Solution Advanced Accounting 11ed Chp4

2011 Pearson Education, Inc. publishing as Prentice Hall 4-1

Chapter 4

CONSOLIDATION TECHNIQUES AND PROCEDURES Answers to Questions 1 Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its

subsidiary investment and income accounts. Since patents and patent amortization accounts are not recorded on the parents books, they are created for consolidated statement purposes through workpaper entries.

2 Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper

adjusting entry in which noncontrolling interest share is debited, noncontrolling interests share of dividends is credited and noncontrolling interest is credited. The noncontrolling interest share (debit) is carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest for noncontrolling interest share is added to the beginning noncontrolling interest. The noncontrolling interest share is calculated based on the subsidiarys reported net income adjusted to reflect fair value through the amortization of the excess of fair value over book value. This is the approach illustrated throughout this text.

3 Workpaper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity

accounts are alike in regard to the objectives of consolidation. Regardless of the configuration of the workpaper entries, the final result of adjustments for these items is to eliminate them through workpaper entries. In other words, the investment in subsidiary, income from subsidiary, and the capital stock, additional paid-in capital, retained earnings, and other stockholders equity accounts of the subsidiary never appear in consolidated financial statements.

4 When the parent does not amortize fair value/book value differentials on its separate books, the parents

income from subsidiary and investment in subsidiary accounts are overstated in the year of acquisition. In subsequent years, the income from the subsidiary, investment in subsidiary, and parents beginning retained earnings will be overstated. (This assumes that the asset is undervalued).The error may be corrected in the workpapers with the following entries:

Year of acquisition Income from subsidiary XXX Investment in subsidiary XXX Subsequent year Income from subsidiary XXX Retained earnings parent XXX Investment in subsidiary XXX

4-2 Consolidation Techniques and Procedures

2011 Pearson Education, Inc. publishing as Prentice Hall

By entering a correcting entry, all other workpaper entries are the same as if the parent provided for amortization on its separate books.

If the errors are not corrected through the workpaper entries suggested above, the entry to eliminate the income from subsidiary in the year of acquisition is prepared in the usual manner without further complications because neither the beginning investment nor retained earnings accounts are affected by the omission. In subsequent years the entry to eliminate income from subsidiary and dividends from subsidiary will have to be changed to correct the beginning-of-the-period retained earnings as follows:

Income from subsidiary XXX Retained earnings parent XXX Dividends (subsidiary) XXX Investment in subsidiary XXX 5 No. Workpaper adjustments are not entered in the general ledger of the parent or any other entity. They are

used in the preparation of consolidated financial statements for a conceptual entity for which there are no formal accounting records.

6 Workpapers are tools of the accountant that facilitate the consolidation of parent and subsidiary financial

statements. Given the tools available, the accountant should select those that are most convenient in the circumstances. If financial statements are to be consolidated, the financial statement approach is the appropriate tool. The trial balance approach is most convenient when the data are presented in the form of a trial balance. The accountant needs to be familiar with both approaches to perform the work as efficiently as possible.

7 Workpaper adjustment and elimination entries as illustrated in this text are exactly the same when the trial

balance approach is used as when the financial statement approach is used. This is possible through a check-off system that nullifies the closing process when the financial statement approach is used.

8 The retained earnings of the parent will equal consolidated retained earnings if the equity method of

accounting has been correctly applied. In consolidating the financial statements of affiliated companies, the beginning retained earnings of the parent are used as beginning consolidated retained earnings. If the equity method has not been correctly applied, parent beginning retained earnings will not equal beginning consolidated retained earnings. In this case, retained earnings of the parent are adjusted to a correct equity basis in order to establish the correct amount of beginning consolidated retained earnings. Thus, workpaper adjustments to beginning retained earnings of the parent are needed whenever the beginning retained earnings of the parent do not correctly reflect the equity method.

9 The noncontroling interest that appears in the consolidated balance sheet can be checked by first adjusting

the equity of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for any unamortized excess of fair value over book value) and then multiplying by the noncontrolling interest percentage. Consolidated retained earnings at a balance sheet date can be checked by comparing the amount with the parents retained earnings on the same date. If consolidated retained earnings and parent retained earnings are not equal, either consolidated retained earnings have been computed incorrectly, or parent retained earnings do not reflect a correct equity method of accounting.

10 Consolidated assets and liabilities are reported for all equity holdersnoncontrolling as well as

controlling. Therefore, the change in net assets from operations for a period results from noncontrolling interest share and controlling interest share.

11 A change in cash relates to all interests in the consolidated entity. This difference is one of many

inconsistencies in the concepts underlying consolidated financial statements. Consider, for example, the error that could result from dividing cash provided by operations by outstanding parent shares to compute cash flow per share.

Chapter 4 4-3


SOLUTIONS TO EXERCISES Solution E4-1 1 d 6 d 2 c 7 b 3 a 8 b 4 d 9 a 5 b 10 b Solution E4-2 Preliminary computations (in thousands) Investment cost January 2 $600 Implied total fair value of Sal ($600 / 80%) $750 Less: Book value (500) Excess fair value over book value $250 Excess allocated to: Inventory $ 25 Remainder to goodwill 225 Excess fair value over book value $250 1 Income from Sal Sals reported net income $140 Less: Excess allocated to inventory (sold in 2011) (25) Sal adjusted income $115 Pans 80% share $ 92 2 Noncontrolling interest share Sals adjusted income $115 20% noncontrolling interest

$ 23 3 Noncontrolling interest December 31 Sals equity book value $520 Add: Unamortized excess (Goodwill) 225 Sals equity fair value $745 20% noncontrolling interest $149 4 Investment in Sal December 31 Investment cost January 2 $600 Add: Income from Sal (given)* 100 Less: Dividends ($120 80%) (96) Investment in Sal December 31 $604 * Assumes this is based on Sals adjusted income 5 Consolidated net income

Noncontrolling interest share Controlling interest share equals Parent NI under equity method.

$383.4 $ 23 $360.4



Solution E4-3 1 $700,000 ($300,000 + $440,000 - $40,000 intercompany) Preliminary computations for 2 and 3 Investment cost on January 1, 2011 $28,000 Implied total fair value of Sar ($28,000 / 70%) $40,000 Book value of Sar 30,000 Excess allocated entirely to Goodwill $10,000 2 Pims separate income for 2013 $24,000 Loss from investment in Sar ($1,000 70%) (700) Controlling share of consolidated net income $23,300 Noncontrolling share + (300) Consolidated net income $23,000 3 Investment cost January 1, 2011 $28,000 Add: Share of income less dividends 2011 2013 ($1,400 income - $1,000 dividends) 70% 280 Investment balance December 31, 2013 $28,280 Solution E4-4 Preliminary computations Investment cost $580,000 Implied total fair value of Sin ($580,000 / 80%) $725,000 Book value 600,000 Total excess fair value over book value $125,000 Excess allocated to: Equipment (5-year life) $ 50,000 Patents (10-year amortization period) 75,000 Total excess fair value over book value $125,000 Income from Sin 2011 2012 Sins reported net income $120,000 $150,000 Less: Depreciation of excess allocated to equipment (10,000) (10,000) Less: Amortization of patents (7,500) (7,500) Sins adjusted income $102,500 $132,500 Income from Sin (80%) $ 82,000 $106,000 1a Consolidated net income for 2011 Pens net income = controlling share of consolidated net

income under equity method $340,000

Add: Noncontrolling interest share 20,500 Consolidated net income $360,500 1b Investment in Sin December 31, 2011 Cost January 1 $580,000 Add: Income from Sin 2011 82,000 Less: Dividends from Sin 2011 ($80,000 80%) (64,000) Investment in Sin December 31 $598,000 1c Noncontrolling interest share 2011

