solusi manual advanced acc zy Chap004

Chapter 04 - Consolidation of Wholly Owned Subsidiaries

CHAPTER 4

CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES

ANSWERS TO QUESTIONS

Q4-1 An adjusting entry is recorded on the company's books and causes the balances reported by the company to change. Eliminating entries, on the other hand, are not recorded on the books of the companies. Instead, they are entered in the consolidation workpaper so that when the amounts included in the eliminating entries are added to, or deducted from, the balances reported by the individual companies, the appropriate balances for the consolidated entity are reported.

Q4-2 The differential represents the difference between the acquisition-date fair value of the acquiree and its book value.

Q4-3 A company must acquire a subsidiary at a price equal to the subsidiary’s fair value, and that subsidiary must have a total acquisition-date fair value less than its book value.

Q4-4 Each of the stockholders' equity accounts of the subsidiary is eliminated in the consolidation process. Thus, none of the balances is included in the stockholders' equity accounts of the consolidated entity. That portion of the stockholders' equity claim assigned to the noncontrolling shareholders is reported indirectly in the balance assigned to the noncontrolling shareholders.

Q4-5 Current consolidation standards require recognition of the fair value of the subsidiary's individual assets and liabilities at the date of acquisition. At least some portion of the book value would not be included if the fair value of a particular asset or liability was less than book value.

Q4-6 One hundred percent of the fair value of the subsidiary’s assets and liabilities at the date of acquisition should be included. The type of asset or liability will determine whether a change in its value will be recognized following the date of acquisition.

Q4-7 Using a clearing account can reduce the chance of error in preparing consolidated statements. The number of accounts requiring adjustment for the difference between book value and fair value at the date of acquisition may be very large. Rather than including all such adjustments along with other eliminations in a single eliminating entry, it is often easier to place the unamortized balance in a differential clearing account and then use one or more subsequent entries to assign the clearing account balance to the appropriate individual accounts or account groups.

Q4-8 The differential account is a clearing account. Each time consolidated statements are prepared, the balance in the investment account is eliminated and the unamortized portion of the differential is entered in the clearing account. It then is assigned to the appropriate asset and liability accounts. This same process is followed each time consolidated statements are prepared. The eliminating entries do not actually remove the balance in the investment account from the parent's books; thus, the differential continues to be a part of the investment account balance until fully amortized.

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Q4-9 The investment account in the financial statements of the parent company shows its investment in the subsidiary as a single total and therefore does not provide information on the individual assets and liabilities held by the subsidiary, nor their relative values. The existence of a large differential indicates the parent paid well over book value to acquire ownership of the subsidiary. When the differential is assigned to identifiable assets or liabilities of the subsidiary, both the consolidated balance sheet and consolidated income statement are likely to provide information not available in the financial statements of the individual companies. The consolidated statements are likely to provide a better picture of the assets actually being used and the resulting income statement charges that should be reported.

Q4-10 Additional entries are needed to eliminate all income statement and retained earnings statement effects of intercorporate ownership and any transfers of goods and services between related companies.

Q4-11 Separate parts of the consolidation workpaper are used to develop the consolidated income statement, retained earnings statement, and balance sheet. All eliminating entries needed to complete the entire workpaper normally are entered before any of the three statements are prepared. The income statement portion of the workpaper is completed first so that net income can be carried forward to the retained earnings statement portion of the workpaper. When the retained earnings portion is completed, the ending balances are carried forward and entered in the consolidated balance sheet portion of the workpaper.

Q4-12 None of the dividends declared by the subsidiary are included in the consolidated retained earnings statement. Those which are paid to the parent have not gone outside the consolidated entity and therefore must be eliminated in preparing the consolidated statements. Those paid to noncontrolling shareholders are treated as a reduction in the net assets assigned to noncontrolling interest and also must be eliminated.

Q4-13 Consolidated net income is equal to the parent’s income from its own operations, excluding any investment income from consolidated subsidiaries, plus the income of each of the consolidated subsidiaries, adjusted for any differential write-off.

Q4-14 Consolidated net income includes 100 percent of the revenues and expenses of the individual consolidating companies arising from transactions with unaffiliated companies.

Q4-15 Consolidated retained earnings is defined in current accounting practice as that portion of the undistributed earnings of the consolidated entity accruing to the parent company shareholders.

Q4-16 Consolidated retained earnings at the end of the period is equal to the beginning consolidated retained earnings balance plus consolidated net income attributable to the controlling interest, less consolidated dividends.

Q4-17 The retained earnings statement shows the increase or decrease in retained earnings during the period. Thus, income for the period is added to the beginning balance and dividends are deducted in deriving the ending balance in retained earnings. Because the consolidation workpaper includes the retained earnings statement, the beginning retained earnings balance must be entered in the workpaper.

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Q4-18 An additional eliminating entry normally must be entered in the workpaper to expense an appropriate portion of the amount assigned to buildings and equipment. Normally, depreciation expense is debited and accumulated depreciation is credited.

Q4-19 The differential is simply a clearing account used in the consolidation process. If the differential arises because the fair value of land held by the subsidiary is greater than book value, the amount assigned to the differential will remain constant so long as the subsidiary continues to hold the land. When the differential arises because the fair value of depreciable or amortizable assets is greater than book value, the amount debited to the differential account each period will decrease as the parent amortizes an appropriate portion of the differential against investment income.

Q4-20 Push-down accounting occurs when the assets and liabilities of the subsidiary are revalued on the subsidiary's books as a result of the purchase of shares by the parent company. The basis of accountability that the parent company would use in accounting for its investment in the various assets and liabilities is used to revalue the subsidiary's assets and liabilities; thereby pushing down the parent's basis of accountability onto the books of the subsidiary.

Q4-21 Push-down accounting is considered appropriate when a subsidiary is substantially wholly owned by the parent.

Q4-22 When the assets and liabilities of the subsidiary are revalued at the date of acquisition there will no longer be a differential. The parent's portion of the revised carrying value of the net assets on the books of the subsidiary will agree with the balance in the investment account reported by the parent.

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SOLUTIONS TO CASES

C4-1 Need for Consolidation Process

After the financial statements of each of the individual companies are prepared in accordance with generally accepted accounting principles, consolidated financial statements must be prepared for the economic entity as a whole. The individual companies generally record transactions with other subsidiaries on the same basis as transactions with unrelated enterprises. In preparing consolidated financial statements, the effects of all transactions with related companies must be removed, just as all transactions within a single company must be removed in preparing financial statements for that individual company. It therefore is necessary to prepare a consolidation workpaper and to enter a number of special journal entries in the workpaper to remove the effects of the intercorporate transactions. The parent company also reports an investment in each of the subsidiary companies and investment income or loss in its financial statements. Each of these accounts must be eliminated as well as the stockholders' equity accounts of the subsidiaries. The latter must be eliminated because only the parent's ownership is held by parties outside the consolidated entity.

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C4-2 Account Presentation

MEMO

To: Chief AccountantPrime Company

From: , Accounting Staff

Re: Combining Broadly Diversified Balance Sheet Accounts

Many manufacturing and merchandising enterprises excluded finance, insurance, real estate, leasing, and perhaps other types of subsidiaries from consolidation prior to 1987 on the basis of “nonhomogeneous” operations. Companies generally argued that the accounts of these companies were dissimilar in nature and combining them in the consolidated financial statements would mislead investors. FASB 94 specifically eliminated the exception for nonhomogeneous operations. [FASB 94, Par. 9] FASB 160 affirms the requirement for consolidating entities in which a controlling financial interest is held.

Prime Company controls companies in very different industries and combining the accounts of its subsidiaries may lead to confusion by some investors; however, it may be equally confusing to provide detailed listings of assets and liabilities by industry or other breakdowns in the consolidated balance sheet. The actual number of assets and liabilities presented in the consolidated balance sheet must be carefully considered, but is the decision of Prime’s management.

