10th Edition

Chapter 4 CONSOLIDATION TECHNIQUES AND PROCEDURES

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 Excess allocated Undervalued inventory items sold in 2009 Undervalued buildings (7 year life) Undervalued equipment (3 year life) Remainder to goodwill Excess fair value over book value Calculation of income from Sol Sols reported net income Less: Undervalued inventories sold in 2009 Less: Depreciation on building ($14,000/7 years) Less: Depreciation on equipment ($21,000/3 years) Adjusted income from Soul Pars 70% controlling share 30% Noncontrolling interest share Working paper entries for 2009 a Income from Sol Dividends (Sol) Investment in Sol b 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 Depreciation expense Buildings net Depreciation expense Equipment net Noncontrolling Interest Share Dividends Sol Noncontrolling Interest Accounts payable Accounts receivable Dividends payable Dividends receivable

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

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

$100,000 (5,000) (2,000) (7,000) $ 86,000 $ 60,200 $ 25,800

60,200 35,000 25,200 500,000 100,000 100,000 500,000 200,000 5,000 14,000 21,000 60,000 100,000 2,000 2,000 7,000 7,000 25,800 15,000 10,800 10,000 10,000 14,000 14,000

10th Edition

Solution P4-7 (continued) Par Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 (in thousands)
Par Income Statement Sales Income from Sol $ 800 60.2 Sol 70% $ 700 a 400* 60* 140* $ f $ 255.2 $ 100 25.8 $ c d e 60.2 Adjustments and Eliminations Consolidated Statements $1,500

Gain on equipment
Cost of sales Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings Par Retained earnings Sol Controlling share of NI Dividends Retained earnings Dec 31 $ Balance Sheet Cash Accounts receivable Dividends receivable Inventories Other current assets Land Buildings net Equipment net Investment in Sol Goodwill Unamortized excess

10
300* 155* 160* 5 2 7

10
705* 224* 300* 281 25.8* 255.2

300 $ 100 255.2 200* 355.2 100 50* $ 150 b 100

300 255.2

a f

35 15 $

200* 355.2

96 100 14 150 70 50 140 570 515.2

60 70 100 30 100 160 330

$ g h 10 14

156 160 250 100 150 312 914

c c

14 21

d e

2 7

a 25.2 b 490 c 60 b 100 60 c 100 $2,102 g h 10 14 $ 275 106 145 1,000 355.2

$1,705.2 Accounts payable Dividends payable Other liabilities Capital stock, $10 par Retained earnings $ 200 100 50 1,000

$ 850 $ 85 20 95 500

b 500

355.2 $1,705.2

150 $ 850 b 210 f 10.8

Noncontrolling interest January 1 Noncontrolling interest December 31

* Deduct

220.8 $2,102

10th Edition

Solution P4-8 Supporting computations Ownership percentage 13,500/15,000 shares = 90% Investment cost (13,500 shares $15) Implied fair value of Syn ($202,500 / 90%) Book value of Syn Excess fair value over book value Excess allocated to Land Remainder to patents Excess fair value over book value Income from Syn Syns reported net income Less: Patents amortization Syns adjusted income Pens share of Syns income (90%) Noncontrolling interest share (10%) Investment in Syn December 31, 2010 Cost January 1, 2009 Pens share of the change in Syns retained earnings ($42,000 - $15,000) 90% Less: Pens share (90%) of Patents amortization for 2 years Investment in Syn December 31 $202,500 $225,000 165,000 $ 60,000

$ 20,000 40,000 $ 60,000

$ 24,000 (4,000) $ 20,000 $ 18,000 $ 2,000

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

10th Edition

Solution P4-8 (continued) Pen Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010
(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 Retained earnings Syn Net income Dividends $ 400 18 250* 100.6* 90% Syn $ 100 a 50* 26* c g $ 67.4 $ 24 18 4 2 300* 130.6* $ 69.4 2 * $ 67.4 Adjustments and Eliminations Consolidated Statements $ 500

$ 177 $ 67.4 50* $ 34 24 16* 42 b 34

$ 177 67.4 a g 14.4 1.6 50* $ 194.4

Retained earnings Dec 31 $ 194.4 Balance Sheet Cash Accounts receivable Dividends receivable Inventories Note receivable Pen Investment in Syn Land Buildings net Equipment net Patents Accounts payable Note payable to Syn Dividends payable Capital stock Retained earnings $

