Chapter 07, Modern Advanced accounting-review Q & exr

CHAPTER 7CONSOLIDATED FINANCIAL STATEMENTS:

SUBSEQUENT TO DATE OF BUSINESS COMBINATION

The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 7–1 Prem Corporation (15 minutes, easy)

Preparation of three-column ledger account for parent company’s investment in wholly owned subsidiary. Working paper elimination for first year following business combination. Goodwill is involved, but is unimpaired.

Pr. 7–2 Pro Corporation (20 minutes, easy)

Parent company’s equity-method entries for operations of partially owned subsidiary. Goodwill is involved, but is unimpaired.

Pr. 7–3 Promo Corporation (30 minutes, easy)

Parent company’s journal entries for operating results of wholly owned subsidiary under equity method of accounting. Three-column ledger accounts for parent company's investment and Intercompany Investment Income accounts. Preparation of working paper elimination involving unimpaired goodwill.

Pr. 7–4 Penn Corporation (30 minutes, medium)

Given parent company’s journal entries under equity method of accounting for operating results of partially owned subsidiary and other information for first year following date of business combination, prepare working paper eliminations for parent company and subsidiary. Goodwill is involved, but is unimpaired.

Pr. 7–5 Pewter Corporation (30 minutes, medium)

Parent company’s journal entries under equity method of accounting for two partially owned subsidiaries; computation of minority interest in subsidiaries’ net assets; computation of consolidated retained earnings. No goodwill or negative goodwill is involved.

Pr. 7–6 Parks Corporation (40 minutes, medium)

Given analyses of parent company’s ledger account for investment in partially owned subsidiary, minority interest in net assets of subsidiary, and current fair value differences, reconstruct parent company’s equity-method journal entries for operating results of subsidiary for first year subsequent to date of business combination. Also, prepare working paper eliminations. Goodwill is involved, but is unimpaired.

Pr. 7–7 Paseo Corporation (55 minutes, medium)

Journal entries for parent company to record partially owned subsidiary’s operating results under equity method of accounting for first year following date of business combination. Preparation of working paper eliminations for parent company and subsidiary. Goodwill is involved, but is unimpaired.

Pr. 7–8 Pavich Corporation (60 minutes, strong)

Preparation of parent company’s equity-method journal entries for operating results of partially owned subsidiary for first two years following date of business combination. Preparation of working paper eliminations at end of each of first two years following combination, and a three-column Retained Earnings of Subsidiary ledger account of parent company. Goodwill is involved, but is unimpaired.

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 7 231

Pr. 7–9 Plumm Corporation (60 minutes, medium)

Reconstruct journal entries for parent company under equity method of accounting for first-year operating results of wholly owned subsidiary; preparation of working paper for consolidated financial statements and working paper elimination. Goodwill is involved, but is unimpaired.

Pr. 7–10 Ping Corporation (65 minutes, strong)

Parent company adjusting entries to change accounting for four-year operating results of partially owned subsidiary to equity method of accounting from cost method. Working paper for consolidated financial statements and related working paper eliminations. No goodwill is involved.

Pr. 7–11 Petal Corporation (50 minutes, strong)

Preparation of consolidated balance sheet of parent company and wholly owned subsidiary without the use of working paper for consolidated financial statements or working paper eliminations. Goodwill is involved, but is unimpaired.

ANSWERS TO REVIEW QUESTIONS

1. The statement is true because working paper eliminations under the equity method of accounting differ from those under the cost method of accounting for a subsidiary’s operations. Consolidated balances should not be, and are not, affected by the choice of an accounting method by the parent company.

2. Consolidated financial statements are superior to separate financial statements of the parent company under the equity method of accounting because the consolidated statements include all revenue, expense, asset, and liability components of the affiliated companies’ income statements and balance sheets. Parent company unconsolidated financial statements include only a single item for the parent company’s share of the subsidiary's net income or losses and a single item for the parent company's equity in the subsidiary’s net assets.

3. In addition to the usual debits and credits to revenue and expense ledger accounts, the closing entries for a parent company that uses the equity method of accounting include a credit to the Retained Earnings of Subsidiary account. The amount of the credit is the difference between the parent company’s share of the subsidiary's adjusted net income for the accounting period and its share of the subsidiary’s dividends for the period. Use of a Retained Earnings of Subsidiary account identifies the portion of the parent company’s retained earnings not available for dividends to the parent’s stockholders.

4. The difference between $5,000 (10% of the subsidiary’s reported net income) and $3,500 (the amount of the working paper elimination for the minority interest in the subsidiary’s net income) most likely results from depreciation and amortization of differences between current fair values and carrying amounts of the subsidiary's identifiable net assets on the date of the business combination.

5. Advantages that result from the use of the equity method, rather than the cost method, of accounting for a subsidiary’s operating results include the following:

(1) The equity method emphasizes the economic substance of the parent company–subsidiary relationship, consonant with financial accounting theory.

(2) The equity method permits use of parent company journal entries to reflect many items that must be included in working paper eliminations in the cost method. Formal journal entries provide a better record than do working paper notations.

(3) The equity method facilitates issuance of parent company unconsolidated financial statements, if required by the SEC.

The McGraw-Hill Companies, Inc., 2006232 Modern Advanced Accounting, 10/e

(4) Except where there are intercompany profits (gains) or losses in assets and liabilities to be consolidated, parent company net income and retained earnings under the equity method are identical to the related consolidated amounts. The equity method thus provides a useful self-checking technique.

6. No, Parnell Corporation and Plankton Company do not use the same method of accounting for their subsidiaries’ operating results. The Intercompany Dividends Revenue ledger account indicates that Parnell uses the cost method of accounting, while the Intercompany Investment Income account evidences use of the equity method of accounting by Plankton.

7. a. Intercompany Dividends Receivable 138,000Investment in Subsidiary Company Common Stock 138,000

To record declaration of dividend by subsidiary(46,000 shares x $3 a share = $138,000).

b. Intercompany Dividends Receivable 138,000Intercompany Dividends Revenue 138,000

To record declaration of dividend by subsidiary(46,000 shares x $3 a share = $138,000).

8. A Retained Earnings of Subsidiary ledger account is required for a parent company that uses the equity method of accounting for the subsidiary’s operations. In the equity method of accounting, the parent’s share of net income of the subsidiary is recognized as income by the parent company; thus, the entire income from the subsidiary recognized by the parent company is not available for dividends to parent company stockholders. A Retained Earnings of Subsidiary ledger account thus is required for a parent company that uses the equity method of accounting for a subsidiary’s operations.

SOLUTIONS TO EXERCISES

Ex. 7–1 1. d 9. a2. d 10. d3. d 11. c ($80,000 x 0.80 = $64,000)4. b 12. b ($1,600,000 + $80,000 = $1,680,000)5. c 13. c6. c 14. a7. c 15. a8. b 16. a

Ex. 7–2 Journal entries for Pence Corporation, year ended Sept. 30, 2006:2006Sept. 1 Intercompany Dividends Receivable 80,000

Investment in Spence Company Common Stock 80,000

18 Cash 80,000Intercompany Dividends Receivable 80,000

30 Investment in Spence Company Common Stock 980,000Intercompany Investment Income 980,000


30 Intercompany Investment Income($20,000 + $12,000 + $8,000) 40,000

Investment in Spence Company Common Stock 40,000

Ex. 7–3 The most logical explanation for each of the transactions or events follows:

(1) The September 1, 2005, $630,000 debit to Investment in Subsidiary Common Stock is the cost of the parent company’s investment in the subsidiary, acquired in a business combination.

