Chapter 4 CONSOLIDATION TECHNIQUES AND PROCEDURES Answers to Questions 1
Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its subsidiary investment and income accounts. Since patents and patent amortization accounts are not recorded on the parent’s books, they are created for consolidated statement purposes through workpaper entries.
2
Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper adjusting entry in which noncontrolling interest share is debited and noncontrolling interest is credited. The noncontrolling interest share (debit) is carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest for noncontrolling interest share is added to the beginning noncontrolling interest. The noncontrolling interest share is calculated based on the subsidiary’s reported net income adjusted to reflect fair value through the amortization of the excess of fair value over book value. This is the approach illustrated throughout this text.
3
Workpaper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity accounts are alike in regard to the objectives of consolidation. Regardless of the configuration of the workpaper entries, the final result of adjustments for these items is to eliminate them through workpaper entries. In other words, the investment in subsidiary, income from subsidiary, and the capital stock, additional paid-in capital, retained earnings, and other stockholders’ equity accounts of the subsidiary never appear in consolidated financial statements.
4
When the parent does not amortize fair value/book value differentials on its separate books, the parent’s income from subsidiary and investment in subsidiary accounts are overstated in the year of acquisition. In subsequent years, the income from the subsidiary, investment in subsidiary, and parent’s beginning retained earnings will be overstated. The error may be corrected in the workpapers with the following entries: Year of acquisition Income from subsidiary Investment in subsidiary Subsequent year Income from subsidiary Retained earnings — parent Investment in subsidiary
XXX XXX XXX XXX XXX
By entering a correcting entry, all other workpaper entries are the same as if the parent provided for amortization on its separate books. If the errors are not corrected through the workpaper entries suggested above, the entry to eliminate the income from subsidiary in the year of acquisition is prepared in the usual manner without further complications because neither the beginning investment nor retained earnings accounts are affected by the omission. In subsequent years the entry to eliminate income from subsidiary and dividends from subsidiary will have to be changed to correct the beginning-of-the-period retained earnings as follows: Income from subsidiary Retained earnings — parent Dividends (subsidiary) Investment in subsidiary
XXX XXX XXX XXX
5
Workpaper adjustments are not normally entered in the general ledger of the parent or any other entity. They are used in the preparation of consolidated financial statements for a conceptual entity for which there are no formal accounting records. An exception occurs when the adjusting entries involve the correction of an error. For example, if a parent does not record a dividend from a subsidiary. Then the workpaper entry is recorded in the parent’s separate books.
6
Workpapers are tools of the accountant that facilitate the consolidation of parent and subsidiary financial statements. Given the tools available, the accountant should select those that are most convenient in the circumstances. If financial statements are to be consolidated, the financial statement approach is the appropriate tool. The trial balance approach is most convenient when the data are presented in the form of a trial balance. The accountant needs to be familiar with both approaches to perform the work as efficiently as possible.
7
Workpaper adjustment and elimination entries as illustrated in this text are exactly the same when the trial balance approach is used as when the financial statement approach is used.
8
The retained earnings of the parent will equal consolidated retained earnings if the equity method of accounting has been correctly applied. In consolidating the financial statements of affiliated companies, the beginning retained earnings of the parent are used as beginning consolidated retained earnings. If the equity method has not been correctly applied, parent beginning retained earnings will not equal beginning consolidated retained earnings. In this case, retained earnings of the parent are adjusted to a correct equity basis in order to establish the correct amount of beginning consolidated retained earnings. Thus, workpaper adjustments to beginning retained earnings of the parent are needed whenever the beginning retained earnings of the parent do not correctly reflect the equity method.
9
The noncontroling interest that appears in the consolidated balance sheet can be checked by first adjusting the equity of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for any unamortized excess of fair value over book value) and then multiplying by the noncontrolling interest percentage. Consolidated retained earnings at a balance sheet date can be checked by comparing the amount with the parent’s retained earnings on the same date. If consolidated retained earnings and parent retained earnings are not equal, either consolidated retained earnings have been computed incorrectly, or parent retained earnings do not reflect a correct equity method of accounting.
10
Consolidated assets and liabilities are reported for all equity holders—noncontrolling as well as controlling. Therefore, the change in net cash from operations for a period results from noncontrolling interest share and controlling interest share.
11
No. It relates to all interests in the consolidated entity. This difference is one of many inconsistencies in the concepts underlying consolidated financial statements. Consider, for example, the error that could result from dividing cash provided by operations by outstanding parent shares to compute cash flow per share.
SOLUTIONS TO EXERCISES Solution E4-1 1 d 2 c 3 a 4 d 5 b
6 7 8 9 10
d b b a b
Solution E4-2 Preliminary computations (in thousands) Investment cost January 2 Implied total fair value of Sal ($1,200 / 80%) Less: Book value Excess fair value over book value Excess allocated to: Inventory Remainder to goodwill Excess fair value over book value 1
$1,200 $1,500 (1,000) $ 500 $ 50 450 $500
Income from Sal Sal’s reported net income Less: Excess allocated to inventory (sold in 2011) Sal adjusted income Pan’s 80% share
$280 (50) $230 $184
Noncontrolling interest share Sal’s adjusted income $230 20% noncontrolling interest
$ 46
3
Noncontrolling interest December 31 Sal’s equity book value Add: Unamortized excess (Goodwill) Sal’s equity fair value 20% noncontrolling interest
$1,040 450 $1,490 $ 298
4
Investment in Sal December 31 Investment cost January 2 Add: Income from Sal (given)* Less: Dividends ($120 80%) Investment in Sal December 31 * Assumes this is based on Sal’s adjusted income
2
5
