B. Woods Chapter 11

368

Chapter 11

CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, ANDCORPORATE JOINT VENTURES

Answers to Questions

1 Parent company theory views consolidated financial statements from the viewpoint of the parent company and entity theory views consolidated financial statements from the viewpoint of the business entity under which all resources are controlled by a single management team. By contrast, contemporary theory sometimes reflects the parent company viewpoint and at other times it reflects the viewpoint of the business entity. A detailed comparison of these theories is presented in Exhibit 11-1 of the text.

2 Only contemporary theory is changed by current pronouncements of the Financial Accounting Standards Board. While such pronouncements can and do change the current accounting and reporting practices, they do not change the logic or the consistency of either parent company or entity theory.

3 The valuation of subsidiary assets on the basis of the price paid for the majority interest seems justified conceptually when substantially all of the subsidiary stock is acquired by the parent. But the conceptual support for this approach disappears when only a slim majority of subsidiary stock is acquired. In addition, the valuation of the minority interest based on the price paid by the parent company has practical limitations because minority interest does not represent equity ownership in the usual sense. The ability of minority stockholders to participate in management is limited and minority shares do not possess the usual marketability of equity securities.

4 Consolidated assets are equal to their fair values under entity theory only when the book values of parent company assets are equal to their fair values. Otherwise, consolidated assets are not equal to their fair values under either parent company or entity theories.

5 The valuation of the minority interest at book value might overstate the equity of minority shareholders because of the limited marketability of shares held by minority stockholders and because of the limited ability of minority stockholders to share in management through their voting rights. Valuation of

369 Consolidation Theories, Push-down Accounting, andCorporate Joint Ventures

the minority interest at book value also overstates or understates the minority interest unless the subsidiary assets are recorded at their fair values.

6 Consolidated net income under parent company theory and income to the majority stockholders under entity theory should be the same. This is illustrated in Exhibit 11-5, which shows different income statement amounts for cost of sales, operating expenses, and income allocated to minority stockholders, but the same income to majority stockholders. Note that consolidated net income under parent company and contemporary theories reflects income to majority stockholders.

7 Income to the parent company stockholders under the equity method of accounting is the same as income to the controlling stockholders under entity theory. But income to controlling stockholders is not identified as consolidated net income as it would be under parent company or contemporary theories.

8 Consolidated income statement amounts under entity theory are the same as under contemporary theory when subsidiary investments are made at book value because contemporary theory follows entity theory in eliminating the effects of intercompany transactions from consolidated financial statements. But contemporary theory differs from entity theory in accounting for differences between investment cost and book value acquired.

9 Contemporary theory corresponds to entity theory in matters relating to unrealized and constructive gains and losses from intercompany transactions. In other words, unrealized and constructive gains and losses are allocated between majority and minority interests in the same manner under these two theories.

10 Push-down accounting simplifies the consolidation process. The push-down adjustments are recorded in the subsidiary's separate books at the time of the business combination; thus, it is not necessary to allocate the unamortized cost-book value differentials in the consolidation working papers.

11 A joint venture is an entity that is owned, operated, and jointly controlled by a small group of investor-venturers to operate a business for the mutual benefit of the venturers. Some joint ventures are organized as corporations, while others are organized as partnerships or undivided interests. Each venturer typically participates in important decisions of a joint venture irrespective of ownership percentage.

12 Investors in corporate joint ventures use the equity method of accounting and reporting for their investment earnings and investment balances as

370Chapter 11

required by APB Opinion No. 18. The cost method would be used only if the investor could not exercise significant influence over the corporate joint venture.

Alternatively, investors in unincorporated joint ventures use the equity method of accounting and reporting as explained in Interpretation No. 2 of APB Opinion No. 18 or proportional consolidation for undivided interests specified as a special industry practice.


SOLUTIONS TO EXERCISES

Solution E11-1

1 a 5 b2 a 6 c3 c 7 d4 a

Solution E11-2

1 b 4 d2 b 5 c3 d

Solution E11-3

1 c

Total value of Smith implied by purchase price ($720,000/.8) $900,000Minority interest percentage 20%Minority interest $180,000

2 a Only the parent's percentage of unrealized profits from upstream sales is eliminated under parent company theory.

