Chapter 06, Modern Advanced accounting-review Q & exr

CHAPTER 6 CONSOLIDATED FINANCIAL STATEMENTS: ON DATE OF BUSINESS COMBINATION The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers. Pr. 6–1

Pr. 6–2

Pr. 6–3

Pr. 6–4

Pr. 6–5

Pr. 6–6

Pr. 6–7

Pr. 6–8

Pr. 6–9

Parr Corporation (20 minutes, easy) Journal entries for business combination (parent and partially owned subsidiary relationship) and working paper elimination on date of business combination. Goodwill is involved. Philly Corporation (30 minutes, easy) Preparation of journal entries for business combination involving partially owned subsidiary. Working paper elimination and working paper for consolidated balance sheet. Goodwill acquired by parent company. Pellman Corporation (25 minutes, easy) Journal entries for business combination with wholly owned subsidiary. Bargain-purchase excess is involved. Preparation of working paper for consolidated balance sheet and related working paper elimination. Powell Corporation (40 minutes, medium) Journal entries for business combination in which partially owned subsidiary paid out-ofpocket costs of the combination. Goodwill acquired by parent company. Preparation of working paper elimination and working paper for consolidated balance sheet. Pyr Corporation (30 minutes, easy) Preparation of journal entries for business combination involving wholly owned subsidiary with unimpaired goodwill. Preparation of working paper for consolidated balance sheet and working paper elimination. Pali Corporation (45 minutes, strong) Given unconsolidated and consolidated balance sheets of parent company and partially owned subsidiary, reconstruct working paper elimination. Goodwill is involved. Pagel Corporation (40 minutes, easy) Journal entries for business combination with partially owned subsidiary. Working paper elimination and working paper for consolidated balance sheet. Goodwill is involved. Porcino Corporation (45 minutes, medium) Journal entries for business combination with wholly owned subsidiary involving bargainpurchase excess. Preparation of working paper elimination and working paper for consolidated balance sheet. Pandit Corporation (45 minutes, strong) Journal entries to correct inventories errors in subsidiary's accounting records, which have not been closed. Preparation of working paper elimination and working paper for consolidated balance sheet. Bargain-purchase excess and minority interest are involved.

The McGraw-Hill Companies, Inc., 2006 198

Modern Advanced Accounting, 10/e

Pr. 6–10

Pr. 6–11

Pliny Corporation (45 minutes, medium) Journal entry for business combination with wholly owned subsidiary. Part of consideration for subsidiary is bonds issued by parent company at a discount that must be computed. Preparation of working paper elimination and working paper for consolidated balance sheet. Subsidiary has outstanding bonds that must be valued at present value. Goodwill is involved. Parthenia Corporation (45 minutes, medium) Given erroneous parent company journal entry for business combination and erroneous working paper for consolidated balance sheet, prepare a correcting journal entry and correct working paper elimination and working paper for consolidated balance sheet. Subsidiary is partially owned. Goodwill is involved.

ANSWERS TO REVIEW QUESTIONS 1.

2.

3.

4.

5. 6.

7.

8.

Consolidated financial statements for a parent company and its subsidiaries are similar to combined financial statements for home office and branches of a single legal entity in that both types of financial statements include the total revenue, expenses, assets, and liabilities of the constituent segments after all intracompany and intercompany transactions, profits or gains, and balances have been eliminated. The two types of financial statements are dissimilar because the separate legal entity status of a parent company and its subsidiaries necessitates more complex financial statement items, such as minority interest in net assets of subsidiary. A subsidiary may be excluded from consolidated financial statements if it is undergoing courtsupervised bankruptcy reorganization; if it is in a foreign country having severe production, monetary, or income tax restrictions; or if it has a participative minority interest. No, a consolidated income statement is not required for the year ended on the date of a business combination. A purchase represents a fresh start for accounting purposes; thus, only a consolidated balance sheet is appropriate on the date of a business combination. No, the subsidiary does not enter the current fair values of its identifiable net assets in its accounting records on the date of a business combination. To do so would violate the valuation principle of historical cost. Instead, working paper eliminations are used to reflect differences between carrying amounts and current fair values of the subsidiary's identifiable net assets in the consolidated balance sheet. Eliminations for the preparation of consolidated financial statements are working paper entries only. They are not entered in the accounting records of either the parent company or the subsidiary. A working paper for consolidated balance sheet is used by an accountant to combine the separate balance sheets of a parent company and its subsidiaries into a single balance sheet for the combined enterprise. A consolidated balance sheet is the formal financial statement issued to stockholders of the parent company and other interested parties; it is prepared from data in the working paper for consolidated balance sheet. Following are the three methods that have been proposed for valuing minority interest and goodwill in the consolidated balance sheet of a parent company and its partially owned subsidiary: Method 1 Measure minority interest based on current fair value of subsidiary's identifiable net assets; compute goodwill as difference between parent company's cost and its share of current fair value of subsidiary's identifiable net assets. Method 2 Measure minority interest based on carrying amount of subsidiary's identifiable net assets; compute goodwill as in Method 1. Method 3 Measure minority interest and goodwill based on current fair value of 100% of subsidiary's total net assets, based on independent measurement of minority interest or by inference from the cost of parent company's investment in the subsidiary. Under the parent company concept of consolidated financial statements, the minority interest in net assets of subsidiary is considered to be a liability that is increased each accounting period by the minority interest in net income of subsidiary (an expense) and decreased by dividends paid to



9.

10.

minority stockholders. Under the economic unit concept of consolidated financial statements, the minority interest in net assets of subsidiary is treated as a part of consolidated stockholders' equity, and the minority interest in net income of subsidiary is considered to be a distribution of consolidated net income. The principal limitation of consolidated financial statement results in the following problems, among others: (1) Users of consolidated financial statements cannot determine from them the operating results, financial position, or cash flows of individual subsidiaries. (2) Creditors of the constituent companies comprising the combined enterprise cannot ascertain the asset coverages for their respective claims. (3) Asset liens that affect the rights of creditors are difficult to disclose and explain in consolidated financial statements. (4) Because consolidated financial statements are a composite, a weak subsidiary is difficult to distinguish from a strong one. Push-down accounting is the valuation of net assets (and related revenue and expenses) in the separate financial statements of a subsidiary at their current fair values as reflected in the consolidated financial statements.

SOLUTIONS TO EXERCISES Ex. 6–1

1. 2. 3. 4. 5. 6. 7. 8.

a a a d c a d b

9. c [($100,000 + $15,000) – $10,000 = $105,000] 10. a 11. a 12. b 13. c 14. b 15. a [$1,200,000 – ($1,250,000 x 0.80) = $200,000; $1,250,000 x 0.20 = $250,000] 16. c

Ex. 6–2

Computation of amount of goodwill in Mar. 31, 2005, consolidated balance sheet of Prye Corporation and subsidiary: Cost of Prye Corporation's investment in Stark Company common stock Less: Current fair value of Stark's identifiable net assets ($6,400,000 + $1,500,000 – $300,000 + $400,000) Amount of goodwill

Solutions Manual, Chapter 6

$8,200,000 8,000,000 $ 200,000


Ex. 6–3

a. Computation of amount of goodwill in Dec. 31, 2005, consolidated balance sheet of Phyll Corporation and subsidiary: Cost of Phyll Corporation's investment in Single Company common stock Less: Single’s total stockholders’ equity ($100,000 + $200,000 + $600,000) Excess of carrying amount of Single’s inventories over current fair value ($510,000 – $450,000) Excess of current fair value of Single's plant assets over carrying amount ($1,000,000 – $900,000) Current fair value of Single's identifiable net assets Amount of goodwill b. Consolidated retained earnings on the date of a business combination includes the parent company's retained earnings only; therefore, consolidated retained earnings on the date of the Phyll Corporation-Single Company business combination is:

