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Chapter 4 63

Chapter 4

CONSOLIDATION TECHNIQUES AND PROCEDURES

Answers to Questions

1 Consolidated financial statements are not affected by te metod !sed by te "arent com"any inacco!ntin# for its s!bsidiary in$estments% S!c statements are te same re#ardless of &eter te "arentcom"any !ses te cost metod' te e(!ity metod' or an incom"lete e(!ity metod in acco!ntin# for itss!bsidiary in$estments% Te &or)in# "a"er ad*!stments &ill be different' o&e$er' de"endin# on o& te

"arent com"any acco!nts for its s!bsidiary in$estments%

2 Te standard metod of acco!ntin# for e(!ity in$estments of +, "ercent or more is te e(!ity metod% -!tif te "arent com"any iss!es only consolidated financial statements as te statements of te "rimaryre"ortin# entity' and te consolidated financial statements are correct' it ma)es no difference o& terecords of te "arent com"any are maintained% Te .inancial Acco!ntin# Standards -oard /and its

"redecessor or#ani0ation1 establised standards for e2ternal re"ortin# b!t not for maintenance of internalacco!ntin# records%

3 Under te e(!ity metod' a "arent com"any amorti0es "atents from its s!bsidiary in$estments by ad*!stin#its s!bsidiary in$estment and s!bsidiary income acco!nts% Since "atents and "atent amorti0ation acco!ntsare not recorded on te "arent com"any3s boo)s' tey are created for consolidated statement "!r"osestro!# &or)in# "a"er entries%

4 Noncontrollin# interest e2"ense is entered in te consolidation &or)in# "a"ers by "re"arin# a &or)in# "a"er ad*!stin# entry in &ic noncontrollin# interest e2"ense is debited and noncontrollin# interest iscredited% Te noncontrollin# interest e2"ense /debit1 is carried to te consolidated income statement as aded!ction' and te credit to noncontrollin# interest for noncontrollin# interest income is added to te

be#innin# noncontrollin# interest% Tis is te a""roac ill!strated tro!#o!t tis te2t%An alternati$e a""roac for enterin# noncontrollin# interest income in te consolidation &or)in#

"a"ers is to com"!te noncontrollin# interest income /or loss1 inde"endently' and to enter te amo!nt as anaddition /ded!ction for loss1 to in te noncontrollin# interest col!mn and as a ded!ction /an addition1 toconsolidated net income%

5 4or)in# "a"er "roced!res for te in$estment in s!bsidiary' income from s!bsidiary' and s!bsidiary e(!ityacco!nts are ali)e in re#ard to te ob*ecti$es of consolidation% Re#ardless of te confi#!ration of te&or)in# "a"er entries' te final res!lt of ad*!stments for tese items is to eliminate tem tro!# &or)in#

"a"er entries% In oter &ords' te in$estment in s!bsidiary' income from s!bsidiary' and te ca"ital stoc)'additional "aid5in ca"ital' retained earnin#s' and oter stoc)olders3 e(!ity acco!nts of te s!bsidiaryne$er a""ear in consolidated financial statements%

6 4en te "arent com"any does not amorti0e cost5boo) $al!e differentials on its se"arate boo)s' te "arentcom"any3s income from s!bsidiary and in$estment in s!bsidiary acco!nts are o$erstated in te year of ac(!isition% In s!bse(!ent years' te income from te s!bsidiary' in$estment in s!bsidiary' and "arent3s

be#innin# retained earnin#s &ill be o$erstated% Te error may be corrected in te &or)in# "a"ers &it tefollo&in# entries6

63



64 Consolidation Techniques and Procedures

Year of acquisitionIncome from s!bsidiary 777

In$estment in s!bsidiary 777Subsequent year

Income from s!bsidiary 777

Retained earnin#s 8 "arent 777In$estment in s!bsidiary 777

-y enterin# a correctin# entry' all oter &or)in# "a"er entries are te same as if te "arent "ro$ided for amorti0ation on its se"arate boo)s%

If te errors are not corrected tro!# te &or)in# "a"er entries s!##ested abo$e' te entry toeliminate te income from s!bsidiary in te year of ac(!isition is "re"ared in te !s!al manner &ito!tf!rter com"lications beca!se neiter te be#innin# in$estment nor retained earnin#s acco!nts areaffected by te omission% In s!bse(!ent years te entry to eliminate income from s!bsidiary and di$idendsfrom s!bsidiary &ill a$e to be can#ed to correct te be#innin#5of5te5"eriod retained earnin#s asfollo&s6

Income from s!bsidiary 777Retained earnin#s 8 "arent 777

Di$idends /s!bsidiary1 777In$estment in s!bsidiary 777

7 No% 4or)in# "a"er ad*!stments are not entered in te #eneral led#er of te "arent com"any or any oter entity% Tey are !sed in te "re"aration of consolidated financial statements for a conce"t!al entity for &ic tere are no formal acco!ntin# records%

8 4or)in# "a"ers are tools of te acco!ntant tat facilitate te consolidation of "arent and s!bsidiaryfinancial statements% 9i$en te tools a$ailable' te acco!ntant so!ld select tose tat are most con$enientin te circ!mstances% If financial statements are to be consolidated' te financial statement a""roac is tea""ro"riate tool% Te trial balance a""roac is most con$enient &en te data are "resented in te form of a trial balance% Te acco!ntant needs to be familiar &it bot a""roaces to "erform te &or) asefficiently as "ossible%

9 4or)in# "a"er ad*!stment and elimination entries as ill!strated in tis te2t are e2actly te same &en tetrial balance a""roac is !sed as &en te financial statement a""roac is !sed% Tis is "ossible tro!# acec)5off system tat n!llifies te closin# "rocess &en te financial statement a""roac is !sed%

10 Te retained earnin#s of te "arent com"any &ill e(!al consolidated retained earnin#s if te e(!itymetod of acco!ntin# as been correctly a""lied% In consolidatin# te financial statements of affiliatedcom"anies' te be#innin# retained earnin#s of te "arent com"any are !sed as be#innin# consolidatedretained earnin#s% If te e(!ity metod of acco!ntin# as not been correctly a""lied' "arent com"any

be#innin# retained earnin#s &ill not e(!al be#innin# consolidated retained earnin#s% In tis case' teretained earnin#s of te "arent com"any are ad*!sted to a correct e(!ity basis in order to establis tecorrect amo!nt of be#innin# consolidated retained earnin#s% T!s' &or)in# "a"er ad*!stments to

be#innin# retained earnin#s of te "arent are needed &ene$er te be#innin# retained earnin#s of te "arent com"any do not correctly reflect te e(!ity metod%

64



Chapter 4 65

11 Te noncontrollin# interest tat a""ears in te consolidated balance seet can be cec)ed by m!lti"lyin#te e(!ity of te s!bsidiary on te consolidated balance seet date by te noncontrollin# interest

"ercenta#e% Consolidated retained earnin#s at a balance seet date can be cec)ed by com"arin# teamo!nt &it te "arent com"any3s retained earnin#s on te same date% If consolidated retained earnin#sand "arent com"any retained earnin#s are not e(!al' eiter consolidated retained earnin#s a$e beencom"!ted incorrectly' or "arent com"any retained earnin#s do not reflect a correct e(!ity metod of

acco!ntin#%

12 Consolidated assets and liabilities are re"orted for all e(!ity olders8noncontrollin# as &ell as ma*ority%Terefore' te can#e in net assets from o"erations for a "eriod res!lts from noncontrollin# intereste2"ense and consolidated net income%

13 No% It relates to all interests in te consolidated entity% Tis difference is one of many inconsistencies inte conce"ts !nderlyin# consolidated financial statements% Consider' for e2am"le' te error tat co!ldres!lt from di$idin# cas "ro$ided by o"erations by o!tstandin# "arent com"any sares to #et acom"!tation of cas flo& "er sare%

SOLUTIONS TO EXERCISES

Solution E4-1

1 d 6 d

2 a 7 b

3 a 8 b

4 d 9 a

5 b 10 b

Solution E4-2

Preliminary computations:

Investment cost January 2, 2006 $300,000

Less: Boo value ac!uired "$2#0,000 net assets × 0%& "200,000&

'(cess cost over boo value ac!uired $)00,000'(cess allocated to:

Inventory "$)2,#00 × 0%& $ )0,000

*emainder to +oodill -0,000

'(cess cost over boo value ac!uired $)00,000

1 Income .rom /ally ort1

Ponders s1are o. /ally ort1s reported income

"$0,000 × 0%& $ #6,000

Less: '(cess allocated to inventory ")0,000&

Income .rom /ally ort1 .or 2006 $ 46,000

2 oncontrollin+ interest e(pense

/ally ort1s net income $0,000 × 20% noncontrollin+

interest percenta+e 5 $ )4,000

3 oncontrollin+ interest ecember 3), 2006

/ally ort1s e!uity $260,000 × 20% noncontrollin+ interest

percenta+e 5 $ #2,000

6#




66



Chapter 4 67

4 Investment in /ally ort1 ecember 3), 2006

Investment cost January 2, 2006 $300,000

7dd: Income .rom /ally ort1 "+iven& #0,000

Less: ividends "$60,000 × 0%& "4,000&

Investment in /ally ort1 ecember 3), 2006 $302,000

5 8onsolidated net income 2006 $)0,200

Solution E4-3

1 c $3#0,000 "$)#0,000 9 $220,000 $20,000 intercompany&

Preliminary computations for 2 and 3

Investment cost on January ), 2006 $)#,000

Boo value o. interest ac!uired "$)#,000 × 0%& )0,#00

;oodill $ 4,#00

2 Primroses separate income .or 200 $)2,000

Loss .rom investment in /tarman "$#00 × 0%& "3#0&

8onsolidated net income .or 200 $)),6#0

3 Investment cost January ), 2006 $)#,000

7dd: /1are o. income less dividends 2006 8 200

"$00 income $#00 dividends& × 0% )40

Investment balance ecember 3), 200 $)#,)40

Solution E4-4

Preliminary computations

Investment cost $#0,000Boo value ac!uired "$600,000 × 0%& 40,000

<otal e(cess cost over boo value ac!uired $)00,000

'(cess allocated to:

'!uipment "# year li.e& "$#0,000 × 0%& $ 40,000

Patents ")0 year amorti=ation period& 60,000

<otal e(cess cost over boo value ac!uired $)00,000

Income .rom /tine 200 200

0% o. /tines reported income $-6,000 $)20,000

Less: epreciation o. e(cess allocated to e!uipment ",000& ",000&

Less: 7morti=ation o. patents "6,000& "6,000&

Income .rom /tine $2,000 $)06,000

1a 8onsolidated net income .or 200

Penairs net income 5 consolidated net income under e!uity

>et1od $340,000

1b Investment in /tine ecember 3), 200

6




8ost January ), 200 $#0,000

7dd: Income .rom /tine 8 200 2,000

Less: ividends .rom /tine 8 200 "$0,000 × 0%& "64,000&

Investment in /tine ecember 3), 200 $#-,000

1 oncontrollin+ interest e(pense 8 200 "$)20,000 × 20%& $ 24,000

1! oncontrollin+ interest ecember 3), 200

/tines e!uity ecember 3), 2006 $600,000

7dd: Income less dividends .or 200 and 200 )00,000

/tines e!uity ecember 3), 200 00,000

oncontrollin+ interest percenta+e 20%

oncontrollin+ interest ecember 3), 200 $)40,000

2 8onsolidated net income .or 200 "incomplete e!uity met1od&

et income o. Penair 8 200 $340,000

Less: /1are o. /tines income "$)20,000 × 0%& "-6,000&

/eparate income o. Penair 244,0007dd: Income .rom /tine 8 200 "e!uity met1od& 2,000

8onsolidated net income .or 200 $326,000

Solution E4-5

1 c

2 a

3 b

4 c

5 d

Solution E4-6

"a#t$ Co#%o#ation an! Sub&i!ia#$

Partial 8onsolidated 8as1 los /tatement

.or t1e year ended ecember 3), 2006

8as1 los .rom ?peratin+ 7ctivities

8onsolidated net income $#,000

7d@ustments to reconcile net income to cas1

provided by operatin+ activities:

oncontrollin+ interest e(pense $2#,000

Andistributed income o. e!uity investees "2,#00&Loss on sale o. land #,000

epreciation e(pense 60,000

Patents amorti=ation ,000

Increase in accounts receivable "#2,#00&

Increase in inventories "22,#00&

ecrease in accounts payable ")0,000& )0,#00

et cas1 .los .rom operatin+ activities $#,#00

6



Chapter 4 69

6-




Solution E4-7

"#ola' Co#%o#ation an! Sub&i!ia#$

Partial 8onsolidated 8as1 los /tatement


8as1 los .rom ?peratin+ 7ctivities

8as1 received .rom customers $322,#00ividends received .rom e!uity investees ,000

Less:

8as1 paid to suppliers $)2,#00

8as1 paid to employees 2,000

8as1 paid .or ot1er operatin+ items 23,#00

8as1 paid .or interest e(pense )2,000 24#,000

et cas1 .los .rom operatin+ activities $ 4,#00

SOLUTIONS TO "RO(LE)S

Solution "4-1

Preliminary computationsInvestment in /eine "#%& January ), 2006 $2,#00,000

Boo value ac!uired "$2,400,000 × #%& "),00,000&

<otal e(cess o. cost over boo value ac!uired $ 00,000

'(cess allocated:

)0% to inventories "sold in 2006& $ 0,000

40% to plant assets "use a li.e o. years& 20,000

#0% to +oodill 3#0,000

<otal e(cess o. cost over boo value ac!uired $ 00,000

1 ;oodill at ecember 3), 20)0 $ 3#0,000

2 oncontrollin+ interest e(pense .or 20)0

"$),000,000 sales $600,000 e(penses&×

2#% interest$ )00,000

3 8onsolidated retained earnin+s ecember 3), 200-

'!ual to Pearls ecember 3), 200- retained earnin+s $),60,000

4 8onsolidated retained earnin+s ecember 3), 20)0

Pearls retained earnin+s ecember 3), 200- $),60,000

7dd: Pearls net income .or 20)0 ),0#,000

Less: Pearls dividends .or 20)0 "#00,000&

8onsolidated retained earnin+s ecember 3), 20)0 $2,2##,000

5 8onsolidated net income .or 20)0

8onsolidated sales $#,000,000

Less: 8onsolidated e(penses "$3,0,000 9 $3#,000

depreciation& "3,)#,000&

<otal consolidated income ),)#,000

Less: oncontrollin+ interest e(pense ")00,000&

8onsolidated net income .or 20)0 $),0#,000

6 oncontrollin+ interest ecember 3), 200-

/eines stoc1olders e!uity $2,400,000 × 2#% $ 600,000

7 oncontrollin+ interest ecember 3), 20)0

0



Chapter 4 71

/eines stoc1olders e!uity $2,600,000 × 2#% $ 6#0,000

8 ividends payable ecember 3), 20)0 none

)




Solution "4-2

1 "al* Co#%o#ation an! Sub&i!ia#$

8onsolidation orin+ Papers


Palm

0%

/ail

7d@ustments and

'liminations

8onsolidated

/tatements

Income Statement

/ales $ 3)0,000 $ )00,000 $ 4)0,000

Income .rom /ail )0,#00 a )0,#00

8ost o. +oods sold 200,000C 6#,000C 26#,000C

?peratin+ e(penses ,000C 20,000C -,000C

oncontrD e(pense

"$)#,000 × 30%& c 4,#00 4,#00C

et income $ 43,#00 $ )#,000 $ 43,#00

Retained Earnings

*etained earnin+s

8 Palm $ 6#,000 $ 6#,000

*etained earnin+s 8 /ail $ )),000 b )),000

et income 43,#00 )#,000 43,#00

ividends 30,000C )0,000C a ,000

c 3,000 30,000C

*etained earnin+s

ecember 3) $ ,#00 $ )6,000 $ ,#00

Balance Sheet

8as1 $ 4#,#00 $ )#,000 $ 60,#00

7ccounts receivable

8 net 60,000 30,000 -0,000

Inventories 24,000 20,000 44,000

Plant and e!uipment

8 net )20,000 3#,000 )##,000

Investment in /ail 4-,000 a 3,#00

b 4#,#00

$ 2-,#00 $ )00,000 $ 34-,#00

7ccounts payable $ 30,000 $ ),000 $ 4,000

?t1er liabilities 20,000 )2,000 32,000

8apital stoc )#0,000 #0,000 b #0,000 )#0,000

?t1er paidin

8apital 20,000 4,000 b 4,000 20,000

*etained earnin+s ,#00 )6,000 ,#00

$ 2-,#00 $ )00,000

oncontrollin+ interest January ) b )-,#00

oncontrollin+ interest ecember 3) c ),#00 2),000

$ 34-,#00

C educt

Working paper entries

a <o eliminate income .rom /ail and dividends received .rom /ail and ad@ust

t1e investment in /ail account to its be+innin+ o. t1e period balanceD

2



Chapter 4 73

b <o eliminate reciprocal investment in /ail and e!uity amounts o. /ail and

to enter be+innin+ noncontrollin+ interestD

c <o enter noncontrollin+ interest s1are o. subsidiary income and dividendsD

3




Solution "4-2 "continued&

2 "al* Co#%o#ation an! Sub&i!ia#$

8onsolidated Income /tatement


/ales $4)0,000

Less: 8ost o. +oods sold 26#,000

;ross pro.it )4#,000

?peratin+ e(penses -,000

<otal consolidated income 4,000

Less: oncontrollin+ interest e(pense 4,#00

8onsolidated net income $ 43,#00

"al* Co#%o#ation an! Sub&i!ia#$

8onsolidated *etained 'arnin+s /tatement


8onsolidated retained earnin+s January ) $ 6#,0007dd: 8onsolidated net income 43,#00