(2) The August 16, 2006, debit to Intercompany Dividends Receivable and credit to Investment in Subsidiary Common Stock in the amount of $36,000 is the parent company’s share of dividends declared by the subsidiary on that date.

(3) The August 27, 2006, credit to Intercompany Dividends Receivable in the amount of $36,000 shows the collection of the dividend paid by the subsidiary.

(4) The August 31, 2006, debit to Investment in Subsidiary Common Stock and credit to Intercompany Investment Income in the amount of $72,000 is the parent company's share of the subsidiary’s reported net income for the year ended on that date.

(5) The August 31, 2006, debit to Intercompany Investment Income and credit to Investment in Subsidiary Common Stock in the amount of $5,000 is the parent company’s share of the depreciation and amortization of the differences between current fair values and carrying amounts of the subsidiary’s identifiable net assets on the date of the business combination.

Ex. 7–4 PRISTINE CORPORATION AND SUBSIDIARYWorking Paper Elimination

May 31, 2006

Common StockSuperb 100,000Additional Paid-in CapitalSuperb 200,000Retained EarningsSuperb 450,000Intercompany Investment IncomePristine

($80,000 – $65,000) 15,000LandSuperb 40,000Building (net) Superb ($50,000 – $5,000) 45,000GoodwillSuperb 50,000Cost of Goods SoldSuperb ($60,000 + $5,000) 65,000

Investment in Superb Company Common StockPristine($950,000 + $80,000 – $65,000 – $30,000) 935,000

Dividends DeclaredSuperb 30,000


Ex. 7–5 POLAR CORPORATION AND SUBSIDIARYWorking Paper Elimination

July 31, 2006

(a) Common Stock, no parSolar 50,000Retained EarningsSolar 250,000Intercompany Investment IncomePolar($50,000 – $30,000 – $12,000) 8,000

Plant Assets (net)Solar 108,000GoodwillSolar 20,000Cost of Goods SoldSolar ($30,000 + $12,000) 42,000

Investment in Solar Company Common Stock Polar ($470,000 + $8,000 – $20,000) 458,000Dividends DeclaredSolar 20,000

Ex. 7–6 PARO CORPORATION AND SUBSIDIARYWorking Paper Elimination

February 28, 2006

Common Stock Savo 50,000Retained EarningsSavo 80,000Intercompany Investment IncomeParo ($60,000 – $16,000) 44,000Plant Assets (net)Savo ($60,000 – $6,000) 54,000GoodwillSavo 10,000Cost of Goods SoldSavo ($10,000 + $6,000) 16,000

Investment in Savo Company Common Stock Paro ($210,000 + $60,000 – $20,000 – $16,000) 234,000Dividends DeclaredSavo 20,000

Ex. 7–7 a. Journal entries (explanations omitted) for Parry Corporation, Oct. 31, 2006:

Investment in Samuel Company Common Stock 50,000Intercompany Investment Income 50,000

Intercompany Investment Income 25,000Investment in Samuel Company Common Stock 25,000

Intercompany Dividends Receivable 20,000Investment in Samuel Company Common Stock 20,000

b. Working paper elimination (explanation omitted) for Parry Corporation and subsidiary, Oct. 31, 2006:

Common StockSamuel 100,000Additional Paid-in CapitalSamuel 150,000Retained EarningsSamuel 200,000Plant Assets (net)Samuel ($250,000 – $25,000) 225,000GoodwillSamuel 60,000Intercompany Investment IncomeParry ($50,000 – $25,000) 25,000Cost of Goods SoldSamuel 25,000

Investment in Samuel Company Common StockParry($760,000 + $50,000 – $25,000 – $20,000) 765,000

Dividends DeclaredSamuel 20,000

Ex. 7–8 a. Journal entries for Pulp Corporation, Jan. 31, 2006:


Investment in Stump Company Common Stock 240,000Intercompany Investment Income 240,000

Cash 120,000Investment in Stump Company Common Stock 120,000

Intercompany Investment Income ($20,000 + $20,000) 40,000Investment in Stump Company Common Stock 40,000

b. PULP CORPORATION AND SUBSIDIARYWorking Paper Elimination

January 31, 2006

Common Stock, no par or stated valueStump 100,000Retained EarningsStump 180,000Intercompany Investment IncomePulp ($240,000 – $40,000) 200,000Plant AssetsStump ($100,000 – $20,000) 80,000GoodwillStump 40,000Cost of Goods SoldStump ($20,000 + $20,000) 40,000

Investment in Stump Company Common StockPulp($440,000 + $240,000 – $120,000 – $40,000) 520,000

Dividends DeclaredStump 120,000

Ex. 7–9 Retained Earnings of Subsidiary

Date Explanation Debit Credit Balance2006Dec. 31 Close net income not available for

dividends ($45,500 – $20,000) 25,500 25,500 cr2007Dec. 31 Close net income not available for

dividends ($85,500 – $50,000) 35,500 61,000 cr

Ex. 7–10 Computation of balance of Pitt Corporation’s Intercompany Investment Income ledger account, Mar. 31, 2006:

Pitt’s share of Scow’s net loss for Year 2006 ($130,000 x 0.90) $117,000Adjustments -0 - *Pitt’s debit balance of the Intercompany Investment Income account $117,000

*Impairment of goodwill attributable to a business combination with a partially owned subsidiary is debited to the parent company’s Impairment Loss ledger account.

Ex. 7–11 Balance of Ply Corporation’s Investment in Spade Company Common Stock ledger account, Dec. 31, 2006:

Cost of investment, Jan. 2, 2006 $345,000Add: Ply’s share of Spade’s net income (Intercompany Investment Income

account balance) ($160,000 x 0.75) 120,000Less: Dividends declared by subsidiary (60,000 ) Balance, Dec. 31, 2006 $405,000


Ex. 7–12 Consolidated retained earnings of Plain Corporation and subsidiary, Dec. 31, 2006:

Plain Corporation’s Retained Earnings ledger account balance, Jan. 2, 2006 $500,000Add: Plain’s net income, year ended Dec. 31, 2006 200,000 *Subtotal $700,000Less: Plain’s dividends, year ended Dec. 31, 2006 50,000 Total of Plain’s Retained Earnings and Retained Earnings of Subsidiary post-closing ledger account balances, Dec. 31, 2006 (equal to consolidated retained earnings) $650,000 *Includes Plain’s share of Sano’s Year 2006 net income under the equity method of accounting.