Noncontrolling interest share Controlling interest share equals Parent NI under equity method. Consolidated net income Investment income is given as $200,000 = $250,000 x 80% Noncontrolling interest share is $250,000 x 20% = $50,000
$1,200 200 (192) $1,208 $ 50 720.8 $770.8
Solution E4-3 1 $1,400,000
($600,000 + $880,000 - $80,000 intercompany)
Preliminary computations for 2 and 3 Investment cost on January 1, 2011 Implied total fair value of San ($56,000 / 70%) Book value of San Excess allocated entirely to Goodwill 2
3
$56,000 $80,000 60,000 $20,000
Peg’s separate income for 2013 Loss from investment in San ($2,000 70%) Controlling share of consolidated net income Add: Noncontrolling share of consolidated net income (2,000 Loss x 30%) Consolidated net income
$48,000 (1,400) $46,600
Investment cost January 1, 2011 Add: Share of income less dividends 2011 — 2013 ($2,800 income - $2,000 dividends) 70% Investment balance December 31, 2013
$56,000
(600) $46,000
560 $56,560
Solution E4-4 Preliminary computations Investment cost Implied total fair value of Sin ($1,160,000 / 80%) Book value Total excess fair value over book value
$1,160,000 $1,450,000 1,200,000 $ 250,000
Excess allocated to: Equipment (5-year life) Patents (10-year amortization period) Total excess fair value over book value
$ 100,000 150,000 $ 250,000
Income from Sin Sin’s reported net income Less: Depreciation of excess allocated to equipment Less: Amortization of patents Sin’s adjusted income Income from Sin (80%) 1
2
2011 $240,000 (20,000) (15,000) $205,000 $164,000
2012 $300,000 (20,000) (15,000) $265,000 $212,000
Consolidated net income for 2011 Pen’s net income = controlling share of consolidated net income under equity method Add: Noncontrolling interest share($205,000 x 20%) Consolidated net income
$680,000 41,000 $721,000
Investment in Sin December 31, 2011 Cost January 1 Add: Income from Sin — 2011 Less: Dividends from Sin — 2011 ($160,000 Investment in Sin December 31
$1,160,000 164,000 (128,000) $1,196,000
80%)
3
Noncontrolling interest share — 2011 ($205,000 adjusted income 20%)
$ 41,000
4
Noncontrolling interest December 31, 2012 Sin’s equity book value at acquisition date Add: Income less dividends for 2011 and 2012 (see note) Sin’s equity book value at December 31, 2012 Unamortized excess at December 31, 2012 Sin’s equity fair value at December 31, 2012 Noncontrolling interest percentage Noncontrolling interest December 31, 2012
$1,200,000 200,000 1,400,000 180,000 $1,580,000 20% $ 316,000
Note: Sin’s income less dividends: 2011 Net Income 2011 Dividends 2012 Net Income 2012 Dividends Total Solution E4-5
$240,000 (160,000) 300,000 (180,000) $200,000
1 2 3 4 5
c a b c d
Solution E4-6 Par Corporation and Subsidiary Partial Consolidated Cash Flows Statement for the year ended December 31, Cash Flows from Operating Activities Controlling interest share of consolidated net income Adjustments to reconcile controlling interest share of consolidated net income to net cash provided by operating activities: Noncontrolling interest share $100,000 Undistributed income of equity investees (10,000) Loss on sale of land 200,000 Depreciation expense 240,000 Patents amortization 32,000 Increase in accounts receivable (210,000) Increase in inventories (90,000) Decrease in accounts payable (40,000) Net cash flows from operating activities
$200,000
222,000 $422,000
Solution E4-7
Pro Corporation and Subsidiary Partial Consolidated Cash Flows Statement for the year ended December 31,
Cash Flows from Operating Activities Cash received from customers Dividends received from equity investees Less: Cash paid to suppliers Cash paid to employees Cash paid for other operating items Cash paid for interest expense Net cash flows from operating activities
$645,000 14,000 $365,000 54,000 47,000 24,000
490,000 $169,000
Solutions to Problems Solution P4-1 (in thousands of $) Preliminary computations Investment in Sen (75%) January 1, 2011 Implied fair value of Sen ($4,800 / 75%) Book value of Sen Total excess of fair value over book value Excess allocated: 10% to inventories (sold in 2011) 40% to plant assets (use life 8 years) 50% to goodwill Total excess of fair value over book value 1
Goodwill at December 31, 2015 (not amortized)
2
Noncontrolling interest share for 2015 Net income ($2,000 sales - $1,200 expenses) Less: Amortization of excess Plant assets ($640 / 8 yrs.) Adjusted Sen income 25% Share
3
4
5
6
$4,800 $6,400 (4,800) $1,600 $
160 640 800 $1,600 $
800
$
800
$ $
(80) 720 180
Consolidated retained earnings December 31, 2014 Equal to Pea’s December 31, 2014 retained earnings Since this a trial balance, reported retained earnings equals beginning of 2015 retained earnings.
$3,340
Consolidated retained earnings December 31, 2015 Pea’s retained earnings December 31, 2014 Add: Pea’s net income for 2015 Less: Pea’s dividends for 2015 Consolidated retained earnings December 31
$3,340 2,170 (1,000) $4,510
Consolidated net income for 2015 Consolidated sales Less: Consolidated expenses ($7,570 + $80 depreciation) Total consolidated income Less: Noncontrolling interest share Controlling share of consolidated net income for 2015
$10,000 (7,650) 2,350 (180) $ 2,170
Noncontrolling interest December 31, 2014 Sen’s stockholders’ equity at book value Unamortized excess after four years: Inventory Plant assets ($640 - $320) Goodwill Sen’s stockholders’ equity at fair value 25% Sen’s stockholders’ equity at fair value
$4,800 0 320 800 $5,920 $1,480
Solution P4-1 (continued) 7
Noncontrolling interest December 31, 2015 Sen’s stockholders’ equity at book value Unamortized excess after five years: Inventory Plant assets ($640 - $400) Goodwill Sen’s stockholders’ equity at fair value 25% Sen’s stockholders’ equity at fair value
$5,200 0 240 800 $6,240 $1,560
Solution P4-2 1
Pal Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) 80% Sal
Pal Income Statement Sales Income from Sal Cost of goods sold Operating expenses Consolidated NI Noncontrol. share ($60,000 30%)
$1,240 42 800* 308*
$
174
Retained Earnings Retained earnings — Pal
$
260
Accounts payable Other liabilities Capital stock Other paid-in capital Retained earnings
260* 80*
$
1,060* 388* $ 192
$
60
44
174
60
120*
40*
$
18* 174
$
260
b 44 174 a c
28 12
120*
314
$
64
$
314
182 240 96 480 196 ______ $1,194
$
60 120 80 140
$
242 360 176 620
$
$
$
120 80 600 80
a 14 b 182
_____ $ 400 72 48 200 16
$1,398 $ b 200 b 16
314 64 $1,194 $ 400
Noncontrolling interest January 1 Noncontrolling interest December 31 *
$1,640 a 42
$
Retained earnings — Sal Controlling Share of net income Dividends
Balance Sheet Cash Receiv. — net Inventories PP&E — net Investment in Sal
$ 400
Consolidated Statements
c 18
Controlling share
Retained earnings December 31
Adjustments and Eliminations
b 78 __________ c 6 320 320
192 128 600 80 314
84 $1,398
Deduct
Workpaper entries a To eliminate income from Sal and dividends received from Sal and adjust the investment in Sal account to its beginning of the period balance. b To eliminate reciprocal investment in Sal and equity amounts of Sal and to enter beginning noncontrolling interest. c To enter noncontrolling interest share of subsidiary income and dividends.