Less: ividends o. Palm "30,000&

8onsolidated retained earnin+s ecember 3) $ ,#00

"al* Co#%o#ation an! Sub&i!ia#$

8onsolidated Balance /1eet

at ecember 3), 2006

Assets

8urrent assets:

8as1 $ 60,#00

*eceivables 8 net -0,000

Inventories 44,000 $)-4,#00

Plant assets 8 net )##,000

<otal assets $34-,#00

Liailities and Stockholders! E"uity

Liabilities:

7ccounts payable $ 4,000

?t1er liabilities 32,000 $ 0,000

/toc1olders e!uity:

8apital stoc, $)0 par $)#0,000

?t1er paidin capital 20,000

8onsolidated retained earnin+s ,#00

24,#00

7dd: oncontrollin+ interest 2),000 26-,#00

<otal liabilities and stoc1olders e!uity $34-,#00

4



Chapter 4 75

Solution "4-3

"an Co#%o#ation an! Sub&i!ia#$



Pan /a. #%7d@ustments and'liminations

8onsolidated/tatements

Income Statement

/ales $400,000 $)00,000 $#00,000

Income .rom /a. ),000 a ),000

8ost o. sales 2#0,000C #0,000C 300,000C

?t1er e(penses -,000C 26,000C c ),000 )24,000C

oncontrollin+ e(pense . 6,000 6,000C

et income $ 0,000 $ 24,000 $ 0,000

Retained Earnings

*etained earnin+s 8 Pan $)0,000 $)0,000

*etained earnin+s 8 /a. $ 34,000 b 34,000

et income 0,000 24,000 0,000

ividends #0,000C )6,000C a )2,000

. 4,000C #0,000C

*etained earnin+s

ecember 3) $200,000 $ 42,000 $200,000

Balance Sheet

8as1 $ 6),000 $ )#,000 $ 6,000

7ccounts receivable 0,000 20,000 )00,000

ividends receivable

.rom /a. 6,000 e 6,000

Inventories -#,000 )0,000 )0#,000

ote receivable .rom Pan #,000 d #,000Land 6#,000 30,000 -#,000

Buildin+s 8 net )0,000 0,000 2#0,000

'!uipment 8 net )30,000 #0,000 )0,000

Investment in /a. )3,000 a #,000

b ),000

Patents b 40,000 c ),000 3-,000

$-0,000 $2)0,000 $4#,000

7ccounts payable $ #,000 $ )0,000 $ -#,000

ote payable to /a. #,000 d #,000

ividends payable ,000 e 6,000 2,000

8apital stoc, $)0 par #00,000 )#0,000 b )#0,000 #00,000*etained earnin+s 200,000 42,000 200,000

$-0,000 $2)0,000

oncontrollin+ interest January ) b 46,000

oncontrollin+ interest ecember 3) . 2,000 4,000

$4#,000

C educt

#




Solution "4-4

"al Co#%o#ation an! Sub&i!ia#$



Pal /un #%7d@ustments and'liminations


Income Statement

/ales $400,000 $)00,000 $#00,000

Income .rom /un ),000 a ),000

8ost o. sales 2#0,000C #0,000C 300,000C

?t1er e(penses -,000C 26,000C )23,000C

oncontrollin+ income c 6,000 6,000C

et income $ ),000 $ 24,000 $ ),000

Retained Earnings

*etained earnin+s 8 Pal $)0,000 $)0,000

*etained earnin+s 8 /un $ 34,000 b 34,000et income ),000 24,000 ),000

ividends #0,000C )6,000C a )2,000

c 4,000 #0,000C

*etained earnin+s

ecember 3) $20),000 $ 42,000 $20),000

Balance Sheet

8as1 $ 6),000 $ )#,000 $ 6,000

7ccounts receivable 0,000 20,000 )00,000

ividends receivable

.rom /un 6,000 e 6,000

Inventories -#,000 )0,000 )0#,000

ote receivable .rom Pal #,000 d #,000

Land 6#,000 30,000 -#,000

Buildin+s 8 net )0,000 0,000 2#0,000

'!uipment 8 net )30,000 #0,000 )0,000

Investment in /un )4,000 a 6,000

b ),000

;oodill b 40,000 40,000

$-),000 $2)0,000 $46,000

7ccounts payable $ #,000 $ )0,000 $ -#,000ote payable to /un #,000 d #,000

ividends payable ,000 e 6,000 2,000

8apital stoc, $)0 par #00,000 )#0,000 b )#0,000 #00,000

*etained earnin+s 20),000 42,000 20),000

$-),000 $2)0,000


oncontrollin+ interest ecember 3) c 2,000 4,000

$46,000

6



Chapter 4 77

C educt




Solution "4-5


7llocation o. e(cess cost over boo value ac!uired:

8ost o. 0% interest January ) $#00,000Boo value ac!uired "$600,000 × 0%& "420,000&

'(cess cost over boo value ac!uired $ 0,000

'(cess allocated:

Andervalued inventory items sold in 2006 $ #,000

Andervalued buildin+s " year li.e& )4,000

Andervalued e!uipment "3 year li.e& 2),000

*emainder to patents 40,000


8alculation o. income .rom /oul:

'!uity in /ouls income "$)00,000 × 0%& $ 0,000Less: Andervalued inventories sold in 2006 "#,000&

Less: epreciation on buildin+ "$)4,000E years& "2,000&

Less: epreciation on e!uipment "$2),000E3 years& ",000&

Less: Patents amorti=ation "$40,000E40 years& "),000&

Income .rom /oul $ ##,000



Chapter 4 79


orin+ paper entries .or 2006:

a Income .rom /oul ##,000

ividends "/oul& 3#,000

Investment in /oul 20,000

b 8apital stoc "/oul& #00,000

*etained earnin+s "/oul& January ) )00,000

Anamorti=ed e(cess 0,000

Investment in /oul #00,000

oncontrollin+ interest January ) )0,000

c 8ost o. sales ".or inventory items& #,000

Buildin+s 8 net )4,000

'!uipment 8 net 2),000

Patents 40,000


d epreciation e(pense 2,000

Buildin+s 8 net 2,000

e epreciation e(pense ,000

'!uipment 8 net ,000

. ?t1er e(penses ),000

Patents ),000

+ 7ccounts payable )0,000

7ccounts receivable )0,000

1 ividends payable )4,000

ividends receivable )4,000

i oncontrollin+ Interest '(pense 30,000

ividends 8 /oul )#,000

oncontrollin+ Interest )#,000

-





"a#i Co#%o#ation an! Sub&i!ia#$



Pari /oul 0% 7d@ustments and'liminations 8onsolidated/tatements

Income Statement

/ales $ 00,000 $ 00,000 $),#00,000

Income .rom /oul ##,000 a ##,000

;ain on e!uipment )0,000 )0,000

8ost o. sales 300,000C 400,000C c #,000 0#,000C

epreciation e(pense )##,000C 60,000C d 2,000

e ,000

224,000C

?t1er e(penses )60,000C )40,000C . ),000 30),000C

oncontrollin+ e(pense i 30,000 30,000C

et income $ 2#0,000 $ )00,000 $ 2#0,000

Retained Earnings

*etained earnin+s 8 Pari $ 300,000 $ 300,000

*etained earnin+s 8 /oul $ )00,000 b )00,000

et income 2#0,000 )00,000 2#0,000

ividends 200,000C #0,000C a 3#,000

i )#,000 200,000C

*etained earnin+s

ecember 3) $ 3#0,000 $ )#0,000 $ 3#0,000

Balance Sheet

8as1 $ 6,000 $ 60,000 $ )46,000

7ccounts receivable )00,000 0,000 + )0,000 )60,000

ividends receivable )4,000 1 )4,000

Inventories )#0,000 )00,000 2#0,000

?t1er current assets 0,000 30,000 )00,000

Land #0,000 )00,000 )#0,000

Buildin+s 8 net )40,000 )60,000 c )4,000 d 2,000 3)2,000

'!uipment 8 net #0,000 330,000 c 2),000 e ,000 -)4,000

Investment in /oul #20,000 a 20,000

b #00,000

Patents c 40,000 . ),000 3-,000

Anamorti=ed e(cess b 0,000 c 0,000

$),00,000 $ #0,000 $2,0),000

7ccounts payable $ 200,000 $ #,000 + )0,000 $ 2#,000

ividends payable )00,000 20,000 1 )4,000 )06,000

?t1er liabilities #0,000 -#,000 )4#,000

8apital stoc, $)0 par ),000,000 #00,000 b #00,000 ),000,000

*etained earnin+s 3#0,000 )#0,000 3#0,000

$),00,000 $ #0,000

oncontrollin+ interest January ) b )0,000

0



Chapter 4 81

oncontrollin+ interest ecember 3) i )#,000 )-#,000

$2,0),000

C educt

)




Solution "4-6

Supporting computations

?ners1ip percenta+e )3,#00E)#,000 s1ares 5 -0%

Investment cost ")3,#00 s1ares × $)#& $202,#00Boo value ac!uired "$)6#,000 × -0%& )4,#00

'(cess cost over boo value ac!uired $ #4,000

'(cess allocated to

Land $ )4,000



Income .rom /yn:

Pens s1are o. /yns income "$24,000 × -0%& $ 2),600

Less: Patents amorti=ation 4,000

Income .rom /yn $ ),600

Investment in /yn ecember 3), 200:

8ost January ), 2006 $202,#00

Pens s1are o. t1e c1an+e in /yns retained earnin+s

"$42,000 $)#,000& × -0% 24,300

Less: Patents amorti=ation .or 2 years ",000&

Investment in /yn ecember 3), 200 $2),00

2



Chapter 4 83


"+n Co#%o#ation an! Sub&i!ia#$



Pen -0% /yn7d@ustments and'liminations


Income Statement

/ales $ 400,000 $ )00,000 $ #00,000

Income .rom /yn ),600 a ),600

8ost o. sales 2#0,000C #0,000C 300,000C

?t1er e(penses )00,600C 26,000C c 4,000 )30,600C

oncontrollin+ e(pense + 2,400 2,400C

et income $ 6,000 $ 24,000 $ 6,000

Retained Earnings

*etained earnin+s 8 Pen $ ),000 $ ),000

*etained earnin+s 8 /yn $ 34,000 b 34,000et income 6,000 24,000 6,000

ividends #0,000C )6,000C a )4,400

+ ),600 #0,000C

*etained earnin+s

ecember 3) $ )-4,000 $ 42,000 $ )-4,000

Balance Sheet

8as1 $ ),000 $ )#,000 $ 33,000

7ccounts receivable 0,000 20,000 . #,000 -#,000

ividends receivable ,200 d ,200

Inventories -#,000 )0,000 )0#,000

ote receivable 8 Pen #,000 e #,000

Investment in /yn 2),00 a 3,200

b 2)#,600

Land 6#,000 30,000 b )4,000 )0-,000

Buildin+s 8 net )0,000 0,000 2#0,000

'!uipment 8 net )30,000 #0,000 )0,000

Patents b 36,000 c 4,000 32,000

$ 4,000 $ 2)0,000 $ 04,000

7ccounts payable $ #,000 $ )0,000 . #,000 $ -0,000

ote payable to /yn #,000 e #,000

ividends payable ,000 d ,200 00

8apital stoc #00,000 )#0,000 b )#0,000 #00,000*etained earnin+s )-4,000 42,000 )-4,000

$ 4,000 $ 2)0,000

oncontrollin+ interest January ) b ),400

oncontrollin+ interest ecember 3) + 00 )-,200

$ 04,000

C educt

3




Solution "4-7


7llocation o. e(cess cost over boo value ac!uired:

8ost o. 0% interest January ) $#00,000Boo value ac!uired "$600,000 × 0%& "420,000&


'(cess allocated:

Andervalued inventory items sold in 2006 $ #,000

Andervalued buildin+s " year li.e& )4,000

Andervalued e!uipment "3 year li.e& 2),000

*emainder to +oodill 40,000


8alculation o. income .rom /oul:

'!uity in /ols income "$)00,000 × 0%& $ 0,000Less: Andervalued inventories sold in 2006 "#,000&

Less: epreciation on buildin+ "$)4,000E years& "2,000&

Less: epreciation on e!uipment "$2),000E3 years& ",000&

Income .rom /oul $ #6,000

orin+ paper entries .or 2006:

a Income .rom /ol #6,000

ividends "/ol& 3#,000

Investment in /ol 2),000

b 8apital stoc "/ol& #00,000

*etained earnin+s "/ol& January ) )00,000Anamorti=ed e(cess 0,000

Investment in /ol #00,000

oncontrollin+ interest January ) )0,000

c 8ost o. sales ".or inventory items& #,000

Buildin+s 8 net )4,000

'!uipment 8 net 2),000

;oodill 40,000


d epreciation e(pense 2,000

Buildin+s 8 net 2,000

e epreciation e(pense ,000

'!uipment 8 net ,000

. oncontrollin+ Interest '(pense 30,000

ividends 8 /ol )#,000

oncontrollin+ Interest )#,000

+ 7ccounts payable )0,000

7ccounts receivable )0,000

4



Chapter 4 85

1 ividends payable )4,000

ividends receivable )4,000

#





"a# Co#%o#ation an! Sub&i!ia#$



Par /ol 0%7d@ustments and'liminations


Income Statement

/ales $ 00,000 $ 00,000 $),#00,000

Income .rom /ol #6,000 a #6,000

;ain on e!uipment )0,000 )0,000

8ost o. sales 300,000C 400,000C c #,000 0#,000C

epreciation e(pense )##,000C 60,000C d 2,000 224,000C

e ,000

?t1er e(penses )60,000C )40,000C 300,000C


et income $ 2#),000 $ )00,000 $ 2#),000

Retained Earnings

*etained earnin+s 8 Par $ 300,000 $ 300,000

*etained earnin+s 8 /ol $ )00,000 b )00,000

et income 2#),000 )00,000 2#),000

ividends 200,000C #0,000C a 3#,000

. )#,000 200,000C

*etained earnin+s

ecember 3) $ 3#),000 $ )#0,000 $ 3#),000

Balance Sheet

8as1 $ 6,000 $ 60,000 $ )46,000

7ccounts receivable )00,000 0,000 + )0,000 )60,000

ividends receivable )4,000 1 )4,000

Inventories )#0,000 )00,000 2#0,000

?t1er current assets 0,000 30,000 )00,000

Land #0,000 )00,000 )#0,000

Buildin+s 8 net )40,000 )60,000 c )4,000 d 2,000 3)2,000

'!uipment 8 net #0,000 330,000 c 2),000 e ,000 -)4,000

Investment in /ol #2),000 a 2),000

b #00,000

;oodill c 40,000 40,000

Anamorti=ed e(cess b 0,000 8 0,000

$),0),000 $ #0,000 $2,02,000

7ccounts payable $ 200,000 $ #,000 + )0,000 $ 2#,000

ividends payable )00,000 20,000 1 )4,000 )06,000

?t1er liabilities #0,000 -#,000 )4#,000

8apital stoc, $)0 par ),000,000 #00,000 b #00,000 ),000,000

*etained earnin+s 3#),000 )#0,000 3#),000

$),0),000 $ #0,000


6



Chapter 4 87

oncontrollin+ interest ecember 3) . )#,000 )-#,000

$2,02,000

C educt




Solution "4-8


?ners1ip percenta+e )3,#00E)#,000 s1ares 5 -0%

Investment cost ")3,#00 s1ares × $)#& $202,#00Boo value ac!uired "$)6#,000 × -0%& )4,#00


'(cess allocated to

Land $ )4,000



Income .rom /on:

Puns s1are o. /ons income "$24,000 × -0%& $ 2),600

Investment in /on ecember 3), 200:

8ost January ), 2006 $202,#00

Puns s1are o. t1e c1an+e in /ons retained earnin+s

"$42,000 $)#,000& × -0% 24,300

Investment in /on ecember 3), 200 $226,00



Chapter 4 89


"un Co#%o#ation an! Sub&i!ia#$



Pun -0% /on7d@ustments and'liminations


Income Statement

/ales $ 400,000 $ )00,000 $ #00,000

Income .rom /on 2),600 a 2),600

8ost o. sales 2#0,000C #0,000C 300,000C

?t1er e(penses )00,600C 26,000C )26,600C

oncontrollin+ e(pense c 2,400 2,400C

et income $ ),000 $ 24,000 $ ),000

Retained Earnings

*etained earnin+s 8 Pun $ )),000 $ )),000

*etained earnin+s 8 /on $ 34,000 b 34,000et income ),000 24,000 ),000

ividends #0,000C )6,000C a )4,400

c ),600 #0,000C

*etained earnin+s

ecember 3) $ 202,000 $ 42,000 $ 202,000

Balance Sheet

8as1 $ ),000 $ )#,000 $ 33,000

7ccounts receivable 0,000 20,000 . #,000 -#,000


Inventories -#,000 )0,000 )0#,000

ote receivable 8 Pun #,000 e #,000

Investment in /on 226,00 a ,200

b 2)-,600

Land 6#,000 30,000 b )4,000 )0-,000

Buildin+s 8 net )0,000 0,000 2#0,000

'!uipment 8 net )30,000 #0,000 )0,000

;oodill b 40,000 40,000

$ -2,000 $ 2)0,000 $ )2,000

7ccounts payable $ #,000 $ )0,000 . #,000 $ -0,000

ote payable to /on #,000 e #,000

ividends payable ,000 d ,200 008apital stoc #00,000 )#0,000 b )#0,000 #00,000

*etained earnin+s 202,000 42,000 202,000

$ -2,000 $ 2)0,000


oncontrollin+ interest ecember 3) c 00 )-,200

$ )2,000

C educt

-




Solution "4-9

"a& Co#%o#ation an! Sub&i!ia#$



Pas 0% /el7d@ustments and'liminations


Income Statement

/ales $ 200,000 $ ))0,000 $ 3)0,000

Income .rom /el ),000 a ),000

8ost o. sales 0,000C 40,000C b )0,000 )30,000C

epreciation e(pense 40,000C 20,000C d 4,000 64,000C

?t1er e(penses 2#,#00C )0,000C + ),000 36,#00C

oncontrollin+ e(pense c ,000 ,000C

et income $ ),#00 $ 40,000 $ ),#00

Retained Earnings

*etained earnin+s 8 Pas $ #,000 $ #,000*etained earnin+s 8 /el $ #0,000 b #0,000

et income ),#00 40,000 ),#00

ividends 40,000C 20,000C a )6,000

c 4,000 40,000C

*etained earnin+s

ecember 3) $ )06,#00 $ 0,000 $ )06,#00

Balance Sheet

8as1 $ 2-,#00 $ 30,000 $ #-,#00

<rade receivables 8 net 2,000 40,000 e 4,000 64,000

ividends receivable ,000 . ,000

Inventories 40,000 30,000 0,000

Land )#,000 30,000 4#,000

Buildin+s 8 net 6#,000 0,000 )3#,000

'!uipment 8 net 200,000 )00,000 b 20,000 d 4,000 3)6,000

Investment in /el 2)),000 a ),000

b 2)0,000

Patents b 20,000 + ),000 )-,000

$ #-6,#00 $ 300,000 $ 0,#00

7ccounts payable $ 40,000 $ #0,000 e 4,000 $ 6,000

ividends payable )00,000 )0,000 . ,000 )02,000

?t1er liabilities #0,000 20,000 0,0008apital stoc 300,000 )#0,000 b )#0,000 300,000

*etained earnin+s )06,#00 0,000 )06,#00

$ #-6,#00 $ 300,000



$ 0,#00

C educt

-0



Chapter 4 91



Investment cost January ), 2006 $2)0,000

Boo value ac!uired "$200,000 × 0%& )60,000


'(cess allocated:Andervalued inventory $)2,#00 × 0% $ )0,000

Andervalued e!uipment $2#,000 × 0% 20,000



-)




Solution "4-10

"la&ti, Co#%o#ation an! Sub&i!ia#$



Plasti0%

/eldane7d@ustments and'liminations


Income Statement

/ales $ 200,000 $ ))0,000 $ 3)0,000

Income .rom /eldane ),000 a ),000

8ost o. sales 0,000C 40,000C b )0,000 )30,000C

epreciation e(pense 40,000C 20,000C d 4,000 64,000C

?t1er e(penses 2#,#00C )0,000C 3#,#00C

oncontrollin+ e(pense c ,000 ,000C

et income $ 2,#00 $ 40,000 $ 2,#00

Retained Earnings

*etained earnin+s 8Plasti

$ #,000 $ #,000

*etained earnin+s 8/eldane

$ #0,000 b #0,000

et income 2,#00 40,000 2,#00

ividends 40,000C 20,000C a )6,000

c 4,000 40,000C

*etained earnin+s

ecember 3) $ )0,#00 $ 0,000 $ )0,#00

Balance Sheet

8as1 $ 2-,#00 $ 30,000 $ #-,#00

<rade receivables 8 net 2,000 40,000 e 4,000 64,000ividends receivable ,000 . ,000

Inventories 40,000 30,000 0,000

Land )#,000 30,000 4#,000

Buildin+s 8 net 6#,000 0,000 )3#,000

'!uipment 8 net 200,000 )00,000 b 20,000 d 4,000 3)6,000

Investment in /eldane 2)2,000 a 2,000

b 2)0,000

;oodill b 20,000 20,000

$ #-,#00 $ 300,000 $ 0-,#00

7ccounts payable $ 40,000 $ #0,000 e 4,000 $ 6,000

ividends payable )00,000 )0,000 . ,000 )02,000

?t1er liabilities #0,000 20,000 0,000

8apital stoc 300,000 )#0,000 b )#0,000 300,000

*etained earnin+s )0,#00 0,000 )0,#00

$ #-,#00 $ 300,000



-2



Chapter 4 93

$ 0-,#00

C educt

-3






Investment cost January ), 2006 $2)0,000

Boo value ac!uired "$200,000 × 0%& )60,000


'(cess allocated:Andervalued inventory $)2,#00 × 0% $ )0,000

Andervalued e!uipment $2#,000 × 0% 20,000



-4



Chapter 4 95

Solution "4-11


Investment cost ecember 3), 2006 $)0,000

Boo value ac!uired "$)#0,000 × 0%& )20,000


7llocation

o. '(cess

7morti=ation

200 8 20)0

Anamorti=ed

'(cess

ecember 3), 20)0

Inventories $ ,000 $ ,000 $

Plant assets 8 net ),000 ,000 )0,000

Patents 2#,000 20,000 #,000

$#0,000 $3#,000 $)#,000

"ill Co#%o#ation an! Sub&i!ia#$

8onsolidated Balance /1eet orin+ Paperson ecember 3), 20)0

Pill /tud 0%

7d@ustments and

'liminations

8onsolidated

Balance /1eet

Assets

8as1 $ 4),000 $ 3#,000 $ 6,000

<rade receivables 60,000 ##,000 c #,000 ))0,000


7dvance to /tud 2#,000 e 2#,000

Inventories )2#,000 3#,000 )60,000

Plant assets 8 net 300,000 )#,000 b )0,000 4#,000

Investment in /tud )-),000 a )-),000

Patents b #,000 #,000

Anamorti=ed e(cess a )#,000 b )#,000

<otal assets $#0,000 $300,000 $36,000

E"uities

7ccounts payable $ #0,000 $ 4#,000 c #,000 $ -0,000

ividends payable )0,000 d ,000 2,000

7dvance .rom Pill 2#,000 e 2#,000

8apital stoc 400,000 )00,000 a )00,000 400,000

*etained earnin+s 300,000 )20,000 a )20,000 300,000

oncontrollin+ interest a 44,000 44,000

<otal e!uities $#0,000 $300,000 $36,000

-#




Solution "4-12


Investment cost $240,000

Boo value ac!uired "$22#,000 × 0%& )0,000


7llocation o. di..erential:

Plant assets $#0,000 undervaluation × 0% $ 40,000

;oodill 20,000


7morti=ation:

Plant assets $40,000E4 years 5 $)0,000 per year

Investment account balance at ecember 3), 200

Anderlyin+ boo value "$2-0,000 × 0%& $232,000

7dd: Anamorti=ed e(cess allocated to plant assets

"$40,000 $20,000 amorti=ation& 20,0007dd: ;oodill 20,000

8orrect balance o. investment account at ecember 3) $22,000

<1e investment account balance is overstated at $20,000 .or

t1e $,000 dividend receivableD

-6



Chapter 4 97


"at Co#%o#ation an! Sub&i!ia#$



Pat /ci 0%7d@ustments and'liminations


Income Statement

/ales $ -00,000 $ 300,000 $),200,000

Income .rom /ci 3,000 c 3,000

8ost o. sales 600,000C )#0,000C #0,000C

?peratin+ e(pense )-0,000C -0,000C e )0,000 2-0,000C

oncontrollin+ e(pense . )2,000 )2,000C

et income $ )4,000 $ 60,000 $ )4,000

Retained Earnings

*etained earnin+s 8 Pat $ )22,000 $ )22,000

*etained earnin+s 8 /ci $ #0,000 d #0,000

et income )4,000 60,000 )4,000

ividends )00,000C 20,000C c )6,000

. 4,000 )00,000C

*etained earnin+s

ecember 3) $ )0,000 $ -0,000 $ )0,000

Balance Sheet

8as1 $ 6,000 $ )#,000 a 20,000 $ 4),000

7ccounts receivable 26,000 20,000 1 #,000 4),000

Inventories 2,000 60,000 )42,000

7dvance to /ci 20,000 a 20,000

?t1er current assets 0,000 #,000 #,000

Land )60,000 30,000 )-0,000

Plant assets 8 net 340,000 230,000 d 30,000 e )0,000 #-0,000

Investment in /ci 20,000 b ,000

c 22,000

d 2#0,000

ividends receivable b ,000 + ,000

;oodill d 20,000 20,000

$ --4,000 $ 360,000 $),)0-,000

7ccounts payable $ 24,000 $ )#,000 1 #,000 $ 34,000

ividends payable )0,000 + ,000 2,000?t1er liabilities )00,000 4#,000 )4#,000

8apital stoc 00,000 200,000 d 200,000 00,000

*etained earnin+s )0,000 -0,000 )0,000

$ --4,000 $ 360,000

oncontrollin+ interest January ) d #0,000

oncontrollin+ interest ecember 3) . ,000 #,000

$),)0-,000

C educt

-




-



Chapter 4 99

Solution "4-13

a Income .rom /tarmar 0,000

ividends 4#,000

Investment in /tarmar 3#,000

<o eliminate income .rom /tarmar and dividends paid by /tarmar,

and to establis1 reciprocity beteen be+innin+ investment ande!uity accountsD

b 8apital stoc 8 /tarmar )00,000

7dditional paidin capital 8 /tarmar )#0,000

*etained earnin+s 8 /tarmar )#0,000

Plant assets 8 net 20,000

Patents 30,000

Investment in /tarmar 4)0,000

oncontrollin+ interest ecember 3) 40,000

<o eliminate reciprocal investment and e!uity accounts, to

establis1 be+innin+ noncontrollin+ interest, and to record

unamorti=ed patents at ecember 3)D

c ?peratin+ e(penses )0,000

Patents #,000

Plant assets 8 net #,000

<o enter current amorti=ation o. patents and depreciation o. t1e

riteup in plant assetsD

d 7ccounts payable #,000

7ccounts receivable #,000

<o eliminate reciprocal receivable and payable balancesD

e ividends payable 2,000

ividends receivable 2,000

<o eliminate reciprocal dividends receivable and payable balancesD

. oncontrollin+ interest e(pense )0,000

ividends #,000

oncontrollin+ interest #,000

<o reco+ni=e an income c1ar+e .or noncontrollin+ interest e(pense,

to eliminate dividends paid to noncontrollin+ stoc1olders, and to

update noncontrollin+ interest e!uity .or current year c1an+esD

--




Solution "4-14


Investment cost January ), 2006 $0,000

Boo value ac!uired "$-0,000 × 0%& 2,000

'(cess cost over boo value ac!uired $ ,000


Inventory "sold in 2006& $),000 × 0% $ 00

>ac1inery "4 year remainin+ use li.e& $4,000 × 0% 3,200

Intan+ibles "40 year amorti=ation period assumed& 4,000

'(cess cost over boo value ac!uired $ ,000

Income .rom /i .or 2006:

/1are o. /is net income "$)#,000 × 0%& $)2,000

Less: '(cess allocated to inventories "00&

Less: 7morti=ation o. e(cess allocated to mac1inery

"$3,200E4 years& "00&Less: 7morti=ation o. intan+ibles "$4,000E40 years& ")00&

Income .rom /i .or 2006 $)0,300

oncontrollin+ interest e(pense .or 2006:

20% o. /is net income "$)#,000 × 20%& $ 3,000

oncontrollin+ interest e(pense .or 200:

20% o. /is net income "$20,000 × 20%& $ 4,000

ote: /ince t1e prior years income is not a..ected by t1e current years

error o. omission, t1e orin+ papers .or 200 are easier to prepareit1out an additional conversiontoe!uity entryD

)00



Chapter 4 101


"l$ Co#%o#ation an! Sub&i!ia#$



Ply /i 0%7d@ustments and'liminations


Income Statement

/ales $ )60,000 $ 0,000 $ 240,000

Income .rom /i )0,300 a )0,300

8ost o. sales )0#,000C 3#,000C b 00 )40,00C

?peratin+ e(penses 3#,000C 30,000C c 00

d )00

6#,-00C


et income $ 30,300 $ )#,000 $ 30,300

Retained Earnings

*etained earnin+s 8 Ply $ 0,000 $ 0,000

*etained earnin+s 8 /i $ 30,000 b 30,000

et income 30,300 )#,000 30,300

ividends )0,000C #,000C a 4,000

. ),000 )0,000C

*etained earnin+s

ecember 3) $ -0,300 $ 40,000 $ -0,300

Balance Sheet

8as1 $ 24,00 $ )#,000 $ 3-,00

<rade receivables 8 net 2#,000 20,000 4#,000

ividends receivable 4,000 0 e 4,000

Inventories 40,000 30,000 0,000

Plant F e!uipment 8 net )00,000 ##,000 b 3,200 c 00 )#,400

Investment in /i 6,300 a 6,300

b 0,000

Intan+ibles b 4,000 d )00 3,-00

$ 20,000 $ )20,000 $ 3)6,000

7ccounts payable $ 20,00 $ )#,000 $ 3#,00

ividends payable -,000 #,000 e 4,000 )0,000

8apital stoc )00,000 40,000 b 40,000 )00,000

?t1er paidin capital 60,000 20,000 b 20,000 60,000

*etained earnin+s -0,300

40,000

-0,300$ 20,000 $ )20,000



$ 3)6,000

C educt

)0)





"l$ Co#%o#ation an! Sub&i!ia#$



Ply /i 0%7d@ustments and'liminations


Income Statement

/ales $ )0,000 $ -0,000 $ 260,000

Income .rom /i )6,000 a )6,000

8ost o. sales ))0,000C 3#,000C )4#,000C

?peratin+ e(penses 30,000C 3#,000C c 00

d )00

6#,-00C


et income $ 46,000 $ 20,000 $ 4#,)00

Retained Earnings

*etained earnin+s 8 Ply $ -0,300 $ -0,300

*etained earnin+s 8 /i $ 40,000 b 40,000

et income 46,000 20,000 4#,)00

ividends )#,000C )0,000C a ,000

. 2,000 )#,000C

*etained earnin+s

ecember 3) $ )2),300 $ #0,000 $ )20,400

Balance Sheet

8as1 $ 26,00 $ 20,000 $ 46,00

<rade receivables 8 net 4#,000 30,000 #,000

ividends receivable 4,000 e 4,000

Inventories 40,000 30,000 0,000

Plant F e!uipment 8 net -#,000 60,000 b 2,400 c 00 )#6,600

Investment in /i -4,300 a ,000

b 6,300

Intan+ibles b 3,-00 d )00 3,00

$ 30#,000 $ )40,000 $ 3#2,)00

7ccounts payable $ ),00 $ 2#,000 $ 42,00

ividends payable 6,000 #,000 e 4,000 ,000

8apital stoc )00,000 40,000 b 40,000 )00,000

?t1er paidin capital 60,000 20,000 b 20,000 60,000

*etained earnin+s )2),300 #0,000 )20,400

$ 30#,000 $ )40,000oncontrollin+ interest January ) b 20,000


$ 3#2,)00

C educt

)02



Chapter 4 103

Solution "4-15


Investment cost $)00,000

Boo value ac!uired "$0,000 × -0%& 2,000



Inventories "sold in 2006& $ ,000

Patents ")0year remainin+ use.ul li.e& 20,000


1 7nalysis o. investment in /imple account

Investment in /imple January #, 2006 $)00,000

7dd: -0% o. c1an+e in retained earnin+s .rom

January #, 2006 to ecember 3), 200

"$0,000 $20,000& × -0% 4#,000

Less: 7morti=ation o. e(cess

7llocated to inventories and amorti=ed in 2006 ",000&

7llocated to patents and amorti=ed over )0 years

"$20,000E)0 years& × 3 years "6,000&

Investment balance ecember 3), 200 )3),000

7dd: Income .rom /imple .or 200- )6,000

Less: ividends received in 200- "$)0,000 × -0%& "-,000&

Investment in /imple ecember 3), 200- $)3,000

)03





"+%%+# Co*%an$ an! Sub&i!ia#$


.or t1e year ended ecember 3), 200-

Pepper /imple7d@ustments and'liminations

Income/tatement

*etained'arnin+s

Balance/1eet

#eits

8as1 $ )),000 $ )#,000 $ 26,000

7ccounts

receivable

)#,000 2#,000 40,000

Plant assets 220,000 )0,000 400,000

Investment

in /imple )3,000

a ,000

b )3),000

Patents b )4,000 c 2,000 )2,000

8ost o. +oods sold #0,000 30,000 $ 0,000C

?peratin+ e(penses 2#,000 40,000 c 2,000 6,000C

ividends 20,000 )0,000 a -,000 $ 20,000C

d ),000

$4-,000 $300,000 $4,000

$redits

7ccumulated

depreciation $ -0,000 $ #0,000 )40,000

Liabilities 0,000 30,000 ))0,000

8apital stoc )00,000 60,000 b 60,000 )00,000

Paidine(cess 20,000 20,000

*etained earnin+s 3,000 0,000 b 0,000 3,000

/ales )00,000 -0,000 )-0,000

Income .rom /imple )6,000 a )6,000$4-,000 $300,000


oncontrollin+ interest e(pense

"$20,000 × )0%& d 2,000 2,000C

8onsolidated net income $ 4),000 4),000

8onsolidated retained earnin+s $ -4,000 -4,000

oncontrollin+ interest ecember 3) d ),000 )4,000

$4,000

C educt

a <o eliminate income .rom subsidiary and dividends received and reduce t1e

investment account to its be+innin+o.t1eperiod balanceDb <o eliminate reciprocal investment and subsidiary e!uity amounts, establis1

be+innin+ noncontrollin+ interest, and ad@ust patents .or t1e unamorti=ed

e(cess as o. t1e be+innin+ o. t1e periodD

c <o amorti=e e(cess allocated to patents .or 200-D

d <o enter noncontrollin+ interest s1are o. subsidiary income and dividendsD

)04



Chapter 4 105

Solution "4-16

1 Journal entries on Pe++ys boos

%anuary &' 2(()

Investment in /uper "-0%& 20,000

8as1 20,000

<o record purc1ase o. -0% o. /upers stoc .or cas1D

%uly &' 2(()

Investment in 'llen "2#%& ,000

8as1 ,000

<o record purc1ase o. 2#% o. 'llens stoc .or cas1D

*o+emer 2(()