It is important to recognize that the notes to the consolidated financial statements are regarded as an integral part of the financial statements and Prime Company is required to include in its notes to the financial statements certain information on its reportable segments [FASB 131]. Because of the diversity of its ownership, Prime may wish to provide more than the minimum disclosures specified in FASB 131. Segment information appears to be used quite broadly by investors and permits the company to provide sufficient detail to assist the financial statement user in gaining a better understanding of the various operating divisions of the company.

You have requested information on those situations in which it may not be appropriate to combine similar appearing accounts of two or more subsidiaries. The following is a partial listing of such situations: (a) the accounts of a subsidiary should not be included along with other subsidiaries if control of the assets and liabilities does not rest with Prime Company, as when a subsidiary is in receivership; (b) while the assets and liability accounts of the subsidiary should be combined with the parent, the equity account balances should not; (c) negative account balances in cash or accounts receivable should be reclassified as liabilities rather than being added to the positive

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C4-2 (continued)

balances of other affiliates, and (d) assets pledged for a specific purpose and not available for other use by the consolidated entity generally should be separately reported.

Primary citations:FASB 94FASB 131FASB 160

Secondary sources:ARB 51FASB 14

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C4-3 Consolidating an Unprofitable Subsidiary

MEMO

TO: Chief AccountantAmazing Chemical Corporation

FROM: , Accounting Staff

Re: Consolidation of Unprofitable Boatyard

This memo is intended to provide recommendations on the presentation of the boatyard in Amazing Chemical’s consolidated financial statements. Amazing Chemical Corporation currently has full ownership of the boatyard and should fully consolidate the boatyard in its financial statements. Consolidated statements should be prepared when a company directly or indirectly has a controlling financial interest in one or more other companies. [ARB 51, Par. 1] This requirement has been reaffirmed by FASB 160.

Prior to the issuance of FASB 94, Amazing Chemical may have justified excluding the boatyard from consolidation based on the differences in operating characteristics between the subsidiary and the parent company; however, FASB 94 specifically deleted the nonhomogeneity exclusion [FASB 94, Par. 9]. Thus, Amazing Chemical appears to be following generally accepted accounting procedures in fully consolidating the boatyard in its financial statements and should continue to do so.

The operations of the boatyard appear to be distinct from the other operations of the parent company and its losses appear to be sufficient to establish it as a reportable segment [FASB 131, Par. 10 and 18]. While the operating losses of the boatyard may not be evident in analyzing the consolidated income statement, a review of the notes to the consolidated statements should provide adequate disclosure of its operations as a reportable segment. The financial statements for the current period should contain these disclosures and if prior period statements have not included the boatyard as a reportable segment it may be necessary to restate those statements.

Failure of the president of Amazing Chemical to receive approval by the board of directors for the purchase of the boatyard and his subsequent actions to keep information about its operations from the board members appears to be a serious breach of ethics. These actions by the president should immediately be brought to the attention of the board of directors for appropriate action by the board.

Primary citations:ARB 51, Par. 1FASB 94, Par. 9 FASB 131, Par. 10 and 18FASB 160

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C4-4 Assigning an Acquisition Differential

It may be difficult to determine the amount of the differential to be assigned to the manufacturing facilities of Ball Corporation. The equipment is relatively old and may be in varying states of repair or operating condition. Some units may be technologically obsolete or of little value because production needs have changed. The $600,000 estimated fair value of net assets therefore may be difficult to document and even more difficult to assign to specific assets and liabilities.

Inventories should be compared to sales to determine if Ball has excess balances on hand. Factors such as the degree of salability, physical condition, and expected sales prices should be examined as well in determining the portion of the differential to be assigned to inventory. The LIFO inventory balances are likely to be below fair value while the FIFO balances may be relatively close to fair value. The amount of differential assigned to inventory will be significantly affected by the rate of change in inventory costs since the LIFO inventory method was adopted and the relative magnitude of inventory on hand under each method.

No mention is made of patents or other intangible assets developed by Ball Corporation. While Ball Corporation could not record as assets its expenditures on research and development, the buyer should recognize all tangible and intangible assets at fair value before goodwill is computed. Goodwill normally is measured as the excess of the sum of the consideration given in the acquisition and the fair value of the noncontrolling interest over the fair value of the identifiable net assets of the acquired company. Timber must evaluate the fair value of Ball as a whole and consider the fair value of the equity interest in Ball that it is not acquiring.

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C4-5 Negative Retained Earnings

Net assets of the subsidiary increase when positive earnings results occur and decrease when negative results occur. A negative retained earnings balance indicates that the other stockholders' equity balances of the subsidiary exceed the reported net assets of the subsidiary.

a. The negative retained earnings balance of the subsidiary is eliminated in the consolidation process and does not affect the dollar amounts reported in the consolidated stockholders' equity accounts.

b. The consolidation process does not change in any substantive manner. Rather than debiting retained earnings in the entry to eliminate the stockholders' equity balances of the subsidiary in the consolidation workpaper, the account must be credited.

c. Goodwill is recorded whenever the fair value of the acquired company as a whole, as evidenced by the fair value of the consideration given in the acquisition and the fair value of the noncontrolling interest, exceeds the fair value of the net identifiable assets acquired. In this case it is not known whether the fair value is above or below book value. Sloan Company recorded losses in prior periods and may have written down all assets that had decreased in value. On the other hand, management may have been reluctant to recognize such losses in order to avoid reducing earnings even further. In the extreme, it may even have sold all assets that had appreciated in value. Many factors, including the future earning power of the company, will affect the purchase price and it is therefore difficult to determine whether goodwill will be recorded in a situation such as this.

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C4-6 Balance Sheet Reporting Issues

a. Under the first two alternatives, the cars and associated debt would appear on Crumple's consolidated balance sheet. In the first case the debt is recorded directly by Crumple. In the second case, the leasing subsidiary should be fully consolidated. Although in economic substance there may be little difference between creating a leasing subsidiary and creating a trust to accomplish the same goals, consolidation of a trust generally has not been required under generally accepted accounting procedures. However, the recent issuance of FASB 160 changes the definition of a subsidiary to include trusts. Although the FASB is still grappling with specifically what entities to include in consolidation, it now seems unlikely that a trust in which another company has a controlling financial interest can escape being included in the consolidated financial statements. If Crumple has the capability to name the directors of the trust and to administer its activities, the activities of the trust may be carried out to benefit Crumple in virtually the same manner as an operating corporate affiliate. The situation presented provides an opportunity to think about the concept of control and the use of nontraditional organization structures in carrying out the business activities of a company.

b. Crumple apparently has not considered selling additional common or preferred shares. The sale of additional shares or use of convertible securities would be one set of options to consider. If Crumple is willing to lease the automobiles, other leasing companies or automobile manufacturers may be interested in participating. If the availability of rental cars is considered important in the economic development of the states into which Crumple intends to expand, the company may be able to negotiate low cost loans or partially forgivable loans in acquiring the facilities and automobiles needed for expansion.

c. Some individuals may focus on the fact that Crumple will not get any residual amounts if the trust is dissolved. However, through management charges and selection of lease rates, Crumple is likely to be able to leave as large or small a balance in the trust as it wishes. Students may wish to look at the financial statements of one or more leasing companies in arriving at their recommendation(s).

From a financial reporting perspective, all three alternatives now should be reported in essentially the same manner in the consolidated financial statements. Thus, the financial reporting aspects of the three alternatives have become irrelevant. However, even when different alternatives lead to different reporting treatments, the choice of an alternative should be based on economic considerations rather than on the financial reporting effects. Even though the three financing alternatives Crumple is considering are reported in the same manner, they each may have different legal, tax, and economic aspects that should be considered by Crumple’s management.