Ex. 7–13 Consolidated net income of Pinson Corporation and subsidiary for Year 2006:

Net income of Pinson Corporation, exclusive of intercompany investment income $145,000Add: Pinson’s share of net income of Solomon ($120,000 x 0.90) 108,000Consolidated net income $253,000

Ex. 7–14 a. Journal entries for Pallid Corporation, Jan. 31, 2006:

Investment in Sallow Company Common Stock ($120,000 x 0.85) 102,000Intercompany Investment Income 102,000

Intercompany Dividends Receivable ($60,000 x 0.85) 51,000Investment in Sallow Company Common Stock 51,000

Intercompany Investment Income [($10,000 + $5,000) x 0.85] 12,750Investment in Sallow Company Common Stock 12,750

b. PALLID CORPORATION AND SUBSIDIARYWorking Paper Eliminations

January 31, 2006

(a) Common Stock, no par or stated valueSallow 50,000Retained EarningsSallow 90,000Intercompany Investment IncomePallid($102,000 – $12,750) 89,250

Plant AssetsSallow ($50,000 – $5,000) 45,000GoodwillPallid 20,000Cost of Goods SoldSallow ($10,000 + $5,000) 15,000

Investment in Sallow Company Common StockPallid ($190,000 + $102,000 – $51,000

– $12,750) 228,250Dividends DeclaredSallow 60,000Minority Interest in Net Assets of Subsidiary

[$30,000 – ($60,000 x 0.15)] 21,000

(b) Minority Interest in Net Income of Subsidiary [($120,000 – $15,000) x 0.15] 15,750

Minority Interest in Net Assets of Subsidiary 15,750


Ex. 7–15 Statement of retained earnings section of working paper for consolidated financial statements of Putter Corporation and subsidiary, year ended May 31, 2007:

Putter Corporation

Simmer Company

Eliminations increase

(decrease) ConsolidatedRetained earnings,

beginning of year 692,000 150,000 (a) (122,000) 720,000Net income to parent 180,000 120,000 (120,000) 180,000

Subtotal 872,000 270,000 (242,000) 900,000Dividends declared 90,000 50,000 (a) (50,000) 90,000Retained earnings,

end of year 782,000 220,000 (192,000 ) 810,000

Ex. 7–16 Closing entries for Parton Corporation, May 31, 2006:

Sales 840,000Intercompany Investment Income 95,000

Income Summary 935,000

Income Summary 590,000Cost of Goods Sold 378,000Operating Expenses and Income Taxes Expense 212,000

Income Summary ($935,000 – $590,000) 345,000Retained Earnings of Subsidiary ($95,000 – $60,000) 35,000Retained Earnings ($345,000 – $35,000) 310,000

Retained Earnings 50,000Dividends Declared 50,000

Ex. 7–17 a. Balance of Investment in Salisbury Company Common Stock ledger account, Sept. 30, 2006 $265,000

Add: Putnam’s share of Salisbury’s net income ($50,000 x 0.80) 40,000

Subtotal $305,000Less: Putnam’s share of amortization of current fair value

difference ($4,500 x 0.80) $ 3,600Putnam’s share of dividends declared by Salisbury

($18,750 x 0.80) 15,000 18,600Balance of Investment in Salisbury Company Common Stock

account, Sept. 30, 2007 $286,400

b. Balance of Intercompany Investment Income ledger account, Sept. 30, 2007 ($40,000 – $3,600) $ 36,400

c. Amount of closing entry to Retained Earnings of Subsidiary ledger account, Sept. 30, 2007 ($36,400 – $15,000) $ 21,400

d. Minority interest in net income of subsidiary, year ended Sept. 30, 2007 [($50,000 – $4,500) x 0.20] $ 9,100

e. Minority interest in net assets of subsidiary, Sept. 30, 2007 [($60,0000 + $9,100 – ($18,750 x 0.20)] $ 65,350

CASES

Case 7–1 Rebuttals to each of the chief accountant's arguments are as follows:


(1) Because consolidated financial statements disregard legal form of the affiliated corporations in favor of economic substance of the parent company–subsidiary relationship, there is no reason for the parent company to use a method of accounting for the subsidiary’s operations that emphasizes legal form.

(2) The economic unit concept of consolidated financial statements treats the minority interest in a subsidiary’s net assets as a part of stockholders’ equity; thus, there is no need to use a method of accounting that emphasizes legal separateness of parent company and subsidiary. The presence of a minority interest does not preclude the preparation of consolidated financial statements.

(3) Although the Intercompany Investment Income ledger account theoretically does not meet the definition of realized revenue, it is consistent with the accrual basis of accounting in that it permits the parent company to recognize the subsidiary’s operating results in the parent company’s income statement. Rigid adherence to the revenue realization principle should not preclude accounting for economic substance of events.

(4) Use of a Retained Earnings of Subsidiary ledger account to segregate net income of a subsidiary not paid to the parent company as dividends safeguards against illegal dividend payments by the parent company.

(5) The fact that journal entries in ledger accounts are used in the equity method of accounting to record amortization of differences between current fair values and carrying amounts of the subsidiary’s net assets is an argument in favor of the equity method of accounting. Formal accounting records provide a better history than do working paper notations. Adherence to the historical-cost valuation principle should not bar the use of a preferable accounting method.

Case 7–2 The literature researched by Nancy Wade is as follows:

FAS 142, ¶ 11. The accounting for a recognized intangible asset is based on its useful life to the reporting entity. An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. The estimate of the useful life of an intangible asset to an entity shall be based on an analysis of all pertinent factors, in particular:

a. The expected use of the asset by entity.

b. The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate (such as mineral rights to depleting assets).

c. Any legal, regulatory, or contractual provisions that may limit the useful life.

d. Any legal, regulatory, or contractual provisions that enable renewal or extension of the asset’s legal or contractual life without substantial cost (provide there is evidence to support renewal or extension and renewal or extension can be accomplished without material modifications of the existing terms and conditions).

e. The effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels).

f. The level of maintenance expenditures required to obtain the expected future cash flows from the asset (for example, a material level of required maintenance in relation to the carrying amount of the asset may suggest a very limited useful life).

If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite. The term indefinite does not mean infinite.

APB 20, ¶ 10. Changes in estimates used in accounting are necessary consequences of periodic presentations of financial statements. Preparing financial statements requires estimating the effects of future events. Examples of items for which estimates are necessary


are uncollectible receivables, inventory obsolescence, service lives and salvage values of depreciable assets, warranty costs, periods benefited by a deferred cost, and recoverable mineral reserves. Future events and their effects cannot be perceived with certainty; estimating, therefore, requires the exercise of judgment. Thus accounting estimates change as new events occur, as more experience is acquired, or as additional information is obtained.

APB 20, ¶ 31. The [Accounting Principles] Board concludes that the effect of a change in accounting estimate should be accounted for in (a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both. A change in an estimate should not be accounted for by restating amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods.

APB 20, ¶ 33. Disclosure. The effect on income before extraordinary items, net income and related per share amounts of the current period should be disclosed for a change in estimate that affects several future periods, such as a change in service lives of depreciable assets or actuarial assumptions affecting pension costs. Disclosure of the effect on those income statement amounts is not necessary for estimates made each period in the ordinary course of accounting for items such as uncollectible accounts or inventory obsolescence; however, disclosure is recommended if the effect of a change in the estimate is material.

AU 342.05 Management is responsible for establishing a process for preparing accounting estimates. Although the process may not be documented or formally applied, it normally consists ofa. Identifying situations for which accounting estimates are required.

b. Identifying the relevant factors that may affect the accounting estimate.

c. Accumulating relevant, sufficient, and reliable data on which to base the estimate.

d. Developing assumptions that represent management's judgment of the most likely circumstances and events with respect to the relevant factors.

e. Determining the estimated amount based on the assumptions and other relevant factors.

f. Determining that the accounting estimate is presented in conformity with applicable accounting principles and that disclosure is adequate.

