Chapter 10, Modern Advanced accounting-review Q & exr

CHAPTER 10 CONSOLIDATED FINANCIAL STATEMENTS: SPECIAL PROBLEMS 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. 10–1

Pr. 10–2

Pr. 10–3

Pr. 10–4

Pr. 10–5

Pr. 10–6

Pr. 10–7

Pr. 10–8

Pr. 10–9

Pinch Corporation (30 minutes, medium) Working paper eliminations for parent company and partially owned subsidiary at end of year following parent’s acquisition of part of minority stockholders’ common stock. Prime Corporation (40 minutes, medium) Journal entries under equity method of accounting for wholly owned subsidiary’s operations, and working paper eliminations, for subsidiary having treasury stock on date of business combination. Pumble Corporation (40 minutes, medium) Journal entries under equity method of accounting for partially owned subsidiary’s operations, and working paper eliminations, for subsidiary that issued additional shares of common stock to the parent company. Pronto Corporation (35 minutes, medium) Journal entry for partially owned subsidiary’s issuance of additional common stock to parent company, computation of balance of parent company’s Investment ledger account, and working paper elimination. Pun Corporation (30 minutes, medium) Working paper eliminations following partially owned subsidiary’s acquisition of treasury stock. Peterson Corporation (40 minutes, medium) Reconstruction of working paper eliminations from separate and consolidated financial statements of parent company and wholly owned subsidiary. Income taxes are disregarded. Pomerania Corporation (90 minutes, strong) Adjusting entries to account for parent company’s investment in a partially owned subsidiary’s preferred and common stock by the equity method. Working paper for consolidated financial statements and working paper eliminations for parent company and two partially owned subsidiaries, one of which was acquired in installments. Income taxes are disregarded. Plover Corporation (90 minutes, strong) Reconstruction of intercompany receivables (payables) that do not offset. Adjusting entries derived from reconstruction. Working paper for consolidated financial statements and working paper eliminations for parent and wholly owned subsidiary having a minority interest in its preferred stock. Income taxes are disregarded. Pullard Corporation (90 minutes, strong) Working paper for consolidated financial statements and working paper eliminations for parent company and wholly owned subsidiary having a minority interest in its preferred stock. Income taxes are disregarded.

ANSWERS TO REVIEW QUESTIONS 1.

2.

Given that purchase accounting is required for all business combinations, it stands to reason that purchase accounting is appropriate for a parent company or a subsidiary’s acquisition of minority interests, for such an action may be construed as “completing” the business combination. If a parent company acquires the minority interest in net assets of a subsidiary at less than carrying amount, the difference (assuming it is not material) may be offset against previously recognized

Solutions Manual, Chapter 10

The McGraw-Hill Companies, Inc., 2006 71

3.

4.

5.

6.

7.

8.

9.

goodwill of the subsidiary. Although this procedure may have theoretical shortcomings, it is appropriate from a practical and cost-benefit point of view. A parent company recognizes a nonoperating gain when a subsidiary issues common stock to the public at a price per share larger than the carrying amount per share of the parent company’s investment in the subsidiary’s common stock, for the following reason. Although the parent company’s percentage interest in the subsidiary has decreased, the net assets (book value) per share of the subsidiary’s outstanding common stock is larger than before the additional common stock was issued to the public. Because the parent company did not disburse any assets or incur any liabilities for its increased per-share interest in the subsidiary, the parent company has realized a nonoperating gain. The converse reasoning supports the parent company’s recognition of a nonoperating loss when the subsidiary issues common stock to the public at a price less than the per-share carrying amount of the parent’s investment in the subsidiary prior to the stock issuance. A gain or loss recognized by a parent company on the disposal of part of its investment in common stock of a subsidiary is not eliminated in the preparation of consolidated financial statements because the gain or loss was realized in a transaction with an outsider. When a parent company acquires less than 100% of a subsidiary’s preferred stock, together with all or a majority of the subsidiary’s common stock, the preferences associated with the preferred stock must be considered in determining the claims to the subsidiary’s net assets assignable to both preferred and common minority stockholders. For cumulative, fully participating preferred stock, any cumulative preferred dividends in arrears must be included in the minority interest of the preferred stockholders in net assets of the subsidiary. In addition, the retained earnings remaining after provision for the preferred dividend arrearage must be prorated to preferred and common stockholders based on the participation preference of the preferred stock. The declaration of a stock dividend by a subsidiary does not necessitate any special treatment in working paper eliminations if the parent company uses the equity method of accounting for the subsidiary’s operations. The balances of the subsidiary’s stockholders’ equity ledger accounts after the stock dividend is recorded are reflected in the working paper elimination prepared subsequent to the declaration and distribution of the stock dividend. When a subsidiary acquires for its treasury all or part of its outstanding common stock owned by minority stockholders of the subsidiary, the subsidiary debits the Treasury Stock ledger account for the current fair value of the stock acquired. Any amount in excess of current fair value, such as is paid in greenmail, is debited to a loss account. The quotation is acceptable only if one adopts a liquidation approach, rather than a going-concern approach, to consolidated financial statements. The treasury stock treatment of parent company common stock owned by a subsidiary emphasizes economic substance over legal formthe subsidiary has acquired common stock for the consolidated group’s treasury as agent for the parent company. This approach does not involve allocation of a portion of the parent company’s net income to minority stockholders of the subsidiary. On a going-concern basis, such an allocation is unnecessary. There is no inconsistency in the treatment of parent company stock owned by the subsidiary as treasury stock of the consolidated entity. The dividends declared and paid by the parent company to the subsidiary are eliminated in the preparation of consolidated financial statements; thus, dividends displayed in the consolidated statement of retained earnings are those declared and paid to the parent company’s outside stockholders only.

SOLUTIONS TO EXERCISES Ex. 10–1

1. 2. 3. 4. 5. 6.

b d b b a a

8. b 9. e 10. d 11. b 12. c 13. d


Modern Advanced Accounting, 10/e

7. b Ex. 10–2

14. b

Computation of goodwill and minority interest in net assets of subsidiary, Apr. l, 2006: 

Goodwill: $65,400 + $10,000 –  $22,800 x 

Minority interest: $22,800 x

500   = $67,800 1,500 * 

1,000 = $15,200 1,500

*Parent company’s 85% interest indicates minority interest of 15%, or 1,500 shares (10,000 x 0.15 = 1,500). Ex. 10–3

Computation of nonoperating gain to Prester Company, Jan. 3, 2005:

Total Carrying amount of Shire Company’s identifiable net assets after common stock issuance to public

$51,000

Less: Carrying amount of Shire Company’s identifiable net assets before common stock issuance to public

40,000

Difference ($2,500 nonoperating gain to Prester)