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C4-7 Subsidiary Ownership: AMR Corporation and International Lease

a. (1) Airline service(2) American Airlines, Inc.(3) Fort Worth, Texas(4) Delaware(5) Delaware(6) The New York Stock Exchange(7) 20(8) All of AMR’s subsidiaries are wholly owned except several subsidiaries of American Airlines.

b. (1) International Lease Finance Corporation leases aircraft to airlines.(2) AIG Capital Corporation and National Union Fire Insurance Company of Pittsburgh, Pennsylvania are the direct owners of International Lease.(3) Los Angeles, California(4) California(5) International Lease’s common stock is not publicly traded because the company is an indirect wholly owned subsidiary of American International Group.(6) American International Group, Inc., is the parent of the consolidated group. American International is a holding company with businesses that include insurance, and related products, financial services, and asset management.

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SOLUTIONS TO EXERCISES

E4-1 Multiple-Choice Questions on Consolidation Process

1. c

2. d [AICPA Adapted]

3. d

4. b

5. a

E4-2 Multiple-Choice Questions on Consolidation [AICPA Adapted]

1. c

2. a

3. d

4. c $400,000 = $1,700,000 - $1,300,000

E4-3 Basic Elimination Entry

Common Stock – Broadway Corporation 200,000Additional Paid-In Capital 300,000Retained Earnings 100,000 Investment in Broadway Common Stock 600,000

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E4-4 Eliminating Entries with Differential

a. Eliminating entries:

E(1) Common Stock – Brown Company 20,000 Retained Earnings 37,000 Differential 43,000 Investment in Brown Company Stock 100,000

Computation of differentialFair value of consideration given $100,000 Book value of Brown's assets $85,000 Book value of Brown's liabilities (28,000 )Net book value (57,000 )Differential $ 43,000

E(2) Inventory 5,000 Buildings and Equipment (net) 20,000 Goodwill 18,000 Differential 43,000

b. Journal entries used to record transactions, adjust account balances, and close income and revenue accounts at the end of the period are recorded in the company's books and change the reported balances. On the other hand, eliminating entries are entered only in the consolidation workpaper to facilitate the preparation of consolidated financial statements. As a result, they do not change the balances recorded in the company's accounts and must be reentered each time a consolidation workpaper is prepared.

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E4-5 Balance Sheet Consolidation

Eliminating entries:

E(1) Common Stock – Thorne Corporation 120,000 Retained Earnings 240,000 Differential 35,000 Investment in Thorne Corporation Stock 395,000 Eliminate investment balance.

Computation of differential

Fair value of consideration given $395,000 Book value of Thorne's assets $640,000 Book value of Thorne's liabilities (280,000)Net book value (360,000)Differential $ 35,000

E(2) Inventory 36,000 Goodwill 19,000 Buildings (net) 20,000 Differential 35,000 Assign differential.

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E4-6 Acquisition with Differential

a. Goodwill is $60,000, computed as follows:

Book value of Conger's net assets: Common stock outstanding $ 80,000 Retained earnings 130,000 $210,000 Fair value increment: Land ($100,000 - $80,000 $ 20,000 Buildings ($400,000 - $220,000) 180,000 200,000 Fair value of net assets $410,000 Fair value of consideration given (470,000 )Goodwill $ 60,000

b. Eliminating entries needed:

E(1) Common Stock – Conger Corporation 80,000Retained Earnings 130,000Differential 260,000 Investment in Conger Corporation Stock 470,000 Eliminate investment balance: $260,000 = $470,000 - $80,000 - $130,000

E(2) Land 20,000Buildings 180,000Goodwill 60,000 Differential 260,000 Assign differential.

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E4-7 Balance Sheet Workpaper

a. Eliminating entry:

E(1) Common Stock – Faith Corporation 60,000Retained Earnings 90,000 Investment in Faith Corporation Stock 150,000 Eliminate investment balance.

b. Blank Corporation and Faith CorporationConsolidated Balance Sheet Workpaper

December 31, 20X2

Blank Faith Eliminations Consol- Item Corp. Corp. Debit _ Credit Idated

Cash 65,000 18,000 83,000Accounts Receivable 87,000 37,000 124,000Inventory 110,000 60,000 170,000Buildings and Equipment (net) 220,000 150,000 370,000Investment in Faith Corporation Stock 150,000 (1)150,000 _ Total Debits 632,000 265,000 747,000

Accounts Payable 92,000 35,000 127,000Notes Payable 150,000 80,000 230,000Common Stock Blank Corporation 100,000 100,000 Faith Corporation 60,000 (1) 60,000Retained Earnings 290,000 90,000 (1) 90,000 290,000Total Credits 632,000 265,000 150,000 150,000 747,000

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E4-8 Balance Sheet Workpaper with Differential


E(1) Common Stock – Faith Corporation 60,000Retained Earnings 90,000Differential 39,000 Investment in Faith Corporation Stock 189,000 Eliminate investment balance.

E(2) Inventory 24,000Buildings and Equipment (net) 15,000 Differential 39,000 Assign Differential.

b. Blank Corporation and Faith CorporationConsolidated Balance Sheet Workpaper

December 31, 20X2

Blank Faith Eliminations Consol- Item Corp. Corp. Debit Credit idated

Cash 26,000 18,000 44,000Accounts Receivable 87,000 37,000 124,000Inventory 110,000 60,000 (2) 24,000 194,000Buildings and Equipment(net) 220,000 150,000 (2) 15,000 385,000Investment in Faith Corporation Stock 189,000 (1)189,000Differential (1) 39,000 (2) 39,000 Total Debits 632,000 265,000 747,000

Accounts Payable 92,000 35,000 127,000Notes Payable 150,000 80,000 230,000Common Stock Blank Corporation 100,000 100,000 Faith Corporation 60,000 (1) 60,000Retained Earnings 290,000 90,000 (1) 90,000 290,000Total Credits 632,000 265,000 228,000 228,000 747,000

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E4-9 Workpaper for Wholly Owned Subsidiary

a. Eliminating entry:

E(1) Common Stock – Premium Builders 140,000Retained Earnings 10,000Inventory 7,000Buildings and Equipment (net) 12,000 Cash and Receivables 2,000 Investment in Premium Builders Stock 167,000 Eliminate investment balance.

b. Gold Enterprises and Premium BuildersConsolidated Balance Sheet Workpaper

January 1, 20X5

Gold Enter- Premium Eliminations Consol-

Item prises Builders Debit Credit idated

Cash and Receivables 80,000 30,000 (1) 2,000 108,000Inventory 150,000 350,000 (1) 7,000 507,000Buildings and Equipment (net) 430,000 80,000 (1) 12,000 522,000Investment in Premium Stock 167,000 (1)167,000 Total Debits 827,000 460,000 1,137,000

Current Liabilities 100,000 110,000 210,000Long-Term Debt 400,000 200,000 600,000Common Stock Gold 200,000 200,000 Premium 140,000 (1)140,000Retained Earnings 127,000 10,000 (1) 10,000 ________ 127,000 Total Credits 827,000 460,000 169,000 169,000 1,137,000

c. Gold Enterprises and SubsidiaryConsolidated Balance Sheet

January 1, 20X5

Cash and Receivables $ 108,000 Current Liabilities $ 210,000Inventory 507,000 Long-Term Debt 600,000Buildings and Common Stock $200,000 Equipment (net) 522,000 Retained Earnings 127,000 327,000

Total Liabilities &Total Assets $1,137,000 Stockholders' Equity $1,137,000

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E4-10 Computation of Consolidated Balances

a. Inventory $ 140,000

b. Land $ 60,000

c. Buildings and Equipment $ 550,000

d. Goodwill: Fair value of consideration given $ 576,000 Book value of net assets at acquisition $450,000 Fair value increment for: Inventory 20,000 Land (10,000) Buildings and equipment 70,000 Fair value of net assets at acquisition (530,000 )Balance assigned to goodwill $ 46,000

e. Investment in Astor Corporation: Nothing would be reported; the balance in the investment account is eliminated.