The risk of material misstatement of accounting estimates normally varies with the complexity and subjectivity associated with the process, the availability and reliability of relevant data, the number and significance of assumptions that are made, and the degree of uncertainty associated with the assumptions.

AU 420.14 Accounting estimates (such as service lives and salvage values of depreciable assets and provisions for warranty costs, uncollectible receivables, and inventory obsolescence) are necessary in the preparation of financial statements. Accounting estimates change as new events occur and as additional experience and information are acquired. This type of accounting change is required by altered conditions that affect comparability but do not involve the consistency standard. The independent auditor, in addition to satisfying himself with respect to the conditions giving rise to the change in accounting estimate, should satisfy himself that the change does not include the effect of a change in accounting principle. Provided he is so satisfied, he need not comment on the change in his report. However, an accounting change of this type having a material effect on the financial statements may require disclosure in a note to the financial statements.

A review of the foregoing literature may lead Nancy Wade to respond to John Raymond’s request as follows:

(1) Unless, per APB 20, paragraph 10, new events have occurred, more experience has been acquired, or additional information has been obtained that would support an extension of the composite economic life of Selvidge Company’s depreciable plant assets to ten years from five years, the change should not be made. This is especially true if the five-year economic life was used in the pro forma data for the business combination reported in Punjab Corporation’s consolidated financial statements for the year ended December 31,


2005 (see Chapter 5 of the text). The requirements for accounting estimates set forth in AU 342.05 leave no room for arbitrary extensions of economic lives of plant assets.

(2) FAS 142, paragraph 11c, makes it clear that legal life is an outer limit on the amortization period for intangible assets, not a conventional limit. Unless favorable changes have occurred in forecasts of obsolescence, demand, competition, or other economic factors (FAS 142, paragraph 11e), there is no basis for an arbitrary extension of the economic life of Selvidge’s patent.

Overall, Nancy Wade should resist John Raymond’s efforts to enhance the consolidated operating results of Punjab Corporation and Selvidge Company by unwarranted changes to or adoptions of excessive economic lives for depreciable and amortizable assets.

Case 7–3 The view of student Carl is supportable; that of student Rachel is not. Once the board of directors of the partially owned subsidiary has declared a dividend, liabilities to the parent company and to minority stockholders must be recognized. The liabilities for declared but unpaid dividends clearly meet the provisions of Statement of Financial Accounting Concepts No. 6, “Elements of Financial Statements,” paragraph 35 of which defines liabilities as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” Taking student Rachel’s view to the extreme, dividends payable to the parent company of a partially owned subsidiary also should be displayed with consolidated stockholders’ equity.


15 Minutes, EasyPrem Corporation Pr. 7–1

a. Investment in Supp Company Stock

Date Explanation Debit Credit Balance

20 05

Dec. 31 Balance 1 9 2 0 0 0 dr

20 06

Dec. 8 Dividend declared by Supp 6 0 0 0 1 8 6 0 0 0 dr

31 Net income of Supp 3 0 0 0 0 2 1 6 0 0 0 dr

31 Amortization ($20,000 + $6,000) 2 6 0 0 0 1 9 0 0 0 0 dr

b. Prem Corporation and Subsidiary

Working Paper Elimination

December 31, 2006

(a) Common Stock—Supp 1 0 0 0 0

Additional Paid-in Capital—Supp 4 0 0 0 0

Retained Earnings—Supp 5 0 0 0 0

Intercompany Investment Income—Prem

($30,000 – $26,000) 4 0 0 0

Plant Assets (net)—Supp ($60,000 – $6,000) 5 4 0 0 0

Goodwill—Supp 1 2 0 0 0

Cost of Goods Sold—Supp ($20,000 + $6,000) 2 6 0 0 0

Investment in Supp Company Common

Stock—Prem 1 9 0 0 0 0

Dividends Declared—Supp 6 0 0 0

To carry out the following:

(1) Eliminate intercompany investment and equity

accounts of subsidiary at beginning of year, and

subsidiary dividend.

(2) Provide for Year 2006 depreciation and

amortization on differences between combination

date current fair values and carrying amounts of

Supp’s net assets.

(3) Allocate unamortized differences between

combination date current fair values and carrying

amounts of Supp’s net assets to appropriate

assets.

(Income tax effects are disregarded.)


20 Minutes, EasyPro Corporation Pr. 7–2

Pro Corporation

Journal Entries

20 06

Sept 5 Intercompany Dividends Receivable [(100,000 x $1)

x 0.80] 8 0 0 0 0

Investment in Soy Company Common Stock 8 0 0 0 0

To record dividend declared by Soy Company, payable

September 26, 2006.

26 Cash 8 0 0 0 0

Intercompany Dividends Receivable 8 0 0 0 0

To record receipt of dividend from Soy Company.

30 Investment in Soy, Company Common Stock

($300,000 x 0.80) 2 4 0 0 0 0

Intercompany Investment Income 2 4 0 0 0 0

To record 80% of net income of Soy Company for the

year ended September 30, 2006. (Income tax effects

are disregarded.)

30 Intercompany Investment Income [($60,000 + $8,000

+ $4,000) x 0.80] 5 7 6 0 0

Investment in Soy Company Common Stock 5 7 6 0 0

To amortize differences between current fair values

and carrying amounts of Soy Company’s identifiable

net assets on Sept. 30, 2005. (Income tax effects are

disregarded.)


30 Minutes, EasyPromo Corporation Pr. 7–3

a. Promo Corporation

Journal Entries

20 06

Mar 1 Intercompany Dividends Receivable (50,000 x $0.40) 2 0 0 0 0

Investment in Sanz Company Common Stock 2 0 0 0 0

To record dividend declared by Sanz Company,

payable Mar. 15, 2006.

15 Cash 2 0 0 0 0

Intercompany Dividends Receivable 2 0 0 0 0

To record receipt of dividend from Sanz Company.

31 Investment in Sanz Company Common Stock 6 0 0 0 0

Intercompany Investment Income 6 0 0 0 0

To record 100% of Sanz Company’s net income for

the year ended Mar. 31, 2006. (Income tax effects are

disregarded.)

