Chap 010

www.downloadslide.
net
Chapter 10 - Additional Consolidation Reporting Issues
CHAPTER 10
ADDITIONAL CONSOLIDATION REPORTING ISSUES
ANSWERS TO QUESTIONS
Q10-1 The balance sheet, income statement, and statement of changes in retained
earnings are an integrated set and generally need to be completed as a unit. Once
completed, these statements can then be used in preparing a consolidated cash flow
statement. Because both the beginning and ending consolidated balance sheet totals are
needed in determining cash flows for the period, the cash flow statement cannot be easily
incorporated into the existing three-part workpaper format.
Q10-2 Consolidated retained earnings do not include the earnings assigned to

noncontrolling shareholders. As a result, dividends paid to noncontrolling shareholders are
not included in the consolidated retained earnings statement. On the other hand, all the cash
generated by the subsidiary is included in the consolidated cash flow statement and all uses
of cash must also be included, including that distributed to noncontrolling shareholders in the
form of dividends.
Q10-3 The indirect method focuses on reconciling between net income and cash flows from
operations and does not attempt to report payments to suppliers or other specific uses of
cash. It does report the change in inventory and accounts payable which are included in
determining payments to suppliers. While adjusting net income for changes in inventory and
accounts payable leads to a correct reporting of cash flows from operations, it does not
permit explicit reporting of payments to suppliers.
Q10-4 Changes in inventory balances are used in computing the amount reported as
payments to suppliers and do not need to be separately reported.
Q10-5 Sales must be included in the consolidated cash flows workpaper when the direct
method is used. They are excluded from the workpaper when the indirect method is used.
Q10-6 (a) When the indirect method is used the changes in inventory are reported as a
reconciling item in the statement of cash flows. (b) When the direct method is used, changes
in inventory are included in the computation of payments to suppliers and not separately
disclosed.
Q10-7 Only sales subsequent to the date of acquisition are included. The acquired
company was not part of the consolidated entity prior to the date of acquisition.
Q10-8 Dividends paid by the acquired company to the noncontrolling shareholders following
the date of acquisition are included as a cash outflow in the consolidated statement of cash
flows. Dividends paid by the acquired company prior to acquisition are excluded. The
acquired company was not part of the consolidated entity.
10-1
www.downloadslide.net
Q10-9 The revenues and expenses of the subsidiary for the full year are included in the
consolidated income statement when the acquisition occurs at the beginning of the year.
When a mid-year acquisition occurs, the revenues and expenses of the acquired company
prior to the date of acquisition were not transactions of the consolidated entity. The
eliminating entries at the end of the year must be expanded to eliminate those amounts. In
addition, the eliminating entry used to assign income to the noncontrolling interest and
eliminate dividends paid to the noncontrolling shareholders will be modified to include only
the income earned and dividends declared for that portion of the year in which ownership
was held by the parent.
Q10-10 An accurate measure of the overall profit contribution from each segment of
business operations is often considered desirable in evaluating past operations and in
planning future strategy. In some cases the tax impact of operating a particular division is
very different from one or more other divisions, and that difference should be recognized in
evaluating the segment. Even when such differences do not exist, better knowledge of the
approximate after tax return from a particular subsidiary can be very helpful in assessing
future investment and operating strategies.
Q10-11 When a consolidated tax return is filed, all intercorporate transfers are eliminated in
computing taxable income and there should be no need to adjust recorded tax expense in
preparing consolidated financial statements for the period. When the companies do not file a
consolidated return, tax payments and expense accruals recorded by the individual
companies presumably will include gains and losses on intercompany transfers. If an
unrealized gain or loss is eliminated in consolidation, the amount reported as tax expense
also should be adjusted to reflect only the tax expense on those items included in the
consolidated income statement.
Q10-12 Assuming an unrealized profit has been reported, an additional elimination entry is
needed to reduce tax expense and establish a deferred tax asset in the amount of the
excess payment. If a loss is eliminated, additional tax expense and taxes payable must be
established in the elimination process.
Q10-13 When one of the companies in the consolidated entity has recorded tax expense on
unrealized profit in a preceding period, its retained earnings balance at the start of the period
will be overstated by the amount of unrealized profit less the tax expense recorded thereon.
In the period in which the item is sold and the profit is considered realized, the eliminating
entries must include a debit to beginning retained earnings for the amount of the net
overstatement and a debit to tax expense for the proper amount of expense to be
recognized.
Q10-14 When taxes are not considered, income assigned to noncontrolling shareholders is
reduced by a proportionate share of the unrealized profit. When taxes are considered, the
reduction is based on a proportionate share of the after tax balance of unrealized profits.
Q10-15 Perhaps the most important reason is that the earnings per share data reported by
the separate companies may include unrealized profits that must be eliminated in computing
the consolidated totals. Even without unrealized profits, simple addition could not be used
when the companies do not have an equal number of shares outstanding or when the parent
does not hold all the common or preferred shares of the subsidiary.
Q10-16 The full amount of dividends paid to unaffiliated preferred shareholders of the parent
are deducted from consolidated net income in arriving at consolidated earnings per share.
Preferred dividends paid by the subsidiary to noncontrolling shareholders and income
10-2
assigned to noncontrolling common shareholders are deducted from consolidated revenue

