patents b !,2*0 !,2*0

9namorti:ed e/cess a 1&,)*0 b 1&,)*0

Botal assets )*0,000 600,000 &65,)*0

Euities

8ccounts payable *0,000 3*,000 c *,000 50,000

=ividends payable 10,000 d &,000 2,000

8dvance "rom Pil 2*,000 e 2*,000

>apital stoc 300,000 100,000 a 100,000 300,000

etained earnings 600,000 120,000 a 120,000 600,000

?oncontrolling interest a 3),)*0 3),)*0

Botal e7uities )*0,000 600,000 &65,)*0



31/51

Chapter 4 4-31

Solution %4-12


Investment cost 3&0,000

Implied "air value #ci $3&0,000 % &0'( !00,000

-oo value o" #ci 3*0,000

E/cess "air value over boo value 1*0,000

*llocation of differential

Plant assets 100,000

;oodill *0,000

E/cess "air value over boo value 1*0,000

*morti4ation

Plant assets 100,000%3 years C 2*,000 per year

Inestment account balance at December 31& !#1!

9nderlying boo value *&0,000

8dd 9namorti:ed e/cess allocated to plant assets

$100,000 A *0,000 depreciation( *0,0008dd 9namorti:ed goodill *0,000

Dair value o" #ci at =ecember 61 !&0,000

Investment account balance at =ecember 61 $&0'( *33,000

?oncontrolling interest at =ecember 61 $20'( 16!,000

Bhe investment account balance is overstated at *!0,000 "or

the 1!,000 dividend receivable.



32/51



%at Co&'o&ation an! Sub(i!ia&)



$in thousands(

Pat #ci &0'8d4ustments andEliminations


Income Statement

#ales 1,&00 !00 2,300

Income "rom #ci )! c )!

>ost o" sales 1,200< 600< 1,*00ontrolling share o" ?I 25! 120 25!

=ividends 200< 30< c 62

" & 200ash 12 60 a 30 &2

8ccounts receivable *2 30 h 10 &2

Inventories 1!3 120 2&3

8dvance to #ci 30 a 30

Fther current assets 1!0 10 1)0

+and 620 !0 6&0

Plant assets5 net !&0 3!0 d )* e 2* 1,150

Investment in #ci *!0 b 1!

c 33

d *00

=ividends receivable b 1! g 1!

;oodill d *0 *0

1,5&& )20 2,26&

8ccounts payable 3& 60 h 10 !&

=ividends payable 20 g 1! 3Fther liabilities 200 50 250

>apital stoc 1,300 300 d 300 1,300

etained earnings 630 1&0 630

1,5&& )20

?oncontrolling interest January 1 d 12*

?oncontrolling interest =ecember 61 " 11 16!

&2) &2) 2,26&

< =educt



33/51

Chapter 4 4-33



34/51


Solution %4-13


Investment cost January 1, 2011 &0,000

Implied "air value o" #i $&0,000 % &0'( 100,000

-oo value o" #i 50,000


Excess allocated to

Inventory $sold in 2011( 1,000

E7uipment $3Ayear remaining use li"e( 3,000

Intangible assets $30Ayear amorti:ation period( *,000


Income from Si for !#11

#is net income 1*,000

+ess E/cess allocated to inventories $1,000(

+ess 8morti:ation o" e/cess allocated to e7uipment

$3,000%3 years( $1,000(

+ess 8morti:ation o" intangibles $*,000%30 years( $12*(#is ad4usted income "or 2011 12,&)*

Plys &0' controlling interest share 10,600

?oncontrolling interest share "or 2011 $20'( 2,*)*

Income from Si for !#1!

#is net income 20,000

+ess 8morti:ation o" e/cess allocated to e7uipment

$3,000%3 years( $1,000(

+ess 8morti:ation o" intangibles $*,000%30 years( $12*(

#is ad4usted income "or 2012 1&,&)*

Plys &0' controlling interest share 1*,100

?oncontrolling interest share "or 2012 $20'( 6,))*

?ote #ince the prior years income is not a""ected by the current years

error o" omission, the orpapers "or 2012 are easier to prepare

ithout an additional conversionAtoAe7uity entry.