$11,000

Prester’s share  10   12   

 10     10 

$42,500

Minority interest share  2   12   

$8,500

40,000 $ 2,500

$8,500


Ex. 10–4

a. Computation of nonoperating loss to Pinto Corporation, Oct. 31, 2006:

Total Carrying amount of Sorrell Company’s identifiable net assets after common stock issuance to Pinto

$819,000

Less: Carrying amount of Sorrell Company’s identifiable net assets before common stock issuance to Pinto

675,000

Difference ($1,500 nonoperating loss to Pinto)

Pinto’s share 5  6   

$682,500

 8     10 

$144,000

540,000

$142,500

Minority interest share 1  6   

$136,500

 2     10 

135,000 $ 1,500

b. Journal entry for Pinto Corporation, Oct. 31, 2006: Investment in Sorrell Company Common Stock Loss from Subsidiary’s Issuance of Common Stock Cash To record acquisition of 2,000 shares of Sorrell Company’s common stock at $72 a share, and to recognize nonoperating loss on the transaction. Ex. 10–5

142,500 1,500 144,000

a. Aggregate call price of preferred stock (100,000 x $1.10) Add: Cumulative preferred dividends in arrears ($8,000 x 2) Total callable value of preferred stock Portion acquired by Panay Corporation equals amount of total cost assignable to preferred stock ($126,000 x 0.50)

$ 63,000

b. Minority interest of preferred stockholders ($126,000 x 0.50)

$ 63,000

c. Total cost of Panay Corporation investment in Stegg Company Less: Cost assignable to preferred stock (see a) Cost assignable to common stock Panay Corporation’s share of current fair value of Stegg Company’s identifiable net assets attributable to common stock [($1,200,000 – $126,000) x 0.75] Goodwill acquired by Panay Corporation d. Current fair value of Stegg Company’s identifiable net assets (common stock) ($1,200,000 – $126,000) Minority common stockholders' interest ($1,074,000 x 0.25) Ex. 10–6

$110,000 16,000 $126,000

$1,030,500 63,000 $ 967,500 805,500 $ 162,000 $1,074,000 $ 268,500

Allocation of Simplex Company’s net income, year ended May 31, 2006:

To preferred stockholders: 10,000 shares x $12, in ratio of 70% and 30% To common stockholders: in ratio of 75% (6/8) and 25% (2/8) Net income of Simplex Company Ex. 10–7 a.

Total

Net income to parent

Minority interest

$120,000

$ 84,000

$36,000

222,800

167,100

55,700

$342,800

$251,100

$91,700

Revised working paper elimination for Placard Corporation and subsidiary, Sept. 30, 2006: (a) Common Stock, $2 parSabro [$80,000 + (6,000 x $2)] 92,000



Additional Paid-in CapitalSabro [$40,000 + (6,000 x $3)] Retained EarningsSabro ($130,000 – $10,000) Retained Earnings of SubsidiaryPlacard Intercompany Investment IncomePlacard GoodwillSabro Investment in Sabro Company Common Stock Placard Dividends DeclaredSabro (6,000 x $5)

58,000 120,000 10,000 70,000 20,000 340,000 30,000

b. Closing entry for Placard Corporation, Sept. 30, 2006: Net Sales Intercompany Investment Income Costs and Expenses Retained Earnings of Subsidiary ($70,000 – $30,000) Retained Earnings ($241,700 – $40,000) Ex. 10–8

668,500 40,000 201,700

Working paper elimination for Portland Corporation and subsidiary, Dec. 31, 2005: (a) Common StockSalem (500 x $5) Additional Paid-in CapitalSalem [500 x ($8 – $5)] Retained EarningsSalem [500 x ($11 – $8)] Treasury StockSalem To account for subsidiary’s treasury stock as though it had been retired.

Ex. 10–9

840,200 70,000

2,500 1,500 1,500 5,500

Working paper eliminations for Priam Corporation and subsidiary, Feb. 28, 2005: (a) Common StockStocker (2,000 x $5) Retained EarningsStocker (2,000 x $3) Treasury StockStocker

10,000 6,000 16,000

(b) Common StockStocker ($250,000 – $10,000) Retained EarningsStocker ($600,000 – $6,000) GoodwillStocker ($900,000 – $834,000) Investment in Stocker Company Common StockPriam

240,000 594,000 66,000 900,000

Ex. 10–10 Working paper eliminations for Private Corporation and subsidiary, May 31, 2005: 5,000 2,500

Common StockSergeant (500 x $10) Additional Paid-in CapitalSergeant (500 x $5) Treasury StockSergeant

7,500

Common StockSergeant ($100,000 – $5,000) Additional Paid-in CapitalSergeant ($50,000 – $2,500) Retained Earnings of SubsidiaryPrivate Investment in Sergeant Company Common StockPrivate


95,000 47,500 150,000 292,500


Ex. 10–11 Working paper eliminations for Parson Corporation and subsidiary, Feb. 28, 2005: Common StockSibley (5,000 x $2) Retained EarningsSibley (5,000 x $8) GoodwillSibley ($60,000 – $50,000) Treasury StockSibley

10,000 40,000 10,000 60,000

Common StockSibley ($160,000 – $10,000) Retained EarningsSibley ($640,000 – $40,000) GoodwillSibley ($790,000 – $750,000) Investment in Sibley Company Common StockParsons

150,000 600,000 40,000 790,000

Ex. 10–12 a. Journal entries for Prince Corporation for Year 2005: Investment in Sabine Company Common Stock (80,000 x 0.40) Intercompany Investment Income Intercompany Dividends Receivable (4,000 x $2) Investment in Sabine Company Common Stock b. Journal entries for Samnite Company for Year 2005:

32,000 32,000 8,000 8,000

Investment in Sabine Company Common Stock ($80,000 x 0.60) Intercompany Investment Income

48,000

Intercompany Dividends Receivable (6,000 x $2) Investment in Sabine Company Common Stock

12,000

48,000 12,000

Ex. 10–13 Working paper eliminations for Peaches Corporation and subsidiary, May 31, 2007: (b) Treasury StockPeaches Investment in Peaches Corporation Common StockSugar (c) Intercompany Dividends RevenueSugar Dividends DeclaredPeaches

100,000 100,000 5,000 5,000

Ex. 10–14 Working paper elimination for Pressman Corporation and subsidiary, July 31, 2006: Treasury StockPressman Investment in Pressman Corporation Common Stock Sycamore To transfer subsidiary’s investment in parent company’s common stock to treasury stock category.

15,000 15,000

Note to Instructor: A working paper elimination is not required for the subsidiary’s stock dividend under the equity method of accounting because the parent company’s accounting records include the growth in the subsidiary’s retained earnings subsequent to the date of the business combination, in both the Investment ledger account and the Retained Earnings of Subsidiary account.