3 b

Subsidiary's income of $200,000 x 10% minority interest $ 20,000Less: Patent amortization ($70,000/10 years x 10%) (700)Minority interest expense $ 19,300

4 a

Implied fair value - $840,000 = patents at acquisition

Book value of 100% of identifiable net assets $840,000Add: Patents at acquisition ($54,000/90%) 60,000Total implied value 900,000Percent acquired 80%Purchase price under entity theory $720,000

5 b

Purchase price - ($840,000 x 80%) = patents at acquisition

Book value $840,000 x 80% = underlying equity $672,000Add: Patents at acquisition ($54,000/90%) 60,000Purchase price (contemporary theory) $732,000

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Solution E11-4

1 Goodwill

Parent company theoryCost of investment in Staff $500,000Fair value acquired ($400,000 x 80%) 320,000Goodwill $180,000

Entity theoryImplied value based on purchase price ($500,000/.8) $625,000Fair value of Staff's net assets 400,000Goodwill $225,000

2 Minority interest

Parent company theoryBook value of Staff's net assets $260,000Minority interest percentage 20%Minority interest $ 52,000

Entity theoryTotal valuation of Staff $625,000Minority interest percentage 20%Minority interest $125,000

3 Total assets

Parent company theory Pond Staff Adjustment Total

Current assets $20,000 $ 50,000 $ 40,000 x 80% $ 102,000Plant assets-net 480,000 250,000 110,000 x 80% 818,000Goodwill 180,000

$500,000 $300,000 $1,100,000

Entity theoryCurrent assets $20,000 $ 50,000 $ 40,000 x 100% $ 110,000Plant assets-net 480,000 250,000 110,000 x 100% 840,000Goodwill 225,000

$500,000 $300,000 $1,175,000


Solution E11-5

Preliminary computations

Parent company theoryCost of 80% interest $300,000Fair value acquired ($350,000 x 80%) 280,000Goodwill $ 20,000

Entity theoryImplied total value ($300,000 cost 80%) $375,000Fair value of Shelly 350,000Goodwill $ 25,000

1 Consolidated net income and minority interest expense for 2005:

Parent Company Theory Entity Theory

Combined separate incomes $550,000 $550,000

Depreciation on excess allocated to equipment: $75,000 excess x 80% acquired 5 years (12,000) $75,000 excess 5 years (15,000)

Total consolidated income 538,000 535,000

Less: Minority interest expense $50,000 x 20% (10,000) ($50,000 -15,000) x 20% (7,000)

Consolidated net income $528,000 $528,000

2 Goodwill at December 31, 2005:

$ 20,000 $ 25,000

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Solution E11-6

Preliminary computation

Interest acquired in Stahl: 72,000 shares 80,000 shares = 90%

1 Stahl's net assets under entity theory

Implied value from purchase price: $1,800,000/90% interest $2,000,000

2 Goodwill

a Entity theory

Implied value $2,000,000Less: Fair value and book value of net assets 1,710,000Goodwill $ 290,000

b Parent company theory

Cost of 90% interest $1,800,000Fair values of net assets acquired ($1,710,000 x 90%) 1,539,000Goodwill $ 261,000

c Contemporary theory (same as parent company theory) $ 261,000

3 Investment income from Stahl

Income from Stahl ($80,000 x 1/2 year x 90% interest) $ 36,000

4 Minority interest under entity theory

Imputed value of Stahl at July 1, 2003 $2,000,000Add: Income for 1/2 year 40,000

2,040,000Minority percentage 10%Minority interest $ 204,000

Alternatively, $200,000 minority interest at July 1, plus $4,000 share of reported income = $204,000


Solution E11-7

1 Parent company theory

Combined separate incomes of Palumbo and Seal $800,000Less: Palumbo's share of unrealized profits from upstream inventory sales ($30,000 x 80%) (24,000)Less: Minority interest expense ($300,000 x 20%) (60,000)Consolidated net income $716,000