Ex. 6–4

$1,560,000 $900,000 (60,000) 100,000 940,000 $ 620,000

$2,500,000

a. Computation of amount of goodwill in Dec. 31, 2005, consolidated balance sheet of Pelerin Corporation and subsidiary: Cost of Pelerin Corporation’s investment in South Company common stock $2,000,000 Less: Current fair value of South's identifiable net assets ($100,000 + $200,000 + $1,500,000 – $100,000) 1,700,000 Goodwill in consolidated balance sheet $ 300,000 b. Computation of amount of plant assets in Dec. 31, 2005, consolidated balance sheet of Pelerin Corporation and subsidiary: Plant assets (net) of Pelerin Corporation $5,000,000 Add: Current fair value of South Company's plant assets (net) $1,500,000 Less: Excess of current fair value of South's identifiable net assets ($1,700,000) over cost of Pelerin's investment in South ($1,600,000) 100,000 1,400,000 Plant assets (net) in consolidated balance sheet $6,400,000

Ex. 6–5

PAINTER CORPORATION AND SUBSIDIARY Consolidated Balance Sheet May 31, 2005 Assets Current assets: Inventories ($60,000 + $40,000) Other ($140,000 + $110,000) Total current assets Plant assets (net) ($220,000 + $180,000) Goodwill [$10,000 + ($250,000 – $230,000)] Total assets

$100,000 250,000 $350,000 400,000 30,000 $780,000 (continued)

Liabilities & Stockholders' Equity Liabilities The McGraw-Hill Companies, Inc., 2006 201


Current liabilities ($100,000 + $70,000) Bonds payable ($104,000 + $30,000) Total liabilities Stockholders' equity: Common stock, $1 par Additional paid-in capital Retained earnings Total stockholders' equity Total liabilities & stockholders' equity Ex. 6–6

$170,000 134,000 $304,000 $200,000 116,000 160,000 $476,000 $780,000

Working paper elimination for Pristine Corporation and subsidiary, May 31, 2005: Common StockSuperb Additional Paid-in CapitalSuperb Retained EarningsSuperb InventoriesSuperb LandSuperb Building (net) Superb GoodwillSuperb Investment in Superb Company Common StockPristine

Ex. 6–7

950,000

Working paper elimination for Perth Corporation and subsidiary, June 30, 2005: Common StockSykes Additional Paid-in CapitalSykes InventoriesSykes ($610,000 – $590,000) Plant Assets (net)Sykes ($1,440,000 – $1,360,000) GoodwillSykes ($120,000 – $100,000) Investment in Sykes Company Common StockPerth Retained EarningsSykes To eliminate intercompany investment and equity accounts of subsidiary on date of business combination and to establish difference between current fair values and carrying amounts of subsidiary's inventories and plant assets, with remainder to goodwill. (Income tax effects are disregarded.)

Ex. 6–8

100,000 200,000 450,000 60,000 40,000 50,000 50,000

200,000 210,000 20,000 80,000 20,000 440,000 90,000

Journal entries for Prox Corporation, Nov. 1, 2005: Investment in Senna Company Common Stock (10,000 x $30) Common Stock (10,000 x $10) Paid-in Capital in Excess of Par To record issuance of 10,000 shares of common stock for 85 of the 100 shares of Senna Company's outstanding common stock in a business combination. (Income tax effects are disregarded.) Investment in Senna Company Common Stock Paid-in Capital in Excess of Par Cash To record payment of out-of-pocket costs of business combination with Senna Company.


300,000 100,000 200,000

36,800 20,000 56,800


Ex. 6–9

a. Journal entries for Ploy Corporation, Feb. 28, 2005: Investment in Skye Company Common Stock Cash Common Stock (5,000 x $10) Paid-in Capital in Excess of Par (5,000 x $10) To record payment of cash and issuance of common stock for 8,800 of the 10,000 outstanding shares of Skye Company common stock in a business combination.

150,000 50,000 50,000 50,000

Investment in Skye Company Common Stock 15,000 Paid-in Capital in Excess of Par 10,000 Cash 25,000 To record payment of out-of-pocket costs of business combination with Skye Company. b. Computations for consolidated balance sheet of Ploy Corporation and subsidiary, Feb. 28, 2005: (1) Goodwill: Cost of Ploy's investment in Skye ($150,000 + $15,000) $165,000 Less: Ploy's share of current fair value of Skye's identifiable net assets [($10,000 + $30,000 + $60,000 + $20,000 + $80,000 – $30,000) x 0.88] 149,600 Goodwill $ 15,400 (2) Minority interest in net assets of subsidiary: Current fair value of Skye's identifiable net assets [from (1)] $170,000 Minority share (100% – 88%) 0.12 Minority interest in net assets of subsidiary ($170,000 x 0.12) $ 20,400 Ex. 6–10

a. Consolidated current assets Less: Current assets of Pullin Corporation Add: Style Company receivable from Pullin Total current assets in Style Company’s separate balance sheet, July 31, 2005 b. Style Company’s current assets (from a) Style’s plant assets ($370,000 – $10,000 – $270,000) Style’s current liabilities ($28,000 – $15,000 + $2,000) Total stockholders’ equity in Style Company’s separate balance sheet, July 31, 2005 Alternative computation: Current fair value of Style Company's identifiable net assets ($38,100 ÷ 0.30) Less: Difference between current fair value and carrying amount of Style's plant assets Carrying amount of Style's identifiable net assets (equal to Style Company's stockholders' equity) c. Investment in Style Company common stock Less: Current fair value of Style's identifiable net assets acquired by Pullin Corporation ($127,000 x 0.70) Goodwill in consolidated balance sheet, July 31, 2005


$146,000 (106,000) 2,000 $ 42,000 $ 42,000 90,000 (15,000) $117,000

$127,000 10,000 $117,000 $100,000 88,900 $ 11,100


Ex. 6–11

Ex. 6–12

Ex. 6–13

Ex. 6–14

Computation of debit to Goodwill and credit to Minority Interest in Net Assets of Subsidiary: Implied value of 100% of subsidiary's net assets ($800,000 ÷ 0.80) $1,000,000 Less: Current fair value of subsidiary's identifiable net assets ($50,000 + $60,000 + $490,000 + $50,000 + $100,000) 750,000 Debit to Goodwill $ 250,000 Implied value of 100% of subsidiary's net assets (above) $1,000,000 Minority interest percentage 0.20 Credit to Minority Interest in Net Assets of Subsidiary ($1,000,000 x 0.20) $ 200,000 Computation of minority interest in net assets of subsidiary and goodwill by three alternative methods: Method 1 Identifiable net assets recognized at current fair value; minority interest based on current fair value of identifiable net assets: Minority interest: $800,000 x 0.20 = $160,000 Goodwill: $700,000 – ($800,000 x 0.80) = $60,000 Method 2 Identifiable net assets recognized at current fair value only to extent of parent company's interest; remainder of net assets and minority interest reflected at carrying amounts: Minority interest: $600,000 x 0.20 = $120,000 Goodwill: $700,000 – ($800,000 x 0.80) = $60,000 Method 3 Current fair value (through inference) assigned to total net assets of subsidiary, including goodwill: Minority interest: ($700,000 ÷ 0.80) x 0.20 = $175,000 Goodwill: ($700,000 ÷ 0.80) – $800,000 = $75,000 Working paper elimination for Pismo Corporation and subsidiary, May 31, 2005: Common StockSobol 300,000 Retained EarningsSobol 400,000 InventoriesSobol 40,000 LandSobol 50,000 Building (net)Sobol 60,000 GoodwillPismo [$760,000 – ($850,000 x 0.80)] 80,000 Investment in Sobol Company Common StockPismo Minority Interest in Net Assets of Subsidiary ($850,000 x 0.20) a. Cost of investment in subsidiary’s common stock Less: Goodwill Cost attributable to identifiable net assets of subsidiary Current fair value of identifiable net assets of subsidiary ($60,000 + $35,250 + $50,100 + $3,900 + $28,500 + $4,500) Percentage of subsidiary's outstanding common stock acquired by parent company ($160,380 ÷ $182,250) b. Aggregate current fair value of subsidiary’s identifiable net assets (computed in a) c. Cost of investment in subsidiary Parent company’s ownership percentage (from a) Inferred total current fair value of all subsidiary's net assets ($165,660 ÷ 0.88) Less: Aggregate current fair value of subsidiary's identifiable net assets (from a and b)


