solusi manual advanced acc zy Chap009

Chapter 09 - Consolidation Ownership Issues

CHAPTER 9

CONSOLIDATION OWNERSHIP ISSUES

ANSWERS TO QUESTIONS

Q9-1 Preferred stock of the subsidiary is eliminated in the consolidation process in a manner comparable to that used in eliminating the common stock of the subsidiary. For those preferred shares held by the parent company, a proportionate share of subsidiary income and net assets assigned to the preferred shares is eliminated against the balance in the parent's investment account. Subsidiary income and net assets assigned to preferred shares not held by the parent are included as a part of the noncontrolling interest along with the balances assigned to noncontrolling interest for common stock not held by the parent. The claim of the preferred shareholders normally is computed before the common stock is eliminated so that any priority claim associated with the preferred stock can be properly recognized and assigned to the correct shareholder group.

Q9-2 All preferred shares held by the parent are eliminated against the balance in the investment account. Those held by unrelated parties are included in the total assigned to the noncontrolling interest.

Q9-3 Preferred dividends normally are deducted in arriving at income available to common shareholders. When preferred dividends are paid by the subsidiary to shareholders other than the parent, the income accruing to the common shares held by the parent company is reduced. Therefore, they must be deducted to arrive at income available to the parent company shareholders. No preferred dividends are deducted if the parent company owns all the shares or if no dividends are declared and the preferred stock is noncumulative.

Q9-4 In the event the preferred shares are redeemed, the subsidiary must pay the call premium and the net assets of the subsidiary will be reduced by the amount of the premium. Because it is more conservative to assume the call premium will be paid, the amount of the premium normally is added to the claim of the preferred shareholders and deducted from the equity assigned to the common shareholders whenever consolidated statements are prepared.

Q9-5 The fair value of the net assets of the subsidiary is computed by deducting the fair value of the subsidiary's liabilities from the fair value of its assets. When the subsidiary has preferred stock outstanding, the claims of the preferred shareholders, including dividends in arrears and participation rights held by preferred shareholders, must be taken into consideration in determining the fair value of net assets available to common shareholders. These items, when deducted from the fair value of the identifiable assets of the acquired company, will reduce the amount of net assets assigned to common stock and potentially increase the amount reported as goodwill.

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Q9-6 The parent may record the difference between the carrying value and the sale price of the shares as either a gain on sale of investment or an adjustment to its additional paid-in capital. No gain or loss on the sale of subsidiary shares should be reported in the consolidated statements. If the parent records a gain on the sale, it should be eliminated in the consolidation process and treated as a part of additional paid-in capital of the consolidated entity.

Q9-7 All common shareholders should share equally in the net assets of a company. When a subsidiary sells additional shares to a nonaffiliate at a price in excess of existing book value, the effect will be to increase the net book value of all shareholders. Because it is a capital transaction, no gain or loss is recognized on the sale.

Q9-8 Each purchase of additional shares should be examined to determine the difference between the price paid and underlying book value. When an amount greater than book value is paid directly to the subsidiary for the shares, the book value of the shares held by the noncontrolling interest will increase. As a result, the increase in the parent’s claim on the net assets of the subsidiary will be less than the amount paid. When consolidated statements are prepared, additional paid-in capital or retained earnings (if the parent has no additional paid-in capital) must be debited for the increase in the balance assigned to the noncontrolling interest, thereby reducing the amount reported in the consolidated balance sheet.

Q9-9 All the shares of the subsidiary are eliminated in preparing the consolidated statements. Thus, treasury shares reported by the subsidiary are eliminated in the consolidation workpaper. The effect of the retirement on the consolidated statements depends on the price paid and whether the shares were purchased from the parent or from a nonaffiliate.

Q9-10 Indirect ownership is a general term used whenever one company owns shares of another company and that company holds ownership in a third company. Indirect control occurs when a majority of the shares of a particular company are held by one or more companies that are, in turn, under the control of another company. By exercising its control over those companies the parent can exercise control of the company indirectly owned.

Q9-11 A reciprocal relationship exists if Subsidiary A and Subsidiary B hold ownership in each other. If Subsidiary A records investment income based on the reported net income of Subsidiary B and Subsidiary B records investment income based on the reported net income of Subsidiary A, the sum of the reported net income totals for the two companies may be substantially greater than the sum of the reported operating income totals for the two companies. Parent company net income will be overstated if the impact of the reciprocal relationship is ignored when the parent company records investment income on its ownership in the two subsidiaries.

Q9-12 Under the treasury stock method the parent company shares that have been purchased by a subsidiary are reported as treasury stock in the consolidated balance sheet. The carrying value of the shares is the amount paid by the subsidiary when they were purchased.

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Q9-13 Consolidated net income will be reduced by $100,000. Income assigned to the controlling interest will be reduced by $72,000 ($100,000 x .90 x .80) when the unrealized profit of Tiny Corporation is eliminated. A total of $10,000 is treated as a reduction to the income assigned to noncontrolling shareholders of Tiny Corporation ($100,000 x .10) and $18,000 is a reduction of the income assigned to noncontrolling shareholders of Subsidiary Company ($100,000 x .90 x .20).

Q9-14 All three companies should be included in the consolidated financial statements. Slide Company should be consolidated with Bit Company because Bit holds majority ownership of Slide. Bit Company, in turn, should be consolidated with Snapper Corporation because Snapper holds majority ownership of Bit.

Q9-15 A subsidiary's stock dividend results in the capitalization of some portion of its retained earnings. Such an action will have no effect on the consolidated financial statements since the entire stockholders' equity section of the subsidiary is eliminated in preparing the consolidation workpaper.

Q9-16 A 15 percent stock dividend is a small stock dividend and must be recorded by capitalizing retained earnings equal to the market price per share of the stock times the number of shares actually issued. As a result, retained earnings will decrease and the par value of stock outstanding and additional paid-in capital will increase on the subsidiary's books. There should be no change in the investment account balance reported by the parent. Thus, the only change in the eliminating entries is the relative amount debited to each of the three individual stockholders' equity accounts of the subsidiary.

Q9-17 When the parent or other affiliates own all the shares of all companies included in the consolidation, the order in which the consolidation is completed may not be particularly critical. On the other hand, when less than 100 percent ownership is held there is a much greater chance of error in apportioning unrealized profits or other adjustments between noncontrolling ownership and consolidated net income when some other sequence is used. By starting the consolidation with the company furthest away from the parent, the computation of income assigned to noncontrolling interest at each level can be most easily accomplished.

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SOLUTIONS TO CASES

C9-1 Effect of Subsidiary Preferred Stock

When a parent company does not own all the shares of a subsidiary, income assigned to the noncontrolling interest includes (1) a portion of subsidiary preferred dividends and (2) a portion of earnings available to common shareholders.