2 Entity theory

Combined separate incomes $800,000Less: Unrealized profits from upstream sales (30,000)Total consolidated income $770,000

Income allocated to majority stockholders ($500,000 + [$270,000 x 80%]) $716,000

Income allocated to minority stockholders ($300,000 - $30,000) x 20% $ 54,000

Solution E11-8 Parent Contemporary Company Entity Theory Theory Theory

Combined separate incomes $180,000 $180,000 $180,000

Less: Unrealized inventory profits

from downstream sales ($60,000 - $30,000) x 50% (15,000) (15,000) (15,000)

Less: Unrealized profit on upstream sale of land ($96,000 - $70,000) x 100% (26,000) (26,000) ($96,000 - $70,000) x 80% (20,800)

Less: Minority interest expense ($60,000 - $26,000) x 20% (6,800) $60,000 x 20% (12,000) Consolidated net income $132,200 $132,200

Total consolidated income $139,000

Allocated to majority stockholders $132,200

Allocated to minority stockholders

($60,000 - $26,000) x 20% $ 6,800

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Solution E11-9 [Push-down accounting]

1 Push down under parent company theory

Retained earnings $ 800,000Inventories 90,000Land 450,000Buildings-net 270,000Goodwill 360,000

Equipment $ 180,000Other liabilities 90,000Push down equity 1,700,000

To record revaluation of 90% of the net assets and elimination of retained earnings as a result of a business combination with Pioneer Corporation. Push down equity = ($600,000 fair value-book value differential x 90%) + $360,000 goodwill + $800,000 retained earnings.

2 Push down under entity theory

Retained earnings $ 800,000Inventories 100,000Land 500,000Buildings-net 300,000Goodwill 400,000

Equipment-net $ 200,000Other liabilities 100,000Push down equity 1,800,000

To record revaluation of 100% of the net assets and elimination of retained earnings as a result of a business combination with Pioneer. Push down equity = $600,000 fair value-book value differential + $400,000 goodwill + $800,000 retained earnings.

Solution E11-10

Each of the investments should be accounted for by the equity method as a one-line consolidation because the joint venture agreement requires consent of each venturer for important decisions. Thus, each venturer is able to exercise significant influence over its joint venture investment irrespective of ownership interest.

The 40 percent venturer:

Income from Sun-Belt ($500,000 x 40%) $ 200,000Investment in Sun-Belt ($8,500,000 x 40%) $3,400,000

The 15 percent venturer

Income from Sun-Belt ($500,000 x 15%) $ 75,000Investment in Sun-Belt ($8,500,000 x 15%) $1,275,000


SOLUTION TO PROBLEMS

Solution P11-1

Picody Corporation and SubsidiaryComparative Consolidated Balance Sheets

at December 31, 2005

ParentCompany Theory Entity Theory

AssetsCash $ 52,000 $ 52,000Receivables-net 300,000 300,000Inventories 450,000 450,000Plant assets-neta 1,998,000 2,010,000Patentsb 64,000 80,000 Total assets $2,864,000 $2,892,000

LiabilitiesAccounts payable $ 304,000 $ 304,000Other liabilities 500,000 500,000Minority interestc 160,000 _ Total liabilities 964,000 804,000

Capital stock 1,000,000 1,000,000Retained earnings 900,000 900,000Minority interestd 188,000 Total stockholders' equity 1,900,000 2,088,000 Total liabilities and

stockholders' equity $2,864,000 $2,892,000

a Parent company theory: Combined plant assets of $1,950,000 + ($80,000 x 3/5 undepreciated excess)Entity theory: Combined plant assets of $1,950,000 + ($100,000 x 3/5 undepreciated excess)

b Parent company theory: $80,000 patents - $16,000 amortizationEntity theory: $100,000 patents - $20,000 amortization

c Parent company theory: Minority interest equals Scone's equity of $800,000 x 20%

d Entity theory: [Scone's equity of $800,000 + ($60,000 undepreciated plant assets + $80,000 unamortized patents)] x 20%

