Beams AdvAcc11 Chapter

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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 parent’s 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 interest’s 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 subsidiary’s 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 parent’s 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 parent’s 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 Investment in subsidiary Subsequent year Income from subsidiary Retained earnings — parent Investment in subsidiary

XXX XXX XXX XXX XXX

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


Consolidation Techniques and Procedures

4-2

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 Retained earnings — parent Dividends (subsidiary) Investment in subsidiary

XXX XXX XXX 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 parent’s 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 holders—noncontrolling 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.

©2011 Pearson Education, Inc. publishing as Prentice Hall


Chapter 4

4-3

SOLUTIONS TO EXERCISES Solution E4-1 d 1 c 2 a 3 d 4 b 5

6 7 8 9 10

d b b a b

Solution E4-2 Preliminary computations (in thousands) Investment cost January 2 Implied total fair value of Sal ($600 / 80%) Less: Book value Excess fair value over book value Excess allocated to: Inventory Remainder to goodwill Excess fair value over book value 1

2

Income from Sal Sal’s reported net income Less: Excess allocated to inventory (sold in 2011) Sal adjusted income Pan’s 80% share

$600 $750 (500) $250 $ 25 225 $250

$140 (25) $115 $ 92

Noncontrolling interest share Sal’s adjusted income $115  20% noncontrolling interest $ 23

3

4

5

Noncontrolling interest December 31 Sal’s equity book value Add: Unamortized excess (Goodwill) Sal’s equity fair value 20% noncontrolling interest Investment in Sal December 31 Investment cost January 2 Add: Income from Sal (given)* Less: Dividends ($120  80%) Investment in Sal December 31 * Assumes this is based on Sal’s adjusted income Consolidated net income Noncontrolling interest share Controlling interest share equals Parent NI under equity method.

$520 225 $745 $149

$600 100 (96) $604 $383.4 $ 23 $360.4




4-4

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 Implied total fair value of Sar ($28,000 / 70%) Book value of Sar Excess allocated entirely to Goodwill 2

3

$28,000 $40,000 30,000 $10,000 $24,000 (700) $23,300 + (300) $23,000 $28,000

Pim’s separate income for 2013 Loss from investment in Sar ($1,000  70%) Controlling share of consolidated net income Noncontrolling share Consolidated net income Investment cost January 1, 2011 Add: Share of income less dividends 2011 — 2013 ($1,400 income - $1,000 dividends)  70% Investment balance December 31, 2013

280 $28,280

Solution E4-4 Preliminary computations Investment cost Implied total fair value of Sin ($580,000 / 80%) Book value Total excess fair value over book value

$580,000 $725,000 600,000 $125,000

Excess allocated to: Equipment (5-year life) Patents (10-year amortization period) Total excess fair value over book value

$ 50,000 75,000 $125,000

Income from Sin Sin’s reported net income Less: Depreciation of excess allocated to equipment Less: Amortization of patents Sin’s adjusted income Income from Sin (80%) 1a

1b

1c

1d

2011 $120,000 (10,000) (7,500) $102,500 $ 82,000

2012 $150,000 (10,000) (7,500) $132,500 $106,000

Consolidated net income for 2011 Pen’s net income = controlling share of consolidated net income under equity method Add: Noncontrolling interest share Consolidated net income Investment in Sin December 31, 2011 Cost January 1 Add: Income from Sin — 2011 Less: Dividends from Sin — 2011 ($80,000  80%) Investment in Sin December 31

$580,000 82,000 (64,000) $598,000

Noncontrolling interest share — 2011 ($102,500 adjusted income  20%)

$ 20,500

Noncontrolling interest December 31, 2012 Sin’s equity book value at acquisition date Add: Income less dividends for 2011 and 2012 (see note) Sin’s equity book value at December 31, 2012 Unamortized excess at December 31, 2012

$600,000 100,000 700,000 90,000

$340,000 20,500 $360,500



Chapter 4

4-5

Sin’s equity fair value at December 31, 2012 Noncontrolling interest percentage Noncontrolling interest December 31, 2012 Solution E4-4 (continued)

$790,000 20% $158,000

Note: Sin’s income less dividends: 2011 Net Income 2011 Dividends 2012 Net Income 2012 Dividends Total

$ 120,000 (80,000) 150,000 (90,000) $ 100,000

Solution E4-5 1 2 3 4 5

c a b c 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 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) Net cash flows from operating activities

$100,000

111,000 $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 Dividends received from equity investees Less: Cash paid to suppliers Cash paid to employees Cash paid for other operating items Cash paid for interest expense Net cash flows from operating activities

$322,500 7,000 $182,500 27,000 23,500 12,000

245,000 $ 84,500




4-6

SOLUTIONS TO PROBLEMS Solution P4-1 (in thousands of $) Preliminary computations Investment in Sen (75%) January 1, 2011 Implied fair value of Sen ($2,400 / 75%) Book value of Sen Total excess of fair value over book value Excess allocated: 10% to inventories (sold in 2011) 40% to plant assets (useful life 8 years) 50% to goodwill Total excess of fair value over book value 1

Goodwill at December 31, 2015 (not amortized)

2

Noncontrolling interest share for 2015 Net income ($1,000 sales - $600 expenses) Less: Amortization of excess Plant assets ($320 / 8 yrs.) Adjusted Sen income 25% Share

3

4

5

6

7

$2,400 $3,200 (2,400) $ 800 $ $

80 320 400 800

$

400

$

400

$ $

(40) 360 90

Consolidated retained earnings December 31, 2014 Equal to Pea’s December 31, 2014 retained earnings Since this a trial balance, reported retained earnings equals beginning of 2015 retained earnings.