To determine the amount of income to assign to preferred and common shareholders of the subsidiary, the controller needs to have the following information about the preferred stock:

1. The number of preferred shares outstanding and the number owned by the parent and other affiliates.

2. The annual preferred dividend rate per share and whether the dividends are cumulative or noncumulative.

3. If the dividends are noncumulative, the amount of preferred dividends declared during the period, if any.

In this particular case the parent does not appear to own any of the subsidiary's preferred shares. Once the controller determines the portion of subsidiary income assignable to common shareholders, consolidated net income attributable to the controlling interest is computed by adding the parent's pro rata share of this amount to the parent's income from its own operations.

C9-2 Consolidated Stockholders’ Equity: Theory vs. Practice

a. Upon the sale of stock of a subsidiary, Xerox used to recognize a gain or loss in the consolidated income statement equal to the company’s proportionate share of the corresponding increase or decrease in that subsidiary’s equity. Under FASB 160, the sale of subsidiary shares is viewed as an equity transaction and does not affect income. Instead, the difference between the fair value of the consideration received and the change in the amount of the noncontrolling interest is recognized as an adjustment to stockholders’ equity (usually additional paid-in capital).

b. Occidental Petroleum has generally treated subsidiary preferred stock as a liability (the amount is small). It should be reported as part of the noncontrolling interest.

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C9-3 Sale of Subsidiary Shares

MEMO

To: Robert ReaderVice President of FinanceBook Corporation

From: , CPA

Re: Recognition of Gain on Sale of Subsidiary Shares

Previous accounting standards did not specifically address the issue of how to treat a sale of subsidiary shares when the parent retained controlling ownership. However, a common practice was to recognize a gain or loss on the sale of shares.

The FASB’s recent issuance of FASB 160 makes clear that, from a consolidated perspective, a parent’s sale of subsidiary shares while maintaining control is an equity transaction. Accordingly, no gain or loss on the sale should be reported in the consolidated income statement. Instead, equity should be adjusted by the difference between the consideration received and the change in the parent’s subsidiary interest.

In the current situation, Book’s interest in Lance prior to its sale of Lance shares was $360,000, an amount equal to 90 percent of Lance’s $400,000 book value. Immediately following the sale of Lance shares, Book’s remaining 60 percent interest in Lance is $240,000 ($400,000 x .60), a decrease of $120,000 ($360,000 - $240,000). The difference between the proceeds received and the change in the book value of Book’s interest in Lance is as follows:

Proceeds received ($5.60 x 30,000 shares) $168,000Change in book value of interest ($360,000 - $240,000) 120,000Required adjustment to equity $ 48,000

This $48,000 difference should be reported within equity in the consolidated balance sheet. Although alternatives exist in terms of how to meet the FASB’s reporting requirement, the following entry to record the sale of shares on Book’s books would be consistent with the FASB’s requirement and probably the most efficient approach:

Cash 168,000Investment in Lance Company Stock 120,000Additional Paid-In Capital 48,000

The additional paid-in capital recorded on Book’s books would carry over to the consolidated balance sheet and would be included in consolidated equity.

If Book elected to record a $48,000 gain on the sale of Lance shares instead of recognizing additional paid-in capital as shown in the entry, that gain would have to be transferred to additional paid-in capital in the preparation of consolidated financial statements.

Primary citation:FASB 160ARB 51 (as amended by FASB 160), Par. 33.

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C9-4 Sale of Subsidiary Shares

(a) With a sale of shares to a nonaffiliate, net resources have been brought into the consolidated entity and the noncontrolling shareholders have an additional claim. The excess of the proceeds received from the sale over the change in the parent’s interest in the subsidiary increases the amount of additional paid-in capital reported in the consolidated balance sheet. A sale of subsidiary shares to a nonaffiliate also changes the amount of income assigned to the noncontrolling interest in the consolidated income statement and the amount of net assets assigned to the noncontrolling interest in the consolidated balance sheet.

(b) When a parent sells shares of one subsidiary to another subsidiary, net resources to the consolidated entity do not change. Any gain recorded by the parent must be eliminated when the investment balance reported by the subsidiary is eliminated in preparing consolidated financial statements. A change in the claim of the noncontrolling interest is likely to occur if the subsidiary that purchases the shares is not wholly owned. As a result, there may be some change in consolidated income and the balance sheet totals assigned to noncontrolling interest.

C9-5 Reciprocal Ownership

A great many factors beyond the immediate impact on reported earnings may be important in deciding on the use of the funds. Items such as the following should be considered:

1. Are the excess funds held by Thorson available only temporarily or are they not likely to be needed in the foreseeable future?

2. Will there be any regulatory or taxation problems associated with one or more of the alternatives?

3. Can shares of the companies be purchased in the desired quantities and at existing market prices or are there potential difficulties associated with one or more alternatives?

4. Is it desirable to acquire more shares of either subsidiary since controlling ownership already is in the hands of Strong Manufacturing?

5. Have the noncontrolling shareholders of either subsidiary been troublesome or caused the parent to refrain from actions that it might otherwise have taken?

With the information given, it is difficult to determine which action will have the most favorable impact on consolidated net income. The earnings of each company, the number of shares outstanding, and the relative market prices of the shares each will have an effect. In general, reported income is maximized by purchasing the shares with the lowest price-earnings ratio.

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SOLUTIONS TO EXERCISES

E9-1 Multiple-Choice Questions on Preferred Stock Ownership

1. d $50,000 = $20,000 + $30,000

2. c $29,000 = $20,000 + .30($30,000)

3. b Only the retained earnings of the acquiring company is included.

4. a The portion held by the parent is eliminated when the preferred investment is eliminated, and the portion held by nonaffiliates is eliminated and included with the balance reported as noncontrolling interest in the consolidated balance sheet.

E9-2 Multiple-Choice Questions on Multilevel Ownership

1. b $188,000 = $100,000 + .80[$80,000 + .60($50,000)]

2. b $20,000 = .40($50,000)

3. c $22,000 = .20[$80,000 + .60($50,000)]

4. c $42,000 = .40($50,000) + .20[$80,000 + .60($50,000)]

5. b $2,400 = .80 x .60[($150,000 + $100,000 - $200,000) / 10 years)

E9-3 Acquisition of Preferred Shares

Eliminating entries:

E(1) Common Stock — Separate Company 50,000Retained Earnings 150,000 Investment in Separate Company Common Stock 140,000 Noncontrolling Interest 60,000 Eliminate investment in common stock.

E(2) Preferred Stock — Separate Company 100,000 Investment in Separate Company Preferred Stock 60,000 Noncontrolling Interest 40,000 Eliminate subsidiary preferred stock.