760,000 170,000 $165,660 (5,280) $160,380 $182,250 88% $182,250 $165,660 88% $188,250 (continued) (182,250)


Goodwill under inference method

$

d. Inferred total current fair value of all subsidiary's net assets (from c) Minority interest percentage (100% – 88% owned by parent company) Minority interest under inference method ($188,250 x 0.12)

6,000

$188,250 12% $ 22,590

CASES Case 6–1

Case 6–2

Case 6–3

Case 6–4

If one considers the definition of a quasi-reorganization in Chapter 7A of Accounting Research Bulletin No. 43, “Restatement and Revision of Accounting Research Bulletins,” it is difficult to accept the premise that push-down accounting procedures should be the same as those for quasi-reorganizations. A subsidiary that issues separate financial statements has not been reorganized; that is, its parent company has not elected to restate its assets, capital stock, and retained earnings through a readjustment, as that term is used in ARB 43, Chapter 7A. On a going-concern basis, the subsidiary's retained earnings should not be written off; to do so would be to misstate the dividend-paying ability of the subsidiary. Unfortunately, the “new basis accounting” component of the FASB's “Consolidations and Related Matters” project was inactive in mid-2003; guidance for push-down accounting is sorely needed. Given the FASB's definition of fair value in recent Statements (for example, Nos. 67, 87, 115, and 121) as the amount at which an asset could be bought or sold in a current transaction between willing parties, the arbitrary reduction of asset values required by FASB Statement No. 141 is not justifiable. The FASB should consider whether there has been an enhancement of the paid-in capital of a combinor in a bargain purchase acquisition of a combinee, as a justification for overturning paragraph 44 of FASB Statement No 141. Subsequent to Photo Corporation's assignment of 15,000 shares of Soto Company common stock owned by Photo to the voting trust, the trustee thereof has custody of 55% [(40,000 + 15,000) ÷ (105,000 – 5,000) = 0.55] of Soto's outstanding common stock. However, unless Photo has lost its control, as defined by the FASB, Photo may continue to issue consolidated financial statements that include Soto's, because the term of the voting trust is three years. a. Paley Corporation's journal entry for its investment in common stock of Saye Company appears to be in accord with the provisions of APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” Relevant provisions of APB Opinion No. 29 follow:1 [T]he cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss should be recognized on the exchange. The fair value of the asset received should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered. The price of $1,000 a share in an unrelated sale of nearly the same number of shares of Saye Company common stock as the shares acquired by Paley Corporation provides an appropriate measure of the current fair value of the Saye common stock acquired by Paley because a current fair value for the transferred research and development projects is unavailable.

1APB Opinion No. 29, "Accounting for Nonmonetary Transactions," AICPA (New York: 1973), par. 18. b. The $55,000 gain was realized in a transaction between the parent company and the former stockholder of the subsidiary; thus, the gain is not an intercompany gain requiring elimination. Further, only a consolidated balance sheet is appropriate for Paley Corporation and Saye Company on July 31, 2005, because purchase accounting is required for the Paley-Saye business combination. Assuming that the two companies The McGraw-Hill Companies, Inc., 2006 205


Case 6–5

Case 6–6

Case 6–7

Case 6–8

Case 6–9

adopted a July 31 fiscal year, the gain would not appear in a consolidated income statement for Paley Corporation and subsidiary for the year ended July 31, 2005. Although Patrick Corporation does not own more than 50% of Stear Company's outstanding common stock, and thus in legal form does not have a majority ownership of Stear, Patrick's officers constitute a majority of Stear's board of directors. Further, Patrick has only to convert the $500,000 face amount of Stear's bonds to Stear common stock in order to obtain a majority (50,000 of 90,000 shares) of Stear's outstanding common stock. For the foregoing reasons, Patrick substantively controls Stear, and consolidated financial statements are appropriate for Patrick Corporation and Stear Company. a. Purchase accounting requires a fresh start with respect to accounting for the net assets of the subsidiary. This fresh start necessitates stating net assets of the subsidiary at their current fair values in the consolidated balance sheet on the date of the business combination. Similar treatment should be given to the subsidiary's net assets in its separate balance sheet, for the sake of consistency if for no other reason. Further, to state the net assets of a wholly owned subsidiary at their carrying amounts in the subsidiary's accounting records would imply that the subsidiary was the same going concern it was before the business combination. Such an inference is unwarranted. b. Generally accepted accounting principles do not sanction write-ups of assets of a going concern to their current fair values. The fact that Silver Company has become a subsidiary of Pinch Corporation does not change its separate legal existence or its status as a going concern. Moreover, increasing Silver's asset valuations would necessitate an adjustment of Silver's stockholders’ equity in a manner that has not yet been standardized by the FASB. Further, recognizing goodwill in Silver's balance sheet would violate the principle that goodwill should be recognized only when purchased. Pinch, not Silver, acquired the goodwill. c. Despite the Securities and Exchange Commission's sanctioning of “push-down accounting” for certain subsidiaries of parent companies that report to the SEC, the author supports the position of Silver's controller. Prior to the action by the FASB, too many unresolved problems are associated with write-ups of assets to make this course of action feasible. However, a note to Silver's separate balance sheet should disclose the business combination with Pinch and the current fair values included in the consolidated balance sheet for Silver's assets. The controller of Purdido Corporation may ethically comply with the CFO's instructions only if it is probable that a business combination will be enacted soon enough to permit use of the materials and services attributable to the abandoned SEC filing in a filing in connection with a completed combination. However, it seems likely that many of the costs incurred in the abandoned filing related solely to services and materials with respect to Sontee Company; if so, such costs should be recognized as a loss. An additional paid-in capital ledger account may be debited only for costs directly associated with a specific issuance of common stock. It is not unusual for opinions of the staff of the AICPA to be at variance with those of the SEC; a publicly owned company is subject to that agency's jurisdiction. The CFO should carefully analyze the facts regarding the CEO's planned corporation investment and compare those facts with the issues in AAER 34 and “Reporting on Company Where Options to Acquire Control Exists.” If, substantively, the corporation established by the CEO is controlled by the CFO's corporate employer, consolidated financial statements are required. Student Michael is probably correct in asserting that the minority interest in net assets of a subsidiary is not a liability, as that element is defined in paragraph 35 of Statement of Financial Accounting Concepts No. 6, “Elements of Financial Statements” (CON 6). However, given the definition of equity in paragraph 49 of CON 6 as the residual interest in the assets of an entity that remains after deducting its liabilities and the positions taken by the FASB, as described on page xxx of the textbook, Michael's statement that minority interest is not a part of consolidated stockholders' equity may be challenged. Nonetheless, for many years proponents of the parent company concept have maintained that minority stockholders of a



subsidiary, who exercise no significant influence on either the subsidiary or the parent company, are in substance a special class of creditors of the consolidated entity. In view of the foregoing, student Roger's suggestion that minority interest in net assets of a subsidiary be displayed between liabilities and stockholders' equity in a consolidated balance sheet has merit. Financial statement users could decide whether minority interest is debt or equity when they compute the consolidated enterprise's debt-to-equity ratio.



20 Minutes, Easy Parr Corporation a.

Pr. 6–1 Parr Corporation Journal Entries

20 05 Sept 30 Investment in Sane Company Common Stock Cash To record acquisition of 90,000 of the 100,000 outstanding shares Sane Company in a business combination.

1 0 0 0 0 0 0 1 0 0 0 0 0 0

30 Investment in Sane Company Common Stock Cash To record payment of out-of-pocket costs of business combination with Sane Company.

b.