35/51

Chapter 4 4-35


%l) Co&'o&ation an! Sub(i!ia&)



Ply #i &0'8d4ustments andEliminations


Income Statement

#ales 1!0,000 &0,000 230,000

Income "rom #i 10,600 a 10,600

>ost o" sales 10*,000< 6*,000< b 1,000 131,000ontrolling share o" ?I 60,600 1*,000 60,600

=ividends 10,000< *,000< a 3,000

" 1,000 10,000ash 23,)00 1*,000 65,)00

Brade receivables5 net 2*,000 20,000 3*,000

=ividends receivable 3,000 0 e 3,000

Inventories 30,000 60,000 )0,000

Plant G e7uipment5 net 100,000 **,000 b 3,000 c 1,000 1*&,000

Investment in #i &!,600 a !,600

b &0,000

Intangibles b *,000 d 12* 3,&)*

2&0,000 120,000 61),*)*

8ccounts payable 20,)00 1*,000 6*,)00

=ividends payable 5,000 *,000 e 3,000 10,000

>apital stoc 100,000 30,000 b 30,000 100,000

Fther paidAin capital !0,000 20,000 b 20,000 !0,000

etained earnings 50,600 30,000 50,600 2&0,000 120,000

?oncontrolling interest January 1 b 20,000

?oncontrolling interest =ecember 61 " 1,*)* 21,*)*

11&,000 11&,000 61),*)*

< =educt



36/51



%l) Co&'o&ation an! Sub(i!ia&)



Ply #i &0'8d4ustments andEliminations


Income Statement

#ales 1)0,000 50,000 2!0,000

Income "rom #i 1!,000 a 1!,000

>ost o" sales 110,000< 6*,000< 13*,000ontrolling share o" ?I 3!,000 20,000 3*,100

=ividends 1*,000< 10,000< a &,000

" 2,000 1*,000ash 2!,)00 20,000 3!,)00

Brade receivables5 net 3*,000 60,000 )*,000

=ividends receivable 3,000 e 3,000

Inventories 30,000 60,000 )0,000

Plant G e7uipment5 net 5*,000 !0,000 b 6,000 c 1,000 1*),000

Investment in #i 53,600 a &,000

b &!,600

Intangible assets b 3,&)* d 12* 3,)*0

60*,000 130,000 6*6,3*0

8ccounts payable 1),)00 2*,000 32,)00

=ividends payable !,000 *,000 e 3,000 ),000

>apital stoc 100,000 30,000 b 30,000 100,000

Fther paidAin capital !0,000 20,000 b 20,000 !0,000

etained earnings 121,600 *0,000 120,300

60*,000 130,000

?oncontrolling interest January 1 b 21,*)*

?oncontrolling interest =ecember 61 " 1,))* 26,6*0

162,))* 162,))* 6*6,3*0

< =educt



37/51

Chapter 4 4-37

Solution %4-14


Investment cost 55,000

Implied "air value o" #im $55,000 % 50'( 110,000

-oo value o" #im &0,000


E/cess allocated to

Inventories $sold in 2011( 10,000

Patents $10Ayear remaining use"ul li"e( 20,000


1 *nalysis of inestment in Sim account

Dair value o" #im January *, 2011 110,000

8dd >hange in retained earnings "rom

January *, 2011 to =ecember 61, 2016 *0,000

+ess 8morti:ation o" e/cess

8llocated to inventories and amorti:ed in 2011 $10,000(8llocated to patents and amorti:ed over 10 years

$20,000%10 years( 6 years $!,000(

Dair value at =ecember 61, 2016 133,000

8dd Income "rom #im "or 2013 1&,000

+ess =ividends in 2013 $10,000(

Dair value at =ecember 61, 2013 1*2,000

Investment in #im on =ecember 61, 2016 $50' "air value( 125,!00

Investment in #im on =ecember 61, 2013 $50' "air value( 16!,&00

?oncontrolling interest on =ec. 61, 2016 $10' "air value( 13,300

?oncontrolling interest on =ec. 61, 2013 $10' "air value( 1*,200



38/51



%#' Co'an) an! Sub(i!ia&)