$1,670

Consolidated retained earnings December 31, 2015 Pea’s retained earnings December 31, 2014 Add: Pea’s net income for 2015 Less: Pea’s dividends for 2015 Consolidated retained earnings December 31

$1,670 1,085 (500) $2,255

Consolidated net income for 2015 Consolidated sales Less: Consolidated expenses ($3,785 + $40 depreciation) Total consolidated income Less: Noncontrolling interest share Controlling share of consolidated net income for 2015

$5,000 (3,825) 1,175 (90) $1,085

Noncontrolling interest December 31, 2014 Sen’s stockholders’ equity at book value Unamortized excess after four years: Inventory Plant assets ($320 - $160) Goodwill Sen’s stockholders’ equity at fair value 25% Sen’s stockholders’ equity at fair value Noncontrolling interest December 31, 2015 Sen’s stockholders’ equity at book value Unamortized excess after five years: Inventory Plant assets ($320 - $200) Goodwill Sen’s stockholders’ equity at fair value

$2,400 0 160 400 $2,960 $ 740

$2,600 0 120 400 $3,120



Chapter 4

4-7

25% Sen’s stockholders’ equity at fair value

$


780



4-8

Solution P4-2 Pal Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands)

1

80% Sal

Pal Income Statement $ 620 Sales Income from Sal 21 Cost of goods sold 400* Operating expenses 154* Consolidated NI Noncontrol.interest share ($1530,000  30%) Controlling share

$

Retained Earnings Retained earnings — Pal

$ 130

Balance Sheet Cash Receivables — net Inventories PP&E — net Investment in Sal

Accounts payable Other liabilities Capital stock Other paid-in capital Retained earnings

$ 200

87

$ 820

130* 40*

530* 194* $ 96

$

30

$

22

9*

9 $

87

$ 130

87 60*

b 22 87

30 20*

a 14 c 6

60*

$ 157

$

32

$ 157

$

$

30 60 40 70

$ 121 180 88 310

91 120 48 240 98

a 7 b 91

$ 597

$ 200

$ 699

$

$

$

60 40 300 40 157 $ 597

36 24 100 8 32 $ 200

b100 b 8

Noncontrolling interest January 1 Noncontrolling interest December 31 160 *

Consolidated Statements

a 21

c

Retained earnings — Sal Net income Dividends Retained earnings December 31

Adjustments and Eliminations

b 39 c 3 160

96 64 300 40 157

42 $ 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 Less: Cost of goods sold Gross profit Operating expenses Consolidated net income Less: Noncontrolling interest share Controlling share of consolidated net income

$820 530 290 194 96 9 $ 87

Pal Corporation and Subsidiary Consolidated Retained Earnings Statement for the year ended December 31, 2011 Consolidated retained earnings January 1 Add: Controlling share of onsolidated net income Less: Dividends of Pal Consolidated retained earnings December 31

$130 87 (60) $157

Pal Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 Assets Current assets: Cash Receivables — net Inventories Plant assets — net Total assets Liabilities and Stockholders’ Equity Liabilities: Accounts payable Other liabilities Stockholders’ equity: Capital stock, $10 par Other paid-in capital Consolidated retained earnings Add: Noncontrolling interest Total liabilities and stockholders’ equity

$121 180 88

$ 96 64 $300 40 157 497 42

$389 310 $699

$160

539 $699




4-10

Solution P4-3 Pan Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Pan Income Statement Sales Income from Saf Cost of sales Other expenses Consolidated Net Income Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pan Retained earnings — Saf Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable Dividends receivable from Saf Inventories Note receivable from Pan Land Buildings — net Equipment — net Investment in Saf

$800 27.6 500* 194*

$200 100* 52*

Consolidated Statements $1,000

a

27.6

c

11.2

f

9.2 $

600* 257.2* 142.8 9.2* 133.6

$

360

$ $133.6

$ 48

$360 $ 68 133.6 100*

b

68 133.6

48 32*

a f

24 8

100*

$393.6

$ 84

$

393.6

$

$ 30 40

$

136 212

106 172 12 190 130 340 260 363.6

20 10 60 160 100

Patents

Accounts payable Note payable to Saf Dividends payable Capital stock, $10 par Retained earnings


Saf 75%

$1,573.6

$420

$

$ 20

170 10

1,000 393.6 $1,573.6 Noncontrolling interest January 1 Noncontrolling interest December 31

16 300 84 $420

e

12

d

10

210 190 500 360

b

112

d e b

10 12 300

a 3.6 b 360 c 11.2

100.8 $1,708.8 $

550

190

4 1,000 393.6 b 120 f 1.2 550

121.2 $1,708.8

*Deduct



Chapter 4

4-11

Solution P4-3 (continued) Supporting Calculations Saf’s value at acquisition Book value at December 31, 2011 Less: 2011 Net income Add: 2011 Dividends Book value on January 1, 2011 Fair value of patents Saf’s fair value on January 1, 2011

$384 (48) 32 $368 112 $480

Purchase price (fair value) of Pan’s 75% share Noncontrolling interest (25%)

$360 $120

Patents have a ten-year life, so amortization is $11,200 per year. Saf’s Adjusted Income Saf’s net income Less: Amortization of Patents Saf’s adjusted income Pan’s 75% share Noncontrolling interest 25% share

$ 48 (11.2) $ 36.8 $ 27.6 $ 9.2




4-12

Solution P4-4 Pal Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Pal Income Statement Sales Income from Sun Cost of sales Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pal

$800 36 500* 194*

$200 36

100* 52* $

$142

12

$ 48

$

$360 142 100*

$

118 160 12 190

b

68 142

48 32*

a c

$ 30 40

Buildings — net

130 340

Equipment — net Investment in Sun

260

100

372

$

e

12

d

10

148 200

210 190 500 360

b 112 $1,582

$420

$

$ 20

1,000 402 $1,582

100* $402

a 12 b 360

Goodwill

16 300 84 $420

112 $1,720 $

d 10 e 12 b 300


24 8

$ 84

20 10 60 160

170 10

600* 246* 154 12* 142

$360 $ 68

Retained earnings – Dec 31 $402

Accounts payable Note payable to Sun Dividends payable Capital stock, $10 par Retained earnings


a

c

Retained earnings — Sun Controlling share of NI Dividends

Balance Sheet Cash Accounts receivable Dividends receivable from Sun Inventories Note receivable from Pal Land


Sun 75%

190

4 1,000 402 b 120 c 4 550

124 $1,720

Deduct



Chapter 4

4-13

Solution P4-4(continued) Supporting Calculations Sun’s value at acquisition: Book value at December 31, 2011 Less: 2011 Net income Add: 2011 Dividends Book value on January 1, 2011

$384 (48) 32 $368

Purchase price of Pal’s 75% share Implied fair value of Sun ($360 / 75%) Sun’s book value Excess allocated to Goodwill Noncontrolling interest (25% x $480)

$360 $480 368 $112 $120

Sun’sAdjusted Income Saf’s net income Less: Amortization of Goodwill Sun’s adjusted income Pal’s 75% share Noncontrolling interest 25% share