8 0 0 0 0 8 0 0 0 0

Parr Corporation and Subsidiary Working Paper Elimination September 30, 2005 (a) Common Stock—Sane Retained Earnings—Sane Inventories—Sane Plant Assets—Sane Goodwill—Parr [$1,080,000 – ($990,000 x 0.90)] Investment in Sane Company Common Stock —Parr ($1,000,000 + $80,000) Minority Interest in Net Assets of Subsidiary ($990,000 x 0.10) To eliminate intercompany investment and equity accounts of subsidiary on date of business combination; to allocate excess of cost over carrying amount of identifiable net assets acquired, with remainder to goodwill; and to establish minority interest in net assets of subsidiary on date of business combination. (Income tax effects are disregarded.)

4 0 0 5 0 0 3 0 6 0 1 8 9

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0 1 0 8 0 0 0 0 9 9 0 0 0

30 Minutes, Easy



Philly Corporation

Pr. 6–2

a.

Philly Corporation Journal Entries

20 05 Sept 30 Investment in Stype Company Common Stock (100,000 x $12) Common Stock, no par To record issuance of 100,000 shares of common stock for 18,800 of the 20,000 outstanding shares of Stype Company common stock in a business combination.

1 2 0 0 0 0 0

30 Investment in Stype Company Common Stock ($150,000 x 0.60) Common Stock, no par ($150,000 x 0.40) Cash To record payment of out-of-pocket costs of business combination with Stype Company. b.

1 2 0 0 0 0 0

9 0 0 0 0 6 0 0 0 0 1 5 0 0 0 0

(Working paper for consolidated balance sheet is on page 210.)

Philly Corporation and Subsidiary Working Paper Elimination September 30, 2005 (a) Common Stock—Stype Retained Earnings—Stype Inventories—Stype ($340,000 – $300,000) Plant Assets—Stype ($1,100,000 – $1,000,000) Discount on Long-Term Debt—Stype ($100,000 – $90,000) Goodwill—Philly [$1,290,000 – ($1,250,000 x 0.94)] Investment in Stype Company Common Stock—Philly ($1,200,00 + $90,000) Minority Interest in Net Assets of Subsidiary ($1,250,000 x 0.06) To eliminate intercompany investment and equity accounts of subsidiary on date of business combination; to allocate excess of cost over carrying amounts of identifiable net assets acquired, with remainder to goodwill; and to establish minority interest in net assets of subsidiary on date of business combination. (Income tax effects are disregarded.)


4 0 0 7 0 0 4 0 1 0 0

0 0 0 0

0 0 0 0

0 0 0 0

1 0 0 0 0 1 1 5 0 0 0 1 2 9 0 0 0 0 7 5 0 0 0


Philly Corporation (concluded)

Pr. 6–2 Philly Corporation and Subsidiary Working Paper for Consolidated Balance Sheet September 30, 2005 Eliminations Philly

Stype

increase

Corporation

Corporation

(decrease)

5 0 0 0 0 4 0 0 0 0 0 6 0 0 0 0 0

1 0 0 0 0 0 2 0 0 0 0 0 3 0 0 0 0 0

1 2 9 0 0 0 0 1 3 0 0 0 0 0

1 0 0 0 0 0 0

(a)(1 2 9 0 0 0 0 ) (a) 1 0 0 0 0 0 (a) 1 1 5 0 0 0

2 4 0 0 0 0 0 1 1 5 0 0 0

3 6 4 0 0 0 0

1 6 0 0 0 0 0

(1 0 3 5 0 0 0 )

4 2 0 5 0 0 0

8 0 0 0 0 0

4 0 0 0 0 0 1 0 0 0 0 0

Consolidated

Assets Cash Trade accounts receivable (net) Inventories (net) Investment in Stype Company common stock Plant assets (net) Goodwill Total assets

(a)

4 0 0 0 0

1 5 0 0 0 0 6 0 0 0 0 0 9 4 0 0 0 0

Liabilities & Stockholders’ Equity

Current liabilities Long-term debt Discount on long-term debt Common stock, no par Common stock, $20 par Minority interest in net assets of subsidiary Retained earnings Total liabilities & stockholders’ equity

(a)

1 0 0 0 0 *

2 3 4 0 0 0 0

1 2 1 ( 2 3

0 0 1 4

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 ) 0

4 0 0 0 0 0

(a)( 4 0 0 0 0 0 )

5 0 0 0 0 0

7 0 0 0 0 0

(a) 7 5 0 0 0 (a)( 7 0 0 0 0 0 )

7 5 0 0 0 5 0 0 0 0 0

3 6 4 0 0 0 0

1 6 0 0 0 0 0

(1 0 3 5 0 0 0 )

4 2 0 5 0 0 0

*An increase in discount on long-term debt and a decrease in total liabilities & stockholders’ equity.



25 Minutes, Easy Pellman Corporation

Pr. 6–3

a.

Pellman Corporation Journal Entries

20 05 May 31 Investment in Shire Company Common Stock Cash To record acquisition of all 10,000 outstanding shares of Shire Company common stock in a business combination. 31 Investment in Shire Company Common Stock Cash To record payment of out-of-pocket costs of business combination with Shire Company. b.

3 0 0 0 0 0 3 0 0 0 0 0

5 0 0 0 0 5 0 0 0 0


Pellman Corporation and Subsidiary Working Paper Elimination May 31, 2005 (a) Common Stock—Shire Additional Paid-in Capital—Shire Retained Earnings—Shire Inventories—Shire ($140,000 – $120,000) Plant Assets (net)—Shire ($690,000 – $610,000 – $380,000 + $350,000) Premium on Long-Term Debt—Shire ($440,000 – $400,000) Investment in Shire Company Common Stock—Pellman To eliminate intercompany investment and equity accounts of subsidiary on date of business combination, and to deduct $30,000 excess of current fair values of subsidiary’s identifiable net assets over acquisition price from current fair value of subsidiary’s plant assets. (Income tax effects are disregarded.)

Pellman Corporation (concluded)


1 0 0 1 4 0 1 8 0 2 0

0 0 0 0

0 0 0 0

0 0 0 0

5 0 0 0 0 4 0 0 0 0 3 5 0 0 0 0

Pr. 6–3


Pellman Corporation and Subsidiary Working Paper for Consolidated Balance Sheet May 31, 2005 Eliminations Pellman

Shire

increase

Corporation

Corporation

(decrease)

Consolidated

Assets Cash Trade accounts receivable (net) Inventories (net) Investment in Shire Company common stock Plant assets (net)

2 0 0 0 0 0 7 0 0 0 0 0 1 4 0 0 0 0 0

1 0 0 0 0 6 0 0 0 0 1 2 0 0 0 0

3 5 0 0 0 0 2 8 5 0 0 0 0

6 1 0 0 0 0

(a)( 3 5 0 0 0 0 ) (a) 5 0 0 0 0

3 5 1 0 0 0 0

5 5 0 0 0 0 0

8 0 0 0 0 0

( 2 8 0 0 0 0 )

6 0 2 0 0 0 0

Current liabilities Long-term debt Premium on long-term debt Common stock, $10 par Additional paid-in capital Retained earnings Total liabilities &

5 0 0 0 0 0 1 0 0 0 0 0 0

8 0 0 0 0 4 0 0 0 0 0

1 5 0 0 0 0 0 1 2 0 0 0 0 0 1 3 0 0 0 0 0

1 0 0 0 0 0 4 0 0 0 0 1 8 0 0 0 0

stockholders’ equity

5 5 0 0 0 0 0

8 0 0 0 0 0

Total assets

(a)

2 0 0 0 0

2 1 0 0 0 0 7 6 0 0 0 0 1 5 4 0 0 0 0



(a) 4 0 (a)( 1 0 0 (a) ( 4 0 (a)( 1 8 0

0 0 0 0

0 0 0 0

0 0 ) 0 ) 0 )

( 2 8 0 0 0 0 )

5 8 0 1 4 0 0 4 0 1 5 0 0 1 2 0 0 1 3 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

6 0 2 0 0 0 0


40 Minutes, Easy Powell Corporation a.

Pr. 6–4 Seaver Company Journal Entries

20 05 Apr 30 Receivable from Powell Corporation Cash To record payment, on behalf of Powell Corporation, of out-of-pocket costs of business combination with Powell.

b.