31 Intercompany Investment Income 2 8 0 0 0

Investment in Sanz Company Common Stock 2 8 0 0 0


and carrying amounts of Sanz Company’s identifiable

net assets on Mar. 31, 2006, as follows:

Inventories—to cost of goods sold $20,000

Other plant assets—depreciation

($80,000 10) 8,000

Total amortization applicable to

Year 2006 $28,000


b. Investment in Sanz Company Common Stock


20 05

Mar 31 Balance 4 9 0 0 0 0 dr

20 06

Mar 1 Dividend declared by Sanz 2 0 0 0 0 4 7 0 0 0 0 dr

31 Net income of Sanz 6 0 0 0 0 5 3 0 0 0 0 dr

31 Amortization of differences between

current fair values and carrying

amounts of Sanz’s identifiable

net assets 2 8 0 0 0 5 0 2 0 0 0 dr

Intercompany Investment Income


20 06

Mar 31 Net income of Sanz 6 0 0 0 0 6 0 0 0 0 cr

31 Amortization of differences between

current fair values and carrying

amounts of Sanz’s identifiable

net assets 2 8 0 0 0 3 2 0 0 0 cr


Promo Corporation Pr. 7–3

c. Promo Corporation

Working Paper Elimination

March 31, 2006

(a) Common Stock, $1 par—Sanz 5 0 0 0 0

Additional Paid-In Capital—Sanz 1 0 0 0 0 0

Retained Earnings—Sanz 1 5 0 0 0 0

Intercompany Investment Income—Promo 3 2 0 0 0

Land—Sanz 5 0 0 0 0

Other Plant Assets—Sanz ($80,000 – $8,000) 7 2 0 0 0

Goodwill—Sanz 4 0 0 0 0

Cost of Goods Sold—Sanz 2 0 0 0 0

Operating Expenses—Sanz 8 0 0 0

Investment in Sanz Company Common

Stock—Promo 5 0 2 0 0 0

Dividends Declared—Sanz 2 0 0 0 0






amortization of differences between combination


Sanz’s identifiable net assets to appropriate

assets.



30 Minutes, MediumPenn Corporation Pr. 7–4

Penn Corporation and SubsidiaryWorking Paper Eliminations

October 31, 2006(a) Common Stock—Soper 2 0 0 0 0 (1)

Additional Paid-in Capital—Soper 6 0 0 0 0 (2)

Retained Earnings—Soper 7 0 0 0 0 (3)

Intercompany Investment Income—Penn ($40,000 –

$22,400) 1 7 6 0 0

Plant Assets (net)—Soper ($80,000 – $8,000) 7 2 0 0 0

Goodwill (net)—Penn 4 0 0 0 0

Cost of Goods Sold—Soper

[$20,000 + ($8,000 x 0.75)] 2 6 0 0 0

Operating Expenses—Soper ($8,000 x 0.25) 2 0 0 0

Investment in Soper Company Common

Stock—Penn ($240,000 – $16,000 +

$40,000 – $22,400) 2 4 1 6 0 0

Dividends Declared—Soper ($16,000 0.80) 2 0 0 0 0

Minority Interest in Net Assets of Subsidiary

[($250,000 x 0.20) – ($20,000 x 0.20)] 4 6 0 0 0




subsidiary dividends.




Soper’s identifiable net assets.



amounts of Soper’s net assets to appropriate

assets.

(4) Establish minority interest in net assets of

subsidiary at beginning of year, less minority

interest share of dividends declared by subsidiary

during year.


(b) Minority Interest in Net Income of Subsidiary

($17,600 x 20%/80%) 4 4 0 0

Minority Interest in Net Assets of Subsidiary 4 4 0 0

To establish minority interest in subsidiary’s adjusted

net income for Year 2006.

Computations:

(1) $50,000 0.20 = $250,000; $250,000 – ($20,000 + $80,000) = $150,000 stockholders’ equity on

Oct. 31, 2005; $150,000 + $50,000 – $20,000 = $180,000 stockholders’ equity on Oct. 31, 2006;

$180,000 x 1/9 = $20,000

(2) $180,000 x 3/9 = $60,000

(3) $180,000 x 5/9 = $100,000; $100,000 – $50,000 + $20,000 = $70,000


30 Minutes, EasyPewter Corporation Pr. 7–5

a. Pewter Corporation

Journal Entries

(1)

20 06

Jan 2 Investment in Stewart Company Common Stock

(800 x $70) 5 6 0 0 0

Cash 5 6 0 0 0

To record payment of cash for 80% of the outstanding

common stock of Stewart Company in a business

combination.

2 Investment in Skate Company Common Stock (2,100

x $40) 8 4 0 0 0

Cash 8 4 0 0 0

To record payment of cash for 70% of the outstanding

common stock of Skate Company in a business

combination.

(2)Dec 31 Investment in Stewart Company Common Stock

($36,000 x 0.80) 2 8 8 0 0

Investment in Skate Company Common

Stock ($12,000 x 0.70) 8 4 0 0


To record share of subsidiaries’ net income or net loss

for Year 2006.

(3)

31 Intercompany Dividends Receivable 1 9 1 0 0

Investment in Stewart Company Common

Stock ($16,000 x 0.80) 1 2 8 0 0

Investment in Skate Company Common

Stock ($9,000 x 0.70) 6 3 0 0

To record declaration of dividends by subsidiaries

during Year 2006.

b. Pewter Corporation

Computation of Minority Interest in Net Assets of Subsidiaries

December 31, 2006

Stewart Skate

Company Company

Stockholders’ equity of subsidiaries, Dec. 31, 2006:

Common stock $ 5 0 0 0 0 $ 6 0 0 0 0

Additional paid-in capital 2 0 0 0 0

Retained earnings 4 0 0 0 0 1 9 0 0 0

Total stockholders’ equity $ 9 0 0 0 0 $ 9 9 0 0 0

Minority interest percentage 0 2 0 0 3 0

Minority interest in net assets of subsidiaries $ 1 8 0 0 0 $ 2 9 7 0 0


. .

Pewter Corporation (concluded) Pr. 7–5

c. Pewter Corporation

Computation of Consolidated Retained Earnings

December 31, 2006

Retained earnings of Pewter Corporation, before giving

effect to journal entry in a (2) on page 247. $ 3 0 4 6 0 0

Add: Effect of journal entry in a (2) 2 0 4 0 0

Retained earnings of Pewter Corporation, reflecting

equity method of accounting for subsidiaries’

operations (equal to consolidated retained earnings) $ 3 2 5 0 0 0


40 Minutes, MediumParks Corporation Pr. 7–6

a. Parks Corporation

Journal Entries

20 06

May 31 Intercompany Dividends Receivable 3 0 0 0 0

Investment in State Company Common Stock 3 0 0 0 0

To record dividends declared by State Company.

31 Investment in State Company Common Stock 8 0 0 0 0


To record 80% of State Company’s net income for the

year ended May 31, 2006. (Income tax effects are

disregarded.)

31 Intercompany Investment Income 7 2 0 0

Investment in State Company Common Stock 7 2 0 0

To amortize difference between current fair values and

carrying amounts of State Company’s identifiable net

assets on May 31, 2005 ($9,000 x 0.80 = $7,200).



Parks Corporation (concluded) Pr. 7–6

b. Parks Corporation and Subsidiary

Working Paper Eliminations

May 31, 2006

(a) Common Stock—State (10,000 x $1) 1 0 0 0 0

Additional Paid-in Capital—State (10,000 x $4) 4 0 0 0 0

Retained Earnings—State ($500,000 – $50,000) 4 5 0 0 0 0

Intercompany Investment Income—Parks 7 2 8 0 0

Land—State 3 9 0 0 0

Buildings—State 3 2 0 0 0

Machinery—State 2 0 0 0 0

Goodwill—Parks 5 0 0 0 0

Cost of Goods Sold—State 9 0 0 0

Investment in State Company Common

Stock—Parks 5 7 2 8 0 0

Dividends Declared—State ($30,000 +

$7,500) 3 7 5 0 0


($120,000 – $7,500) 1 1 2 5 0 0





(2) Provide for Year 2006 depreciation on differences

between combination date current fair values and

carrying amounts of State’s identifiable net assets.



amounts of State’s net assets to appropriate

accounts.




during year.