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E9-4 Reciprocal Ownership [AICPA Adapted]

a. None of Simba's dividends is reported in the consolidated statements. All of Simba's dividends are eliminated in the consolidation process.

b. Only 90 percent of Pride's dividends are included in the consolidated retained earnings statement. The dividend payment on the 10 percent owned by Simba is an intercorporate payment to an affiliate and must be eliminated in the consolidation process.

E9-5 Subsidiary with Preferred Stock Outstanding

Eliminating entries:

E(1) Common Stock — Topple Company 150,000Retained Earnings 210,000 Investment in Topple Common Stock 270,000 Noncontrolling Interest 90,000 Eliminate investment in common stock.

E(2) Preferred Stock — Topple Company 200,000 Investment in Topple Preferred Stock 80,000 Noncontrolling Interest 120,000 Eliminate subsidiary preferred stock.

E9-6 Subsidiary with Preferred Stock Outstanding

a. Entries recorded by Clayton Corporation:

(1) Investment in Topple Common Stock 270,000Investment in Topple Preferred Stock 80,000 Cash 350,000 Record purchase of Topple stock.

(2) Cash 25,500 Investment in Topple Common Stock 25,500 Record dividends from Topple: $25,500 = ($50,000 - $16,000) x .75

(3) Cash 6,400 Dividend Income 6,400 Record dividends on preferred stock from Topple: $16,000 x .40

(4) Investment in Topple Common Stock 40,500 Income from Subsidiary 40,500 Record equity-method income: $40,500 = ($70,000 - $16,000) x .75

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E9-6 (continued)

b. Eliminating entries:

E(1) Income from Subsidiary 40,500 Dividends Declared — Common Stock 25,500 Investment in Topple Common Stock 15,000 Eliminate income from subsidiary.

E(2) Dividend Income — Preferred 6,400 Dividends Declared — Preferred 6,400 Eliminate dividend income from subsidiary preferred.

E(3) Income to Noncontrolling Interest 23,100 Dividends Declared — Preferred Stock 9,600 Dividends Declared — Common Stock 8,500 Noncontrolling Interest 5,000 Assign income to noncontrolling interest: $23,100 = [($70,000 - $16,000) x .25] + ($16,000 x .60) $9,600 = $16,000 x .60 $8,500 = ($50,000 - $16,000) x .25 $5,000 = $13,500 - $8,500

E(4) Common Stock — Topple Company 150,000Retained Earnings, January 1 210,000 Investment in Topple Common Stock 270,000 Noncontrolling Interest 90,000 Eliminate beginning investment balance.

E(5) Preferred Stock — Topple Company 200,000 Investment in Topple Preferred Stock 80,000 Noncontrolling Interest 120,000 Eliminate subsidiary preferred stock.

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E9-7 Preferred Dividends and Call Premium

a. Culbertson Company's contribution to 20X2 consolidated net income is equal to its reported net income of $70,000.

b. Income assigned to noncontrolling interest:

Preferred shares [.40($100,000 x .12)] $ 4,800 Common shares {.10[$70,000 - ($100,000 x .12)]} 5,800 Total income assigned to noncontrolling interest $10,600

c. Retained earnings assignable to preferred shareholders:

Dividends in arrears [5 years x ($100,000 x .12)] $60,000 Call feature ($2 x 10,000 shares) 20,000 Total retained earnings assigned to preferred stock $80,000

d. Book value of common shares:

Par value of common shares outstanding $300,000 Retained earnings balance $380,000 Less: Balance assigned to preferred shares (80,000 ) 300,000 Book value of common shares $600,000

e. Total noncontrolling interest:

Preferred stock [.40($100,000 + $80,000)] $ 72,000

Common stock (.10 x $600,000) 60,000 Total noncontrolling interest $132,000

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E9-8 Multilevel Ownership

a. Consolidated net income for 20X6 is $190,000 ($90,000 + $40,000 + $60,000)

b. Income of $36,800 is assigned to the noncontrolling interest:

Income from Dally ($40,000 x .35) $14,000 Income from Latent [($60,000 + $16,000) x .30] 22,800 Total income assigned to noncontrolling interest $36,800

c. Income of $153,200 is assigned to the controlling interest:

Consolidated net income $190,000 Less: Income assigned to noncontrolling interest (36,800 )Income assigned to controlling interest $153,200

d. Only the $45,000 of dividends paid by Grasper Corporation to its shareholders will be reported as dividends declared in Grasper’s 20X6 consolidated retained earnings statement.

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E9-9 Eliminating entries for Multilevel Ownership

a. Journal entries recorded by Brown Corporation on its investment in Tann Company:

(1) Investment in Tann Company Stock 120,000 Cash 120,000 Record purchase of Tann Company stock.

(2) Cash 9,000 Investment in Tann Company Stock 9,000 Record dividends from Tann Company: $15,000 x .60

(3) Investment in Tann Company Stock 24,000 Income from Tann Company 24,000 Record equity-method income: $40,000 x .60

b. Journal entries recorded by Promise Enterprises on its investment in Brown Corporation:

(1) Investment in Brown Corporation Stock 315,000 Cash 315,000 Record purchase of Brown Corporation stock.

(2) Cash 45,000 Investment in Brown Corporation Stock 45,000 Record dividends from Brown Corporation: $50,000 x .90

(3) Investment in Brown Corporation Stock 129,600 Income from Brown Corporation 129,600 Record equity-method income: ($120,000 + $24,000) x .90

c. Eliminating entries:

E(1) Income from Tann Company 24,000 Dividends Declared 9,000 Investment in Tann Company Stock 15,000 Eliminate income from Tann Company.

E(2) Income to Noncontrolling Interest 16,000 Dividends Declared 6,000 Noncontrolling Interest 10,000 Assign income to noncontrolling interest: $16,000 = $40,000 x .40 $6,000 = $15,000 x .40

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E9-9 (continued)

E(3) Common Stock — Tann Company 100,000Additional Paid-In Capital 60,000Retained Earnings, January 1 40,000 Investment in Tann Company Stock 120,000 Noncontrolling Interest 80,000 Eliminate investment in Tann Company stock: $120,000 = $200,000 x .60 $80,000 = $200,000 x .40

E(4) Income from Brown Corporation 129,600 Dividends Declared 45,000 Investment in Brown Corporation Stock 84,600 Eliminate income from Brown Corporation.