CASES Case 10–1 The belief of Wayne Cartwright that SEC pronouncements should prevail over preferences of the FASB tentatively appears contrary to the evidence derived from the references cited in the case. For example, Section l0l of the SEC’s Codification of Financial Reporting Policies includes the following: Various Acts of Congress administered by the Securities and Exchange Commission clearly state the authority of the Commission to prescribe the methods to be followed in the preparation of accounts and the form and content of financial statements to be filed under the The McGraw-Hill Companies, Inc., 2006 76


Acts . . . the Commission has historically looked to the standard-setting bodies designated by the profession to provide leadership in establishing and improving the accounting principles. Further, in Section 103 of the Codification, the SEC explains the limited role of Staff Accounting Bulletins as follows: The statements in the Bulletin[s] are not rules or interpretations of the Commission nor are they published as bearing the Commission’s official approval . . . Further evidence contrary to Cartwright’s belief is found in the following excerpt from paragraph 25 of FASB Statement No. 111, “Rescission of FASB Statement No. 32 and Technical Corrections”: The chart below summarizes the [generally accepted accounting principles] for financial statements of nongovernmental agencies . . . Established Accounting Principles Category (a )FASB Statements and Interpretations, APB Opinions, and AICPA Accounting Research Bulletins . . . An appended footnote reads in part as follows: Rules and interpretive releases of the Securities and Exchange Commission (SEC) have an authority similar to category (a) pronouncements for SEC registrants. In addition, the SEC staff issues Staff Accounting Bulletins that represent practices followed by the staff in administering SEC disclosure requirements. (Emphasis added.) However, although Rule 203, “Accounting Principles,” and Appendix A of the AICPA Code of Professional Conduct (Chapter l of the textbook) obligate AICPA member Wilma Reynolds to comply with FASB pronouncements in Category (a) above, the FASB has not yet issued a statement on consolidation procedures. Thus, the $150,000 increase in Premium Corporation’s investment in Service Company may be accounted for as a nonoperating gain by Premium, in accordance with standards established by the SEC. Case 10–2 The $700,000 difference between the $1,800,000 carrying amount and the $2,500,000 offering price for the minority interest of Mary Phillips in Bank of Provence is extraordinarily large, given that most assets of banks are monetary assets with carrying amounts equal to or approximating current fair values. Accordingly, before opining on the need for Banking Enterprises, Inc. to recognize a greenmail-type loss for all or part of the $700,000 difference, the partner of Crandall & Lowe, CPAs, should seek answers to the following: (l) What was the basis for Banking’s board of directors to make the $2,500,000 offer? Was it based on an appraisal of the current fair value of a 40% interest in the net assets of Bank of Provence, or was it an inducement to get rid of Phillips because of irreconcilable differences? (2) Has approval been obtained from federal banking regulators for the significant outlay? (3) Have legal counsel for Banking and Bank of Provence reviewed and approved the offer? Above all, the Crandall & Lowe partner should exercise professional skepticism in judging the need for recognition of a loss, rather than goodwill, for all or part of the $700,000 amount. Case 10–3 Student Ross may be overly “picky” in his distinction between the “noncontrollership” of a subsidiary’s preferred stockholders, who seldom have voting rights, and that of its common stockholders other than the parent company. Although those common stockholders do have the right to vote at stockholders’ meetings, they generally will be outvoted on controversial issues by the parent companythe controlling stockholder. Accordingly, student Kerry’s position is the supportable one, especially because the so-called “mezzanine” area of a consolidated balance sheet, between liabilities and stockholders’ equity, has no official standing under generally accepted accounting principles.



30 minutes, Medium Pinch Corporation

Pr. 10–1 Pinch Corporation and Subsidiary Working Paper Eliminations March 31, 2006

(a) Common Stock—Scrip (10,000 x $5) Additional Paid-in Capital—Scrip [($300,000 x ½) – $50,000] Retained Earnings—Scrip ($300,000 x ½) Intercompany Investment Income—Pinch ($90,000 x 0.90) Goodwill—Pinch [$40,000 + $44,000 – ($60,000 x ½) ] Investment in Scrip Company Common Stock—Pinch [$280,000 + $44,000 + $81,000 – (9,000 x $3)] Dividends Declared—Scrip (10,000 x $3) Minority Interest in Net Assets of Subsidiary [$60,000 – $30,000 – (1,000 x $3)] To eliminate intercompany investment and equity accounts of subsidiary at beginning of year; to allocate excess of cost over current fair values (equal to carrying amounts) of identifiable net assets acquired to unimpaired goodwill; and to establish minority interest in net assets of subsidiary at beginning of year ($60,000), less minority interest acquired ($30,000) and minority interest in dividends. (Income tax effects are disregarded.) (b) Minority Interest in Net Income of Subsidiary ($90,000 x 0.10) Minority Interest in Net Assets of Subsidiary To establish minority interest in net income of subsidiary for year ended Mar. 31, 2006.


5 0 0 0 0 1 0 0 0 0 0 1 5 0 0 0 0 8 1 0 0 0 5 4 0 0 0

3 7 8 0 0 0 3 0 0 0 0 2 7 0 0 0

9 0 0 0 9 0 0 0


40 Minutes, Medium Prime Corporation a.

Pr. 10–2 Prime Corporation Journal Entries

20 05 Dec 29 Intercompany Dividends Receivable [(400,000 – 20,000) x $0.10] Investment in Showboat Company Common Stock To record dividend declared by Showboat Company, payable in Year 2006.

3 8 0 0 0 3 8 0 0 0

31 Investment in Showboat Company Common Stock Intercompany Investment Income To record 100% of Showboat Company’s net income for the year ended Dec. 31, 2005. (Income tax effects are disregarded.)

b.

9 0 0 0 0 9 0 0 0 0

Prime Corporation and Subsidiary Working Paper Eliminations December 31, 2005 (a) Common Stock—Showboat (20,000 x $1) Additional Paid-in Capital—Showboat (20,000 x $0.75) Retained Earnings—Showboat (20,000 x $0.75) Treasury Stock—Showboat To account for subsidiary’s treasury stock as though it had been retired. (b) Common Stock—Showboat ($400,000 – $20,000) Additional Paid-in Capital—Showboat ($300,000 – $15,000) Retained Earnings—Showboat ($250,000 – $15,000) Intercompany Investment Income—Prime Investment in Showboat Company Common Stock—Prime ($900,000 – $38,000 + $90,000) Dividends Declared—Showboat To eliminate intercompany investment, related accounts for stockholders’ equity of subsidiary, and investment income from subsidiary.


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

3 8 0 0 0 0 2 8 5 0 0 0 2 3 5 0 0 0 9 0 0 0 0

9 5 2 0 0 0 3 8 0 0 0


40 Minutes, Medium Pumble Corporation

Pr. 10–3

a.