and expenses in computing consolidated net income and earnings per share. Subsidiary
preferred dividends paid to the parent or other affiliates must be eliminated and are not
deducted in computing consolidated earnings per share.
Q10-17 A subsidiary's contribution to consolidated earnings per share may be different from
its contribution to consolidated net income if the subsidiary has convertible bonds or
preferred stock outstanding that are treated as if they had been converted, or if the treasury
stock method is used to include the dilutive effects of subsidiary stock rights or stock options
outstanding.
Q10-18 The net of tax interest savings from the assumed conversion of the bond into
common stock is included in the numerator and the additional shares are added to the
denominator of the earnings per share computation for the subsidiary. In doing so, earnings
per share of the subsidiary will be reduced. Moreover, the additional shares added to the
denominator will potentially alter the ownership ratio held by the parent; thus, the amount of
subsidiary income included in the consolidated earnings per share computation is likely to be
reduced.
Q10-19 Those rights, warrants, and options treated as stock outstanding in the denominator
of the earnings per share computation of the subsidiary will reduce the amount of subsidiary
income included in the consolidated earnings per share computation to the extent that the
ownership ratio held by the parent is reduced. The actual shares will not be reported as such,
because they are assumed to be either eliminated or assigned to the noncontrolling interest.
Q10-20 In the earnings per share computation, the amount of income assigned to
noncontrolling interest may change as it is assumed that convertible securities are converted
or rights, warrants, and options are exercised. Both the amount of subsidiary income
included in the numerator and the proportion of parent company ownership may vary,
thereby changing the amount of subsidiary income included in the consolidated earnings per
share computation.
10-3
SOLUTIONS TO CASES
C10-1 The Effect of Security Type on Earnings per Share
a. Until the securities are converted, the interest expense on bonds and the preferred
dividends must both be deducted in determining income available to common shareholders
when basic earnings per share is computed. Because interest expense is deductible for tax
purposes and preferred dividends are not, the increase in earnings available to common
shareholders will be less with conversion of the debentures. The decrease in earnings per
share will be greater with conversion of the convertible debentures since the two securities
convert into an equal number of common shares.
b. Interest expense is deducted in computing net income and preferred dividends are not.
Thus, conversion of the bonds will increase net income and conversion of the preferred stock
will have no effect on the reported net income of Stage Corporation. If Stage Corporation is a
parent company, consolidated net income will increase by the full amount of the interest
saving (net of tax) if the bonds are converted. In the event Stage Corporation is a subsidiary
of another company, consolidated net income again will increase if the bonds are converted,
but the amount of the increase depends on the percentage ownership of Stage by the parent.
Conversion of the preferred stock will increase consolidated net income because it increases
Stage’s income available to common shareholders, of which the parent is one. The increase
will be greater than the effect of the bond conversion because the preferred dividends have
no tax effect, but the amount of the increase will depend on the parent’s percentage
ownership.
c. If the preferred shares are those of a parent company, they will be excluded entirely if (1)
all the shares are owned by its subsidiaries, or (2) the preferred shares are noncumulative
and have had no dividends declared during the period. If the shares are those of a
subsidiary, the preferred shares will have an effect on basic earnings per share unless (1)
the parent or other affiliates own all the common and preferred shares outstanding, or (2) the
preferred shares are noncumulative and have had no dividends declared during the period.
d. Interest expense will be deducted in computing Stage's net income. The preferred
dividends will then be deducted from net income in computing Stage's income available to
common shareholders. Assuming both securities are dilutive, interest expense (net of tax)
will be added back to Stage's net income, no preferred dividends will be deducted, and the
increased number of shares from the conversion of both securities will be added to the
denominator in computing Stage’s diluted earnings per share. These earnings per share
amounts will then be used by Prop Company in determining the income from the subsidiary
to be included in its consolidated earnings per share computations.
10-4
C10-2 Evaluating Consolidated Statements
MEMO
To: Treasurer
Cowl Corporation
From: , Accounting Staff
Re: Disclosure of Transfer of Cash from Subsidiary to Parent
The following comments are provided in response to your concern with respect to the
transfer of cash from Plum Corporation to the parent company. Intercompany borrowings
often offer an opportunity for one company to borrow money from an affiliate at rates
favorable to both parties. As a result, transfers of cash between affiliates are very common.
These transactions are eliminated in preparing the consolidated statements and the financial
statement reader will be unaware of them unless supplemental disclosures are made.
In general, the FASB does not require separate disclosure of transactions between
consolidated entities when they are eliminated in the preparation of consolidated or
combined financial statements. [FASB 57, Par. 2]
Nevertheless, the fact that Cowl Company is unable to generate sufficient cash from its
separate operations to pay its bills appears to be of sufficient importance that disclosure
would be appropriate in both the Management Discussion and Analysis (MD&A) section of
Cowl’s annual report and in the notes to the financial statements. The SEC establishes the
disclosure requirements for MD&A and requires discussion of currently known trends,
demands, commitments, events, or uncertainties that are reasonably expected to have
material effects on the registrant’s financial condition or results of operations, or that would
cause reported financial information not to be necessarily indicative of future operating
results or financial condition. [SEC Regulation S-K, Item 303]
The SEC also requires discussion of both short- and long-term liquidity and capital
resources. [SEC Financial Reporting Release 36]
10-5
C10-2 (continued)
FASB Statement No. 95, ―Statement of Cash Flows,” does not specify those situations in
which a discussion of operating cash flows must be included in the notes to the financial
statements. However, if the negative cash flow from Cowl Company’s operations significantly
affects the operating cash flows of the consolidated entity, one or more notes to the financial
statements should be used to provide information to the financial statement readers. One
possible form for doing so would be to include supplemental cash flow information if the
operations of the parent are identified as a separate reportable segment [FASB 131, Par.
16].
Primary citations:
FASB 57, Par. 2
SEC Regulation S-K, Item 303
Secondary citations:
FASB 95
FASB 131, Par. 131
10-6
C10-3 Income Tax Expense
a. When prior-period intercompany profits are realized through resale to a nonaffiliate in the
current period, tax expense reported by the consolidated entity will be greater than actual tax
payments made by the separate companies.
b. Two reporting procedures are usually discussed in dealing with income tax allocation for
consolidated entities. One procedure is to report the additional amount paid as a deferred tax
asset or as prepaid income tax in the consolidated balance sheet. An alternate approach is
to net the overpayment for unrealized profits against deferred income taxes payable.
c. Whenever separate tax returns are filed and unrealized profits are recorded on
intercompany transfers of land, buildings and equipment, or other assets, income tax
expense reported in the consolidated income statement in the period of the intercompany
transfer will be less than tax payments made. A similar effect occurs when one affiliate
purchases the bonds of another affiliate and a constructive loss on bond retirement is
reported in the consolidated income statement.
d. When unrealized profits from a prior period are realized in the current period, income tax
expense recognized in the current period will be greater than the actual tax payment made.
Also, when unrealized losses are recorded on intercompany transfers, tax expense reported
in the consolidated income statement in the period of the transfer will be greater than the
actual tax payment. A constructive gain on bond retirement on a purchase of an affiliate's
bonds will also result in an excess of consolidated tax expense over tax payments.
10-7
C10-4 Consolidated Cash Flows
a. The factors contributing to the increase in net income over the prior period are key in this
case. One possible explanation is that operating earnings of the combined companies
actually declined and the increase in net income resulted from a substantial gain on sale of a
division or other assets in the current period. Another possibility would be a decrease in
noncash charges deducted in computing income. Cash generated by operations often is well
above operating earnings as a result of charges such as amortization of intangible assets or
depreciation. A decrease in these charges will increase net income but not change cash
flows
Changes in the net amounts invested in receivables, inventories, and other current assets
are included in the computation of cash flows from operations. Increases in these balances
can substantially reduce the reported cash flows from operations without affecting net
income.
b. Both sales and the balance in accounts receivable should increase when less stringent
criteria are used in extending credit. Similarly, both should decrease when credit terms are
tightened. If the companies have relaxed credit standards during the current period, net
income may be greater as a result of increased sales; however, cash flows are likely to
increase to a lesser degree as accounts receivable increase.
c. An inventory write-down under lower of cost or market and other noncash charges will not
reduce cash flows from operations. The amount expensed would be added back to
consolidated net income in arriving at cash generated by operating activities.
d. Assuming an allowance account is used, this particular write-off will not appear in either
the income statement or computation of cash flows from operations. There is no charge in
the income statement and no change in the net receivable balance as a result of a simple
write-off of an account receivable.
e. There are no significant differences between the preparation of a statement of cash flows
for a consolidated entity and a single corporate entity. However, for the consolidated entity,
dividend payments to the subsidiary’s noncontrolling interest must be included in the
financing section because they use cash even though they are not viewed as dividends of
the consolidated entity.
10-8
SOLUTIONS TO EXERCISES
E10-1 Analysis of Cash Flows
a. The consolidated cash balance at January 1, 20X2, was $83,000, computed as

follows:
Balance at December 31, 20X2 $ 57,000

Decrease in cash balance during 20X2:
Cash flows from operations $284,000
Cash outflow for investment activities (80,000)
Cash outflow for financing activities (230,000)
Net cash outflow 26,000
Cash balance at January 1, 20X2 $83,000
b. Dividends of $48,000 were reported:
Dividends paid to Lamb shareholders $45,000