E(5) Income to Noncontrolling Interest 14,400 Dividends Declared 5,000 Noncontrolling Interest 9,400 Assign income to noncontrolling shareholders of Brown Corporation: $14,400 = ($120,000 + $24,000) x .10 $5,000 = $50,000 x .10 $9,400 = $14,400 - $5,000

E(6) Common Stock — Brown Corporation 150,000Additional Paid-In Capital 60,000Retained Earnings, January 1 140,000 Investment in Brown Corporation Stock 315,000 Noncontrolling Interest 35,000 Eliminate investment in Brown Corporation stock: $315,000 = $350,000 x .90 $35,000 = $350,000 x .10

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E9-10 Reciprocal Ownership

Operating income of Grower Supply Corporation $112,000 Operating income of Schultz Company 50,000 Consolidated net income $162,000 Less: Income to noncontrolling interest: ($50,000 x .15) (7,500 )Income to controlling interest $154,500

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E9-11 Consolidated Balance Sheet with Reciprocal Ownership

Talbott Company and Short CompanyConsolidated Balance Sheet Workpaper

December 31, 20X9

Talbott Short Eliminations Consol- Item Company Company Debit Credit idated

Cash 78,000 39,000 117,000Accounts Receivable 120,000 80,000 200,000Inventory 150,000 120,000 270,000Buildings and Equipment (net) 400,000 300,000 700,000Investment in Short Co. Common Stock 352,000 (1)352,000Investment in Talbott Co. Common Stock 61,000 (2) 61,000Treasury Stock (2) 61,000 61,000 Debits 1,100,000 600,000 1,348,000

Accounts Payable 90,000 60,000 150,000Bonds Payable 400,000 100,000 500,000Common Stock 300,000 200,000 (1)200,000 300,000Retained Earnings 310,000 240,000 (1)240,000 310,000Noncontrolling Interest (1) 88,000 88,000 Credits 1,100,000 600,000 501,000 501,000 1,348,000

Eliminating entries:E(1) Common Stock — Short Company 200,000

Retained Earnings 240,000 Investment in Short Company Common Stock 352,000 Noncontrolling Interest 88,000

E(2) Treasury Stock 61,000 Investment in Talbott Company Common Stock 61,000

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E9-11 (continued)

Talbott Company and SubsidiaryConsolidated Balance Sheet

December 31, 20X9

Current Assets: Cash $117,000 Accounts Receivable 200,000 Inventory 270,000 $ 587,000Noncurrent Assets: Buildings and Equipment (net) 700,000 Total Assets $1,287,000

Current Liabilities: Accounts Payable $ 150,000Bonds Payable 500,000Stockholders' Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 310,000 Total Controlling Interest $610,000 Noncontrolling Interest 88,000 Total Equity before Reduction for Treasury Shares $698,000 Less: Treasury Shares (61,000 )Total Stockholders’ Equity 637,000 Total Liabilities and Stockholders' Equity $1,287,000

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E9-12 Subsidiary Stock Dividend

a. Lake Company:Stock Dividends Declared 40,000 Common Stock 40,000

Lindale Company: No entry required.

b. Eliminating entries, December 31, 20X3:

E(1) Income from Subsidiary 17,500 Dividends Declared 7,000 Investment in Lake Company Stock 10,500

E(2) Income to Noncontrolling Interest 7,500 Dividends Declared 3,000 Noncontrolling Interest 4,500

E(3) Common Stock — Lake Company 140,000 Retained Earnings, January 1 200,000 Investment in Lake Company Stock 210,000 Noncontrolling Interest 90,000 Stock Dividends Declared 40,000

c. Eliminating entry, January 1, 20X4:

E(1) Common Stock — Lake Company 140,000 Retained Earnings 175,000 Investment in Lake Company Stock 220,500 Noncontrolling Interest 94,500

Lake Company retained earnings, December 31, 20X3:

Balance, December 31, 20X2 $200,000 Add: Net income for 20X3 25,000 Less: Stock dividend in 20X3 (40,000) Cash dividend paid in 20X3 (10,000 )Balance, December 31, 20X3 $175,000

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E9-13 Sale of Subsidiary Shares by Parent

a. Investment in Acme Concrete, January 1, 20X5: Purchase price $360,000 Acme net income in 20X3 and 20X4 $100,000 Dividends paid by Acme in 20X3 and 20X4 (40,000 )

$ 60,000 Proportion of stock held by Stable x .80 48,000 Balance prior to sale of shares $408,000

b. Journal entry recorded by Stable Home Builders for sale of shares:

Cash 120,000 Investment in Acme Stock 102,000 Additional Paid-in Capital 18,000

$102,000 = $408,000 x 4,000 / [($200,000 / $10) x .80]


E(1) Income from Subsidiary 30,000 Dividends Declared 12,000 Investment in Acme Stock 18,000

E(2) Income to Noncontrolling Interest 20,000 Dividends Declared 8,000 Noncontrolling Interest 12,000

E(3) Common Stock — Acme Concrete 200,000 Retained Earnings, January 1 310,000 Investment in Acme Stock 306,000 Noncontrolling interest 204,000

E9-14 Purchase of Additional Shares from Nonaffiliate

a. Purchase price, December 31, 20X7 $210,000 Modern Products Company net income for 20X8 ($230,000 + $20,000 - $200,000) $50,000 Proportion of stock held by Weal x .60 Income from subsidiary 30,000 Dividend received from Modern Products Company ($20,000 x .60) (12,000 )Balance in investment account, December 31, 20X8 $228,000

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E9-14 (continued)

b. Balance in investment account, December 31, 20X8 $228,000 Purchase of additional shares on January 1, 20X9 96,000 Investment balance January 1, 20X9, after purchase $324,000 Modern Products Company net income for 20X9 ($280,000 + $20,000 - $230,000) $70,000 Proportion of stock held by Weal x .80

$56,000 Less: Amortization of differential on stock purchased January 1, 20X9: ($20,000 / 10 years)

(2,000 )

Income from subsidiary 54,000 Dividend received from Modern Products Company ($20,000 x .80) (16,000 )Balance in investment account, December 31, 20X9 $362,000


E(1) Income from Modern Products Company 54,000 Dividends Declared 16,000 Investment in Modern Products Company Stock 38,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 14,000 Dividends Declared 4,000 Noncontrolling Interest 10,000 Assign income to noncontrolling interest: $14,000 = $70,000 x .20

E(3) Common Stock — Modern Products Company 150,000 Retained Earnings, January 1 230,000 Differential 20,000 Investment in Modern Products Company Stock 324,000 Noncontrolling Interest 76,000 Eliminate beginning investment balance: $20,000 = $96,000 – ($380,000 x .20) $76,000 = $380,000 x .20

E(4) Patents 18,000 Amortization Expense 2,000 Differential 20,000 Assign differential and amortize for year: $2,000 = $20,000 / 10 years