18 80 7.2 95 219.6 65 170 130

15 20 10 5

$ f d e 5 7.2 5

33 95 105

a 3.6 b 216 30 80 50 b 36 c 4 $ 210 $ 10 8 150 42 $ 210 b g 24 .4 f 5 e 5 d 7.2 b 150 b 20 115 250 180 32 $ 810 $ 90.4 .8 500 194.4

$ 784.8 85.4 5 500 194.4 $ 784.8

Noncontrolling interest January 1 Noncontrolling interest December 31

* Deduct

24.4 $ 810

10th Edition

Solution P4-9 Plastik Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 (in thousands)
Plastik Income Statement Sales Income from Seldane Cost of sales Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI $ 200 18 80* 40* 25.5* 80% Seldane $ 110 40* 20* 10* a b d 18 12.5 5 $ c $ 72.5 $ 40 4.5 $ Adjustments and Eliminations $ Consolidated Statements 310 132.5* 65* 35.5* 77 4.5* 72.5

Retained Earnings Retained earnings Plastik $ Retained earnings Seldane Controlling share of NI Dividends

75 $ 72.5 40* $ 50 40 20* 70 b 50

75 72.5

a c

16 4 $

Retained earnings Dec 31 $ 107.5 Balance Sheet Cash Trade receivables net Dividends receivable Inventories Land Buildings net Equipment net Investment in Seldane Goodwill $ 597.5 Accounts payable Dividends payable Other liabilities Capital stock Retained earnings $ 40 100 50 300

40* 107.5

29.5 28 8 40 15 65 200 212

30 40 30 30 70 100 b 25

$ e f 4 8

59.5 64 70 45 135

320

a 2 b 210 b $ 300 $ 50 10 20 150 e f 4 8 25 $ $ 25 718.5 86 102 70 300 107.5

b 150

107.5 $ 597.5

70 $ 300 b c 52.5 .5 $

Noncontrolling interest January 1 Noncontrolling interest December 31

* Deduct

53 718.5

10th Edition

Solution P4-9 (continued) Supporting computations Investment cost January 1, 2009 Implied fair value of Seldane ($210,000 / 80%) Book value of Seldane Excess fair value over book value Excess allocated: Undervalued inventory Undervalued equipment Remainder to goodwill Excess fair value over book value Income from Seldane Seldanes reported net income Less amortization of excess fair value: Inventory Depreciation ($25,000 / 5 years) Seldanes adjusted income Plastiks 80% controlling share 20% Noncontrolling interest share

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

$ 40,000

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

10th Edition

Solution P4-10 Pas Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009
(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 Retained earnings Sel Controlling share of NI Dividends $ 200 17 80* 40* 25.5* 80% Sel $ 110 40* 20* 10* a b d g c $ 71.5 $ 40 17 12.5 5 1.25 4.25 Adjustments and Eliminations Consolidated Statements $ 310 132.5* 65* 36.75* $ 75.75 4.25* $ 71.5

75 $ 71.5 40* $ 50 40 20* 70 b 50

75 71.5

a c

16 4

Retained earnings Dec 31 $ 106.5 Balance Sheet Cash Trade receivables net Dividends receivable Inventories Land Buildings net Equipment net Investment in Sel Patents $ 596.5 Accounts payable Dividends payable Other liabilities Capital stock Retained earnings $ 40 100 50 300

40* $ 106.5

29.5 28 8 40 15 65 200 211

30 40 30 30 70 100 b 25

$ e f 4 8

59.5 64 70 45 135

320

b $ 300 $ 50 10 20 150 e f

25

a 1 b 210 g 1.25

23.75 $ 717.25 $ 86 102 70 300 106.5

4 8

b 150

106.5 $ 596.5

70 $ 300 b c 52.5 .25

Noncontrolling interest January 1 Noncontrolling interest December 31

* Deduct

52.75 $ 717.25

10th Edition

Solution P4-10 (continued) Supporting computations Investment cost January 1, 2009 Implied fair value of Sel ($210,000 / 80%) Book value of Sel Excess fair value over book value Excess allocated: Undervalued inventory Undervalued equipment Remainder to patents Excess fair value over book value

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

10th Edition

Solution P4-12 Preliminary computations Investment cost Implied fair value Sci ($240,000 / 80%) Book value of Sci Excess fair value over book value Allocation of differential Plant assets Goodwill Excess fair value over book value Amortization Plant assets $50,000/4 years = $12,500 per year Investment account balance at December 31, 2010 Underlying book value Add: Unamortized excess allocated to plant assets ($50,000 - $25,000 depreciation) Add: Unamortized goodwill Fair value of Sci at December 31 Investment account balance at December 31 (80%) Noncontrolling interest at December 31 (20%)

$240,000 $300,000 225,000 $ 75,000

$ 50,000 25,000 $ 75,000

$290,000 25,000 25,000 $340,000 $272,000 $ 68,000

The investment account balance is overstated at $280,000 for the $8,000 dividend receivable.

