Chapter 09, Modern Advanced accounting-review Q & exr

CHAPTER 9CONSOLIDATED FINANCIAL STATEMENTS: INCOME

TAXES, CASH FLOWS, AND INSTALLMENT ACQUISITIONS

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. 9–1 Pro Corporation and Primrose Corporation (40 minutes, medium)

Working paper eliminations (in journal entry format), including income tax allocation, for intercompany profits on merchandise sales and gain on extinguishment of bonds.

Pr. 9-2 Pullet Corporation (40 minutes, medium)

Given working paper eliminations for intercompany bonds and related deferred income taxes on date of bonds acquisition, prepare journal entries for intercompany interest revenue and expense for the following year and working paper eliminations (in journal entry format) at the end of the following year.

Pr. 9–3 Presto Corporation (40 minutes, medium)

Preparation of journal entries for business combination that is a tax-free corporate reorganization for income tax purposes.

Pr. 9–4 Pellerin Corporation (40 minutes, medium)

Journal entries to account for parent company’s installment investments in subsidiary by the equity method. Income taxes are disregarded.

Pr. 9–5 Porcelain Corporation (45 minutes, medium)

Preparation of consolidated statement of cash flows (indirect method) for parent company and partially owned subsidiary.

Pr. 9–6 Parkhurst Corporation (55 minutes, strong)

Working paper eliminations (in journal entry format), including income tax allocation, for intercompany profits (gains) in inventories, machinery, land, and bonds.

Pr. 9–7 Paine Corporation (70 minutes, strong)

Parent company journal entries for equity method and for income taxes attributable to equity method, with respect to two subsidiaries. Preparation of working paper for consolidated financial statements and working paper eliminations (in journal entry format), including income tax allocation, disregarding the dividend-received deduction.

Pr. 9–8 Pickens Corporation (80 minutes, strong)

Working paper for consolidated financial statements and working paper eliminations (in journal entry format), including income tax allocation, for parent company and subsidiary acquired in installments. The dividend-received deduction is disregarded.

Pr. 9–9 Plummer Corporation (80 minutes, strong)

Adjusting entries for income tax allocation for parent company using equity method of accounting. Working paper for consolidated financial statements and working paper eliminations (in journal entry format), including income tax allocation, for parent company and subsidiary having bargain purchase excess. The 80% dividend-received deduction applies.

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 299

ANSWERS TO REVIEW QUESTIONS

1. Income taxes enter into the measurement of current fair values of a combinee’s identifiable net assets if the business combination is a tax-free corporate reorganization for income tax purposes. In such a combination, a new basis of accounting may not be required for the combinee’s assets for income tax purposes; thus, a deferred income tax asset or liability is recognized for the tax effects of current fair value differences.

2. In FASB Statement No. 109, “Accounting for Income Taxes,” the Financial Accounting Standards Board required the provision of deferred income tax liabilities for the undistributed earnings of domestic subsidiaries of parent companies.

3. No, income tax allocation procedures are not necessary in working paper eliminations for a parent company and subsidiaries that file consolidated income tax returns. Intercompany profits (gains) and losses are eliminated in the preparation of consolidated income tax returns just as they are eliminated in the preparation of consolidated financial statements.

4. The consolidated deferred income tax asset associated with the intercompany gain on the parent company’s sale of a depreciable plant asset to the subsidiary reverses as the subsidiary recognizes depreciation expense of the asset. The portion of the subsidiary’s depreciation expense attributable to the intercompany gain is in effect a realization of the gain; thus, the deferred tax related to the depreciation expense is an expense of the consolidated entity.

5. Only cash dividends paid by a partially owned subsidiary to minority stockholders are reported with cash flows from financing activities in a consolidated statement of cash flows.

6. The equity method of accounting generally must be applied when the parent company’s investment in the eventual subsidiary totals 20% or more of the investee’s outstanding common stock. Absent evidence to the contrary, APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” considers a 20% investment sufficient enable the investor to exercise significant influence over the operating and financial policies of the investee, which underlies application of the equity method.

7. The most logical point for ascertaining the current fair values of a subsidiary’s net assets is when the parent company obtains a substantial percentage of the subsidiary’s common stock during the course of an installment acquisition of the stock. Until that time, the parent company’s acquisition costs for small blocks of the eventual subsidiary’s common stock generally may not be reliable indicators of the current fair values of the eventual subsidiary’s identifiable net assets.

8. Included in consolidated retained earnings on the date of a business combination that involves the installment acquisition of the subsidiary’s outstanding common stock are both the parent company’s retained earnings and the parent’s share of the increase or decrease in the subsidiary’s retained earnings during the “influenced investee” phase of the affiliation.

SOLUTIONS TO EXERCISES

Ex. 9–1 1. b 8. d2. a 9. d3. b 10. c4. a 11. d5. d 12. b6. a 13. c7. c

The McGraw-Hill Companies, Inc., 2006300 Modern Advanced Accounting, 10/e

Ex. 9–2 Computation of deferred income tax liability related to Salvo Corporation’s building on date of merger:

Current fair value of building $150,000Less: Carrying amount (tax basis) of building 90,000Current fair value difference $60,000Income tax rate 40%Deferred income tax liability related to building ($60,000 x 0.40) $24,000

Ex. 9–3 Journal entries for Combinor Corporation, May 31, 2005:

Investment in Net Assets of Combinee Company 560,000Cash 560,000

Investment in Net Assets of Combinee Company 60,000Cash 60,000

Other Current Assets 300,000Plant Assets (net) 780,000Intangible Assets (net) 130,000Goodwill ($620,000 – $570,000) 50,000

Liabilities 620,000Deferred Income Tax Liability ($50,000 x 0.40) 20,000Investment in Net Assets of Combinee Company 620,000

Ex. 9–4 Journal entries for Prudence Corporation, Oct. 31, 2006:

Investment in Sagacity Company Common Stock ($140,000 x 0.70) 98,000

Intercompany Investment Income 98,000

Cash ($50,000 x 0.70) 35,000Investment in Sagacity Company Common Stock 35,000

Income Taxes Expense {[($98,000 – $35,000 – $4,000 tax- deductible goodwill amortization) x 0.20] x 0.40} 4,720

Income Taxes Payable [($35,000 x 0.20) x 0.40] 2,800Deferred Income Tax Liability 1,920

Ex. 9–5 Working paper eliminations for Ponte Corporation and subsidiaries, Oct. 31, 2006:

Retained EarningsShipp ($35,000 x 40/140) 10,000Intercompany SalesShipp 630,000

Intercompany Cost of Goods SoldShipp ($630,000 x 100/140) 450,000Cost of Goods SoldStack ($588,000 x 40/140) 168,000InventoriesStack ($77,000 x 40/140) 22,000

Deferred Income Tax AssetShipp ($22,000 x 0.40) 8,800Income Taxes ExpenseShipp 8,800

Income Taxes ExpenseShipp ($10,000 x 0.40) 4,000Retained EarningsShipp 4,000

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 301

Ex. 9–6 Working paper eliminations for Pederson Corporation and subsidiary, Nov. 30, 2006:

Retained EarningsPederson ($20,000 x 0.20) 4,000Intercompany SalesPederson 125,000

Intercompany Cost of Goods SoldPederson 100,000Cost of Goods SoldSolomon ($115,000 x 0.20) 23,000InventoriesSolomon ($30,000 x 0.20) 6,000

To eliminate intercompany sales, costs of goods sold, and unrealized profit in inventories.

Deferred Income Tax AssetPederson ($6,000 x 0.40) 2,400Income Taxes ExpensePederson 2,400

To defer income taxes provided on separate income tax returns of parent company applicable to unrealized intercompany profits in subsidiary’s inventories on Nov. 30, 2006:

Income Taxes ExpensePederson ($4,000 x 0.40) 1,600Retained EarningsPederson 1,600

To provide for income taxes attributable to realized intercompany profits in subsidiary’s inventories on Nov. 30, 2005.