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E9-15 Repurchase of Shares by Subsidiary from Nonaffiliate

a. Book value of Quinn stock outstanding $500,000 Cost of treasury shares repurchased (84,000 )Book value of remaining shares outstanding $416,000 Proportion of remaining shares held by noncontrolling Interest (2,000 / 8,000) x .25 Adjusted book value of shares held $104,000 Book value of shares held before treasury stock repurchase by Quinn ($500,000 x .20) (200,000)Reduction of noncontrolling interest $ 96,000 Consideration given by Quinn Manufacturing (84,000 )Increase in equity attributable to parent $ 12,000

b. Investment in Quinn Manufacturing Stock 12,000 Additional Paid-In Capital 12,000

c. Common Stock — Quinn Manufacturing 100,000Additional Paid-In Capital 150,000Retained Earnings, January 1 250,000 Investment in Quinn Stock 312,000 Noncontrolling Interest 104,000 Treasury Shares 84,000 $312,000 = .75($500,000 - $84,000) $104,000 = .25($500,000 - $84,000)

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E9-16 Sale of Shares by Subsidiary to Nonaffiliate

a. Computation of change in book value of Schroeder Corporation shares held by Browne Corporation:

Before After Sale Sale

Common stock, $10 par value $150,000 $ 200,000Additional paid-in capital 50,000 400,000Retained earnings 400,000 400,000 Total stockholders' equity of Schroeder $600,000 $1,000,000Proportion of stock held by Browne Corporation: 11,000 / 15,000 x .733 11,000 / (15,000 + 5,000) x .550 Book value of shares $440,000 $ 550,000

Increase in book value of shares held by Browne Corporation $ 110,000

b. Investment in Schroeder Stock 110,000 Additional Paid-In Capital 110,000

c. Common Stock — Schroeder Corporation 200,000Additional Paid-In Capital 400,000Retained Earnings 400,000 Investment in Schroeder Stock 550,000 Noncontrolling Interest 450,000 $450,000 = $1,000,000 x .45

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SOLUTIONS TO PROBLEMS

P9-17 Multiple-Choice Questions on Preferred Stock Ownership

1. d Book value of shares held by noncontrolling interest:Preferred stock ($100,000 x .30) $30,000 Common stock [($200,000 + $50,000) x .20] 50,000 Total book value $80,000

2. b Income to noncontrolling preferred shareholders [($100,000 x .10) x .30] $3,000 Income to noncontrolling common shareholders: Reported net income of Upland Company $30,000 Income to preferred shareholders (10,000) Income to common shareholders $20,000 Proportion of common stock owned by noncontrolling interest x .20 4,000 Total income to noncontrolling interest $7,000

3. b Reported net income of Upland Company $ 30,000 Operating income of Stacey Company 100,000 Consolidated net income $130,000 Less: Income to noncontrolling interest (7,000 )Income to controlling interest $123,000

4. c Controlling interest: Common stock $ 300,000 Retained earnings 350,000 Total controlling interest $ 650,000 Noncontrolling interest: ($250,000 x .20) + ($100,000 x .30) 80,000 Total stockholders’ equity $730,000

5. a All preferred shares of the subsidiary are eliminated in preparing the consolidated financial statements.

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P9-18 Multilevel Ownership with Differential

a. Journal entries recorded by Corn Corporation on its investment in Bark Company:

(1) Investment in Bark Company Stock 406,000 Cash 406,000 Record purchase of Bark Company stock.

(2) Cash 14,000 Investment in Bark Company Stock 14,000 Record dividends from Bark Company: $20,000 x .70

(3) Investment in Bark Company Stock 21,000 Income from Bark Company 21,000 Record equity-method income: $30,000 x .70

(4) Income from Bark Company 2,100 Investment in Bark Company Stock 2,100 Amortize differential related to buildings and equipment: ($30,000 / 10 years) x .70

b. Journal entries recorded by Purple Corporation on its investment in Corn Corporation:

(1) Cash 20,000 Investment in Corn Corporation Stock 20,000 Record dividends from Corn Corporation: $25,000 x .80

(2) Investment in Corn Corporation Stock 63,120 Income from Corn Corporation 63,120 Record equity-method income: ($60,000 + $18,900) x .80

(3) Income from Corn Corporation 8,000 Investment in Corn Corporation Stock 8,000 Amortize differential related to trademark: ($50,000 / 5 years) x .80

9-26


P9-18 (continued)


E(1) Income from Bark Company 18,900 Dividends Declared 14,000 Investment in Bark Company Stock 4,900 Eliminate income from Bark Company.

E(2) Income to Noncontrolling Interest 8,100 Dividends Declared 6,000 Noncontrolling Interest 2,100 Assign income to noncontrolling shareholders of Bark Company: $8,100 = ($30,000 - $3,000) x .30 $6,000 = $20,000 x .30 $2,100 = $8,100 - $6,000

E(3) Common Stock — Bark Company 250,000Retained Earnings, January 1 300,000Differential 30,000 Investment in Bark Company Stock 406,000 Noncontrolling Interest 174,000 Eliminate investment in Bark Company stock: $30,000 = $406,000 + $174,000 - $550,000

E(4) Buildings and Equipment 30,000 Differential 30,000 Assign beginning differential.

E(5) Depreciation Expense 3,000 Accumulated Depreciation 3,000 Amortize differential related to buildings and equipment: $30,000 / 10 years

E(6) Income from Corn Corporation 55,120 Dividends Declared 20,000 Investment in Corn Corporation Stock 35,120 Eliminate income from Corn Corporation.

E(7) Income to Noncontrolling Interest 13,780 Dividends Declared 5,000 Noncontrolling Interest 8,780 Assign income to noncontrolling shareholders of Corn Corporation: $13,780 = ($60,000 + $18,900 - $10,000) x .20 $5,000 = $25,000 x .20 $8,780 = $13,780 - $5,000

9-27


P9-18 (continued)

E(8) Common Stock — Corn Corporation 400,000Retained Earnings, January 1 270,000Differential 30,000 Investment in Corn Corporation Stock 560,000 Noncontrolling Interest 140,000 Eliminate investment in Corn Corporation stock: $270,000 = $200,000 + $35,000 + $35,000 $30,000 = $50,000 - $10,000 - $10,000 $560,000 = $520,000 + [($35,000 - $10,000) x .80] x 2 years $140,000 = $700,000 x .20

E(9) Trademark 30,000 Differential 30,000 Assign beginning differential: $50,000 - ($10,000 x 2 years)

E(10) Amortization Expense 10,000 Trademark 10,000 Amortize differential related to trademark: $50,000 / 5 years

9-28


P9-19 Subsidiary Stock Dividend

Investment elimination entry, January 1, 20X8:

Alternative 1: Pound Manufacturing stock is split 2:1.