$48 (0) $48 $36 $12

Solution P4-5 Preliminary computations Allocation of excess fair value over book value Cost of 70% interest January 1 Implied fair value of Sul ($490,000 / 70%) Book value of Sul Excess fair value over book value Noncontrolling interest – 30% of fair value at acquisition Excess allocated Undervalued inventory items sold in 2011 Undervalued buildings (7 year life) Undervalued equipment (3 year life) Patents Remainder to Goodwill Excess fair value over book value Calculation of income from Sul Sul’s net income Less: Undervalued inventories sold in 2011 Less: Additional Depreciation on building ($14,000/7 years) Less: Additional Depreciation on equipment ($21,000/3 years) Less: Patent amortization ($40,000/40 years) Sul’s adjusted income Par’s 70% controlling interest share Noncontrolling interest’s 30% share

$490,000 $700,000 (600,000) $100,000 $210,000 $

5,000 14,000 21,000 40,000 20,000 $100,000

$100,000 (5,000) (2,000) (7,000) (1,000) $ 85,000 $ 59,500 $ 25,500




4-14

Solution P4-5 (continued) Workpaper entries for 2011 a

b

c

d

e

f g h i

Income from Sul Dividends (Sul) Investment in Sul Capital stock (Sul) Retained earnings (Sul) January 1 Unamortized excess Investment in Sul Noncontrolling interest January 1 Cost of sales (for inventory items) Buildings — net Equipment — net Patents Goodwill Unamortized excess

59,500 35,000 24,500 500,000 100,000 100,000 490,000 210,000 5,000 14,000 21,000 40,000 20,000 100,000

Depreciation expense Buildings — net

2,000

Depreciation expense Equipment — net

7,000

Other expenses Patents

1,000

2,000

7,000

1,000

Accounts payable Accounts receivable

10,000

Dividends payable Dividends receivable

14,000

Noncontrolling Interest Share Dividends — Sul Noncontrolling Interest

25,500

10,000 14,000


15,000 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 Income Statement Sales Income from Sul Cost of sales Depreciation expense

$

800 59.5 300* 154*

Other expenses Consolidated NI Noncontrolling share Controlling share of NI

$

245.5

Retained Earnings Retained earnings — Par

$

300

$ 700 400* 60*

160*

140*

$1,500 a c d e f

59.5 5 2 7 1

i

$ 100

Retained earnings – Dec 31 $

345.5

$ 150

86 100 14 150 70 50 140

$

$

Buildings — net

$

301* 271 25.5* 245.5

$

300

25.5

b 100 245.5

100 50*

570

Equipment — net Investment in Sul

a i

$ g h

10 14

200* 345.5 146 160

100 30 100 160

c

14

d

2

250 100 150 312

330

c

21

e

7

914

514.5 c 40 c 20 b 100 $1,694.5

$ 850

$

$

200 100 49 1,000 345.5 $1,694.5

35 15 $

60 70

Patents Goodwill Unamortized excess

85 20 95 500 150 $ 850

a 24.5 b 490 f 1

39 20

c 100 $2,091

g h

10 14

$

275 106 144 1,000 345.5

b 500


705* 223*

$ 100

245.5 200*

Accounts payable Dividends payable Other liabilities Capital stock, $10 par Retained earnings


$

Retained earnings — Sul Net income Dividends

Balance Sheet Cash Accounts receivable Dividends receivable Inventories Other current assets Land


Sul 70%

b 210 i 10.5 919

220.5 $2,091

Deduct




4-16

Solution P4-6 Supporting computations Ownership percentage 13,500/15,000 shares = 90% Investment cost (13,500 shares  $15) Implied fair value of Syn ($202,500 / 90%) Book value of Syn Excess fair value over book value

$202,500 $225,000 165,000 $ 60,000

Excess allocated to Land Remainder to patents Excess fair value over book value

$ 20,000 40,000 $ 60,000

Income from Syn Syn’s reported net income Less: Patent amortization Syn’s adjusted income

$ 24,000 (4,000) $ 20,000

Pen’s share of Syn’s income (90%) Noncontrolling interest share (10%)

$ 18,000 $ 2,000

Investment in Syn December 31, 2012 Cost January 1, 2011 Pen’s share of the change in Syn’s retained earnings ($42,000 - $15,000)  90% Less: Pen’s share (90%) of Patent amortization for 2 years Investment in Syn December 31

$202,500 24,300 (7,200) $219,600



Chapter 4

4-17

Solution P4-6 (continued) Pen Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) Pen Income Statement Sales Income from Syn Cost of sales Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pen

$ 400 18 250* 100.6*

$ 100

$

$

67.4

18

c

4

g

2

67.4 50*

$

Note receivable — Pen Investment in Syn

24

18 80 7.2 95

34

b

34 67.4

24 16* $

42

$

15 20

Buildings — net Equipment — net Patents

10 5

30 80

130

50

f d

5 7.2

e

5

50* $ 194.4

33 95 105

b

$ 210

$

$

10

8 150 42 $ 210

20

115 250 180

b $ 784.8

500 194.4 $ 784.8

14.4 1.6

a 3.6 b 216

65 170

85.4 5

a g

$

219.6

Land

36

c

4

f 5 e 5 d 7.2 b 150

Noncontrolling interest January 1 Noncontrolling interest December 31 281.2 *

300* 130.6* $ 69.4 2 * $ 67.4

$ 177 $

Retained earnings – Dec 31 $ 194.4

Accounts payable Note payable to Syn Dividends payable Capital stock Retained earnings

50* 26*

Consolidated Statements $ 500

a

$ 177

Retained earnings — Syn Net income Dividends

Balance Sheet Cash Accounts receivable Dividends receivable--Syn Inventories


90% Syn

32 $ 810 $

90.4 .8 500 194.4

b 24 g .4 281.2

24.4 $ 810

Deduct




4-18

Solution P4-7 Preliminary computations Allocation of excess fair value over book value Cost of 70% interest January 1 Implied fair value of Sol ($490,000 / 70%) Book value of Sol Excess fair value over book value

$490,000 $700,000 (600,000) $100,000

Excess allocated Undervalued inventory items sold in 2011 Undervalued buildings (7 year life) Undervalued equipment (3 year life) Remainder to goodwill Excess fair value over book value