(b) Minority Interest in Net Income of Subsidiary 1 8 2 0 0

Minority Interest in Net Assets of Subsidiary 1 8 2 0 0


net income for Year 2006. (20,000 – 1,800)


55 Minutes, MediumPaseo Corporation Pr. 7–7

a. Paseo Corporation

Journal Entries

20 06

Mar 31 Investment in Steppe Company Common Stock

[(25,000 x $1.20) x 0.82] 2 4 6 0 0


To record 82% of Steppe Company’s net income for

the year ended Mar. 31, 2006. (Income tax effects

are disregarded.)

31 Intercompany Investment Income 6 1 5 0

Investment in Steppe Company Common

Stock 6 1 5 0

To amortize differences between Steppe Company’s

identifiable assets’ current fair value and carrying

amounts on Mar. 31, 2005, as follows:

Building—depreciation ($50,000 10) $5,000

Patent—amortization ($20,000 8) 2,500

Total differences applicable to year 2006 $7,500

Amortization for Year 2006 ($7,500 x 0.82) $6,150



Paseo Corporation (concluded) Pr. 7–7

b. Paseo Corporation and Subsidiary


March 31, 2006

(a) Common Stock—Steppe 5 0 0 0 0

Additional Paid-in Capital—Steppe 7 5 0 0 0

Retained Earnings—Steppe 1 3 5 0 0 0

Intercompany Investment Income—Paseo ($24,600 –

$6,150) 1 8 4 5 0

Land—Steppe 2 0 0 0 0

Building (net)—Steppe ($50,000 – $5,000) 4 5 0 0 0

Patent (net)—Steppe ($20,000 – $2,500) 1 7 5 0 0

Goodwill (net)—Paseo [$328,000 – ($350,000 x 0.82)] 4 1 0 0 0

Cost of Goods Sold—Steppe 5 0 0 0

Operating Expenses—Steppe 2 5 0 0

Investment in Steppe Company Common

Stock—Paseo 3 4 6 4 5 0


($350,000 x 0.18) 6 3 0 0 0



accounts of subsidiary at beginning of year.



date current fair values and carrying amounts

of Steppe Company’s identifiable assets.



amounts of Steppe’s net assets to appropriate

assets.


subsidiary at beginning of year.


(b) Minority Interest in Net Income of Subsidiary 4 0 5 0



net income for Year 2006 as follows:

Net income of subsidiary $30,000

Less: Net reduction in elimination

(a) above 7,500

Adjusted net income of subsidiary $22,500

Minority interest share: $22,500 x 0.18 $ 4,050


60 Minutes, StrongPavich Corporation Pr. 7–8

a. Pavich Corporation

Journal Entries

20 06Sept 30 Cash ($10,000 x 0.75) 7 5 0 0

Investment in Sisler Company Common Stock 7 5 0 0

To record dividend received from Sisler Company.

30 Investment in Sisler Company Common Stock

($80,000 x 0.75) 6 0 0 0 0


To record 75% of Sisler Company’s net income for the

year ended Sept. 30, 2006. (Income tax effects are

disregarded.)

30 Intercompany Investment Income [($30,000 + $5,000

+ $4,000) x 0.75] 2 9 2 5 0

Investment in Sisler Company Common Stock 2 9 2 5 0


and carrying amounts of Sisler Company’s identifiable

net assets on Oct. 1, 2005. (Income tax effects are

disregarded.)

20 07

Sept 30 Cash ($75,000 x 0.75) 5 6 2 5 0

Investment in Sisler Company Common Stock 5 6 2 5 0

To record dividend received from Sisler Company.

30 Investment in Sisler Company Common Stock

($120,000 x 0.75) 9 0 0 0 0


To record 75% of Sisler Company’s net income for the

year ended Sept. 30, 2007. (Income tax effects are

disregarded.)

30 Intercompany Investment Income [($5,000 + $4,000)

x 0.75] 6 7 5 0

Investment in Sisler Company Common Stock 6 7 5 0


and carrying amounts of Sisler Company’s identifiable

net assets on Oct. 1, 2005. (Income tax effects are

disregarded.)


Pavich Corporation (continued) Pr. 7–8

b. Pavich Corporation and Subsidiary


September 30, 2006

(a) Common Stock—Sisler 2 5 0 0 0 0

Additional Paid-in Capital—Sisler 1 0 0 0 0 0

Retained Earnings—Sisler 2 0 0 0 0 0

Intercompany Investment Income—Pavich

($60,000 – $29,250) 3 0 7 5 0

Plant Assets (net)—Sisler ($50,000 – $5,000) 4 5 0 0 0

Patents (net)—Sisler ($20,000 – $4,000) 1 6 0 0 0

Goodwill—Pavich [$547,500 – ($650,000 x 0.75)] 6 0 0 0 0

Cost of Goods Sold—Sisler ($30,000 + $5,000) 3 5 0 0 0

Operating Expenses—Sisler 4 0 0 0

Investment in Sisler Company Common Stock—

Pavich ($547,500 – $7,500 + $60,000 –

$29,250) 5 7 0 7 5 0

Dividends Declared—Sisler 1 0 0 0 0


[($650,000 x 0.25) – ($10,000 x 0.25)] 1 6 0 0 0 0



accounts of subsidiary at beginning of year,

and subsidiary dividend.

(2) Provide for Year 2006 depreciation and amortiza-

tion on differences between combination date

current fair values and carrying amounts of Sisler’s

identifiable net assets.



amounts of Sisler’s net assets to appropriate

accounts.




during year.



[($80,000 – $39,000) x 0.25] 1 0 2 5 0



net income for Year 2006.


Pavich Corporation (continued) Pr. 7–8

Pavich Corporation and Subsidiary


September 30, 2007

(a) Common Stock—Sisler 2 5 0 0 0 0

Additional Paid-in Capital—Sisler 1 0 0 0 0 0

Retained Earnings—Sisler ($200,000 + $80,000 –

$10,000 – $23,250) 2 4 6 7 5 0

Retained Earnings of Subsidiary—Pavich ($30,750 –

$7,500) 2 3 2 5 0

Intercompany Investment Income—Pavich ($90,000 –

$6,750) 8 3 2 5 0

Plant Assets (net)—Sisler ($45,000 – $5,000) 4 0 0 0 0

Patents (net)—Sisler ($16,000 – $4,000) 1 2 0 0 0

Goodwill—Pavich 6 0 0 0 0

Cost of Goods Sold—Sisler 5 0 0 0

Operating Expenses—Sisler 4 0 0 0

Investment in Sisler Company Common Stock—

Pavich ($570,750 – $56,250 + $90,000 – $6,750) 5 9 7 7 5 0

Dividends Declared—Sisler 7 5 0 0 0


[($160,000 + $10,250) – ($75,000 x 0.25)] 1 5 1 5 0 0



accounts of subsidiary at beginning of year and


(2) Provide for Year 2007 depreciation and amortiza-

tion on differences between combination date

current fair values and carrying amounts of Sisler’s

identifiable net assets.



amounts of Sisler’s net assets to appropriate

accounts.




during year.