Dividends paid to noncontrolling interest of
Mint Company ($10,000 x .30) 3,000
Total cash payments $48,000
c. Consolidated net income was $207,000, computed as follows:
Cash flow from operations $284,000

Adjustments to reconcile consolidated net income
and cash provided by operations (77,000)
Consolidated net income $207,000
10-9
E10-2 Statement of Cash Flows
a. The noncontrolling interest received dividends of $6,000 ($15,000 x .40).
b. A total of $320,000 will be reported as cash provided by operations, computed as

follows:

Depreciation expense 21,000
Amortization of patents 13,000
Gain on bond retirement (4,000)
Loss on sale of land 8,000
Decrease in accounts receivable 32,000
Increase in inventory (16,000)
Decrease in accounts payable (12,000)
Increase in wages payable 7,000
Total $320,000
c. Cash used in investing activities will be reported at $161,000, computed as follows:
Purchases of equipment $(295,000)

Sale of land 134,000
Total $(161,000)
d. Cash used in financing activities will be reported at $81,000, computed as follows:
Sale of stock $150,000

Bond retirement (200,000)
Dividends paid to Becon Corporation shareholders (25,000)
Dividends paid to noncontrolling interests (6,000)
Total $ (81,000)
e. The cash balance increased by $78,000 ($320,000 - $161,000 - $81,000) in 20X4.
E10-3 Computation of Operating Cash Flows
Cash received from customers was $293,000 ($310,000 - $17,000). Cash payments to
suppliers was $193,000 ($180,000 - $8,000 + $21,000), resulting in cash flows from
operations of $100,000 ($293,000 - $193,000).
10-10
E10-4 Consolidated Operating Cash Flows
a. Cash received from customers was $482,000 ($300,000 + $200,000 - $28,000 +

$10,000).
b. Cash payments to suppliers was $288,000 ($160,000 + $95,000 + $35,000 - $15,000 +

17,000 - $4,000).
c. Cash flows from operating activities was $194,000 ($482,000 - $288,000).
E10-5 Preparation of Statement of Cash Flows
Consolidated Enterprises Inc. and Subsidiary

Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X3
Cash Flows from Operating Activities:

Consolidated Net Income $ 464,000
Noncash Expenses, Revenue, and Gains
Included in Income:
Depreciation Expense 73,000
Goodwill Impairment Loss 3,000
Gain on Sale of Equipment (8,000)
Decrease in Accounts Receivable 23,000
Increase in Accounts Payable 5,000
Increase in Inventory (15,000)
Net Cash Provided by Operating Activities $545,000
Cash Flows from Investing Activities:

Equipment Purchased $(380,000)
Sale of Equipment 45,000
Net Cash Used in Investing Activities (335,000)
Cash Flows from Financing Activities:

Sale of Bonds $ 120,000
Repurchase of Common Stock (35,000)
Dividends Paid:
To Parent Company Shareholders (60,000)
To Noncontrolling Shareholders (6,000)
Net Cash Provided by Financing Activities 19,000
Net Increase in Cash $229,000
10-11
E10-6 Direct Method Cash Flow Statement
Consolidated Enterprises Inc. and Subsidiary


Cash Received from Customers $ 923,000 (a)
Cash Payments to Suppliers (378,000) (b)
Net Cash Provided by Operating Activities $ 545,000

Equipment Purchased $(380,000)

Sale of Bonds $120,000
Repurchase of Common Stock (35,000)
Dividends Paid:
Net Increase in Cash $ 229,000
(a) $923,000 = $900,000 + $23,000

(b) $378,000 = $368,000 - $5,000 + $15,000
The FASB also requires the following reconciliation when the statement of cash flows is
prepared using the direct method:
Reconciliation of consolidated net income to net cash provided by operating

activities
Consolidated Net Income $464,000

Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation Expense $73,000
Total Adjustments 81,000
10-12
E10-7 Analysis of Consolidated Cash Flow Statement
a. Dividends paid to noncontrolling interest $ 6,000

Proportion of stock held by noncontrolling interest ÷ .40
Total dividends paid by Jones Delivery $15,000
b. When bonds are sold at a premium the annual cash payment is greater than
reported interest expense. The amount of premium amortized must therefore be
deducted from net income in determining the cash flow from operations.
c. An increase in accounts receivable means that cash collections have been less
than sales for the period. The amount of the increase must be deducted from
operating income to determine the amount of cash actually made available from
current period operations.
d. Dividends paid to noncontrolling shareholders are reported as a cash outflow in

the cash flow statement because they represent funds that have been distributed
during the period and are no longer available to the consolidated entity. On the
other hand, these same dividends are omitted from the retained earnings
statement. Only the income to the parent company shareholders is included in the
consolidated retained earnings statement and only dividends to the parent
company shareholders are deducted in deriving the ending consolidated retained
earnings balance.
e. The loss occurred on a sale to a nonaffiliate. All profits and losses on sales to
affiliates are eliminated in the period of intercorporate sale and are considered
realized as the equipment is depreciated by the purchasing affiliate.
10-13
E10-8 Midyear Acquisition
a. The retained earnings balance reported for the consolidated entity as of January 1,
20X1, would be $400,000.
b. Separate earnings of Yarn Manufacturing $140,000

Net income reported by Spencer Corporation $60,000
Portion of year ownership was held by Yarn x 4/12
Income earned following acquisition 20,000
Income to noncontrolling interest ($20,000 x .05) (1,000)
Income to controlling interest $159,000
c. Consolidated retained earnings, January 1, 20X1 $400,000

Income to controlling interest 159,000
Dividends paid by Yarn Manufacturing (80,000)
Consolidated retained earnings, December 31, 20X1 $479,000
d. Purchase price on August 30, 20X1 $503,500

Equity method income 19,000
Dividends received from Spencer ($25,000 x .95) (23,750)
Balance in investment account December 31, 20X1 $498,750
10-14
E10-9 Purchase of Shares at Midyear
a. Journal entries recorded by Highbeam in 20X2:
(1) Investment in Copper Company Stock 319,500

Cash 319,500
Record purchase of Copper Company Stock.
(2) Cash 13,500

Investment in Copper Company Stock 13,500
Record dividends from Copper Company.
(3) Investment in Copper Company Stock 27,000