E(1) Common Stock — Pound Manufacturing 100,000Additional Paid-In Capital 70,000Retained Earnings 280,000 Investment in Pound Mfg. Stock 306,000 Noncontrolling Interest 144,000

Alternative 2: A stock dividend of 4,000 shares is issued.


Alternative 3: A stock dividend of 1,500 shares is issued.


9-29


P9-20 Subsidiary Preferred Stock Outstanding

a. Eliminating entries, January 1, 20X5:

Preferred Stock — Pert Company 200,000Retained Earnings 32,000 Investment in Pert Preferred Stock 92,800 Noncontrolling Interest 139,200 Eliminate preferred stock: $32,000 = ($200,000 x .08) x 2 years

Common Stock — Pert Company 150,000Retained Earnings 168,000 Investment in Pert Common Stock 222,600 Noncontrolling Interest 95,400 Eliminate common stock: $168,000 = $200,000 - $32,000

b. Consolidated net income and income to controlling interest: Operating income of Emerald Corporation $ 80,000 Net income of Pert 34,000 Consolidated net income $114,000 Income to noncontrolling interest: Income from preferred stock of Pert Company ($16,000 x .60) $ 9,600 Income from common stock of Pert Company [($34,000 - $16,000) x .30] 5,400 Income to noncontrolling interest (15,000 ) Income to controlling interest $ 99,000

Alternate computation of income to controlling interest Operating income of Emerald Corporation $80,000 Income from preferred stock of Pert Company ($16,000 x .40) 6,400 Income from common stock of Pert Company [($34,000 - $16,000) x .70] 12,600 Income to controlling interest $99,000

9-30


P9-21 Ownership of Subsidiary Preferred Stock

a. Preferred stockholders' claim on net assets of Jacobs:

Liquidation value of preferred stock ($101 per share) $202,000 20X6 dividends in arrears ($200,000 x .10) 20,000 Total preferred stockholder claim, December 31, 20X6 $222,000

b. Book value of Jacobs common shares acquired by Presley:

Total Jacobs stockholders' equity, December 31, 20X6 $3,155,000 Claim of preferred stockholders (222,000 )Book value of Jacobs common stock $2,933,000 Portion acquired by Presley x .60 Book value of common shares acquired by Presley $1,759,800

c. Goodwill associated with acquisition of common shares:

Consideration given by Presley to acquire shares $1,800,000 Fair value of noncontrolling interest in common shares 1,200,000 Total fair value $3,000,000 Book value of common shares (2,933,000)Goodwill $ 67,000

d. Income to noncontrolling interest, 20X7:

Jacobs net income $280,000 Less: impairment of goodwill (26,000)Less: 20X7 preferred dividends ($200,000 x .10) (20,000 )Income accruing to common shareholders $234,000 Noncontrolling common shareholders' interest x .40 Income to noncontrolling common shareholders $ 93,600 Preferred dividends to noncontrolling shareholders ($20,000 x .80) 16,000 Total income to noncontrolling shareholders $109,600

e. Presley's income from investment in subsidiary common stock:

Jacobs net income $280,000 Less: 20X7 preferred dividends ($200,000 x .10) (20,000 )Income accruing to common shareholders $260,000 Presley's proportionate share x .60 Presley's share of income to common shareholders $156,000

Note: Basic equity method does not include adjustment for Impairment of goodwill.

9-31


P9-21 (continued)

f. Noncontrolling interest, December 31, 20X7:

Total amount assigned to noncontrolling interest:Noncontrolling interest - common $1,289,600 Noncontrolling interest - preferred 161,600 Total noncontrolling interest $1,451,200

Assigned to noncontrolling interest - commonJacobs stockholders' equity, January 1, 20X7 $3,155,000 20X7 net income 280,000 Less: Preferred dividends (40,000)Less: Common dividends (10,000 )Total Jacobs stockholders' equity, December 31, 20X7 $3,385,000 Claim of preferred stockholders (202,000 )Book value of Jacobs' common stock $3,183,000 Unimpaired goodwill at December 31, 20X7 ($67,000 - $26,000) 41,000 Total basis for common shareholders $3,224,000 Noncontrolling stockholders' interest x .40 Noncontrolling interest — common $1,289,600

Assigned to noncontrolling interest - preferredTotal Jacobs preferred stockholders' equity, January 1, 20X7 $222,000 Less: Dividends in arrears paid during 20X7 (20,000 )Jacobs preferred stockholders' equity, December 31, 20X7 $202,000 Noncontrolling stockholders' interest x .80 Noncontrolling interest — preferred $161,600

9-32


P9-21 (continued)

g. Eliminating entries:

E(1) Income from Subsidiary 156,000 Dividends Declared — Common 6,000 Investment in Jacobs Common Stock 150,000 Eliminate income from subsidiary.

E(2) Dividend Income — Preferred 8,000 Dividends Declared — Preferred 8,000 Eliminate dividend income from subsidiary preferred stock: $40,000 x .20

E(3) Income to Noncontrolling Interest 109,600 Dividends Declared — Common 4,000 Dividends Declared — Preferred 32,000 Noncontrolling Interest 73,600 Assign income to noncontrolling interest: $4,000 = $10,000 x .40 $32,000 = $40,000 x .80

E(4) Common Stock — Jacobs Jacuzzi 500,000Additional Paid-In Capital — Common 800,000Premium on Preferred Stock 3,000 *Retained Earnings, January 1 1,630,000 **Goodwill 67,000 Investment in Jacobs Common Stock 1,800,000 Noncontrolling Interest 1,200,000 Eliminate beginning investment in common stock: $3,000 = $5,000 - $2,000 $1,630,000 = $1,650,000 - $20,000

*Portion accruing to common shareholders

**Portion accruing to common shareholders after deducting preferred dividends in arrears

9-33


P9-21 (continued)

E(5) Goodwill Impairment Loss 26,000 Goodwill 26,000 Recognize goodwill impairment loss.