($102,500 adjusted income 20%) $ 20,500

1d Noncontrolling interest December 31, 2012 Sins equity book value at acquisition date $600,000 Add: Income less dividends for 2011 and 2012 (see note) 100,000 Sins equity book value at December 31, 2012 700,000 Unamortized excess at December 31, 2012 90,000

Chapter 4 4-5


Sins equity fair value at December 31, 2012 $790,000 Noncontrolling interest percentage 20% Noncontrolling interest December 31, 2012 $158,000 Solution E4-4 (continued) Note: Sins income less dividends: 2011 Net Income $ 120,000 2011 Dividends (80,000) 2012 Net Income 150,000 2012 Dividends (90,000) Total $ 100,000 Solution E4-5 1 c 2 a 3 b 4 c 5 d Solution E4-6

Pat Corporation and Subsidiary Partial Consolidated Cash Flows Statement

for the year ended December 31, Cash Flows from Operating Activities Controlling interest share of consolidated net income $100,000

Adjustments to reconcile net income to cash provided by operating activities:

Noncontrolling interest share $ 50,000 Undistributed income of equity investees (5,000) Loss on sale of land 100,000 Depreciation expense 120,000 Patents amortization 16,000 Increase in accounts receivable (105,000) Increase in inventories (45,000) Decrease in accounts payable (20,000) 111,000 Net cash flows from operating activities $211,000 Solution E4-7

Pro Corporation and Subsidiary Partial Consolidated Cash Flows Statement

for the year ended December 31, Cash Flows from Operating Activities Cash received from customers $322,500 Dividends received from equity investees 7,000 Less: Cash paid to suppliers $182,500 Cash paid to employees 27,000 Cash paid for other operating items 23,500 Cash paid for interest expense 12,000 245,000 Net cash flows from operating activities $ 84,500



SOLUTIONS TO PROBLEMS Solution P4-1 (in thousands of $) Preliminary computations Investment in Sen (75%) January 1, 2011 $2,400 Implied fair value of Sen ($2,400 / 75%) $3,200 Book value of Sen (2,400) Total excess of fair value over book value $ 800 Excess allocated: 10% to inventories (sold in 2011) $ 80 40% to plant assets (useful life 8 years) 320 50% to goodwill 400 Total excess of fair value over book value $ 800 1 Goodwill at December 31, 2015 (not amortized) $ 400 2 Noncontrolling interest share for 2015 Net income ($1,000 sales - $600 expenses) $ 400 Less: Amortization of excess Plant assets ($320 / 8 yrs.) (40) Adjusted Sen income $ 360 25% Share $ 90 3 Consolidated retained earnings December 31, 2014 Equal to Peas December 31, 2014 retained earnings

Since this a trial balance, reported retained earnings equals beginning of 2015 retained earnings.

$1,670

4 Consolidated retained earnings December 31, 2015 Peas retained earnings December 31, 2014 $1,670 Add: Peas net income for 2015 1,085 Less: Peas dividends for 2015 (500) Consolidated retained earnings December 31 $2,255 5 Consolidated net income for 2015 Consolidated sales $5,000 Less: Consolidated expenses ($3,785 + $40 depreciation) (3,825) Total consolidated income 1,175 Less: Noncontrolling interest share (90) Controlling share of consolidated net income for 2015 $1,085 6 Noncontrolling interest December 31, 2014 Sens stockholders equity at book value $2,400 Unamortized excess after four years: Inventory 0 Plant assets ($320 - $160) 160 Goodwill 400 Sens stockholders equity at fair value $2,960 25% Sens stockholders equity at fair value $ 740 7 Noncontrolling interest December 31, 2015 Sens stockholders equity at book value $2,600 Unamortized excess after five years: Inventory 0 Plant assets ($320 - $200) 120 Goodwill 400 Sens stockholders equity at fair value $3,120

Chapter 4 4-7


25% Sens stockholders equity at fair value $ 780



Solution P4-2 1 Pal Corporation and Subsidiary

Consolidation Workpapers for the year ended December 31, 2011

(in thousands)

Pal 80% Sal

Adjustments and Eliminations

Consolidated Statements

Income Statement Sales

$ 620

$ 200

$ 820

Income from Sal 21 a 21 Cost of goods sold 400* 130* 530* Operating expenses 154* 40* 194* Consolidated NI $ 96 Noncontrol.interest share

($1530,000 30%)

c 9

9* Controlling share $ 87 $ 30 $ 87 Retained Earnings

Retained earnings Pal $ 130

$ 130

Retained earnings Sal $ 22 b 22 Net income 87 30 87 Dividends 60* 20* a 14 c 6 60* Retained earnings

December 31 $ 157

$ 32

$ 157

Balance Sheet Cash

$ 91

$ 30

$ 121

Receivables net 120 60 180 Inventories 48 40 88 PP&E net 240 70 310 Investment in Sal 98 a 7

b 91

$ 597 $ 200 $ 699 Accounts payable $ 60 $ 36 $ 96 Other liabilities 40 24 64 Capital stock 300 100 b100 300 Other paid-in capital 40 8 b 8 40 Retained earnings 157 32 157 $ 597 $ 200 Noncontrolling interest January 1 b 39 Noncontrolling interest December 31 c 3 42 160 160 $ 699

* Deduct Workpaper entries

a To eliminate income from Sal and dividends received from Sal and adjust the investment in Sal account to its beginning of the period balance.

b To eliminate reciprocal investment in Sal and equity amounts of Sal and to enter beginning noncontrolling interest.

c To enter noncontrolling interest share of subsidiary income and dividends.

Chapter 4 4-9


Solution P4-2 (continued) 2 Pal Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011

(in thousands) Sales $820 Less: Cost of goods sold 530 Gross profit 290 Operating expenses 194 Consolidated net income 96 Less: Noncontrolling interest share 9 Controlling share of consolidated net income $ 87 Pal Corporation and Subsidiary Consolidated Retained Earnings Statement for the year ended December 31, 2011 Consolidated retained earnings January 1 $130 Add: Controlling share of onsolidated net income 87 Less: Dividends of Pal (60) Consolidated retained earnings December 31 $157 Pal Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 Assets Current assets: Cash $121 Receivables net 180 Inventories 88 $389 Plant assets net 310 Total assets $699 Liabilities and Stockholders Equity Liabilities: Accounts payable $ 96 Other liabilities 64 $160 Stockholders equity: Capital stock, $10 par $300 Other paid-in capital 40 Consolidated retained earnings 157 497 Add: Noncontrolling interest 42 539 Total liabilities and stockholders equity $699



Solution P4-3

Pan Corporation and Subsidiary Consolidation Workpapers

for the year ended December 31, 2011 (in thousands)

Pan

Saf 75%


ConsolidatedStatements


$800

$200

$1,000

Income from Saf 27.6 a 27.6 Cost of sales 500* 100* 600* Other expenses 194* 52* c 11.2 257.2* Consolidated Net Income $ 142.8 Noncontrolling share f 9.2 9.2* Controlling share of NI $133.6 $ 48 $ 133.6 Retained Earnings Retained earnings Pan

$360

$ 360

Retained earnings Saf $ 68 b 68 Controlling share of NI 133.6 48 133.6 Dividends 100* 32* a 24 f 8 100* Retained earnings December 31

$393.6

$ 84

$ 393.6

Balance Sheet Cash

$ 106

$ 30

$ 136

Accounts receivable 172 40 212 Dividends receivable from Saf

12

e 12

Inventories 190 20 210 Note receivable from Pan 10 d 10 Land 130 60 190 Buildings net 340 160 500 Equipment net 260 100 360 Investment in Saf 363.6 a 3.6

b 360

Patents b 112 c 11.2 100.8 $1,573.6 $420 $1,708.8 Accounts payable $ 170 $ 20 $ 190 Note payable to Saf 10 d 10 Dividends payable 16 e 12 4 Capital stock, $10 par 1,000 300 b 300 1,000 Retained earnings 393.6 84 393.6 $1,573.6 $420 Noncontrolling interest January 1 b 120 Noncontrolling interest December 31 f 1.2 121.2 550 550 $1,708.8

