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Under the equity method, a parent amortizes patents from its subsidiary investments. Noncontrolling interest share is entered in the consolidation workpapers. 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.
Under the equity method, a parent amortizes patents from its subsidiary investments. Noncontrolling interest share is entered in the consolidation workpapers. 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.
Under the equity method, a parent amortizes patents from its subsidiary investments. Noncontrolling interest share is entered in the consolidation workpapers. 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.
1 Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its subsidiary investment and income accounts. Since patents and patent amortization accounts are not recorded on the parents books, they are created for consolidated statement purposes through workpaper entries.
2 Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper adjusting entry in which noncontrolling interest share is debited, noncontrolling interests share of dividends is credited and noncontrolling interest is credited. The noncontrolling interest share (debit) is carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest for noncontrolling interest share is added to the beginning noncontrolling interest. The noncontrolling interest share is calculated based on the subsidiarys reported net income adjusted to reflect fair value through the amortization of the excess of fair value over book value. This is the approach illustrated throughout this text.
3 Workpaper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity accounts are alike in regard to the objectives of consolidation. Regardless of the configuration of the workpaper entries, the final result of adjustments for these items is to eliminate them through workpaper entries. In other words, the investment in subsidiary, income from subsidiary, and the capital stock, additional paid-in capital, retained earnings, and other stockholders equity accounts of the subsidiary never appear in consolidated financial statements.
4 When the parent does not amortize fair value/book value differentials on its separate books, the parents income from subsidiary and investment in subsidiary accounts are overstated in the year of acquisition. In subsequent years, the income from the subsidiary, investment in subsidiary, and parents beginning retained earnings will be overstated. (This assumes that the asset is undervalued).The error may be corrected in the workpapers with the following entries:
Year of acquisition Income from subsidiary XXX Investment in subsidiary XXX Subsequent year Income from subsidiary XXX Retained earnings parent XXX Investment in subsidiary XXX
4-2 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l By entering a correcting entry, all other workpaper entries are the same as if the parent provided for amortization on its separate books. If the errors are not corrected through the workpaper entries suggested above, the entry to eliminate the income from subsidiary in the year of acquisition is prepared in the usual manner without further complications because neither the beginning investment nor retained earnings accounts are affected by the omission. In subsequent years the entry to eliminate income from subsidiary and dividends from subsidiary will have to be changed to correct the beginning-of-the-period retained earnings as follows:
Income from subsidiary XXX Retained earnings parent XXX Dividends (subsidiary) XXX Investment in subsidiary XXX
5 No. Workpaper adjustments are not entered in the general ledger of the parent or any other entity. They are used in the preparation of consolidated financial statements for a conceptual entity for which there are no formal accounting records.
6 Workpapers are tools of the accountant that facilitate the consolidation of parent and subsidiary financial statements. Given the tools available, the accountant should select those that are most convenient in the circumstances. If financial statements are to be consolidated, the financial statement approach is the appropriate tool. The trial balance approach is most convenient when the data are presented in the form of a trial balance. The accountant needs to be familiar with both approaches to perform the work as efficiently as possible.
7 Workpaper adjustment and elimination entries as illustrated in this text are exactly the same when the trial balance approach is used as when the financial statement approach is used. This is possible through a check-off system that nullifies the closing process when the financial statement approach is used.
8 The retained earnings of the parent will equal consolidated retained earnings if the equity method of accounting has been correctly applied. In consolidating the financial statements of affiliated companies, the beginning retained earnings of the parent are used as beginning consolidated retained earnings. If the equity method has not been correctly applied, parent beginning retained earnings will not equal beginning consolidated retained earnings. In this case, retained earnings of the parent are adjusted to a correct equity basis in order to establish the correct amount of beginning consolidated retained earnings. Thus, workpaper adjustments to beginning retained earnings of the parent are needed whenever the beginning retained earnings of the parent do not correctly reflect the equity method.
9 The noncontroling interest that appears in the consolidated balance sheet can be checked by first adjusting the equity of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for any unamortized excess of fair value over book value) and then multiplying by the noncontrolling interest percentage. Consolidated retained earnings at a balance sheet date can be checked by comparing the amount with the parents retained earnings on the same date. If consolidated retained earnings and parent retained earnings are not equal, either consolidated retained earnings have been computed incorrectly, or parent retained earnings do not reflect a correct equity method of accounting.
10 Consolidated assets and liabilities are reported for all equity holdersnoncontrolling as well as controlling. Therefore, the change in net assets from operations for a period results from noncontrolling interest share and controlling interest share.
11 A change in cash relates to all interests in the consolidated entity. This difference is one of many inconsistencies in the concepts underlying consolidated financial statements. Consider, for example, the error that could result from dividing cash provided by operations by outstanding parent shares to compute cash flow per share.
Chapter 4 4-3
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l SOLUTIONS TO EXERCISES
Solution E4-1 1 d 6 d 2 c 7 b 3 a 8 b 4 d 9 a 5 b 10 b
Solution E4-2 Preliminary computations (in thousands) I nvest ment cost J anuar y 2 $600 I mpl i ed t ot al f ai r val ue of Sal ( $600 / 80%) $750 Less: Book val ue ( 500) Excess f ai r val ue over book val ue $250 Excess allocated to: I nvent or y $ 25 Remai nder t o goodwi l l 225 Excess f ai r val ue over book val ue $250
1 Income from Sal Sal s r epor t ed net i ncome $140 Less: Excess al l ocat ed t o i nvent or y ( sol d i n 2011) ( 25) Sal adj ust ed i ncome $115 Pan s 80%shar e $ 92
2 Noncontrolling interest share
Sal s adj ust ed i ncome $115 20%noncont r ol l i ng i nt er est
$ 23
3 Noncontrolling interest December 31 Sal s equi t y book val ue $520 Add: Unamor t i zed excess ( Goodwi l l ) 225 Sal s equi t y f ai r val ue $745 20%noncont r ol l i ng i nt er est $149
4 Investment in Sal December 31 I nvest ment cost J anuar y 2 $600 Add: I ncome f r omSal ( gi ven) * 100
Less: Di vi dends ( $120 80%) ( 96) I nvest ment i n Sal December 31 $604 * Assumes t hi s i s based on Sal s adj ust ed i ncome
5 Consol i dat ed net i ncome Noncont r ol l i ng i nt er est shar e Cont r ol l i ng i nt er est shar e equal s Par ent NI under equi t y met hod. $383. 4 $ 23 $360. 4
4-4 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution E4-3 1 $700, 000 ( $300, 000 + $440, 000 - $40, 000 i nt er company)
Preliminary computations for 2 and 3 I nvest ment cost on J anuar y 1, 2011 $28, 000 I mpl i ed t ot al f ai r val ue of Sar ( $28, 000 / 70%) $40, 000 Book val ue of Sar 30, 000 Excess al l ocat ed ent i r el y t o Goodwi l l $10, 000
2 Pims separate income for 2013 $24, 000
Loss f r omi nvest ment i n Sar ( $1, 000 70%) ( 700) Cont r ol l i ng shar e of consol i dat ed net i ncome $23, 300 Noncont r ol l i ng shar e + ( 300) Consol i dat ed net i ncome $23, 000 3 I nvest ment cost J anuar y 1, 2011 $28, 000
Add: Shar e of i ncome l ess di vi dends 2011 2013
( $1, 400 i ncome - $1, 000 di vi dends) 70% 280 I nvest ment bal ance December 31, 2013 $28, 280
Solution E4-4
Preliminary computations I nvest ment cost $580, 000 I mpl i ed t ot al f ai r val ue of Si n ( $580, 000 / 80%) $725, 000 Book val ue 600, 000 Tot al excess f ai r val ue over book val ue $125, 000
Excess allocated to: Equi pment ( 5- year l i f e) $ 50, 000 Pat ent s ( 10- year amor t i zat i on per i od) 75, 000 Tot al excess f ai r val ue over book val ue $125, 000
Income from Sin 2011 2012 Si n s r epor t ed net i ncome $120, 000 $150, 000 Less: Depr eci at i on of excess al l ocat ed t o equi pment ( 10, 000) ( 10, 000) Less: Amor t i zat i on of pat ent s ( 7, 500) ( 7, 500) Si n s adj ust ed i ncome $102, 500 $132, 500 I ncome f r omSi n ( 80%) $ 82, 000 $106, 000
1a Consolidated net income for 2011 Pen s net i ncome = cont r ol l i ng shar e of consol i dat ed net i ncome under equi t y met hod
$340, 000 Add: Noncont r ol l i ng i nt er est shar e 20, 500 Consol i dat ed net i ncome $360, 500 1b Investment in Sin December 31, 2011 Cost J anuar y 1 $580, 000
Add: I ncome f r omSi n 2011 82, 000
Less: Di vi dends f r omSi n 2011 ( $80, 000 80%) ( 64, 000) I nvest ment i n Si n December 31 $598, 000
1c Noncontrolling interest share 2011 ( $102, 500 adj ust ed i ncome 20%)
$ 20, 500
1d Noncontrolling interest December 31, 2012 Si n s equi t y book val ue at acqui si t i on dat e $600, 000 Add: I ncome l ess di vi dends f or 2011 and 2012 ( see not e) 100, 000 Si n s equi t y book val ue at December 31, 2012 700, 000 Unamor t i zed excess at December 31, 2012 90, 000 Chapter 4 4-5
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Si n s equi t y f ai r val ue at December 31, 2012 $790, 000 Noncont r ol l i ng i nt er est per cent age 20% Noncont r ol l i ng i nt er est December 31, 2012 $158, 000 Solution E4-4 (continued)
Not e: Si n s i ncome l ess di vi dends:
2011 Net I ncome $ 120, 000 2011 Di vi dends ( 80, 000) 2012 Net I ncome 150, 000 2012 Di vi dends ( 90, 000) Tot al $ 100, 000
Solution E4-5
1 c 2 a 3 b 4 c 5 d
Solution E4-6
Pat Corporation and Subsidiary Par t i al Consol i dat ed Cash Fl ows St at ement f or t he year ended December 31,
Cash Flows from Operating Activities Cont r ol l i ng i nt er est shar e of consol i dat ed net i ncome $100, 000 Adjustments to reconcile net income to cash provided by operating activities:
Noncont r ol l i ng i nt er est shar e $ 50, 000 Undi st r i but ed i ncome of equi t y i nvest ees ( 5, 000) Loss on sal e of l and 100, 000 Depr eci at i on expense 120, 000 Pat ent s amor t i zat i on 16, 000 I ncr ease i n account s r ecei vabl e ( 105, 000) I ncr ease i n i nvent or i es ( 45, 000) Decr ease i n account s payabl e ( 20, 000) 111, 000 Net cash flows from operating activities $211, 000
Solution E4-7 Pro Corporation and Subsidiary Par t i al Consol i dat ed Cash Fl ows St at ement f or t he year ended December 31,
Cash Flows from Operating Activities Cash r ecei ved f r omcust omer s $322, 500 Di vi dends r ecei ved f r omequi t y i nvest ees 7, 000 Less: Cash pai d t o suppl i er s $182, 500 Cash pai d t o empl oyees 27, 000 Cash pai d f or ot her oper at i ng i t ems 23, 500 Cash pai d f or i nt er est expense 12, 000 245, 000 Net cash flows from operating activities $ 84, 500
4-6 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l SOLUTIONS TO PROBLEMS
Solution P4-1 ( i n t housands of $)
Preliminary computations I nvest ment i n Sen ( 75%) J anuar y 1, 2011 $2, 400 I mpl i ed f ai r val ue of Sen ( $2, 400 / 75%) $3, 200 Book val ue of Sen ( 2, 400) Tot al excess of f ai r val ue over book val ue $ 800 Excess al l ocat ed: 10%t o i nvent or i es ( sol d i n 2011) $ 80 40%t o pl ant asset s ( usef ul l i f e 8 year s) 320 50%t o goodwi l l 400 Tot al excess of f ai r val ue over book val ue $ 800
1 Goodwi l l at December 31, 2015 ( not amor t i zed) $ 400
2 Noncontrolling interest share for 2015 Net i ncome ( $1, 000 sal es - $600 expenses) $ 400 Less: Amor t i zat i on of excess Pl ant asset s ( $320 / 8 yr s. ) ( 40) Adj ust ed Sen i ncome $ 360 25%Shar e $ 90
3 Consolidated retained earnings December 31, 2014 Equal t o Pea s December 31, 2014 r et ai ned ear ni ngs Si nce t hi s a t r i al bal ance, r epor t ed r et ai ned ear ni ngs equal s begi nni ng of 2015 r et ai ned ear ni ngs.