Ex. 9–7 Working paper eliminations for Pol Corporation and subsidiaries, Oct. 31, 2006:

Retained EarningsSol ($20,000 x 0.80) 16,000Minority Interest in Net Assets of Sol Company ($20,000 x 0.20) 4,000Intercompany SalesSol 400,000

Intercompany Cost of Goods SoldSol 300,000Cost of Goods SoldStu 97,500InventoriesStu 22,500

Deferred Income Tax AssetSol ($22,500 x 0.40) 9,000Income Taxes ExpenseSol 9,000

Income Taxes ExpenseSol ($20,000 x 0.40) 8,000Retained EarningsSol ($16,000 x 0.40) 6,400Minority Interest in Net Assets of Sol Company ($4,000 x 0.40) 1,600

Ex. 9–8 Working paper eliminations for Purdue Corporation and subsidiary, Feb. 28, 2007:

Retained EarningsPurdue 12,000Accumulated DepreciationScarsdale ($12,000 6) 2,000

MachineryScarsdale 12,000Depreciation ExpenseScarsdale 2,000

Income Taxes ExpensePurdue ($2,000 x0.40) 800Deferred Income Tax AssetScarsdale ($4,800 – $800) 4,000

Retained EarningsPurdue ($12,000 x 0.40) 4,800

The McGraw-Hill Companies, Inc., 2006302 Modern Advanced Accounting, 10/e

Ex. 9–9 Additional working paper eliminations for Pegler Corporation and subsidiary, Oct. 31, 2006:

Deferred Income Tax AssetStang ($70,000 x 0.40) 28,000Income Taxes ExpenseStang 28,000

Income Taxes ExpenseStang ($10,000 x 0.40) 4,000Retained EarningsStang 4,000

Income Taxes ExpensePegler ($20,000 x 0.40) 8,000Deferred Income Tax AssetPegler 8,000

Retained EarningsPegler ($40,000 x 0.40) 16,000

Ex. 9–10 a. Working paper eliminations for Panama Corporation and subsidiary, Oct. 31, 2006:

Intercompany Gain on Sale of PatentSalvador 5,000PatentPanama 5,000

To eliminate unrealized intercompany gain on sale of patent ($20,000 – $15,000 = $5,000).

Deferred Income Tax AssetSalvador 2,000Income Taxes Expense Salvador 2,000

To defer income taxes provided on separate income tax returns of subsidiary applicable to intercompany profit in parent’s patent on Oct. 31, 2006 ($5,000 x 0.40 = $2,000).

b. Working paper eliminations for Panama Corporation and subsidiary, Oct. 31, 2007:

Retained EarningsSalvador ($5,000 x 0.80) 4,000Minority Interest in Net Assets of Subsidiary ($5,000 x 0.20) 1,000Accumulated Amortization of PatentPanama ($5,000 5) 1,000

PatentPanama 5,000Amortization ExpensePanama 1,000

To eliminate unrealized intercompany gain in patent and in related amortization.

Income Taxes ExpenseSalvador 400Deferred Income Tax AssetSalvador ($2,000 – $400) 1,600

Retained EarningsSalvador ($2,000 x 0.80) 1,600Minority Interest in Net Assets of Subsidiary ($2,000 x 0.20) 400

To provide for income tax expense on intercompany gain realized through parent company’s amortization ($2,000 5 years = $400); and to defer income taxes attributable to remainder of unrealized intercompany gain.

Ex. 9–11 Working paper elimination for Plumm Corporation and subsidiary, Mar. 31, 2006:

Retained EarningsSam ($21,124 x 0.40) 8,450Income Taxes ExpenseSam [($45,645 – $42,981) x 0.40] 1,066Deferred Income Tax LiabilitySam ($8,450 – $1,066) 7,384

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 303

Ex. 9–12 Computation of missing amounts in working paper eliminations of Pom Corporation and subsidiary:

(1) and (2) $26,403 ($66,007 x 0.40)

(3) $26,403 ($66,007 x 0.40)

(4) $1,420 [($57,107 – $53,558) x 0.40]

(5) $24,983 ($26,403 – $1,420)

Ex. 9–13 Computation of cash flows for payment of dividends for Prieto Corporation and subsidiary:

Cash dividends paid by Prieto Corporation $250,000Cash dividends paid by Sora Company on $5 cumulative preferred stock owned by minority stockholders 25,000Cash dividends paid by Sano Company to minority stockholders ($44,000 x 0.25) 11,000

Total cash flows for payments of dividends $286,000

Ex. 9–14 1. A-O 8. A-O2. N 9. D-O3. N 10. IA4. FA 11. N5. N 12. N6. IA 13. FA7. D-O

Ex. 9–15 Journal entries for Packard Corporation, two years ended July 31, 2004:

2005Aug. 1 Investment in Stenn Company Common Stock 5,000

Cash 5,0002006July 31 Cash 300

Dividends Revenue ($3,000 x 0.10) 300

Aug. 1 Investment in Stenn Company Common Stock 22,500Cash 22,500

2007July 31 Investment in Stenn Company Common Stock 4,125

Intercompany Investment Income ($7,500 x 0.55) 4,125

CASES

Case 9–1 Given that the Financial Accounting Standards Board issued FASB Statement No. 109, “Accounting for Income Taxes,” to replace a previously issued statement with the same title that never became fully effective, it is not inappropriate for critics such as student Laura to question the FASB’s conclusions in Statement No. 109. The increase in goodwill occasioned by the recognition of a deferred income tax liability in a business combination, for differences between financial accounting valuations and tax bases of a combinee’s identifiable assets, exacerbates the problem associated with the residual measurement of the goodwill. A serious shortcoming of FASB Statement No. 141, “Business Combinations,” is the “thou shalt” language in paragraph 43 thereof: “The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed shall be recognized as an asset referred to as goodwill” (emphasis added). Although the FASB

The McGraw-Hill Companies, Inc., 2006304 Modern Advanced Accounting, 10/e

dealt with the thorny question of the nature and appropriate valuation of goodwill in both FASB Statement No. 141 and FASB Statement No. 142, “Goodwill and Other Tangible Assets,” critics such as Laura will continue to find fault with FASB Statement No. 109.

Case 9–2 The Paddock Corporation controller’s interpretation of generally accepted accounting principles for undistributed earnings of domestic subsidiaries is erroneous. FASB Statement No. 109, “Accounting for Income Taxes,” is quite specific in requiring the recognition of a deferred income tax liability for an excess of the financial reporting carrying amount of an investment in a domestic subsidiary over its tax basis. No exception is provided for the possibility of dividends being omitted by such a subsidiary because of a severe cash shortage.

Case 9–3 One possible alternative to the recognition of multiple amounts of goodwill in business combinations accomplished in installments would be the immediate expensing of such “goodwill” amounts until control of the combinee is obtained by the combinor/parent company. Only on the date of obtaining control would goodwill be recognized in accordance with accounting for business combinations. Another possible alternative would be the display of goodwill-type amounts as an offset element in the stockholders’ equity section of the consolidated balance sheet.

Case 9–4 There is no clear answer to the question as to whether a valuation allowance should be provided for the $400,000 deferred tax asset of Pantheon Corporation and subsidiary. In FASB Statement No. 109, “Accounting for Income Taxes,” paragraph 17(e), the FASB defined more likely than not, with respect to ultimate realization of a deferred tax asset, as a likelihood of more than 50%. Clearly, if Synthesis Company sold to an outsider the land that had been acquired from Pantheon Corporation, the $400,000 deferred tax asset would be realized. However, is there a likelihood of more than 50% that Synthesis will make such a sale in the near future?

An alternative view might consider that, once the new factory building constructed on the land is in production and generating revenue, the deferred tax asset would thereby be realized indirectly.