*Deduct

Chapter 4 4-11


Solution P4-3 (continued) Supporting Calculations Safs value at acquisition Book value at December 31, 2011 $384 Less: 2011 Net income (48) Add: 2011 Dividends 32 Book value on January 1, 2011 $368 Fair value of patents 112 Safs fair value on January 1, 2011 $480 Purchase price (fair value) of Pans 75% share $360 Noncontrolling interest (25%) $120 Patents have a ten-year life, so amortization is $11,200 per year. Safs Adjusted Income Safs net income $ 48 Less: Amortization of Patents (11.2) Safs adjusted income $ 36.8 Pans 75% share $ 27.6 Noncontrolling interest 25% share $ 9.2



Solution P4-4

Pal Corporation and Subsidiary Consolidation Workpapers


Pal

Sun 75%




$800

$200

$1,000

Income from Sun 36 a 36 Cost of sales 500* 100* 600* Other expenses 194* 52* 246* Consolidated NI $ 154 Noncontrolling share c 12 12* Controlling share of NI $142 $ 48 $ 142 Retained Earnings Retained earnings Pal

$360

$360

Retained earnings Sun $ 68 b 68 Controlling share of NI 142 48 142 Dividends 100* 32* a 24 c 8 100* Retained earnings Dec 31 $402 $ 84 $402 Balance Sheet Cash

$ 118

$ 30

$ 148

Accounts receivable 160 40 200 Dividends receivable from Sun

12

e 12

Inventories 190 20 210 Note receivable from Pal 10 d 10 Land 130 60 190 Buildings net 340 160 500 Equipment net 260 100 360 Investment in Sun 372 a 12

b 360

Goodwill b 112 112 $1,582 $420 $1,720 Accounts payable $ 170 $ 20 $ 190 Note payable to Sun 10 d 10 Dividends payable 16 e 12 4 Capital stock, $10 par 1,000 300 b 300 1,000 Retained earnings 402 84 402 $1,582 $420 Noncontrolling interest January 1 b 120 Noncontrolling interest December 31 c 4 124 550 550 $1,720 * Deduct

Chapter 4 4-13


Solution P4-4(continued) Supporting Calculations Suns value at acquisition: Book value at December 31, 2011 $384 Less: 2011 Net income (48) Add: 2011 Dividends 32 Book value on January 1, 2011 $368 Purchase price of Pals 75% share $360 Implied fair value of Sun ($360 / 75%) $480 Suns book value 368 Excess allocated to Goodwill $112 Noncontrolling interest (25% x $480) $120 SunsAdjusted Income Safs net income $48 Less: Amortization of Goodwill (0) Suns adjusted income $48 Pals 75% share $36 Noncontrolling interest 25% share $12 Solution P4-5 Preliminary computations Allocation of excess fair value over book value Cost of 70% interest January 1 $490,000 Implied fair value of Sul ($490,000 / 70%) $700,000 Book value of Sul (600,000) Excess fair value over book value $100,000 Noncontrolling interest 30% of fair value at acquisition $210,000 Excess allocated Undervalued inventory items sold in 2011 $ 5,000 Undervalued buildings (7 year life) 14,000 Undervalued equipment (3 year life) 21,000 Patents 40,000 Remainder to Goodwill 20,000 Excess fair value over book value $100,000 Calculation of income from Sul Suls net income $100,000 Less: Undervalued inventories sold in 2011 (5,000) Less: Additional Depreciation on building ($14,000/7 years) (2,000) Less: Additional Depreciation on equipment ($21,000/3 years) (7,000) Less: Patent amortization ($40,000/40 years) (1,000) Suls adjusted income $ 85,000 Pars 70% controlling interest share $ 59,500 Noncontrolling interests 30% share $ 25,500



Solution P4-5 (continued) Workpaper entries for 2011 a Income from Sul 59,500 Dividends (Sul) 35,000 Investment in Sul 24,500 b Capital stock (Sul) 500,000 Retained earnings (Sul) January 1 100,000 Unamortized excess 100,000 Investment in Sul 490,000 Noncontrolling interest January 1 210,000 c Cost of sales (for inventory items) 5,000 Buildings net 14,000 Equipment net 21,000 Patents 40,000 Goodwill 20,000 Unamortized excess 100,000 d Depreciation expense 2,000 Buildings net 2,000 e Depreciation expense 7,000 Equipment net 7,000 f Other expenses 1,000 Patents 1,000 g Accounts payable 10,000 Accounts receivable 10,000 h Dividends payable 14,000 Dividends receivable 14,000 i Noncontrolling Interest Share 25,500 Dividends Sul 15,000 Noncontrolling Interest 10,500

Chapter 4 4-15


Solution P4-5 (continued) Par Corporation and Subsidiary

Consolidation Workpapers for the year ended December 31, 2011

(in thousands)

Par

Sul 70% Adjustments and Eliminations

ConsolidatedStatements


$ 800

$ 700

$1,500

Income from Sul 59.5 a 59.5 Cost of sales 300* 400* c 5 705* Depreciation expense 154* 60* d 2

e 7 223*

Other expenses 160* 140* f 1 301* Consolidated NI $ 271 Noncontrolling share i 25.5 25.5* Controlling share of NI $ 245.5 $ 100 $ 245.5 Retained Earnings Retained earnings Par

$ 300

$ 300

Retained earnings Sul $ 100 b 100 Net income 245.5 100 245.5 Dividends 200* 50* a 35 i 15 200* Retained earnings Dec 31 $ 345.5 $ 150 $ 345.5 Balance Sheet Cash

$ 86

$ 60

$ 146

Accounts receivable 100 70 g 10 160 Dividends receivable 14 h 14 Inventories 150 100 250 Other current assets 70 30 100 Land 50 100 150 Buildings net 140 160 c 14 d 2 312 Equipment net 570 330 c 21 e 7 914 Investment in Sul 514.5 a 24.5

b 490

Patents c 40 f 1 39 Goodwill c 20 20 Unamortized excess b 100 c 100 $1,694.5 $ 850 $2,091 Accounts payable $ 200 $ 85 g 10 $ 275 Dividends payable 100 20 h 14 106 Other liabilities 49 95 144 Capital stock, $10 par 1,000 500 b 500 1,000 Retained earnings 345.5 150 345.5 $1,694.5 $ 850 Noncontrolling interest January 1 b 210 Noncontrolling interest December 31 i 10.5 220.5 919 919 $2,091 * Deduct



Solution P4-6 Supporting computations Ownership percentage 13,500/15,000 shares = 90% Investment cost (13,500 shares $15) $202,500 Implied fair value of Syn ($202,500 / 90%) $225,000 Book value of Syn 165,000 Excess fair value over book value $ 60,000 Excess allocated to Land $ 20,000 Remainder to patents 40,000 Excess fair value over book value $ 60,000 Income from Syn Syns reported net income $ 24,000 Less: Patent amortization (4,000) Syns adjusted income $ 20,000 Pens share of Syns income (90%) $ 18,000 Noncontrolling interest share (10%) $ 2,000 Investment in Syn December 31, 2012 Cost January 1, 2011 $202,500 Pens share of the change in Syns retained earnings ($42,000 - $15,000) 90% 24,300 Less: Pens share (90%) of Patent amortization for 2 years (7,200) Investment in Syn December 31 $219,600

Chapter 4 4-17


Solution P4-6 (continued)