E(6) Preferred Stock — Jacobs Jacuzzi 200,000Premium on Preferred Stock 2,000 *Retained Earnings, January 1 20,000 ** Investment in Jacobs Preferred Stock 42,000 Additional Paid-In Capital — Retirement of Preferred Stock 2,400 Noncontrolling Interest 177,600 Eliminate subsidiary preferred stock: $2,000 = $5,000 - $3,000 $20,000 = $200,000 x .10 $2,400 = ($222,000 x .20) - $42,000 $177,600 = $222,000 x .8

*Portion representing call premium

**Portion relating to preferred dividends in arrears

P9-22 Consolidation Workpaper with Subsidiary Preferred Stock

a. Eliminating entries:

E(1) Income from Subsidiary 58,500 Dividends Declared — Common Stock 9,000 Investment in White Common Stock 49,500

E(2) Dividend Income 9,000 Dividends Declared — Preferred Stock 9,000

E(3) Income to Noncontrolling Interest 12,500 Dividends Declared — Preferred Stock 6,000 Dividends Declared — Common Stock 1,000 Noncontrolling Interest 5,500

E(4) Common Stock — White Corporation 100,000Retained Earnings, January 1 250,000 Investment in White Common Stock 315,000 Noncontrolling Interest 35,000

E(5) Preferred Stock — White Corporation 200,000 Investment in White Preferred Stock 120,000 Noncontrolling Interest 80,000

E(6) Dividends Payable 9,000 Dividends Receivable 9,000

9-34


P9-22 (continued)

b. Brown Company and White CorporationConsolidation Workpaper

December 31, 20X6

Brown White Eliminations Consol-

Item Company Corporatio

n Debit Credit idated

Sales 500,000 300,000 800,000 Dividend Income 9,000 (2) 9,000Income from Subsidiary 58,500 (1) 58,500 Credits 567,500 300,000 800,000 Cost of Goods Sold 280,000 170,000 450,000 Deprec. and Amort. 40,000 30,000 70,000 Other Expenses 131,000 20,000 151,000 Debits (451,000) (220,000) (671,000 )Consolidated Net Income 129,000 Income to Noncon- trolling Interest (3) 12,500 (12,500 )Income, carry forward 116,500 80,000 80,000 116,500

Retained Earnings, Jan. 1 435,000 250,000 (4) 250,000 435,000 Income, from above 116,500 80,000 80,000 116,500

551,500 330,000 551,500 Dividends Declared Preferred Stock (15,000) (2) 9,000

(3) 6,000 Common Stock (60,000) (10,000) (1) 9,000

(3) 1,000 (60,000 )Ret. Earnings, Dec. 31, carry forward 491,500 305,000 330,000 25,000 491,500

Cash 58,000 100,000 158,000 Accounts Receivable 80,000 120,000 200,000 Dividends Receivable 9,000 (6) 9,000Inventory 100,000 200,000 300,000 Bldgs. and Equip. (net) 360,000 270,000 630,000 Investment in White Corp.: Preferred Stock 120,000 (5) 120,000 Common Stock 364,500 (1) 49,500

(4) 315,000 Debits 1,091,500 690,000 1,288,000

Accounts Payable 100,000 70,000 170,000 Dividends Payable 15,000 (6) 9,000 6,000 Bonds Payable 300,000 300,000 Preferred Stock 200,000 (5) 200,000Common Stock 200,000 100,000 (4) 100,000 200,000 Ret. Earnings, from above 491,500 305,000 330,000 25,000 491,500 Noncontrolling Interest (3) 5,500

(4) 35,000 (5) 80,000 120,500

Credits 1,091,500 690,000 639,000 639,000 1,288,000

9-35


P9-23 Subsidiary Stock Transactions

a. (1) Book value of Beta Company stock outstanding $500,000 Cost of treasury shares repurchased (68,000 )Book value of remaining shares outstanding $432,000 Proportion of remaining shares held by noncontrolling Interest (1,500 / 9,000) x .1667 Adjusted book value of shares held $ 72,000 Book value of shares held before treasury stock repurchase by Beta Company ($500,000 x .25) (125,000 )Reduction of noncontrolling interest $ 53,000 Consideration given by Beta Company (68,000 )Decrease in equity attributable to parent $ (15,000 )

(2) Journal entry recorded by Apex Corporation:

Retained Earnings 15,000 Investment in Beta Company Stock 15,000

(3) Eliminating entries:

E(1) Income from Subsidiary 37,500 Investment in Beta Company Stock 37,500 $45,000 x .833

E(2) Income to Noncontrolling Interest 7,500 Noncontrolling Interest 7,500 $45,000 x .167

E(3) Common Stock — Beta Company 100,000Additional Paid-In Capital 80,000Retained Earnings, January 1 320,000 Treasury Stock 68,000 Investment in Beta Company Stock 360,000 Noncontrolling Interest 72,000

b. (1) Book value of Beta Company stock outstanding $500,000 Cost of treasury shares repurchased (68,000 )Book value of remaining shares outstanding $432,000 Proportion of remaining shares held by noncontrolling Interest (2,500 / 9,000) x .2778 Adjusted book value of shares held by noncontrolling Interest $120,000 Book value of shares held before treasury stock repurchase by Beta Company ($500,000 x .25) (125,000)Increase in equity attributable to parent $ 5,000

(2) Journal entry recorded by Apex Corporation:

Cash 68,000 Investment in Beta Company Stock 63,000 Additional Paid-In Capital 5,000

9-36


P9-23 (continued)

(3) Eliminating entries:

E(1) Income from Subsidiary 32,500 Investment in Beta Company Stock 32,500 $45,000 x .722

E(2) Income to Noncontrolling Interest 12,500 Noncontrolling Interest 12,500 $45,000 x .278

E(3) Common Stock — Beta Company 100,000Additional Paid-In Capital 80,000Retained Earnings, January 1 320,000 Treasury Stock 68,000 Investment in Beta Company Stock 312,000 Noncontrolling Interest 120,000

P9-24 Sale of Subsidiary Shares

a. Eliminating entries:

E(1) Gain on Sale of ENC Company Stock 10,000 Additional Paid-In Capital 10,000 Eliminate gain on sale of ENC shares: $60,000 - ($250,000 x .20)

E(2) Income from Subsidiary 18,000 Dividends Declared 6,000 Investment in ENC Company Stock 12,000 Eliminate income from subsidiary: $18,000 = .60($170,000 - $140,000)

E(3) Income to Noncontrolling Interest 12,000 Dividends Declared 4,000 Noncontrolling Interest 8,000 Assign income to noncontrolling interest: $12,000 = .40($170,000 - $140,000)

E(4) Common Stock — ENC Company 100,000Additional Paid-In Capital 20,000Retained Earnings, January 1 130,000 Investment in ENC Company Stock 150,000 Noncontrolling Interest 100,000 Eliminate investment in common stock.