A compromise position might be to provide no valuation allowance for the $400,000 deferred tax asset and to include a note to consolidated financial statements such as the following, adapted from paragraph A-44 of Statement of Position 94-6, “Disclosure of Certain Significant Risks and Uncertainties”:

The consolidated company has recognized a deferred tax asset of $400,000 as a result of the taxable gain on the company’s sale of land for a factory site to its subsidiary. Realization of the deferred tax asset depends on the profitability of the subsidiary’s factory, or, alternatively, on the subsidiary’s sale of the land to an outsider at a gain. Although realization is not assured, management believes it is more likely than not that the entire deferred tax asset will be realized.

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 305

40 Minutes, MediumPro Corporation and Primrose Corporation Pr. 9–1

a. Pro Corporation and Subsidiaries

Working Paper Eliminations

October 31, 2006(b) Retained Earnings—Spa 2 5 0 0 0

Intercompany Sales—Spa 2 0 0 0 0 0 0

Intercompany Cost of Goods Sold—Spa 1 5 0 0 0 0 0

Cost of Goods Sold—Sol 4 5 0 0 0 0

Inventories—Sol 7 5 0 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized intercompany profit in inventories.

(c) Deferred Income Tax Asset—Spa 3 0 0 0 0

Income Taxes Expense—Spa 3 0 0 0 0

To defer income taxes provided on separate income

tax returns of Spa applicable to unrealized

intercompany profits in Sol’s inventories on Oct. 31,

2006 ($75,000 x 0.40 = $30,000).

(d) Income Taxes Expense—Spa 1 0 0 0 0

Retained Earnings—Spa 1 0 0 0 0

To provide for income taxes attributed to realized

intercompany profits in Sol’s inventories on Oct. 31,

2005 ($25,000 x 0.40 = $10,000).

b. Primrose Corporation and SubsidiaryWorking Paper Eliminations

October 31, 2006(b) Intercompany Interest Revenue—Primrose ($770,602

x 0.06) 4 6 2 3 6

Intercompany 8% Bonds Payable—Safflower 1 0 0 0 0 0 0

Discount on Intercompany 8% Bonds

Payable—Safflower ($124,622 – $3,769) 1 2 0 8 5 3

Investment in Safflower Company 8%

Bonds—Primrose ($770,602 + $6,236) 7 7 6 8 3 8

Intercompany Interest Expense—Safflower

($875,378 x 0.05) 4 3 7 6 9

Retained Earnings—Safflower 1 0 4 7 7 6

To eliminate subsidiary’s bonds owned by parent

company, and related interest revenue and expense;

and to increase subsidiary’s beginning retained

earnings by amount of unamortized realized gain on

the extinguishment of the bonds.

(c) Retained Earnings—Safflower ($104,776 x 0.40) 4 1 9 1 0

Income Taxes Expense—Safflower [($46,236 –

$43,769) x 0.40] 9 8 7

Deferred Income Tax Liability—Safflower ($41,910

– $987) 4 0 9 2 3

To reduce the subsidiary’s income taxes expense for

amount attributable to recorded intercompany gain (for

consolidation purposes) on subsidiary’s bonds; and to

provide for remaining deferred income taxes on

unrecorded portion of gain.

The McGraw-Hill Companies, Inc., 2006306 Modern Advanced Accounting, 10/e

40 Minutes, MediumPullet Corporation Pr. 9–2

a. Pullet Corporation

Journal Entry

20 07

Nov 30 Cash ($60,000 x 0.08) 4 8 0 0

Investment in Sagehen Company Bonds ($6,325 –

$4,800) 1 5 2 5

Intercompany Interest Revenue ($52,710 x 0.12) 6 3 2 5

To record receipt of annual interest on Sagehen’s

8% bonds payable.

Sagehen Company

Journal Entry

20 07

Nov 30 Intercompany Interest Expense [($60,000 – $3,804) x

0.10] 5 6 2 0

Discount on Intercompany Bonds Payable

($5,620 – $4,800) 8 2 0

Cash ($60,000 x 0.08) 4 8 0 0

To record payment of annual intercompany interest

on 8% bonds.

b. Pullet Corporation and Subsidiary

Working Paper Eliminations

November 30, 2007

(b) Intercompany Interest Revenue—Pullet 6 3 2 5

Intercompany Bonds Payable—Sagehen 6 0 0 0 0

Discount on Intercompany Bonds Payable—

Sagehen ($3,804 – $820) 2 9 8 4

Investment in Sagehen Company Bonds—

Pullet ($52,710 + $1,525) 5 4 2 3 5

Intercompany Interest Expense—Sagehen 5 6 2 0

Retained Earnings—Sagehen 3 4 8 6

To eliminate subsidiary’s bonds owned by parent

company, and related interest revenue and expense;

and to increase subsidiary’s beginning retained

earnings by amount of unamortized realized gain on

the extinguishment of the bonds.

(c) Retained Earnings—Sagehen ($3,486 x 0.40) 1 3 9 4

Income Taxes Expense—Sagehen [($6,325

– $5,620) x 0.40] 2 8 2

Deferred Income Tax Liability—Sagehen

($1,394 – $282) 1 1 1 2

To reduce the subsidiary’s income taxes expense for

amount attributable to recorded intercompany gain (for

consolidation purpose) on subsidiary’s bonds; and to

provide for remaining deferred income taxes on

unrecorded portion of gain.

40 Minutes, Medium

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 307

Presto Corporation Pr. 9–3

Presto Corporation

Journal Entries

20 05Jan 2 Investment in Shuey Company Common Stock

($10,000 x $40) 4 0 0 0 0 0

Common Stock (10,000 x $1) 1 0 0 0 0

Paid-in Capital in Excess of Par 3 9 0 0 0 0

To record merger with Shuey Company.

2 Investment in Shuey Company Common Stock 6 0 0 0 0

Paid-in Capital in Excess of Par 3 0 0 0 0

Cash 9 0 0 0 0

To record payment of costs incurred in merger with

Shuey Company.

2 Cash 2 0 0 0 0

Trade Accounts Receivable (net) 8 0 0 0 0

Inventories 1 6 0 0 0 0

Short-Term Prepayments 1 0 0 0 0

Investments 4 5 0 0 0

Plant Assets (net) 4 9 0 0 0 0

Intangible Assets (net) 1 3 0 0 0 0

Goodwill {$460,000 – [$935,000 – ($480,000 +

$54,000)]} 5 9 0 0 0

Notes Payable 6 0 0 0 0

Trade Accounts Payable 9 0 0 0 0

Income Taxes Payable 3 0 0 0 0

Long-Term Debt 3 0 0 0 0 0

Deferred Income Tax Liability [($935,000 –

$800,000) x 0.40] 5 4 0 0 0

Investment in Shuey Company Common Stock 4 6 0 0 0 0

To allocate cost of Shuey Company investment to

identifiable asset and liabilities, with remainder to

goodwill.

The McGraw-Hill Companies, Inc., 2006308 Modern Advanced Accounting, 10/e

40 Minutes, MediumPellerin Corporation Pr. 9–4

Pellerin Corporation

Journal Entries

20 05Dec 31 Investment in Sigmund Company Common Stock 6 0 0 0 0

Investment Income 6 0 0 0 0

To record share of Sigmund’s net income for nine

months ended Sept. 30, 2005 [($800,000 – $600,000) x

0.30 = $60,000].

31 Cash in Transit ($300,000 x 0.90) 2 7 0 0 0 0Investment in Sigmund Company Common Stock

2 7 0 0 0 0

To record cash dividend in transit from subsidiary on

Dec. 31, 2005.

31 Investment in Sigmund Company Common Stock 1 3 5 0 0 0

Intercompany Investment Income 1 3 5 0 0 0

To record share of Sigmund’s net income for three

months ended Dec. 31, 2005 [($650,000 + $300,000 –

$800,000) x 0.90 = $135,000].