$1, 670
4 Consolidated retained earnings December 31, 2015 Pea s r et ai ned ear ni ngs December 31, 2014 $1, 670 Add: Pea s net i ncome f or 2015 1, 085 Less: Pea s di vi dends f or 2015 ( 500) Consol i dat ed r et ai ned ear ni ngs December 31 $2, 255
5 Consolidated net income for 2015 Consol i dat ed sal es $5, 000 Less: Consol i dat ed expenses ( $3, 785 + $40 depr eci at i on) ( 3, 825) Tot al consol i dat ed i ncome 1, 175 Less: Noncont r ol l i ng i nt er est shar e ( 90) Cont r ol l i ng shar e of consol i dat ed net i ncome f or 2015 $1, 085
6 Noncontrolling interest December 31, 2014 Sen s st ockhol der s equi t y at book val ue $2, 400 Unamor t i zed excess af t er f our year s: I nvent or y 0 Pl ant asset s ( $320 - $160) 160 Goodwi l l 400 Sen s st ockhol der s equi t y at f ai r val ue $2, 960 25%Sen s st ockhol der s equi t y at f ai r val ue $ 740
7 Noncontrolling interest December 31, 2015 Sen s st ockhol der s equi t y at book val ue $2, 600 Unamor t i zed excess af t er f i ve year s: I nvent or y 0 Pl ant asset s ( $320 - $200) 120 Goodwi l l 400 Sen s st ockhol der s equi t y at f ai r val ue $3, 120 Chapter 4 4-7
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l 25%Sen s st ockhol der s equi t y at f ai r val ue $ 780
4-8 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-2
1 Pal Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2011 ( i n t housands)
Pal 80% Sal Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$ 620
$ 200
$ 820 I ncome f r omSal 21 a 21 Cost of goods sol d 400 * 130 * 530 *
Oper at i ng expenses 154 * 40 * 194 *
Consol i dat ed NI $ 96 Noncont r ol . i nt er est shar e ( $1530, 000 30%)
c 9
9 *
Cont r ol l i ng shar e $ 87 $ 30 $ 87 Retained Earnings Ret ai ned ear ni ngs Pal
$ 130
$ 130
Ret ai ned ear ni ngs Sal $ 22 b 22 Net i ncome 87 30 87 Di vi dends 60 * 20 * a 14 c 6 60 *
Ret ai ned ear ni ngs
December 31
$ 157
$ 32
$ 157 Balance Sheet Cash
$ 91
$ 30
$ 121 Recei vabl es net 120 60 180 I nvent or i es 48 40 88 PP&E net 240 70 310 I nvest ment i n Sal 98 a 7 b 91
$ 597 $ 200 $ 699 Account s payabl e $ 60 $ 36 $ 96 Ot her l i abi l i t i es 40 24 64 Capi t al st ock 300 100 b100 300 Ot her pai d- i n capi t al 40 8 b 8 40 Ret ai ned ear ni ngs 157 32 157 $ 597 $ 200 Noncont r ol l i ng i nt er est J anuar y 1 b 39 Noncont r ol l i ng i nt er est December 31 c 3 42 160 160 $ 699 * Deduct
Workpaper entries a To el i mi nat e i ncome f r omSal and di vi dends r ecei ved f r omSal and adj ust t he i nvest ment i n Sal account t o i t s begi nni ng of t he per i od bal ance. b To el i mi nat e r eci pr ocal i nvest ment i n Sal and equi t y amount s of Sal and t o ent er begi nni ng noncont r ol l i ng i nt er est . c To ent er noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome and di vi dends. Chapter 4 4-9
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-2 ( cont i nued)
2 Pal Corporation and Subsidiary Consol i dat ed I ncome St at ement f or t he year ended December 31, 2011 ( i n t housands) Sal es $820 Less: Cost of goods sol d 530 Gr oss pr of i t 290 Oper at i ng expenses 194 Consol i dat ed net i ncome 96 Less: Noncont r ol l i ng i nt er est shar e 9 Cont r ol l i ng shar e of consol i dat ed net i ncome $ 87
Pal Corporation and Subsidiary Consol i dat ed Ret ai ned Ear ni ngs St at ement f or t he year ended December 31, 2011 Consol i dat ed r et ai ned ear ni ngs J anuar y 1 $130 Add: Cont r ol l i ng shar e of onsol i dat ed net i ncome 87 Less: Di vi dends of Pal ( 60) Consol i dat ed r et ai ned ear ni ngs December 31 $157
Pal Corporation and Subsidiary Consol i dat ed Bal ance Sheet at December 31, 2011 Assets Cur r ent asset s: Cash $121
Recei vabl es net 180 I nvent or i es 88 $389
Pl ant asset s net 310 Tot al asset s $699
Liabilities and Stockholders Equity Li abi l i t i es: Account s payabl e $ 96 Ot her l i abi l i t i es 64 $160
St ockhol der s equi t y: Capi t al st ock, $10 par $300 Ot her pai d- i n capi t al 40 Consol i dat ed r et ai ned ear ni ngs 157 497 Add: Noncont r ol l i ng i nt er est 42 539 Tot al l i abi l i t i es and st ockhol der s equi t y $699
4-10 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-3
Pan Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2011 ( i n t housands)
Pan
Saf 75% Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$800
$200
$1, 000 I ncome f r omSaf 27. 6 a 27. 6 Cost of sal es 500* 100* 600* Ot her expenses 194* 52* c 11. 2 257. 2* Consol i dat ed Net I ncome $ 142. 8 Noncont r ol l i ng shar e f 9. 2 9. 2* Cont r ol l i ng shar e of NI $133. 6 $ 48 $ 133. 6
Retained Earnings Ret ai ned ear ni ngs Pan
$360
$ 360 Ret ai ned ear ni ngs Saf $ 68 b 68 Cont r ol l i ng shar e of NI 133. 6 48 133. 6 Di vi dends 100* 32* a 24 f 8 100* Ret ai ned ear ni ngs December 31
$393. 6
$ 84
$ 393. 6
Balance Sheet Cash
$ 106
$ 30
$ 136 Account s r ecei vabl e 172 40 212 Di vi dends r ecei vabl e f r omSaf
12
e 12
I nvent or i es 190 20 210 Not e r ecei vabl e f r omPan 10 d 10 Land 130 60 190 Bui l di ngs net 340 160 500 Equi pment net 260 100 360 I nvest ment i n Saf 363. 6 a 3. 6 b 360
Pat ent s b 112 c 11. 2 100. 8
$1, 573. 6 $420 $1, 708. 8
Account s payabl e $ 170 $ 20 $ 190 Not e payabl e t o Saf 10 d 10 Di vi dends payabl e 16 e 12 4 Capi t al st ock, $10 par 1, 000 300 b 300 1, 000 Ret ai ned ear ni ngs 393. 6 84 393. 6
$1, 573. 6 $420
Noncont r ol l i ng i nt er est J anuar y 1 b 120 Noncont r ol l i ng i nt er est December 31 f 1. 2 121. 2 550 550 $1, 708. 8 *Deduct Chapter 4 4-11
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-3 ( cont i nued)
Supporting Calculations
Safs value at acquisition Book val ue at December 31, 2011 $384 Less: 2011 Net i ncome ( 48) Add: 2011 Di vi dends 32 Book val ue on J anuar y 1, 2011 $368 Fai r val ue of pat ent s 112 Saf s f ai r val ue on J anuar y 1, 2011 $480
Pur chase pr i ce ( f ai r val ue) of Pan s 75%shar e $360 Noncont r ol l i ng i nt er est ( 25%) $120
Pat ent s have a t en- year l i f e, so amor t i zat i on i s $11, 200 per year .