Income from Subsidiary 27,000
Record equity-method income.
b. Eliminating Entries:
E(1) Income from Subsidiary 27,000

Dividends Declared 13,500
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 3,000

Noncontrolling Interest 1,500
Assign income to noncontrolling interest:
$3,000 = $30,000 x .10
$1,500 = $15,000 x .10
E(3) Common Stock — Copper Company 160,000

Additional Paid-In Capital 40,000
Retained Earnings, January 1 150,000
Sales 90,000
Total Expenses 80,000
Eliminate beginning investment balance.
10-15
E10-10 Tax Deferral on Gains and Losses
Eliminating entries, December 31, 20X7:
E(1) Sales 90,000

Cost of Goods Sold 70,000
Inventory 20,000
Eliminate downstream inventory sale:
$20,000 = ($90,000 - $60,000) x 2/3
E(2) Deferred Tax Asset 8,000

Income Tax Expense 8,000
Eliminate tax expense on unrealized
intercompany profit on inventory transfer.
E(3) Gain on Sale of Land 100,000

Land 100,000
Eliminate upstream gain on sale of land.

intercompany profit on land transfer.
E10-11 Unrealized Profits in Prior Year
Eliminating entries, December 31, 20X8:
E(1) Retained Earnings, January 1 12,000

Eliminate beginning inventory profit.

Land 100,000
Eliminate unrealized gain on sale of land.
10-16
E10-12 Allocation of Income Tax Expense
a. Allocation of tax expense incurred in 20X5:
Winter Ray Guard Block

Item Corporation Corporation Company
Reported operating income $100,000 $50,000 $30,000

20X4 profits realized in 20X5 40,000 20,000
Unrealized profits in 20X5
sales (10,000) (20,000) (10,000)
Realized income before tax $130,000 $30,000 $40,000
Income tax assigned:

($130,000 / $200,000) x $80,000 $ 52,000
($30,000 / $200,000) x $80,000 $12,000
($40,000 / $200,000) x $80,000 $16,000
b. Computation of consolidated net income and income to controlling interest:
Realized income before tax:

Winter Corporation $130,000
Ray Guard Corporation 30,000
Block Company 40,000
Consolidated income before tax $200,000
Income tax expense (80,000)
Income to noncontrolling interests:
Ray Guard Corporation ($30,000 - $12,000) x .20 $ 3,600
Block Company ($40,000 - $16,000) x .10 2,400 (6,000)
10-17
E10-13 Effect of Preferred Stock on Earnings per Share
Because both companies paid preferred dividends in 20X1 and neither issue is convertible,
only one basic consolidated earnings per share number will be reported for 20X1:
Operating income of Amber Corporation $ 59,000

Net income of Newtop Company $45,000
Less: Preferred dividends (5,000)
Earnings available to Newtop common shareholders 40,000
Less: Income to noncontrolling interest ($40,000 x .30) (12,000)
Income to common shareholders of Amber Corporation $87,000
Less: Preferred dividends of Amber Corporation (9,000)
Earnings available to common shareholders $78,000
Consolidated earnings per share for 20X1

($78,000 / 12,000 shares) $6.50
E10-14 Effect of Convertible Bonds on Earnings per Share
Basic earnings per share:
Operating income of Crystal Corporation $45,000

Contribution to consolidated EPS from Evans Company
($30,000 / 10,000) x 6,000 shares 18,000

($63,000 / 30,000 shares) $2.10
Diluted earnings per share:
Operating income of Crystal Corporation $45,000

Contribution to consolidated EPS from Evans Company:
$30,000 + $12,000 (a) x 6,000 shares

10,000 shares + 10,000 shares 12,600

($57,600 / 30,000 shares) $1.92
(a) $12,000 = ($200,000 x .10) x (1 - .40)
10-18
E10-15 Effect of Convertible Preferred Stock on Earnings per Share
Basic earnings per share:
Operating income of Eagle Corporation $60,000

Contribution to consolidated EPS from Standard Company:
$45,000 - $12,000 x 8,000 shares

10,000 shares 26,400
Earnings available to shareholders $86,400

Preferred dividends of Eagle Corporation (16,000)

($70,400 / 10,000 shares) $7.04
Diluted earnings per share:
Operating income of Eagle Corporation $60,000

Contribution to consolidated EPS from Standard Company:
$45,000 x 8,000 shares

10,000 shares + 15,000 shares 14,400
Earnings available to shareholders $74,400

Preferred dividends of Eagle Corporation (16,000)

($58,400 / 10,000 shares) $5.84
10-19
SOLUTIONS TO PROBLEMS
P10-16 Direct Method Computation of Cash Flows
Car Corporation and Subsidiary

Operating Cash Flows

Cash Received from Customers $533,000
Cash Payments to Suppliers (268,000)
Computation of payments received from customers
Sales of Car Corporation $400,000

Sales to outside parties by Bus Company ($240,000 - $100,000) 140,000
Increase in Car Corporation accounts receivable (9,000)
Decrease in Bus Company’s accounts receivable 2,000
Payments received from customers $533,000
Computation of payments to suppliers
Cost of goods sold by Car Corporation excluding sale of

inventory purchased from Bus Company ($235,000 - $40,000) $195,000
Cost of goods sold on sales by Bus Company
to outside parties ($105,000 - $70,000) 35,000
Cost of goods sold on intercompany sales
resold in period ($70,000 x .40) 28,000
Decrease in Car Corporation inventory (22,000)
Increase in Bus Company inventory 16,000
Decrease in accounts payable of Car Corporation 31,000
Increase in accounts payable of Bus Company (15,000)
Payment made to suppliers $268,000
10-20
P10-17 Preparing a Statement of Cash Flows
a. Metal Corporation and Ocean Company

Consolidated Cash Flow Workpaper
Year Ended December 31, 20X3
Balance Balance
Item 1/1/X3 Debit Credit 12/31/X3
Cash 68,500 (a) 32,000 100,500

Accounts Receivable 82,000 (b) 15,000 97,000
Inventory 115,000 (c) 8,000 123,000
Land 45,000 (d) 10,000 55,000
Buildings and Equipment 515,000 (e) 35,000 550,000
Patents 5,000 (f) 1,000 4,000
830,500 929,500
Accumulated Depreciation 186,500 (g) 36,500 223,000

Accounts Payable 61,000 (h) 5,000 66,000
Wages Payable 26,000 (i) 6,000 20,000
Notes Payable 250,000 (j) 15,000 265,000
Common Stock 150,000 150,000
Retained Earnings 130,000 (k) 30,000 (l) 74,500 174,500
Noncontrolling Interest 27,000 (m) 5,000 (l) 9,000 31,000
830,500 141,000 141,000 929,500

Consolidated Net Income (l) 83,500
Depreciation Expense (g) 36,500
Amortization of Patent (f) 1,000
Increase in Accounts Receivable (b) 15,000
Increase in Inventory (c) 8,000
Increase in Accounts Payable (h) 5,000
Decrease in Wages Payable (i) 6,000