31 Intercompany Investment Income 4 0 0 0 0

Investment in Sigmund Company Common Stock 4 0 0 0 0

To record additional patent amortization attributable to

subsidiary for Sept. 30–Dec. 31, 2005, as follows:

Cost of 60% investment in Sigmund’s

common stock, Sept 30, 2005 $1,760,000

Less: Share of Sigmund’s identifiable

net assets (including patents) on

Sept. 30, 2005 ($1,800,000 x 0.60) 1,080.000

Amount attributable to Sigmund’s patents $ 680,000

Amortization for Sept. 30—Dec. 31, 2005

($680,000 4 3/12 x 3/12) $ 40,000

Note to Instructor: Pellerin’s 30% investment in

Sigmund on Jan. 2, 2005, was equal to the carrying

amount of Sigmund’s identifiable net assets on that

date ($1,600,000 x 0.30 = $480,000).

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 309

45 Minutes, MediumPorcelain Corporation Pr. 9–5

Porcelain Corporation and Subsidiary

Consolidated Statement of Cash Flows (indirect method)

For Year Ended December 31, 2006

Net cash provided by operating activities (Exhibit 1) $ 1 3 5 0 0 0

Cash flows from investing activities:

Acquisition of plant assets $( 2 2 0 0 0 0 )

Disposal of plant assets 1 5 0 0 0 0

Net cash used in investing activities ( 7 0 0 0 0 )

Cash flows from financing activities:

Payment on long-term borrowings $ ( 5 0 0 0 0 )

Dividends paid, including $5,000 to minority stockholders of

Skinner Company ( 6 5 0 0 0 )

Issuance of common stock 7 0 0 0 0

Net cash used in financing activities ( 4 5 0 0 0 )

Net increase in cash $ 2 0 0 00

0

Cash, beginning of year 5 0 0 0 0

Cash, end of year $ 7 0 0 0 0

Exhibit 1 Cash flows from operating activities:

Net income to parent $ 1 1 8 0 0 0

Adjustments to reconcile net income to net cash provided by operating

activities:

Minority interest in net income of subsidiary 1 0 0 0 0

Depreciation expense 4 0 0 0 0

Goodwill impairment loss 2 0 0 0 0

Gain on disposal of plant assets ( 5 0 0 0 0 )

Net increase in net current assets ( 3 0 0 0 )

Net cash provided by operating activities $ 1 3 5 0 0 0

55 Minutes, StrongParkhurst Corporation Pr. 9–6

The McGraw-Hill Companies, Inc., 2006310 Modern Advanced Accounting, 10/e

Parkhurst Corporation and Subsidiary

Working Paper Eliminations

March 31, 2006

(b) Retained Earnings—Parkhurst ($20,000 x 0.30) 6 0 0 0Intercompany Sales—Parkhurst 2 0 0 0 0 0

Intercompany Cost of Goods Sold—Parkhurst

($200,000 x 0.70) 1 4 0 0 0 0

Cost of Goods Sold—Sandland

($180,000 x 0.30) 5 4 0 0 0

Inventories—Sandland ($40,000 x 0.30) 1 2 0 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized intercompany profit in inventories.

(c) Deferred Income Tax Asset—Parkhurst

($12,000 x0.40) 4 8 0 0

Income Taxes Expense—Parkhurst 4 8 0 0

To defer income taxes provided on separate income

tax returns of parent company applicable to unrealized

intercompany profits in subsidiary’s inventories on

Mar. 31, 2006.

Income Taxes Expense—Parkhurst ($6,000 x 0.40) 2 4 0 0

Retained Earnings—Parkhurst 2 4 0 0

To provide for income taxes attributable to realized

intercompany profits in subsidiary’s inventories on

Mar. 31, 2005.

(d) Intercompany Gain on Sale of Machinery—Sandland

($50,000 – $30,000) 2 0 0 0 0

Accumulated Depreciation—Parkhurst ($20,000 5) 4 0 0 0

Machinery—Parkhurst 2 0 0 0 0

Depreciation Expense—Parkhurst 4 0 0 0

To eliminate intercompany gain in machinery and in

related depreciation.

(e) Deferred Income Tax Asset—Sandland [($20,000 –

$4,000) x 0.40] 6 4 0 0

Income Taxes Expense—Sandland 6 4 0 0

To defer income taxes attributable to remainder of

unrealized gain in parent company’s machinery.

(f) Intercompany Gain on Sale of Land—Parkhurst

($480,000 – $360,000) 1 2 0 0 0 0

Land—Sandland 1 2 0 0 0 0

To eliminate unrealized intercompany gain on sale of

land.

(Continued on page 312.)

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 311

Parkhurst Corporation (concluded) Pr. 9–6

Parkhurst Corporation and Subsidiary

Working Paper Eliminations (concluded)

March 31, 2006

(g) Deferred Income Tax Asset—Parkhurst ($120,000 x 0.40) 4 8 0 0 0

Income Taxes Expense—Parkhurst 4 8 0 0 0

To defer income taxes attributable to unrealized

intercompany gain in subsidiary’s land.

(h) Intercompany 12% Bonds Payable—Sandland

($1,000,000 x 0.60) 6 0 0 0 0 0

Discount on Intercompany 12% Bonds Payable—a

Sandland ($100,590 x 0.60) 6 0 3 5 4

Investment in Sandland Company 12% Bonds—a

Parkhurst 4 8 7 5 3 7

Gain on Extinguishment of Bonds—Sandland 5 2 1 0 9

To eliminate subsidiary’s bonds acquired by parent

company, and to recognize gain on the extinguishment

of the bonds.

(i) Income Taxes Expense—Sandland ($52,109 x 0.40) 2 0 8 4 4

Deferred Income Tax Liability—Sandland 2 0 8 4 4

To provide for income taxes attributable to subsidiary’s

realized gain on parent company’s acquisition of the

subsidiary’s bonds.

The McGraw-Hill Companies, Inc., 2006312 Modern Advanced Accounting, 10/e

70 Minutes, StrongPaine Corporation Pr. 9–7

a. Paine Corporation

Journal Entries

20 06June 30 Income Taxes Expense 6 0 0 0 0

Income Taxes Payable (Other Liabilities) 6 0 0 0 0

To provide for income taxes for 2006 on income

exclusive of intercompany investment income

[($153,480 – $3,480*) x 0.40 = $60,000].

30 Intercompany Dividends Receivable 2 8 8 0 0

Investment in Spilberg Company Common Stock 1 9 8 0 0

Investment in Sykes Company Common Stock 9 0 0 0

To record dividends receivable from subsidiaries on

June 30, 2006, computed as follows:

Spilberg Company ($20,000 x 0.99) $19,800

Sykes Company ($10,000 x 0.90) 9,000

Total dividends receivable $28,800

30 Investment in Spilberg Company Common Stock 3 9 6 0 0

Investment in Sykes Company Common Stock 1 8 0 0 0

Intercompany Investment Income 5 7 6 0 0

To record share of subsidiaries’ reported net income

for Year 2006 computed as follows:

Spilberg Company ($40,000 x 0.99) $39,600

Sykes Company ($20,000 x 0.90) 18,000

Total investment income $57,600

*Goodwill amortization for income tax purposes:

$52,200 15 = $3,480

(Continued on page 314.)

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 313

Paine Corporation (continued) Pr. 9–7

Paine CorporationJournal Entries (concluded)

20 06June 30 Income Taxes Expense 2 3 0 4 0

Income Taxes Payable (Other Liabilities) 1 1 5 2 0

Deferred Income Tax Liability (Other Liabilities) 1 1 5 2 0

To provide for income taxes on intercompany invest-

ment income from subsidiaries as follows (dividend

received deduction is disregarded):

Spilberg Sykes

Company Company Total

Net income $40,000 $20,000

Parent company’s

share 99% and 90% $39,600 $18,000

Income taxes

expense, 40% $15,840 $ 7,200 $23,040

Income taxes

currently payable

based on dividends

received constructively

(50%) $ 7,920 $ 3,600 $11,520

Taxes deferred

until earnings

remitted by

subsidiary (50%) 7,920 3,600 11,520

Income taxes

expense $15,840 $ 7,200 $23,040

Note: Intercompany profits in ending inventories do not

enter into the computation of income taxes related to

undistributed earnings of subsidiaries. See elimination

(c) on page 317 for part b.