7 0 0 0 0 7 0 0 0 0

Powell Corporation Journal Entries 20 05 Apr 30 Investment in Seaver Company Common Stock (30,000 x $20) Common Stock, no par To record issuance of 30,000 shares of common stock for 8,000 of the 10,000 outstanding shares of Seaver Company common stock in a business combination. 30 Investment in Seaver Company Common Stock Common Stock, no par Payable to Seaver Company To record liability to Seaver Company for Seaver’s payment of out-of-pocket costs of business combination with Seaver. Finder’s and legal fees relating to the combination are recorded as additional costs of the investment; costs associated with the SEC registration statement are recorded as an offset to the previously recorded proceeds from the issuance of common stock.


6 0 0 0 0 0 6 0 0 0 0 0

4 0 0 0 0 3 0 0 0 0 7 0 0 0 0


Powell Corporation (concluded)

Pr. 6–4

c.

Powell Corporation and Subsidiary Working Paper for Consolidated Balance Sheet April 30, 2005 Eliminations Powell

Seaver

increase

Corporation

Corporation

(decrease)

5 0 0 0 0 2 3 0 0 0 0

8 0 0 0 0 2 0 0 0 0 0

( 7 0 0 0 0 ) 4 0 0 0 0 0

7 0 0 0 0 3 5 0 0 0 0

Consolidated

Assets Cash Trade accounts receivable (net) Intercompany receivables (payables) Inventories Investment in Seaver Company common stock Plant assets (net) Goodwill Total assets

1 3 0 0 0 0 4 3 0 0 0 0

(a)

9 0 0 0 0

6 4 0 0 0 0 1 3 0 0 0 0 0

5 6 0 0 0 0

(a)( 6 4 0 0 0 0 ) (a) 2 2 0 0 0 0 (a) 8 0 0 0 0

2 5 5 0 0 0 0

1 2 6 0 0 0 0

( 2 5 0 0 0 0 )

3 1 0 0 0 0 8 0 0 0 0 0

2 5 0 0 0 0 6 0 0 0 0 0

8 4 0 0 0 0

2 0 8 0 0 0 0 8 0 0 0 0 3 5 6 0 0 0 0


Current liabilities Long-term debt Premium on long-term debt Common stock, no par Common stock, $10 par Additional paid-in capital Minority interest in net assets of subsidiary Retained earnings (deficit) Total liabilities & stockholders’ equity

(a)

2 0 0 0 0

1 0 7 0 0 0 0 1 0 0 0 0 0 3 6 0 0 0 0

3 7 0 0 0 0 2 5 5 0 0 0 0

( 5 0 0 0 0 ) 1 2 6 0 0 0 0

5 6 0 1 4 0 0 2 0 1 0 7 0

0 0 0 0

0 0 0 0

0 0 0 0

(a)( 1 0 0 0 0 0 ) (a)( 3 6 0 0 0 0 ) (a) 1 4 0 0 0 0 (a) 5 0 0 0 0 ( 2 5 0 0 0 0 )

1 4 0 0 0 0 3 7 0 0 0 0 3 5 6 0 0 0 0

(Working paper elimination is on page 215.)



Powell Corporation (concluded)

Pr. 6–4 Powell Corporation and Subsidiary Working Paper Elimination April 30, 2005

(a) Common Stock—Seaver Additional Paid-In Capital—Seaver Inventories—Seaver ($440,000 – $350,000) Plant Assets (net)—Seaver ($780,000 – $560,000) Goodwill—Powell [$640,000 – ($700,000 x 0.80)] Retained Earnings—Seaver Premium on Long-Term Debt—Seaver ($620,000 – $600,000) Investment in Seaver Company Common Stock—Powell Minority Interest in Net Assets of Subsidiary ($700,000 x 0.20) To eliminate intercompany investment and equity accounts of subsidiary on date of business combination; to allocate excess of cost over carrying amounts of identifiable assets acquired, with remainder to goodwill; and to establish minority interest in net assets of subsidiary on date of business combination. (Income tax effects are disregarded.)


1 0 0 3 6 0 9 0 2 2 0 8 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0 5 0 0 0 0 2 0 0 0 0 6 4 0 0 0 0 1 4 0 0 0 0


30 Minutes, Easy Pyr Corporation a.

Pr. 6–5 Pyr Corporation Journal Entries

20 05 July 31 Investment in Soper Company Common Stock (20,000 x $10) Common Stock (20,000 x $2) Paid-in Capital in Excess of Par To record issuance of 20,000 shares of common stock for all 5,000 outstanding shares of common stock of Soper Company in a business combination.

2 0 0 0 0 0 4 0 0 0 0 1 6 0 0 0 0

31 Investment in Soper Company Common Stock Paid-in Capital in Excess of Par Cash To record payment of out-of-pocket costs of business combination with Soper Company. b.

2 0 0 0 0 1 0 0 0 0 3 0 0 0 0


Pyr Corporation and Subsidiary Working Paper Elimination July 31, 2005 (a) Common Stock—Soper Additional Paid-in Capital—Soper Retained Earnings—Soper Current Assets (Inventories)—Soper ($65,000 – $60,000) Plant Assets (net)—Soper ($340,000 – $300,000) Discount on Long-Term Debt—Soper ($200,000 – $190,000) Goodwill—Soper ($220,000 – $185,000 – $20,000) Investment in Soper Company Common Stock—Pyr To eliminate intercompany investment and equity accounts of subsidiary on date of business combination; and to allocate excess of cost over carrying amounts of identifiable net assets acquired, with remainder to goodwill. (Income tax effects are disregarded.)


2 5 0 0 0 5 0 0 0 0 7 5 0 0 0 5 0 0 0 4 0 0 0 0 1 0 0 0 0 1 5 0 0 0 2 2 0 0 0 0


Pyr Corporation (concluded)

Pr. 6–5 Pyr Corporation and Subsidiary Working Paper for Consolidated Balance Sheet July 31, 2005 Eliminations

Assets Current assets Investment in Soper Company common stock Plant assets (net) Goodwill Total assets

Pyr

Soper

increase

Corporation

Corporation

(decrease)

7 7 0 0 0 0

1 5 0 0 0 0

2 2 0 0 0 0 2 4 0 0 0 0 0

(a)

5 0 0 0

Consolidated 9 2 5 0 0 0

3 0 0 0 0 0 2 0 0 0 0

(a)( 2 2 0 0 0 0 ) (a) 4 0 0 0 0 (a) 1 5 0 0 0

2 7 4 0 0 0 0 3 5 0 0 0

3 3 9 0 0 0 0

4 7 0 0 0 0

( 1 6 0 0 0 0 )

3 7 0 0 0 0 0

4 0 0 0 0 0 1 0 0 0 0 0 0

1 2 0 0 0 0 2 0 0 0 0 0


Current liabilities Long-term debt Discount on long-term debt Common stock, $2 par Common stock, $5 par Additional paid-in capital Retained earnings Total liabilities & stockholders’ equity

(a)

1 0 0 0 0 *

8 4 0 0 0 0

5 1 2 ( 8

2 0 1 4

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 ) 0

5 5 0 0 0 0 6 0 0 0 0 0

2 5 0 0 0 5 0 0 0 0 7 5 0 0 0

(a) ( 2 5 0 0 0 ) (a) ( 5 0 0 0 0 ) (a) ( 7 5 0 0 0 )

5 5 0 0 0 0 6 0 0 0 0 0

3 3 9 0 0 0 0

4 7 0 0 0 0

( 1 6 0 0 0 0 )

3 7 0 0 0 0 0




45 Minutes, Strong

Pali Corporation

Pr. 6–6 Pali Corporation and Subsidiary Working Paper Elimination August 31, 2005

(a) Common Stock—Soda Additional Paid-in Capital—Soda Retained Earnings—Soda Inventories—Soda Plant Assets (net)—Soda Goodwill—Pali Premium on Long-Term Debt—Soda Investment in Soda Company Stock—Pali Minority Interest Net Assets of Subsidiary To eliminate intercompany investment and equity account of subsidiary on date of business combination; to allocate excess of cost over carrying amounts of identifiable net assets acquired, with remainder to goodwill; and to establish minority interest in net assets of subsidiary on date of business combination. (Income tax effects are disregarded.)