8as1 2,00


<o record receipt o. -0% o. /upers $3,000 dividendsD

*o+emer 2(()

8as1 ),2#0

Investment in 'llen "2#%& ),2#0

<o record receipt o. 2#% o. 'llens $#,000 dividendsD

#ecemer 3&' 2(()


Income .rom /uper 4,300

<o record investment income .rom /uper .or

2006 computed as:

/1are o. /upers reported income

"$2,000 $23,000& × -0% $ 4,#00

Less: Patents amorti=ation

G$20,000 "$20,000 × -0%&H

÷ )0 years

"200&

Investment income .rom /uper $ 4,300

#ecemer 3&' 2(()

Investment in 'llen "2#%& 00

Income .rom 'llen 00

<o record investment income .rom 'llen .or

2006 computed as:

/1are o. 'llens reported income

"$30,000 $24,000& × )E2 year

× 2#% $ #0

Less: 7morti=ation o. e(cess

G$,000 "$24,000 × 2#%&H

÷ )0 years × )E2 year

"#0&

Investment income .rom 'llen $ 00

)0#





2 Pe++ys separate company .inancial statements

"+$ Co#%o#ation

Income /tatement


Re+enues

/ales $)00,000

Income .rom /uper 4,300

Income .rom 'llen 00

<otal revenue $)0#,000

$osts and e,penses

8ost o. sales $ 60,000

?t1er e(penses 2#,000

<otal costs and e(penses #,000

et income $ 20,000

"+$ Co#%o#ation

*etained 'arnin+s /tatement


*etained earnin+s January ) $ 20,000

7dd: et income 20,000

educt: ividends ")0,000&

*etained earnin+s ecember 3) $ 30,000

"+$ Co#%o#ation

Balance /1eet

at ecember 3), 2006

Assets

8urrent assets:

8as1 $ )6,-#0

?t1er current assets 40,000 $ #6,-#0

Plant assets 8 net )20,000

Investments:

Investment in /uper "-0%& $ 2),600

Investment in 'llen "2#%& 6,4#0 2,0#0

<otal assets $20#,000

Liailities and stockholders! e"uity

8urrent liabilities $ 2#,000/toc1olders e!uity:

8apital stoc $)#0,000

*etained earnin+s ecember 3), 2006 30,000 )0,000

<otal liabilities and stoc1olders e!uity $20#,000

)06



Chapter 4 107


3 8onsolidation orin+ papers 8 trial balance .ormat

"+$ Co#%o#ation an! Sub&i!ia#i+&



Pe++y

-0%

/uper

7d@ustments and

'liminations

Income

/tatement

*etained

'arnin+s

Balance

/1eet

#eits

8as1 $ )6,-#0 $ 4,000 $ 20,-#0

?t1er current assets 40,000 )),000 #),000

Plant assets 8 net )20,000 )4,000 )34,000

Investment in

/uper 2),600

a ),600

b 20,000

Investment in 'llen 6,4#0 6,4#0

8ost o. sales 60,000 )6,000 $ 6,000C

?t1er e(penses 2#,000 ,000 c 200 32,200Cividends )0,000 3,000 a 2,00 $

)0,000C

d

300C

Patents b 2,000 c 200 ),00

<otal debits $300,000 $##,000 $2)4,200

$redits

8urrent liabilities $ 2#,000 $ ,000 $ 32,000

8apital stoc )#0,000 ),000 b ),000 )#0,000

*etained earnin+s 20,000 2,000 b 2,000 20,000

/ales )00,000 2,000 )2,000

Income .rom /uper 4,300 a 4,300

Income .rom 'llen 00 00

<otal credits $300,000 $##,000

oncontrollin+

interest January ) b 2,000

oncontrollin+ interest e(pense

$#,000 × )0% d #00 #00C

8onsolidated net income $ 20,000 20,000

8onsolidated retained earnin+s $ 30,000 30,000

oncontrollin+ interest ecember 3)

d 200 2,200

$2)4,200

)0





4 8onsolidated .inancial statements


8onsolidated Income /tatement


Re+enues

/ales $)2,000

Income .rom 'llen "e!uity basis& 00

<otal revenues $)2,00

$osts and e,penses

8ost o. sales $ 6,000

?t1er e(penses 32,200

<otal costs and e(penses )0,200

<otal consolidated income 20,#00

Less: oncontrollin+ interest e(pense #00

8onsolidated net income $ 20,000


8onsolidated *etained 'arnin+s /tatement


8onsolidated retained earnin+s January ) $ 20,000

7dd: et income 20,000

educt: ividends ")0,000&

8onsolidated retained earnin+s ecember 3) $ 30,000


8onsolidated Balance /1eet

at ecember 3), 2006

Assets

8urrent assets:

8as1 $ 20,-#0

?t1er current assets #),000 $ ),-#0

Plant assets 8 net )34,000

Investments and ot1er assets:

Investment in 'llen $ 6,4#0

Patents ),00 ,2#0

<otal assets $2)4,200

Liailities and stockholders! e"uity

8urrent liabilities $ 32,000

/toc1olders e!uity:

8apital stoc $)#0,000

8onsolidated retained earnin+s 30,000

oncontrollin+ interest 2,200 )2,200

<otal liabilities and stoc1olders e!uity $2)4,200

)0



Chapter 4 109

)0-




Solution "4-17

Partial consolidated statement o. cas1 .los usin+ t1e direct met1od:

"illo#$ Co#%o#ation an! Sub&i!ia#i+&

Partial 8onsolidated /tatement o. 8as1 los

.or t1e current year

$ash -lo.s from /perating Acti+ities

8as1 received .rom customers $),600,000

ividends .rom e!uity investees 40,000

Interest received .rom s1ortterm loan #,000

8as1 paid .or ot1er e(penses "4#0,000&

8as1 paid to suppliers "630,000&

8as1 .lo .rom operatin+ activities $ #6#,000

))0



Chapter 4 111

Solution "4-18

.i#+t )+t/o!

"+&+, Co#%o#ation an! Sub&i!ia#$

8onsolidated /tatement o. 8as1 los



8as1 received .rom customers $60,000

8as1 paid to suppliers $34,000

8as1 paid .or operatin+ e(penses )#,#00 "#0#,#00&

*et cash flo.s from operating acti+ities )64,#00

$ash -lo.s from In+esting Acti+ities

Purc1ase o. e!uipment ")2#,000&

*et cash flo.s from in+esting acti+ities ")2#,000&

$ash -lo.s from -inancing Acti+ities

Payment o. cas1 dividends 8 ma@ority "36,000&

Payment o. cas1 dividends 8 noncontrollin+ "2,000&

Payment o. lon+term liabilities ")),000&

*et cash flo.s from financing acti+ities "4-,000&

ecrease in cas1 .or 200 "-,#00&

8as1 on January ) 6#,000

8as1 on ecember 3) $ ##,#00

*econciliation o. net income to cas1 provided by operatin+ activities:

8onsolidated net income $)30,000



oncontrollin+ interest e(pense $ #,000

epreciation e(pense #),000

Patents amorti=ation #00

Increase in accounts payable 22,000

Increase in accounts receivable "#,000&

Increase in inventories "20,000&

Increase in ot1er current assets ")-,000& 34,#00

et cas1 .los .rom operatin+ activities $)64,#00

)))





In!i#+t )+t/o!

"+&+, Co#%o#ation an! Sub&i!ia#$

8onsolidated /tatement o. 8as1 los



8onsolidated net income $)30,000

oncontrollin+ interest e(pense #,000 $)3#,000

oncas1 e(penses, revenue, +ains and losses

included in income:

epreciation $ #),000

Patents amorti=ation #00

Increase in accounts receivable "#,000&

Increase in inventories "20,000&

Increase in ot1er current assets ")-,000&

Increase in accounts payable 22,000 2-,#00

*et cash flo.s from operating acti+ities )64,#00


Purc1ase o. e!uipment ")2#,000&

*et cash flo.s from in+esting acti+ities ")2#,000&


Payment o. cas1 dividends 8 ma@ority "36,000&


Payment o. lon+term liabilities ")),000&

*et cash flo.s from financing acti+ities "4-,000&

ecrease in cas1 .or 200 "-,#00&

8as1 on January ) 6#,000

8as1 on ecember 3) $ ##,#00

*ote0 1he cash flo.s from in+esting acti+ities and cash flo.s from financing

acti+ities sections of the statement of cash flo.s are the same under the

direct and indirect method

))2



Chapter 4 113

Solution "4-19 G7I8P7H

In!i#+t )+t/o!