Safs Adjusted Income Saf s net i ncome $ 48 Less: Amor t i zat i on of Pat ent s ( 11. 2) Saf s adj ust ed i ncome $ 36. 8 Pan s 75%shar e $ 27. 6 Noncont r ol l i ng i nt er est 25%shar e $ 9. 2
4-12 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-4
Pal Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2011 ( i n t housands)
Pal
Sun 75% Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$800
$200
$1, 000 I ncome f r omSun 36 a 36 Cost of sal es 500* 100* 600* Ot her expenses 194* 52* 246* Consol i dat ed NI $ 154 Noncont r ol l i ng shar e c 12 12* Cont r ol l i ng shar e of NI $142 $ 48 $ 142
Retained Earnings Ret ai ned ear ni ngs Pal
$360
$360 Ret ai ned ear ni ngs Sun $ 68 b 68 Cont r ol l i ng shar e of NI 142 48 142 Di vi dends 100* 32* a 24 c 8 100* Ret ai ned ear ni ngs Dec 31 $402 $ 84 $402
Balance Sheet Cash
$ 118
$ 30
$ 148 Account s r ecei vabl e 160 40 200 Di vi dends r ecei vabl e f r omSun
12
e 12
I nvent or i es 190 20 210 Not e r ecei vabl e f r omPal 10 d 10 Land 130 60 190 Bui l di ngs net 340 160 500 Equi pment net 260 100 360 I nvest ment i n Sun 372 a 12 b 360
Goodwi l l b 112 112
$1, 582 $420 $1, 720
Account s payabl e $ 170 $ 20 $ 190 Not e payabl e t o Sun 10 d 10 Di vi dends payabl e 16 e 12 4 Capi t al st ock, $10 par 1, 000 300 b 300 1, 000 Ret ai ned ear ni ngs 402 84 402
$1, 582 $420
Noncont r ol l i ng i nt er est J anuar y 1 b 120 Noncont r ol l i ng i nt er est December 31 c 4 124 550 550 $1, 720 * Deduct Chapter 4 4-13
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-4( cont i nued)
Supporting Calculations Suns value at acquisition: Book val ue at December 31, 2011 $384 Less: 2011 Net i ncome ( 48) Add: 2011 Di vi dends 32 Book val ue on J anuar y 1, 2011 $368
Pur chase pr i ce of Pal s 75%shar e $360 I mpl i ed f ai r val ue of Sun ( $360 / 75%) $480 Sun s book val ue 368 Excess al l ocat ed t o Goodwi l l $112 Noncont r ol l i ng i nt er est ( 25%x $480) $120
SunsAdjusted Income Saf s net i ncome $48 Less: Amor t i zat i on of Goodwi l l ( 0) Sun s adj ust ed i ncome $48 Pal s 75%shar e $36 Noncont r ol l i ng i nt er est 25%shar e $12
Solution P4-5
Preliminary computations
Allocation of excess fair value over book value Cost of 70%i nt er est J anuar y 1 $490, 000 I mpl i ed f ai r val ue of Sul ( $490, 000 / 70%) $700, 000 Book val ue of Sul ( 600, 000) Excess f ai r val ue over book val ue $100, 000 Noncont r ol l i ng i nt er est 30%of f ai r val ue at acqui si t i on $210, 000
Excess allocated Under val ued i nvent or y i t ems sol d i n 2011 $ 5, 000 Under val ued bui l di ngs ( 7 year l i f e) 14, 000 Under val ued equi pment ( 3 year l i f e) 21, 000 Pat ent s 40, 000 Remai nder t o Goodwi l l 20, 000 Excess f ai r val ue over book val ue $100, 000
Calculation of income from Sul Sul s net i ncome $100, 000 Less: Under val ued i nvent or i es sol d i n 2011 ( 5, 000) Less: Addi t i onal Depr eci at i on on bui l di ng ( $14, 000/ 7 year s) ( 2, 000) Less: Addi t i onal Depr eci at i on on equi pment ( $21, 000/ 3 year s) ( 7, 000) Less: Pat ent amor t i zat i on ( $40, 000/ 40 year s) ( 1, 000) Sul s adj ust ed i ncome $ 85, 000 Par s 70%cont r ol l i ng i nt er est shar e $ 59, 500 Noncont r ol l i ng i nt er est s 30%shar e $ 25, 500
4-14 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-5 ( cont i nued)
Workpaper entries for 2011
a I ncome f r omSul 59, 500 Di vi dends ( Sul ) 35, 000 I nvest ment i n Sul 24, 500
b Capi t al st ock ( Sul ) 500, 000 Ret ai ned ear ni ngs ( Sul ) J anuar y 1 100, 000 Unamor t i zed excess 100, 000 I nvest ment i n Sul 490, 000 Noncont r ol l i ng i nt er est J anuar y 1 210, 000
c Cost of sal es ( f or i nvent or y i t ems) 5, 000
Bui l di ngs net 14, 000
Equi pment net 21, 000 Pat ent s 40, 000 Goodwi l l 20, 000 Unamor t i zed excess 100, 000
d Depr eci at i on expense 2, 000
Bui l di ngs net 2, 000
e Depr eci at i on expense 7, 000
Equi pment net 7, 000
f Ot her expenses 1, 000 Pat ent s 1, 000
g Account s payabl e 10, 000 Account s r ecei vabl e 10, 000
h Di vi dends payabl e 14, 000 Di vi dends r ecei vabl e 14, 000
i Noncont r ol l i ng I nt er est Shar e 25, 500
Di vi dends Sul 15, 000 Noncont r ol l i ng I nt er est 10, 500
Chapter 4 4-15
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-5 ( cont i nued) Par Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2011 ( i n t housands)
Par
Sul 70% Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$ 800
$ 700
$1, 500 I ncome f r omSul 59. 5 a 59. 5 Cost of sal es 300* 400* c 5 705* Depr eci at i on expense 154* 60* d 2 e 7 223* Ot her expenses 160* 140* f 1 301* Consol i dat ed NI $ 271 Noncont r ol l i ng shar e i 25. 5 25. 5* Cont r ol l i ng shar e of NI $ 245. 5 $ 100 $ 245. 5
Retained Earnings Ret ai ned ear ni ngs Par
$ 300
$ 300 Ret ai ned ear ni ngs Sul $ 100 b 100 Net i ncome 245. 5 100 245. 5 Di vi dends 200* 50* a 35 i 15 200* Ret ai ned ear ni ngs Dec 31 $ 345. 5 $ 150 $ 345. 5 Balance Sheet Cash
$ 86
$ 60
$ 146 Account s r ecei vabl e 100 70 g 10 160 Di vi dends r ecei vabl e 14 h 14 I nvent or i es 150 100 250 Ot her cur r ent asset s 70 30 100 Land 50 100 150 Bui l di ngs net 140 160 c 14 d 2 312 Equi pment net 570 330 c 21 e 7 914 I nvest ment i n Sul 514. 5 a 24. 5 b 490
Pat ent s c 40 f 1 39 Goodwi l l c 20 20 Unamor t i zed excess b 100 c 100
$1, 694. 5 $ 850 $2, 091
Account s payabl e $ 200 $ 85 g 10 $ 275 Di vi dends payabl e 100 20 h 14 106 Ot her l i abi l i t i es 49 95 144 Capi t al st ock, $10 par 1, 000 500 b 500 1, 000 Ret ai ned ear ni ngs 345. 5 150 345. 5
$1, 694. 5 $ 850
Noncont r ol l i ng i nt er est J anuar y 1 b 210 Noncont r ol l i ng i nt er est December 31 i 10. 5 220. 5 919 919 $2, 091 * Deduct 4-16 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-6
Supporting computations
Owner shi p per cent age 13, 500/ 15, 000 shar es = 90%
I nvest ment cost ( 13, 500 shar es $15) $202, 500 I mpl i ed f ai r val ue of Syn ( $202, 500 / 90%) $225, 000 Book val ue of Syn 165, 000 Excess f ai r val ue over book val ue $ 60, 000
Excess allocated to Land $ 20, 000 Remai nder t o pat ent s 40, 000 Excess f ai r val ue over book val ue $ 60, 000
Income from Syn Syn s r epor t ed net i ncome $ 24, 000 Less: Pat ent amor t i zat i on ( 4, 000) Syn s adj ust ed i ncome $ 20, 000
Pen s shar e of Syn s i ncome ( 90%) $ 18, 000 Noncont r ol l i ng i nt er est shar e ( 10%) $ 2, 000
Investment in Syn December 31, 2012 Cost J anuar y 1, 2011 $202, 500 Pen s shar e of t he change i n Syn s r et ai ned ear ni ngs ( $42, 000 - $15, 000) 90% 24, 300 Less: Pen s shar e ( 90%) of Pat ent amor t i zat i on f or 2 year s ( 7, 200) I nvest ment i n Syn December 31 $219, 600
Chapter 4 4-17
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-6 ( cont i nued)
Pen Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2012 ( i n t housands)
Pen
90%Syn Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$ 400
$ 100
$ 500 I ncome f r omSyn 18 a 18 Cost of sal es 250* 50* 300* Ot her expenses 100. 6* 26* c 4 130. 6* Consol i dat ed NI $ 69. 4 Noncont r ol l i ng shar e g 2 2 * Cont r ol l i ng shar e of NI $ 67. 4 $ 24 $ 67. 4
Retained Earnings Ret ai ned ear ni ngs Pen
$ 177
$ 177 Ret ai ned ear ni ngs Syn $ 34 b 34 Net i ncome 67. 4 24 67. 4 Di vi dends 50* 16* a 14. 4 g 1. 6 50* Ret ai ned ear ni ngs Dec 31 $ 194. 4 $ 42 $ 194. 4
Balance Sheet Cash
$ 18
$ 15
$ 33 Account s r ecei vabl e 80 20 f 5 95 Di vi dends r ecei vabl e- - Syn 7. 2 d 7. 2 I nvent or i es 95 10 105 Not e r ecei vabl e Pen 5 e 5 I nvest ment i n Syn 219. 6 a 3. 6 b 216