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Solution P11-2

Preliminary computationImplied value of Pisces based on purchase price ($160,000/.8) $200,000Book value 170,000Excess to undervalued equipment $ 30,000

1 Pisces Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 2003

Sales $600,000Less: Cost of sales 380,000 Gross profit 220,000Other expenses $ 80,000Depreciationa 79,500 159,500

Total consolidated net income $ 60,500

Allocation of income to: Minority interestb $ 4,100 Majority interest $ 56,400

a$75,000 depreciation - $500 piecemeal recognition of gain on equipment through depreciation + ($30,000 excess 6 years) excess depreciationb($30,000 reported income - $5,000 unrealized gain on equipment + $500 piecemeal recognition of gain on equipment - $5,000 excess depreciation)x 20% interest

2 Pisces Corporation and SubsidiaryConsolidated Balance Sheet


AssetsCurrent assets $241,600Plant and equipment-net ($595,000 - $199,500 + 25,000) 420,500Total assets $662,100

Liabilities and equityLiabilities $150,000Capital stock 300,000Retained earningsa 170,000Minority interestb 42,100Total liabilities and stockholders' equity $662,100

aPisces beginning retained earnings $163,600 + Pisces net income $56,400 - Pisces dividends of $50,000b($190,000 stockholders' equity + $25,000 excess - $4,500 unrealized gain on equipment) x 20%Check: $40,000 beginning minority interest + $4,100 minority interest expense - $2,000 minority interest dividends = $42,100


Solution P11-3

Parent company theory1a Income from Sign for 2003 ($90,000 x 70%) $ 63,000

1b Goodwill at December 31, 2003 $ 70,000($595,000 cost- $525,000 fair value)

1c Consolidated net income for 2003

Palace's separate income $300,000Add: Income from Sign 63,000 $363,000

1d Minority interest income for 2003

Net income of Sign of $90,000 x 30% $ 27,000

1e Minority interest December 31, 2003

Sign's stockholders' equity $790,000 x 30% $237,000

Entity theory

2a Income from Sign for 2003 ($90,000 x 70%) $ 63,000

2b Goodwill at December 31, 2003

Imputed value ($595,000/70%) $850,000Fair value of Sign's net assets 750,000Goodwill $100,000

2c Total consolidated income for 2003

Income to majority stockholders ($300,000 + $63,000) $363,000Add: Minority interest income ($90,000 x 30%) 27,000Total consolidated income $390,000

2d Minority interest income (computed in 2c above) $ 27,000

2e Minority interest at December 31, 2003

(Book equity $790,000 + $100,000 goodwill) x 30% $267,000

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Solution P11-4

Preliminary computationsParent company theoryInvestment in Smedley $224,000Fair value of 80% interest acquired ($240,000 x 80%) 192,000Goodwill $ 32,000

Entity TheoryImplied value of Smedley ($224,000/.8) $280,000Fair value of net assets 240,000Goodwill $ 40,000

Pierre used an incomplete equity method in accounting for its investment in Smedley. It ignored the intercompany upstream sales of inventory. Income from Smedley on an equity basis would be:Share of Smedley’s income ($50,000 x .8) $ 40,000Less: Unrealized profits in ending inventory from

upstream sale ($8,000 x 50% x 80%) (3,200)Income from Smedley $ 36,800

Pierre Corporation and SubsidiaryComparative Consolidated Income Statements

for the year ended December 31, 2004 Contem- Parent porary Company Entity Theory Theory Theory

Sales $1,000,000 $1,000,000 $1,000,000Less: Cost of sales (575,000) (575,000) (575,000)

Gross profit 425,000 425,000 425,000

Expenses (200,000) (200,000) (200,000)

Less: Unrealized profit on upstream sale of inventory ($23,000 - $15,000) x 50% x 100% (4,000) (4,000) ($23,000 - $15,000) x 50% x 80% (3,200)Minority interest expense ($50,000 - $4,000) x 20% (9,200) $50,000 x 20% (10,000)