Solution P4-2 (continued) 2
Pal Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 (in thousands) Sales Less: Cost of goods sold Gross profit Operating expenses Total consolidated net income Less: Noncontrolling interest share Controlling share of consolidated net income
$1,640 1,060 580 388 192 18 $ 174
Pal Corporation and Subsidiary Consolidated Retained Earnings Statement for the year ended December 31, 2011 Consolidated retained earnings January 1 Add: Controlling share of onsolidated net income Less: Dividends of Pal Consolidated retained earnings December 31
$260 174 (120) $314
Pal Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011
Assets Current assets: Cash Receivables — net Inventories Plant assets — net Total assets
Liabilities and Stockholders’ Equity Liabilities: Accounts payable Other liabilities Stockholders’ equity: Capital stock, $10 par Other paid-in capital Consolidated retained earnings Add: Noncontrolling interest Total liabilities and stockholders’ equity
$242 360 176
$
$192 128
$
$600 80 314 994 84
778 620 $1,398
320
1,078 $1,398
Solution P4-3 Pan Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Pan Income Statement Sales Income from Saf Cost of sales Other expenses Consolidated Net Income Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pan Retained earnings — Saf Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable Dividends receivable from Saf Inventories Note receivable from Pan Land Buildings — net Equipment — net Investment in Saf
$800 27.6 500* 194*
$200
______ $133.6
____ $ 48
100* 52*
Consolidated Statements $1,000
a
27.6
c
11.2
f
9.2 $
600* 257.2* 142.8 9.2* 133.6
$
360
$
$360 $ 68 133.6 100*
b
68 133.6
48 32*
a f
24 8*
100*
$393.6
$ 84
$
393.6
$
$ 30 40
$
136 212
106 172 12 190 130 340 260 363.6
20 10 60 160 100
Patents
________ $1,573.6
____ $420
Accounts payable Note payable to Saf Dividends payable Capital stock, $10 par Retained earnings
$
$ 20
170 10
16 1,000 300 393.6 84 $1,573.6 $420 Noncontrolling interest January 1 Noncontrolling interest December 31 *Deduct
Adjustments and Eliminations
Saf 75%
e
12
d
10
210 190 500 360
b 112
a 3.6 b 360 c 11.2
100.8 $1,708.8 $
d 10 e 12 b 300
_____ 550
190 4 1,000 393.6
b 120 f 1.2 550
121.2 $1,708.8
Solution P4-3 (continued) Supporting Calculations Saf’s value at acquisition Book value at December 31, 2011 Less: 2011 Net income Add: 2011 Dividends Book value on January 1, 2011 Fair value of patents Saf’s fair value on January 1, 2011
$384 (48) 32 $368 112 $480
Purchase price (fair value) of Pan’s 75% share Noncontrolling interest (25%)
$360 $120
Patents have a ten-year life, so amortization is $11,200 per year. Saf’s Adjusted Income Saf’s net income Less: Amortization of Patents Saf’s adjusted income Pan’s 75% share Noncontrolling interest 25% share
$ 48 (11.2) $ 36.8 $ 27.6 $ 9.2
Solution P4-4 Pal Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Pal Income Statement Sales Income from Sun Cost of sales Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pal
$1,600 72 1,000* 388*
$400
$
284
$ 96
$
720 284 200*
Retained earnings – Dec 31 $
804
$168
236 320
$ 60 80
Buildings — net Equipment — net Investment in Sun
260 680 520
200
284 a c
____ $840
Accounts payable Note payable to Sun Dividends payable Capital stock, $10 par Retained earnings
$
$ 40
2,000
32 600
804 $3,164
168 $840
Noncontrolling interest January 1 Noncontrolling interest December 31
48 16
200* $804
$
e
24
d
20
296 400
420 380 1,000 720 a 24 b 720
______ $3,164
Deduct
b 136
744
Goodwill
*
24
96 64*
40 20 120 320
340 20
1,200* 492* $ 308 24* $ 284
$720
Dividends
24 380
72
200* 104*
$136
$
Consolidated Statements $2,000
a
c
Retained earnings — Sun Controlling share of NI
Balance Sheet Cash Accounts receivable Dividends receivable from Sun Inventories Note receivable from Pal Land
Adjustments and Eliminations
Sun 75%
b 224
224 $3,440 $
d 20 e 24 b 600
b 240 __________ c 8 1,100 1,100
380 8 2,000 804
248 $3,440
Solution P4-4(continued) Supporting Calculations Sun’s value at acquisition: Book value at December 31, 2011 Less: 2011 Net income Add: 2011 Dividends Book value on January 1, 2011
$768 (96) 64 $736
Purchase price of Pal’s 75% share Implied fair value of Sun ($720 / 75%) Sun’s book value Excess allocated to Goodwill Noncontrolling interest (25% x $960)
$720 $960 736 $224 $240
Sun’s Adjusted Income Sun’s net income Less: Amortization of Goodwill Sun’s adjusted income Pal’s 75% share Noncontrolling interest 25% share
$96 (0) $96 $72 $24
Solution P4-5 Preliminary computations Allocation of excess fair value over book value Cost of 70% interest January 1 Implied fair value of Sul ($980,000 / 70%) Book value of Sul Excess fair value over book value Noncontrolling interest – 30% of fair value at acquisition
$ 980,000 $1,400,000 (1,200,000) $ 200,000 $ 420,000
Excess allocated Undervalued inventory items sold in 2011 Undervalued buildings (7 year life) Undervalued equipment (3 year life) Trademark Remainder to Goodwill Excess fair value over book value
$ 10,000 28,000 42,000 80,000 40,000 $200,000
Calculation of income from Sul Sul’s net income Less: Undervalued inventories sold in 2011 Less: Additional Depreciation on building ($28,000/7 years) Less: Additional Depreciation on equipment ($42,000/3 years) Less: Trademark amortization ($80,000/40 years) Sul’s adjusted income Par’s 70% controlling interest share Noncontrolling interest’s 30% share
$200,000 (10,000) (4,000) (14,000) (2,000) $170,000 $119,000 $ 51,000
Solution P4-5 (continued) Workpaper entries for 2011 a
Income from Sul Dividends (Sul) Investment in Sul
b
Capital stock (Sul) Retained earnings (Sul) January 1 Unamortized excess Investment in Sul Noncontrolling interest January 1
c
d e f
Cost of sales (for inventory items) Buildings — net Equipment — net Trademarks Goodwill Unamortized excess
119,000
1,000,000 200,000 200,000
10,000 28,000 42,000 80,000 40,000
Depreciation expense Buildings — net
4,000
Depreciation expense Equipment — net
14,000
Other expenses Trademarks
980,000 420,000
200,000 4,000 14,000
2,000 2,000
g
Accounts payable Accounts receivable
20,000
h
Dividends payable Dividends receivable
28,000
Noncontrolling Interest Share Dividends — Sul Noncontrolling Interest
51,000
i
70,000 49,000
20,000 28,000 30,000 21,000
Solution P4-5 (continued) Par Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Par Income Statement Sales Income from Sul Cost of sales Depreciation expense
$ 1,600 119 600* 308*
Other expenses Consolidated NI Noncontrolling share
$1,400 800* 120*
320*
Controlling share of NI