$

5,000 14,000 21,000 60,000 $100,000

Calculation of income from Sol Sol’s reported net income Less: Undervalued inventories sold in 2011 Less: Depreciation on building ($14,000/7 years) Less: Depreciation on equipment ($21,000/3 years) Adjusted income from Soul Par’s 70% controlling share 30% Noncontrolling interest share Workpaper entries for 2011 a Income from Sol Dividends (Sol) Investment in Sol b

c

d

e

f

g h

Capital stock (Sol) Retained earnings (Sol) - January 1 Unamortized excess Investment in Sol Noncontrolling interest - January 1 Cost of sales (for inventory items) Buildings — net Equipment — net Goodwill Unamortized excess

$100,000 (5,000) (2,000) (7,000) $ 86,000 $ 60,200 $ 25,800 60,200 35,000 25,200 500,000 100,000 100,000 490,000 20,000 5,000 14,000 21,000 60,000 100,000

Depreciation expense Buildings — net

2,000

Depreciation expense Equipment — net

7,000

2,000

7,000

Noncontrolling Interest Share Dividends — Sol Noncontrolling Interest

25,800

Accounts payable Accounts receivable

10,000

Dividends payable Dividends receivable

14,000

15,000 10,800 10,000 14,000



Chapter 4

4-19

Solution P4-7 (continued) Par Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Par Income Statement Sales Income from Sol Gain on equipment Cost of sales Depreciation expense

$

800 60.2 10 300* 155*

Other expenses Consolidated NI Noncontrolling share Controlling share of NI

$

255.2

Retained Earnings Retained earnings — Par

$

300

$ 700

400* 60*

160*

$1,500 a

60.2

c d e

5 2 7

$

300* 281 25.8* 255.2

$

300

$ 100

$

b 100 255.2

100 50*

355.2

$ 150

96 100 14 150 70 50 140

$

570

Equipment — net Investment in Sol

25.8

$ 100

255.2 200*

Buildings — net

a f

$ g h

10 14

200* 355.2

156 160

100 30 100 160

c

14

d

2

250 100 150 312

330

c

21

e

7

914

515.2

a 25.2 b 490 c 60 b 100

$1,705.2

$ 850

$

$

200 100 50 1,000 355.2 $1,705.2

35 15 $

60 70

Goodwill Unamortized excess 85 20 95 500 150 $ 850

60 c 100 $2,102

g h

10 14

$

275 106 145 1,000 355.2

b 500


10 705* 224*

140* f

Retained earnings – Dec 31 $

Accounts payable Dividends payable Other liabilities Capital stock, $10 par Retained earnings


$

Retained earnings — Sol Controlling share of NI Dividends

Balance Sheet Cash Accounts receivable Dividends receivable Inventories Other current assets Land


Sol 70%

b 210 f 10.8 919

220.8 $2,102

Deduct




4-20

Solution P4-8 Supporting computations Ownership percentage

13,500/15,000 shares = 90%

Investment cost (13,500 shares  $15) Implied fair value of Son ($202,500 / 90%) Book value of Son Excess fair value over book value

$202,500 $225,000 165,000 $ 60,000

Excess allocated to Land Remainder to goodwill Excess fair value over book value

$ 20,000 40,000 $ 60,000

Income from Son Pun’s controlling share of Son’s income ($24,000  90%)

$ 21,600

Investment in Son December 31, 2012 Cost January 1, 2011 Pun’s share of the change in Son’s retained earnings ($42,000 - $15,000)  90% Investment in Son December 31 Noncontrolling interest at December 31, 2012 (10% of fair value) (($225,000 + $42,000 - $15,000) x 10%)

$202,500 24,300 $226,800 $ 25,200



Chapter 4

4-21

Solution P4-8 (continued) Pun Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) Pun Income Statement Sales Income from Son Cost of sales Expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pun

$ 400 21.6 250* 100.6*

$

71

a

Note receivable — Pun Investment in Son

18 80 7.2 95

$

24

$

34

b

$

42

$

15 20

50

$ 792

$ 210

14.4 1.6

$ f d

5 7.2

e

5

50* 202

33 95 105

$

$

b

10

8 150 42 $ 210

20

115 250 180

40

f 5 e 5 d 7.2 b 150

Noncontrolling interest January 1 Noncontrolling interest December 31 285.2 *

181

$

b

500 202 $ 792

$

a 7.2 b 219.6

130

85 5

$

71 a c

10 5

30 80

Equipment — net Goodwill

$

300* 126.6* 73.4 2.4* 71

34

24 16*

65 170

Buildings — net

500

2.4

226.8

Land

$

50* 26*

71 50*

$


21.6

$ 181

Retained earnings – Dec 31 $ 202

Accounts payable Note payable to Son Dividends payable Capital stock Retained earnings

$ 100

c

Retained earnings — Son Controlling share of NI Dividends

Balance Sheet Cash Accounts receivable Dividends receivable Inventories


90% Son

$

40 818

$

90 .8 500 202

b 24.4 c .8 285.2

$

Deduct


25.2 818



4-22

Solution P4-9 Pas Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Pas Income Statement Sales Income from Sel Cost of sales Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pas

$ 200 17 80* 40* 25.5*

$ 110

$

71.5

$

40

$

75 $

50

Retained earnings — Sel Controlling share of NI Dividends

40* 20* 10*

$

70

Balance Sheet Cash

$

30 40

Buildings — net Equipment — net Investment in Sel

29.5 28 8 40 15 65

30 30 70

200

100

17 12.5 5 1.25

c

4.25

b

$ 596.5

$ 300

$

$

40 100 50 300 106.5 $ 596.5

50 10 20 150 70 $ 300

75 71.5

a c

16 4

e

4

f

8

40* $ 106.5

$

59.5 64 70 45 135

b

25

d

b

25

a 1 b 210 g 1.25

e f

4 8

5

302

320

23.75 $ 717.25 $

b 150

Noncontrolling interest January 1 Noncontrolling interest December 31 *

132.5* 65* 36.75* $ 75.75 4.25* $ 71.5

50

211

Patents

Accounts payable Dividends payable Other liabilities Capital stock Retained earnings

$ 310 a b d g

40 20*


$


$

71.5 40*

Trade receivables — net Dividends receivable Inventories Land


80% Sel

b 52.5 c .25 302

86 102 70 300 106.5

52.75 $ 717.25

Deduct



Chapter 4

4-23

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

$210,000 $262,500 200,000 $ 62,500 $ 12,500 25,000 25,000 $ 62,500




4-24

Solution P4-10 Pik Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) 80% Sel

Pik Income Statement Sales Income from Sel Cost of sales Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pik