[($120,000 – $9,000) x 0.25] 2 7 7 5 0


To establish minority interest in subsidiary’s net

income for Year 2007.


Pavich Corporation (concluded) Pr. 7–8

c. Retained Earnings of Subsidiary


20 06

Sept 30 Close net income not available

for dividends ($30,750 – $7,500) 2 3 2 5 0 2 3 2 5 0 cr

20 07

Sept 30 Close net income not available

for dividends ($83,250 – $56,250) 2 7 0 0 0 5 0 2 5 0 cr


60 Minutes, MediumPlumm Corporation Pr. 7–9

a. Plumm Corporation

Journal Entries

20 06

Nov 30 Investment in Stamm Company Common Stock 9 0 0 0 0


To record 100% of Stamm Company’s net income for

the year ended Nov. 30, 2006.

30 Intercompany Investment Income 2 0 0 0 0

Investment in Stamm Company Common Stock 2 0 0 0 0

To amortize differences between Stamm Company’s

assets’ current fair values and carrying amounts on

Nov. 30, 2005 as follows:

Inventories—to cost of goods sold $20,000


30 Cash 3 0 0 0 0

Investment in Stamm Company Common Stock 3 0 0 0 0

To record receipt of dividends from Stamm Company

during Year 2006.

b. Plumm Corporation and Subsidiary


November 30, 2006

(a) Common Stock—Stamm 8 0 0 0 0

Additional Paid-in Capital—Stamm 2 0 0 0 0 0

Retained Earnings—Stamm 2 2 0 0 0 0

Intercompany Investment Income—Plumm 7 0 0 0 0

Cost of Goods Sold—Stamm 2 0 0 0 0

Goodwill—Stamm 4 0 0 0 0

Investment in Stamm Company Common

Stock—Plumm 6 0 0 0 0 0

Dividends Declared—Stamm 3 0 0 0 0


(1) Eliminate intercompany investment and equtiy

accounts of subsidiary at beginning of Year 2006

and subsidiary dividends.

(2) Provide for Year 2006 amortization of differences

between combination date current fair values and

carrying amounts of Stamm’s identifiable net

assets.


combination date current fiar values and carrying

amounts of Stamm’s net identifiable assets to

appropriate assets.



Plumm Corporation (concluded) Pr. 7–9

Plumm Corporation and Subsidiary

Working Paper for Consolidated Financial Statements

November 30, 2006

Eliminations

Plumm Stamm increase

Corporation Company (decrease) Consolidated

Income Statement

Revenue:

Sales 8 0 0 0 0 0 4 1 5 0 0 0 1 2 1 5 0 0 0

Intercompany investment

income 7 0 0 0 0 (a) ( 7 0 0 0 0 )

Total revenue 8 7 0 0 0 0 4 1 5 0 0 0 ( 7 0 0 0 0 ) 1 2 1 5 0 0 0

Costs and expenses:

Cost of goods sold 5 0 0 0 0 0 1 1 0 0 0 0 (a) 2 0 0 0 0 6 3 0 0 0 0

Operating expenses 2 3 3 3 3 3 1 5 5 0 0 0 3 8 8 3 3 3

Income taxes expense 2 6 6 6 7 6 0 0 0 0 8 6 6 6 7

Total costs and expenses 7 6 0 0 0 0 3 2 5 0 0 0 2 0 0 0 0 * 1 1 0 5 0 0 0

Net income 1 1 0 0 0 0 9 0 0 0 0 ( 9 0 0 0 0 ) 1 1 0 0 0 0

Statement of Retained

Earnings

Retained earnings, beginning

of year 6 4 0 0 0 0 2 2 0 0 0 0 (a) 2 2 0 0 0 0 ) 6 4 0 0 0 0

Net income 1 1 0 0 0 0 9 0 0 0 0 ( 9 0 0 0 0 ) 1 1 0 0 0 0

Subtotals 7 5 0 0 0 0 3 1 0 0 0 0 ( 3 1 0 0 0 0 ) 7 5 0 0 0 0

Dividends declared 6 0 0 0 0 3 0 0 0 0 (a) ( 3 0 0 0 0 )† 6 0 0 0 0

Retained earnings, end of year 6 9 0 0 0 0 2 8 0 0 0 0 ( 2 8 0 0 0 0 ) 6 9 0 0 0 0

Balance Sheet

Assets

Investment in Stamm Company

common stock 6 0 0 0 0 0 (a)( 6 0 0 0 0 0 )

Other 1 8 4 0 0 0 0 9 6 0 0 0 0 2 8 0 0 0 0 0

Goodwill (a) 4 0 0 0 0 4 0 0 0 0

Total assets 2 4 4 0 0 0 0 9 6 0 0 0 0 ( 5 6 0 0 0 0 ) 2 8 4 0 0 0 0

Liabilities & Stockholders’ Equity

Liabilities 6 50

0 0 0 0 4 0 0 0 0 0 1 0 5 0 0 0 0

Common stock, $1 par 5 0 0 0 0 0 8 0 0 0 0 (a) ( 8 0 0 0 0 ) 5 0 0 0 0 0

Additonal paid-in capital 6 0 0 0 0 0 2 0 0 0 0 0 (a)( 2 0 0 0 0 0 ) 6 0 0 0 0 0

Retained earnings 6 9 0 0 0 0 2 8 0 0 0 0 ( 2 8 0 0 0 0 ) 6 9 0 0 0 0

Total liabilities &

stockholders’ equity 2 4 4 0 0 0 0 9 6 0 0 0 0 ( 5 6 0 0 0 0 ) 2 8 4 0 0 0 0

* An increase in total costs and expenses and a decrease in net income.

† A decrease in dividends and an increase in retained earnings.


65 Minutes, StrongPing Corporation Pr. 7–10

a. Ping Corporation and Subsidiary

Adjusting Entries

December 31, 2006

(1)

Investment in Stang Company Common Stock

[($75,000 – $30,000) x 0.80] 3 6 0 0 0

Intercompany Dividends Receivable ($9,000 x 0.80) 7 2 0 0

Retained Earnings of Subsidiary

[($59,000 – $30,000) x 0.80] 2 3 2 0 0

Intercompany Investment Income ($25,000 x

0.80) 2 0 0 0 0

To convert accounting for investment in subsidiary to

equity method from cost method of accounting.