Consolidated net income $211,800 $211,800

Total consolidated income $221,000

Allocated to majority stockholders $211,800

Allocated to minority stockholders ($50,000 - $4,000) x 20% $ 9,200


Pierre Corporation and SubsidiaryComparative Statements of Retained Earnings

for the year ended December 31, 2004 Contem- Parent porary Company Entity Theory Theory Theory

Retained earnings December 31, 2003 $360,000 $360,000 $360,000Add: Consolidated net income 211,800 211,800Add: Net income to majority stockholders 211,800

571,800 571,800 571,800Less: Dividends to majority stockholders (120,000) (120,000) (120,000)

Retained earnings December 31, 2004 $451,800 $451,800 $451,800

Solution P11-4 (continued)

Pierre Corporation and SubsidiaryComparative Consolidated Balance Sheets


Contem- Parent porary Company Entity Theory Theory Theory

AssetsCash $ 110,800 $ 110,800 $ 110,800Accounts receivable 120,000 120,000 120,000Inventory 196,000 196,800 196,000Land 280,000 280,000 280,000Buildings-net 840,000 840,000 840,000Goodwill 32,000 32,000 40,000

Total assets $1,578,800 $1,579,600 $1,586,800

LiabilitiesAccounts payable $ 275,800 $ 275,800 $ 275,800Minority interest 52,000

Total liabilities 275,800 327,800 275,800

Stockholders' equity

Capital stock 800,000 800,000 800,000Retained earnings 451,800 451,800 451,800Minority interest 51,200 59,200

Total stockholders' equity 1,303,000 1,251,800 1,311,000

Total equities $1,578,800 $1,579,600 $1,586,800

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Solution P11-5

Packard Corporation and SubsidiaryComparative Balance Sheets


Contemporary Entity Theory Theory

AssetsCash $ 70,000 $ 70,000Receivables-net 110,000 110,000Inventories 120,000 120,000Plant assets-net 300,000 300,000Goodwill 40,000 50,000

Total assets $640,000 $650,000

LiabilitiesAccounts payable $ 95,000 $ 95,000Other liabilities 25,000 25,000 Total liabilities 120,000 120,000

Stockholders' equityCapital stock 300,000 300,000Retained earnings 194,000 194,000Minority interest ($150,000 - $20,000) x 20% 26,000 ($150,000 + $50,000 - $20,000) x 20% 36,000 Total stockholders' equity 520,000 530,000

Total equities $640,000 $650,000

Supporting computations Contemporary Entity Theory Theory

Cost or imputed value $128,000 $160,000Book value of 80% 88,000Book value of 100% 110,000Goodwill $ 40,000 $ 50,000

Investment cost $128,000Add: 80% of retained earnings increase ($50,000 - $10,000) x 80% 32,000Less: 80% of $20,000 unrealized profits (16,000)Investment balance $144,000

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Solution P11-6 [AICPA adapted]

1 X carries its investment in Y on a cost basis. This is evidenced by the appearance of dividend revenue in X Company's income statement and by the absence of income from subsidiary.

2 X holds 1,400 shares of Y. X Company's percentage ownership is 70%, as determined by the relationship of X Company's dividend revenues and Y Company's dividends paid ($11,200/$16,000). Y has 2,000 outstanding shares ($200,000/$100) and X holds 70% of these, or 1,400 shares.

3 Y Company's retained earnings at acquisition were $100,000.

Imputed value of Y ($245,000 cost/70%) $350,000Less: Patents (applicable to 100%) (50,000)Book value and fair value of Y's identifiable net assets 300,000Less: Capital stock (200,000)Retained earnings $100,000

4 The nonrecurring loss is a constructive loss on the purchase of X bonds by Y Company.

Working paper entry:Mortgage bonds payable (5%) $100,000Loss on retirement of X bonds 3,000

X bonds owned $103,000

To eliminate intercompany bond investment and bonds payable and to recognize a loss on the constructive retirement of X bonds.