10th Edition

Solution P4-12 (continued) Pat Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 (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 Retained earnings Sci Controlling share of NI Dividends $ 900 38 600* 190* Sci 80% $ 300 c 150* 90* e f $ 148 $ 60 38 12.5 $ 9.5 $ 750* 292.5* 157.5 9.5* 148 Adjustments and Eliminations Consolidated Statements $1,200

$ 122 $ 148 100* $ 50 60 20* 90 d 50

122

148 c f 16 4 $ 100* 170

Retained earnings Dec 31 $ 170 Balance Sheet Cash Accounts receivable Inventories Advance to Sci Other current assets Land Plant assets net Investment in Sci

6 26 82 20 80 160 340 280

15 20 60 5 30 230

20 h a 5 20

41 41 142 85 190 595

37.5

12.5

Dividends receivable Goodwill $ 994 Accounts payable Dividends payable Other liabilities Capital stock Retained earnings $ 24 100 700 170 $ 994 $ 360 $ 15 10 45 200

b d

8 25

b 8 c 22 d 250 g 8 25 $1,119 $ 34 2 145 700 170

h g

5 8

d 200

90 $ 360 d f 62.5 5.5

Noncontrolling interest January 1 Noncontrolling interest December 31

* Deduct

68 $1,119

10

10th Edition

Solution P4-18 Indirect Method Pilgrim Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2010 Cash Flows from Operating Activities Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Increase in accounts payable Income less dividends equity investee Increase in accounts receivable Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends controlling Payment of cash dividends noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January 1 Cash on December 31

$ 500,000

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

27,000 527,000

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

11

10th Edition

Solution P4-18 (continued) Indirect Method Pilgrim Corporation and Subsidiary Working Papers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2010
Cash Flows From Operations Cash Flows Investing Activities Cash Flows Financing Activities

Years Change Asset Changes Cash Accounts receivable net Inventories Plant & equipment net Equity investments Patents Total asset changes $ 70,000 210,000 0 300,000 30,000 (10,000)

Reconciling Items Debit Credit

e 210,000 f 200,000 l 30,000 h 10,000 g 500,000 m 60,000

$ 600,000

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

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

a 500,000 b 40,000

c 150,000 d 20,000

a 500,000 b 40,000 g 500,000 f 200,000 h 10,000 e 210,000 m 60,000 l 30,000 i 17,000 j 200,000 k 13,000 1,950,000

$ 500,000 40,000 $(500,000) 200,000 10,000 (210,000) (30,000) 17,000 0

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

$ 527,000

$(500,000)

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

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

12

10th Edition

Solution P4-18 (continued) Direct Method Pilgrim Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2010 Cash Flows from Operating Activities Cash received from customers Cash received from equity investees Cash paid to suppliers Cash paid for operating expenses Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends controlling Payment of cash dividends noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January 1 Cash on December 31 Reconciliation of net income to cash provided by operating activities Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Income less dividends equity investee Depreciation expense Patents amortization Increase in accounts payable Increase in accounts receivable Net cash flows from operating activities

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

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

500,000

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

27,000 527,000

13

10th Edition

Solution P4-18 (continued) Direct Method Pilgrim Corporation and Subsidiary Working Papers for the Statement of Cash Flows (Direct Method) for the year ended December 31, 2010
Cash Flow From Operations Cash Flow Investing Activities Cash Flow Financing Activities

Years 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 Pilgrim $ 70,000 210,000 0 300,000 30,000 (10,000) 600,000 17,000 13,000 200,000 350,000 20,000 600,000

Reconciling Items Debit Credit

a 210,000 b 200,000 e 10,000 c 500,000 d 30,000

$ $

f 17,000 g 13,000 h 200,000 i 40,000 j 20,000

$2,600,000 60,000 (1,450,000) (200,000) (470,000) (40,000) (150,000)

a 210,000 d 30,000 f 17,000 b 200,000 e 10,000 i 40,000

$2,390,000 30,000 (1,433,000) 0 (460,000) 0

g 13,000 k 137,000

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

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

$ 200,000 (137,000) (20,000) $ 527,000 $(500,000) $(500,000) $ 43,000

1,377,000

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

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

14