The McGraw-Hill Companies, Inc., 2006314 Modern Advanced Accounting, 10/e

Paine Corporation (continued) Pr. 9–7

b. Paine Corporation and Subsidiaries

Working Paper for Consolidated Financial Statements

For Year Ended June 30, 2006

Eliminations

Paine Spilberg Sykes increase

Corporation Company Company (decrease) Consolidated

Income Statement

Revenue:

Net sales 1 0 0 0 0 0 0 5 5 0 0 0 0 2 2 0 0 0 0 1 7 7 0 0 0 0

Intercompany sales 1 0 0 0 0 0 (b)( 1 0 0 0 0 0 )

Intercompany investment income 5 7 6 0 0 (a) ( 5 7 6 0 0 )

Total revenue 1 1 5 7 6 0 0 5 5 0 0 0 0 2 2 0 0 0 0 ( 1 5 7 6 0 0 ) 1 7 7 0 0 0 0

Cost and expenses and minority interest:

Cost of goods sold 7 0 0 0 0 0 3 5 7 5 0 0 1 4 3 0 0 0 (b) ( 1 6 5 0 0 ) 1 1 8 4 0 0 0

Intercompany cost of goods sold 7 0 0 0 0 (b) ( 7 0 0 0 0 )

Operating expenses 1 3 0 0 0 0 1 2 5 8 3 3 4 3 6 6 7 2 9 9 5 0 0

Interest expense 4 6 5 2 0 4 6 5 2 0

Income taxes expense 8 3 0 4 0 2 6 6 6 7 1 3 3 3 3 (c) ( 5 4 0 0 ) 1 1 7 6 4 0

Minority interest in net income of subsidiaries (d) 2 4 0 0 2 4 0 0

Total costs and expenses and minority interest 1 0 2 9 5 6 0 5 1 0 0 0 0 2 0 0 0 0 0 ( 8 9 5 0 0 )* 1 6 5 0 0 6 0

Net income 1 2 8 0 4 0 4 0 0 0 0 2 0 0 0 0 ( 6 8 1 0 0 ) 1 1 9 9 4 0

Statement of Retained Earnings (a)( 1 5 0 0 0 0 )

Retained earnings, beginning of year 3 9 6 5 2 0 3 0 0 0 0 0 1 5 0 0 0 0 (a)( 3 0 0 0 0 0 ) 3 9 6 5 2 0

Net income 1 2 8 0 4 0 4 0 0 0 0 2 0 0 0 0 ( 6 8 1 0 0 ) 1 1 9 9 4 0

Subtotal 5 2 4 5 6 0 3 4 0 0 0 0 1 7 0 0 0 0 ( 5 1 8 1 0 0 ) 5 1 6 4 6 0

Dividends declared 5 0 0 0 0 2 0 0 0 0 1 0 0 0 0 (a) ( 3 0 0 0 0 )† 5 0 0 0 0

Retained earnings, end of year 4 7 4 5 6 0 3 2 0 0 0 0 1 6 0 0 0 0 ( 4 8 8 1 0 0 ) 4 6 6 4 6 0

* A decrease in costs and expenses and an increase in net income.

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

(Continued on page 316.)

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 315

Paine Corporation (continued) Pr. 9–7

b. Paine Corporation and Subsidiaries

Working Paper for Consolidated Financial Statements (concluded)

For Year Ended June 30, 2006

Eliminations

Paine Spilberg Sykes increase

Corporation Company Company (decrease) Consolidated

Balance Sheet

Assets

Intercompany dividends receivable (payable) 2 8 8 0 0 ( 1 9 8 0 0 ) ( 9 0 0 0 )

Inventories 1 0 0 0 0 0 0 8 0 0 0 0 0 7 0 0 0 0 0 (b) ( 1 3 5 0 0 ) 2 4 8 6 5 0 0

Investment in Spilberg Company common stock 1 0 0 9 8 0 0 * (a)(1 0 0 9 8 0 0 )

Investment in Sykes Company common stock 5 8 3 2 0 0 † (a)( 5 8 3 2 0 0 )

Goodwill (a) 5 2 2 0 0 5 2 2 0 0

Other assets 1 5 0 1 3 0 0 1 2 6 0 0 0 0 7 9 0 0 0 0 (c) 5 4 0 0 3 5 5 6 7 0 0

Total assets 4 1 2 3 1 0 0 2 0 4 0 2 0 0 1 4 8 1 0 0 0 (1 5 4 8 9 0 0 ) 6 0 9 5 4 0 0

Liabilities & Stockholders’ Equity

Other liabilities 2 0 4 8 5 4 0 1 0 2 0 2 0 0 8 9 1 0 0 0 3 9 5 9 7 4 0

Common stock, $1 par 1 0 0 0 0 0 0 5 0 0 0 0 0 3 0 0 0 0 0 (a)( 8 0 0 0 0 0 ) 1 0 0 0 0 0 0

Additional paid-in capital 6 0 0 0 0 0 2 0 0 0 0 0 1 3 0 0 0 0 (a)( 3 3 0 0 0 0 ) 6 0 0 0 0 0Minority interest in net assets of subsidiaries (a) 6 6 8 0 0 6 9 2 0 0

(d) 2 4 0 0

Retained earnings 4 7 4 5 6 0 3 2 0 0 0 0 1 6 0 0 0 0 ( 4 8 8 1 0 0 ) 4 6 6 4 6 0

Total liabilities & stockholders’ equity 4 1 2 3 1 0 0 2 0 4 0 2 0 0 1 4 8 1 0 0 0 (1 5 4 8 9 0 0 ) 6 0 9 5 4 0 0

* $990,000 + $39,600 – $19,800 = $1,009,800.

† $574,200 + $18,000 – $9,000 = $583,200.

The McGraw-Hill Companies, Inc., 2006316 Modern Advanced Accounting, 10/e

Paine Corporation (concluded) Pr. 9–7

Paine Corporation and Subsidiary

Working Paper Eliminations

June 30, 2006

(a) Common Stock—Spilberg and Sykes ($500,000 + $300,000) 8 0 0 0 0 0

Additional Paid-in Capital—Spilberg and Sykes

($200,000 + $130,000) 3 3 0 0 0 0

Retained Earnings—Spilberg 3 0 0 0 0 0

Retained Earnings—Sykes 1 5 0 0 0 0

Intercompany Investment Income—Paine 5 7 6 0 0

Goodwill—Paine 5 2 2 0 0

Investment in Spilberg Company Common

Stock—Paine 1 0 0 9 8 0 0

Investment in Sykes Company Common

Stock—Paine 5 8 3 2 0 0

Dividends Declared—Spilberg and Sykes

($20,000 + $10,000) 3 0 0 0 0

Minority Interest in Net Assets of Subsidiaries

($9,800 + $57,000) 6 6 8 0 0

To eliminate intercompany investments and equity

accounts of subsidiaries at beginning of year, and

subsidiary dividends; to establish unimpaired

goodwill; and to establish minority interest as follows:

Spilberg Sykes

Company Company

Minority interest at

beginning of year $10,000(A) $58,000(B)

Less: Minority interest

in dividends 200 1,000

Net minority interest $ 9,800 $57,000

(A) ($300,000 + 500,000 + 200,000) x 0.01 (B) ($150,000 + 300,000 + 130,000) x 0.10(b) Intercompany Sales—Paine 1 0 0 0 0 0

Intercompany Cost of Goods Sold—Paine 7 0 0 0 0

Cost of Goods Sold—Spilberg and Sykes

($30,000 – $13,500) 1 6 5 0 0

Inventories—Spilberg and Sykes ($6,000 +

$7,500) 1 3 5 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized profits in inventories.