Pumble Corporation Journal Entries 20 07 Oct 31 Intercompany Dividends Receivable [(9,800 + 1,000) x $2] Investment in Salton Company Common Stock To record dividend declared by Salton Company. 31 Investment in Salton Company Common Stock ($35,000 x 0.9818) Intercompany Investment Income To record 98.18% of Salton Company’s net income for year ended Oct. 31, 2007. (Income tax effects are disregarded.)

b.

2 1 6 0 0 2 1 6 0 0

3 4 3 6 3 3 4 3 6 3

Pumble Corporation Working Paper Eliminations October 31, 2007 (a)

Common Stock—Salton ($10,000 + $1,000) Additional Paid-in Capital—Salton ($60,000 + $19,000) Retained Earnings—Salton [($80,000 + $40,000 – $10,000) x 0.02] Retained Earnings of Subsidiary—Pumble ($78,400 + $39,200 – $9,800) Intercompany Investment Income—Pumble ($35,000 x 0.9818) Investment in Salton Company Common Stock—Pumble ($176,400 + $19,960* + $34,363 – $21,600) Dividends Declared—Salton (11,000 x $2) Minority Interest in Net Assets of Subsidiary [$2,800 + $800 + $40 – (200 x $2)] To eliminate intercompany investment and related accounts for stockholders’ equity of subsidiary at beginning of year, and investment income from subsidiary; and to establish minority interest in net assets of subsidiary at beginning of year, less minority interest in dividends.

(b) Minority Interest in Net Income of Subsidiary ($35,000 x 0.0182) Minority Interest in Net Assets of Subsidiary To establish minority interest in net income of subsidiary for year ended Oct. 31, 2007.

1 1 0 0 0 7 9 0 0 0 2 2 0 0 1 0 7 8 0 0 3 4 3 6 3

2 0 9 1 2 3 2 2 0 0 0 3 2 4 0

6 3 7 6 3 7

*($200,000 x 0.9818) – ($180,000 x 0.98) = $19,960



35 Minutes, Medium Pronto Corporation a.

Pr. 10–4 Speedy Company Journal Entry

20 06 Mar 1 Cash

3 2 0 0 0

Common Stock (2,000 x $1) Paid-in Capital in Excess of Par To record issuance of 2,000 shares of common stock to Pronto Corporation.

b.

2 0 0 0 3 0 0 0 0

Pronto Corporation Computation of Balance of Investment in Speedy Company Common Stock Ledger Account March 1, 2006 Balance, Feb. 28, 2006 Add: Acquisition of 2,000 shares, Mar. 1, 2006

$

Subtotal Less: Nonoperating loss on acquisition of 2,000 shares [$32,000 – [($132,000 x 0.66 2/3) – ($100,000 x 0.60)]}

$ 1 0 7 0 0 0

Balance. Mar 1, 2006

$ 1 0 3 0 0 0

c.

7 5 0 0 0 3 2 0 0 0

4 0 0 0

Pronto Corporation and Subsidiary Working Paper Elimination March 1, 2006 (a) Common Stock, $1 par—Speedy ($10,000 + $2,000) Additional Paid-in Capital—Speedy ($30,000 + $30,000) Retained Earnings—Speedy ($60,000 – $9,000) Retained Earnings of Subsidiary—Pronto Goodwill—Pronto Investment in Speedy Company Common Stock—Pronto Minority Interest in Net Assets of Subsidiary ($40,000 + $4,000) To eliminate intercompany investment and related equity accounts of subsidiary; to record unimpaired goodwill; and to provide for minority interest in net assets of subsidiary.


1 2 0 0 0 6 0 0 5 1 0 9 0 1 5 0

0 0 0 0

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


30 Minutes, Medium Pun Corporation

Pr. 10–5 Pun Corporation and Subsidiary Working Paper Eliminations November 1, 2006

(a) Common Stock—Sim [1,000 x ($500,000 ÷ 10,000)] Retained Earnings—Sim [1,000 x ($660,000 ÷ 10,000)] Goodwill—Sim (1,000 x $54) Treasury Stock—Sim To account for subsidiary’s treasury stock as though it had been retired. (b) Common Stock—Sim ($500,000 – $50,000) Retained Earnings—Sim ($660,000 – $66,000 – $48,000) Retained Earnings of Subsidiary—Pun Goodwill—Pun Investment in Sim Company Common Stock—Pun Minority Interest in Net Assets of Subsidiary [($1,100,000 + $60,000) x 0.10], or ($232,000 – $116,000) To eliminate intercompany investment and equity accounts of subsidiary; to allocate excess of cost over current fair value of identifiable net assets to unimpaired goodwill; and to establish minority interest in net assets of subsidiary (1,000 of 10,000 issued shares = 10%).


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

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

1 1 6 0 0 0


40 Minutes, Medium Peterson Corporation

Pr. 10–6 Peterson Corporation and Subsidiary Working Paper Eliminations May 31, 2007

(a) Common Stock, $10 par—Swanson Retained Earnings—Swanson ($825,000 – $122,500) (beginning) Retained Earnings of Subsidiary—Peterson Other Revenue—Peterson Goodwill—Swanson Investment in Swanson Company Common Stock—Peterson Dividends Declared—Swanson

1 5 0 0 0 0

(b) Treasury Stock—Peterson Other Revenue—Swanson (1,000 x $3) Short-Term Investments—Swanson Dividends Declared—Peterson ($300,000 x 0.01)

2 0 0 0 0 3 0 0 0

(c) Net Sales—Peterson Retained Earnings—Peterson (beginning) Cost of Good Sold—Peterson ($1,700,000 x 0.67) Cost of Goods Sold—Swanson Inventories—Swanson


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

0 0 0 0

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

2 0 0 0 0 3 0 0 0 1 7 0 0 0 0 0 1 3 2 0 0 1 1 3 9 0 0 0 5 5 7 7 0 0 1 6 5 0 0


90 Minutes, Strong Pomerania Corporation

Pr. 10–7

a.

Pomerania Corporation Adjusting Entries December 31, 2005 Investment in Sylvania Company Perferred Stock Investment in Sylvania Company Common Stock Intercompany Investment Income To record share of net income of Sylvania Company, as follows:  $50,000  x $20,000 x 0.10   $250,000 

Preferred stock: 

 $200,000  x $20,000 x 0.70   $250,000 

Common stock: 

Total investment income

$

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

400 11,200

$11,600

(Income tax effects are disregarded.) Note to Instructor: There is no goodwill or other asset amortization associated with Pomerania Corporation’s Investment in Sylvania Company because the investments were equal to the carrying amount of the stock acquired, computed as follows: Carrying amount and cost Preferred stock:   $50,000  x $100,000  x 0.10 $50,000 +   $250,000  

$ 7,000

Common stock:   $200,000  x $100,000  x 0.70 $200,000 +  $ 250 , 000   


$196,000


Pomerania Corporation (continued)

Pr. 10–7

b.