$ 200 18 80* 40* 25.5*


$ 110 40* 20* 10*

$ a b d

18 12.5 5

c

4.5

$ $

72.5

$

75

Retained earnings — Sel Controlling share of NI Dividends

$

40

$

50

72.5 40*

70

Balance Sheet Cash

$

30 40

Trade receivables — net Dividends receivable Inventories Land Buildings — net Equipment — net Investment in Sel

29.5 28

b

8 40 15 65

30 30 70

200

100

75

16 4 $

$ e

4

f

8

40* 107.5

59.5 64 70 45 135

b

25

d

5

320

a 2 b 210

Goodwill

b $ 597.5

$ 300

$

$

50 10 20 150 70 $ 300

25 $

e f

4 8

$

b 150


132.5* 65* 35.5* 77 4.5* 72.5

72.5 a c

212

40 100 50 300 107.5 $ 597.5

310

50

40 20* $

$

$

$




b 52.5 c .5 302

$

Deduct


25 718.5 86 102 70 300 107.5

53 718.5


Chapter 4

4-25

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

$210,000 $262,500 200,000 $ 62,500 $ 12,500 25,000 25,000 $ 62,500

$ 40,000 (12,500) ( 5,000) $ 22,500 $ 18,000 $ 4,500




4-26

Solution P4-11 Supporting computations Investment cost December 31, 2011 Implied fair value of Stu ($170,000 / 80%) Book value of Stu Excess fair value over book value Allocation of Excess $ 8,750 22,500 31,250 $62,500

Inventories Plant assets — net Patents

$170,000 $212,500 150,000 $ 62,500

Amortization 2012 — 2015 $ 8,750 10,000 25,000 $43,750

Unamortized Excess December 31, 2015 $ --12,500 6,250 $18,750

Pil Corporation and Subsidiary Consolidated Balance Sheet Workpapers on December 31, 2015 Pil Assets Cash Trade receivables Dividends receivable Advance to Stu Inventories Plant assets — net Investment in Stu Patents Unamortized excess Total assets Equities Accounts payable Dividends payable Advance from Pil Capital stock Retained earnings Noncontrolling interest Total equities

$ 41,000 60,000 8,000 25,000 125,000 300,000


Stu 80% $ 35,000 55,000

35,000 175,000

c d e

$300,000

$ 50,000

400,000 300,000

$ 45,000 10,000 25,000 100,000 120,000

$750,000

$300,000

$ 76,000 110,000

160,000 487,500

b

12,500

b a

a 191,000 6,250 18,750 b 18,750

191,000

$750,000

5,000 8,000 25,000

Consolidated Balance Sheet

6,250 $839,750

c 5,000 d 8,000 e 25,000 a 100,000 a 120,000

$ 90,000 2,000

a

47,750

400,000 300,000 47,750 $839,750



Chapter 4

4-27

Solution P4-12 Preliminary computations Investment cost Implied fair value Sci ($480,000 / 80%) Book value of Sci Excess fair value over book value

$480,000 $600,000 450,000 $150,000

Allocation of differential Plant assets Goodwill Excess fair value over book value

$100,000 50,000 $150,000

Amortization Plant assets $100,000/4 years = $25,000 per year Investment account balance at December 31, 2012 Underlying book value Add: Unamortized excess allocated to plant assets ($100,000 - $50,000 depreciation) Add: Unamortized goodwill Fair value of Sci at December 31 Investment account balance at December 31 (80%) Noncontrolling interest at December 31 (20%)

$580,000 50,000 50,000 $680,000 $544,000 $136,000

The investment account balance is overstated at $560,000 for the $16,000 dividend receivable.




4-28

Solution P4-12 (continued) Pat Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) Pat Income Statement Sales Income from Sci Cost of sales Operating expense Consolidated NI Noncontrolling share Controlling share of NI

$1,800 76 1,200* 380*

$ 600

$

$ 120

296


Sci 80%

300* 180*


c

76

e

25

f

19

1,500* 585* $ 315 19* $ 296

Retained Earnings Retained earnings — Pat

$ 244

Retained earnings — Sci Controlling share of NI Dividends

296 200*

Retained earnings – Dec 31 $ 340 Balance Sheet Cash Accounts receivable Inventories Advance to Sci Other current assets Land

$ $

$

Plant assets — net Investment in Sci

12 52 164 40 160 320 680

100

c f

30 40 120 10 60 460

$

a

d

40

75

560

$1,988

$ 720

$

$

48

200 1,400 340 $1,988

30 20 90 400 180 $ 720

b d

16 50

h g

10 16

$ h

10

a

40

e

827

200* 340

82 82 284

170 380 1,190

25

b 16 c 44 d 500 g 16 50 $2,238 $

d 400


32 8

$ 180

Dividends receivable Goodwill


296

120 40*

$

244

d 100

d 125 f 11 827

68 4 290 1,400 340

136 $2,238

Deduct



Chapter 4

4-29

Solution P4-13 Supporting computations Investment cost January 1, 2011 Implied fair value of Ski ($80,000 / 80%) Book value of Ski Excess fair value over book value

$ 80,000 $100,000 90,000 $ 10,000

Excess allocated to Inventory (sold in 2011) Equipment (4-year remaining use life) Intangible assets (40-year amortization period) Excess fair value over book value

$ 1,000 4,000 5,000 $10,000

Income from Ski for 2011 Ski’s net income Less: Excess allocated to inventories Less: Amortization of excess allocated to equipment ($4,000/4 years) Less: Amortization of intangibles ($5,000/40 years) Ski’s adjusted income for 2011

(1,000) (125) $ 12,875

Ply’s 80% controlling interest share Noncontrolling interest share for 2011 (20%)

$ 10,300 $ 2,575

$ 15,000 (1,000)

Income from Ski for 2012 Ski’s net income Less: Amortization of excess allocated to equipment ($4,000/4 years) Less: Amortization of intangibles ($5,000/40 years) Ski’s adjusted income for 2012

(1,000) (125) $ 18,875

Ply’s 80% controlling interest share Noncontrolling interest share for 2012 (20%)

$ 15,100 $ 3,775

$ 20,000

Note: Since the prior year’s income is not affected by the current year’s error of omission, the workpapers for 2012 are easier to prepare without an additional conversion-to-equity entry.