Pen Corporation and Subsidiary Consolidation Workpapers


Pen

90% Syn




$ 400

$ 100

$ 500

Income from Syn 18 a 18 Cost of sales 250* 50* 300* Other expenses 100.6* 26* c 4 130.6* Consolidated NI $ 69.4 Noncontrolling share g 2 2 * Controlling share of NI $ 67.4 $ 24 $ 67.4 Retained Earnings Retained earnings Pen

$ 177

$ 177

Retained earnings Syn $ 34 b 34 Net income 67.4 24 67.4 Dividends 50* 16* a 14.4 g 1.6 50* Retained earnings Dec 31 $ 194.4 $ 42 $ 194.4 Balance Sheet Cash

$ 18

$ 15

$ 33

Accounts receivable 80 20 f 5 95 Dividends receivable--Syn 7.2 d 7.2 Inventories 95 10 105 Note receivable Pen 5 e 5 Investment in Syn 219.6 a 3.6

b 216

Land 65 30 b 20 115 Buildings net 170 80 250 Equipment net 130 50 180 Patents b 36 c 4 32 $ 784.8 $ 210 $ 810 Accounts payable $ 85.4 $ 10 f 5 $ 90.4 Note payable to Syn 5 e 5 Dividends payable 8 d 7.2 .8 Capital stock 500 150 b 150 500 Retained earnings 194.4 42 194.4 $ 784.8 $ 210 Noncontrolling interest January 1 b 24 Noncontrolling interest December 31 g .4 24.4 281.2 281.2 $ 810 * Deduct



Solution P4-7 Preliminary computations Allocation of excess fair value over book value Cost of 70% interest January 1 $490,000 Implied fair value of Sol ($490,000 / 70%) $700,000 Book value of Sol (600,000) Excess fair value over book value $100,000 Excess allocated Undervalued inventory items sold in 2011 $ 5,000 Undervalued buildings (7 year life) 14,000 Undervalued equipment (3 year life) 21,000 Remainder to goodwill 60,000 Excess fair value over book value $100,000 Calculation of income from Sol Sols reported net income $100,000 Less: Undervalued inventories sold in 2011 (5,000) Less: Depreciation on building ($14,000/7 years) (2,000) Less: Depreciation on equipment ($21,000/3 years) (7,000) Adjusted income from Soul $ 86,000 Pars 70% controlling share $ 60,200 30% Noncontrolling interest share $ 25,800 Workpaper entries for 2011 a Income from Sol 60,200 Dividends (Sol) 35,000 Investment in Sol 25,200 b Capital stock (Sol) 500,000 Retained earnings (Sol) - January 1 100,000 Unamortized excess 100,000 Investment in Sol 490,000 Noncontrolling interest - January 1 20,000 c Cost of sales (for inventory items) 5,000 Buildings net 14,000 Equipment net 21,000 Goodwill 60,000 Unamortized excess 100,000 d Depreciation expense 2,000 Buildings net 2,000 e Depreciation expense 7,000 Equipment net 7,000 f Noncontrolling Interest Share 25,800 Dividends Sol 15,000 Noncontrolling Interest 10,800 g Accounts payable 10,000 Accounts receivable 10,000 h Dividends payable 14,000 Dividends receivable 14,000

Chapter 4 4-19



Par Corporation and Subsidiary Consolidation Workpapers


Par

Sol 70%




$ 800

$ 700

$1,500

Income from Sol 60.2 a 60.2 Gain on equipment 10 10 Cost of sales 300* 400* c 5 705* Depreciation expense 155* 60* d 2 224* e 7 Other expenses 160* 140* 300* Consolidated NI $ 281 Noncontrolling share f 25.8 25.8* Controlling share of NI $ 255.2 $ 100 $ 255.2 Retained Earnings Retained earnings Par

$ 300

$ 300

Retained earnings Sol $ 100 b 100 Controlling share of NI 255.2 100 255.2 Dividends 200* 50* a 35 f 15 200* Retained earnings Dec 31 $ 355.2 $ 150 $ 355.2 Balance Sheet Cash

$ 96

$ 60

$ 156

Accounts receivable 100 70 g 10 160 Dividends receivable 14 h 14 Inventories 150 100 250 Other current assets 70 30 100 Land 50 100 150 Buildings net 140 160 c 14 d 2 312 Equipment net 570 330 c 21 e 7 914 Investment in Sol 515.2 a 25.2

b 490

Goodwill c 60 60 Unamortized excess b 100 c 100 $1,705.2 $ 850 $2,102 Accounts payable $ 200 $ 85 g 10 $ 275 Dividends payable 100 20 h 14 106 Other liabilities 50 95 145 Capital stock, $10 par 1,000 500 b 500 1,000 Retained earnings 355.2 150 355.2 $1,705.2 $ 850 Noncontrolling interest January 1 b 210 Noncontrolling interest December 31 f 10.8 220.8 919 919 $2,102 * Deduct



Solution P4-8 Supporting computations Ownership percentage 13,500/15,000 shares = 90% Investment cost (13,500 shares $15) $202,500 Implied fair value of Son ($202,500 / 90%) $225,000 Book value of Son 165,000 Excess fair value over book value $ 60,000 Excess allocated to Land $ 20,000 Remainder to goodwill 40,000 Excess fair value over book value $ 60,000 Income from Son Puns controlling share of Sons income ($24,000 90%) $ 21,600 Investment in Son December 31, 2012 Cost January 1, 2011 $202,500 Puns share of the change in Sons retained earnings ($42,000 - $15,000) 90% 24,300 Investment in Son December 31 $226,800 Noncontrolling interest at December 31, 2012 (10% of fair value) (($225,000 + $42,000 - $15,000) x 10%)

$ 25,200

Chapter 4 4-21



Pun Corporation and Subsidiary Consolidation Workpapers


Pun

90% Son




$ 400

$ 100

$ 500

Income from Son 21.6 a 21.6 Cost of sales 250* 50* 300* Expenses 100.6* 26* 126.6* Consolidated NI $ 73.4 Noncontrolling share c 2.4 2.4* Controlling share of NI $ 71 $ 24 $ 71 Retained Earnings Retained earnings Pun

$ 181

$ 181

Retained earnings Son $ 34 b 34 Controlling share of NI 71 24 71 Dividends 50* 16* a 14.4 c 1.6 50* Retained earnings Dec 31 $ 202 $ 42 $ 202 Balance Sheet Cash

$ 18

$ 15

$ 33

Accounts receivable 80 20 f 5 95 Dividends receivable 7.2 d 7.2 Inventories 95 10 105 Note receivable Pun 5 e 5 Investment in Son 226.8 a 7.2

b 219.6

Land 65 30 b 20 115 Buildings net 170 80 250 Equipment net 130 50 180 Goodwill b 40 40 $ 792 $ 210 $ 818 Accounts payable $ 85 $ 10 f 5 $ 90 Note payable to Son 5 e 5 Dividends payable 8 d 7.2 .8 Capital stock 500 150 b 150 500 Retained earnings 202 42 202 $ 792 $ 210 Noncontrolling interest January 1 b 24.4 Noncontrolling interest December 31 c .8 25.2 285.2 285.2 $ 818 * Deduct



Solution P4-9

Pas Corporation and Subsidiary Consolidation Workpapers


Pas

80% Sel




$ 200

$ 110

$ 310

Income from Sel 17 a 17 Cost of sales 80* 40* b 12.5 132.5* Depreciation expense 40* 20* d 5 65* Other expenses 25.5* 10* g 1.25 36.75* Consolidated NI $ 75.75 Noncontrolling share c 4.25 4.25* Controlling share of NI $ 71.5 $ 40 $ 71.5 Retained Earnings Retained earnings Pas

$ 75

$ 75

Retained earnings Sel $ 50 b 50 Controlling share of NI 71.5 40 71.5 Dividends 40* 20* a 16 c 4 40* Retained earnings Dec 31 $ 106.5 $ 70 $ 106.5 Balance Sheet Cash