Pomerania Corporation and Subsidiaries Working Paper for Consolidated Financial Statements For Year Ended December 31, 2005 Pomerania Corporation

Eliminations increase (decrease)

Slovakia Company

Sylvania Company

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

9 0 0 0 0 0

7 0 0 0 0 0

Total revenue Costs and expenses and minority interest: Cost of goods sold Intercompany cost of goods sold Operating expenses and income taxes expense Minority interest in net income of subsidiaries

1 3 1 5 6 0 0

9 0 0 0 0 0

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

Total costs and expenses and minority interest Net income

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

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

6 8 0 0 0 0 2 0 0 0 0

Statement of Retained Earnings Retained earnings, beginning of year

1 2 6 2 0 0

1 0 7 0 0 0

1 0 0 0 0 0

Net income

1 1 5 6 0 0

1 0 0 0 0 0

2 0 0 0 0

Subtotal Dividends declared

2 4 1 8 0 0 2 2 0 0 0

2 0 7 0 0 0 7 5 0 0 0

1 2 0 0 0 0

( 3 3 1 6 4 0 ) (a) ( 7 5 0 0 0 )†

2 3 7 1 6 0 2 2 0 0 0

Retained earnings, end of year

2 1 9 8 0 0

1 3 2 0 0 0

1 2 0 0 0 0

( 2 5 6 6 4 0 )

2 1 5 1 6 0

Consolidated

Income Statement Revenue: Net sales Intercompany sales Intercompany investment income

2 7 2 0 0 0 0 (c)( 1 4 0 0 (a) ( 4 4 0 (b) ( 1 1 6 (d) 2 2

0 ) 0 ) 0 ) 0

2 2 0 0

7 0 0 0 0 0

( 1 9 3 4 0 0 )

2 7 2 2 2 0 0

6 5 0 0 0 0

5 5 0 0 0 0

(c) ( 3 3 6 0 0 ) (c)( 1 0 0 0 0 0 )

1 9 6 6 4 0 0

1 5 0 0 0 0

1 3 0 0 0 0

Gain on extinguishment of bonds

(e)

* A decrease in costs and expenses and an increase in net income. † A decrease in dividends and an increase in retained earnings.

0 0 0 0

6 4 8 4 0

( 6 8 7 6 0 )* ( 1 2 4 6 4 0 )

(a)( 1 0 7 0 0 0 ) (b)( 1 0 0 0 0 0 ) ( 1 2 4 6 4 0 )

5 8 0 0 0 0 6 4 8 4 0 2 6 1 1 2 4 0 1 1 0 9 6 0

1 2 6 2 0 0 1 1 0 9 6 0

(Continued on page 342.)

The McGraw-Hill Companies, Inc., 2006 Solutions Manual, Chapter 10

85


Pr. 10–7

b.

Pomerania Corporation and Subsidiaries Working Paper for Consolidated Financial Statements (concluded) For Year Ended December 31, 2005 Pomerania Corporation

Slovakia Company

Eliminations increase (decrease)

Sylvania Company

Consolidated

Balance Sheet Assets Intercompany receivables (payables) Inventories Investment in Slovakia Company common stock Investment in Slovakia Company bonds Investment in Sylvania Company preferred stock Investment in Sylvania Company common stock Other assets Total assets Liabilities & Stockholders’ Equity Dividends payable Bonds payable Intercompany bonds payable Discount on bonds payable Discount on intercompany bonds payable Other liabilities Preferred stock, $20 par Common stock, $10 par

6 3 2 9 0 3 0 5 2 0 7 2 0 7 8 3 6

4 0 6 8 4 2 4

0 0 0 0 0 0 0

0 0 0 0 0 0 0

( 4 1 0 0 0 ) 9 0 0 0 0

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

5 5 5 0 0 0

5 1 0 0 0 0

1 7 3 0 8 0 0

6 0 4 0 0 0

6 0 2 6 0 0

2 2 0 0 0 2 8 5 0 0 0 ( 8 0 0 0 ) 2 1 2 0 0 0 4 0 0 0 0 0 6 0 0 0 0 0

1 2 2 ( 1 ( 7

6 5 5 0 2 8

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 ) 0 ) 0

2 5 0 0 0 0

Total liabilities & stockholders’ equity

0 0 0 0 0

) ) ) ) )

4 8 8 6 0 0

1 9 0 1 4 0 0 ( 5 4 7 4 0 0 )

2 3 9 0 0 0 0

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

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

2 1 9 8 0 0

1 3 2 0 0 0

1 2 0 0 0 0

1 7 3 0 8 0 0

6 0 4 0 0 0

6 0 2 6 0 0

* A decrease in discount and an increase in total liabilities & stockholders’ equity.


0 0 0 0 0

1 2 5 0 0 0

Minority interest in net assets of subsidiaries Retained earnings

(c) ( 6 4 (a)( 3 0 5 6 (d) ( 2 0 8 (b) ( 7 4 (b)( 2 0 7 2


(b) (a)( (b)( (a) (b) (e) (

( 2 0 0 0 )* ( 5 0 0 2 5 0 0 2 0 0 0 2 0 4 1 4 7 0 6 4 8 2 5 6 6

0 0 0 0 0 4 4

0 0 0 0 0 0 0

) ) )

3 9 7 6 0 0 4 0 0 0 0 0 6 0 0 0 0 0

2 3 2 2 4 0 )

2 1 5 1 6 0

( 5 4 7 4 0 0 )

2 3 9 0 0 0 0


Pr. 10–7

Pomerania Corporation and Subsidiary Working Paper Eliminations December 31, 2005 (a) Common Stock—Slovakia Retained Earnings—Slovakia Intercompany Investment Income—Pomerania Investment in Slovakia Company Common Stock—Pomerania Dividends Declared—Slovakia Minority Interest in Net Assets of Subsidiaries To eliminate intercompany investment and related equity accounts of Slovakia at beginning of year; to eliminate intercompany investment income and dividends of Slovakia, and to establish minority interest in net assets of Slovakia less minority interest in dividends, computed as follows: Minority interest, Jan. 2, 2005 ($357,000 x 0.80) $285,600 Minority interest share of June 30, 2005 dividend ($45,000 x 0.80) (36,000) Minority interest acquired by Pomerania July 1, 1999 {[$285,600 – $36,000 + ($60,000 x 0.80)] x 60/80] (223,200) Minority interest share of Dec. 31, 2005 dividend ($30,000 x 0.20) (6,000) Net minority interest

  $200,000  x $100,000  x 0.30 $200,000 +   $250,000  

Total minority interest

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

$ 20,400

(b) Preferred Stock—Sylvania Common Stock—Sylvania Retained Earnings—Sylvania Intercompany Investment Income—Pomerania Investment in Sylvania Company Preferred Stock—Pomerania Investment in Sylvania Company Common Stock—Pomerania Minority Interest in Net Assets of Subsidiaries To eliminate intercompany investment and related equity accounts of Sylvania at beginning of year; to eliminate intercompany investment income; and to establish minority interest in net assets of Sylvania at beginning of year, computed as follows: Minority interest in preferred stock:   $50,000  x $100,000  x 0.90 $50,000 +   $250,000  

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

5 0 2 0 0 1 0 0 1 1

0 0 0 6

0 0 0 0

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

$ 63,000 84,000 $147,000 (Continued on page 344.)