Purchase of Land (d) 10,000
Purchase of Buildings and Equipment (e) 35,000

Increase in Notes Payable (j) 15,000
Dividends Paid:
To Metal Corporation Shareholders (k) 30,000
To Ocean Company Shareholders (m) 5,000
Increase in Cash (a) 32,000
141,000 141,000
10-21
P10-17 (continued)
b. Consolidated statement of cash flows for 20X3
Metal Corporation and Subsidiary

Cash Flows from Operating Activities

Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Amortization Expense 1,000
Increase in Accounts Receivable (15,000)
Decrease in Wages Payable (6,000)

Purchase of Land $(10,000)
Purchase of Buildings and Equipment (35,000)

Increase in Notes Payable $ 15,000
Dividends Paid to Parent Company Shareholders (30,000)
Dividends Paid to Noncontrolling Shareholders ( 5,000)
Net Cash Used in Financing Activities (20,000)

Cash at Beginning of Year 68,500
Cash at End of Year $100,500
10-22
P10-18 Preparing a Statement of Cash Flows – Direct Method
a. Metal Corporation and Ocean Company

Consolidated Cash Flow Workpaper
Balance Balance
Cash 68,500 (a) 32,000 100,500

Inventory 115,000 (c) 8,000 123,000
Land 45,000 (d) 10,000 55,000
Patents 5,000 (f) 1,000 4,000
830,500 929,500
Accumulated Depreciation 186,500 (g) 36,500 223,000

Accounts Payable 61,000 (c) 5,000 66,000
Wages Payable 26,000 (h) 6,000 20,000
Notes Payable 250,000 (j) 15,000 265,000
Common Stock 150,000 150,000
830,500 141,000 141,000 929,000
Sales 490,000 (b)490,000

Cost of Goods Sold 259,000 (c)259,000
Wage Expense 55,000 (h) 55,000
Depreciation Expense 36,500 (g) 36,500
Interest Expense 16,000 (i) 16,000
Amortization Expense 1,000 (f) 1,000
Other Expenses 39,000 (c) 39,000
406,500
Consolidated Net Income 83,500 (l) 83,500
490,000 490,000
10-23
P10-18 (continued)

Cash Received from Customers (b) 475,000
Cash Paid to Suppliers (c)301,000
Cash Paid to Employees (h) 61,000
Cash Paid for Interest on Notes Payable (i) 16,000

Purchase of Buildings and Equipment (e) 35,000

Increase in Notes Payable (j) 15,000
Dividends Paid:
To Metal Corporation Shareholders (k) 30,000
To Ocean Company Shareholders (m) 5,000
490,000 490,000
b. Consolidated statement of cash flows for 20X3
Metal Corporation and Subsidiary


Cash Paid to Suppliers $301,000
Cash Paid to Employees 61,000
Cash Paid for Interest on Notes Payable 16,000 (378,000)

Purchase of Land $(10,000)

Increase in Notes Payable $15,000
Dividends Paid to Parent Company Shareholders (30,000)
Dividends Paid to Noncontrolling Shareholders ( 5,000)

10-24
P10-18 (continued)

activities

Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in Accounts Receivable (15,000)
Decrease in Wages Payable (6,000)
10-25
P10-19 Consolidated Statement of Cash Flows
a. Traper Company and Arrow Company

Consolidation Cash Flow Workpaper
Balance Balance
Cash 83,000 (a) 98,000 181,000

Inventory 320,000 (c) 50,000 370,000
Land 190,000 (d) 30,000 160,000
Buildings and Equipment 850,000 (e)130,000 980,000
Goodwill 40,000 (f) 12,000 28,000
1,693,000 1,894,000
Accum. Depreciation 280,000 (g) 45,000 325,000

Accounts Payable 52,000 (h) 22,000 74,000
Interest Payable 45,000 (i) 15,000 30,000
Bonds Payable 400,000 (j) 100,000 500,000
Bond Premium 18,000 (k) 2,000 16,000
Common Stock 300,000 300,000
Additional Paid-In Capital 70,000 70,000
Retained Earnings 488,000 (l) 25,000 (m) 72,000 535,000
Noncontrolling Interest 40,000 (n) 3,000 (m) 7,000 44,000
1,693,000 323,000 323,000 1,894,000

Consolidated Net Income (m) 79,000
Depreciation Expense (g) 45,000
Goodwill Impairment Loss (f) 12,000
Amortization of Bond Premium (k) 2,000
Loss on Sale of Land (d) 20,000
Decrease in Accounts Receivable (b) 35,000
Increase in Accounts Payable (h) 22,000
Decrease in Interest Payable (i) 15,000

Sale of Land (d) 10,000
Purchase of Buildings and Equipment (e)130,000

Sale of Bonds (j)100,000
Dividends Paid:
To Traper Shareholders (l) 25,000
To Noncontrolling Shareholders (n) 3,000
323,000 323,000
10-26
P10-19 (continued)
Explanation of Workpaper Entries:
(a) Increase in cash balance
(b) Decrease in accounts receivable
(c) Increase in inventory
(d) Sale of land
(e) Purchase of buildings and equipment
(f) Goodwill impairment loss recognized in 20X4
(g) Depreciation charges for 20X4
(h) Increase in accounts payable
(i) Decrease in interest payable
(j) Sale of bonds
(k) Amortize bond premium
(l) Traper Company dividend $25,000
(m) Consolidated net income $79,000
(n) Arrow Company dividend $15,000 x .20
10-27
P10-19 (continued)
b. Consolidated statement of cash flows for 20X4:
Traper Company and Subsidiary

For Year Ended December 31, 20X4

Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Amortization of Bond Premium (2,000)
Loss on Sale of Land 20,000
Decrease in Interest Payable (15,000)

Sale of Land $ 10,000

Dividends Paid:

Cash Balance at Beginning of Year 83,000
Cash Balance at End of Year $181,000
10-28
P10-20 Consolidated Statement of Cash Flows — Direct Method
a. Traper Company and Arrow Company

Balance Balance
Cash 83,000 (a) 98,000 181,000

Inventory 320,000 (c) 50,000 370,000
Land 190,000 (d) 30,000 160,000
Goodwill 40,000 (f) 12,000 28,000
1,693,000 1,894,000
Accum. Depreciation 280,000 (g) 45,000 325,000

Interest Payable 45,000 (h) 15,000 30,000
Bonds Payable 400,000 (i) 100,000 500,000
Bond Premium 18,000 (h) 2,000 16,000
Common Stock 300,000 300,000
Additional Paid-In 70,000 70,000
Capital
Retained Earnings 488,000 (j) 25,000 (k) 72,000 535,000
Noncontrolling Interest 40,000 (l) 3,000 (k) 7,000 44,000
1,693,000 323,000 323,000 1,894,000
Sales 600,000 (b) 600,000