(c) Deferred Income Tax Asset (Other Assets)—Spilberg

and Sykes ($13,500 x 0.40) 5 4 0 0

Income Taxes Expense—Paine 5 4 0 0

To defer income taxes provided on separate income

tax returns of parent company applicable to unrealized

intercompany profits in subsidiaries’ inventories on

June 30, 2006.

(d) Minority Interest in Net Income of Subsidiaries ($400 +

$2,000) 2 4 0 0

Minority Interest in Net Assets of Subsidiaries 2 4 0 0

To establish minority interest in subsidiaries’ net

income for Year 2006, as follows: Spilberg ($40,000 x

0.01 = $400); Sykes ($20,000 x 0.10 = $2,000).

80 Minutes, Strong

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 317

Pickens Corporation Pr. 9–8

Pickens Corporation and SubsidiaryWorking Paper for Consolidated Financial Statements

December 31, 2005Eliminations

Pickens Skiffen increase

Corporation Company (decrease) Consolidated

Income Statement

Revenue:

Net sales 8 4 0 0 0 0 3 6 0 0 0 0 1 2 0 0 0 0 0Intercompany sales 8 0 6 0 0 6 5 0 0 0 (b) ( 8 0 6 0 0 )

(c) ( 6 5 0 0 0 )

Gain on extinguishment of

bonds (e) 1 4 3 8 1 4 3 8

Intercompany gain on sale

of equipment 9 5 0 0 (g) ( 9 5 0 0 )

Intercompany interest revenue 2 7 0 2 (e) ( 2 7 0 2 )

Intercompany investment

income 4 4 8 0 0 (a) ( 4 4 8 0 0 )

Total revenue 9 7 7 6 0 2 4 2 5 0 0 0 ( 2 0 1 1 6 4 ) 1 2 0 1 4 3 8Costs & expenses & minority interest:

Cost of goods sold 5 4 6 0 0 0 2 5 2 0 0 0 (b) ( 1 7 5 8 0 ) 7 7 0 6 7 0

(c) ( 9 7 5 0 )

Intercompany cost of goods

sold 5 6 4 2 0 4 8 7 5 0 (b) ( 5 6 4 2 0 )

(c) ( 4 8 7 5 0 )

Interest expense 3 2 0 0 0 9 1 0 6 4 1 1 0 6

Intercompany interest expense 2 2 7 6 (e) ( 2 2 7 6 )

Other operating expenses

and income taxes expense 2 7 0 7 5 2 5 6 8 6 8 (d) ( 5 2 4 0 ) 3 1 8 7 9 5

(f) 4 0 5

(g) ( 3 1 7 )

(h) ( 3 6 7 3 )

Minority interest in net

income of subsidiary (i) 1 0 5 4 1 1 0 5 4 1

Total cost and expenses

and minority interest 9 0 5 1 7 2 3 6 9 0 0 0 ( 1 3 3 0 6 0 )* 1 1 4 1 1 1 2

Net income 7 2 4 3 0 5 6 0 0 0 ( 6 8 1 0 4 ) 6 0 3 2 6

Statement of Retained Earnings

Retained earnings, beginning of

year 5 9 5 0 0 0 1 3 6 0 0 0 (a)( 1 3 2 5 0 0 ) 5 9 8 5 0 0

Net income 7 2 4 3 0 5 6 0 0 0 ( 6 8 1 0 4 ) 6 0 3 2 6

Subtotal 6 6 7 4 3 0 1 9 2 0 0 0 ( 2 0 0 6 0 4 ) 6 5 8 8 2 6

Dividends declared 2 0 0 0 0 1 1 0 0 0 (a) ( 1 1 0 0 0 )† 2 0 0 0 0

Retained earnings, end of year 6 4 7 4 3 0 1 8 1 0 0 0 ( 1 8 9 6 0 4 ) 6 3 8 8 2 6

* A decrease in costs and expenses and an increase in net income.† A decrease in dividends and an increase in retained earnings.

(Continued on page 319.)

Pickens Corporation (continued) Pr. 9–8

The McGraw-Hill Companies, Inc., 2006318 Modern Advanced Accounting, 10/e

Pickens Corporation and SubsidiaryWorking Paper for Consolidated Financial Statements (concluded)

December 31, 2005Eliminations

Pickens Skiffen increase

Corporation Company (decrease) Consolidated

Balance Sheet

Assets

Intercompany receivables

(payables) 3 5 8 0 0 ( 3 5 8 0 0 )

Inventories 1 8 0 0 0 0 9 6 0 0 0 (b) ( 6 6 0 0 ) 2 6 2 9 0 0

(c) ( 6 5 0 0 )

Investment in Skiffen Company

common stock 3 9 3 2 0 0 (a)( 3 9 3 2 0 0 )

Investment in Skiffen Company

bonds 2 7 9 1 8 (e) ( 2 7 9 1 8 )

Plant assets 7 8 1 5 0 0 5 1 0 0 0 0 (g) ( 9 5 0 0 ) 1 2 8 2 0 0 0

Accumulated depreciation ( 8 7 0 0 0 ) ( 8 5 0 0 0 ) (g) ( 3 1 7 )* ( 1 7 1 6 8 3 )Other assets 3 3 3 7 8 2 1 4 6 5 0 0 (d) 5 2 4 0 4 8 9 1 9 5

(h) 3 6 7 3

Goodwill (a) 2 5 2 0 0 2 5 2 0 0

Total assets 1 6 6 5 2 0 0 6 3 1 7 0 0 ( 4 0 9 2 8 8 ) 1 8 8 7 6 1 2

Liabilities & Stockholders’ Equity

Dividends payable 2 0 0 0 0 2 2 0 0 2 2 2 0 0

Bonds payable 4 0 0 0 0 0 1 2 0 0 0 0 5 2 0 0 0 0

Intercompany bonds payable 3 0 0 0 0 (e) ( 3 0 0 0 0 )

Discount on bonds payable ( 4 2 8 1 ) ( 4 2 8 1 )

Discount on intercompany bonds

payable ( 1 0 7 0 ) (e) ( 1 0 7 0 )†

Deferred income tax liability 1 5 8 0 0 (f) 4 0 5 1 6 2 0 5Other liabilities 1 6 4 4 7 0 2 4 8 5 1 1 8 9 3 2 1

Common stock, $2.50 par 4 0 0 0 0 0 2 5 0 0 0 0 (a)( 2 5 0 0 0 0 ) 4 0 0 0 0 0

Additional paid-in capital 1 4 0 0 0 2 9 0 0 0 (a) ( 2 9 0 0 0 ) 1 4 0 0 0

Minority interest in net assets of (a) 8 0 8 0 0 9 1 3 4 1

subsidiary (I) 1 0 5 4 1

Retained earnings 6 4 7 4 3 0 1 8 1 0 0 0 ( 1 8 9 6 0 4 ) 6 3 8 8 2 6

Retained earnings of subsidiary 3 5 0 0 (a) ( 3 5 0 0 )

Total liabilities & stockholders’

equity 1 6 6 5 2 0 0 6 3 1 7 0 0 ( 4 0 9 2 8 8 ) 1 8 8 7 6 1 2

* A decrease in accumulated depreciation and an increase in total assets.† A decrease in discount and an increase in total liabilities & stockholders’ equity.