Pomerania Corporation (concluded)

Pr. 10–7

Pomerania Corporation and Subsidiary Working Paper Eliminations (concluded) December 31, 2005 (c) Intercompany Sales—Pomerania Intercompany Cost of Goods Sold—Pomerania Cost of Goods Sold—Sylvania ($117,600 x 2/7) Inventories—Sylvania ($22,400 x 2/7) To eliminate intercompany sales, cost of goods sold, and unrealized profits in inventories. (Income tax effects are disregarded.)

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

(d) Intercompany Bonds Payable—Slovakia Discount on Intercompany Bonds Payable— Slovakia Investment in Slovakia Company Bonds— Pomerania Gain on Extinguishment of Bonds—Slovakia To eliminate intercompany investment in bonds and to provide for realized gain on extinguishment of bonds. (Income tax effects are disregarded.)

2 5 0 0 0

(e) Minority Interest in Net Income of Subsidiaries Minority Interest in Net Assets of Subsidiaries To provide for minority interest in net income of subsidiaries, computed as follows: Slovakia Company [($60,000 x 0.80) + ($42,200 x 0.20)] $56,440 Sylvania Company: Preferred stock ($20,000 x 1/5 x 0.90) 3,600 Common stock ($20,000 x 4/5 x 0.30) 4,800

6 4 8 4 0

Total minority interest


2 0 0 0 2 0 8 0 0 2 2 0 0

6 4 8 4 0

$64,840


90 Minutes, Strong Plover Corporation

Pr. 10–8

a.

Plover Corporation and Starling Company Analysis of Intercompany Receivables (Payables) Accounts December 31, 2006 Plover Corporation Mortgage note receivable (payable) [$12,000 – ($2,270 x 2) + $851] Cost and estimated earnings in excess of billings on uncompleted contract [$45,000 + ($20,000 x 0.60)] Dividend receivable (payable) ($2,500 x 0.20) Accounts receivable (payable) for merchandise ($238,000 – $211,000) Balance of intercompany accounts, Dec. 31, 2006

b.

$

8 3 1 1

Starling Company $

5 7 0 0 0 ( 5 0 0 )

5 0 0 2 7 0 0 0 $ 3 5 8 1 1

( 8 3 1 1 )

( 2 7 0 0 0 ) $

2 1 1 8 9

Plover Corporation Adjusting Entry December 31, 2006 Other Plant Assets Intercompany Payables To record liability to subsidiary for costs and earnings on contract for construction in progress on Dec. 31, 2006 computed as follows: Cost $45,000 Add: Earnings[($95,000 – $75,000) x 45/75] 12,000 Total costs and earnings


5 7 0 0 0 5 7 0 0 0

$57,000


Plover Corporation (continued) c.

Pr. 10–8

Plover Corporation and Subsidiary Working Paper for Consolidated Financial Statements For Year Ended December 31, 2006 Eliminations Plover

Starling

increase

Corporation

Company

(decrease)

Consolidated

Income Statement Revenue: Net sales Intercompany sales

1 5 6 2 0 0 0 2 3 8 0 0 0 1 2 1 0 0 0 0 7 9 0 0 0

Contract revenue Intercompany contract revenue Interest revenue

1 5 6 2 0 0 0 (e)( 2 3 8 0 0 0 ) 1 2 1 0 0 0 0 (c) ( 2 2 0 0 0 ) (d) ( 5 7 0 0 0 )

1 9 1 4 9

1 9 1 4 9

Intercompany investment income Intercompany dividend revenue

4 2 5 0 0 5 0 0

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

Intercompany gain on sale of land

4 0 0 0

(a)

( 4 0 0 0 )

Intercompany interest revenue (expense) Total revenue

8 5 1 1 8 6 7 0 0 0

( 8 5 1 ) 1 2 8 8 1 4 9

( 3 6 4 0 0 0 )

2 7 9 1 1 4 9

Costs and expenses and minority interest: Cost of goods sold

9 4 2 5 0 0

9 4 2 5 0 0

Intercompany cost of goods sold

2 1 2 5 0 0 7 8 9 5 0 0

Cost of contract revenue Intercompany cost of contract

6 2 5 0 0

revenue

(e)( (e) (c) (d)

2 ( ( (

1 2 1 4

2 4 7 5

5 3 5 0

0 0 0 0

0 0 0 0

) ) ) )

7 6 5 2 0 0

Operating expenses and income taxes expense Interest expense

4 9 7 0 0 0 4 9 0 0 0

3 6 0 0 0 0 3 1 1 4 9

(c)

( 2 2 5 )

(f)

2 0 0 0

8 5 6 7 7 5 8 0 1 4 9

Minority interest in net income of subsidiary

2 0 0 0

Total costs and expenses

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

1 2 4 3 1 4 9 4 5 0 0 0

Net income

1 3 9 3 1 1 1 6 6 0 0 0

4 9 5 0 0 4 5 0 0 0

(a) ( 4 1 0 0 0 ) ( 6 6 4 7 5 )

1 4 7 8 1 1 1 4 4 5 2 5

Subtotal

3 0 5 3 1 1

9 4 5 0 0 2 5 0 0

( 1 0 7 4 7 5 ) (a) ( 2 5 0 0 )†

2 9 2 3 3 6

3 0 5 3 1 1

9 2 0 0 0

( 1 0 4 9 7 5 )

2 9 2 3 3 6

and minority interest Net income

( 2 9 7 5 2 5 )* ( 6 6 4 7 5 )

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

Statement of Retained Earnings Retained earnings, beginning of year

Dividends declared Retained earnings, end of year

* A decrease in costs and expenses and an increase in net income. † A decrease in dividends and an increase in retained earnings.