$
491
Retained Earnings Retained earnings — Par
$
600
280*
$
200
Dividends
491 400*
Retained earnings – Dec 31 $
691
$
300
172 200 28 300 140 100 280
$
120 140
Balance Sheet Cash Accounts receivable Dividends receivable Inventories Other current assets Land
$
Buildings — net
Trademarks Goodwill Unamortized excess Accounts payable Dividends payable Other liabilities Capital stock, $10 par Retained earnings
Deduct
i
51
b
$
491
$
600 491
a i
70 30
400* 691
$ $ g h
292 320
20 28
c
28
d
4
500 200 300 624
660
c
42
e
14
1,828
______ $1,700
$
$
691 $ 3,389
$
602* 542 51*
200 60 200 320
_______ $ 3,389 400 200 98 2,000
1,410* 446*
200
1,029
Noncontrolling interest January 1 Noncontrolling interest December 31 *
119 10 4 14 2
200 100*
1,140
Equipment — net Investment in Sul
Consolidated Statements $3,000
a c d e f
200
$
Retained earnings — Sul Net income
Adjustments and Eliminations
Sul 70%
170 40 190 1,000
c c b
80 40 200
g h
20 28
a 49 b 980 f 2 c 200
b 1,000
300 $1,700 b 420 _________ i 21 1,838 1,838
78 40 ______ $4,182 $
550 212 288 2,000 691
441 $4,182
Solution P4-6 Supporting computations Ownership percentage 13,500/15,000 shares = 90% Investment cost (13,500 shares $30) Implied fair value of Syn ($405,000 / 90%) Book value of Syn Excess fair value over book value
$405,000 $450,000 330,000 $120,000
Excess allocated to Land Remainder to patents Excess fair value over book value
$ 40,000 80,000 $120,000
Income from Syn Syn’s reported net income Less: Patent amortization Syn’s adjusted income
$ 48,000 (8,000) $ 40,000
Pen’s share of Syn’s income (90%) Noncontrolling interest share (10%)
$ 36,000 $ 4,000
Investment in Syn December 31, 2012 Cost January 1, 2011 Pen’s share of the change in Syn’s retained earnings ($84,000 - $30,000) 90% Less: Pen’s share (90%) of Patent amortization for 2 years Investment in Syn December 31
$405,000 48,600 (14,400) $439,200
Solution P4-6 (continued) Pen Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) Pen Income Statement Sales Income from Syn Cost of sales Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pen
$ 800 36 500* 201.2*
$
36 160 14.4 190
36
c
8
48
$
600* 261.2* 138.8 4 * 134.8
$
68
$
354
4
b
68 134.8
48 32* $
84
$
30 40
a g
Buildings — net
260
100
b
e
10
66 190
40
b
$
$
f 10 e 10 d 14.4 b 300
20 16 300
230 500 360
_____ $ 420
Noncontrolling interest January 1 Noncontrolling interest December 31
10 14.4
210
________ $1,569.6
388.8 $1,569.6
f d
a 7.2 b 432 60 160
1,000
100* 388.8
$
20 10
130 340
170.8 10
28.8 3.2 $
439.2
Land
Deduct
$
134.8 100*
Note receivable — Pen Investment in Syn
*
a
$ 354
Retained earnings – Dec 31 $ 388.8
Accounts payable Note payable to Syn Dividends payable Capital stock Retained earnings
100* 52*
$1,000
g $ 134.8
Dividends
Equipment — net Patents
$ 200
Consolidated Statements
$
Retained earnings — Syn Net income
Balance Sheet Cash Accounts receivable Dividends receivable Inventories
Adjustments and Eliminations
90% Syn
72
c
8
$
180.8 1.6 1,000 388.8
84 $ 420 _________ 562.4
64 $1,620
b g
48 .8 562.4
48.8 $1,620
Solution P4-7 Preliminary computations Allocation of excess fair value over book value Cost of 70% interest January 1 Implied fair value of Sol ($490,000 / 70%) Book value of Sol Excess fair value over book value
$490,000 $700,000 (600,000) $100,000
Excess allocated Undervalued inventory items sold in 2011 Undervalued buildings (7 year life) Undervalued equipment (3 year life) Remainder to goodwill Excess fair value over book value
$
5,000 14,000 21,000 60,000 $100,000
Calculation of income from Sol Sol’s reported net income Less: Undervalued inventories sold in 2011 Less: Depreciation on building ($14,000/7 years) Less: Depreciation on equipment ($21,000/3 years) Adjusted income from Sol Par’s 70% controlling share 30% Noncontrolling interest share Workpaper entries for 2011 a Income from Sol Dividends (Sol) Investment in Sol b
c
d e f
Capital stock (Sol) Retained earnings (Sol) - January 1 Unamortized excess Investment in Sol Noncontrolling interest - January 1 Cost of sales (for inventory items) Buildings — net Equipment — net Goodwill Unamortized excess
$100,000 (5,000) (2,000) (7,000) $ 86,000 $ 60,200 $ 25,800 60,200 35,000 25,200 500,000 100,000 100,000 490,000 210,000 5,000 14,000 21,000 60,000
Depreciation expense Buildings — net
2,000
Depreciation expense Equipment — net
7,000
100,000 2,000 7,000
Noncontrolling Interest Share Dividends — Sol Noncontrolling Interest
25,800
g
Accounts payable Accounts receivable
10,000
h
Dividends payable Dividends receivable
14,000
15,000 10,800 10,000 14,000
Solution P4-7 (continued) Par Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Par Income Statement Sales Income from Sol Gain on equipment Cost of sales Depreciation expense
$
800 60.2 10 300* 155*
Other expenses Consolidated NI Noncontrolling share Controlling share of NI
________ $ 255.2
Retained Earnings Retained earnings — Par
$
$
5 2 7
_____ $ 100
f
$ 100
b 100
$
300* 281 25.8* 255.2
$
300
25.8
255.2
100 50*
355.2
$ 150
96 100 14 150 70 50 140
$
570
Equipment — net Investment in Sol
a f
60 70
$ g h
156 160
10 14
c
14
d
2
250 100 150 312
330
c
21
e
7
914
a 25.2 b 490 _____ $ 850
$
$
355.2 $1,705.2
200* 355.2
100 30 100 160
________ $1,705.2 200 100 50 1,000
35 15 $
515.2
Noncontrolling interest January 1 Noncontrolling interest December 31 Deduct
10 705* 224*
140*
255.2 200*
Buildings — net
*
c d e
60.2
300
Retained earnings – Dec 31 $
Accounts payable Dividends payable Other liabilities Capital stock, $10 par Retained earnings
$1,500 a
400* 60*
Consolidated Statements
$
Dividends
Goodwill Unamortized excess
$ 700
160*
Retained earnings — Sol Controlling share of NI
Balance Sheet Cash Accounts receivable Dividends receivable Inventories Other current assets Land
Adjustments and Eliminations
Sol 70%
85 20 95 500
c 60 b 100 g h
c 100
10 14
b 500
150 $ 850 b 210 _________ f 10.8 919 919
60 ______ $2,102 $
275 106 145 1,000 355.2
220.8 $2,102
Solution P4-8 Supporting computations Ownership percentage
13,500/15,000 shares = 90%
Investment cost (13,500 shares $15) Implied fair value of Son ($202,500 / 90%) Book value of Son Excess fair value over book value
$202,500 $225,000 165,000 $ 60,000
Excess allocated to Land Remainder to goodwill Excess fair value over book value
$ 20,000 40,000 $ 60,000
Income from Son Pun’s controlling share of Son’s income ($24,000
90%)
Investment in Son December 31, 2012 Cost January 1, 2011 Pun’s share of the change in Son’s retained earnings ($42,000 - $15,000) 90% Investment in Son December 31, 2012 Noncontrolling interest at December 31, 2012 (10% of fair value) (($225,000 + $42,000 - $15,000) x 10%)