Land 65 30 b 20 115 Bui l di ngs net 170 80 250 Equi pment net 130 50 180 Pat ent s b 36 c 4 32
$ 784. 8 $ 210 $ 810 Account s payabl e $ 85. 4 $ 10 f 5 $ 90. 4 Not e payabl e t o Syn 5 e 5 Di vi dends payabl e 8 d 7. 2 . 8 Capi t al st ock 500 150 b 150 500 Ret ai ned ear ni ngs 194. 4 42 194. 4
$ 784. 8 $ 210
Noncont r ol l i ng i nt er est J anuar y 1 b 24 Noncont r ol l i ng i nt er est December 31 g . 4 24. 4 281. 2 281. 2 $ 810 * Deduct 4-18 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-7
Preliminary computations
Allocation of excess fair value over book value Cost of 70%i nt er est J anuar y 1 $490, 000 I mpl i ed f ai r val ue of Sol ( $490, 000 / 70%) $700, 000 Book val ue of Sol ( 600, 000) Excess f ai r val ue over book val ue $100, 000
Excess allocated Under val ued i nvent or y i t ems sol d i n 2011 $ 5, 000 Under val ued bui l di ngs ( 7 year l i f e) 14, 000 Under val ued equi pment ( 3 year l i f e) 21, 000 Remai nder t o goodwi l l 60, 000 Excess f ai r val ue over book val ue $100, 000
Calculation of income from Sol Sol s r epor t ed net i ncome $100, 000 Less: Under val ued i nvent or i es sol d i n 2011 ( 5, 000) Less: Depr eci at i on on bui l di ng ( $14, 000/ 7 year s) ( 2, 000) Less: Depr eci at i on on equi pment ( $21, 000/ 3 year s) ( 7, 000) Adj ust ed i ncome f r omSoul $ 86, 000 Par s 70%cont r ol l i ng shar e $ 60, 200 30%Noncont r ol l i ng i nt er est shar e $ 25, 800
Workpaper entries for 2011 a I ncome f r omSol 60, 200 Di vi dends ( Sol ) 35, 000 I nvest ment i n Sol 25, 200
b Capi t al st ock ( Sol ) 500, 000 Ret ai ned ear ni ngs ( Sol ) - J anuar y 1 100, 000 Unamor t i zed excess 100, 000 I nvest ment i n Sol 490, 000 Noncont r ol l i ng i nt er est - J anuar y 1 20, 000
c Cost of sal es ( f or i nvent or y i t ems) 5, 000
Bui l di ngs net 14, 000
Equi pment net 21, 000 Goodwi l l 60, 000 Unamor t i zed excess 100, 000
d Depr eci at i on expense 2, 000
Bui l di ngs net 2, 000
e Depr eci at i on expense 7, 000
Equi pment net 7, 000
f Noncont r ol l i ng I nt er est Shar e 25, 800
Di vi dends Sol 15, 000 Noncont r ol l i ng I nt er est 10, 800
g Account s payabl e 10, 000 Account s r ecei vabl e 10, 000
h Di vi dends payabl e 14, 000 Di vi dends r ecei vabl e 14, 000
Chapter 4 4-19
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-7 ( cont i nued)
Par Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2011 ( i n t housands)
Par
Sol 70% Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$ 800
$ 700
$1, 500 I ncome f r omSol 60. 2 a 60. 2 Gai n on equi pment 10 10 Cost of sal es 300* 400* c 5 705* Depr eci at i on expense 155* 60* d 2 224* e 7 Ot her expenses 160* 140* 300* Consol i dat ed NI $ 281 Noncont r ol l i ng shar e f 25. 8 25. 8* Cont r ol l i ng shar e of NI $ 255. 2 $ 100 $ 255. 2
Retained Earnings Ret ai ned ear ni ngs Par
$ 300
$ 300 Ret ai ned ear ni ngs Sol $ 100 b 100 Cont r ol l i ng shar e of NI 255. 2 100 255. 2 Di vi dends 200* 50* a 35 f 15 200* Ret ai ned ear ni ngs Dec 31 $ 355. 2 $ 150 $ 355. 2
Balance Sheet Cash
$ 96
$ 60
$ 156 Account s r ecei vabl e 100 70 g 10 160 Di vi dends r ecei vabl e 14 h 14 I nvent or i es 150 100 250 Ot her cur r ent asset s 70 30 100 Land 50 100 150 Bui l di ngs net 140 160 c 14 d 2 312 Equi pment net 570 330 c 21 e 7 914 I nvest ment i n Sol 515. 2 a 25. 2 b 490
Goodwi l l c 60 60 Unamor t i zed excess b 100 c 100
$1, 705. 2 $ 850 $2, 102 Account s payabl e $ 200 $ 85 g 10 $ 275 Di vi dends payabl e 100 20 h 14 106 Ot her l i abi l i t i es 50 95 145 Capi t al st ock, $10 par 1, 000 500 b 500 1, 000 Ret ai ned ear ni ngs 355. 2 150 355. 2
$1, 705. 2 $ 850
Noncont r ol l i ng i nt er est J anuar y 1 b 210 Noncont r ol l i ng i nt er est December 31 f 10. 8 220. 8 919 919 $2, 102 * Deduct 4-20 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-8
Supporting computations
Owner shi p per cent age 13, 500/ 15, 000 shar es = 90%
I nvest ment cost ( 13, 500 shar es $15) $202, 500 I mpl i ed f ai r val ue of Son ( $202, 500 / 90%) $225, 000 Book val ue of Son 165, 000 Excess f ai r val ue over book val ue $ 60, 000
Excess allocated to Land $ 20, 000 Remai nder t o goodwi l l 40, 000 Excess f ai r val ue over book val ue $ 60, 000
Income from Son Pun s cont r ol l i ng shar e of Son s i ncome ( $24, 000 90%) $ 21, 600
Investment in Son December 31, 2012 Cost J anuar y 1, 2011 $202, 500 Pun s shar e of t he change i n Son s r et ai ned ear ni ngs ( $42, 000 - $15, 000) 90% 24, 300 I nvest ment i n Son December 31 $226, 800
Noncont r ol l i ng i nt er est at December 31, 2012 ( 10%of f ai r val ue) ( ( $225, 000 + $42, 000 - $15, 000) x 10%) $ 25, 200
Chapter 4 4-21
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-8 ( cont i nued)
Pun Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2012 ( i n t housands)
Pun
90%Son Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$ 400
$ 100
$ 500 I ncome f r omSon 21. 6 a 21. 6 Cost of sal es 250* 50* 300* Expenses 100. 6* 26* 126. 6* Consol i dat ed NI $ 73. 4 Noncont r ol l i ng shar e c 2. 4 2. 4* Cont r ol l i ng shar e of NI $ 71 $ 24 $ 71
Retained Earnings Ret ai ned ear ni ngs Pun
$ 181
$ 181 Ret ai ned ear ni ngs Son $ 34 b 34 Cont r ol l i ng shar e of NI 71 24 71 Di vi dends 50* 16* a 14. 4 c 1. 6 50* Ret ai ned ear ni ngs Dec 31 $ 202 $ 42 $ 202
Balance Sheet Cash
$ 18
$ 15
$ 33 Account s r ecei vabl e 80 20 f 5 95 Di vi dends r ecei vabl e 7. 2 d 7. 2 I nvent or i es 95 10 105 Not e r ecei vabl e Pun 5 e 5 I nvest ment i n Son 226. 8 a 7. 2 b 219. 6
Land 65 30 b 20 115 Bui l di ngs net 170 80 250 Equi pment net 130 50 180 Goodwi l l b 40 40
$ 792 $ 210 $ 818
Account s payabl e $ 85 $ 10 f 5 $ 90 Not e payabl e t o Son 5 e 5 Di vi dends payabl e 8 d 7. 2 . 8 Capi t al st ock 500 150 b 150 500 Ret ai ned ear ni ngs 202 42 202
$ 792 $ 210
Noncont r ol l i ng i nt er est J anuar y 1 b 24. 4 Noncont r ol l i ng i nt er est December 31 c . 8 25. 2 285. 2 285. 2 $ 818 * Deduct 4-22 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-9
Pas Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2011 ( i n t housands)
Pas
80%Sel Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$ 200
$ 110
$ 310 I ncome f r omSel 17 a 17 Cost of sal es 80* 40* b 12. 5 132. 5* Depr eci at i on expense 40* 20* d 5 65* Ot her expenses 25. 5* 10* g 1. 25 36. 75* Consol i dat ed NI $ 75. 75 Noncont r ol l i ng shar e c 4. 25 4. 25* Cont r ol l i ng shar e of NI $ 71. 5 $ 40 $ 71. 5
Retained Earnings Ret ai ned ear ni ngs Pas
$ 75
$ 75 Ret ai ned ear ni ngs Sel $ 50 b 50 Cont r ol l i ng shar e of NI 71. 5 40 71. 5 Di vi dends 40* 20* a 16 c 4 40* Ret ai ned ear ni ngs Dec 31 $ 106. 5 $ 70 $ 106. 5
Balance Sheet Cash
$ 29. 5
$ 30
$ 59. 5 Tr ade r ecei vabl es net 28 40 e 4 64 Di vi dends r ecei vabl e 8 f 8 I nvent or i es 40 30 70 Land 15 30 45 Bui l di ngs net 65 70 135 Equi pment net 200 100 b 25 d 5 320 I nvest ment i n Sel 211 a 1 b 210
Pat ent s b 25 g 1. 25 23. 75
$ 596. 5 $ 300 $ 717. 25
Account s payabl e $ 40 $ 50 e 4 $ 86 Di vi dends payabl e 100 10 f 8 102 Ot her l i abi l i t i es 50 20 70 Capi t al st ock 300 150 b 150 300 Ret ai ned ear ni ngs 106. 5 70 106. 5
$ 596. 5 $ 300
Noncont r ol l i ng i nt er est J anuar y 1 b 52. 5 Noncont r ol l i ng i nt er est December 31 c . 25 52. 75 302 302 $ 717. 25 * Deduct Chapter 4 4-23
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-9 ( cont i nued)
Supporting computations I nvest ment cost J anuar y 1, 2011 $210, 000 I mpl i ed f ai r val ue of Sel ( $210, 000 / 80%) $262, 500 Book val ue of Sel 200, 000 Excess f ai r val ue over book val ue $ 62, 500 Excess al l ocat ed: Under val ued i nvent or y $ 12, 500 Under val ued equi pment 25, 000 Remai nder t o pat ent s 25, 000 Excess f ai r val ue over book val ue $ 62, 500