2 0 0 0 1 2 0 0 2 4 0 0 3 0 0 5 0 0 8 0

0 0 0 0 0 0

0 0 0 0 0 0

(1) (2) (3) (4) (5) 2 0 0 0 0 3 8 0 0 0 0 2 4 8 0 0 0

Supporting computations: (1) ($380,000 – $20,000) ÷ $3 = 120,000 shares; 120,000 ÷ 0.60 = 200,000; 200,000 x $1 = $200,000 (2)

200,000 x ($2.80 – $1.00) = $360,000; $360,000 x 1/3 = $120,000

(3)

$360,000 x 2/3 = $240,000 (or $120,000 x 2 = $240,000)

(4)

Current fair value of identifiable net assets of Soda Company: $248,000 minority interest ÷ 0.40 $620,000 Less: Soda’s stockholders’ equity [total of (1), (2), and (3)] reduced by increase in premium on longterm debt ($560,000 – $20,000) 540,000 Excess of current fair value of Soda’s plant assets and inventories over carrying amount $ 80,000 Let x = increase in value of inventories 1 2/3x = increase in value of plant assets 2 2/3x = $80,000 x = $30,000

(5)

$30,000 x 1 2/3 = $50,000

(See Note to Instructor on page 219.)

Pali Corporation (concluded)


Pr. 6–6


Note to Instructor: Soda Company’s separate balance sheet on August 31, 2005, may be reconstructed as follows:

Soda Company Separate Balance Sheet August 31, 2005 Assets Cash ($160,000 – $120,000) Trade accounts receivable (net) ($540,000 – $380,000) Inventories ($730,000 – $470,000 – $30,000) Plant assets (net) ($1,470,000 – $850,000 – $50,000) Total assets Liabilities & Stockholders’ Equity Current liabilities ($690,000 – $430,000) Long-term debt ($730,000 – $550,000) Common stock, $1 par Additional paid-in capital Retained earnings Total liabilities & stockholders’ equity


$

4 0 0 1 6 0 0 2 3 0 0 5 7 0 0

0 0 0 0

0 0 0 0

$1 0 0 0 0 0 0

$ 2 1 2 1 2

6 8 0 2 4

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

$1 0 0 0 0 0 0


40 Minutes, Easy Pagel Corporation a.

Pr. 6–7 Pagel Corporation Journal Entries

Oct

20 05 31 Investment in Sayre Company Common Stock (50,000 x $10) Common Stock, no par (50,000 x $2) Paid-in Capital in Excess of Stated Value To record issuance of 50,000 shares of common stock for 83% of outstanding common stock of Sayre Company in a business combination. 31 Investment in Sayre Company Common Stock Paid-in Capital in Excess of Stated Value Cash To record payment of out-of-pocket costs of business combination with Sayre Company.

b.

5 0 0 0 0 0 1 0 0 0 0 0 4 0 0 0 0 0

3 4 7 5 0 5 5 2 5 0 9 0 0 0 0


Pagel Corporation and Subsidiary Working Paper Elimination October 31, 2005 (a) Common Stock—Sayre Retained Earnings—Sayre Inventories—Sayre ($620,000 – $600,000) Plant Assets (net)—Sayre ($1,550,000 – $1,500,000) Patents (net)—Sayre ($95,000 – $80,000) Discount on Long-Term Debt—Sayre ($1,240,000 – $1,225,000) Goodwill—Pagel [$534,750 – ($536,000 x 0.83)] Investment in Sayre Company Common Stock—Pagel Minority Interest in Net Assets of Subsidiary ($536,000 x 0.17) To eliminate intercompany investment and equity accounts of subsidiary on date of business combination; to allocate excess of cost over carrying amounts of identifiable net assets acquired, with remainder to goodwill; and to establish minority interest in subsidiary on date of business combination. (Income tax effects are disregarded.)

Pagel Corporation (concluded)


1 0 0 3 3 6 2 0 5 0 1 5

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

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

Pr. 6–7


Pagel Corporation and Subsidiary Working Paper for Consolidated Balance Sheet October 31, 2005 Eliminations Pagel

Sayre

increase

Corporation

Corporation

(decrease)

1 6 0 0 0 0 8 6 0 0 0 0 5 0 0 0 0 0

1 5 0 0 0 0 6 0 0 0 0 0 2 6 0 0 0 0

Consolidated

Assets Cash Inventories Other current assets Investment in Sayre Company common stock Plant assets (net) Patents (net) Goodwill Total assets

5 3 4 7 5 0 3 4 0 0 0 0 0

1 5 0 0 0 0 0 8 0 0 0 0

5 4 5 4 7 5 0

2 5 9 0 0 0 0

4 0 0 0 0 3 9 0 0 0 0 9 5 0 0 0 0

6 0 0 0 0 8 5 4 0 0 0 1 2 4 0 0 0 0

(a)

2 0 0 0 0

(a)( 5 3 4 7 (a) 5 0 0 (a) 1 5 0 (a) 8 9 8

5 0 0 7

3 1 0 0 0 0 1 4 8 0 0 0 0 7 6 0 0 0 0

0 ) 0 0 0

4 9 5 0 0 0 0 9 5 0 0 0 8 9 8 7 0

( 3 5 9 8 8 0 )

7 6 8 4 8 7 0


Income taxes payable Other current liabilities Long-term debt Discount on long-term debt Common stock, $2 stated value Common stock , $10 par Additional paid-in capital Minority interest in net assets of subsidiary Retained earnings Total liabilities & stockholders’ equity

(a)

1 5 0 0 0 *

1 6 0 0 0 0 0 1 0 0 0 0 0

1 0 1 2 4 2 1 9 ( 1 1 6 0

0 4 0 5 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 ) 0

(a)( 1 0 0 0 0 0 )

1 8 4 4 7 5 0

1 8 4 4 7 5 0

6 3 0 0 0 0

3 3 6 0 0 0

(a) 9 1 1 2 0 (a)( 3 3 6 0 0 0 )

9 1 1 2 0 6 3 0 0 0 0

5 4 5 4 7 5 0

2 5 9 0 0 0 0

( 3 5 9 8 8 0 )

7 6 8 4 8 7 0

* An increase in discount on long-term debt and a decrease in total liabilities & stockholders’ equity.



45 Minutes, Medium Porcino Corporation a.

Pr. 6–8 Porcino Corporation Journal Entries

20 05 Jan 31 Investment in Secor Company Common Stock [$50,000 + (6,000 x $15) + $50,000] Cash Common Stock (6,000 x $2) Paid-in Capital in Excess of Par Notes Payable To record issuance of cash, 6,000 shares of common stock, and five-year, 14% note payable for all 10,000 shares of Secor Company’s outstanding common stock in a business combination. 31 Investment in Secor Company Common Stock Cash To record payment of out-of-pocket costs of business combination with Secor Company. b.

1 9 0 0 0 0 5 1 7 5

0 2 8 0

0 0 0 0

0 0 0 0

0 0 0 0

1 0 0 0 0 1 0 0 0 0


Porcino Corporation and Subsidiary Working Paper Elimination January 31, 2005 (a) Common Stock—Secor Additional Paid-in Capital—Secor Inventories—Secor ($70,000 – $60,000) Plant Assets (net)—Secor [$540,000 – $470,000 – ($50,000 x 0.90)] Intangible Assets (net)—Secor [$60,000 – $40,000 – ($50,000 x 0.10)] Retained Earnings—Secor Premium on Long-Term Debt—Secor ($350,000 – $300,000) Investment in Secor Company Common Stock—Porcino To eliminate intercompany investment and equity accounts of subsidiary on date of business combination, and to allocate $50,000 excess ($250,000 – $200,000 = $50,000) of current fair value of subsidiary’s identifiable net assets over cost to subsidiary’s plant assets and intangible assets in ratio of $540,000 : $60,000, or 9:1. (Income tax effects are disregarded.)