$ 29.5

$ 30

$ 59.5

Trade receivables net 28 40 e 4 64 Dividends receivable 8 f 8 Inventories 40 30 70 Land 15 30 45 Buildings net 65 70 135 Equipment net 200 100 b 25 d 5 320 Investment in Sel 211 a 1

b 210

Patents b 25 g 1.25 23.75 $ 596.5 $ 300 $ 717.25 Accounts payable $ 40 $ 50 e 4 $ 86 Dividends payable 100 10 f 8 102 Other liabilities 50 20 70 Capital stock 300 150 b 150 300 Retained earnings 106.5 70 106.5 $ 596.5 $ 300 Noncontrolling interest January 1 b 52.5 Noncontrolling interest December 31 c .25 52.75 302 302 $ 717.25 * Deduct

Chapter 4 4-23


Solution P4-9 (continued) Supporting computations Investment cost January 1, 2011 $210,000 Implied fair value of Sel ($210,000 / 80%) $262,500 Book value of Sel 200,000 Excess fair value over book value $ 62,500 Excess allocated: Undervalued inventory $ 12,500 Undervalued equipment 25,000 Remainder to patents 25,000 Excess fair value over book value $ 62,500



Solution P4-10

Pik Corporation and Subsidiary Consolidation Workpapers


Pik

80% Sel




$ 200

$ 110

$ 310

Income from Sel 18 a 18 Cost of sales 80* 40* b 12.5 132.5* Depreciation expense 40* 20* d 5 65* Other expenses 25.5* 10* 35.5* Consolidated NI $ 77 Noncontrolling share c 4.5 4.5* Controlling share of NI $ 72.5 $ 40 $ 72.5 Retained Earnings Retained earnings Pik

$ 75

$ 75

Retained earnings Sel $ 50 b 50 Controlling share of NI 72.5 40 72.5 Dividends 40* 20* a 16 c 4 40* Retained earnings Dec 31 $ 107.5 $ 70 $ 107.5 Balance Sheet Cash

$ 29.5

$ 30

$ 59.5

Trade receivables net 28 40 e 4 64 Dividends receivable 8 f 8 Inventories 40 30 70 Land 15 30 45 Buildings net 65 70 135 Equipment net 200 100 b 25 d 5 320 Investment in Sel 212 a 2

b 210

Goodwill b 25 25 $ 597.5 $ 300 $ 718.5 Accounts payable $ 40 $ 50 e 4 $ 86 Dividends payable 100 10 f 8 102 Other liabilities 50 20 70 Capital stock 300 150 b 150 300 Retained earnings 107.5 70 107.5 $ 597.5 $ 300 Noncontrolling interest January 1 b 52.5 Noncontrolling interest December 31 c .5 53 302 302 $ 718.5 * Deduct

Chapter 4 4-25


Solution P4-10 (continued) Supporting computations Investment cost January 1, 2011 $210,000 Implied fair value of Sel ($210,000 / 80%) $262,500 Book value of Sel 200,000 Excess fair value over book value $ 62,500 Excess allocated: Undervalued inventory $ 12,500 Undervalued equipment 25,000 Remainder to goodwill 25,000 Excess fair value over book value $ 62,500 Income from Sel Sels reported net income $ 40,000 Less amortization of excess fair value: Inventory (12,500) Depreciation ($25,000 / 5 years) ( 5,000) Sels adjusted income $ 22,500 Piks 80% controlling share $ 18,000 20% Noncontrolling interest share $ 4,500



Solution P4-11 Supporting computations Investment cost December 31, 2011 $170,000 Implied fair value of Stu ($170,000 / 80%) $212,500 Book value of Stu 150,000 Excess fair value over book value $ 62,500

Allocation of Excess

Amortization 2012 2015

Unamortized Excess

December 31, 2015 Inventories $ 8,750 $ 8,750 $ --- Plant assets net 22,500 10,000 12,500 Patents 31,250 25,000 6,250 $62,500 $43,750 $18,750

Pil Corporation and Subsidiary Consolidated Balance Sheet Workpapers

on December 31, 2015

Pil

Stu 80% Adjustments and Eliminations

Consolidated Balance Sheet

Assets Cash

$ 41,000

$ 35,000

$ 76,000

Trade receivables 60,000 55,000 c 5,000 110,000 Dividends receivable 8,000 d 8,000 Advance to Stu 25,000 e 25,000 Inventories 125,000 35,000 160,000 Plant assets net 300,000 175,000 b 12,500 487,500 Investment in Stu 191,000 a 191,000 Patents b 6,250 6,250 Unamortized excess a 18,750 b 18,750 Total assets $750,000 $300,000 $839,750 Equities Accounts payable

$ 50,000

$ 45,000

c 5,000

$ 90,000

Dividends payable 10,000 d 8,000 2,000 Advance from Pil 25,000 e 25,000 Capital stock 400,000 100,000 a 100,000 400,000 Retained earnings 300,000 120,000 a 120,000 300,000 Noncontrolling interest a 47,750 47,750 Total equities $750,000 $300,000 $839,750

Chapter 4 4-27


Solution P4-12 Preliminary computations Investment cost $480,000 Implied fair value Sci ($480,000 / 80%) $600,000 Book value of Sci 450,000 Excess fair value over book value $150,000 Allocation of differential Plant assets $100,000 Goodwill 50,000 Excess fair value over book value $150,000 Amortization Plant assets $100,000/4 years = $25,000 per year Investment account balance at December 31, 2012 Underlying book value $580,000 Add: Unamortized excess allocated to plant assets ($100,000 - $50,000 depreciation) 50,000 Add: Unamortized goodwill 50,000 Fair value of Sci at December 31 $680,000 Investment account balance at December 31 (80%) $544,000 Noncontrolling interest at December 31 (20%) $136,000 The investment account balance is overstated at $560,000 for the $16,000 dividend receivable.




Pat Corporation and Subsidiary Consolidation Workpapers


Pat

Sci 80%




$1,800

$ 600

$2,400

Income from Sci 76 c 76 Cost of sales 1,200* 300* 1,500* Operating expense 380* 180* e 25 585* Consolidated NI $ 315 Noncontrolling share f 19 19* Controlling share of NI $ 296 $ 120 $ 296 Retained Earnings Retained earnings Pat

$ 244

$ 244

Retained earnings Sci $ 100 d 100 Controlling share of NI 296 120 296 Dividends 200* 40* c 32 f 8 200* Retained earnings Dec 31 $ 340 $ 180 $ 340 Balance Sheet Cash

$ 12

$ 30

a 40

$ 82

Accounts receivable 52 40 h 10 82 Inventories 164 120 284 Advance to Sci 40 a 40 Other current assets 160 10 170 Land 320 60 380 Plant assets net 680 460 d 75 e 25 1,190 Investment in Sci 560 b 16

c 44 d 500

Dividends receivable b 16 g 16 Goodwill d 50 50 $1,988 $ 720 $2,238 Accounts payable $ 48 $ 30 h 10 $ 68 Dividends payable 20 g 16 4 Other liabilities 200 90 290 Capital stock 1,400 400 d 400 1,400 Retained earnings 340 180 340 $1,988 $ 720 Noncontrolling interest January 1 d 125 Noncontrolling interest December 31 f 11 136 827 827 $2,238 * Deduct

Chapter 4 4-29


Solution P4-13 Supporting computations Investment cost January 1, 2011 $ 80,000 Implied fair value of Ski ($80,000 / 80%) $100,000 Book value of Ski 90,000 Excess fair value over book value $ 10,000 Excess allocated to Inventory (sold in 2011) $ 1,000 Equipment (4-year remaining use life) 4,000 Intangible assets (40-year amortization period) 5,000 Excess fair value over book value $10,000 Income from Ski for 2011 Skis net income $ 15,000 Less: Excess allocated to inventories (1,000) Less: Amortization of excess allocated to equipment ($4,000/4 years) (1,000) Less: Amortization of intangibles ($5,000/40 years) (125) Skis adjusted income for 2011 $ 12,875 Plys 80% controlling interest share $ 10,300 Noncontrolling interest share for 2011 (20%) $ 2,575 Income from Ski for 2012 Skis net income $ 20,000 Less: Amortization of excess allocated to equipment ($4,000/4 years) (1,000) Less: Amortization of intangibles ($5,000/40 years) (125) Skis adjusted income for 2012 $ 18,875 Plys 80% controlling interest share $ 15,100 Noncontrolling interest share for 2012 (20%) $ 3,775 Note: Since the prior years income is not affected by the current years

error of omission, the workpapers for 2012 are easier to prepare without an additional conversion-to-equity entry.