4-24 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-10
Pik Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2011 ( i n t housands)
Pi k 80% Sel Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$ 200
$ 110
$ 310 I ncome f r omSel 18 a 18 Cost of sal es 80* 40* b 12. 5 132. 5* Depr eci at i on expense 40* 20* d 5 65* Ot her expenses 25. 5* 10* 35. 5* Consol i dat ed NI $ 77 Noncont r ol l i ng shar e c 4. 5 4. 5* Cont r ol l i ng shar e of NI $ 72. 5 $ 40 $ 72. 5
Retained Earnings Ret ai ned ear ni ngs Pi k
$ 75
$ 75 Ret ai ned ear ni ngs Sel $ 50 b 50 Cont r ol l i ng shar e of NI 72. 5 40 72. 5 Di vi dends 40* 20* a 16 c 4 40* Ret ai ned ear ni ngs Dec 31 $ 107. 5 $ 70 $ 107. 5
Balance Sheet Cash
$ 29. 5
$ 30
$ 59. 5 Tr ade r ecei vabl es net 28 40 e 4 64 Di vi dends r ecei vabl e 8 f 8 I nvent or i es 40 30 70 Land 15 30 45 Bui l di ngs net 65 70 135 Equi pment net 200 100 b 25 d 5 320 I nvest ment i n Sel 212 a 2 b 210
Goodwi l l b 25 25
$ 597. 5 $ 300 $ 718. 5
Account s payabl e $ 40 $ 50 e 4 $ 86 Di vi dends payabl e 100 10 f 8 102 Ot her l i abi l i t i es 50 20 70 Capi t al st ock 300 150 b 150 300 Ret ai ned ear ni ngs 107. 5 70 107. 5
$ 597. 5 $ 300
Noncont r ol l i ng i nt er est J anuar y 1 b 52. 5 Noncont r ol l i ng i nt er est December 31 c . 5 53 302 302 $ 718. 5 * Deduct Chapter 4 4-25
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-10 ( cont i nued)
Supporting computations I nvest ment cost J anuar y 1, 2011 $210, 000 I mpl i ed f ai r val ue of Sel ( $210, 000 / 80%) $262, 500 Book val ue of Sel 200, 000 Excess f ai r val ue over book val ue $ 62, 500 Excess al l ocat ed: Under val ued i nvent or y $ 12, 500 Under val ued equi pment 25, 000 Remai nder t o goodwi l l 25, 000 Excess f ai r val ue over book val ue $ 62, 500
Income from Sel Sel s r epor t ed net i ncome $ 40, 000 Less amor t i zat i on of excess f ai r val ue: I nvent or y ( 12, 500) Depr eci at i on ( $25, 000 / 5 year s) ( 5, 000) Sel s adj ust ed i ncome $ 22, 500
Pi k s 80%cont r ol l i ng shar e $ 18, 000 20%Noncont r ol l i ng i nt er est shar e $ 4, 500
4-26 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-11
Supporting computations I nvest ment cost December 31, 2011 $170, 000 I mpl i ed f ai r val ue of St u ( $170, 000 / 80%) $212, 500 Book val ue of St u 150, 000 Excess f ai r val ue over book val ue $ 62, 500
Al l ocat i on of Excess
Amor t i zat i on 2012 2015 Unamor t i zed Excess December 31, 2015 I nvent or i es $ 8, 750 $ 8, 750 $ - - - Pl ant asset s net 22, 500 10, 000 12, 500 Pat ent s 31, 250 25, 000 6, 250 $62, 500 $43, 750 $18, 750
Pil Corporation and Subsidiary Consol i dat ed Bal ance Sheet Wor kpaper s on December 31, 2015
Pi l
St u 80% Adj ust ment s and El i mi nat i ons Consol i dat ed Bal ance Sheet Assets Cash
$ 41, 000
$ 35, 000
$ 76, 000 Tr ade r ecei vabl es 60, 000 55, 000 c 5, 000 110, 000 Di vi dends r ecei vabl e 8, 000 d 8, 000 Advance t o St u 25, 000 e 25, 000 I nvent or i es 125, 000 35, 000 160, 000 Pl ant asset s net 300, 000 175, 000 b 12, 500 487, 500 I nvest ment i n St u 191, 000 a 191, 000 Pat ent s b 6, 250 6, 250 Unamor t i zed excess a 18, 750 b 18, 750 Tot al asset s $750, 000 $300, 000 $839, 750
Equities Account s payabl e
$ 50, 000
$ 45, 000
c 5, 000
$ 90, 000 Di vi dends payabl e 10, 000 d 8, 000 2, 000 Advance f r omPi l 25, 000 e 25, 000 Capi t al st ock 400, 000 100, 000 a 100, 000 400, 000 Ret ai ned ear ni ngs 300, 000 120, 000 a 120, 000 300, 000 Noncont r ol l i ng i nt er est a 47, 750 47, 750 Tot al equi t i es $750, 000 $300, 000 $839, 750
Chapter 4 4-27
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-12
Preliminary computations I nvest ment cost $480, 000 I mpl i ed f ai r val ue Sci ( $480, 000 / 80%) $600, 000 Book val ue of Sci 450, 000 Excess f ai r val ue over book val ue $150, 000
Allocation of differential Pl ant asset s $100, 000 Goodwi l l 50, 000 Excess f ai r val ue over book val ue $150, 000
Amortization Pl ant asset s $100, 000/ 4 year s = $25, 000 per year
Investment account balance at December 31, 2012 Under l yi ng book val ue $580, 000 Add: Unamor t i zed excess al l ocat ed t o pl ant asset s ( $100, 000 - $50, 000 depr eci at i on) 50, 000 Add: Unamor t i zed goodwi l l 50, 000 Fai r val ue of Sci at December 31 $680, 000 I nvest ment account bal ance at December 31 ( 80%) $544, 000 Noncont r ol l i ng i nt er est at December 31 ( 20%) $136, 000
The i nvest ment account bal ance i s over st at ed at $560, 000 f or t he $16, 000 di vi dend r ecei vabl e.
4-28 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-12 ( cont i nued)
Pat Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2012 ( i n t housands)
Pat
Sci 80% Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$1, 800
$ 600
$2, 400 I ncome f r omSci 76 c 76 Cost of sal es 1, 200* 300* 1, 500* Oper at i ng expense 380* 180* e 25 585* Consol i dat ed NI $ 315 Noncont r ol l i ng shar e f 19 19* Cont r ol l i ng shar e of NI $ 296 $ 120 $ 296
Retained Earnings Ret ai ned ear ni ngs Pat
$ 244
$ 244 Ret ai ned ear ni ngs Sci $ 100 d 100 Cont r ol l i ng shar e of NI 296 120 296 Di vi dends 200* 40* c 32 f 8 200* Ret ai ned ear ni ngs Dec 31 $ 340 $ 180 $ 340
Balance Sheet Cash
$ 12
$ 30
a 40
$ 82 Account s r ecei vabl e 52 40 h 10 82 I nvent or i es 164 120 284 Advance t o Sci 40 a 40 Ot her cur r ent asset s 160 10 170 Land 320 60 380 Pl ant asset s net 680 460 d 75 e 25 1, 190 I nvest ment i n Sci 560 b 16 c 44 d 500
Di vi dends r ecei vabl e b 16 g 16 Goodwi l l d 50 50
$1, 988 $ 720 $2, 238
Account s payabl e $ 48 $ 30 h 10 $ 68 Di vi dends payabl e 20 g 16 4 Ot her l i abi l i t i es 200 90 290 Capi t al st ock 1, 400 400 d 400 1, 400 Ret ai ned ear ni ngs 340 180 340
$1, 988 $ 720
Noncont r ol l i ng i nt er est J anuar y 1 d 125 Noncont r ol l i ng i nt er est December 31 f 11 136 827 827 $2, 238 * Deduct
Chapter 4 4-29
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-13
Supporting computations I nvest ment cost J anuar y 1, 2011 $ 80, 000 I mpl i ed f ai r val ue of Ski ( $80, 000 / 80%) $100, 000 Book val ue of Ski 90, 000 Excess f ai r val ue over book val ue $ 10, 000
Excess allocated to I nvent or y ( sol d i n 2011) $ 1, 000 Equi pment ( 4- year r emai ni ng use l i f e) 4, 000 I nt angi bl e asset s ( 40- year amor t i zat i on per i od) 5, 000 Excess f ai r val ue over book val ue $10, 000
Income from Ski for 2011 Ski s net i ncome $ 15, 000 Less: Excess al l ocat ed t o i nvent or i es ( 1, 000) Less: Amor t i zat i on of excess al l ocat ed t o equi pment ( $4, 000/ 4 year s) ( 1, 000) Less: Amor t i zat i on of i nt angi bl es ( $5, 000/ 40 year s) ( 125) Ski s adj ust ed i ncome f or 2011 $ 12, 875
Pl y s 80%cont r ol l i ng i nt er est shar e $ 10, 300 Noncont r ol l i ng i nt er est shar e f or 2011 ( 20%) $ 2, 575
Income from Ski for 2012 Ski s net i ncome $ 20, 000 Less: Amor t i zat i on of excess al l ocat ed t o equi pment ( $4, 000/ 4 year s) ( 1, 000) Less: Amor t i zat i on of i nt angi bl es ( $5, 000/ 40 year s) ( 125) Ski s adj ust ed i ncome f or 2012 $ 18, 875
Pl y s 80%cont r ol l i ng i nt er est shar e $ 15, 100 Noncont r ol l i ng i nt er est shar e f or 2012 ( 20%) $ 3, 775
Not e: Si nce t he pr i or year s i ncome i s not af f ect ed by t he cur r ent year s er r or of omi ssi on, t he wor kpaper s f or 2012 ar e easi er t o pr epar e wi t hout an addi t i onal conver si on- t o- equi t y ent r y.