$ 21,600 $202,500 24,300 $226,800 $ 25,200
Solution P4-8 (continued) Pun Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) Pun Income Statement Sales Income from Son Cost of sales Expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pun
$ 400 21.6 250* 100.6*
$
71
$
Note receivable — Pun Investment in Son
18 80 7.2 95
Deduct
24
$
34
b
$ $
300* 126.6* 73.4 2.4* 71
$
181
34 71
24 16* $
42
$
15 20
a c
14.4 1.6 $
$
10 5
f d
5 7.2
e
5
50* 202
33 95 105
a 7.2 b 219.6 30 80
b
20
40
130
50 _____ $ 210
b
$
$
f 5 e 5 d 7.2 b 150
85 5
500
2.4
_____ $ 792
10
500
8 150
202 $ 792
42 $ 210
Noncontrolling interest January 1 Noncontrolling interest December 31 *
$
65 170
Buildings — net
$ 21.6
226.8
Land
Consolidated Statements
50* 26*
71 50*
Retained earnings – Dec 31 $ 202
Accounts payable Note payable to Son Dividends payable Capital stock Retained earnings
a
$ 181
Dividends
Equipment — net Goodwill
$ 100
c
Retained earnings — Son Controlling share of NI
Balance Sheet Cash Accounts receivable Dividends receivable Inventories
Adjustments and Eliminations
90% Son
115 250 180
_________ 285.2
$
40 818
$
90 .8 500 202
b c
24.4 .8 285.2
$
25.2 818
Solution P4-9 Pas Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Pas Income Statement Sales Income from Sel Cost of sales Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pas
Adjustments and Eliminations
80% Sel
$ 400 34 160* 80* 51*
$ 220
$ 143
$
80* 40* 20*
$ 620 a b d g
34 25 10 2.5
c
8.5
265* 130* 73.5* $ 151.5 8.5* $ 143
80
$ 150
$ 150 $ 100
Retained earnings — Sel Controlling share of NI
143 80*
Dividends
Consolidated Statements
b 100 143
80 40*
a c
32 8
Retained earnings – Dec 31 $ 213
$ 140
80* $ 213
Balance Sheet Cash
$
$
$
Trade receivables — net Dividends receivable Inventories Land Buildings — net Equipment — net Investment in Sel
59 56
60 80
16 80 30 130
60 60 140
400
200
b
d
a 2 b 420 g 2.5
______ $1,193
_____ $ 600
b
50
Accounts payable Dividends payable Other liabilities Capital stock Retained earnings
$
$ 100 20 40 300
e f
8 16
Noncontrolling interest January 1 Noncontrolling interest December 31 *
Deduct
16
50
Patents
213 $1,193
8
f
140 90 270
422
80 200 100 600
e
119 128
10
b 300
140 $ 600 b 105 _________ c .5 604 604
640
47.5 $1,434.5 $
172 204 140 600 213
105.5 $1,434.5
Solution P4-9 (continued) Supporting computations Investment cost January 1, 2011 Implied fair value of Sel ($420,000 / 80%) Book value of Sel Excess fair value over book value Excess allocated: Undervalued inventory Undervalued equipment Remainder to patents Excess fair value over book value
$420,000 $525,000 400,000 $125,000 $ 25,000 50,000 50,000 $125,000
Solution P4-10 Pik Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) 80% Sel
Pik Income Statement Sales Income from Sel Cost of sales Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pik
$ 400 36 160* 80* 51*
$ 220
_____ $ 145
_____ $ 80
80* 40* 20*
Adjustments and Eliminations
Consolidated Statements $
a b d
36 25 10
c
9 $
265* 130* 71* 154 9* 145
$
150
$
$ 150 $ 100
Retained earnings — Sel Controlling share of NI
145 80*
Dividends
$ 140
Balance Sheet Cash
$
$
Trade receivables — net Dividends receivable Inventories Land Buildings — net Equipment — net Investment in Sel
59 56
b 100 145
80 40*
Retained earnings – Dec 31 $ 215
a c
60 60 140
400
200
32 8 $
60 80
16 80 30 130
620
$ e
8
f
16
80* 215
119 128 140 90 270
b
50
424
d
10
640
a 4 b 420
Goodwill
______ $1,195
_____ $ 600
b
50
50 $1,437
Accounts payable Dividends payable Other liabilities Capital stock Retained earnings
$
$ 100 20 40 300
e f
8 16
$
80 200 100 600
215 $1,195
Noncontrolling interest January 1 Noncontrolling interest December 31 *
Deduct
b 300
140 $ 600
________ 604
b 105 c 1 604
172 204 140 600 215
106 $1,437
Solution P4-10 (continued) Supporting computations Investment cost January 1, 2011 Implied fair value of Sel ($420,000 / 80%) Book value of Sel Excess fair value over book value Excess allocated: Undervalued inventory Undervalued equipment Remainder to goodwill Excess fair value over book value Income from Sel Sel’s reported net income Less amortization of excess fair value: Inventory Depreciation ($50,000 / 5 years) Sel’s adjusted income Pik’s 80% controlling share 20% Noncontrolling interest share
$420,000 $525,000 400,000 $125,000 $ 25,000 50,000 50,000 $125,000 $ 80,000 (25,000) (10,000) $ 45,000 $ 36,000 $ 9,000
Solution P4-11 Supporting computations Investment cost December 31, 2011 Implied fair value of Stu ($170,000 / 80%) Book value of Stu Excess fair value over book value Allocation of Excess $ 8,750 22,500 31,250 $62,500
Inventories Plant assets — net Patents
$170,000 $212,500 150,000 $ 62,500
Amortization 2012 — 2015 $ 8,750 10,000 25,000 $43,750
Unamortized Excess December 31, 2015 $ --12,500 6,250 $18,750
Pil Corporation and Subsidiary Consolidated Balance Sheet Workpapers on December 31, 2015 Pil Assets Cash Trade receivables Dividends receivable Advance to Stu Inventories Plant assets — net Investment in Stu Patents Unamortized excess Total assets Equities Accounts payable Dividends payable Advance from Pil Capital stock Retained earnings Noncontrolling interest Total equities
Adjustments and Eliminations
Stu 80%
$ 41,000 60,000 8,000 25,000 125,000
$ 35,000 55,000
300,000
175,000
c d e
35,000
$ 76,000 110,000
160,000 b
12,500
b a
6,250 18,750
191,000
487,500 a 191,000
________ $750,000
________ $300,000
$ 50,000
$ 45,000 10,000 25,000 100,000 120,000 ________ $300,000
400,000 300,000 ________ $750,000
5,000 8,000 25,000
Consolidated Balance Sheet
c 5,000 d 8,000 e 25,000 a 100,000 a 120,000 _________ 295,500
b
18,750
6,250 ________ $839,750
$ 90,000 2,000
a
47,750 295,500
400,000 300,000 47,750 $839,750
Solution P4-12 Preliminary computations Investment cost Implied fair value Sci ($480,000 / 80%) Book value of Sci Excess fair value over book value
$480,000 $600,000 450,000 $150,000
Allocation of differential Plant assets Goodwill Excess fair value over book value
$100,000 50,000 $150,000
Amortization Plant assets $100,000/4 years = $25,000 per year Investment account balance at December 31, 2012 Underlying book value Add: Unamortized excess allocated to plant assets ($100,000 - $50,000 depreciation) Add: Unamortized goodwill Fair value of Sci at December 31 Investment account balance at December 31 (80%) Noncontrolling interest at December 31 (20%)
$580,000
The investment account balance is overstated at $560,000 for the $16,000 dividend receivable.