5 Intercompany sales X to Y are $240,000 computed as follows:

Combined sales ($600,000 + $400,000) $1,000,000Less: Consolidated sales 760,000Intercompany sales $ 240,000

6 Yes, there are other intercompany debts:Intercompany

Combined Consolidated Balances

Cash and receivables $143,000 $97,400 $45,600

Current payables 93,000 53,000 40,000

Dividends payable 18,000 12,400 5,600

Y Company owes X Company $40,000 on intercompany purchases and X Company owes Y Company $5,600 dividends.



7 Adjustment to determine consolidated cost of goods sold:

Consolidated Cost of Goods Sold | Combined cost of goods sold $640,000 | $240,000 Intercompany purchasesUnrealized profit in | 5,000 Unrealized profit in beginning ending inventory 8,000 | inventory | 403,000 To balance $648,000 | $648,000Consolidated cost of | goods sold $403,000 |

Unrealized profit in ending inventory is equal to the combined less consolidated inventories ($130,000 - $122,000).

Unrealized profit in beginning inventory is plugged as follows: ($640,000 + $8,000) - ($240,000 + $403,000) = $5,000

8 Minority interest expense of $8,700 is computed as follows:

Net income of Y $34,000Less: Patent amortization ($50,000/10 years) 5,000Adjusted income of Y 29,000Minority interest percentage 30%Minority interest expense $ 8,700

9 Minority interest of $117,000 at the balance sheet date is computed:

Stockholders' equity of Y Company $360,000Add: Unamortized patents 30,000Equity of Y plus unamortized patents 390,000Minority interest percentage 30%Minority interest on balance sheet date $117,000

10 Consolidated retained earnings

Retained earnings of X end of year $200,000Add: X's share of increase in Y's retained earnings since acquisition ($160,000 - $100,000) x 70% 42,000Less: Unrealized profit in Y's ending inventory (8,000)Less: X's patent amortization since acquisition $20,000 x 70% (14,000)Less: Loss on constructive retirement of X's bonds (3,000)Consolidated retained earnings-end of year $217,000

386Chapter 11

Solution P11-7

1 Entry on Splash's books at acquisition

Inventories $ 20,000Land 25,000Buildings-net 50,000Other liabilities 10,000Goodwill 20,000Retained earnings 90,000

Equipment-net $ 15,000Push-down capital 200,000

To push down fair value-book value differentials.

2 Splash CorporationBalance Sheet

at January 1, 2004

ASSETS

Cash $ 30,000Accounts receivable-net 70,000Inventories 80,000 Total current assets $180,000

Land $ 75,000Buildings-net 150,000Equipment-net 75,000 Total plant assets 300,000

Goodwill 20,000 Total assets $500,000

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable $ 40,000Other liabilities 60,000 Total liabilities $100,000

Capital stock $200,000Push-down capital 200,000 Total stockholders' equity 400,000 Total liabilities and stockholders' equity $500,000

3 If Splash reports net income of $90,000 under the new push-down system for the calendar year 2004, Played's income from Splash will also be $90,000 under a one-line consolidation.


Solution P11-8

1 Parent company theory

Preliminary computation:Cost of 80% interest in Sanue $3,000,000Book value acquired ($2,000,000 x 80%) 1,600,000 Excess cost over book value acquired $1,400,000Excess allocated to:Inventories $1,600,000 x 80% $1,280,000Equipment-net $(500,000) x 80% (400,000)Goodwill for the remainder 520,000 Excess cost over book value acquired $1,400,000

Entry on Sanue's books to reflect 80% push down:

Inventories $1,280,000Goodwill 520,000Retained earnings 1,200,000

Equipment-net $ 400,000Push-down capital 2,600,000

2 Entity theory

Preliminary computation:Implied value of net assets ($3,000,000/.8) $3,750,000Book value of net assets 2,000,000 Total excess $1,750,000Excess allocated to:Inventories $1,600,000Equipment-net (500,000)Goodwill for remainder 650,000 Total excess $1,750,000

Entry on Sanue's books to reflect 100% push down:

Inventories $1,600,000Goodwill 650,000Retained earnings 1,200,000

Equipment $ 500,000Push-down capital 2,950,000

3 Minority interest (Parent company theory)

Sanue's stockholders' equity $2,000,000 x 20% $ 400,000

4 Minority interest (Entity theory)

Capital stock $ 800,000Push-down capital 2,950,000Stockholders' equity 3,750,000Minority interest percentage 20%Minority interest $ 750,000

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Solution P11-9

1 Push down under parent company theory

Buildings-net $ 18,000Equipment-net 27,000Goodwill 36,000Retained earnings 20,000

Inventories $ 9,000Push-down capital 92,000

To record revaluation of 90% of net assets and elimination of retained earnings as a result of a business combination with Power Corporation.