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E4-11 Multiple-Choice Questions on Balance Sheet Consolidation

1. d $215,000 = $130,000 + $85,000

2. b $23,000 = $198,000 – ($405,000 - $265,000 + $15,000 + $20,000)

3. c $1,109,000 = Total Assets of Top Corp. $ 844,000 Less: Investment in Sun Corp. (198,000 )Book value of assets of Top Corp. $ 646,000 Book value of assets of Sun Corp. 405,000 Total book value $1,051,000 Payment in excess of book value ($198,000 - $140,000) 58,000 Total assets reported $1,109,000

4. c $701,500 = ($61,500 + $95,000 + $280,000) + ($28,000 + $37,000+ $200,000)

5. d $257,500 = The amount reported by Top Corporation

6. a $407,500 = The amount reported by Top Corporation

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E4-12 Consolidation Entries for Wholly Owned Subsidiary

a. Journal entries recorded by Trim Corporation:

(1) Investment in Round Corporation Stock 400,000 Cash 400,000 Record investment.

(2) Cash 25,000 Investment in Round Corporation Stock 25,000 Record dividends from Round Corporation.

(3) Investment in Round Corporation Stock 80,000 Income from Subsidiary 80,000 Record equity-method income.

b. Eliminating entries:

E(1) Income from Subsidiary 80,000 Dividends Declared 25,000 Investment in Round Corporation Stock 55,000 Eliminate income from subsidiary.

E(2) Common Stock — Round Corporation 120,000Retained Earnings, January 1 280,000 Investment in Round Corporation Stock 400,000 Eliminate beginning investment balance.

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E4-13 Basic Consolidation Entries for Fully Owned Subsidiary

a. Journal entries recorded by Purple Company:

(1) Investment in Amber Corporation Stock 500,000 Cash 500,000 Record investment.

(2) Cash 20,000 Investment in Amber Corporation Stock 20,000 Record dividends from Amber Corporation.

(3) Investment in Amber Corporation Stock 50,000 Income from Subsidiary 50,000 Record equity-method income.


E(1) Income from Subsidiary 50,000 Dividends Declared 20,000 Investment in Amber Corporation Stock 30,000 Eliminate income from subsidiary.

E(2) Common Stock — Amber Corporation 300,000Retained Earnings, January 1 200,000 Investment in Amber Corporation Stock 500,000 Eliminate beginning investment balance.

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E4-14 Wholly Owned Subsidiary with Differential

a. Journal entries recorded by Winston Corporation:

(1) Investment in Canton Corporation Stock 178,000 Cash 178,000 Record investment.

(2) Cash 12,000 Investment in Canton Corporation Stock 12,000 Record dividends from Canton Corporation.

(3) Investment in Canton Corporation Stock 30,000 Income from Subsidiary 30,000 Record equity-method income.

(4) Income from Subsidiary 4,000 Investment in Canton Corporation Stock 4,000 Amortize differential assigned to equipment: $4,000 = $28,000 / 7 years

b. Eliminating entries December 31, 20X3:

E(1) Income from Subsidiary 26,000 Dividends Declared 12,000 Investment in Canton Corporation Stock 14,000 Eliminate income from subsidiary.

E(2) Common Stock — Canton Corporation 60,000Retained Earnings, January 1 90,000Differential 28,000 Investment in Canton Corporation Stock 178,000 Eliminate beginning investment balance.

E(3) Equipment 28,000 Differential 28,000 Assign beginning differential.

E(4) Depreciation Expense 4,000 Accumulated Depreciation 4,000 Amortize differential related to equipment.

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E4-15 Basic Consolidation Workpaper


E(1) Income from Subsidiary 30,000 Dividends Declared 10,000 Investment in Shaw Corporation Stock 20,000 Eliminate income from subsidiary.

E(2) Common Stock — Shaw Corporation 100,000Retained Earnings, January 1 50,000 Investment in Shaw Corporation Stock 150,000 Eliminate beginning investment balance.

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E4-15 (continued)

b. Blake Corporation and Shaw CorporationConsolidation Workpaper

December 31, 20X3

Blake Shaw Eliminations Consol- Item Corp. Corp. Debit Credit idated

Sales 200,000 120,000 320,000 Income from Subsidiary 30,000 (1) 30,000 Credits 230,000 120,000 320,000 Depreciation Expense 25,000 15,000 40,000 Other Expenses 105,000 75,000 180,000 Debits (130,000) (90,000 ) (220,000)Income, carry forward 100,000 30,000 30,000 100,000

Ret. Earnings, Jan. 1 230,000 50,000 (2) 50,000 230,000 Income, from above 100,000 30,000 30,000 100,000

330,000 80,000 330,000 Dividends Declared (40,000 ) (10,000 ) (1) 10,000 (40,000 )Ret. Earnings, Dec. 31, carry forward 290,000 70,000 80,000 10,000 290,000

Current Assets 145,000 105,000 250,000 Depreciable Assets 325,000 225,000 550,000 Investment in Shaw Corporation Stock 170,000 (1) 20,000

(2)150,000 Debits 640,000 330,000 800,000

Current Liabilities 50,000 40,000 90,000 Long-Term Debt 100,000 120,000 220,000 Common Stock Blake Corporation 200,000 200,000 Shaw Corporation 100,000 (2)100,000Retained Earnings, from above 290,000 70,000 80,000 10,000 290,000 Credits 640,000 330,000 180,000 180,000 800,000

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E4-16 Basic Consolidation Workpaper for Second Year


E(1) Income from Subsidiary 35,000 Dividends Declared 15,000 Investment in Shaw Corporation Stock 20,000 Eliminate income from subsidiary.

E(2) Common Stock — Shaw Corporation 100,000Retained Earnings, January 1 70,000 Investment in Shaw Corporation Stock 170,000 Eliminate beginning investment balance.

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E4-16 (continued)

b. Blake Corporation and Shaw CorporationConsolidation Workpaper

December 31, 20X4

Blake Shaw Eliminations Consol- Item Corp. Corp. Debit Credit idated

Sales 230,000 140,000 370,000 Income from Subsidiary 35,000 (1) 35,000 Credits 265,000 140,000 370,000 Depreciation Expense 25,000 15,000 40,000 Other Expenses 150,000 90,000 240,000 Debits (175,000) (105,000) (280,000)Income, carry forward 90,000 35,000 35,000 90,000


380,000 105,000 380,000 Dividends Declared (50,000) (15,000 ) (1) 15,000 (50,000 )Ret. Earnings, Dec. 31, Carry forward 330,000 90,000 105,000 15,000 330,000

Current Assets 210,000 150,000 360,000 Depreciable Assets 300,000 210,000 510,000 Investment in Shaw Corporation Stock 190,000 (1) 20,000

(2)170,000 Debits 700,000 360,000 870,000

Current Liabilities 70,000 50,000 120,000 Long-Term Debt 100,000 120,000 220,000 Common Stock Blake Corporation 200,000 200,000 Shaw Corporation 100,000 (2)100,000Retained Earnings, from above 330,000 90,000 105,000 15,000 330,000 Credits 700,000 360,000 205,000 205,000 870,000

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E4-17 Consolidation Workpaper with Differential


E(1) Income from Subsidiary 25,000 Dividends Declared 10,000 Investment in Short Company Stock 15,000 Eliminate income from subsidiary.

E(2) Common Stock — Short Company 100,000Retained Earnings, January 1 50,000Differential 30,000 Investment in Short Company Stock 180,000 Eliminate beginning investment balance.

E(3) Depreciable Assets (net) 30,000 Differential 30,000 Assign beginning differential.

E(4) Depreciation Expense 5,000 Depreciable Assets (net) 5,000 Amortize differential.