Cost of Goods Sold 375,000 (c)375,000
Depreciation Expense 45,000 (g) 45,000
Interest Expense 69,000 (h) 69,000
Loss on Sale of Land 20,000 (d) 20,000
Goodwill Impairment Loss 12,000 (f) 12,000
521,000
Consolidated Net Income 79,000 (k) 79,000
600,000 600,000
10-29
P10-20 (continued)

Cash Received from Customers (b)635,000
Cash Paid to Suppliers (c)403,000
Cash Paid for Interest on
Bonds Payable (h) 86,000

Sale of Land (d) 10,000
Purchase of Buildings and Equipment (e)130,000

Sale of Bonds (i) 100,000
Dividends Paid:
To Traper Shareholders (j) 25,000
To Noncontrolling Shareholders (l) 3,000
745,000 745,000
Explanation of Workpaper Entries:
(a) Increase in cash balance
(b) Payments received from customers
(c) Payments to suppliers
(d) Sale of land
(e) Purchase of buildings and equipment
(f) Goodwill impairment loss recognized in 20X4
(g) Depreciation charges for 20X4
(h) Payment of interest
(i) Sale of bonds
(j) Traper Company dividend $25,000
(k) Consolidated net income $79,000
(l) Arrow Company dividend $15,000 x .20
10-30
P10-20 (continued)
b. Consolidated statement of cash flows for 20X4:
Traper Company and Subsidiary

For Year Ended December 31, 20X4

Cash Payments to Suppliers $403,000
Cash Payments of Interest 86,000 (489,000)

Sale of Land $ 10,000

Dividends Paid:

Cash Balance at End of Year $181,000

activities

Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of Bond Premium (2,000)
Loss on Sale of Land 20,000
Decrease in Interest Payable (15,000)
10-31
P10-21 Consolidated Statement of Cash Flows
Weatherbee Company and Sun Corporation

Balance Balance
Cash 54,000 (a) 21,000 75,000

Inventory 230,000 (c)130,000 360,000
Land 95,000 (d) 5,000 100,000
1,300,000 1,296,000
Accumulated Depreciation 290,000 (e)100,000 (f) 40,000 230,000

Accounts Payable 90,000 (g) 15,000 105,000
Bonds Payable 300,000 (h) 50,000 250,000
Common Stock 300,000 300,000
Retained Earnings 290,000 (i) 65,000 (j) 148,000 373,000
Noncontrolling Interest 30,000 (k) 4,000 (j) 12,000 38,000
1,300,000 375,000 375,000 1,296,000

Consolidated Net Income (j) 160,000
Depreciation Expense (f) 40,000
Gain on Sale of Equipment (e) 30,000
Increase in Inventory (c)130,000
Increase in Accounts Payable (g) 15,000

Sale of Buildings and Equipment (e) 80,000

Bond Retirement (h) 50,000
Dividends Paid:
To Weatherbee Company Shareholders (i) 65,000
To Noncontrolling Shareholders (k) 4,000
305,000 305,000
10-32
P10-22 Consolidated Statement of Cash Flows — Direct Method
Weatherbee Company and Sun Corporation

Balance Balance
Cash 54,000 (a) 21,000 75,000

Inventory 230,000 (c) 130,000 360,000
Land 95,000 (d) 5,000 100,000
1,300,000 1,296,000
Accumulated Depreciation 290,000 (e) 100,000 (f) 40,000 230,000

Bonds Payable 300,000 (g) 50,000 250,000
Common Stock 300,000 300,000
Retained Earnings 290,000 (h) 65,000 (i) 148,000 373,000
Noncontrolling Interest 30,000 (j) 4,000 (i) 12,000 38,000
1,300,000 375,000 375,000 1,296,000
Sales 1,070,000 (b)1,070,000

Gain on Sale
of Equipment 30,000 (e) 30,000
1,100,000
Cost of Goods Sold 750,000 (c) 750,000
Depreciation Expense 40,000 (f) 40,000
Other Expenses 150,000 (c) 150,000
940,000
Consolidated Net Income 160,000 (i) 160,000
1,100,000 1,100,000

Cash Received from Customers (b)1,080,000
Cash Paid to Suppliers (c)1,015,000

Sale of Buildings and Equipment (e) 80,000

Bond Retirement (g) 50,000
Dividends Paid
To Weatherbee Company Shareholders (h) 65,000
To Noncontrolling Shareholders (j) 4,000
1,160,000 1,160,000
10-33
P10-23 Consolidated Statement of Cash Flows [AICPA Adapted]
Brimer, Inc., and Subsidiary


Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 82,000 [1]
Decrease in Allowance to Reduce
Marketable Securities to Market (11,000)
Increase in Inventories (70,000)
Increase in Accounts Payable
and Accrued Liabilities 121,000
Increase in Deferred Income Taxes 12,000

Purchase of Equipment $(127,000)

Payment on Note Payable $(150,000)
Sale of Treasury Stock 44,000
Cash Dividend Paid by Parent Company (58,000)
Cash Dividend Paid to Minority Stockholders
of Subsidiary (15,000) [2]
Net Increase in Cash $118,000

Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of Common Stock to Purchase Land $215,000
10-34
P10-23 (continued)
Explanations of Amounts:
[1] Depreciation:
Accumulated depreciation, Dec. 31, 20X6 $199,000
Accumulated depreciation on equipment sold
($62,000 - $34,000) 28,000
227,000
Deduct accumulated depreciation, Dec. 31, 20X5 (145,000)
Depreciation for 20X6 $ 82,000
[2] Cash dividends paid to minority stockholders of subsidiary:

Cash dividend paid by Dore Corporation $ 50,000
Minority ownership x .30
Cash dividend paid to minority stockholders in 20X6 $ 15,000
10-35
P10-24 Statement of Cash Flows Prepared from Consolidation Workpaper
a. Workpaper for consolidated statement of cash flows:
Detecto Corporation and Strand Company

Balance Balance
Cash 92,000 (a) 30,200 61,800

Inventory 140,000 (c) 59,000 199,000
Land 75,000 (d) 5,000 80,000
Buildings and Equipment 400,000 (e)100,000
(f) 40,000 540,000
Patents 30,000 (g) 5,000 25,000
872,000 1,025,800
Accumulated Depreciation 210,000 (h) 40,000 250,000

Accounts Payable 114,200 (i) 19,200 95,000
Bonds Payable 90,000 (j) 100,000 190,000
Common Stock 100,000 100,000
872,000 281,200 281,200 1,025,800

Consolidated Net Income (l) 91,000
Amortization Expense (g) 5,000
Depreciation Expense (h) 40,000
Decrease in Accounts Payable (i) 19,200

Acquisition of Buildings and
Equipment from Bond Issue (e)100,000
Purchase of Buildings and Equipment (f) 40,000

Dividends Paid:
To Detecto Corp. Shareholders (k) 50,000
To Noncontrolling Shareholders (m) 8,000
Issuance of Bonds for Buildings
and Equipment (j) 100,000
Decrease in Cash (a) 30,200
281,200 281,200
10-36
P10-24 (continued)
b. Consolidated cash flow statement for 20X3:
Detecto Corporation and Subsidiary