Pep #im8d4ustments andEliminations

Income#tatement

etainedEarnings

-alance#heet

Debits

>ash 11,000 1*,000 2!,000

8ccounts

receivable

1*,000 2*,000 30,000

Plant assets 220,000 1&0,000 300,000

Investment

in #im 16!,&00

a ),200

b 125,!00

Patents b 13,000 c 2,000 12,000

>ost o" goods sold *0,000 60,000 &0,000onsolidated retained earnings 52,&00 52,&00

?oncontrolling interest =ec 61, 2013 d &00 1*,200

1!3,000 1!3,000 3)&,000

< =educt

a Bo eliminate income "rom subsidiary and dividends received and reduce the

investment account to its beginningAo"AtheAperiod balance.

b Bo eliminate reciprocal investment and subsidiary e7uity amounts, establish

beginning noncontrolling interest, and ad4ust patents "or the unamorti:ed

e/cess as o" the beginning o" the period.

c Bo amorti:e e/cess allocated to patents "or 2013.

d Bo enter noncontrolling interest share o" subsidiary income and dividends.



39/51

Chapter 4 4-39

Solution %4-15

1 5ournal entries on Peg"s boos

5anuary 1& !#11

Investment in #up $50'( 1&,000

>ash 1&,000Bo record purchase o" 50' o" #ups stoc "or cash.

5uly 1& !#11

Investment in Ell $2*'( ),000

>ash ),000

Bo record purchase o" 2*' o" Ells stoc "or cash.

Noember !#11

>ash 2,)00

Investment in #up $50'( 2,)00

Bo record receipt o" 50' o" #ups 6,000 dividends.

Noember !#11>ash 1,2*0

Investment in Ell $2*'( 1,2*0

Bo record receipt o" 2*' o" Ells *,000 dividends.

December 31& !#11

Investment in #up $50'( 3,*00

Income "rom #up 3,*00

Bo record #hare o" #ups reported income

$2&,000 A 26,000( 50'

December 31& !#11

Investment in Ell $2*'( )00

Income "rom Ell )00

Bo record investment income "rom Ell "or

20115 computed as

#hare o" Ells reported income )*0

$60,000A23,000(1%2 year 2*'

+ess 8morti:ation o" e/cess

),000 $23,000 2*'(

10 years 1%2 year $*0(

)00



40/51



2 Peg"s separate company financial statements

%#. Co&'o&ation

Income #tatement


.eenues

#ales 100,000

Income "rom #up 3,*00

Income "rom Ell )00

Botal revenue 10*,200

%osts and expenses

>ost o" sales !0,000

Fther e/penses 2*,000

Botal costs and e/penses &*,000

?et income 20,200

%#. Co&'o&ationetained Earnings #tatement


etained earnings January 1 20,000

8dd ?et income 20,200

=educt =ividends $10,000(

etained earnings =ecember 61 60,200

%#. Co&'o&ation

-alance #heet


*ssets

>urrent assets

>ash 1&,5*0

Fther current assets 30,000 *&,5*0

Plant assets5 net 120,000

Investments

Investment in #up $50'( 15,&00

Investment in Ell $2*'( !,3*0 2!,2*0

Botal assets 20*,200

2iabilities and stocholders" euity

>urrent liabilities 2*,000

#tocholders e7uity

>apital stoc 1*0,000etained earnings =ecember 61 60,200 1&0,200

Botal liabilities and stocholders e7uity 20*,200



41/51

Chapter 4 4-41


3 >onsolidation orpapers5 trial balance "ormat

%#. Co&'o&ation an! Sub(i!ia&)



Peg

50'