4-30

Solution P4-13 (continued) Ply Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 Ply Income Statement Sales Income from Ski Cost of sales Operating expenses Consolidated NI Noncontrolling share Controlling share of NI

$ 160,000 10,300 105,000* 35,000*


Ski 80% $

80,000 35,000* 30,000*

Consolidated Statements $ 240,000

a 10,300 b 1,000 c 1,000 d 125

141,000* 66,125* $

f $

30,300

$

70,000

$

15,000

$

30,000

$

32,875 2,575* 30,300

$

70,000

2,575

Retained Earnings Retained earnings — Ply Retained earnings — Ski Controlling share of NI Dividends

30,300 10,000*

Retained earnings – Dec 31 $ Balance Sheet Cash

$

Trade receivables — net Dividends receivable Inventories

30,300

15,000 5,000*

a f

$

40,000

$

24,700 25,000

$

15,000 20,000

$

0 30,000 55,000

b

e

4,000

4,000

c

1,000

5,000

a 6,300 b 80,000 d 125

86,300

Intangibles

b

Accounts payable Dividends payable Capital stock Other paid-in capital Retained earnings

$ 280,000

$ 120,000

$

$

20,700 9,000 100,000 60,000 90,300 $ 280,000

15,000 5,000 40,000 20,000 40,000 $ 120,000

118,000

b 20,000 f 1,575 118,000

10,000* 90,300

39,700 45,000 70,000 158,000

4,875 $ 317,575 $

e 4,000 b 40,000 b 20,000


4,000 1,000

90,300

4,000 40,000 100,000

Plant & equipment — net Investment in Ski

b 30,000

35,700 10,000 100,000 60,000 90,300

21,575 $ 317,575

Deduct



Chapter 4

4-31

Solution P4-13 (continued) Ply Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 Ply Income Statement Sales Income from Ski Cost of sales Operating expenses Consolidated NI Noncontrolling share Controlling share of NI

$ 170,000 16,000 110,000* 30,000*


Ski 80% $

90,000

Consolidated Statements $ 260,000

a 16,000 35,000* 35,000*

c d

1,000 125

f

3,775

145,000* 66,125* $

$

46,000

$

90,300

$

20,000

$

40,000

$

48,875 3,775* 45,100

$

90,300

Retained Earnings Retained earnings — Ply Retained earnings — Ski Controlling share of NI Dividends

46,000 15,000* $

50,000

Balance Sheet Cash

$

20,000 30,000

Trade receivables — net Dividends receivable Inventories

26,700 45,000 4,000 40,000 95,000

Plant & equipment — net Investment in Ski

30,000 60,000

a f

b

b $ 305,000

$ 140,000

$

$

17,700 6,000 100,000 60,000 121,300 $ 305,000

25,000 5,000 40,000 20,000 50,000 $ 140,000

e

4,000

3,000

c

1,000

4,875

a 8,000 b 86,300 d 125

15,000* $ 120,400

46,700 75,000 70,000 157,000

4,750 $ 353,450 $

e 4,000 b 40,000 b 20,000

Noncontrolling interest January 1 Noncontrolling interest December 31

42,700 7,000 100,000 60,000 120,400

b 21,575 f 1,775 132,775

*

8,000 2,000

$

94,300

Intangible assets Accounts payable Dividends payable Capital stock Other paid-in capital Retained earnings

45,100

20,000 10,000*

Retained earnings – Dec 31 $ 121,300

$

b 40,000

132,775

23,350 $ 353,450

Deduct




4-32

Solution P4-14 Preliminary computations Investment cost Implied fair value of Sim ($99,000 / 90%) Book value of Sim Excess fair value over book value

$ 99,000 $110,000 80,000 $ 30,000

Excess allocated to: Inventories (sold in 2011) Patents (10-year remaining useful life) Excess fair value over book value

$ 10,000 20,000 $ 30,000

1

Analysis of investment in Sim account Fair value of Sim January 5, 2011 Add: Change in retained earnings from January 5, 2011 to December 31, 2013 Less: Amortization of excess Allocated to inventories and amortized in 2011 Allocated to patents and amortized over 10 years ($20,000/10 years)  3 years Fair value at December 31, 2013 Add: Income from Sim for 2014 Less: Dividends in 2014 Fair value at December 31, 2014

$110,000

Investment in Sim on December 31, 2013 (90% fair value) Investment in Sim on December 31, 2014 (90% fair value) Noncontrolling interest on Dec. 31, 2013 (10% fair value) Noncontrolling interest on Dec. 31, 2014 (10% fair value)

$129,600 $136,800 $ 14,400 $ 15,200

50,000 (10,000) (6,000) 144,000 18,000 (10,000) $152,000



Chapter 4

4-33

Solution P4-14 (continued) Pep Company and Subsidiary Consolidation Workpapers for the year ended December 31, 2014 Pep


Sim

Debits $ 11,000 $ 15,000 Cash Accounts receivable 15,000 25,000 Plant assets 220,000 180,000 Investment in Sim 136,800 Patents b 14,000 Cost of goods sold 50,000 30,000 Operating expenses 25,000 40,000 c 2,000 Dividends 20,000 10,000

Income Retained Statement Earnings

$ 26,000 40,000 400,000 a 7,200 b 129,600 c 2,000

12,000 $ 80,000* 67,000*

a d

9,000 1,000

$ 20,000*

$477,800 $300,000 Credits Accumulated depreciation Liabilities Capital stock Paid-in-excess Retained earnings Sales Income from Sim

$478,000

$ 90,000 $ 50,000 80,000 30,000 100,000 60,000 b 60,000 20,000 71,600 70,000 b 70,000 100,000 90,000 16,200 a 16,200 $477,800 $300,000

Noncontrolling interest Dec 31, 2013 Noncontrolling interest share ($18,000 adj. inc. x 10%) Controlling share of NI

Balance Sheet

140,000 110,000 100,000 20,000 71,600 190,000

b d

14,400

1,800

1,800* $ 41,200

Consolidated retained earnings

41,200 $ 92,800

Noncontrolling interest Dec 31, 2014 164,000

d 800 164,000

92,800 15,200 $478,000

*

Deduct

a

To eliminate income from subsidiary and dividends received and reduce the investment account to its beginning-of-the-period balance. 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. To amortize excess allocated to patents for 2014. To enter noncontrolling interest share of subsidiary income and dividends.

b c d




4-34

Solution P4-15 1

Journal entries on Peg’s books January 1, 2011 Investment in Sup (90%) 18,000 Cash 18,000 To record purchase of 90% of Sup’s stock for cash. July 1, 2011 Investment in Ell (25%) 7,000 Cash 7,000 To record purchase of 25% of Ell’s stock for cash. November 2011 Cash

2,700 Investment in Sup (90%) 2,700 To record receipt of 90% of Sup’s $3,000 dividends.