4-30


E4-17 (continued)

b. Kennelly Corporation and Short CompanyConsolidation Workpaper

December 31, 20X5

Kennelly Short Eliminations Consol- Item Corp. Co. Debit Credit idated

Sales 200,000 120,000 320,000 Income from Subsidiary 25,000 (1) 25,000 Credits 225,000 120,000 320,000 Depreciation Expense 25,000 15,000 (4) 5,000 45,000 Other Expenses 105,000 75,000 180,000 Debits (130,000) (90,000 ) (225,000)Income, carry forward 95,000 30,000 30,000 95,000



Cash 15,000 5,000 20,000 Accounts Receivable 30,000 40,000 70,000 Inventory 70,000 60,000 130,000 Depreciable Assets (net) 325,000 225,000 (3) 30,000 (4) 5,000 575,000 Investment in Short Company Stock 195,000 (1) 15,000

(2) 180,000Differential (2) 30,000 (3) 30,000 Debits 635,000 330,000 795,000

Accounts Payable 50,000 40,000 90,000 Notes Payable 100,000 120,000 220,000 Common Stock Kennelly Corporation 200,000 200,000 Short Company 100,000 (2)100,000Retained Earnings, from above 285,000 70,000 80,000 10,000 285,000 Credits 635,000 330,000 240,000 240,000 795,000

4-31


E4-18 Consolidation Workpaper for Subsidiary


E(1) Income from Subsidiary 35,000 Dividends Declared 15,000 Investment in Growth Company Stock 20,000 Eliminate income from subsidiary.

E(2) Common Stock — Growth Company 100,000Retained Earnings, January 1 70,000 Investment in Growth Company Stock 170,000 Eliminate beginning investment balance.

4-32


E4-18 (continued)

b. Land Corporation and Growth CompanyConsolidation Workpaper

December 31, 20X4

Land Growth Eliminations Consol- Item Corp. Co. Debit Credit idated

Sales 230,000 140,000 370,000 Income from Subsidiary 35,000 (1) 35,000 Credits 265,000 140,000 370,000 Depreciation Expense 25,000 15,000 40,000 Other Expenses 150,000 90,000 240,000 Debits (175,000) (105,000 ) _________ ________ ( 280,000 )Income, carry forward 90,000 35,000 35,000 90,000


408,000 105,000 408,000 Dividends Declared (50,000 ) (15,000) _________ (1) 15,000 (50,000 )Ret. Earnings, Dec. 31, carry forward 358,000 90,000 105,000 15,000 358,000

Current Assets 238,000 150,000 388,000 Depreciable Assets 500,000 300,000 800,000 Investment in Growth Company Stock 190,000 (1) 20,000

(2)170,000 Debits 928,000 450,000 1,188,000

Accum. Depreciation 200,000 90,000 290,000 Current Liabilities 70,000 50,000 120,000 Long-Term Debt 100,000 120,000 220,000 Common Stock Land Corporation 200,000 200,000 Growth Company 100,000 (2)100,000Retained Earnings, from above 358,000 90,000 105,000 15,000 358,000 Credits 928,000 450,000 205,000 205,000 1,188,000

4-33


E4-19 Push-Down Accounting

a. Entry to record acquisition of Louis stock on books of Jefferson:

Investment in Louis Corporation Stock 789,000 Cash 789,000

b. Entry to record revaluation of assets on books of Louis Corporation:

Land 15,000Buildings 50,000Equipment 20,000 Revaluation Capital 85,000

c. Investment elimination entry in consolidation workpaper (no other entries needed):

Common Stock – Louis Corporation 200,000Additional Paid-In Capital 425,000Retained Earnings 79,000Revaluation Capital 85,000 Investment in Louis Corporation Stock 789,000

4-34


4-35


SOLUTIONS TO PROBLEMS

P4-20 Assignment of Differential in Workpaper

a. Teresa Corporation and Sally EnterprisesConsolidated Balance Sheet Workpaper

January 1, 20X4

SallyTeresa Enter- Eliminations Consol-

Item Corp. prises Debit Credit idated

Cash and Receivables 40,000 20,000 60,000Inventory 95,000 40,000 135,000Land 80,000 90,000 170,000Buildings and Equipment 400,000 230,000 (2) 10,000 640,000Investment in Sally Enterprises Stock 290,000 (1)290,000Differential (1) 40,000 (2) 40,000Goodwill (2) 30,000 30,000 Total Debits 905,000 380,000 1,035,000

Accumulated Depreciation 175,000 65,000 240,000Accounts Payable 60,000 15,000 75,000Notes Payable 100,000 50,000 150,000Common Stock Teresa Corporation 300,000 300,000 Sally Enterprises 100,000 (1)100,000Retained Earnings 270,000 150,000 (1)150,000 270,000 Total Credits 905,000 380,000 330,000 330,000 1,035,000

b. Teresa Corporation and SubsidiaryConsolidated Balance Sheet

January 1, 20X4

Cash and Receivables $ 60,000Inventory 135,000Land 170,000Buildings and Equipment $640,000 Less: Accumulated Depreciation (240,000 ) 400,000Goodwill 30,000 Total Assets $795,000

Accounts Payable $ 75,000Notes Payable 150,000Common Stock $300,000 Retained Earnings 270,000 570,000 Total Liabilities and Stockholders' Equity $795,000

4-36


4-37


P4-21 Computation of Consolidated Balances

a. Inventories ($110,000 + $170,000) $280,000

b. Buildings and Equipment (net) ($350,000 + $375,000) $725,000

c. Investment in Decibel stock will be fully eliminated and will not appear in the consolidated balance sheet.

d. Goodwill Fair value of consideration given $280,000 Fair value of Decibel's net assets: Cash and receivables $ 40,000 Inventory 170,000 Buildings and equipment (net) 375,000 Accounts payable (90,000) Notes payable (250,000)Fair value of net identifiable assets (245,000 )Goodwill to be reported $ 35,000

Note: Goodwill on books of Decibel is not an identifiable asset and therefore is not included in the computation of Decibel's net identifiable assets at the date of acquisition.

e. Common Stock $400,000

f. Retained Earnings $105,000

4-38


P4-22 Balance Sheet Consolidation [AICPA Adapted]

Case Inc. and Frey Inc.Consolidated Balance Sheet Workpaper

December 31, 20X4

Case Frey Eliminations Consol- Item Inc. Inc. Debit Credit idated

Cash 825,000 330,000 1,155,000Accounts and Other Receivables 2,140,000 835,000 2,975,000Inventory 2,310,000 1,045,000 3,355,000Land 650,000 300,000 (2) 250,000 1,200,000Deprec. Assets (net) 4,575,000 1,980,000 6,555,000Investment in Frey Inc. Stock 2,680,000 (1)2,680,000Long-Term Investments and Other Assets 865,000 385,000 1,250,000Differential (1) 250,000 (2) 250,000 Total Debits 14,045,000 4,875,000 16,490,000Accounts Payable and Other Current Liabilities 2,465,000 1,145,000 3,610,000Long-Term Debt 1,900,000 1,300,000 3,200,000Common Stock, $25 Par 3,200,000 1,000,000 (1) 1,000,000 3,200,000Additional Paid-In Capital 2,100,000 190,000 (1) 190,000 2,100,000Retained Earnings 4,380,000 1,240,000 (1) 1,240,000 _________ 4,380,000 Total Credits 14,045,000 4,875,000 2,930,000 2,930,000 16,490,000

4-39


P4-23 Consolidated Balance Sheet


E(1) Common Stock — Lake Corporation 100,000Retained Earnings 120,000Differential 32,000 Investment in Lake Corporation Stock 252,000 Eliminate investment balance.

E(2) Buildings and Equipment 40,000 Accumulated Depreciation 8,000 Differential 32,000 Assign differential.

b. Thompson Company and Lake CorporationConsolidated Balance Sheet Workpaper

December 31, 20X3

Thompson Lake Eliminations Consol- Item Co. Corp. Debit Credit idated

Cash 30,000 20,000 50,000Accounts Receivable 100,000 40,000 140,000Land 60,000 50,000 110,000Buildings and Equipment 500,000 350,000 (2) 40,000 890,000Investment in Lake Corporation Stock 252,000 (1)252,000Differential (1) 32,000 (2) 32,000 Total Debits 942,000 460,000 1,190,000

Accum. Depreciation 230,000 75,000 (2) 8,000 313,000Accounts Payable 80,000 10,000 90,000Taxes Payable 40,000 70,000 110,000Notes Payable 100,000 85,000 185,000Common Stock 200,000 100,000 (1)100,000 200,000Retained Earnings 292,000 120,000 (1)120,000 292,000 Total Credits 942,000 460,000 292,000 292,000 1,190,000

4-40


P4-24 Comprehensive Problem: Consolidation in Subsequent Period

a. Journal entries recorded by Thompson Company:

(1) Cash 12,000 Investment in Lake Corporation Stock 12,000 Record dividends from subsidiary.