"u&/ In an! Sub&i!ia#$

/tatement o. 8as1 los Indirect 4ethod5



8onsolidated net income $ )-,000



oncontrollin+ interest e(pense $ 33,000


Patents amorti=ation 3,000

ecrease in accounts receivable 22,000

Increase in accounts payable )2),000

Increase in de.erred income ta(es )2,000Increase in inventories "0,000&

;ain on maretable e!uity securities ")),000&

;ain on sale o. e!uipment "6,000& )6,000

*et cash flo.s from operating acti+ities 34,000


Purc1ase o. e!uipment $")2,000&

Proceeds .rom sale o. e!uipment 40,000

*et cash flo.s from in+esting acti+ities ",000&


8as1 received .rom sale o. treasury stoc 44,000

Payment o. cas1 dividends 8 ma@ority "#,000&

Payment o. cas1 dividends 8 noncontrollin+ ")#,000&

Payment on lon+term note ")#0,000&

*et cash flo.s from financing acti+ities ")-,000&

Increase in cas1 .or 2006 )),000

8as1 on January ) )-#,000

8as1 on ecember 3) $ 3)3,000

Listin+ o. noncas1 investin+ and .inancin+ activities:

Issued common stoc in e(c1an+e .or land it1 a .air value o. $2)#,000D

))3





In!i#+t )+t/o!

"u&/ In an! Sub&i!ia#$

orin+ Papers .or t1e /tatement o. 8as1 los Indirect 4ethod5


8as1 lo 8as1 lo 8as1 lo ears *econcilin+ Items .rom Investin+ inancin+

81an+e ebit 8redit ?perations 7ctivities 7ctivities

Asset $hanges

8as1 )),000

7lloance to reduce >'/ )),000 e )),000

7ccounts receivable 8 net "22,000& . 22,000

Inventories 0,000 + 0,000

LandC 2)#,000 1 2)#,000

Plant and e!uipment 6#,000 62,000 @ )2,000

7ccumulated depreciation "#4,000& l 2,000 2,000

Patents 8 net "3,000& m 3,000

<otal asset c1an+es 400,000

$hanges in E"uities

7ccounts F accrued payable )2),000 n )2),000

ote payable lon+term ")#0,000& o )#0,000

e.erred income ta(es )2,000 p )2,000

oncontrollin+ interest in

/torr

),000 b 33,000 d )#,000

8ommon stoc, $)0 parC )00,000 1 )00,000

7dditional paidin capital )23,000 1 ))#,000

i ,000

*etained earnin+s )40,000 a )-,000 c #,000

<reasury stoc at cost 36,000 i 36,000

<otal c1an+es in

e!uities 400,000

8onsolidated net income a )-,000 )-,000

oncontrollin+ interest e(pense b 33,000 33,000

;ain on >'/ e )),000 ")),000&

Purc1ase o. plant and e!uipment @ )2,000 ")2,000&

/ale o. e!uipment 40,000 40,000

;ain on e!uipment 6,000 "6,000&

epreciation e(pense l 2,000 2,000

Payment on lon+term note o )#0,000 ")#0,000&

7morti=ation o. patents m 3,000 3,000

ecrease in receivables . 22,000 22,000

Increase in inventories + 0,000 "0,000&

Increase in accounts payable n )2),000 )2),000

Increase in de.erred income ta(es p )2,000 )2,000

Proceeds .rom treasury stoc i 44,000 44,000

Payment o. dividends 8 ma@ority c #,000 "#,000&

Payment o. dividends 8 noncontrollin+ d )#,000 ")#,000&

),22-,000 ),22-,000

34,000 ",000& ")-,000&

8as1 increase .or 2006 5 $34,000 $,000 $)-,000 5 $)),000D

C oncas1 item: Purc1ased $2)#,000 land t1rou+1 common stoc issuanceD

))4



Chapter 4 115

Solution "4-20

Indirect 4ethod

"il#i* Co#%o#ation an! Sub&i!ia#$

8onsolidated /tatement o. 8as1 los.or t1e year ended ecember 3), 200


8onsolidated net income $ #00,000





Patents amorti=ation )0,000

Increase in accounts payable ),000

Income less dividends 8 e!uity investee "30,000&

Increase in accounts receivable "2)0,000& 2,000

*et cash flo.s from operating acti+ities #2,000


Purc1ase o. e!uipment $"#00,000&

*et cash flo.s from in+esting acti+ities "#00,000&


8as1 received .rom lon+term note $ 200,000

Payment o. cas1 dividends 8 ma@ority ")3,000&


*et cash flo.s from financing acti+ities 43,000

Increase in cas1 .or 200 0,000

8as1 on January ) 360,000

8as1 on ecember 3) $ 430,000

))#





Indirect 4ethod


orin+ Papers .or t1e /tatement o. 8as1 los "Indirect >et1od&


8as1 los 8as1 los 8as1 los

ears *econcilin+ Items .rom Investin+ inancin+


Asset $hanges

8as1 $ 0,000

7ccounts receivable 8 net 2)0,000 e 2)0,000

Inventories 0

Plant F e!uipment 8 net 300,000 . 200,000 + #00,000

'!uity investments 30,000 l 30,000 m 60,000

Patents ")0,000& 1 )0,000

<otal asset c1an+es $ 600,000

$hanges in E"uities

7ccounts payable $ ),000 i ),000

ividends payable )3,000 )3,000

Lon+term note payable 200,000 @ 200,000

8ommon stoc 0

?t1er paidin capital 0

*etained earnin+s 3#0,000 a #00,000 c )#0,000

oncontrD interest 20% 20,000 b 40,000 d 20,000

81an+es in

e!uities $ 600,000

8onsolidated net income a #00,000 $ #00,000

oncontrollin+ interest e(pense b 40,000 40,000

Purc1ase o. plant F e!uipment + #00,000 $"#00,000&

epreciation 8 plant F e!uipment . 200,000 200,000

7morti=ation o. patents 1 )0,000 )0,000

Increase in accounts receivable e 2)0,000 "2)0,000&

Income less dividends .rom

investees m 60,000 l 30,000 "30,000&

Increase in accounts payable i ),000 ),000

*eceived cas1 .rom lon+term note @ 200,000 0 $ 200,000

Payment o. dividends 8 ma@ority c )#0,000 )3,000 ")3,000&

Payment o. dividends 8 noncontrollin+ d 20,000 "20,000&

),-#0,000 ),-#0,000 $ #2,000 $"#00,000& $ 43,000

8as1 increase .or 200 5 $#2,000 $#00,000 9 $43,000 5 $0,000D

))6



Chapter 4 117


#irect 4ethod


8onsolidated /tatement o. 8as1 los.or t1e year ended ecember 3), 200


8as1 received .rom customers $2,3-0,000

8as1 received .rom e!uity investees 30,000

8as1 paid to suppliers $),433,000

8as1 paid .or operatin+ e(penses 460,000 "),-3,000&

*et cash flo.s from operating acti+ities #2,000


Purc1ase o. e!uipment $ "#00,000&

*et cash flo.s from in+esting acti+ities "#00,000&


8as1 received .rom lon+term note $ 200,000

Payment o. cas1 dividends 8 ma@ority ")3,000&


*et cash flo.s from financing acti+ities 43,000

Increase in cas1 .or 200 0,000

8as1 on January ) 360,000

8as1 on ecember 3) $ 430,000

*econciliation o. net income to cas1 provided by

operatin+ activities:

8onsolidated net income $ #00,000




Income less dividends 8 e!uity investee "30,000&


Patents amorti=ation )0,000

Increase in accounts payable ),000

Increase in accounts receivable "2)0,000& 2,000

))




et cas1 .los .rom operatin+ activities $ #2,000

))



Chapter 4 119


#irect 4ethod


orin+ Papers .or t1e /tatement o. 8as1 los "irect >et1od&.or t1e year ended ecember 3), 200

8as1 lo 8as1 lo 8as1 lo ears *econcilin+ Items .rom Investin+ inancin+


Asset $hanges

8as1 $ 0,000

7ccounts receivable 8net 2)0,000 a 2)0,000

Inventories 0

Plant F e!uipment 8 net 300,000 b 200,000 c #00,000

'!uity investments 30,000 d 30,000

Patents ")0,000& e )0,000

<otal assetc1an+es $ 600,000

81an+es in '!uities

7ccounts payable $ ),000 . ),000

ividends payable )3,000 + )3,000

Lon+term note payable 200,000 1 200,000

*etained earnin+sC 3#0,000

oncontrDinterest 20% 20,000 i 40,000 @ 20,000

81an+es in

e!uities $ 600,000

*etained earnin+s

c1an+eC

/ales $2,600,000 a 2)0,000 $2,3-0,000

Income .rom e!uity

investees 60,000 d 30,000 30,0008ost o. +oods sold "),4#0,000& . ),000 "),433,000&

epreciation e(pense "200,000& b 200,000 0

?t1er operatin+ e(penses "40,000& e )0,000 "460,000&

oncontrollin+ interest

e(pense "40,000& i 40,000 0

ividends declared 8

Pil+rim ")#0,000& + )3,000

)3,000

*etained earnin+s

c1an+e $ 3#0,000

*eceived cas1 .rom lon+term note 1 200,000 $ 200,000

Payment o. dividends 8 ma@ority )3,000 ")3,000&

Payment o. dividends 8noncontrollin+ @ 20,000 "20,000&

Purc1ase o. e!uipment c #00,000 $"#00,000&),3,000 ),3,000 $ #2,000 $"#00,000& $ 43,000

C *etained earnin+s c1an+es replace t1e retained earnin+s account .or reconcilin+ purposesD

beams9esm_ch04

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