4-30 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-13 ( cont i nued)
Ply Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2011
Pl y
Ski 80% Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$ 160, 000
$ 80, 000
$ 240, 000 I ncome f r omSki 10, 300 a 10, 300 Cost of sal es 105, 000* 35, 000* b 1, 000 141, 000* Oper at i ng expenses 35, 000* 30, 000* c 1, 000 d 125 66, 125* Consol i dat ed NI $ 32, 875 Noncont r ol l i ng shar e f 2, 575 2, 575* Cont r ol l i ng shar e of NI $ 30, 300 $ 15, 000 $ 30, 300
Retained Earnings Ret ai ned ear ni ngs Pl y
$ 70, 000
$ 70, 000 Ret ai ned ear ni ngs Ski $ 30, 000 b 30, 000 Cont r ol l i ng shar e of NI 30, 300 15, 000 30, 300 Di vi dends 10, 000* 5, 000* a 4, 000 f 1, 000 10, 000* Ret ai ned ear ni ngs Dec 31 $ 90, 300 $ 40, 000 $ 90, 300
Balance Sheet Cash
$ 24, 700
$ 15, 000
$ 39, 700 Tr ade r ecei vabl es net 25, 000 20, 000 45, 000 Di vi dends r ecei vabl e 4, 000 0 e 4, 000 I nvent or i es 40, 000 30, 000 70, 000 Pl ant & equi pment net 100, 000 55, 000 b 4, 000 c 1, 000 158, 000 I nvest ment i n Ski 86, 300 a 6, 300 b 80, 000
I nt angi bl es b 5, 000 d 125 4, 875
$ 280, 000 $ 120, 000 $ 317, 575
Account s payabl e $ 20, 700 $ 15, 000 $ 35, 700 Di vi dends payabl e 9, 000 5, 000 e 4, 000 10, 000 Capi t al st ock 100, 000 40, 000 b 40, 000 100, 000 Ot her pai d- i n capi t al 60, 000 20, 000 b 20, 000 60, 000 Ret ai ned ear ni ngs 90, 300 40, 000 90, 300
$ 280, 000 $ 120, 000
Noncont r ol l i ng i nt er est J anuar y 1 b 20, 000 Noncont r ol l i ng i nt er est December 31 f 1, 575 21, 575 118, 000 118, 000 $ 317, 575 * Deduct Chapter 4 4-31
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-13 ( cont i nued)
Ply Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2012
Pl y
Ski 80% Adj ust ment s and El i mi nat i ons Consol i dat ed St at ement s Income Statement Sal es
$ 170, 000
$ 90, 000
$ 260, 000 I ncome f r omSki 16, 000 a 16, 000 Cost of sal es 110, 000* 35, 000* 145, 000* Oper at i ng expenses 30, 000* 35, 000* c 1, 000 d 125 66, 125* Consol i dat ed NI $ 48, 875 Noncont r ol l i ng shar e f 3, 775 3, 775* Cont r ol l i ng shar e of NI $ 46, 000 $ 20, 000 $ 45, 100
Retained Earnings Ret ai ned ear ni ngs Pl y
$ 90, 300
$ 90, 300 Ret ai ned ear ni ngs Ski $ 40, 000 b 40, 000 Cont r ol l i ng shar e of NI 46, 000 20, 000 45, 100 Di vi dends 15, 000* 10, 000* a 8, 000 f 2, 000 15, 000* Ret ai ned ear ni ngs Dec 31 $ 121, 300 $ 50, 000 $ 120, 400
Balance Sheet Cash
$ 26, 700
$ 20, 000
$ 46, 700 Tr ade r ecei vabl es net 45, 000 30, 000 75, 000 Di vi dends r ecei vabl e 4, 000 e 4, 000 I nvent or i es 40, 000 30, 000 70, 000 Pl ant & equi pment net 95, 000 60, 000 b 3, 000 c 1, 000 157, 000 I nvest ment i n Ski 94, 300 a 8, 000 b 86, 300
I nt angi bl e asset s b 4, 875 d 125 4, 750
$ 305, 000 $ 140, 000 $ 353, 450 Account s payabl e $ 17, 700 $ 25, 000 $ 42, 700 Di vi dends payabl e 6, 000 5, 000 e 4, 000 7, 000 Capi t al st ock 100, 000 40, 000 b 40, 000 100, 000 Ot her pai d- i n capi t al 60, 000 20, 000 b 20, 000 60, 000 Ret ai ned ear ni ngs 121, 300 50, 000 120, 400
$ 305, 000 $ 140, 000
Noncont r ol l i ng i nt er est J anuar y 1 b 21, 575 Noncont r ol l i ng i nt er est December 31 f 1, 775 23, 350 132, 775 132, 775 $ 353, 450 * Deduct 4-32 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-14
Preliminary computations I nvest ment cost $ 99, 000 I mpl i ed f ai r val ue of Si m( $99, 000 / 90%) $110, 000 Book val ue of Si m 80, 000 Excess f ai r val ue over book val ue $ 30, 000
Excess al l ocat ed t o: I nvent or i es ( sol d i n 2011) $ 10, 000 Pat ent s ( 10- year r emai ni ng usef ul l i f e) 20, 000 Excess f ai r val ue over book val ue $ 30, 000
1 Analysis of investment in Sim account
Fai r val ue of Si mJ anuar y 5, 2011 $110, 000 Add: Change i n r et ai ned ear ni ngs f r om J anuar y 5, 2011 t o December 31, 2013
50, 000 Less: Amor t i zat i on of excess Al l ocat ed t o i nvent or i es and amor t i zed i n 2011 ( 10, 000) Al l ocat ed t o pat ent s and amor t i zed over 10 year s
( $20, 000/ 10 year s) 3 year s ( 6, 000) Fai r val ue at December 31, 2013 144, 000 Add: I ncome f r omSi mf or 2014 18, 000 Less: Di vi dends i n 2014 ( 10, 000) Fai r val ue at December 31, 2014 $152, 000
I nvest ment i n Si mon December 31, 2013 ( 90%f ai r val ue) $129, 600 I nvest ment i n Si mon December 31, 2014 ( 90%f ai r val ue) $136, 800 Noncont r ol l i ng i nt er est on Dec. 31, 2013 ( 10%f ai r val ue) $ 14, 400 Noncont r ol l i ng i nt er est on Dec. 31, 2014 ( 10%f ai r val ue) $ 15, 200
Chapter 4 4-33
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-14 ( cont i nued)
Pep Company and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2014
Pep
Si m Adj ust ment s and El i mi nat i ons I ncome St at ement Ret ai ned Ear ni ngs Bal ance Sheet Debits Cash
$ 11, 000
$ 15, 000
$ 26, 000 Account s r ecei vabl e 15, 000 25, 000 40, 000 Pl ant asset s 220, 000 180, 000 400, 000 I nvest ment i n Si m
136, 800 a 7, 200 b 129, 600
Pat ent s b 14, 000 c 2, 000 12, 000 Cost of goods sol d 50, 000 30, 000 $ 80, 000* Oper at i ng expenses 25, 000 40, 000 c 2, 000 67, 000* Di vi dends 20, 000 10, 000 a 9, 000 $ 20, 000* d 1, 000
$477, 800 $300, 000
$478, 000
Credits Accumul at ed depr eci at i on
$ 90, 000
$ 50, 000
140, 000 Li abi l i t i es 80, 000 30, 000 110, 000 Capi t al st ock 100, 000 60, 000 b 60, 000 100, 000 Pai d- i n- excess 20, 000 20, 000 Ret ai ned ear ni ngs 71, 600 70, 000 b 70, 000 71, 600 Sal es 100, 000 90, 000 190, 000 I ncome f r omSi m 16, 200 a 16, 200
$477, 800 $300, 000
Noncont r ol l i ng i nt er est Dec 31, 2013 b 14, 400 Noncont r ol l i ng i nt er est shar e ( $18, 000 adj . i nc. x 10%)
d 1, 800
1, 800*
Cont r ol l i ng shar e of NI $ 41, 200
41, 200 Consol i dat ed r et ai ned ear ni ngs $ 92, 800
92, 800 Noncont r ol l i ng i nt er est Dec 31, 2014 d 800 15, 200 164, 000 164, 000 $478, 000 * Deduct
a To el i mi nat e i ncome f r omsubsi di ar y and di vi dends r ecei ved and r educe t he i nvest ment account t o i t s begi nni ng- of - t he- per i od bal ance. b To el i mi nat e r eci pr ocal i nvest ment and subsi di ar y equi t y amount s, est abl i sh begi nni ng noncont r ol l i ng i nt er est , and adj ust pat ent s f or t he unamor t i zed excess as of t he begi nni ng of t he per i od. c To amor t i ze excess al l ocat ed t o pat ent s f or 2014. d To ent er noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome and di vi dends.
4-34 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-15
1 Journal entries on Pegs books
January 1, 2011 I nvest ment i n Sup ( 90%) 18, 000 Cash 18, 000 To r ecor d pur chase of 90%of Sup s st ock f or cash.
July 1, 2011 I nvest ment i n El l ( 25%) 7, 000 Cash 7, 000 To r ecor d pur chase of 25%of El l s st ock f or cash.
November 2011 Cash 2, 700 I nvest ment i n Sup ( 90%) 2, 700 To r ecor d r ecei pt of 90%of Sup s $3, 000 di vi dends.
November 2011 Cash 1, 250 I nvest ment i n El l ( 25%) 1, 250 To r ecor d r ecei pt of 25%of El l s $5, 000 di vi dends.