2 Push down under entity theory

Buildings-net $ 20,000Equipment-net 30,000Goodwill 40,000Retained earnings 20,000

Inventories $ 10,000Push-down capital 100,000

To record revaluation of net assets imputed from purchase price of 90% interest acquired by Power Corporation.

3 Swing CorporationComparative Balance Sheets

at January 1, 2004

Parent Company Theory Entity TheoryAssetsCash $ 20,000 $ 20,000Accounts receivable-net 50,000 50,000Inventories 31,000 30,000Land 15,000 15,000Buildings-net 48,000 50,000Equipment-net 97,000 100,000Goodwill 36,000 40,000 Total assets $297,000 $305,000

Liabilities and stockholders' equityAccounts payable $ 45,000 $ 45,000Other liabilities 60,000 60,000Capital stock 100,000 100,000Push-down capital 92,000 100,000Retained earnings 0 0 Total equities $297,000 $305,000


Solution P11-10

a Power Corporation and SubsidiaryConsolidation Working Papers


Push down 90% - parent company theory | | 90% | Adjustments and |Consolidated | Power | Swing | Eliminations | Statements | | | | Income Statement | | | | Sales |$310,800 |$110,000 | | $420,800 Income from Swing | 37,800 | |b 37,800 | Cost of sales | 140,000*| 33,000*| | 173,000* Depreciation expense | 29,000*| 24,200*| | 53,200* Other operating | | | | expenses | 45,000*| 11,000*| | 56,000* Minority expense | | |e 4,000 | 4,000* Net income |$134,600 |$ 41,800 | | $134,600 | | | | Retained Earnings | | | | Retained earnings - Power|$147,000 | | | $147,000 Retained earnings - Swing| |$ 0 | | Net income | 134,600 | 41,800 | | 134,600 Dividends | 60,000*| 10,000*| b 9,000| e 1,000| 60,000* Retained earnings | | | | December 31, 2004 | $221,600 |$ 31,800 | | $221,600 | | | | Balance Sheet | | | | Cash |$ 63,800 |$ 27,000 |a 8,000 | $ 98,800 Accounts receivable - net| 90,000 | 40,000 | a 8,000| 122,000 Dividends receivable | 9,000 | | d 9,000| Inventories | 20,000 | 35,000 | | 55,000 Land | 40,000 | 15,000 | | 55,000 Buildings - net | 140,000 | 43,200 | | 183,200 Equipment - net | 165,000 | 77,600 | | 242,600 Investment in Swing | 208,800 | | b 28,800| | | | c 180,000| Goodwill | | 36,000 | | 36,000 | $736,600 |$273,800 | | $792,600 | | | | Accounts payable |$125,000 |$ 20,000 | | $145,000 Dividends payable | 15,000 | 10,000 |d 9,000 | 16,000 Other liabilities | 75,000 | 20,000 | | 95,000 Capital stock | 300,000 | 100,000 |c 100,000 | 300,000 Push-down capital | | 92,000 |c 92,000 | Retained earnings | 221,600 | 31,800 | | 221,600 | $736,600 |$273,800 | | | | Minority interest January 1, 2004 | c 12,000| Minority interest December 31, 2004 | e 3,000| 15,000 | | $792,600 | | *Deduct