November 2011 Cash

1,250 Investment in Ell (25%) 1,250 To record receipt of 25% of Ell’s $5,000 dividends.

December 31, 2011 Investment in Sup (90%) 4,500 Income from Sup To record Share of Sup’s reported income ($28,000 - $23,000)  90% December 31, 2011 Investment in Ell (25%) 700 Income from Ell To record investment income from Ell for 20119 computed as: Share of Ell’s reported income $ 750 ($30,000-$24,000)1/2 year  25% Less: Amortization of excess [$7,000 – ($24,000  25%)] (50)  10 years  1/2 year $ 700


4,500

700


Chapter 4

4-35


Peg’s separate company financial statements Peg Corporation Income Statement for the year ended December 31, 2011 Revenues Sales Income from Sup Income from Ell Total revenue Costs and expenses Cost of sales Other expenses Total costs and expenses Net income

$100,000 4,500 700 $105,200 $ 60,000 25,000 85,000 $ 20,200

Peg Corporation Retained Earnings Statement for the year ended December 31, 2011 Retained earnings January 1 Add: Net income Deduct: Dividends Retained earnings December 31

$ 20,000 20,200 (10,000) $ 30,200

Peg Corporation Balance Sheet at December 31, 2011 Assets Current assets: Cash Other current assets Plant assets — net Investments: Investment in Sup (90%) Investment in Ell (25%)

$ 18,950 40,000

$ 19,800 6,450

Total assets Liabilities and stockholders’ equity Current liabilities Stockholders’ equity: Capital stock Retained earnings December 31 Total liabilities and stockholders’ equity

$ 58,950 120,000

26,250 $205,200 $ 25,000

$150,000 30,200

180,200 $205,200




4-36


Consolidation workpapers — trial balance format Peg Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 Peg

90% Sup


Income Retained Statement Earnings

Debits $ 18,950 $ 4,000 Cash Other current assets 40,000 11,000 120,000 14,000 Plant assets — net Investment in Sup Investment in Ell Cost of sales Other expenses Dividends

19,800 6,450 60,000 25,000 10,000

Balance Sheet $ 22,950 51,000 134,000

a 1,800 b 18,000 6,450 16,000 7,000 3,000

$ 76,000* 32,000* a d

2,700 300*

$ 10,000*

Total debits

$300,200 $55,000

$214,400

Credits Current liabilities Capital stock Retained earnings Sales Income from Sup Income from Ell Total credits

$ 25,000 $ 7,000 150,000 18,000 b 18,000 20,000 2,000 b 2,000 100,000 28,000 4,500 a 4,500 700 $300,200 $55,000

$ 32,000 150,000

Noncontrolling interest - January 1

20,000 128,000 700

b

2,000

Noncontrolling interest share $5,000  10% Controlling share of NI

d

500

500* $ 20,200

Consolidated retained earnings Noncontrolling interest December 31

20,200 $ 30,200

d

200


30,200 2,200 $214,400


Chapter 4

4-37


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 Costs and expenses Cost of sales $ 76,000 Other expenses 32,000 Total costs and expenses Total consolidated income Less: Noncontrolling interest share Controlling share of NI

Peg Corporation and Subsidiary Consolidated Retained Earnings Statement for the year ended December 31, 2011 Consolidated retained earnings January 1 Add: Controlling share of NI Deduct: Dividends Consolidated retained earnings December 31

$128,700

108,000 20,700 500 $ 20,200

$ 20,000 20,200 (10,000) $ 30,200

Peg Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 Assets Current assets: Cash $ 22,950 Other current assets 51,000 Plant assets — net Investments and other assets: Investment in Ell Total assets Liabilities and stockholders’ equity Current liabilities Stockholders’ equity: Capital stock $150,000 Consolidated retained earnings 30,200 Noncontrolling interest 2,200 Total liabilities and stockholders’ equity

$ 73,950 134,000 6,450 $214,400 $ 32,000

182,400 $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 ©2011 Pearson Education, Inc. publishing as Prentice Hall



4-38

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 Cash paid to suppliers Cash paid for operating expenses Net cash flows from operating activities Cash Flows from Investing Activities Purchase of plant and equipment Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment of long-term liabilities Net cash flows from financing activities Decrease in cash for the year Cash on January 1 Cash on December 31

$670,000 ($348,000) (157,500)

(505,500) 164,500

(125,000) (125,000) (36,000) (2,000) (11,000) (49,000) (9,500) 65,000 $ 55,500

Reconciliation of net income to cash provided by operating activities Controlling share of NI

Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Increase in accounts payable Increase in accounts receivable Increase in inventories Increase in other current assets Net cash flows from operating activities

$130,000 $

5,000 51,000 500 22,000 (5,000) (20,000) (19,000)

34,500 $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 Patents amortization Increase in accounts receivable Increase in inventories Increase in other current assets Increase in accounts payable Net cash flows from operating activities Cash Flows from Investing Activities Purchase of plant and equipment Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment of long-term liabilities Net cash flows from financing activities Decrease in cash for the year Cash on January 1 Cash on December 31

$ 51,000 500 (5,000) (20,000) (19,000) 22,000

34,500 164,500

(125,000) (125,000) (36,000) (2,000) (11,000) (49,000) (9,500) 65,000 $ 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.