Note to Instructor: Intercompany receivables (payables) are:

Pickens Skiffen

Corporation Company

Dividends receivable (payable) $ 8 8 0 0 $ ( 8 8 0 0 )

Accounts receivable for

merchandise 7 0 0 0 1 2 0 0 0

Accounts payable for

merchandise ( 1 2 0 0 0 ) ( 7 0 0 0 )

Noninterest-bearing advances 3 2 0 0 0 ( 3 2 0 0 0 )

Totals $ 3 5 8 0 0 $ ( 3 5 8 0 0 )

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 319

Pickens Corporation (continued) Pr. 9–8

Pickens Corporation and Subsidiary

Working Paper Eliminations

December 31, 2005

(a) Common Stock—Skiffen 2 5 0 0 0 0Additional Paid-in Capital—Skiffen 2 9 0 0 0

Retained Earnings—Skiffen ($136,000 – $3,500) 1 3 2 5 0 0

Retained Earnings of Subsidiary—Pickens 3 5 0 0

Intercompany Investment Income—Pickens 4 4 8 0 0

Goodwill—Pickens 2 5 2 0 0

Investment in Skiffen Company Common

Stock—Pickens 3 9 3 2 0 0

Dividends Declared—Skiffen 1 1 0 0 0

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

To eliminate intercompany investment and related

equity accounts of subsidiary at beginning of year;

to eliminate intercompany investment income and

dividends of subsidiary; and to establish minority

interest at beginning of year, less minority interest in

dividends, as follows:

Minority interest, Jan. 2, 2005

($415,000 x 0.20) $83,000

Less: Minority interest in Dec. 15, 2005,

dividends ($11,000 x 0.20) (2,200)

Net minority interest $80,800

(b) Intercompany Sales—Pickens 8 0 6 0 0

Intercompany Cost of Goods Sold—Pickens 5 6 4 2 0

Cost of Goods Sold—Skiffen ($58,600 x 0.30) 1 7 5 8 0

Inventories—Skiffen ($22,000 x 0.30) 6 6 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized intercompany profit in inventories.

(c) Intercompany Sales—Skiffen 6 5 0 0 0

Intercompany Cost of Goods Sold—Skiffen 4 8 7 5 0

Cost of Goods Sold—Pickens ($39,000 x 0.25) 9 7 5 0

Inventories—Pickens ($26,000 x 0.25) 6 5 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized intercompany profit in inventories.

(d) Deferred Income Tax Asset (Other Assets) [($6,600 +

$6,500) x 0.40] 5 2 4 0

Income Taxes Expense (Other Operating

Expenses) 5 2 4 0

To defer income taxes provided on separate income

tax returns of parent company and subsidiary

applicable to unrealized intercompany profits in

inventories on Dec. 31, 2005.

(Continued on page 321.)

Pickens Corporation (concluded) Pr. 9–8

The McGraw-Hill Companies, Inc., 2006320 Modern Advanced Accounting, 10/e

Pickens Corporation and SubsidiaryWorking Paper Eliminations (concluded)

December 31, 2005(e) Intercompany Bonds Payable—Skiffen 3 0 0 0 0

Intercompany Interest Revenue—Pickens ($27,016 x

0.10) 2 7 0 2

Discount on Intercompany Bonds Payable—

Skiffen ($1,546 – $476) 1 0 7 0

Intercompany Interest Expense—Skiffen

($28,454 x 0.08) 2 2 7 6

Investment in Skiffen Company Bonds—Pickens

($27,016 + $902) 2 7 9 1 8

Gain on Extinguishment of Bonds—Skiffen

($28,454 – $27,016) 1 4 3 8

To eliminate subsidiary’s bonds owned by parent

company, and related interest revenue and expense,

and to recognize gain on the extinguishment of the

bonds.

(f) Income Taxes Expense (Other Operating Expenses)—

Skiffen {[$1,438 – ($2,702 – $2,276)] x 0.40} 4 0 5

Deferred Income Tax Liability—Skiffen 4 0 5

To provide for income taxes attributable to subsidiary’s

realized gain on parent company’s acquisition of the

subsidiary’s bonds; and to defer income taxes

applicable to the discount related to the bonds.

(g) Intercompany Gain on Sale of Equipment—Pickens 9 5 0 0

Accumulated Depreciation—Skiffen 3 1 7

Plant Assets—Skiffen 9 5 0 0

Other Operating Expenses—Skiffen 3 1 7

To eliminate unrealized intercompany gain in

equipment and in related depreciation. Gain element

of depreciation computed as follows: ($9,500 10 years) x 1/3 = $317.

(h) Deferred Income Tax Asset (Other Assets)—Pickens

[($9,500 – $317) x 0.40] 3 6 7 3

Income Taxes Expense (Other Operating

Expenses)—Pickens 3 6 7 3

To defer income taxes attributable to remainder of

unrealized gain in subsidiary’s machinery.

(i) Minority Interest in Net Income of Subsidiary 1 0 5 4 1

Minority Interest in Net Assets of Subsidiary 1 0 5 4 1

To provide for minority interest in subsidiary’s net

income for Year 2005, as follows:

Net income of subsidiary $56,000

Adjustments for working paper

eliminations:

(c) (6,500)

(d) ($6,500 x 0.40) 2,600

(e) [$1,438 – ($2,702 – $2,276)] 1,012

(f) (405)

Adjusted net income of subsidiary $52,707

Minority interest share ($52,707 x 0.20) $10,541

80 Minutes, Strong

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 321

Plummer Corporation Pr. 9–9

a. Plummer Corporation

Adjusting Entry

December 31, 2005

Income Taxes Expense 2 3 2 5Income Taxes Payable 2 4 0

Deferred Income Tax Liability 2 0 8 5

To provide for income taxes on intercompany

investment income of subsidiary, computed as follows:

Net income of subsidiary $38,750

Add: Amortization of bargain-purchase

excess over composite economic life of

subsidiary’s machinery and equipment

{[($142,000 x 0.75) – $96,000] ÷ 5 years} 2,100

Adjusted net income of subsidiary $40,850

Less: Amortization of bargain purchase

excess, not taxable 2,100

Income of subsidiary subject to income

taxes $38,750

Parent company’s share

($38,750 x 0.75) $29,063

Less: Dividend received deduction

($29,063 x 0.80) 23,250

Amount subject to income taxes $ 5,813

Income taxes expense ($5,813 x 0.40) $ 2,325

Income taxes currently payable, based

on cash dividends received

[($3,000 x 0.20) x 0.40] $ 240

Income taxes deferred until earnings

remitted by subsidiary 2,085

Total income taxes expense $2,325

The McGraw-Hill Companies, Inc., 2006322 Modern Advanced Accounting, 10/e

Plummer Corporation (continued) Pr. 9–9

b. Plummer Corporation and Subsidiary

Working Paper for Consolidated Financial Statements

December 31, 2005

Eliminations

Plummer Sinclair increase

Corporation Company (decrease) Consolidated

Income Statement

Revenue:

Net sales 7 7 2 0 0 0 4 2 6 0 0 0 1 1 9 8 0 0 0

Intercompany sales 7 8 0 0 0 1 0 4 0 0 0 (c) ( 7 8 0 0 0 )

(d)( 1 0 4 0 0 0 )

Dividends revenue 7 5 0 7 5 0

Intercompany gain on sale of

machinery 8 0 0 (b) ( 8 0 0 )

Intercompany investment

income 3 1 1 6 3 (a) ( 3 1 1 6 3 )

Other revenue 9 0 0 0 2 9 0 0 1 1 9 0 0

Total revenue 8 9 0 1 6 3 5 3 4 4 5 0 ( 2 1 3 9 6 3 ) 1 2 1 0 6 5 0

Costs & expenses & minority interest:

Cost of goods sold 4 4 5 0 0 0 3 0 1 2 0 0 (c) ( 8 9 5 0 ) 7 1 1 4 5 0

(d) ( 2 5 8 0 0 )

Intercompany cost of goods (c) ( 6 5 0 0 0 )

sold 6 5 0 0 0 7 2 8 0 0 (d) ( 7 2 8 0 0 )