50,000 50,000 $680,000 $544,000 $136,000
Solution P4-12 (continued) Pat Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) Pat Income Statement Sales Income from Sci Cost of sales Operating expense Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pat
$1,800 76 1,200* 380*
$ 600
______ $ 296
_____ $ 120
$
Retained earnings – Dec 31 $ 340
$
12 52 164 40 160 320 680
Plant assets — net Investment in Sci
Accounts payable Dividends payable Other liabilities Capital stock Retained earnings
Deduct
Solution P4-13
e
25
f
19
100
1,500* 585* $ 315 19* $ 296
$
$
296 c f
10 60 460
______ $1,988
_____ $ 720
$
$
48
32 8
180
30 40 120
200 1,400
30 20 90 400
340 $1,988
180 $ 720
244
d 100
120 40*
200* 340
$
a
d
40
75
560
Noncontrolling interest January 1 Noncontrolling interest December 31 *
76
$
296 200*
Dividends
Dividends receivable Goodwill
300* 180*
Consolidated Statements $2,400
c
$ 244
Retained earnings — Sci Controlling share of NI
Balance Sheet Cash Accounts receivable Inventories Advance to Sci Other current assets Land
Adjustments and Eliminations
Sci 80%
b d
16 50
h g
10 16
$ h
10
a
40
e
170 380 1,190
25
b 16 c 44 d 500 g 16 50 $2,238 $
68 4 290 1,400 340
d 400
_______ 827
82 82 284
d f
125 11 827
136 $2,238
Supporting computations Investment cost January 1, 2011 Implied fair value of Ski ($80,000 / 80%) Book value of Ski Excess fair value over book value
$ 80,000 $100,000 90,000 $ 10,000
Excess allocated to Inventory (sold in 2011) Equipment (4-year remaining use life) Intangible assets (40-year amortization period) Excess fair value over book value
$ 1,000 4,000 5,000 $10,000
Income from Ski for 2011 Ski’s net income Less: Excess allocated to inventories Less: Amortization of excess allocated to equipment ($4,000/4 years) Less: Amortization of intangibles ($5,000/40 years) Ski’s adjusted income for 2011 Ply’s 80% controlling interest share Noncontrolling interest share for 2011 (20%) Income from Ski for 2012 Ski’s net income Less: Amortization of excess allocated to equipment ($4,000/4 years) Less: Amortization of intangibles ($5,000/40 years) Ski’s adjusted income for 2012 Ply’s 80% controlling interest share Noncontrolling interest share for 2012 (20%)
$ 15,000 (1,000) (1,000) (125) $ 12,875 $ 10,300 $ 2,575 $ 20,000 (1,000) (125) $ 18,875 $ 15,100 $ 3,775
Note: Since the prior year’s income is not affected by the current year’s error of omission, the workpapers for 2012 are easier to prepare without an additional conversion-to-equity entry.
Solution P4-13 (continued) Ply Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 Ply Income Statement Sales Income from Ski Cost of sales Operating expenses
$ 160,000 10,300 105,000* 35,000*
Consolidated NI Noncontrolling share Controlling share of NI
$
30,300
Retained Earnings Retained earnings — Ply
$
70,000
Adjustments and Eliminations
Ski 80% $
80,000 35,000* 30,000*
Consolidated Statements $ 240,000
a 10,300 b 1,000 c 1,000 d 125
141,000* 66,125* $
f
Retained earnings — Ski Controlling share of NI
$
15,000
$
30,000
$
32,875 2,575* 30,300
$
70,000
2,575
b 30,000 30,300
Dividends
30,300 10,000*
Retained earnings – Dec 31 $
90,300
$
40,000
$
24,700 25,000
$
15,000 20,000
$
Balance Sheet Cash
$
Trade receivables — net Dividends receivable Inventories
15,000 5,000*
4,000 40,000 100,000
0 30,000 55,000
86,300
_________
$ 280,000
$ 120,000
$
$
Plant & equipment — net Investment in Ski Intangibles
Accounts payable Dividends payable Capital stock Other paid-in capital Retained earnings
Deduct
b
b
20,700 9,000 100,000 60,000
15,000 5,000 40,000 20,000
4,000 1,000
e
4,000
4,000
c
1,000
5,000
a 6,300 b 80,000 d 125
________ 118,000
b 20,000 f 1,575 118,000
10,000* 90,300
39,700 45,000 70,000 158,000
4,875 $ 317,575 $
e 4,000 b 40,000 b 20,000
90,300 40,000 $ 280,000 $ 120,000
Noncontrolling interest January 1 Noncontrolling interest December 31 *
a f
35,700 10,000 100,000 60,000 90,300
21,575 $ 317,575
Solution P4-13 (continued) Ply Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 Ply Income Statement Sales Income from Ski Cost of sales Operating expenses
$ 170,000 16,000 110,000* 30,000*
Consolidated NI Noncontrolling share Controlling share of NI
$
46,000
Retained Earnings Retained earnings — Ply
$
90,300
$
90,000
$ 260,000 a 16,000
35,000* 35,000*
$
20,000
$
40,000
46,000 15,000*
Dividends
c d
1,000 125
f
3,775
145,000* 66,125*
$
50,000
Balance Sheet Cash
$
20,000 30,000
$
Trade receivables — net Dividends receivable Inventories
26,700 45,000 4,000 40,000 95,000
Plant & equipment — net Investment in Ski
30,000 60,000
_________ $ 305,000
_________ $ 140,000
Accounts payable Dividends payable Capital stock Other paid-in capital Retained earnings
$
$
17,700 6,000 100,000 60,000
25,000 5,000 40,000 20,000
a f
8,000 2,000
90,300
15,000* $ 120,400
$
b
e
4,000
3,000
c
1,000
4,875
a 8,000 b 86,300 d 125
b
_________ 132,775
b 21,575 f 1,775 132,775
46,700 75,000 70,000 157,000
4,750 $ 353,450 $
e 4,000 b 40,000 b 20,000
121,300 50,000 $ 305,000 $ 140,000
Noncontrolling interest January 1 Noncontrolling interest December 31
$
45,100
94,300
Intangible assets
$
48,875 3,775* 45,100
b 40,000
20,000 10,000*
Retained earnings – Dec 31 $ 121,300
Deduct
Consolidated Statements
$
Retained earnings — Ski Controlling share of NI
*
Adjustments and Eliminations
Ski 80%
42,700 7,000 100,000 60,000 120,400
23,350 $ 353,450
Solution P4-14 Preliminary computations Investment cost Implied fair value of Sim ($99,000 / 90%) Book value of Sim Excess fair value over book value
$ 99,000 $110,000 80,000 $ 30,000
Excess allocated to: Inventories (sold in 2011) Patents (10-year remaining useful life) Excess fair value over book value
$ 10,000 20,000 $ 30,000
1
Analysis of investment in Sim account Fair value of Sim January 5, 2011 Add: Change in retained earnings from January 5, 2011 to December 31, 2013 Less: Amortization of excess Allocated to inventories and amortized in 2011 Allocated to patents and amortized over 10 years ($20,000/10 years) 3 years Fair value at December 31, 2013 Add: Income from Sim for 2014 Less: Dividends in 2014 Fair value at December 31, 2014
$110,000
Investment in Sim on December 31, 2013 (90% fair value) Investment in Sim on December 31, 2014 (90% fair value) Noncontrolling interest on Dec. 31, 2013 (10% fair value) Noncontrolling interest on Dec. 31, 2014 (10% fair value)
$129,600 $136,800 $ 14,400 $ 15,200
50,000 (10,000) (6,000) 144,000 18,000 (10,000) $152,000
Solution P4-14 (continued) Pep Company and Subsidiary Consolidation Workpapers for the year ended December 31, 2014 Pep
Adjustments and Eliminations
Sim
Debits Cash $ 11,000 $ 15,000 Accounts receivable 15,000 25,000 Plant assets 220,000 180,000 Investment in Sim 136,800 Patents b 14,000 Cost of goods sold 50,000 30,000 Operating expenses 25,000 40,000 c 2,000 Dividends 20,000 10,000
Income Retained Statement Earnings
$ 26,000 40,000 400,000 a 7,200 b 129,600 c 2,000
12,000 $ 80,000* 67,000*
a d
9,000 1,000
$ 20,000* ________ $478,000
$477,800 $300,000 Credits Accumulated depreciation Liabilities Capital stock Paid-in-excess Retained earnings Sales Income from Sim
$ 90,000 $ 50,000 80,000 30,000 100,000 60,000 b 60,000 20,000 71,600 70,000 b 70,000 100,000 90,000 16,200 ________ a 16,200 $477,800 $300,000
Noncontrolling interest Dec 31, 2013 Noncontrolling interest share ($18,000 adj. inc. x 10%) Controlling share of NI
140,000 110,000 100,000 20,000 71,600 190,000
b d
14,400
1,800
1,800* $ 41,200
Consolidated retained earnings Noncontrolling interest Dec 31, 2014
41,200 $ 92,800
________ 164,000
Balance Sheet
d 800 164,000
92,800 15,200 $478,000
*
Deduct
a
To eliminate income from subsidiary and dividends received and reduce the investment account to its beginning-of-the-period balance. To eliminate reciprocal investment and subsidiary equity amounts, establish beginning noncontrolling interest, and adjust patents for the unamortized excess as of the beginning of the period. To amortize excess allocated to patents for 2014. To enter noncontrolling interest share of subsidiary income and dividends.
b c d
Solution P4-15 1
Journal entries on Peg’s books January 1, 2011 Investment in Sup (90%) 36,000 Cash 36,000 To record purchase of 90% of Sup’s stock for cash. July 1, 2011 Investment in Ell (25%) 14,000 Cash 14,000 To record purchase of 25% of Ell’s stock for cash. November 2011 Cash
5,400 Investment in Sup (90%) 5,400 To record receipt of 90% of Sup’s $6,000 dividends.