Ply Corporation and Subsidiary Consolidation Workpapers

for the year ended December 31, 2011

Ply

Ski 80% Adjustments and Eliminations



$ 160,000

$ 80,000

$ 240,000

Income from Ski 10,300 a 10,300 Cost of sales 105,000* 35,000* b 1,000 141,000* Operating expenses 35,000* 30,000* c 1,000

d 125 66,125*

Consolidated NI $ 32,875 Noncontrolling share f 2,575 2,575* Controlling share of NI $ 30,300 $ 15,000 $ 30,300 Retained Earnings Retained earnings Ply

$ 70,000

$ 70,000

Retained earnings Ski $ 30,000 b 30,000 Controlling share of NI 30,300 15,000 30,300 Dividends 10,000* 5,000* a 4,000 f 1,000 10,000* Retained earnings Dec 31 $ 90,300 $ 40,000 $ 90,300 Balance Sheet Cash

$ 24,700

$ 15,000

$ 39,700

Trade receivables net 25,000 20,000 45,000 Dividends receivable 4,000 0 e 4,000 Inventories 40,000 30,000 70,000 Plant & equipment net 100,000 55,000 b 4,000 c 1,000 158,000 Investment in Ski 86,300 a 6,300

b 80,000

Intangibles b 5,000 d 125 4,875 $ 280,000 $ 120,000 $ 317,575 Accounts payable $ 20,700 $ 15,000 $ 35,700 Dividends payable 9,000 5,000 e 4,000 10,000 Capital stock 100,000 40,000 b 40,000 100,000 Other paid-in capital 60,000 20,000 b 20,000 60,000 Retained earnings 90,300 40,000 90,300 $ 280,000 $ 120,000 Noncontrolling interest January 1 b 20,000 Noncontrolling interest December 31 f 1,575 21,575 118,000 118,000 $ 317,575 * Deduct

Chapter 4 4-31



Ply Corporation and Subsidiary Consolidation Workpapers


Ply

Ski 80% Adjustments and Eliminations



$ 170,000

$ 90,000

$ 260,000

Income from Ski 16,000 a 16,000 Cost of sales 110,000* 35,000* 145,000* Operating expenses 30,000* 35,000* c 1,000

d 125 66,125*

Consolidated NI $ 48,875 Noncontrolling share f 3,775 3,775* Controlling share of NI $ 46,000 $ 20,000 $ 45,100 Retained Earnings Retained earnings Ply

$ 90,300

$ 90,300

Retained earnings Ski $ 40,000 b 40,000 Controlling share of NI 46,000 20,000 45,100 Dividends 15,000* 10,000* a 8,000 f 2,000 15,000* Retained earnings Dec 31 $ 121,300 $ 50,000 $ 120,400 Balance Sheet Cash

$ 26,700

$ 20,000

$ 46,700

Trade receivables net 45,000 30,000 75,000 Dividends receivable 4,000 e 4,000 Inventories 40,000 30,000 70,000 Plant & equipment net 95,000 60,000 b 3,000 c 1,000 157,000 Investment in Ski 94,300 a 8,000

b 86,300

Intangible assets b 4,875 d 125 4,750 $ 305,000 $ 140,000 $ 353,450 Accounts payable $ 17,700 $ 25,000 $ 42,700 Dividends payable 6,000 5,000 e 4,000 7,000 Capital stock 100,000 40,000 b 40,000 100,000 Other paid-in capital 60,000 20,000 b 20,000 60,000 Retained earnings 121,300 50,000 120,400 $ 305,000 $ 140,000 Noncontrolling interest January 1 b 21,575 Noncontrolling interest December 31 f 1,775 23,350 132,775 132,775 $ 353,450 * Deduct



Solution P4-14 Preliminary computations Investment cost $ 99,000 Implied fair value of Sim ($99,000 / 90%) $110,000 Book value of Sim 80,000 Excess fair value over book value $ 30,000 Excess allocated to: Inventories (sold in 2011) $ 10,000 Patents (10-year remaining useful life) 20,000 Excess fair value over book value $ 30,000 1 Analysis of investment in Sim account Fair value of Sim January 5, 2011 $110,000 Add: Change in retained earnings from

January 5, 2011 to December 31, 2013 50,000

Less: Amortization of excess Allocated to inventories and amortized in 2011 (10,000) Allocated to patents and amortized over 10 years ($20,000/10 years) 3 years (6,000) Fair value at December 31, 2013 144,000 Add: Income from Sim for 2014 18,000 Less: Dividends in 2014 (10,000) Fair value at December 31, 2014 $152,000 Investment in Sim on December 31, 2013 (90% fair value) $129,600 Investment in Sim on December 31, 2014 (90% fair value) $136,800 Noncontrolling interest on Dec. 31, 2013 (10% fair value) $ 14,400 Noncontrolling interest on Dec. 31, 2014 (10% fair value) $ 15,200

Chapter 4 4-33



Pep Company and Subsidiary Consolidation Workpapers


Pep

Sim


Income Statement

RetainedEarnings

BalanceSheet

Debits Cash

$ 11,000

$ 15,000

$ 26,000

Accounts receivable 15,000 25,000 40,000Plant assets 220,000 180,000 400,000Investment in Sim

136,800

a 7,200b 129,600

Patents b 14,000 c 2,000 12,000Cost of goods sold 50,000 30,000 $ 80,000* Operating expenses 25,000 40,000 c 2,000 67,000* Dividends 20,000 10,000 a 9,000 $ 20,000* d 1,000 $477,800 $300,000 $478,000 Credits Accumulated depreciation

$ 90,000

$ 50,000

140,000

Liabilities 80,000 30,000 110,000Capital stock 100,000 60,000 b 60,000 100,000Paid-in-excess 20,000 20,000Retained earnings 71,600 70,000 b 70,000 71,600 Sales 100,000 90,000 190,000 Income from Sim 16,200 a 16,200 $477,800 $300,000 Noncontrolling interest Dec 31, 2013 b 14,400 Noncontrolling interest share ($18,000 adj. inc. x 10%)

d 1,800

1,800*

Controlling share of NI $ 41,200 41,200 Consolidated retained earnings $ 92,800 92,800Noncontrolling interest Dec 31, 2014 d 800 15,200 164,000 164,000 $478,000* Deduct a To eliminate income from subsidiary and dividends received and reduce the

investment account to its beginning-of-the-period balance. b To eliminate reciprocal investment and subsidiary equity amounts, establish

beginning noncontrolling interest, and adjust patents for the unamortized excess as of the beginning of the period.

c To amortize excess allocated to patents for 2014. d To enter noncontrolling interest share of subsidiary income and dividends.