#up

8d4ustments and

Eliminations

Income

#tatement

etained

Earnings

-alance

#heet

Debits

>ash 1&,5*0 3,000 22,5*0

Fther current assets 30,000 11,000 *1,000

Plant assets5 net 120,000 13,000 163,000

Investment in

#up 15,&00

a 1,&00

b 1&,000

Investment in Ell !,3*0 !,3*0

>ost o" sales !0,000 1!,000 )!,000onsolidated Income #tatement


.eenues#ales 12&,000

Income "rom Ell $e7uity method( )00

Botal revenues 12&,)00

%osts and expenses

>ost o" sales )!,000

Fther e/penses 62,000

Botal costs and e/penses 10&,000

Botal consolidated income 20,)00

+ess ?oncontrolling interest share *00

>ontrolling share o" ?I 20,200


>onsolidated etained Earnings #tatement"or the year ended =ecember 61, 2011

>onsolidated retained earnings January 1 20,000

8dd >ontrolling share o" ?I 20,200

=educt =ividends $10,000(

>onsolidated retained earnings =ecember 61 60,200


>onsolidated -alance #heet


*ssets

>urrent assets

>ash 22,5*0

Fther current assets *1,000 )6,5*0

Plant assets5 net 163,000

Investments and other assets

Investment in Ell !,3*0

Botal assets 213,300

2iabilities and stocholders" euity

>urrent liabilities 62,000

#tocholders e7uity

>apital stoc 1*0,000

>onsolidated retained earnings 60,200

?oncontrolling interest 2,200 1&2,300

Botal liabilities and stocholders e7uity 213,300

Solution %4-16

Partial consolidated statement of cash flos using the direct method

%il Co&'o&ation an! Sub(i!ia&i#(

Partial >onsolidated #tatement o" >ash Dlos

"or the current year


>ash received "rom customers 1,!00,000

=ividends "rom e7uity investees 30,000

Interest received "rom shortAterm loan *,000



43/51

Chapter 4 4-43

>ash paid "or other e/penses $3*0,000(

>ash paid to suppliers $!60,000(

?et cash "lo "rom operating activities *!*,000



44/51


Solution %4-17

/it +#to!

%#( Co&'o&ation an! Sub(i!ia&)

>onsolidated #tatement o" >ash Dlos



>ash received "rom customers !)0,000

>ash paid to suppliers $63&,000(

>ash paid "or operating e/penses $1*),*00( $*0*,*00(

?et cash "los "rom operating activities 1!3,*00

%ash 'los from Inesting *ctiities

Purchase o" plant and e7uipment $12*,000(

?et cash "los "rom investing activities $12*,000(

%ash 'los from 'inancing *ctiities

Payment o" cash dividends5 controlling $6!,000(

Payment o" cash dividends5 noncontrolling $2,000(

Payment o" longAterm liabilities $11,000(?et cash "los "rom "inancing activities $35,000(

=ecrease in cash "or the year $5,*00(

>ash on January 1 !*,000

>ash on =ecember 61 **,*00

.econciliation of net income to cash proided by operating actiities


8d4ustments to reconcile net income to cash

provided by operating activities

?oncontrolling interest share *,000

=epreciation e/pense *1,000

Patents amorti:ation *00

Increase in accounts payable 22,000

Increase in accounts receivable $*,000(

Increase in inventories $20,000(

Increase in other current assets $15,000( 63,*00




45/51

Chapter 4 4-45

Solution %4-17 $continued(

In!it +#to!

%#( Co&'o&ation an! Sub(i!ia&)

>onsolidated #tatement o" >ash Dlos




8d4ustments to reconcile net income to net cash

"rom operating activities

?oncontrolling share o" ?I *000

=epreciation *1,000

Patents amorti:ation *00

Increase in accounts receivable $*,000(

Increase in inventories $20,000(

Increase in other current assets $15,000(Increase in accounts payable 22,000 63,*00



Purchase o" plant and e7uipment $12*,000(

?et cash "los "rom investing activities $12*,000(


Payment o" cash dividends5 controlling $6!,000(


Payment o" longAterm liabilities $11,000(

?et cash "los "rom "inancing activities $35,000(

=ecrease in cash "or the year $5,*00(

>ash on January 1 !*,000

>ash on =ecember 61 **,*00

Note$ 6he cash flos from inesting actiities and cash flos from financing

actiities sections of the statement of cash flos are the same under the

direct and indirect method7



46/51


Solution %4-188I>P8

In!it +#to!