4-40

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

Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Decrease in accounts receivable Increase in accounts payable Increase in deferred income taxes Increase in inventories Gain on marketable equity securities Gain on sale of equipment Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Proceeds from sale of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from sale of treasury stock Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment on long-term note Net cash flows from financing activities Increase in cash for the year Cash on January 1 Cash on December 31

$ 198,000 $

33,000 82,000 3,000 22,000 121,000 12,000 (70,000) (11,000) (6,000)

186,000 384,000

$(127,000) 40,000 (87,000) 44,000 (58,000) (15,000) (150,000) (179,000) 118,000 195,000 $ 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

Solution P4-18 (continued) Indirect Method Puh, Inc. and Subsidiary Workpapers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2011 Year’s Change Asset Changes Cash Allowance to reduce MES Accounts receivable — net Inventories Land* Plant and equipment Accumulated depreciation Patents — net Total asset changes Changes in Equities Accounts & accrued payable Note payable long-term Deferred income taxes Noncontrolling interest in Sto Common stock, $10 par* Additional paid-in capital Retained earnings Treasury stock at cost Total changes in equities

118,000 11,000 (22,000) 70,000 215,000 65,000 (54,000) (3,000)

e f

k l m

Cash Flow From Operations

Cash Flow Investing Activities

Cash Flow Financing Activities

11,000

22,000

62,000 82,000 3,000

g 70,000 h 215,000 j 127,000 k 28,000

400,000

121,000 (150,000) 12,000 18,000 100,000 123,000 140,000 36,000

n 121,000 o 150,000 p b

12,000 33,000

h 100,000 h 115,000 i 8,000 a 198,000 i 36,000

d

15,000

c

58,000

400,000

Controlling share of NI Noncontrolling interest share Gain on MES Purchase of equipment Sale of equipment Gain on equipment Depreciation expense Payment on long-term note Amortization of patents Decrease in receivables Increase in inventories Increase in accounts payable Increase in deferred income taxes Proceeds from treasury stock Payment of dividends Payment of dividends

Reconciling Items Debit Credit

— controlling — noncontrolling

a 198,000 b 33,000 e 11,000 j 127,000 k

k

40,000

l

82,000

m f

3,000 22,000

6,000

198,000 33,000 (11,000) (127,000) 40,000 (6,000) 82,000

o 150,000

g

(150,000)

70,000 n 121,000 p 12,000 i 44,000

c 58,000 d 15,000 1,229,000

3,000 22,000 (70,000) 121,000 12,000 44,000 (58,000) (15,000)

1,229,000 384,000

(87,000)

Cash increase for the year = $384,000 – $87,000 – $179,000 = $118,000. * Non-cash item: Purchased $215,000 land through common stock issuance.


(179,000)



4-42

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 Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Increase in accounts payable Income less dividends — equity investee Increase in accounts receivable Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January 1 Cash on December 31

$ 500,000

$

40,000 200,000 10,000 17,000 (30,000) (210,000)

27,000 527,000

$(500,000) (500,000) $ 200,000 (137,000) (20,000) 43,000 70,000 360,000 $ 430,000



Chapter 4

4-43

Solution P4-19 (continued) Indirect Method Pil Corporation and Subsidiary Workpapers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2011

Year’s Change Asset Changes Cash

$

Accounts receivable — net Inventories Plant & equipment — net Equity investments Patents Total asset changes

70,000 210,000 0 300,000 30,000 (10,000)


Cash Flows From Operations

Cash Flows Investing Activities

Cash Flows Financing Activities

e 210,000 f 200,000 l 30,000 h 10,000

g 500,000 m 60,000

$ 600,000

Changes in Equities Accounts payable $ 17,000 Dividends payable 13,000 Long-term note payable 200,000 Common stock 0 Other paid-in capital 0 Retained earnings 350,000 Noncontrol. interest 20% 20,000 Changes in equities $ 600,000 Controlling share of NI Noncontrolling interest share Purchase of plant & equipment Depreciation — plant & equipment Amortization of patents Increase in accounts receivable Income less dividends from investees Increase in accounts payable Received cash from long-term note

i 17,000 k 13,000 j 200,000

a 500,000 b 40,000

c 150,000 d 20,000

a 500,000 b 40,000

$ 500,000 40,000

g 500,000

$(500,000) f 200,000 h 10,000

200,000 10,000 (210,000)

l 30,000 i 17,000 j 200,000 k 13,000

(30,000) 17,000 0

e 210,000 m

60,000

c 150,000 Payment of dividends — controlling Payment of dividends — noncontrolling d 20,000 1,950,000

1,950,000

$ 527,000

$(500,000)

Cash increase for the year = $527,000 – $500,000 + $43,000 = $70,000.


$ 200,000 (137,000) (20,000) $ 43,000



4-44

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 Cash received from equity investees Cash paid to suppliers Cash paid for operating expenses Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January 1 Cash on December 31 Reconciliation of net income to cash provided by operating activities Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Income less dividends — equity investee Depreciation expense Patents amortization Increase in accounts payable Increase in accounts receivable Net cash flows from operating activities

$2,390,000 30,000 ($1,433,000) (460,000)(1,893,000) 527,000 $ (500,000) (500,000) $

$

200,000 (137,000) (20,000)

$

43,000 70,000 360,000 430,000

$

500,000

$

27,000 527,000

40,000 (30,000) 200,000 10,000 17,000 (210,000)



Chapter 4

4-45

Solution P4-19 (continued) Direct Method Pil Corporation and Subsidiary Workpapers for the Statement of Cash Flows (Direct Method) for the year ended December 31, 2011

Year’s Change Asset Changes Cash Accounts receivable — net Inventories Plant & equipment — net Equity investments Patents Total asset changes Changes in Equities Accounts payable Dividends payable Long-term note payable Retained earnings* Noncontrol.interest 20% Changes in equities Ret. earnings change* Sales Income from equity investees Cost of goods sold Depreciation expense Other operating expenses Noncontrolling interest share Dividends declared — Pil

$

$ $

70,000 210,000 0 300,000 30,000 (10,000) 600,000

b 200,000 e

Cash Flow Investing Activities

Cash Flow Financing Activities

$2,600,000

a 210,000

60,000 (1,450,000) (200,000) (470,000)

d

i

c 500,000 d 30,000

10,000

f 17,000 g 13,000 h 200,000

$

Cash Flow From Operations

a 210,000

17,000 13,000 200,000 350,000 20,000 600,000

40,000

j

20,000

$2,390,000

30,000 f 17,000 b 200,000 e 10,000

(40,000)

i

(150,000)

Retained earnings change $ 350,000 Received cash from long-term note Payment of dividends — controlling Payment of dividends — noncontrolling Purchase of equipment

*


30,000 (1,433,000) 0 (460,000)

40,000

0

g 13,000 k 137,000

h 200,000 k 137,000 j 20,000 c 500,000 1,377,000

1,377,000

$ 200,000 (137,000) (20,000) $

527,000

$(500,000) $(500,000)

Retained earnings changes replace the retained earnings account for reconciling purposes.

Cash increase for the year = $527,000 - $500,000 + $43,000 = $70,000.


$

43,000

Beams AdvAcc11 Chapter

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