390Chapter 11


b Power Corporation and SubsidiaryConsolidation Working Papers


Push down 100% - entity theory | | 90% | Adjustments and |Consolidated | Power | Swing | Eliminations | Statements | | | |Income Statement | | | |Sales |$310,800 |$110,000 | | $420,800 Income from Swing | 37,800 | |b 37,800 | Cost of sales | 140,000*| 32,000*| | 172,000* Depreciation expense | 29,000*| 25,000*| | 54,000* Other operating | | | | expenses | 45,000*| 11,000*| | 56,000* Minority expense | | |e 4,200 | 4,200* Net income |$134,600 |$ 42,000 | | $134,600 | | | | Retained Earnings | | | |Retained earnings - Power|$147,000 | | | $147,000 Retained earnings - Swing| |$ 0 | | Net income | 134,600 | 42,000 | | 134,600 Dividends | 60,000*| 10,000*| b 9,000| e 1,000| 60,000* Retained earnings | | | | December 31, 2004 | $221,600 |$ 32,000 | | $221,600 | | | |Balance Sheet | | | |Cash |$ 63,800 |$ 27,000 |a 8,000 | $ 98,800 Accounts receivable - net| 90,000 | 40,000 | a 8,000| 122,000 Dividends receivable | 9,000 | | d 9,000| Inventories | 20,000 | 35,000 | | 55,000 Land | 40,000 | 15,000 | | 55,000 Buildings - net | 140,000 | 45,000 | | 185,000 Equipment - net | 165,000 | 80,000 | | 245,000 Investment in Swing | 208,800 | | b 28,800| | | | c 180,000| Goodwill | | 40,000 | | 40,000 | $736,600 |$282,000 | | $800,800 | | | | Accounts payable |$125,000 |$ 20,000 | | $145,000 Dividends payable | 15,000 | 10,000 |d 9,000 | 16,000 Other liabilities | 75,000 | 20,000 | | 95,000 Capital stock | 300,000 | 100,000 |c 100,000 | 300,000 Push-down capital | | 100,000 |c 100,000 | Retained earnings | 221,600 | 32,000 | | 221,600 | $736,600 |$282,000 | | | | Minority interest January 1, 2004 | c 20,000| Minority interest December 31, 2004 | e 3,200| 23,200 | | $800,800 | | *Deduct


Solution P11-11

Pepper Corporation and SubsidiaryProportionate Consolidation Working Papers

for the year ended December 31, 2003 | | | Adjustments and |Consolidated | Pepper |Jerry 40%| Eliminations | Statements | | | |Income Statement | | | |Sales |$ 800,000 |$300,000 |b 180,000 | $ 920,000 Income from Jerry | 20,000 | |a 20,000 | Cost of sales | 400,000*| 150,000*| b 90,000| 460,000*Depreciation expense | 100,000*| 40,000*| b 24,000| 116,000*Other expenses | 120,000*| 60,000*| b 36,000| 144,000*Net income |$ 200,000 |$ 50,000 | | $ 200,000 | | | |Retained Earnings | | | |Retained earnings - Pepper|$ 300,000 | | | $ 300,000 Venture equity-Jerry | |$250,000 |b 250,000 | Net income | 200,000 | 50,000 | | 200,000 Dividends | 100,000*| | | 100,000*Retained earnings/ | | | | Venture equity | $ 400,000 |$300,000 | | $ 400,000 | | | |Balance Sheet | | | |Cash |$ 100,000 |$ 50,000 | b 30,000| $ 120,000 Receivables - net | 130,000 | 30,000 | b 18,000| 142,000 Inventories | 110,000 | 40,000 | b 24,000| 126,000 Land | 140,000 | 60,000 | b 36,000| 164,000 Buildings - net | 200,000 | 100,000 | b 60,000| 240,000 Equipment - net | 300,000 | 180,000 | b 108,000| 372,000 Investment in Jerry | 120,000 | | a 20,000| | | | b 100,000| | $1,100,000 |$460,000 | | $1,164,000 | | | |Accounts payable |$ 120,000 |$100,000 |b 60,000 | $ 160,000 Other liabilities | 80,000 | 60,000 |b 36,000 | 104,000 Common stock, $10 par | 500,000 | | | 500,000 Retained earnings | 400,000 | | | 400,000 Venture equity-Jerry | | 300,000 | | | $1,100,000 |$460,000 | | $1,164,000 | | | | *Deduct