%u In an! Sub(i!ia&)

#tatement o" >ash Dlos (Indirect 8ethod)



>ontrolling share o" ?I 15&,000



?oncontrolling interest share 66,000

=epreciation e/pense &2,000

Patents amorti:ation 6,000

=ecrease in accounts receivable 22,000

Increase in accounts payable 121,000

Increase in de"erred income ta/es 12,000

Increase in inventories $)0,000(

;ain on maretable e7uity securities $11,000(;ain on sale o" e7uipment $!,000( 1&!,000

?et cash "los "rom operating activities 6&3,000


Purchase o" e7uipment $12),000(

Proceeds "rom sale o" e7uipment 30,000

?et cash "los "rom investing activities $&),000(


>ash received "rom sale o" treasury stoc 33,000

Payment o" cash dividends5 controlling $*&,000(

Payment o" cash dividends5 noncontrolling $1*,000(

Payment on longAterm note $1*0,000(

?et cash "los "rom "inancing activities $1)5,000(

Increase in cash "or the year 11&,000

>ash on January 1 15*,000

>ash on =ecember 61 616,000

+isting o" nonAcash investing and "inancing activities

Issued common stoc in e/change "or land ith a "air value o" 21*,000.



47/51

Chapter 4 4-47


In!it +#to!

%u In an! Sub(i!ia&)

orpapers "or the #tatement o" >ash Dlos (Indirect 8ethod)


>ash Dlo >ash Dlo >ash DloKears econciling Items Drom Investing Dinancing

>hange =ebit >redit Fperations 8ctivities 8ctivities

*sset %hanges

>ash 11&,000

8lloance to reduce LE# 11,000 e 11,000

8ccounts receivable5 net $22,000( " 22,000Inventories )0,000 g )0,000

+and< 21*,000 h 21*,000

Plant and e7uipment !*,000 !2,000 4 12),000

8ccumulated depreciation $*3,000( l &2,000 2&,000

Patents5 net $6,000( m 6,000

Botal asset changes 300,000

%hanges in Euities

8ccounts G accrued payable 121,000 n 121,000

?ote payable longAterm $1*0,000( o 1*0,000

=e"erred income ta/es 12,000 p 12,000

?oncontrolling interest in

#to

1&,000 b 66,000 d 1*,000

>ommon stoc, 10 par< 100,000 h 100,000

8dditional paidAin capital 126,000 h 11*,000

i &,000

etained earnings 130,000 a 15&,000 c *&,000

Breasury stoc at cost 6!,000 i 6!,000

Botal changes in

e7uities 300,000

>ontrolling share o" ?I a 15&,000 15&,000

?oncontrolling interest share b 66,000 66,000

;ain on LE# e 11,000 $11,000(

Purchase o" e7uipment 4 12),000 $12),000(

#ale o" e7uipment 30,000 30,000

;ain on e7uipment !,000 $!,000(

=epreciation e/pense l &2,000 &2,000

Payment on longAterm note o 1*0,000 $1*0,000(

8morti:ation o" patents m 6,000 6,000

=ecrease in receivables " 22,000 22,000

Increase in inventories g )0,000 $)0,000(

Increase in accounts payable n 121,000 121,000

Increase in de"erred income ta/es p 12,000 12,000

Proceeds "rom treasury stoc i 33,000 33,000

Payment o" dividends 5 controlling c *&,000 $*&,000(

Payment o" dividends 5 noncontrolling d 1*,000 $1*,000(1,225,000 1,225,000

6&3,000 $&),000( $1)5,000(

>ash increase "or the year C 6&3,000 &),000 1)5,000 C 11&,000.

< ?onAcash item Purchased 21*,000 land through common stoc issuance.