(2) Investment in Lake Corporation Stock 32,000 Income from Subsidiary 32,000 Record equity-method income.

(3) Income from Subsidiary 4,000 Investment in Lake Corporation Stock 4,000 Amortize differential: $40,000 / 10 years


E(1) Income from Subsidiary 28,000 Dividends Declared 12,000 Investment in Lake Corporation Stock 16,000 Eliminate income from subsidiary.

E(2) Common Stock — Lake Corporation 100,000Retained Earnings, January 1 120,000Differential 32,000 Investment in Lake Corporation Stock 252,000 Eliminate beginning investment balance.

E(3) Buildings and Equipment 40,000 Accumulated Depreciation 8,000 Differential 32,000 Assign differential.

E(4) Depreciation Expense 4,000 Accumulated Depreciation 4,000 Amortize differential.

E(5) Accounts Payable 2,500 Accounts Receivable 2,500 Eliminate intercorporate receivable/payable.

4-41


P4-24 (continued)

c. Thompson Company and Lake CorporationConsolidation Workpaper

December 31, 20X4

Thompson Lake Eliminations Consol- Item Co. Corp. Debit Credit idated

Service Revenue 610,000 240,000 850,000 Income from Subsidiary 28,000 (1) 28,000 Credits 638,000 240,000 850,000 Cost of Services Provided 470,000 130,000 600,000 Depreciation Expense 35,000 18,000 (4) 4,000 57,000 Other Expenses 57,000 60,000 117,000 Debits (562,000 ) (208,000) (774,000 )Income, carry forward 76,000 32,000 32,000 76,000



Cash 74,000 42,000 116,000 Accounts Receivables 130,000 53,000 (5) 2,500 180,500 Land 60,000 50,000 110,000 Buildings and Equipment 500,000 350,000 (3) 40,000 890,000 Investment in Lake Corporation Stock 268,000 (1) 16,000

(2)252,000Differential (2) 32,000 (3) 32,000 Debits 1,032,000 495,000 1,296,500

Accum. Depreciation 265,000 93,000 (3) 8,000(4) 4,000 370,000

Accounts Payable 71,000 17,000 (5) 2,500 85,500 Taxes Payable 58,000 60,000 118,000 Notes Payable 100,000 85,000 185,000 Common Stock Thompson Company 200,000 200,000 Lake Corporation 100,000 (2)100,000Retained Earnings, from above 338,000 140,000 152,000 12,000 338,000 Credits 1,032,000 495,000 326,500 326,500 1,296,500

4-42


4-43


P4-25 Acquisition at Other than Fair Value of Net Assets

a. Ownership acquired for $280,000:

E(1) Common Stock — Best Company 80,000Retained Earnings 175,000Differential 25,000 Investment in Best Company Stock 280,000 Eliminate investment balance.

E(2) Land 20,000Goodwill 12,000 Inventory 7,000 Differential 25,000 Assign differential.

b. Ownership acquired for $251,000:

E(1) Common Stock — Best Company 80,000Retained Earnings 175,000 Differential 4,000 Investment in Best Company Stock 251,000 Eliminate investment balance.

E(2) Land 20,000Differential 4,000 Inventory 7,000 Retained Earnings 17,000 Assign differential.

4-44


P4-26 Intercorporate Receivables and Payables


E(1) Common Stock — Normal Company 150,000Capital in Excess of Par 140,000Differential 20,000 Retained Earnings 5,000 Investment in Normal Company Stock 305,000 Eliminate investment balance.

E(2) Goodwill 20,000 Differential 20,000 Assign differential.

E(3) Bonds Payable 50,000 Investment in Normal Company Bonds 50,000 Eliminate intercompany bonds.

E(4) Accounts Payable 10,000 Accounts Receivable 10,000 Eliminate intercompany receivable/payable.

4-45


P4-26 (continued)

b. Kim Corporation and Normal CompanyConsolidated Balance Sheet Workpaper

January 1, 20X7

Kim Normal Eliminations Consol- Item Corp. Company Debit Credit idated

Cash 70,000 35,000 105,000Accounts Receivable 90,000 65,000 (4) 10,000 145,000Inventory 84,000 80,000 164,000Buildings and Equipment 400,000 300,000 700,000Investment in: Normal Company Stock 305,000 (1)305,000 Normal Company Bonds 50,000 (3) 50,000Differential (1) 20,000 (2) 20,000Goodwill (2) 20,000 20,000 Total Debits 999,000 480,000 1,134,000

Accumulated Depreciation 160,000 75,000 235,000Accounts Payable 50,000 20,000 (4) 10,000 60,000Bonds Payable 200,000 100,000 (3) 50,000 250,000Common Stock Kim Corporation 300,000 300,000 Normal Company 150,000 (1)150,000Capital in Excess of Par 140,000 (1)140,000Retained Earnings 289,000 (5,000 ) _________ (1) 5,000 289,000 Total Credits 999,000 480,000 390,000 390,000 1,134,000

c. Kim Corporation and SubsidiaryConsolidated Balance Sheet

January 1, 20X7

Cash $105,000Accounts Receivable 145,000Inventory 164,000Buildings and Equipment $700,000 Less: Accumulated Depreciation (235,000) 465,000Goodwill 20,000 Total Assets $899,000

Accounts Payable $ 60,000Bonds Payable 250,000Common Stock $300,000 Retained Earnings 289,000 589,000 Total Liabilities and Stockholders' Equity $899,000

4-46


P4-27 Balance Sheet Consolidation

a. Entry on Primary's books to record acquisition of Street stock:

Investment in Street Stock 650,000 Bonds Payable 650,000

Note: The bonds go directly to the stockholders of Street and are not recorded on the books of Street.


E(1) Common Stock – Street Company 200,000Additional Paid-In Capital 130,000Retained Earnings 148,000Differential 172,000 Investment in Street Stock 650,000

E(2) Inventory 4,000Land 20,000Buildings and Equipment 50,000Patent 40,000Discount on Bonds Payable 10,000Goodwill 48,000 Differential 172,000

E(3) Current Payables 6,500 Receivables 6,500

The FASB now requires that no allowance accounts be carried forward from the acquiree in a business combination. However, because of immateriality and the short-lived nature of the carry forward subsequent to the date of combination, the allowance in this problem has not been offset against the receivable. If such an offset is desired, the following elimination entry would be made:

E(4) Allowance for Bad Debts 1,000 Receivables 1,000

4-47


P4-27 (continued)

c. Primary Corporation and Street CompanyConsolidated Balance Sheet Workpaper

January 2, 20X8

Primary Street Eliminations Consol- Item Corp. Company Debit Credit idated

Cash 12,000 9,000 21,000Receivables 41,000 31,000 (3) 6,500 65,500Inventory 86,000 68,000 (2) 4,000 158,000Investment in Street Stock 650,000 (1)650,000Land 55,000 50,000 (2) 20,000 125,000Buildings and Equipment 960,000 670,000 (2) 50,000 1,680,000Patent (2) 40,000 40,000Goodwill (2) 48,000 48,000Discount on Bonds Payable (2) 10,000 10,000Differential (1)172,000 (2)172,000 Total Assets 1,804,000 828,000 2,147,500