Plover Corporation (continued)

Pr. 10–8

Plover Corporation and Subsidiary Working Paper for Consolidated Financial Statements (concluded) For Year Ended December 31, 2006 Eliminations

Balance Sheet Assets Intercompany receivables (payables) Costs and estimated earnings in excess of billings on uncompleted contracts Inventories Investment in Starling Company common stock Land Other plant assets (net) Other assets Total assets

Plover

Starling

increase

Corporation

Company

(decrease)

( 2 1 1 8 9 )

2 1 1 8 9

2 1 7 0 0 0

3 0 1 0 0 1 1 7 5 0 0

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

4 2 0 0 0 4 0 8 0 0 0

1 5 3 0 0 0

8 4 2 1 1

1 3 5 8 8 1 1

7 0 3 0 0 0

5 9 2 0 0 0 2 0 3 0 0 0

2 0 0 0 3 8 9 0 0 0 7 0 0 0 0

2 5 0 0 0 0

5 0 0 0 0 1 0 0 0 0 0

(e)

Consolidated

( 1 2 0 0 )

(a)( 2 0 (b) ( (c) ( (d) ( 1

2 4 4 2

0 0 2 0

0 0 7 0

0 0 5 0

3 0 1 0 0 3 3 3 3 0 0

) ) ) )

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

( 2 2 3 4 7 5 )

1 8 3 8 3 3 6

2 3 7 2 1 1

Liabilities & Stockholders’ Equity

Dividends payable Mortgage notes payable Other liabilities 5% noncumulative, nonparticipating preferred stock, $1 par Common stock, no par Minority interest in net assets of subsidiary Retained earnings Retained earnings of subsidiary Total liabilities & stockholders’ equity


3 0 5 3 1 1 8 5 0 0

9 2 0 0 0

1 3 5 8 8 1 1

7 0 3 0 0 0

2 0 0 0 9 8 1 0 0 0 2 7 3 0 0 0

(a) ( 5 0 0 0 0 (a)( 1 0 0 0 0 0 (a) 3 8 0 0 0 (f) 2 0 0 0 ( 1 0 4 9 7 5 (a) ( 8 5 0 0

) )

2 5 0 0 0 0 4 0 0 0 0

) )

2 9 2 3 3 6

( 2 2 3 4 7 5 )

1 8 3 8 3 3 6


Plover Corporation (continued)

Pr. 10–8 Plover Corporation and Subsidiary Working Paper Eliminations December 31, 2006

(a) 5% Noncumulative, Nonparticipating Preferred Stock— Starling Common Stock—Starling Retained Earnings—Starling ($49,500 – $8,500) Retained Earnings of Subsidiary—Plover Intercompany Investment Income—Plover Intercompany Dividend Revenue—Plover Investment in Starling Company Preferred and Common Stock—Plover Dividends Declared—Starling Minority Interest in Net Assets of Subsidiary To eliminate intercompany investment and related equity accounts of subsidiary at beginning of year; to eliminate intercompany investment income and dividends of subsidiary; and to establish minority interest in preferred stock as follows: Minority interest, Jan. 1, 2006 ($50,000 x 0.80) $40,000 Less: Minority interest in preferred dividend ($2,500 x 0.80) 2,000 Net minority interest

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

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

$38,000

(b) Intercompany Gain on Sale of Land—Plover ($15,000 – $11,000) Land—Starling To eliminate unrealized intercompany gain in land. (Income tax effects are disregarded.)

4 0 0 0 4 0 0 0

(c) Intercompany Contract Revenue—Starling Intercompany Cost of Contract Revenue— Starling Operating Expenses—Plover ($4,500 x 0.10 x ½) Other Plant Assets (net)—Plover ($4,500 – $225) To eliminate unrealized intercompany gain in office equipment and related depreciation, and applicable intercompany revenue and expense. (Income tax effects are disregarded.)

2 2 0 0 0

(d) Intercompany Contract Revenue—Starling Intercompany Cost of Contract Revenue— Starling Other Plant Assets (net)—Plover To eliminate unrealized intercompany gain in equipment under construction on Dec. 31, 2006, and applicable intercompany revenue and expense. (Income tax effects are disregarded.)

5 7 0 0 0

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

4 5 0 0 0 1 2 0 0 0




Plover Corporation (concluded)

Pr. 10–8 Plover Corporation and Subsidiary Working Paper Eliminations (concluded) December 31, 2006

(e) Intercompany Sales—Plover Intercompany Cost of Goods Sold—Plover Cost of Contract Revenue—Starling ($226,800 x 12/112) Inventories—Starling ($11,200 x 12/112) To eliminate intercompany sales, cost of goods sold, and unrealized profits in inventories. (Income tax effects are disregarded.) (f) Minority Interest in Net Income of Subsidiary Minority Interest in Net Assets of Subsidiary To provide for minority interest of preferred stockholders, represented by dividend to preferred stockholders ($2,500 x 0.80 = $2,000).


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

2 0 0 0 2 0 0 0


90 Minutes, Strong Pullard Corporation

Pr. 10–9 Pullard Corporation and Subsidiary Working Paper for Consolidated Financial Statements For Period Ended October 31, 2005 Eliminations

Income Statement Revenue: Net sales Intercompany sales Intercompany investment income Interest revenue Intercompany interest revenue (expense) Total revenue Costs and expenses: Cost of good sold

Pullard

Staley

increase

Corporation

Company

(decrease)

18 0 4 2 0 0 0 1 5 8 0 0 0

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

5 0 5 1 5 0 2 6 2 5 0

1 7 0 0

7 8 7 5 0

Consolidated

23 5 7 2 0 0 0 (c)( 1 5 8 0 0 0 ) (d)( 2 3 0 0 0 0 ) (a)( 5 0 5 1 5 0 ) 2 7 9 5 0

( 7 8 7 5 0 )

18 8 1 0 1 5 0

5 6 8 2 9 5 0

( 8 9 3 1 5 0 )

23 5 9 9 9 5 0

10 4 4 2 0 0 0

3 0 1 0 5 0 0

(a)( 1 2 8 0 0 0 ) (d) ( 7 6 3 0 0 )

13 2 4 8 2 0 0

1 5 8 0 0 0

1 4 9 5 0 0

Depreciation expense Operating expenses and income taxes expense Interest expense

1 1 0 3 0 0 0

5 8 8 7 5 0

(c)( 1 5 8 0 0 0 ) (d)( 1 4 9 5 0 0 ) (a) 2 5 0 0 0 0

3 4 4 8 5 0 0 8 0 6 0 0 0

1 0 6 3 9 0 0 1 9 0 6 5 0

Total costs and expenses Net income

15 9 5 7 5 0 0 2 8 5 2 6 5 0

5 0 0 3 3 0 0 6 7 9 6 5 0

Retained earnings, beginning of period Net income

12 6 8 3 5 0 0 2 8 5 2 6 5 0

1 0 0 6 0 0 0 6 7 9 6 5 0

(a)(1 0 0 6 0 0 0 ) ( 6 8 3 8 5 0 )

12 6 8 3 5 0 0 2 8 4 8 4 5 0

Retained earnings, end of period

15 5 3 6 1 5 0

1 6 8 5 6 5 0

(1 6 8 9 8 5 0 )

15 5 3 1 9 5 0

Intercompany cost of goods sold

(a)

5 2 5 0 0

1 9 4 1 7 5 0 4 5 6 4 9 0 0 9 9 6 6 5 0

( 2 0 9 3 0 0 )* 20 7 5 1 5 0 0 ( 6 8 3 8 5 0 ) 2 8 4 8 4 5 0

Statement of Retained Earnings

* A decrease in costs and expenses and an increase in net income. (Continued on page 351.)