November 2011 Cash
2,500 Investment in Ell (25%) 2,500 To record receipt of 25% of Ell’s $10,000 dividends.
December 31, 2011 Investment in Sup (90%) 9,000 Income from Sup To record Share of Sup’s reported income ($56,000 - $46,000) 90% December 31, 2011 Investment in Ell (25%) 1,400 Income from Ell To record investment income from Ell for 2011 computed as: Share of Ell’s reported income $ 1,500 ($60,000-$48,000)1/2 year 25% Less: Amortization of excess [$14,000 – ($48,000 25%)] 10 years 1/2 year (100) $ 1,400
9,000
1,400
Solution P4-15 (continued) 2
Peg’s separate company financial statements Peg Corporation Income Statement for the year ended December 31, 2011 Revenues Sales Income from Sup Income from Ell Total revenue Costs and expenses Cost of sales Other expenses Total costs and expenses Net income
$200,000 9,000 1,400 $210,400 $120,000 50,000 170,000 $ 40,400
Peg Corporation Retained Earnings Statement for the year ended December 31, 2011 Retained earnings January 1 Add: Net income Deduct: Dividends Retained earnings December 31
$ 40,000 40,400 (20,000) $ 60,400
Peg Corporation Balance Sheet at December 31, 2011 Assets
Current assets: Cash Other current assets Plant assets — net Investments: Investment in Sup (90%) Investment in Ell (25%)
$ 37,900 80,000 $ 39,600 12,900
Total assets Liabilities and stockholders’ equity Current liabilities Stockholders’ equity: Capital stock Retained earnings December 31 Total liabilities and stockholders’ equity
$117,900 240,000 52,500 $410,400 $ 50,000
$300,000 60,400
360,400 $410,400
Solution P4-15 (continued) 3
Consolidation workpapers — trial balance format Peg Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 Peg
90% Sup
Adjustments and Eliminations
Income Retained Statement Earnings
Debits Cash $ 37,900 $ 8,000 Other current assets 80,000 22,000 240,000 28,000 Plant assets — net Investment in Sup Investment in Ell Cost of sales Other expenses Dividends
39,600 12,900 120,000 50,000 20,000
$ 45,900 102,000 268,000 a 3,600 b 36,000 12,900
32,000 14,000 6,000
$152,000* 64,000* a d
Total debits
$600,400 $110,000
Credits Current liabilities Capital stock Retained earnings Sales Income from Sup Income from Ell Total credits
$ 50,000 $ 14,000 300,000 36,000 b 36,000 40,000 4,000 b 4,000 200,000 56,000 9,000 a 9,000 1,400 ________ $600,400 $110,000
Noncontrolling interest - January 1 Noncontrolling interest share $10,000 10% Controlling share of NI
$ 20,000* ________ $428,800
$ 64,000 300,000 40,000 256,000 1,400
b d
5,400 600*
4,000
1,000
Consolidated retained earnings Noncontrolling interest December 31
Balance Sheet
1,000* $ 40,400
40,400 $ 60,400
________ d 400 50,000 50,000
60,400 4,400 $428,800
Solution P4-15 (continued) 4
Consolidated financial statements Peg Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 Revenues Sales $256,000 Income from Ell (equity method) 1,400 Total revenues Costs and expenses Cost of sales $152,000 Other expenses 64,000 Total costs and expenses Total consolidated income Less: Noncontrolling interest share Controlling share of NI
Peg Corporation and Subsidiary Consolidated Retained Earnings Statement for the year ended December 31, 2011 Consolidated retained earnings January 1 Add: Controlling share of NI Deduct: Dividends Consolidated retained earnings December 31
Assets
$257,400
216,000 41,400 1,000 $ 40,400
$ 40,000 40,400 (20,000) $ 60,400
Peg Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011
Current assets: Cash Other current assets Plant assets — net Investments and other assets: Investment in Ell Total assets Liabilities and stockholders’ equity Current liabilities Stockholders’ equity: Capital stock Consolidated retained earnings Noncontrolling interest Total liabilities and stockholders’ equity
$
45,900 102,000
$147,900 268,000 12,900 $428,800 $ 64,000
$300,000 60,400 4,400
364,800 $428,800
Solution P4-16 Partial consolidated statement of cash flows using the direct method Pil Corporation and Subsidiaries Partial Consolidated Statement of Cash Flows for the current year Cash Flows from Operating Activities Cash received from customers $3,200,000 Dividends from equity investees 80,000 Interest received from short-term loan 10,000 Cash paid for other expenses (900,000) Cash paid to suppliers (1,260,000) Net cash flow from operating activities $1,130,000
Solution P4-17 Direct Method Pes Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 Cash Flows from Operating Activities Cash received from customers Cash paid to suppliers Cash paid for operating expenses Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment of long-term liabilities Net cash flows from financing activities Decrease in cash for the year Cash on January 1 Cash on December 31
$1,340,000 $696,000 315,000
(1,011,000) 329,000
(250,000)
(250,000)
(72,000) (4,000) (22,000)
$
(98,000) (19,000) 130,000 111,000
Reconciliation of controlling share of consolidated net income to net cash provided by operating activities Controlling share of NI
Adjustments to reconcile controlling share of consolidated net income to net cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Increase in accounts payable Increase in accounts receivable Increase in inventories Increase in other current assets Net cash flows from operating activities
$260,000
$ 10,000 102,000 1,000 44,000 (10,000) (40,000) (38,000)
69,000 $329,000
Solution P4-17
(continued)
Indirect Method Pes Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 Cash Flows from Operating Activities
$260,000
Controlling share of NI
Adjustments to reconcile controlling share of consolidated net income to net cash provided by operating activities: Noncontrolling interest share Depreciation Patents amortization Increase in accounts receivable Increase in inventories Increase in other current assets Increase in accounts payable Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment of long-term liabilities Net cash flows from financing activities Decrease in cash for the year Cash on January 1 Cash on December 31
10,000 $102,000 1,000 (10,000) (40,000) (38,000) 44,000
(250,000)
69,000 329,000 (250,000)
(72,000) (4,000) (22,000) (98,000) (19,000) 130,000 $111,000
Note: The cash flows from investing activities and cash flows from financing activities sections of the statement of cash flows are the same under the direct and indirect method.