Porcino Corporation (concluded)


1 5 0 0 0 0 1 6 0 0 0 0 1 0 0 0 0 2 5 0 0 0 1 5 0 0 0 1 1 0 0 0 0 5 0 0 0 0 2 0 0 0 0 0

Pr. 6–8


Porcino Corporation and Subsidiary Working Paper for Consolidated Balance Sheet January 31, 2005 Eliminations Porcino

Secor

increase

Corporation

Corporation

(decrease)

3 8 0 0 0 0 5 8 0 0 0 0

6 0 0 0 0 1 3 0 0 0 0

Consolidated

Assets Inventories Other current assets Investment in Secor Company common stock Plant assets (net) Intangible assets (net) Total assets

2 1 5 1

(a)

1 0 0 0 0

4 5 0 0 0 0 7 1 0 0 0 0

0 0 0 0 0 2 0 0 0 0 0 6 0 0 0 0

4 7 0 0 0 0 4 0 0 0 0

(a)( 2 0 0 0 0 0 ) (a) 2 5 0 0 0 (a) 1 5 0 0 0

2 0 1 5 0 0 0 2 1 5 0 0 0

2 8 4 0 0 0 0

7 0 0 0 0 0

( 1 5 0 0 0 0 )

3 3 9 0 0 0 0

4 2 0 0 0 0 7 0 0 0 0 0

2 0 0 0 0 0 3 0 0 0 0 0


Current liabilities Long-term debt Premium on long-term debt Common stock, $2 par Common stock, $15 par Additional paid-in capital Retained earnings Total liabilities & stockholders’ equity

(a)

5 0 0 0 0

8 1 2 0 0 0 2 9 8 0 0 0 6 1 0 0 0 0 2 8 4 0 0 0 0


1 5 0 0 0 0 (a)( 1 5 0 0 0 0 ) 1 6 0 0 0 0 (a)( 1 6 0 0 0 0 ) ( 1 1 0 0 0 0 ) (a) 1 1 0 0 0 0 7 0 0 0 0 0

( 1 5 0 0 0 0 )

6 2 0 1 0 0 0 5 0 8 1 2

0 0 0 0

0 0 0 0

0 0 0 0

2 9 8 0 0 0 6 1 0 0 0 0 3 3 9 0 0 0 0


45 Minutes, Strong

Pandit Corporation a.

Pr. 6–9 Singh Company Correcting Entries June 30, 2005

Income Tax Refund Receivable ($60,000 x 0.40) Retained Earnings (Prior Period Adjustment) ($60,000 – $24,000) Cost of Goods Sold To correct July 1, 2004, retained earnings balance for after-tax effect of overstatement of 2004 net income due to overstatement of inventories on June 30, 2004; to set up claim for refund of 2004 income taxes overpaid because of overstatement of 2004 pre-tax income; and to correct cost of goods sold due to overstatement of beginning inventories on July 1, 2004

2 4 0 0 0

Income Taxes Expense ($60,000 x 0.40) Income Taxes Payable To increase income taxes for 2005 for effects of overstatement of 2005 cost of goods sold.

2 4 0 0 0

Inventories in Transit Trade Accounts Payable To correct accounting records for effect of omission of merchandise in transit on June 30, 2005.

3 5 0 0 0


3 6 0 0 0 6 0 0 0 0

2 4 0 0 0

3 5 0 0 0


Pandit Corporation (continued) b.

Pr. 6–9 Pandit Corporation and Subsidiary Working Paper Elimination June 30, 2005

(a) Common Stock—Singh Additional Paid-In Capital—Singh Retained Earnings—Singh ($120,000 + $60,000 – 36,000 – $24,000) Inventories—Singh ($185,000 – $155,000) Plant Assets (net)—Singh [$280,000 – $240,000 – ($420,000* x 0.85) + $320,000] Investment in Singh Company Common Stock—Pandit Minority Interest in Net Assets of Subsidiary ($420,000* x 0.15) To eliminate intercompany investment and equity accounts of subsidiary on date of business combination; to increase subsidiary inventories by difference between current fair value and carrying amount; to reduce current fair value of subsidiary’s plant assets by excess of parent company’s share of current fair value of subsidiary’s identifiable net assets over parent company’s cost; and to establish minority interest in subsidiary on date of business combination. (Income tax effects are disregarded.)

1 0 0 0 0 0 1 3 0 0 0 0 1 2 0 0 0 0 3 0 0 0 0 3 0 0 0 3 2 0 0 0 0 6 3 0 0 0

* Current fair value of Singh Company’s identifiable net assets: Singh’s stockholders’ equity ($100,000 +$130,000 + $120,000) $350,000 Difference between current fair values and carrying amounts of Singh’s assets: Inventories ($185,000 – $155,000) 30,000 Plant assets ($280,000 – $240,000) 40,000 Current fair value of Singh’s identifiable net assets

$420,000

(Working paper for consolidated balance sheet is on on page 226.)



Pandit Corporation (concluded)

Pr. 6–9 Pandit Corporation and Subsidiary

Working Paper for Consolidated Balance Sheet June 30, 2005 Eliminations Pandit

Singh

increase

Corporation

Corporation

(decrease)

Consolidated

Assets Cash Income tax refund receivable Trade accounts receivable (net) Inventories Investment in Singh Company common stock Plant assets (net) Goodwill Total assets

8 0 0 0 0 1 7 0 0 0 0 3 7 0 0 0 0

6 2 9 1 5

0 4 0 5

0 0 0 0

0 0 0 0

0 0 0 0 *

3 0 0 0 0

3 2 0 0 0 0 5 7 0 0 0 0 5 0 0 0 0

2 4 0 0 0 0

(a)( 3 2 0 0 0 0 ) (a) 3 0 0 0

1 5 6 0 0 0 0

5 6 9 0 0 0

( 2 8 7 0 0 0 )

1 4 2 2 6 5 5

0 4 0 5

0 0 0 0

0 0 0 0

0 0 0 0

8 1 3 0 0 0 5 0 0 0 0 1 8 4 2 0 0 0


Trade accounts payable Income taxes payable 15% note payable Common stock, $10 par Additional paid-in capital Minority interest in net assets of subsidiary Retained earnings Total liabilities & stockholders’ equity

2 1 3 2 4

2 0 0 5 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

1 5 5 0 0 0 6 4 0 0 0 1 0 0 0 0 0 1 3 0 0 0 0

(a)( 1 0 0 0 0 0 ) (a)( 1 3 0 0 0 0 )

3 1 3 2 4

7 6 0 5 0

5 4 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

2 9 0 0 0 0

1 2 0 0 0 0

(a) 6 3 0 0 0 (a)( 1 2 0 0 0 0 )

6 3 0 0 0 2 9 0 0 0 0

1 5 6 0 0 0 0

5 6 9 0 0 0

( 2 8 7 0 0 0 )

1 8 4 2 0 0 0

*Including $35,000 in transit.



45 Minutes, Medium Pliny Corporation

Pr. 6–10

a.

Pliny Corporation Journal Entries

20 05 Dec 31 Investment in Sylla Company Common Stock ($100,000 + $1,352,727) Discount on Bonds Payable ($1,500,000 – $1,352,727) Cash Bonds Payable To record issuance of cash and 14%, 10-year bonds for all 200,000 outstanding shares of Sylla Company common stock in a business combination. Present value of bonds is computed as follows: [($1,500,000 x 0.214548) + ($105,000 x 9.818147) = $1,352,727].