Allowance for Bad Debts 2,000 1,000 3,000Accumulated Depreciation 411,000 220,000 631,000Current Payables 38,000 29,000 (3) 6,500 60,500Bonds Payable 850,000 100,000 950,000Common Stock 300,000 200,000 (1)200,000 300,000Additional Paid-In Capital 100,000 130,000 (1)130,000 100,000Retained Earnings 103,000 148,000 (1)148,000 _________ 103,000 Total Liabilities and Equity 1,804,000 828,000 828,500 828,500 2,147,500

4-48

P4-27 (continued)

d. Primary Corporation and SubsidiaryConsolidated Balance Sheet

January 2, 20X8

Cash $ 21,000Receivables $ 65,500 Less: Allowance for Bad Debts (3,000 ) 62,500Inventory 158,000Land 125,000Buildings and Equipment $1,680,000 Less: Accumulated Depreciation (631,000 ) 1,049,000Patent 40,000Goodwill 48,000 Total Assets $1,503,500

Current Payables $ 60,500Bonds Payable $ 950,000 Less: Discount on Bonds Payable (10,000 ) 940,000Stockholders’ Equity Common Stock $ 300,000 Additional Paid-In Capital 100,000 Retained Earnings 103,000 503,000 Total Liabilities and Stockholders' Equity $1,503,500

P4-28 Consolidation Workpaper at End of First Year of Ownership


E(1) Income from Subsidiary 22,000 Dividends Declared 16,000 Investment in Roller Company Stock 6,000 Eliminate income from subsidiary.

E(2) Common Stock — Roller Company 60,000Retained Earnings, January 1 40,000Differential 28,000 Investment in Roller Company Stock 128,000 Eliminate beginning investment balance.

E(3) Buildings and Equipment 20,000Goodwill 8,000 Differential 28,000 Assign beginning differential.

E(4) Depreciation Expense 2,000 Accumulated Depreciation 2,000 Amortize differential: $2,000 = $20,000 / 10 years

E(5) Goodwill Impairment Loss 5,500 Goodwill 5,500 Write down goodwill for impairment.

P4-28 (continued)

b. Mill Corporation and Roller CompanyConsolidation Workpaper

December 31, 20X8

Mill Roller Eliminations Consol- Item Corp. Co. Debit Credit idated

Sales 260,000 180,000 440,000 Income from Subsidiary 22,000 (1) 22,000 Credits 282,000 180,000 440,000 Cost of Goods Sold 125,000 110,000 235,000 Wage Expense 42,000 27,000 69,000 Depreciation Expense 25,000 10,000 (4) 2,000 37,000 Interest Expense 12,000 4,000 16,000 Other Expenses 13,500 5,000 18,500 Goodwill Impairment Loss (5) 5,500 5,500 Debits (217,500) (156,000) ________ ________ (381,000)Income, carry forward 64,500 24,000 29,500 59,000


166,500 64,000 161,000 Dividends Declared (30,000) (16,000) ________ (1) 16,000 (30,000 )Ret. Earnings, Dec. 31, carry forward 136,500 48,000 69,500 16,000 131,000

Cash 19,500 21,000 40,500 Accounts Receivable 70,000 12,000 82,000 Inventory 90,000 25,000 115,000 Land 30,000 15,000 45,000 Buildings and Equipment 350,000 150,000 (3) 20,000 520,000 Investment in Roller Company Stock 134,000 (1) 6,000

(2)128,000Differential (2) 28,000 (3) 28,000Goodwill (3) 8,000 (5) 5,500 2,500 Debits 693,500 223,000 805,000

P4-28 (continued)


Accum. Depreciation 145,000 40,000 (4) 2,000 187,000Accounts Payable 45,000 16,000 61,000Wages Payable 17,000 9,000 26,000Notes Payable 150,000 50,000 200,000Common Stock Mill Corporation 200,000 200,000 Roller Company 60,000 (2) 60,000Retained Earnings, from above 136,500 48,000 69,500 16,000 131,000Credits 693,500 223,000 185,500 185,500 805,000

4-55

P4-29 Consolidation Workpaper at End of Second Year of Ownership


E(1) Income from Subsidiary 34,000 Dividends Declared 20,000 Investment in Roller Company Stock 14,000 Eliminate income from subsidiary.

E(2) Common Stock — Roller Company 60,000Retained Earnings, January 1 48,000Differential 26,000 Investment in Roller Company Stock 134,000 Eliminate beginning investment balance.

E(3) Buildings and Equipment 20,000Goodwill 2,500Retained Earnings, January 1 5,500 Differential 26,000 Accumulated Depreciation 2,000 Assign beginning differential.

E(4) Depreciation Expense 2,000 Accumulated Depreciation 2,000 Amortize differential: $2,000 = $20,000 / 10 years

4-56

P4-29 (continued)

b. Mill Corporation and Roller CompanyConsolidation Workpaper

December 31, 20X9


Sales 290,000 200,000 490,000 Income from Subsidiary 34,000 _______ (1)34,000 Credits 324,000 200,000 490,000 Cost of Goods Sold 145,000 114,000 259,000 Wage Expense 35,000 20,000 55,000 Depreciation Expense 25,000 10,000 (4) 2,000 37,000 Interest Expense 12,000 4,000 16,000 Other Expenses 23,000 16,000 39,000 Debits (240,000) (164,000) ________ ________ (406,000)Income, carry forward 84,000 36,000 36,000 84.000

Ret. Earnings, Jan. 1 136,500 48,000 (2) 48,000 131,000 (3) 5,500

Income, from above 84,000 36,000 36,000 84,000 220,500 84,000 215,000

Dividends Declared (30,000 ) (20,000 ) ________ (1) 20,000 (30,000 )Ret. Earnings, Dec. 31, carry forward 190,500 64,000 89,500 20,000 185,000

Cash 45,500 32,000 77,500 Accounts Receivable 85,000 14,000 99,000 Inventory 97,000 24,000 121,000 Land 50,000 25,000 75,000 Buildings and Equipment 350,000 150,000 (3) 20,000 520,000 Investment in Roller Company Stock 148,000 (1) 14,000

(2)134,000Differential (2) 26,000 (3) 26,000Goodwill (3) 2,500 2,500 Debits 775,500 245,000 895,000

4-57

P4-29 (continued)



Accounts Payable 51,000 15,000 66,000Wages Payable 14,000 6,000 20,000Notes Payable 150,000 50,000 200,000Common Stock Mill Corporation 200,000 200,000 Roller Company 60,000 (2) 60,000Retained Earnings, from above 190,500 64,000 89,500 20,000 185,000Credits 775,500 245,000 198,000 198,000 895,000

4-58

P4-29 (continued)

c. Mill Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X9

Cash $ 77,500 Accounts Receivable 99,000 Inventory 121,000 Land 75,000 Buildings and Equipment $520,000 Less: Accumulated Depreciation (224,000) 296,000 Goodwill 2,500 Total Assets $671,000

Accounts Payable $ 66,000 Wages Payable 20,000 Notes Payable 200,000 Common Stock $200,000 Retained Earnings 185,000 385,000 Total Liabilities and Stockholders' Equity $671,000

Mill Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X9

Sales $490,000 Cost of Goods Sold $259,000 Wage Expense 55,000 Depreciation Expense 37,000 Interest Expense 16,000 Other Expenses 39,000 Total Expenses (406,000)Consolidated Net Income $ 84,000

Mill Corporation and SubsidiaryConsolidated Retained Earnings Statement

Year Ended December 31, 20X9

Retained Earnings, January 1, 20X9 $131,000 20X9 Net Income 84,000

$215,000 Dividends Declared, 20X9 (30,000 )Retained Earnings, December 31, 20X9 $185,000

4-59

P4-30 Comprehensive Problem: Wholly Owned Subsidiary

a. Journal entries recorded by Power Corporation:

(1) Cash 10,000 Investment in Upland Products Stock 10,000 Record dividends from Upland Products.

(2) Investment in Upland Products Stock 30,000 Income from Subsidiary 30,000 Record equity-method income.