Solution P4-18 [AICPA] Indirect Method Puh, Inc. and Subsidiary Statement of Cash Flows (Indirect Method) for the year ended December 31, 2011 Cash Flows from Operating Activities
$ 198,000
Controlling share of NI
Adjustments to reconcile controlling share of consolidated net income to net cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Decrease in accounts receivable Increase in accounts and accrued payables Increase in deferred income taxes Increase in inventories Gain on marketable equity securities Gain on sale of equipment Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Proceeds from sale of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from sale of treasury stock Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment on long-term note Net cash flows from financing activities Increase in cash for the year Cash on January 1 Cash on December 31
$
33,000 82,000 3,000 22,000 121,000 12,000 (70,000) (11,000) (6,000)
186,000 384,000
$(127,000) 40,000 (87,000) 44,000 (58,000) (15,000) (150,000) (179,000) 118,000 195,000 $ 313,000
Listing of non-cash investing and financing activities: Issued common stock in exchange for land with a fair value of $215,000.
Solution P4-18 (continued) Indirect Method Puh, Inc. and Subsidiary Workpapers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2011 Year’s Change Asset Changes Cash Allowance to reduce MES Accounts receivable — net Inventories Land* Plant and equipment Accumulated depreciation Patents — net Total asset changes Changes in Equities Accounts & accrued payable Note payable long-term Deferred income taxes Noncontrolling interest in Sto Common stock, $10 par* Additional paid-in capital Retained earnings Treasury stock at cost Total changes in equities
118,000 11,000 (22,000) 70,000 215,000 65,000 (54,000) (3,000)
e f
k l m
Cash Flow Investing Activities
Cash Flow Financing Activities
11,000
22,000
62,000 82,000 3,000
g 70,000 h 215,000 j 127,000 k 28,000
400,000
121,000 n 121,000 (150,000) 12,000 p 12,000 18,000 b 33,000 100,000 123,000 140,000 36,000
h 100,000 h 115,000 i 8,000 a 198,000 i 36,000
o 150,000 d
15,000
c
58,000
400,000
Controlling share of NI Noncontrolling interest share Gain on MES Purchase of plant and equipment Sale of equipment Gain on equipment Depreciation expense Payment on long-term note Amortization of patents Decrease in receivables Increase in inventories Increase in accounts and accrued payables Increase in deferred income taxes Proceeds from treasury stock Payment of dividends Payment of dividends
Reconciling Items Debit Credit
Cash Flow From Operations
— controlling — noncontrolling
a 198,000 b 33,000 e 11,000 j 127,000 k
k
40,000
l
82,000
m f
3,000 22,000
6,000
198,000 33,000 (11,000) (127,000) 40,000 (6,000) 82,000
o 150,000
g
(150,000)
70,000 n 121,000 p i
c 58,000 d 15,000 1,229,000
12,000 44,000
3,000 22,000 (70,000) 121,000 12,000 44,000 (58,000) (15,000)
1,229,000 384,000
Cash increase for the year = $384,000 – $87,000 – $179,000 = $118,000. * Non-cash item: Purchased $215,000 land through common stock issuance.
(87,000)
(179,000)
Solution P4-19 Indirect Method Pil Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 Cash Flows from Operating Activities Controlling share of NI Adjustments to reconcile controlling share of consolidated net income to net cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Increase in accounts payable Income less dividends — equity investee Increase in accounts receivable Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January 1 Cash on December 31
$1,000,000
$
80,000 400,000 20,000 34,000 (60,000) (420,000)
54,000 1,054,000
$(1,000,000) (1,000,000) $
400,000 (274,000) (40,000)
$
86,000 140,000 720,000 860,000
Solution P4-19 (continued) Indirect Method Pil Corporation and Subsidiary Workpapers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2011
Year’s Change Asset Changes Cash
$
Accounts receivable — net Inventories Plant & equipment — net Equity investments Patents Total asset changes
140,000 420,000 0 600,000 F 60,000 l (20,000) h
e
Cash Flows From Operations
Cash Flows Investing Activities
Cash Flows Financing Activities
420,000
400,000 g 1,000,000 60,000 m 120,000 20,000
$1,200,000
Changes in Equities Accounts payable $ 34,000 Dividends payable 26,000 Long-term note payable 400,000 Common stock 0 Other paid-in capital 0 Retained earnings 700,000 Noncontrol. interest 20% 40,000 Changes in equities $1,200,000 Controlling share of NI Noncontrolling interest share Purchase of plant & equipment Depreciation — plant & equipment Amortization of patents Increase in accounts receivable Income less dividends from Investees Increase in accounts payable Received cash from long-term note Payment of dividends — Payment of dividends —
Reconciling Items Debit Credit
i k j
34,000 26,000 400,000
a 1,000,000 c b 80,000 d
300,000 40,000
a 1,000,000 $1,000,000 b 80,000 80,000 g 1,000,000
$(1,000,000) f h
e
420,000
400,000 20,000
400,000 20,000 (420,000)
m
120,000 l 60,000 (60,000) i 34,000 34,000 J 400,000 0 $ 400,000 c 300,000 k 26,000 (274,000) controlling 40,000 __ _ (40,000) noncontrolling d 3,900,000 3,900,000 $1,054,000 $(1,000,000) $ 86,000
Cash increase for the year = $1,054,000 - $1,000,000 + $86,000 = $140,000
Solution P4-19 (continued) Direct Method Pil Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 (in thousands) Cash Flows from Operating Activities Cash received from customers Cash received from equity investees Cash paid to suppliers Cash paid for other operating expenses Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January 1 Cash on December 31 Reconciliation of controlling share of consolidated net income to net cash provided by operating activities Controlling share of NI Adjustments to reconcile controlling share of consolidated net income to net cash provided by operating activities: Noncontrolling interest share Income less dividends — equity investee Depreciation expense Patents amortization Increase in accounts payable Increase in accounts receivable Net cash flows from operating activities
$4,780 60 $ 2,866 920
(3,786) 1,054
$(1,000) (1,000) $
400 (274) (40)
$
86 140 720 860
$1,000
$
80 (60) 400 20 34 (420)
54 $1,054
Solution P4-19 (continued) Direct Method Pil Corporation and Subsidiary Workpapers for the Statement of Cash Flows (Direct Method) for the year ended December 31, 2011 (in thousands)
Year’s Change Asset Changes Cash Accounts receivable — net Inventories Plant & equipment — net Equity investments Patents Total asset changes Changes in Equities Accounts payable Dividends payable Long-term note payable Retained earnings* Noncontrol.interest 20% Changes in equities Ret. earnings change* Sales Income from equity investees Cost of goods sold Depreciation expense Other operating expenses Noncontrolling interest share Dividends declared — Pil
140 420 0 600 60 (20) $1,200
Cash Flow From Operations
Cash Flow Cash Flow Investing Financing Activities Activities
$
a b
400
e
20
34 26 400 700 40 $1,200
f g h
34 26 400
i
80
$5,200
a
420
120 (2,900) (400) (940)
d
60
$
420
c 1,000 d 60
j
40
$4,780
f b e
34 400 20
(80)
i
80
(300)
g k
26 274
h
400
Retained earnings ______ change $ 700 Received cash from long-term note Payment of dividends — controlling Payment of dividends — noncontrolling Purchase of equipment
*
Reconciling Items Debit Credit
k 274 j 40 c 1,000 2,754
2,754
60 (2,866) 0 (920) 0
$1,054
$(1,000) $(1,000)
Retained earnings changes replace the retained earnings account for reconciling purposes.
Cash increase for the year = $1,054 - $1,000 + $86 = $140.
$ 400 (274) (40) __ $ 86