1 4 5 2 7 2 7 1 4 7 2 7 3

31 Investment in Sylla Company Common Stock Bond Issue Costs Cash To record payment of out-of-pocket costs of business combination with Sylla Company. b.

1 0 0 0 0 0 1 5 0 0 0 0 0

5 0 0 0 0 4 0 0 0 0 9 0 0 0 0

(Working paper for consolidation balance sheet is on page 228.)

Pliny Corporation and Subsidiary Working Paper Elimination December 31, 2005 (a) Common Stock—Sylla Additional Paid-In Capital—Sylla Retained Earnings—Sylla Inventories—Sylla ($330,000 – $300,000) Long-Term Investment in Marketable Securities—Sylla ($230,000 – $200,000) Plant Assets (net)—Sylla ($940,000 – $900,000) Intangible Assets (net)—Sylla ($220,000 – $200,000) Discount on Bonds Payable—Sylla ($500,000 – $432,899) Goodwill—Sylla ($1,502,727 – $1,487,101) Investment in Sylla Company Common Stock—Pliny To eliminate intercompany investment and equity accounts of subsidiary on date of business combination; and to allocate excess of cost over carrying amounts of identifiable net assets acquired, with remainder to goodwill. (Income tax effects are disregarded.) Present value of bonds is computed as follows: [($500,000 x 0.463193) + ($30,000 x 6.710081) = $432,899].

Pliny Corporation (concluded)


2 0 0 0 4 0 0 0 7 0 0 0 3 0 0

0 0 0 0

0 0 0 0

3 0 0 0 0 4 0 0 0 0 2 0 0 0 0 6 7 1 0 1 1 5 6 2 6 1 5 0 2 7 2 7

Pr. 6–10


Pliny Corporation and Subsidiary Working Paper for Consolidated Balance Sheet December 31, 2005 Eliminations Pliny

Sylia

increase

Corporation

Corporation

(decrease)

Consolidated

Assets Inventories Other current assets Investment in Sylla Company common stock Long-term investments in marketable securities Plant assets (net) Intangible assets (net) Goodwill Bond issue costs Total assets

8 0 0 0 0 0 1 0 1 0 0 0 0

3 0 0 0 0 0 5 0 0 0 0 0

1 5 0 2 7 2 7

2 5 0 0 0 0 0 1 0 0 0 0 0

(a)

3 0 0 0 0

1 1 3 0 0 0 0 1 5 1 0 0 0 0

(a)(1 5 0 2 7 2 7 ) 2 0 0 0 0 0 9 0 0 0 0 0 2 0 0 0 0 0

(a) (a) (a) (a)

3 4 2 1

0 0 0 5

0 0 0 6

0 0 0 2

0 0 0 6

2 3 0 0 3 4 4 0 0 3 2 0 0 1 5 6 4 0 0

4 0 0 0 0 5 9 5 2 7 2 7

2 1 0 0 0 0 0

(1 3 6 7 1 0 1 )

0 0 0 2 0

0 0 0 6 0

6 6 8 5 6 2 6


Current liabilities 10% note payable Bonds payable Discount on bonds payable Common stock, $1 par Additional paid-in capital Retained earnings Total liabilities & stockholders’ equity

1 2 1 (

4 0 5 1 6 2 4

0 0 0 4 0 0 0

0 0 0 7 0 0 0

0 0 0 2 0 0 0

0 0 0 7 0 0 0

0 0 0 3 ) 0 0 0

5 9 5 2 7 2 7

3 0 0 0 0 0 5 0 0 0 0 0 2 0 0 0 0 0 4 0 0 0 0 0 7 0 0 0 0 0 2 1 0 0 0 0 0

(a) 6 7 (a)( 2 0 0 (a)( 4 0 0 (a)( 7 0 0

1 0 0 0

0 0 0 0

1 0 0 0

* ) ) )

(1 3 6 7 1 0 1 )

1 2 2 (

7 0 0 2 6 2 4

0 0 0 1 0 0 0

0 0 0 4 0 0 0

0 0 0 3 0 0 0

0 0 0 7 0 0 0

0 0 0 4 ) 0 0 0

6 6 8 5 6 2 6

* An increase in discount on bonds payable and a decrease in total liabilities & stockholders’ equity.



45 Minutes, Medium Parthenia Corporation

Pr. 6–11

a.

Parthenia Corporation Correcting Journal Entry June 30, 2005 Investment in Storey Company Common Stock Goodwill Expenses of Business Combination To correct June 30, 2005, journal entries for business combination with Storey Company as follows:

7 0 0 0 0 6 0 0 0 0 1 0 0 0 0

Investment in Storey Company Expenses of common business stock Goodwill combination $ 290,000 $ -0$ -0-

Balance should be Balance per accounting records 220,000 Correction [dr.(cr.)] $ 70,000

b.

60,000 $(60,000)

10,000 $(10,000)


Parthenia Corporation and Subsidiary Working Paper Elimination June 30, 2005 (a) Common Stock—Storey Additional Paid-In Capital—Storey Retained Earnings—Storey Inventories—Storey ($180,000 – $160,000) Plant Assets (net)—Storey ($530,000 – $500,000) Discount on Long-Term Debt—Storey ($300,000 – $260,000) Goodwill—Parthenia [$290,000 – ($310,000 x 0.80)] Investment in Storey Company Common Stock—Parthenia Minority Interest in Net Assets of Subsidiary ($310,000 x 0.20) To eliminate intercompany investment and equity accounts of subsidiary on date of business combination; to allocate excess of cost over carrying amounts of identifiable net assets, with remainder to goodwill; and to establish minority interest in net assets of subsidiary on date of business combination. (Income tax effects are disregarded.)


5 7 1 0 2 3

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0

4 0 0 0 0 4 2 0 0 0 2 9 0 0 0 0 6 2 0 0 0


Parthenia Corporation (concluded)

Pr. 6–11

Parthenia Corporation and Subsidiary Working Paper for Consolidated Balance Sheet June 30, 2005 Eliminations Parthenia

Storey

increase

Corporation

Corporation

(decrease)

6 0 0 0 0 1 2 0 0 0 0 2 5 0 0 0 0

5 0 0 0 0 9 0 0 0 0 1 6 0 0 0 0

2 9 0 0 0 0 5 9 0 0 0 0

5 0 0 0 0 0

(a)( 2 9 0 0 0 0 ) (a) 3 0 0 0 0 (a) 4 2 0 0 0

1 1 2 0 0 0 0 4 2 0 0 0

1 3 1 0 0 0 0

8 0 0 0 0 0

( 1 9 8 0 0 0 )

1 9 1 2 0 0 0

2 0 0 0 0 0 5 0 0 0 0 0

2 8 0 0 0 0 3 0 0 0 0 0

Consolidated

Assets Cash Trade accounts receivable (net) Inventories Investment in Storey Company common stock Plant assets (net) Goodwill Total assets

(a)

2 0 0 0 0

1 1 0 0 0 0 2 1 0 0 0 0 4 3 0 0 0 0


Current liabilities Long-term debt Discount on long-term debt Common stock, $5 par Common stock , $10 par Additional paid-in capital Minority interest in net assets of subsidiary Retained earnings Total liabilities & stockholders’ equity

(a)

4 0 0 0 0 *

1 0 0 0 0 0

4 8 ( 1

8 0 4 0

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 ) 0

2 0 0 0 0 0

5 0 0 0 0 7 0 0 0 0

(a) ( 5 0 0 0 0 ) (a) ( 7 0 0 0 0 )

2 0 0 0 0 0

3 1 0 0 0 0

1 0 0 0 0 0

(a) 6 2 0 0 0 (a)( 1 0 0 0 0 0 )

6 2 0 0 0 3 1 0 0 0 0

1 3 1 0 0 0 0

8 0 0 0 0 0

( 1 9 8 0 0 0 )

1 9 1 2 0 0 0




Chapter 06, Modern Advanced accounting-review Q & exr

Recommend Documents