Solution P4-15 1 Journal entries on Pegs books January 1, 2011 Investment in Sup (90%) 18,000 Cash 18,000 To record purchase of 90% of Sups stock for cash. July 1, 2011 Investment in Ell (25%) 7,000 Cash 7,000 To record purchase of 25% of Ells stock for cash. November 2011 Cash 2,700 Investment in Sup (90%) 2,700 To record receipt of 90% of Sups $3,000 dividends. November 2011 Cash 1,250 Investment in Ell (25%) 1,250 To record receipt of 25% of Ells $5,000 dividends. December 31, 2011 Investment in Sup (90%) 4,500 Income from Sup 4,500 To record Share of Sups reported income

($28,000 - $23,000) 90% December 31, 2011 Investment in Ell (25%) 700 Income from Ell 700 To record investment income from Ell for

20119 computed as: Share of Ells reported income $ 750 ($30,000-$24,000)1/2 year 25% Less: Amortization of excess

[$7,000 ($24,000 25%)] 10 years 1/2 year

(50)

$ 700

Chapter 4 4-35


Solution P4-15 (continued) 2 Pegs separate company financial statements

Peg Corporation Income Statement

for the year ended December 31, 2011 Revenues Sales $100,000 Income from Sup 4,500 Income from Ell 700 Total revenue $105,200 Costs and expenses Cost of sales $ 60,000 Other expenses 25,000 Total costs and expenses 85,000 Net income $ 20,200 Peg Corporation Retained Earnings Statement for the year ended December 31, 2011 Retained earnings January 1 $ 20,000 Add: Net income 20,200 Deduct: Dividends (10,000) Retained earnings December 31 $ 30,200 Peg Corporation Balance Sheet at December 31, 2011 Assets Current assets: Cash $ 18,950 Other current assets 40,000 $ 58,950 Plant assets net 120,000 Investments: Investment in Sup (90%) $ 19,800 Investment in Ell (25%) 6,450 26,250 Total assets $205,200 Liabilities and stockholders equity Current liabilities $ 25,000 Stockholders equity: Capital stock $150,000 Retained earnings December 31 30,200 180,200 Total liabilities and stockholders equity $205,200



Solution P4-15 (continued) 3 Consolidation workpapers trial balance format

Peg Corporation and Subsidiary Consolidation Workpapers


Peg 90% Sup


Income Statement

Retained Earnings

Balance Sheet

Debits Cash

$ 18,950

$ 4,000

$ 22,950

Other current assets 40,000 11,000 51,000Plant assets net 120,000 14,000 134,000Investment in Sup

19,800

a 1,800 b 18,000

Investment in Ell 6,450 6,450Cost of sales 60,000 16,000 $ 76,000* Other expenses 25,000 7,000 32,000* Dividends 10,000 3,000 a 2,700 $ 10,000* d 300* Total debits $300,200 $55,000 $214,400 Credits Current liabilities

$ 25,000

$ 7,000

$ 32,000

Capital stock 150,000 18,000 b 18,000 150,000Retained earnings 20,000 2,000 b 2,000 20,000 Sales 100,000 28,000 128,000 Income from Sup 4,500 a 4,500 Income from Ell 700 700 Total credits $300,200 $55,000 Noncontrolling interest - January 1

b 2,000

Noncontrolling interest share $5,000 10%

d 500

500*

Controlling share of NI $ 20,200 20,200 Consolidated retained earnings $ 30,200 30,200Noncontrolling interest December 31

d 200

2,200

$214,400

Chapter 4 4-37


Solution P4-15 (continued) 4 Consolidated financial statements

Peg Corporation and Subsidiary Consolidated Income Statement

for the year ended December 31, 2011 Revenues Sales $128,000 Income from Ell (equity method) 700 Total revenues $128,700 Costs and expenses Cost of sales $ 76,000 Other expenses 32,000 Total costs and expenses 108,000 Total consolidated income 20,700 Less: Noncontrolling interest share 500 Controlling share of NI $ 20,200 Peg Corporation and Subsidiary Consolidated Retained Earnings Statement for the year ended December 31, 2011 Consolidated retained earnings January 1 $ 20,000 Add: Controlling share of NI 20,200 Deduct: Dividends (10,000) Consolidated retained earnings December 31 $ 30,200 Peg Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 Assets Current assets: Cash $ 22,950 Other current assets 51,000 $ 73,950 Plant assets net 134,000 Investments and other assets: Investment in Ell 6,450 Total assets $214,400 Liabilities and stockholders equity Current liabilities $ 32,000 Stockholders equity: Capital stock $150,000 Consolidated retained earnings 30,200 Noncontrolling interest 2,200 182,400 Total liabilities and stockholders equity $214,400 Solution P4-16 Partial consolidated statement of cash flows using the direct method

Pil Corporation and Subsidiaries Partial Consolidated Statement of Cash Flows

for the current year Cash Flows from Operating Activities Cash received from customers $1,600,000 Dividends from equity investees 40,000 Interest received from short-term loan 5,000 Cash paid for other expenses (450,000) Cash paid to suppliers (630,000) Net cash flow from operating activities $ 565,000



Solution P4-17 Direct Method

Pes Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011

Cash Flows from Operating Activities Cash received from customers $670,000 Cash paid to suppliers ($348,000) Cash paid for operating expenses (157,500) (505,500) Net cash flows from operating activities 164,500 Cash Flows from Investing Activities Purchase of plant and equipment (125,000) Net cash flows from investing activities (125,000) Cash Flows from Financing Activities Payment of cash dividends controlling (36,000) Payment of cash dividends noncontrolling (2,000) Payment of long-term liabilities (11,000) Net cash flows from financing activities (49,000) Decrease in cash for the year (9,500) Cash on January 1 65,000 Cash on December 31 $ 55,500 Reconciliation of net income to cash provided by operating activities Controlling share of NI $130,000 Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share $ 5,000 Depreciation expense 51,000 Patents amortization 500 Increase in accounts payable 22,000 Increase in accounts receivable (5,000) Increase in inventories (20,000) Increase in other current assets (19,000) 34,500 Net cash flows from operating activities $164,500

Chapter 4 4-39


Solution P4-17 (continued) Indirect Method

Pes Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011

Cash Flows from Operating Activities Controlling share of NI $130,000 Adjustments to reconcile net income to net cash from operating activities: Noncontrolling share of NI $5000

Depreciation $ 51,000 Patents amortization 500 Increase in accounts receivable (5,000) Increase in inventories (20,000) Increase in other current assets (19,000) Increase in accounts payable 22,000 34,500 Net cash flows from operating activities 164,500 Cash Flows from Investing Activities Purchase of plant and equipment (125,000) Net cash flows from investing activities (125,000) Cash Flows from Financing Activities Payment of cash dividends controlling (36,000) Payment of cash dividends noncontrolling (2,000) Payment of long-term liabilities (11,000) Net cash flows from financing activities (49,000) Decrease in cash for the year (9,500) Cash on January 1 65,000 Cash on December 31 $ 55,500 Note: The cash flows from investing activities and cash flows from financing activities sections of the statement of cash flows are the same under the direct and indirect method.



Solution P4-18 [AICPA] Indirect Method

Puh, Inc. and Subsidiary Statement of Cash Flows (Indirect Method)

for the year ended December 31, 2011 Cash Flows from Operating Activities Controlling share of NI $ 198,000 Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share $ 33,000 Depreciation expense 82,000 Patents amortization 3,000 Decrease in accounts receivable 22,000 Increase in accounts payable 121,000 Increase in deferred income taxes 12,000 Increase in inventories (70,000) Gain on marketable equity securities (11,000) Gain on sale of equipment (6,000) 186,000 Net cash flows from operating activities 384,000 Cash Flows from Investing Activities Purchase of equipment $(127,000) Proceeds from sale of equipment 40,000 Net cash flows from investing activities (87,000) Cash Flows from Financing Activities Cash received from sale of treasury stock 44,000 Payment of cash dividends controlling (58,000) Payment of cash dividends noncontrolling (15,000) Payment on long-term note (150,000) Net cash flows from financing activities (179,000) Increase in cash for the year 118,000 Cash on January 1 195,000 Cash on December 31 $ 313,000 Listing of non-cash investing and financing activities: Issued common stock in exchange for land with a fair value of $215,000.