December 31, 2011 I nvest ment i n Sup ( 90%) 4, 500 I ncome f r omSup 4, 500 To r ecor d Shar e of Sup s r epor t ed i ncome ( $28, 000 - $23, 000) 90%
December 31, 2011 I nvest ment i n El l ( 25%) 700 I ncome f r omEl l 700 To r ecor d i nvest ment i ncome f r omEl l f or 20119 comput ed as: Shar e of El l s r epor t ed i ncome $ 750
( $30, 000- $24, 000) 1/ 2 year 25%
Less: Amor t i zat i on of excess [ $7, 000 ( $24, 000 25%) ] 10 year s 1/ 2 year
( 50)
$ 700
Chapter 4 4-35
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-15 ( cont i nued)
2 Pegs separate company financial statements
Peg Corporation I ncome St at ement f or t he year ended December 31, 2011
Revenues Sal es $100, 000 I ncome f r omSup 4, 500 I ncome f r omEl l 700 Tot al r evenue $105, 200 Costs and expenses Cost of sal es $ 60, 000 Ot her expenses 25, 000 Tot al cost s and expenses 85, 000 Net i ncome $ 20, 200
Peg Corporation Ret ai ned Ear ni ngs St at ement f or t he year ended December 31, 2011
Ret ai ned ear ni ngs J anuar y 1 $ 20, 000 Add: Net i ncome 20, 200 Deduct : Di vi dends ( 10, 000) Ret ai ned ear ni ngs December 31 $ 30, 200
Peg Corporation Bal ance Sheet at December 31, 2011
Assets Cur r ent asset s: Cash $ 18, 950 Ot her cur r ent asset s 40, 000 $ 58, 950
Pl ant asset s net 120, 000 I nvest ment s: I nvest ment i n Sup ( 90%) $ 19, 800 I nvest ment i n El l ( 25%) 6, 450 26, 250
Tot al asset s $205, 200
Liabilities and stockholders equity Cur r ent l i abi l i t i es $ 25, 000 St ockhol der s equi t y: Capi t al st ock $150, 000 Ret ai ned ear ni ngs December 31 30, 200 180, 200
Tot al l i abi l i t i es and st ockhol der s equi t y $205, 200
4-36 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-15 ( cont i nued)
3 Consol i dat i on wor kpaper s t r i al bal ance f or mat
Peg Corporation and Subsidiary Consol i dat i on Wor kpaper s f or t he year ended December 31, 2011
Peg 90% Sup Adj ust ment s and El i mi nat i ons I ncome St at ement Ret ai ned Ear ni ngs Bal ance Sheet Debits Cash
$ 18, 950
$ 4, 000
$ 22, 950 Ot her cur r ent asset s 40, 000 11, 000 51, 000 Pl ant asset s net 120, 000 14, 000 134, 000 I nvest ment i n Sup
19, 800 a 1, 800 b 18, 000
I nvest ment i n El l 6, 450 6, 450 Cost of sal es 60, 000 16, 000 $ 76, 000* Ot her expenses 25, 000 7, 000 32, 000* Di vi dends 10, 000 3, 000 a 2, 700 $ 10, 000* d 300* Tot al debi t s $300, 200 $55, 000 $214, 400
Credits Cur r ent l i abi l i t i es
$ 25, 000
$ 7, 000
$ 32, 000 Capi t al st ock 150, 000 18, 000 b 18, 000 150, 000 Ret ai ned ear ni ngs 20, 000 2, 000 b 2, 000 20, 000 Sal es 100, 000 28, 000 128, 000 I ncome f r omSup 4, 500 a 4, 500 I ncome f r omEl l 700 700 Tot al cr edi t s $300, 200 $55, 000
Noncont r ol l i ng i nt er est - J anuar y 1
b 2, 000
Noncont r ol l i ng i nt er est shar e $5, 000 10%
d 500
500*
Cont r ol l i ng shar e of NI $ 20, 200
20, 200 Consol i dat ed r et ai ned ear ni ngs $ 30, 200
30, 200 Noncont r ol l i ng i nt er est December 31
d 200
2, 200 $214, 400
Chapter 4 4-37
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-15 ( cont i nued)
4 Consolidated financial statements Peg Corporation and Subsidiary Consol i dat ed I ncome St at ement f or t he year ended December 31, 2011 Revenues Sal es $128, 000 I ncome f r omEl l ( equi t y met hod) 700 Tot al r evenues $128, 700 Costs and expenses Cost of sal es $ 76, 000 Ot her expenses 32, 000 Tot al cost s and expenses 108, 000 Tot al consol i dat ed i ncome 20, 700 Less: Noncont r ol l i ng i nt er est shar e 500 Cont r ol l i ng shar e of NI $ 20, 200
Peg Corporation and Subsidiary Consol i dat ed Ret ai ned Ear ni ngs St at ement f or t he year ended December 31, 2011 Consol i dat ed r et ai ned ear ni ngs J anuar y 1 $ 20, 000 Add: Cont r ol l i ng shar e of NI 20, 200 Deduct : Di vi dends ( 10, 000) Consol i dat ed r et ai ned ear ni ngs December 31 $ 30, 200
Peg Corporation and Subsidiary Consol i dat ed Bal ance Sheet at December 31, 2011 Assets Cur r ent asset s: Cash $ 22, 950 Ot her cur r ent asset s 51, 000 $ 73, 950
Pl ant asset s net 134, 000 I nvest ment s and ot her asset s: I nvest ment i n El l 6, 450 Tot al asset s $214, 400 Liabilities and stockholders equity Cur r ent l i abi l i t i es $ 32, 000 St ockhol der s equi t y: Capi t al st ock $150, 000 Consol i dat ed r et ai ned ear ni ngs 30, 200 Noncont r ol l i ng i nt er est 2, 200 182, 400 Tot al l i abi l i t i es and st ockhol der s equi t y $214, 400
Solution P4-16
Partial consolidated statement of cash flows using the direct method Pil Corporation and Subsidiaries Par t i al Consol i dat ed St at ement of Cash Fl ows f or t he cur r ent year Cash Flows from Operating Activities Cash r ecei ved f r omcust omer s $1, 600, 000 Di vi dends f r omequi t y i nvest ees 40, 000 I nt er est r ecei ved f r omshor t - t er ml oan 5, 000 Cash pai d f or ot her expenses ( 450, 000) Cash pai d t o suppl i er s ( 630, 000) Net cash f l ow f r omoper at i ng act i vi t i es $ 565, 000
4-38 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-17
Direct Method
Pes Corporation and Subsidiary Consol i dat ed St at ement of Cash Fl ows f or t he year ended December 31, 2011
Cash Flows from Operating Activities Cash r ecei ved f r omcust omer s $670, 000 Cash pai d t o suppl i er s ( $348, 000) Cash pai d f or oper at i ng expenses ( 157, 500) ( 505, 500) Net cash f l ows f r omoper at i ng act i vi t i es 164, 500 Cash Flows from Investing Activities Pur chase of pl ant and equi pment ( 125, 000) Net cash f l ows f r omi nvest i ng act i vi t i es ( 125, 000) Cash Flows from Financing Activities Payment of cash di vi dends cont r ol l i ng ( 36, 000) Payment of cash di vi dends noncont r ol l i ng ( 2, 000) Payment of l ong- t er ml i abi l i t i es ( 11, 000) Net cash f l ows f r omf i nanci ng act i vi t i es ( 49, 000) Decr ease i n cash f or t he year ( 9, 500) Cash on J anuar y 1 65, 000 Cash on December 31 $ 55, 500
Reconciliation of net income to cash provided by operating activities
Cont r ol l i ng shar e of NI $130, 000 Adj ust ment s t o r econci l e net i ncome t o cash pr ovi ded by oper at i ng act i vi t i es: Noncont r ol l i ng i nt er est shar e $ 5, 000 Depr eci at i on expense 51, 000 Pat ent s amor t i zat i on 500 I ncr ease i n account s payabl e 22, 000 I ncr ease i n account s r ecei vabl e ( 5, 000) I ncr ease i n i nvent or i es ( 20, 000) I ncr ease i n ot her cur r ent asset s ( 19, 000) 34, 500 Net cash f l ows f r omoper at i ng act i vi t i es $164, 500
Chapter 4 4-39
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-17 ( cont i nued)
Indirect Method
Pes Corporation and Subsidiary Consol i dat ed St at ement of Cash Fl ows f or t he year ended December 31, 2011
Cash Flows from Operating Activities Cont r ol l i ng shar e of NI $130, 000
Adj ust ment s t o r econci l e net i ncome t o net cash f r omoper at i ng act i vi t i es: Noncont r ol l i ng shar e of NI $5000
Depr eci at i on $ 51, 000 Pat ent s amor t i zat i on 500 I ncr ease i n account s r ecei vabl e ( 5, 000) I ncr ease i n i nvent or i es ( 20, 000) I ncr ease i n ot her cur r ent asset s ( 19, 000) I ncr ease i n account s payabl e 22, 000 34, 500 Net cash f l ows f r omoper at i ng act i vi t i es 164, 500 Cash Flows from Investing Activities Pur chase of pl ant and equi pment ( 125, 000) Net cash f l ows f r omi nvest i ng act i vi t i es ( 125, 000) Cash Flows from Financing Activities Payment of cash di vi dends cont r ol l i ng ( 36, 000) Payment of cash di vi dends noncont r ol l i ng ( 2, 000) Payment of l ong- t er ml i abi l i t i es ( 11, 000) Net cash f l ows f r omf i nanci ng act i vi t i es ( 49, 000) Decr ease i n cash f or t he year ( 9, 500) Cash on J anuar y 1 65, 000 Cash on December 31 $ 55, 500
Note: The cash flows from investing activities and cash flows from financing activities sections of the statement of cash flows are the same under the direct and indirect method.
4-40 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-18 [ AI CPA]
Indirect Method
Puh, Inc. and Subsidiary St at ement of Cash Fl ows (Indirect Method) f or t he year ended December 31, 2011
Cash Flows from Operating Activities Cont r ol l i ng shar e of NI $ 198, 000 Adj ust ment s t o r econci l e net i ncome t o cash pr ovi ded by oper at i ng act i vi t i es: Noncont r ol l i ng i nt er est shar e $ 33, 000 Depr eci at i on expense 82, 000 Pat ent s amor t i zat i on 3, 000 Decr ease i n account s r ecei vabl e 22, 000 I ncr ease i n account s payabl e 121, 000 I ncr ease i n def er r ed i ncome t axes 12, 000 I ncr ease i n i nvent or i es ( 70, 000) Gai n on mar ket abl e equi t y secur i t i es ( 11, 000) Gai n on sal e of equi pment ( 6, 000) 186, 000 Net cash f l ows f r omoper at i ng act i vi t i es 384, 000 Cash Flows from Investing Activities Pur chase of equi pment $( 127, 000) Pr oceeds f r omsal e of equi pment 40, 000 Net cash f l ows f r omi nvest i ng act i vi t i es ( 87, 000) Cash Flows from Financing Activities Cash r ecei ved f r omsal e of t r easur y st ock 44, 000 Payment of cash di vi dends cont r ol l i ng ( 58, 000) Payment of cash di vi dends noncont r ol l i ng ( 15, 000) Payment on l ong- t er mnot e ( 150, 000) Net cash f l ows f r omf i nanci ng act i vi t i es ( 179, 000) I ncr ease i n cash f or t he year 118, 000 Cash on J anuar y 1 195, 000 Cash on December 31 $ 313, 000
Li st i ng of non- cash i nvest i ng and f i nanci ng act i vi t i es:
I ssued common st ock i n exchange f or l and wi t h a f ai r val ue of $215, 000.