(3) Income from Subsidiary 5,000 Investment in Upland Products Stock 5,000 Amortize differential: $50,000 / 10 years


E(1) Income from Subsidiary 25,000 Dividends Declared 10,000 Investment in Upland Products Stock 15,000 Eliminate income from subsidiary.

E(2) Common Stock — Upland Products 100,000Retained Earnings, January 1 90,000Differential 30,000 Investment in Upland Products Stock 220,000 Eliminate beginning investment balance: $30,000 = $50,000 – [($50,000 / 10) x 4 years]

E(3) Buildings and Equipment 50,000 Accumulated Depreciation 20,000 Differential 30,000 Assign beginning differential.

E(4) Depreciation Expense 5,000 Accumulated Depreciation 5,000 Amortize differential.

E(5) Accounts Payable 10,000 Cash and Receivables 10,000 Eliminate intercorporate receivable/payable.

4-60

P4-30 (continued)

c. Power Corporation and Upland Products CompanyConsolidation Workpaper

December 31, 20X5

Power Upland Eliminations Consol- Item Corp. Products Debit Credit idated

Sales 200,000 100,000 300,000 Income from Subsidiary 25,000 _______ (1) 25,000 Credits 225,000 100,000 300,000 Cost of Goods Sold 120,000 50,000 170,000 Depreciation Expense 25,000 15,000 (4) 5,000 45,000 Inventory Losses 15,000 5,000 20,000 Debits (160,000) (70,000) _________ _________ (235,000 )Income, carry forward 65,000 30,000 30,000 65,000


383,000 120,000 383,000 Dividends Declared (30,000 ) (10,000 ) _________ (1) 10,000 (30,000 )Ret. Earnings, Dec. 31, carry forward 353,000 110,000 120,000 10,000 353,000

Cash and Receivables 43,000 65,000 (5) 10,000 98,000 Inventory 260,000 90,000 350,000 Land 80,000 80,000 160,000 Buildings and Equipment 500,000 150,000 (3) 50,000 700,000 Investment in Upland Products Stock 235,000 (1) 15,000

(2)220,000Differential (2) 30,000 (3) 30,000 Debits 1,118,000 385,000 1,308,000


Accounts Payable 60,000 20,000 (5) 10,000 70,000 Notes Payable 200,000 50,000 250,000 Common Stock Power Corporation 300,000 300,000 Upland Products 100,000 (2)100,000Retained Earnings, from above 353,000 110,000 120,000 10,000 353,000 Credits 1,118,000 385,000 310,000 310,000 1,308,000

P4-31 Comprehensive Problem: Differential Apportionment

a. Journal entries recorded by Jersey Corporation:

(1) Investment in Lime Company Stock 203,000 Cash 203,000 Acquisition of Lime Company stock.

(2) Cash 20,000 Investment in Lime Company Stock 20,000 Record dividends from Lime Company.

(3) Investment in Lime Company Stock 60,000 Income from Subsidiary 60,000 Record equity-method income.

(4) Income from Subsidiary 3,000 Investment in Lime Company Stock 3,000 Amortize differential assigned to depreciable assets: ($33,000 / 11 years)

P4-31 (continued)


E(1) Income from Subsidiary 57,000 Dividends Declared 20,000 Investment in Lime Company Stock 37,000 Eliminate income from subsidiary.

E(2) Common Stock — Lime Company 50,000Retained Earnings, January 1 100,000Differential 53,000 Investment in Lime Company Stock 203,000 Eliminate beginning investment balance.

E(3) Goodwill 20,000Buildings and Equipment 33,000 Differential 53,000 Assign beginning differential.

E(4) Depreciation Expense 3,000 Accumulated Depreciation 3,000 Amortize differential related to depreciable assets.

E(5) Accounts Payable 16,000 Accounts Receivable 16,000 Eliminate intercorporate receivable/payable.

P4-31 (continued)

c. Jersey Corporation and Lime CompanyConsolidation Workpaper

December 31, 20X7

Jersey Lime Eliminations Consol- Item Corp. Co. Debit Credit idated

Sales 700,000 400,000 1,100,000 Income from Subsidiary 57,000 (1) 57,000 Credits 757,000 400,000 1,100,000 Cost of Goods Sold 500,000 250,000 750,000 Depreciation Expense 25,000 15,000 (4) 3,000 43,000 Other Expenses 75,000 75,000 150,000 Debits (600,000 ) (340,000) (943,000 )Income, carry forward 157,000 60,000 60,000 157,000


447,000 160,000 447,000 Dividends Declared (50,000 ) (20,000) _ (1) 20,000 (50,000 )Ret. Earnings, Dec. 31, carry forward 397,000 140,000 160,000 20,000 397,000

Cash 82,000 25,000 107,000 Accounts Receivable 50,000 55,000 (5) 16,000 89,000 Inventory 170,000 100,000 270,000 Land 80,000 20,000 100,000 Buildings and Equipment 500,000 150,000 (3) 33,000 683,000 Investment in Lime Company Stock 240,000 (1) 37,000

(2) 203,000Differential (2) 53,000 (3) 53,000Goodwill (3) 20,000 20,000 Debits 1,122,000 350,000 1,269,000

Accum. Depreciation 155,000 75,000 (4) 3,000 233,000 Accounts Payable 70,000 35,000 (5) 16,000 89,000 Mortgages Payable 200,000 50,000 250,000 Common Stock Jersey Corporation 300,000 300,000 Lime Company 50,000 (2) 50,000Retained Earnings, from above 397,000 140,000 160,000 20,000 397,000 Credits 1,122,000 350,000 332,000 332,000 1,269,000

P4-32A Push-Down Accounting

a. Entry to record acquisition of Lindy stock on books of Greenly:

Investment in Lindy Company Stock 935,000 Cash 935,000

b. Entry to record revaluation of assets on books of Lindy Company at date of combination:

Inventory 5,000Land 85,000Buildings 100,000Equipment 70,000 Revaluation Capital 260,000 Revalue assets to reflect fair values at date of combination.

c. Investment elimination entry in consolidation workpaper prepared December 31, 20X6 (no other entries needed):

Common Stock — Lindy Company 100,000Additional Paid-In Capital 400,000Retained Earnings 175,000Revaluation Capital 260,000 Investment in Lindy Company Stock 935,000

d. Equity-method entries on the books of Greenly during 20X7:

Cash 50,000 Investment in Lindy Company Stock 50,000 Record dividend from Lindy Company.

Investment in Lindy Company Stock 88,000 Income from Lindy Company 88,000 Record equity-method income.

P4-32A (continued)

e. Eliminating entries in consolidation workpaper prepared December 31, 20X7 (no other entries needed):

E(1) Income from Lindy Company 88,000 Dividends Declared 50,000 Investment in Lindy Company Stock 38,000 Eliminate income from subsidiary.

E(2) Common Stock — Lindy Company 100,000Additional Paid-In Capital 400,000Retained Earnings, January 1 175,000Revaluation Capital 260,000 Investment in Lindy Company Stock 935,000 Eliminate beginning investment balance.

f. Eliminating entries in consolidation workpaper prepared December 31, 20X8 (no other entries needed):

E(1) Income from Lindy Company 90,000 Dividends Declared 50,000 Investment in Lindy Company Stock 40,000 Eliminate income from subsidiary.

E(2) Common Stock — Lindy Company 100,000Additional Paid-In Capital 400,000Retained Earnings, January 1 213,000Revaluation Capital 260,000 Investment in Lindy Company Stock 973,000 Eliminate beginning investment balance: $213,000 = $175,000 + $88,000 - $50,000 $973,000 = $935,000 + $88,000 - $50,000

Solutions Manual- Baker/Lembke/King, Advanced Financial Accounting, 7/e

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solusi manual advanced acc zy Chap004

Economy & Finance

book value

consolidated income

differential account

investment account balance

clearing account balance

subsidiarys fair value

consolidated entity

differential clearing