Depreciation expense 6 5 6 0 0 1 1 2 0 0 (a) ( 2 1 0 0 ) 7 4 7 0 0

Other operating expenses 1 9 5 3 3 8 8 4 6 6 7 2 8 0 0 0 5

Income taxes expenses 3 7 5 5 0 2 5 8 3 3 (e) ( 4 1 0 0 ) 5 9 2 8 3

Minority interest in net

income of subsidiary (f) 8 7 5 8 8 7 5 8

Total costs and expenses

and minority interest 8 0 8 4 8 8 4 9 5 7 0 0 ( 1 6 9 9 9 2 )* 1 1 3 4 1 9 6

Net income 8 1 6 7 5 3 8 7 5 0 ( 4 3 9 7 1 ) 7 6 4 5 4

Statement of Retained

Earnings

Retained earnings, beginning

of year 3 7 8 0 0 0 1 1 2 0 0 0 (a)( 1 1 2 0 0 0 ) 3 7 8 0 0 0

Net income 8 1 6 7 5 3 8 7 5 0 ( 4 3 9 7 1)

) 7 6 4 5 4

Subtotal 4 5 9 6 7 5 1 5 0 7 5 0 ( 1 5 5 9 7 1 ) 4 5 4 4 5 4

Dividends declared 7 5 0 0 4 0 0 0 (a) ( 4 0 0 0 )† 7 5 0 0

Retained earnings, end of year 4 5 2 1 7 5 1 4 6 7 5 0 ( 1 5 1 9 7 1 ) 4 4 6 9 5 4

*A decrease in costs and expenses and an increase in net income.

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

(Continued on page 324.)

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 323

Plummer Corporation (continued) Pr. 9–9

Plummer Corporation and Subsidiary

Working Paper for Consolidated Financial Statements (concluded)

December 31, 2005

Eliminations

Plummer Sinclair increase

Corporation Company (decrease) Consolidated

Balance Sheet

Assets

Short-term investments 1 8 0 0 0 1 8 0 0 0

Intercompany receivables

(payables) 1 6 0 0 0 ( 1 6 0 0 0 ) Inventories 2 7 5 0 0 0 1 3 5 0 0 0 (c) ( 4 0 5 0 ) 4 0 0 5 5 0

(d) ( 5 4 0 0 )

Other current assets 3 0 9 1 0 0 1 0 6 7 5 0 4 1 5 8 5 0

Deferred income tax asset (e) 4 1 0 0 4 1 0 0

Investment in Sinclair

Company common stock 1 2 4 1 6 3 (a)( 1 2 4 1 6 3)

)

Plant assets 5 1 8 0 0 0 2 7 9 0 0 0 (a) ( 1 0 5 0 0 ) 7 8 5 7 0 0

(b) ( 8 0 0 )

Accumulated depreciation ( 2 9 8 2 0 0 ) ( 1 9 6 7 0 0 ) (a) ( 2 1 0 0 )* ( 4 9 2 8 0 0 )

Total assets 9 4 4 0 6 3 3 2 6 0 5 0 $( 1 3 8 7 1 3 ) 1 1 3 1 4 0 0

Liabilities & Stockholders’

Equity

Dividends payable 7 5 0 0 7 5 0 0

Income taxes payable 3 5 4 6 5 2 5 8 3 3 6 1 2 9 8

Other current liabilities 2 6 0 8 3 8 1 2 3 4 6 7 3 8 4 3 0 5

Deferred income tax liability 2 0 8 5 2 0 8 5

Common stock, $10 par 1 5 0 0 0 0 1 5 0 0 0 0

Common stock, $5 par 2 0 0 0 0 (a) ( 2 0 0 0 0 )

Additional paid-in capital 3 6 0 0 0 1 0 0 0 0 (a) ( 1 0 0 0 0 ) 3 6 0 0 0 Minority interest in net assets (a) 3 4 5 0 0 4 3 2 5 8

of subsidiary (f) 8 7 5 8

Retained earnings 4 5 2 1 7 5 1 4 6 7 5 0 ( 1 5 1 9 7 1 ) 4 4 6 9 5 4

Total liabilities &

stockholders’ equity 9 4 4 0 6 3 3 2 6 0 5 0 ( 1 3 8 7 1 3 ) 1 1 3 1 4 0 0

*A decrease in accumulated depreciation and an increase in total assets.

Note to instructor: Intercompany receivables (payables) are:

Plummer Sinclair

Corporation Company

Accounts receivable for

merchandise $ 2 4 0 0 0 $ 8 0 0 0

Accounts payable for

merchandise ( 8 0 0 0 ) ( 2 4 0 0 0 )

Totals $ 1 6 0 0 0 $ ( 1 6 0 0 0 )

The McGraw-Hill Companies, Inc., 2006324 Modern Advanced Accounting, 10/e

Plummer Corporation (continued) Pr. 9–9

Plummer Corporation and Subsidiary

Working Paper Eliminations

December 31, 2005

(a) Common Stock—Sinclair 2 0 0 0 0 Additional Paid-in Capital—Sinclair 1 0 0 0 0

Retained Earnings—Sinclair 1 1 2 0 0 0

Accumulated Depreciation—Plummer ($10,500 ÷ 5) 2 1 0 0

Intercompany Investment Income—Plummer 3 1 1 6 3

Investment in Sinclair Company Common Stock—

Plummer 1 2 4 1 6 3

Plant Assets—Plummer 1 0 5 0 0

Depreciation Expense—Plummer 2 1 0 0

Dividends Declared—Sinclair 4 0 0 0

Minority Interest in Net Assets of Subsidiary

($35,500 – $1,000) 3 4 5 0 0

To eliminate intercompany investment and related

equity accounts of subsidiary at beginning of year;

to eliminate intercompany investment income and

subsidiary dividends; to offset bargain-purchase excess

[($142,000 x 0.75) – $96,000 = $10,500] against plant

assets; to reduce depreciation expense for pro rata

portion of bargain purchase excess ($10,500 ÷ 5

= $2,100); and to provide for minority interest at

beginning of year ($142,000 x 0.25 = $35,500), less

minority interest in subsidiary’s cash dividend

($4,000 x 0.25 = $1,000).

(b) Intercompany Gain on Sale of Machinery—Sinclair 8 0 0

Plant Assets—Plummer 8 0 0

To eliminate unrealized intercompany gain on sale

of machinery.

(c) Intercompany Sales—Plummer 7 8 0 0 0

Intercompany Cost of Goods Sold—Plummer 6 5 0 0 0

Cost of Goods Sold—Sinclair ($53,700 x 0.16 2/3) 8 9 5 0

Inventories—Sinclair ($24,300 x 0.16 2/3) 4 0 5 0

To eliminate intercompany sales, cost of goods sold,

and unrealized intercompany profit in inventories.

(d) Intercompany Sales—Sinclair 1 0 4 0 0 0

Intercompany Cost of Goods Sold—Sinclair 7 2 8 0 0

Cost of Goods Sold—Plummer ($86,000 x 0.30) 2 5 8 0 0

Inventories—Plummer ($18,000 x 0.30) 5 4 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized intercompany profit in inventories.

(e) Deferred Income Tax Asset—Plummer and Sinclair

[($800 + $4,050 + $5,400) x 0.40] 4 1 0 0

Income Taxes Expense—Plummer and Sinclair 4 1 0 0

To defer income taxes applicable to intercompany

(gains) eliminated in eliminations (b), (c), and (d).

(Continued on page 326.)

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 9 325

Plummer Corporation (concluded) Pr. 9–9

Plummer Corporation and Subsidiary

Working Paper Eliminations (concluded)

December 31, 2005

(f) Minority Interest in Net Income of Subsidiary 8q

7 5 8 Minority Interest in Net Assets of Subsidiary 8 7 5 8

To provide for minority interest in net income of

subsidiary, computed as follows:

Net income of subsidiary $38,750

Adjustments for working paper eliminations:

Elimination (b) (800)

Elimination (d) (5,400)

Elimination (e)

[($800 + $5,400) x 0.40] 2,480

Adjusted net income of subsidiary $35,030

Minority interest share ($35,030 x 0.25) $ 8,758

The McGraw-Hill Companies, Inc., 2006326 Modern Advanced Accounting, 10/e