Chapter 4 4-41
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-18 ( cont i nued)
Indirect Method
Puh, Inc. and Subsidiary Wor kpaper s f or t he St at ement of Cash Fl ows (Indirect Method) f or t he year ended December 31, 2011
Cash Fl ow
Cash Fl ow Cash Fl ow Year s Reconci l i ng I t ems Fr om I nvest i ng Fi nanci ng Change Debi t Cr edi t Oper at i ons Act i vi t i es Act i vi t i es Asset Changes Cash 118, 000 Al l owance t o r educe MES 11, 000 e 11, 000 Account s r ecei vabl e net ( 22, 000) f 22, 000 I nvent or i es 70, 000 g 70, 000 Land* 215, 000 h 215, 000 Pl ant and equi pment 65, 000 k 62, 000 j 127, 000 Accumul at ed depr eci at i on ( 54, 000) l 82, 000 k 28, 000 Pat ent s net ( 3, 000) m 3, 000 Tot al asset changes 400, 000
Changes in Equities Account s & accr ued payabl e 121, 000 n 121, 000 Not e payabl e l ong- t er m ( 150, 000) o 150, 000 Def er r ed i ncome t axes 12, 000 p 12, 000 Noncont r ol l i ng i nt er est i n St o 18, 000 b 33, 000 d 15, 000 Common st ock, $10 par * 100, 000 h 100, 000 Addi t i onal pai d- i n capi t al 123, 000 h 115, 000 i 8, 000 Ret ai ned ear ni ngs 140, 000 a 198, 000 c 58, 000 Tr easur y st ock at cost 36, 000 i 36, 000 Tot al changes i n equi t i es
400, 000
Cont r ol l i ng shar e of NI a 198, 000 198, 000 Noncont r ol l i ng i nt er est shar e b 33, 000 33, 000 Gai n on MES e 11, 000 ( 11, 000) Pur chase of equi pment j 127, 000 ( 127, 000) Sal e of equi pment k 40, 000 40, 000 Gai n on equi pment k 6, 000 ( 6, 000) Depr eci at i on expense l 82, 000 82, 000 Payment on l ong- t er mnot e o 150, 000 ( 150, 000) Amor t i zat i on of pat ent s m 3, 000 3, 000 Decr ease i n r ecei vabl es f 22, 000 22, 000 I ncr ease i n i nvent or i es g 70, 000 ( 70, 000) I ncr ease i n account s payabl e n 121, 000 121, 000 I ncr ease i n def er r ed i ncome t axes p 12, 000 12, 000 Pr oceeds f r omt r easur y st ock i 44, 000 44, 000 Payment of di vi dends cont r ol l i ng c 58, 000 ( 58, 000) Payment of di vi dends noncont r ol l i ng d 15, 000 ( 15, 000) 1, 229, 000 1, 229, 000 384, 000 ( 87, 000) ( 179, 000)
Cash i ncr ease f or t he year = $384, 000 $87, 000 $179, 000 = $118, 000. * Non- cash i t em: Pur chased $215, 000 l and t hr ough common st ock i ssuance. 4-42 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-19
Indirect Method
Pil Corporation and Subsidiary Consol i dat ed St at ement of Cash Fl ows f or t he year ended December 31, 2011
Cash Flows from Operating Activities Cont r ol l i ng shar e of NI $ 500, 000 Adj ust ment s t o r econci l e net i ncome t o cash pr ovi ded by oper at i ng act i vi t i es: Noncont r ol l i ng i nt er est shar e $ 40, 000 Depr eci at i on expense 200, 000 Pat ent s amor t i zat i on 10, 000 I ncr ease i n account s payabl e 17, 000 I ncome l ess di vi dends equi t y i nvest ee ( 30, 000) I ncr ease i n account s r ecei vabl e ( 210, 000) 27, 000 Net cash f l ows f r omoper at i ng act i vi t i es 527, 000 Cash Flows from Investing Activities Pur chase of equi pment $( 500, 000) Net cash f l ows f r omi nvest i ng act i vi t i es ( 500, 000) Cash Flows from Financing Activities Cash r ecei ved f r oml ong- t er mnot e $ 200, 000 Payment of cash di vi dends cont r ol l i ng ( 137, 000) Payment of cash di vi dends noncont r ol l i ng ( 20, 000) Net cash f l ows f r omf i nanci ng act i vi t i es 43, 000 I ncr ease i n cash f or t he year 70, 000 Cash on J anuar y 1 360, 000 Cash on December 31 $ 430, 000
Chapter 4 4-43
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-19 ( cont i nued)
Indirect Method Pil Corporation and Subsidiary Wor kpaper s f or t he St at ement of Cash Fl ows ( I ndi r ect Met hod) f or t he year ended December 31, 2011
Cash Fl ows Cash Fl ows Cash Fl ows Year s Reconci l i ng I t ems Fr om I nvest i ng Fi nanci ng Change Debi t Cr edi t Oper at i ons Act i vi t i es Act i vi t i es Asset Changes Cash $ 70, 000 Account s r ecei vabl e net 210, 000 e 210, 000 I nvent or i es 0 Pl ant & equi pment net 300, 000 f 200, 000 g 500, 000 Equi t y i nvest ment s 30, 000 l 30, 000 m 60, 000 Pat ent s ( 10, 000) h 10, 000
Tot al asset changes $ 600, 000
Changes in Equities Account s payabl e $ 17, 000 i 17, 000 Di vi dends payabl e 13, 000 k 13, 000 Long- t er mnot e payabl e 200, 000 j 200, 000 Common st ock 0 Ot her pai d- i n capi t al 0 Ret ai ned ear ni ngs 350, 000 a 500, 000 c 150, 000 Noncont r ol . i nt er est 20% 20, 000 b 40, 000 d 20, 000 Changes i n equi t i es $ 600, 000 Cont r ol l i ng shar e of NI a 500, 000 $ 500, 000 Noncont r ol l i ng i nt er est shar e b 40, 000 40, 000 Pur chase of pl ant & equi pment g 500, 000 $( 500, 000) Depr eci at i on pl ant & equi pment f 200, 000 200, 000 Amor t i zat i on of pat ent s h 10, 000 10, 000 I ncr ease i n account s r ecei vabl e e 210, 000 ( 210, 000) I ncome l ess di vi dends f r om i nvest ees m 60, 000 l 30, 000 ( 30, 000) I ncr ease i n account s payabl e i 17, 000 17, 000 Recei ved cash f r oml ong- t er mnot e j 200, 000 0 $ 200, 000 Payment of di vi dends cont r ol l i ng c 150, 000 k 13, 000 ( 137, 000) Payment of di vi dends noncont r ol l i ng d 20, 000 ( 20, 000) 1, 950, 000 1, 950, 000 $ 527, 000 $( 500, 000) $ 43, 000
Cash i ncr ease f or t he year = $527, 000 $500, 000 + $43, 000 = $70, 000.
4-44 Consolidation Techniques and Procedures
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-19 ( cont i nued)
Direct Method
Pil Corporation and Subsidiary Consol i dat ed St at ement of Cash Fl ows f or t he year ended December 31, 2011
Cash Flows from Operating Activities Cash r ecei ved f r omcust omer s $2, 390, 000 Cash r ecei ved f r omequi t y i nvest ees 30, 000 Cash pai d t o suppl i er s ( $1, 433, 000) Cash pai d f or oper at i ng expenses ( 460, 000) ( 1, 893, 000) Net cash f l ows f r omoper at i ng act i vi t i es 527, 000 Cash Flows from Investing Activities Pur chase of equi pment $ ( 500, 000) Net cash f l ows f r omi nvest i ng act i vi t i es ( 500, 000) Cash Flows from Financing Activities Cash r ecei ved f r oml ong- t er mnot e $ 200, 000 Payment of cash di vi dends cont r ol l i ng ( 137, 000) Payment of cash di vi dends noncont r ol l i ng ( 20, 000) Net cash f l ows f r omf i nanci ng act i vi t i es 43, 000 I ncr ease i n cash f or t he year 70, 000 Cash on J anuar y 1 360, 000 Cash on December 31 $ 430, 000
Reconciliation of net income to cash provided by operating activities
Cont r ol l i ng shar e of NI $ 500, 000 Adj ust ment s t o r econci l e net i ncome t o cash pr ovi ded by oper at i ng act i vi t i es: Noncont r ol l i ng i nt er est shar e $ 40, 000 I ncome l ess di vi dends equi t y i nvest ee ( 30, 000) Depr eci at i on expense 200, 000 Pat ent s amor t i zat i on 10, 000 I ncr ease i n account s payabl e 17, 000 I ncr ease i n account s r ecei vabl e ( 210, 000) 27, 000 Net cash f l ows f r omoper at i ng act i vi t i es $ 527, 000
Chapter 4 4-45
2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l Solution P4-19 ( cont i nued)
Direct Method
Pil Corporation and Subsidiary Wor kpaper s f or t he St at ement of Cash Fl ows ( Di r ect Met hod) f or t he year ended December 31, 2011
Cash Fl ow Cash Fl ow Cash Fl ow Year s Reconci l i ng I t ems Fr om I nvest i ng Fi nanci ng Change Debi t Cr edi t Oper at i ons Act i vi t i es Act i vi t i es Asset Changes Cash $ 70, 000 Account s r ecei vabl e net 210, 000 a 210, 000 I nvent or i es 0 Pl ant & equi pment net 300, 000 b 200, 000 c 500, 000 Equi t y i nvest ment s 30, 000 d 30, 000 Pat ent s ( 10, 000) e 10, 000 Tot al asset changes $ 600, 000 Changes i n Equi t i es Account s payabl e $ 17, 000 f 17, 000 Di vi dends payabl e 13, 000 g 13, 000 Long- t er mnot e payabl e 200, 000 h 200, 000 Ret ai ned ear ni ngs* 350, 000 Noncont r ol . i nt er est 20% 20, 000 i 40, 000 j 20, 000 Changes i n equi t i es $ 600, 000 Ret . ear ni ngs change* Sal es $2, 600, 000 a 210, 000 $2, 390, 000 I ncome f r omequi t y i nvest ees 60, 000 d 30, 000 30, 000 Cost of goods sol d ( 1, 450, 000) f 17, 000 ( 1, 433, 000) Depr eci at i on expense ( 200, 000) b 200, 000 0 Ot her oper at i ng expenses ( 470, 000) e 10, 000 ( 460, 000) Noncont r ol l i ng i nt er est shar e ( 40, 000) i 40, 000 0 Di vi dends decl ar ed
Pi l ( 150, 000) g 13, 000 k 137, 000 Ret ai ned ear ni ngs change $ 350, 000 Recei ved cash f r oml ong- t er mnot e h 200, 000 $ 200, 000 Payment of di vi dends cont r ol l i ng k 137, 000 ( 137, 000) Payment of di vi dends noncont r ol l i ng j 20, 000 ( 20, 000) Pur chase of equi pment c 500, 000 $( 500, 000) 1, 377, 000 1, 377, 000 $ 527, 000 $( 500, 000) $ 43, 000
* Ret ai ned ear ni ngs changes r epl ace t he r et ai ned ear ni ngs account f or r econci l i ng pur poses.
Cash i ncr ease f or t he year = $527, 000 - $500, 000 + $43, 000 = $70, 000.