9-37


P9-24 (continued)

b. Penn Corporation and ENC CompanyConsolidation Workpaper

December 31, 20X4

Penn ENC Eliminations Consol- Item Corp. Company Debit Credit idated

Sales 280,000 170,000 450,000 Gain on Sale of ENC Company Stock 10,000 (1) 10,000Income from Subsidiary 18,000 _______ (2) 18,000 Credits 308,000 170,000 450,000 Cost of Goods Sold 210,000 100,000 310,000 Depreciation Expense 20,000 15,000 35,000 Other Expenses 21,000 25,000 46,000 Debits (251,000) (140,000) (391,000 )Consolidated net income 59,000 Income to Noncon- trolling Interest (3) 12,000 (12,000 )Income, carry forward 57,000 30,000 40,000 47,000

Retained Earnings, January 1 320,000 130,000 (4)130,000 320,000 Income, from above 57,000 30,000 40,000 47,000

377,000 160,000 367,000 Dividends Declared (15,000) (10,000) (2) 6,000

(3) 4,000 (15,000 )Ret. Earnings, Dec. 31, carry forward 362,000 150,000 170,000 10,000 352,000

Cash 30,000 35,000 65,000 Accounts Receivable 70,000 50,000 120,000 Inventory 120,000 100,000 220,000 Buildings and Equipment 650,000 230,000 880,000 Investment in ENC Company Stock 162,000 (2) 12,000

(4) 150,000 Debits 1,032,000 415,000 1,285,000

Accum. Depreciation 170,000 95,000 265,000 Accounts Payable 50,000 20,000 70,000 Bonds Payable 200,000 30,000 230,000 Common Stock 200,000 100,000 (4)100,000 200,000 Additional Paid-In Capital 50,000 20,000 (4) 20,000 (1) 10,000 60,000 Retained Earnings, from above 362,000 150,000 170,000 10,000 352,000 Noncontrolling Interest (3) 8,000

(4)100,000 108,000 Credits 1,032,000 415,000 290,000 290,000 1,285,000

9-38


P9-25 Sale of Shares by Subsidiary to Nonaffiliate

a. E(1) Common Stock — Delta Corporation 240,000 Additional Paid-In Capital 190,000 Retained Earnings 350,000 Investment in Delta Corporation Stock 520,000 Noncontrolling Interest 260,000 Eliminate investment in common stock: $240,000 = $200,000 + ($10 x 4,000 shares) $190,000 = $50,000 + [($45 - $10) x 4,000 shares] $520,000 = $780,000 x (16,000 shares / 24,000 shares) $260,000 = $780,000 x (8,000 shares / 24,000 shares)

Journal entry recorded by Craft Corporation:

Investment in Delta Corporation Stock 40,000 Additional Paid-In Capital 40,000 Book value of shares held by Craft: After sale $780,000 x (16,000 / 24,000) $520,000 Before sale $600,000 x (16,000 / 20,000) (480,000 ) Increase in book value $ 40,000

b. Craft Corporation and Delta CorporationConsolidated Balance Sheet Workpaper

January 1, 20X3

Craft Delta Eliminations Consol- Item Corp. Corp. Debit Credit idated

Cash 50,000 230,000 280,000Accounts Receivable 90,000 120,000 210,000Inventory 180,000 200,000 380,000Buildings & Equipment 700,000 600,000 1,300,000Investment in Delta Corporation 520,000 (1)520,000 Total Debits 1,540,000 1,150,000 2,170,000

Accumulated Depreciation 200,000 220,000 420,000Accounts Payable 70,000 70,000 140,000Taxes Payable 80,000 80,000Mortgages Payable 250,000 250,000Common Stock 300,000 240,000 (1)240,000 300,000Additional Paid-In Capital 220,000 190,000 (1)190,000 220,000Retained Earnings, 500,000 350,000 (1)350,000 500,000Noncontrolling Interest (1)260,000 260,000 Total Credits 1,540,000 1,150,000 780,000 780,000 2,170,000

9-39


9-40


P9-25 (continued)

c. Craft Corporation and SubsidiaryConsolidated Balance Sheet

January 1, 20X3

Current Assets: Cash $ 280,000 Accounts Receivable 210,000 Inventory 380,000 $ 870,000Noncurrent Assets: Buildings and Equipment $1,300,000 Less: Accumulated Depreciation (420,000 ) 880,000 Total Assets $1,750,000

Current Liabilities: Accounts Payable $ 140,000 Taxes Payable 80,000 $ 220,000Mortgages Payable 250,000Stockholders’ Equity: Controlling Interest: Common Stock $ 300,000 Additional Paid-In Capital 220,000 Retained Earnings 500,000 Total Controlling Interest $1,020,000 Noncontrolling Interest 260,000 Total Stockholders’ Equity 1,280,000 Total Liabilities and Stockholders' Equity $1,750,000

9-41


P9-26 Sale of Additional Shares to Parent

a. Eliminating entry:

E(1) Common Stock — Tin Corporation 125,000Additional Paid-In Capital 187,500Retained Earnings 200,000 Investment in Tin Corporation 412,500 Noncontrolling Interest 100,000 Eliminate investment balance: $125,000 = $100,000 + (2,500 x $10) $187,500 = computed below

Computation of debit to Additional Paid-In CapitalBalance reported by Tin Corporation prior to sale of additional shares $ 50,000Increase in paid-in capital from sale of shares [$150,000 – (2,500 x $10)] 125,000Noncontrolling interest after sale of shares ($500,000 x .20) $100,000Noncontrolling interest before sale of shares ($350,000 x .25) (87,500 )Increase in book value of noncontrolling interest 12,500 Debit to additional paid-in capital $187,500

Journal entry recorded by Tin Corporation:

Cash 150,000 Common Stock 25,000 Additional Paid-In Capital 125,000

Journal entry recorded by Lane Manufacturing:

Investment in Tin Corporation Stock 150,000 Cash 150,000

9-42


P9-26 (continued)

b. Lane Manufacturing Company and Tin CorporationConsolidation Workpaper

January 2, 20X1

Lane Tin Eliminations Consol- Item Corp. Corp. Debit Credit idated

Cash 77,500 210,000 287,500Accounts Receivable 60,000 100,000 160,000Inventory 100,000 180,000 280,000Buildings and Equipment 600,000 600,000 1,200,000Investment in Tin Corporation Stock 412,500 (1)412,500 Debits 1,250,000 1,090,000 1,927,500

Accum. Depreciation 150,000 240,000 390,000Accounts Payable 50,000 50,000 100,000Bonds Payable 400,000 300,000 700,000Common Stock 200,000 125,000 (1)125,000 200,000Additional Paid-In Capital 50,000 175,000 (1)187,500 37,500Retained Earnings, 400,000 200,000 (1)200,000 400,000Noncontrolling Interest (1)100,000 100,000 Total Credits 1,250,000 1,090,000 512,500 512,500 1,927,500

9-43


P9-27 Complex Ownership Structure

The overall ownership structure can be diagrammed as follows:

Consolidated net income of $98,800 is reported:

Operating income of First Boston $ 44,000 Operating income of Gulfside 34,000 Operating income of Paddock 50,000 Total earnings available $128,000 Income to noncontrolling interests: Paddock .40[$50,000 + .10($30,000)] $21,200 Gulfside .20[$34,000 + .60($10,000)] 8,000 (29,200 )Consolidated net income $ 98,800

9-44

FirstBoston

Paddock

Gulfside .60

.80 .10