48/51


Solution %4-19

Indirect 8ethod


>onsolidated #tatement o" >ash Dlos"or the year ended =ecember 61, 2011


>ontrolling share o" ?I *00,000






Increase in accounts payable 1),000

Income less dividends5

e7uity investee $60,000(

Increase in accounts receivable $210,000( 2),000

?et cash "los "rom operating activities *2),000


Purchase o" e7uipment $*00,000(

?et cash "los "rom investing activities $*00,000(

%ash'los from 'inancing *ctiities

>ash received "rom longAterm note 200,000

Payment o" cash dividends5 controlling $16),000(


?et cash "los "rom "inancing activities 36,000

Increase in cash "or the year )0,000

>ash on January 1 6!0,000




49/51

Chapter 4 4-49


Indirect 8ethod


orpapers "or the #tatement o" >ash Dlos $Indirect Lethod(


>ash Dlos >ash Dlos >ash Dlos

Kears econciling Items Drom Investing Dinancing


*sset %hanges

>ash )0,000

8ccounts receivable5 net 210,000 e 210,000Inventories 0

Plant G e7uipment5 net 600,000 " 200,000 g *00,000E7uity investments 60,000 l 60,000 m !0,000

Patents $10,000( h 10,000

Botal asset changes !00,000

%hanges in Euities

8ccounts payable 1),000 i 1),000

=ividends payable 16,000 16,000

+ongAterm note payable 200,000 4 200,000

>ommon stoc 0

Fther paidAin capital 0

etained earnings 6*0,000 a *00,000 c 1*0,000

?oncontrol. interest 20' 20,000 b 30,000 d 20,000

>hanges in

e7uities !00,000

>ontrolling share o" ?I a *00,000 *00,000

?oncontrolling interest share b 30,000 30,000

Purchase o" plant G e7uipment g *00,000 $*00,000(

=epreciation5 plant G e7uipment " 200,000 200,0008morti:ation o" patents h 10,000 10,000

Increase in accounts receivable e 210,000 $210,000(

Income less dividends "rom

investees m !0,000 l 60,000 $60,000(

Increase in accounts payable i 1),000 1),000

eceived cash "rom longAterm note 4 200,000 0 200,000

Payment o" dividends5 controlling c 1*0,000 16,000 $16),000(

Payment o" dividends5 noncontrolling d 20,000 $20,000(1,5*0,000 1,5*0,000 *2),000 $*00,000( 36,000

>ash increase "or the year C *2),000 *00,000 @ 36,000 C )0,000.



50/51



Direct 8ethod


>onsolidated #tatement o" >ash Dlos"or the year ended =ecember 61, 2011


>ash received "rom customers 2,650,000

>ash received "rom e7uity investees 60,000

>ash paid to suppliers $1,366,000(

>ash paid "or operating e/penses $3!0,000($1,&56,000(



Purchase o" e7uipment $*00,000(

?et cash "los "rom investing activities $*00,000(


>ash received "rom longAterm note 200,000

Payment o" cash dividends5 controlling $16),000(


?et cash "los "rom "inancing activities 36,000

Increase in cash "or the year )0,000

>ash on January 1 6!0,000


.econciliation of net income to cash proided by

operating actiities

>ontrolling share o" ?I *00,000




Income less dividends5 e7uity investee $60,000(



Increase in accounts payable 1),000

Increase in accounts receivable $210,000( 2),000




51/51

Chapter 4 4-51


Direct 8ethod


orpapers "or the #tatement o" >ash Dlos $=irect Lethod("or the year ended =ecember 61, 2011

>ash Dlo >ash Dlo >ash DloKears econciling Items Drom Investing Dinancing


*sset %hanges

>ash )0,000

8ccounts receivable5net 210,000 a 210,000Inventories 0

Plant G e7uipment5 net 600,000 b 200,000 c *00,000E7uity investments 60,000 d 60,000

Patents $10,000( e 10,000

Botal asset changes !00,000>hanges in E7uities

8ccounts payable 1),000 " 1),000

=ividends payable 16,000 g 16,000

+ongAterm note payable 200,000 h 200,000

etained earnings< 6*0,000

?oncontrol.interest 20' 20,000 i 30,000 4 20,000

>hanges in e7uities !00,000

et. earnings changeash increase "or the year C *2),000 A *00,000 @ 36,000 C )0,000.

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