Noncash Expenses, Revenue, Losses and Gains
Included in Income:
Decrease in Accounts Payable
(19,200)

Purchase of Land $ (5,000)

Dividends Paid:
To Parent Company Shareholders $(50,000)
Net Cash Received from
Financing Activities (58,000)
Net Decrease in Cash $(30,200)

Cash Balance at End of Year $ 61,800
Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of Bonds to Purchase Equipment $100,000
10-37
P10-25 Midyear Purchase of Controlling Interest
a. Equity-method entries recorded by Mega Theaters during 20X1:
(1) Investment in Blase Company Common Stock 765,000

Cash 765,000
Record purchase of Blase Company stock.
(2) Cash 25,500

Investment in Blase Company
Common Stock 25,500
Record dividends from Blase Company:
$30,000 x .85
(3) Investment in Blase Company Common Stock 97,750

Income from Blase Company 97,750
Record equity-method income:
($175,000 - $60,000) x .85
10-38
P10-25 (continued)
b. Eliminating entries, December 31, 20X1:
E(1) Income from Blase Company 97,750

Common Stock 72,250
Eliminate income from subsidiary:
$25,500 = ($40,000 - $10,000) x .85

$17,250 = ($175,000 - $60,000) x .15
$4,500 = ($40,000 - $10,000) x .15
E(3) Common Stock 100,000

Sales 240,000
Differential 100,000
Operating Expense 180,000
Common Stock 765,000
Eliminate beginning investment balance,
subsidiary stockholders’ equity, and subsidiary
preacquisition income and dividends.
Computation of differential
Compensation given by Mega Theaters $765,000

Fair value of noncontrolling interest 135,000
Total fair value $900,000
Book value of Blase stock:
Common stock $100,000
Additional paid-in capital 500,000
Retained earnings, January 1 150,000
First quarter undistributed
earnings ($60,000 - $10,000) 50,000
Book value, April 1 (800,000)
Differential $100,000
E(4) Goodwill 100,000

Differential 100,000
Assign differential to goodwill.
10-39
P10-26 Consolidation Involving a Midyear Purchase
a. Journal entries recorded by Famous Products:
(1) Investment in Sanford Company Stock 247,500

Common Stock 80,000
Record purchase of Sanford Company stock:
$80,000 = $10 x 8,000 shares
$167,500 = $247,500 - $80,000
(2) Cash 9,000

Investment in Sanford Company Stock 9,000
Record dividend received from Sanford:
$9,000 = $10,000 x .90
(3) Investment in Sanford Company Stock 13,500

Record equity-method income:
$13,500 = $15,000 x .90
b. Eliminating entries, December 31, 20X2:

Eliminate income from subsidiary.

Noncontrolling Interest 500
$1,500 = $15,000 x .10
$1,000 = $10,000 x .10
E(3) Common Stock — Sanford Company 150,000

Sales 205,000
Other Expenses 18,000
Eliminate beginning investment balance,
subsidiary stockholders’ equity, and subsidiary
preacquisition income and dividends.
10-40
P10-26 (continued)
c. Famous Products Corporation and Sanford Company
Consolidation Workpaper
December 31, 20X2
Famous
Products Sanford Eliminations Consol-
Item Corp. Co. Debit Credit idated
Sales 390,000 250,000 (3) 205,000 435,000
Income from Subsidiary 13,500 (1) 13,500
Credits 403,500 250,000 435,000
Cost of Goods Sold 305,000 145,000 (3) 126,000 324,000
Depreciation Expense 25,000 20,000 (3) 16,000 29,000
Other Expenses 14,000 25,000 (3) 18,000 21,000
Debits (344,000) (190,000) (374,000)
Consolidated Net Income 61,000
Income to Noncon-
trolling Interest (2) 1,500 (1,500)
Income, carry forward 59,500 60,000 220,000 160,000 59,500
Retained Earnings, Jan. 1 135,000 100,000 (3)100,000 135,000
Income, from above 59,500 60,000 220,000 160,000 59,500
194,500 160,000 194,500
Dividends Declared (40,000) (30,000) (1) 9,000
(2) 1,000
(3) 20,000 (40,000)
Ret. Earnings, Dec. 31,
carry forward 154,500 130,000 320,000 190,000 154,500
Cash 85,000 50,000 135,000
Accounts Receivable 100,000 60,000 160,000
Inventory 150,000 100,000 250,000
Buildings and Equipment 400,000 340,000 740,000
Investment in
Sanford Stock 252,000 (1) 4,500
(3)247,500
Debits 987,000 550,000 1,285,000
Accum. Depreciation 105,000 65,000 170,000
Accounts Payable 40,000 50,000 90,000
Taxes Payable 70,000 55,000 125,000
Bonds Payable 250,000 100,000 350,000
Common Stock 200,000 150,000 (3)150,000 200,000
Additional Paid-In
Capital 167,500 167,500
Retained Earnings,
from above 154,500 130,000 320,000 190,000 154,500
Noncontrolling Interest (2) 500
(3) 27,500 28,000
Credits 987,000 550,000 470,000 470,000 1,285,000
10-41
P10-27 Tax Allocation in Consolidated Balance Sheet
a. Acme Powder Corporation and Brown Company

Consolidated Balance Sheet Workpaper
December 31, 20X9
Acme
Powder Brown Eliminations Consol-
Item Corp. Co. Debit Credit idated
Cash 44,400 20,000 64,400
Inventory 170,000 120,000 (2) 20,000
(3) 25,000 245,000
Land 90,000 30,000 120,000
Buildings and Equipment 500,000 300,000 (4) 30,000 830,000
Investment in Brown
Company Stock 280,000 (1)280,000
Deferred Tax Asset (2) 8,000
(3) 10,000
(4) 20,000 38,000
Debits 1,204,400 530,000 1,477,400
Accum. Depreciation 180,000 80,000 (4) 80,000 340,000

Wages Payable 80,000 30,000 110,000
Bonds Payable 200,000 200,000
Common Stock 100,000 150,000 (1)150,000 100,000
Retained Earnings, 574,400 250,000 (1)250,000
(2) 8,400
(3) 15,000
(4) 21,000 530,000
Noncontrolling Interest (2) 3,600 (1)120,000
(4) 9,000 107,400
Credits 1,204,400 530,000 525,000 525,000 1,477,400
Eliminating entries, December 31, 20X9 (not required)
E(1) Common Stock — Brown Company 150,000

Retained Earnings 250,000
Investment in Brown Company Stock 280,000
Eliminate investment balance.
10-42
P10-27 (continued)

Inventory 20,000
Eliminate inventory profit of
Brown Company:
$8,000 = $20,000 x .40
$8,400 = ($20,000 - $8,000) x .70
$3,600 = ($20,000 - $8,000) x .30