(2)

Intercompany Investment Income 3 2 0 0

Retained Earnings of Subsidiary 9 6 0 0

Investment in Stang Company Common

Stock 1 2 8 0 0

To amortize combination date excess of current fair

value over carrying amount of signboard leases as

follows:

Year 2006: ($20,000 x 1/5 x 0.80 = $3,200)

Years 2003 through 2005: ($20,000 x 3/5 x

0.80 = $9,600)


Ping Corporation (continued) Pr. 7–10


b. Ping Corporation and Subsidiary

Working Paper for Consolidated Financial StatementsDecember 31, 2006

Eliminations

Ping Stang increase

Corporation Corporation (decrease) Consolidated

Income Statements

Revenue:

Net sales 4 2 0 0 0 0 3 0 0 0 0 0 7 2 0 0 0 0

Intercompany investment

income 1 6 8 0 0 (a) ( 1 6 8 0 0 )

Total revenue 4 3 6 8 0 0 3 0 0 0 0 0 ( 1 6 8 0 0 ) 7 2 0 0 0 0

Cost and expenses:

Cost of goods sold 3 1 5 0 0 0 2 4 0 0 0 0 5 5 5 0 0 0

Other expenses 6 5 0 0 0 3 5 0 0 0 (a) 4 0 0 0 1 0 4 0 0 0

Minority interest in net income of subsidiary (b) 4 2 0 0 4 2 0 0

Total costs and expenses 3 8 0 0 0 0 2 7 5 0 0 0 8 2 0 0 * 6 6 3 2 0 0

Net income 5 6 8 0 0 2 5 0 0 0 ( 2 5 0 0 0 ) 5 6 8 0 0

Statement of Retained Earnings

Retained earnings, beginning

of year 1 5 0 0 0 5 9 0 0 0 (a) ( 4 5 4 0 0 ) 2 8 6 0 0

Net income 5 6 8 0 0 2 5 0 0 0 ( 2 5 0 0 0 ) 5 6 8 0 0

Subtotals 7 1 8 0 0 8 4 0 0 0 ( 7 0 4 0 0 ) 8 5 4 0 0

Dividends declared 9 0 0 0 (a) ( 9 0 0 0 )†

Retained earnings, end of year 7 1 8 0 0 7 5 0 0 0 ( 6 1 4 0 0 ) 8 5 4 0 0

Balance Sheet

Assets

Current assets 1 7 2 0 0 0 1 9 9 1 0 0 3 7 1 1 0 0

Intercompany dividends

receivable (payable) 7 2 0 0 ( 7 2 0 0 )

Investment in Stang Company

common stock 1 4 3 2 0 0 (a)( 1 4 3 2 0 0 )

Land 2 5 0 0 0 1 0 5 0 0 3 5 5 0 0

Building and equipment 2 0 0 0 0 0 4 0 0 0 0 2 4 0 0 0 0

Accumulated depreciation ( 1 0 2 0 0 0 ) ( 7 0 0 0 ) ( 1 0 9 0 0 0 )

Signboard leases (net) 8 4 0 0 (a) 4 0 0 0 1 2 4 0 0

Total assets 4 4 5 4 0 0 2 4 3 8 0 0 ( 1 3 9 2 0 0 ) 5 5 0 0 0 0


Dividends payable 1 8 0 0 1 8 0 0

Other current liabilities 6 0 0 0 0 6 7 0 0 0 1 2 7 0 0 0

Common stock, no par 3 0 0 0 0 0 1 0 0 0 0 0 (a)( 1 0 0 0 0 0 ) 3 0 0 0 0 0

Retained earnings 7 1 8 0 0 7 5 0 0 0 ( 6 1 4 0 0 ) 8 5 4 0 0

Minority interest in net assets

of subsidiary (a) 3 1 6 0 0 3 5 8 0 0

(b) 4 2 0 0

Retained earnings of subsidiary 1 3 6 0 0 (a) ( 1 3 6 0 0 )

Total liabilities &

stockholders’ equity 4 4 5 4 0 0 2 4 3 8 0 0 ( 1 3 9 2 0 0 ) 5 5 0 0 0 0

* An increase in total costs and expenses, etc., and a decrease in net income.

†A decrease in dividends and increase in retained earnings.

Ping Corporation (concluded) Pr. 7–10


Ping Corporation and Subsidiary


December 31, 2006

(a) Common Stock—Stang 1 0 0 0 0 0

Retained Earnings—Stang ($59,000 – $13,600) 4 5 4 0 0

Retained Earnings of Subsidiary—Ping ($23,200 –

$9,600) 1 3 6 0 0

Intercompany Investment Income—Ping ($20,000 –

$3,200) 1 6 8 0 0

Signboard Leases (net)—Stang ($20,000 – $16,000) 4 0 0 0

Other Expenses—Stang ($20,000 x 1/5) 4 0 0 0

Investment in Stang Company Common Stock—

Ping 1 4 3 2 0 0

Dividends Declared—Stang 9 0 0 0


($33,400 – $1,800) 3 1 6 0 0


(1) To eliminate intercompany investment and equity


subsidiary dividend. (Subsidiary’s beginning

retained earnings, $59,000, is reduced by amount

recorded in parent company’s account, $13,600.)

(2) To establish cost and amortization attributable

to excess of current fair value over carrying

amount of subsidiary’s signboard leases on date

of business combination.

(3) To provide for Year 2006 amortization expense on

excess of combination date current fair value over

carrying amount of Stang’s signboard leases.

(4) To establish minority interest in net assets of

subsidiary at beginning of Year 2006 [($100,000 +

$59,000 + $8,000) x 0.20 = $33,400], less minority

interest share of dividend declared by subsidiary

during Year 2006 ($9,000 x 0.20 = $1,800).


(b) Minority Interest in Net Income of Subsidiary 4 2 0 0



net income for Year 2006 [($25,000 – $4,000) x 0.20 =

$4,200].

50 Minutes, StrongPetal Corporation Pr. 7–11


Petal Corporation and Subsidiary

Consolidated Balance Sheet

December 31, 2006

Assets

Cash ($3,500,000 + $625,000) $ 4 1 2 5 0 0 0

Trade accounts receivable (net) ($1,400,000 + $1,500,000) 2 9 0 0 0 0 0

Inventories ($1,000,000 + $2,500,000) 3 5 0 0 0 0 0

Plant assets (net) ($2,000,000 + $3,100,000 + $13,100,000 – $500,000) 17 7 0 0 0 0 0

Other assets ($100,000 + $475,000 – $300,000 + $10,000) 2 8 5 0 0 0

Goodwill* 2 8 0 0 0 0 0

Total assets $31 3 1 0 0 0 0


Trade accounts payable and other current liabilities ($1,500,000 + $1,100,000) $ 2 6 0 0 0 0 0

Long-term debt ($4,000,000 + $2,600,000 – $400,000 + $5,000) 6 2 0 5 0 0 0

Other liabilities ($750,000 + $250,000) 1 0 0 0 0 0 0

Common stock, $1 par 10 0 0 0 0 0 0

Additional paid-in capital 5 0 0 0 0 0 0

Retained earnings 6 5 0 5 0 0 0

Total liabilities & stockholders’ equity $31 3 1 0 0 0 0

*Computation of goodwill

Cost of Petal Corporation’s investment (1,000,000 shares x $19) $19 0 0 0 0 0 0

Less: Current fair value of Sepal Corporation’s identifiable net assets on date

of business comination:

Carrying amount of net assets ($1,000,000 + $400,000 + $1,600,000) $ 3 0 0 0 0 0 0

Differences between current fair values and carrying amounts of

identifiable net assets:

Plant assets (net) ($16,400,000 – $3,300,000) 13 1 0 0 0 0 0

Other assets ($200,000 – $500,000) ( 3 0 0 0 0 0 )

Long-term debt ($2,200,000 – $2,600,000) 4 0 0 0 0 0 16 2 0 0 0 0 0

Goodwill $ 2 8 0 0 0 0 0


Chapter 07, Modern Advanced accounting-review Q & exr

Documents