Chapter 4 4-41



Puh, Inc. and Subsidiary Workpapers for the Statement of Cash Flows (Indirect Method)


Cash Flow Cash Flow Cash Flow Years Reconciling Items From Investing Financing Change Debit Credit Operations Activities Activities

Asset Changes Cash 118,000 Allowance to reduce MES 11,000 e 11,000 Accounts receivable net (22,000) f 22,000 Inventories 70,000 g 70,000 Land* 215,000 h 215,000 Plant and equipment 65,000 k 62,000 j 127,000 Accumulated depreciation (54,000) l 82,000 k 28,000 Patents net (3,000) m 3,000 Total asset changes 400,000 Changes in Equities Accounts & accrued payable 121,000 n 121,000 Note payable long-term (150,000) o 150,000 Deferred income taxes 12,000 p 12,000 Noncontrolling interest in Sto

18,000 b 33,000 d 15,000

Common stock, $10 par* 100,000 h 100,000 Additional paid-in capital 123,000 h 115,000 i 8,000 Retained earnings 140,000 a 198,000 c 58,000 Treasury stock at cost 36,000 i 36,000 Total changes in equities

400,000

Controlling share of NI a 198,000 198,000 Noncontrolling interest share b 33,000 33,000 Gain on MES e 11,000 (11,000) Purchase of equipment j 127,000 (127,000) Sale of equipment k 40,000 40,000 Gain on equipment k 6,000 (6,000) Depreciation expense l 82,000 82,000 Payment on long-term note o 150,000 (150,000) Amortization of patents m 3,000 3,000 Decrease in receivables f 22,000 22,000 Increase in inventories g 70,000 (70,000) Increase in accounts payable n 121,000 121,000 Increase in deferred income taxes p 12,000 12,000 Proceeds from treasury stock i 44,000 44,000 Payment of dividends controlling c 58,000 (58,000) Payment of dividends noncontrolling d 15,000 (15,000) 1,229,000 1,229,000 384,000 (87,000) (179,000) Cash increase for the year = $384,000 $87,000 $179,000 = $118,000. * Non-cash item: Purchased $215,000 land through common stock issuance.



Solution P4-19 Indirect Method

Pil Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011

Cash Flows from Operating Activities Controlling share of NI $ 500,000 Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share $ 40,000 Depreciation expense 200,000 Patents amortization 10,000 Increase in accounts payable 17,000 Income less dividends equity investee (30,000) Increase in accounts receivable (210,000) 27,000 Net cash flows from operating activities 527,000 Cash Flows from Investing Activities Purchase of equipment $(500,000) Net cash flows from investing activities (500,000) Cash Flows from Financing Activities Cash received from long-term note $ 200,000 Payment of cash dividends controlling (137,000) Payment of cash dividends noncontrolling (20,000) Net cash flows from financing activities 43,000 Increase in cash for the year 70,000 Cash on January 1 360,000 Cash on December 31 $ 430,000

Chapter 4 4-43



Pil Corporation and Subsidiary Workpapers for the Statement of Cash Flows (Indirect Method)


Cash Flows Cash Flows Cash Flows Years Reconciling Items From Investing Financing Change Debit Credit Operations Activities Activities

Asset Changes Cash $ 70,000 Accounts receivable net 210,000 e 210,000 Inventories 0 Plant & equipment net 300,000 f 200,000 g 500,000 Equity investments 30,000 l 30,000 m 60,000 Patents (10,000) h 10,000 Total asset changes $ 600,000 Changes in Equities Accounts payable $ 17,000 i 17,000 Dividends payable 13,000 k 13,000 Long-term note payable 200,000 j 200,000 Common stock 0 Other paid-in capital 0 Retained earnings 350,000 a 500,000 c 150,000 Noncontrol. interest 20% 20,000 b 40,000 d 20,000 Changes in equities $ 600,000 Controlling share of NI a 500,000 $ 500,000 Noncontrolling interest share b 40,000 40,000 Purchase of plant & equipment g 500,000 $(500,000) Depreciation plant & equipment f 200,000 200,000 Amortization of patents h 10,000 10,000 Increase in accounts receivable e 210,000 (210,000) Income less dividends from investees m 60,000 l 30,000 (30,000) Increase in accounts payable i 17,000 17,000 Received cash from long-term note j 200,000 0 $ 200,000 Payment of dividends controlling c 150,000 k 13,000 (137,000) Payment of dividends noncontrolling d 20,000 (20,000) 1,950,000 1,950,000 $ 527,000 $(500,000) $ 43,000 Cash increase for the year = $527,000 $500,000 + $43,000 = $70,000.



Solution P4-19 (continued) Direct Method

Pil Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011

Cash Flows from Operating Activities Cash received from customers $2,390,000 Cash received from equity investees 30,000 Cash paid to suppliers ($1,433,000) Cash paid for operating expenses (460,000)(1,893,000) Net cash flows from operating activities 527,000 Cash Flows from Investing Activities Purchase of equipment $ (500,000) Net cash flows from investing activities (500,000) Cash Flows from Financing Activities Cash received from long-term note $ 200,000 Payment of cash dividends controlling (137,000) Payment of cash dividends noncontrolling (20,000) Net cash flows from financing activities 43,000 Increase in cash for the year 70,000 Cash on January 1 360,000 Cash on December 31 $ 430,000 Reconciliation of net income to cash provided by operating activities

Controlling share of NI $ 500,000 Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share $ 40,000 Income less dividends equity investee (30,000) Depreciation expense 200,000 Patents amortization 10,000 Increase in accounts payable 17,000 Increase in accounts receivable (210,000) 27,000 Net cash flows from operating activities $ 527,000

Chapter 4 4-45


Solution P4-19 (continued) Direct Method

Pil Corporation and Subsidiary Workpapers for the Statement of Cash Flows (Direct Method)


Cash Flow Cash Flow Cash Flow Years Reconciling Items From Investing Financing Change Debit Credit Operations Activities Activities

Asset Changes Cash $ 70,000 Accounts receivable net 210,000 a 210,000 Inventories 0 Plant & equipment net 300,000 b 200,000 c 500,000 Equity investments 30,000 d 30,000 Patents (10,000) e 10,000 Total asset changes $ 600,000 Changes in Equities Accounts payable $ 17,000 f 17,000 Dividends payable 13,000 g 13,000 Long-term note payable 200,000 h 200,000 Retained earnings* 350,000 Noncontrol.interest 20% 20,000 i 40,000 j 20,000 Changes in equities $ 600,000 Ret. earnings change* Sales $2,600,000 a 210,000 $2,390,000 Income from equity investees 60,000 d 30,000 30,000 Cost of goods sold (1,450,000) f 17,000 (1,433,000) Depreciation expense (200,000) b 200,000 0 Other operating expenses (470,000) e 10,000 (460,000) Noncontrolling interest share (40,000) i 40,000 0 Dividends declared Pil (150,000) g 13,000 k 137,000 Retained earnings change $ 350,000 Received cash from long-term note h 200,000 $ 200,000 Payment of dividends controlling k 137,000 (137,000)Payment of dividends noncontrolling j 20,000 (20,000)Purchase of equipment c 500,000 $(500,000) 1,377,000 1,377,000 $ 527,000 $(500,000) $ 43,000 * Retained earnings changes replace the retained earnings account for reconciling purposes. Cash increase for the year = $527,000 - $500,000 + $43,000 = $70,000.

Documents

Solution Advanced Accounting 11ed Chp4