Pullard Corporation (continued)

Pr. 10–9 Pullard Corporation and Subsidiary

Working Paper for Consolidated Financial Statements (concluded) For Period Ended October 31, 2005 Eliminations Pullard

Staley

increase

Corporation

Company

(decrease)

8 2 2 0 0 0

5 3 0 0 0 0

Consolidated

Balance Sheet Assets Cash Notes receivable Trade accounts receivable (net)

2 7 2 3 7 0 0

1 3 5 2 0 0 0

8 5 0 0 0

8 5 0 0 0

1 3 4 6 4 0 0

4 0 7 0 1 0 0

Intercompany receivables (payables) Inventories

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

( 1 2 3 0 0 ) 1 1 8 2 0 0 0

(d)

( 4 2 0 0 )

4 3 8 1 8 0 0

Investment in Staley Company common stock

6 3 5 5 1 5 0

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

1 5 0 0 0 0

(a) (1 5 0 0 0 0 )

Investment in Staley Company preferred stock Investment in Staley Company bonds Land

1 5 0 0 0 0 0

(b)(1 5 0 0 0 0 0 )

4 0 0 0 0 0 0

1 5 6 0 0 0 0

(a) 5 4 0 0 0 0

6 1 0 0 0 0 0

Other plant assets

17 1 6 1 0 0 0

7 8 5 0 0 0 0

(a)2 7 5 0 0 0 0

27 7 6 1 0 0 0

Accumulated depreciation

(6 6 7 3 0 0 0 )

(3 8 3 8 7 5 0 )

(a)1 0 0 0 0 0 0 *

(11 5 1 1 7 5 0

2 6 3 0 0 0

1 4 0 0 0 0

29 5 1 8 1 5 0

8 8 4 2 3 5 0

Other assets Goodwill Total assets

(a)

( 9 0 0 0 0 )

(a)1 3 4 7 5 0 0 (4 4 6 1 8 5 0 )

)

3 1 3 0 0 0 1 3 4 7 5 0 0 33 8 9 8 6 5 0

Liabilities & Stockholders’ Equity Notes payable Trade accounts payable

1 3 4 2 0 0 0

1 1 5 0 0 0

1 1 5 0 0 0

1 6 9 7 0 0

1 5 1 1 7 0 0

7% bonds payable

3 5 0 0 0 0 0

Intercompany 7% bonds payable

1 5 0 0 0 0 0

(b)(1 5 0 0 0 0 0 )

7 5 0 0 0 0

(a)( 7 5 0 0 0 0 )

Long-term debt

3 5 0 0 0 0 0

10 0 0 0 0 0 0

Preferred stock, $5 par

10 0 0 0 0 0 0

Common stock, $10 par

2 4 0 0 0 0 0

1 0 0 0 0 0 0

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

2 4 0 0 0 0 0

Additional paid-in capital

2 4 0 0 0 0

1 2 2 0 0 0

(a)( 1 2 2 0 0 0 )

2 4 0 0 0 0

15 5 3 6 1 5 0

1 6 8 5 6 5 0

(1 6 8 9 8 5 0 )

15 5 3 1 9 5 0

29 5 1 8 1 5 0

8 8 4 2 3 5 0

(4 4 6 1 8 5 0 )

33 8 9 8 6 5 0

Minority interest in net assets of subsidiary Retained earnings

(a) 6 0 0 0 0 0

6 0 0 0 0 0

Total liabilities & stockholders’ equity

* An increase in accumulated depreciation and a decrease in total assets.



Pullard Corporation (concluded)

Pr. 10–9 Pullard Corporation and Subsidiary Working Paper Eliminations October 31, 2005

(a) Preferred Stock—Staley Common Stock—Staley Additional Paid-in Capital—Staley Retained earnings—Staley Intercompany Investment Income—Pullard Land—Staley ($2,100,000 – $1,560,000) Other Plant Assets—Staley ($10,600,000 – $7,850,000) Goodwill—Staley ($1,400,000 – $52,500) Depreciation Expense—Staley [($2,000,000 ÷ 6) x ¾] Operating Expenses—Staley [($1,400,000 ÷ 20) x ¾]

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

5 0 2 0 0 4 5 4 5 5

0 0 2 6 5 0 0 7 0 2

0 0 0 0 1 0 0 5 0 5

0 0 0 0 5 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0

Cost of Goods Sold—Staley ($828,000 –

1 2 8 0 0 0

$700,000) Accumulated Depreciation—Staley

1 0 0 0 0 0 0 9 0 0 0 0

[($4,000,000 – $3,250,000) + $250,000] Other Assets—Staley ($140,000 – $50,000) Investment in Staley Company Common

6 3 5 5 1 5 0

Stock—Pullard Investment in Staley Company Preferred

1 5 0 0 0 0

Stock—Pullard Minority interest in Net Assets of Subsidiary

6 0 0 0 0 0

($750,000 – $150,000) To eliminate intercompany investment and related equity accounts of subsidiary on date of business combination; to eliminate intercompany investment income and subsidiary dividends; to provide for unamortized differences between current fair values and carrying amount of subsidiary’s identifiable net assets on date of business combination, and related amortization; to recognize unimpaired goodwill; and to provide for minority interest in subsidiary’s preferred stock on date of business combination. (Income tax effects are disregarded.)

(b) Intercompany 7% Bonds Payable—Staley

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

Investment in Staley Company Bonds—Pullard To eliminate subsidiary’s bonds owned by parent company.

(c) Intercompany Sales—Pullard

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

Intercompany Cost of Goods Sold—Pullard To eliminate parent company’s sales to subsidiary.

(d) Intercompany Sales—Staley Intercompany cost of Goods Sold—Staley Cost of Goods Sold—Pullard ($218,000 x 0.35) Inventories—Pullard ($12,000 x 0.35)

2 3 0 0 0 0 1 4 9 5 0 0 7 6 3 0 0 4 2 0 0

To eliminate intercompany sales, cost of good sold, and unrealized gross profit in inventories for subsidiary’s sales to parent company. (Income tax effects are disregarded.)



Chapter 10, Modern Advanced accounting-review Q & exr

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