Inventory 25,000
Eliminate inventory profit of Acme
Powder Corporation:
$10,000 = $25,000 x .40
$15,000 = $25,000 - $10,000
E(4) Buildings and Equipment 30,000

Deferred Tax Asset 20,000
Accumulated Depreciation 80,000
Eliminate unrealized profit on equipment:
$30,000 = $120,000 - $90,000
$20,000 = ($90,000 - $40,000) x .40
$21,000 = [($90,000 - $40,000) x .60] x .70
$9,000 = [($90,000 - $40,000) x .60] x .30
10-43
P10-27 (continued)
b. Acme Powder Corporation and Subsidiary

Consolidated Balance Sheet
December 31, 20X9
Cash $ 64,400
Accounts Receivable 180,000
Inventory 245,000
Land 120,000
Buildings and Equipment $830,000
Less: Accumulated Depreciation (340,000) 490,000
Deferred Tax Asset 38,000
Total Assets $1,137,400
Accounts Payable $ 90,000
Wages Payable 110,000
Bonds Payable 200,000
Stockholders' Equity:
Controlling Interest:
Common Stock $100,000
Total Controlling Interest $630,000
Total Stockholders’ Equity 737,400
Total Liabilities and Stockholders' Equity $1,137,400
10-44
P10-28 Computations Involving Tax Allocation
a. Basic equity-method journal entries recorded by Broom Manufacturing:
(1) Cash 112,500

Investment in Satellite
Industries Stock 112,500
Record dividends for 20X5:
$150,000 x .75
(2) Investment in Satellite Industries Stock 142,500

Record equity-method income for 20X5:
$190,000 x .75
b. Income assigned to noncontrolling interest:
Net income of Satellite Industries $190,000

Unrealized inventory profit ($30,000 x .60) (18,000)
Unrealized profit on sale of land ($120,000 x .60) (72,000)
Satellite's realized net income $100,000
Proportion of stock held by noncontrolling interest x .25
Income to noncontrolling interest $ 25,000
c. Consolidated net income and income to controlling

Interest:
Operating income of Broom Manufacturing $700,000

Inventory profits realized in 20X5 20,000
Realized operating income of Broom Manufacturing $720,000
Realized income of Satellite Industries 100,000
Consolidated income before provision for taxes $820,000
Provision for income taxes on:
Operating income ($720,000 x .40) $288,000
Income from Satellite Industries
($112,500 x .20 x .40) 9,000 (297,000)
Income to noncontrolling interest (25,000)
d. Net assets assigned to noncontrolling interest in consolidated

balance sheet at December 31, 20X5:
Net assets reported by Satellite Industries $900,000

Less: Unrealized inventory profits ($30,000 x .60) (18,000)
Unrealized profit on land ($120,000 x .60) (72,000)
Realized net assets of Satellite Industries $810,000
Proportion of stock held by noncontrolling interest x .25
Net assets assigned to noncontrolling interest $202,500
10-45
P10-29 Workpaper Involving Tax Allocation

a. Eliminating entries:

Investment in Custom Pizza Common
Stock 18,200
Eliminate income from subsidiary:
$25,200 = $36,000 x .70

$8,100 = ($36,000 + $6,000 - $15,000) x .30
$3,000 = $10,000 x .30
$5,100 = $8,100 - $3,000
E(3) Common Stock ─ Custom Pizza 50,000

Investment in Custom Pizza Common
Stock 140,000
Eliminate beginning investment balance.
E(4) Tax Expense 4,000

Eliminate unrealized profits in beginning
inventory on upstream sale.
E(5) Sales 120,000

Inventory 25,000
Eliminate unrealized profits in ending
inventory on upstream sale.

Tax Expense 10,000
intercompany profit: $25,000 x .40
E(7) Buildings and Equipment 85,000

Gain on Sale of Equipment 15,000
Accumulated Depreciation 100,000
Eliminate unrealized profit on downstream
sale of equipment.

Tax Expense 6,000
Eliminate income tax expense on unrealized
gain on equipment: $15,000 x .40
10-46
P10-29 (continued)
b. Hardtack Bread Company and Custom Pizza Corporation

Consolidation Workpaper
December 31, 20X7
Custom
Hardtack Pizza Eliminations Consol-
Item Bread Co. Corp. Debit Credit idated
Sales 580,000 300,000 (5)120,000 760,000

Gain on Sale
of Equipment 15,000 (7) 15,000
Income from Subsidiary 25,200 (1) 25,200
Credits 620,200 300,000 760,000
Cost of Goods Sold 435,000 210,000 (4) 10,000
(5) 95,000 540,000
Depreciation and
Amortization 40,000 20,000 60,000
Tax Expense 44,000 24,000 (4) 4,000 (6) 10,000
(8) 6,000 56,000
Other Expenses 11,400 10,000 21,400
Debits (530,400) (264,000) (677,400)
Consolidated Net Income 82,600
Income to Noncon-
trolling Interest (2) 8,100 (8,100)
Income, carry forward 89,800 36,000 172,300 121,000 74,500
Ret. Earnings, Jan. 1 374,200 150,000 (3)150,000

(4) 4,200 370,000
Income, from above 89,800 36,000 172,300 121,000 74,500
464,000 186,000 444,500
Dividends Declared (20,000) (10,000) (1) 7,000
(2) 3,000 (20,000)
Ret. Earnings, Dec. 31,
carry forward 444,000 176,000 326,500 131,000 424,500
10-47
P10-29 (continued)
Custom
Hardtack Pizza Eliminations Consol-
Item Bread Co. Corp. Debit Credit idated
Cash 35,800 56,000 91,800

Inventory 220,000 60,000 (5) 25,000 255,000
Land 60,000 20,000 80,000
Buildings and Equipment 450,000 400,000 (7) 85,000 935,000
Patents 70,000 70,000
Investment in Custom
Pizza Stock 158,200 (1) 18,200
(3)140,000
Deferred Tax Asset (6) 10,000
(8) 6,000 16,000
Debits 1,124,000 576,000 1,617,800
Accumulated Depreciation 150,000 160,000 (7)100,000 410,000

Wages Payable 70,000 20,000 90,000
Bonds Payable 200,000 100,000 300,000
Deferred Income Tax 120,000 40,000 160,000
Common Stock 100,000 50,000 (3) 50,000 100,000
Retained Earnings,
from above 444,000 176,000 326,500 131,000 424,500
Noncontrolling Interest (4) 1,800 (2) 5,100
(3) 60,000 63,300
Credits 1,124,000 576,000 479,300 479,300 1,617,800
10-48
P10-30 Earnings per Share with Convertible Securities
Basic earnings per share
Branch Manufacturing income from operations $100,000

Short Retail Stores net income $49,200
Preferred dividends ($100,000 x .08) (8,000)
Earnings available $41,200
Short shares outstanding ÷20,000
Computed EPS for Short $ 2.06
Shares held by Branch Manufacturing x16,000
Contribution to Branch Manufacturing earnings 32,960
Total earnings of Branch Manufacturing $132,960
Preferred dividends of Branch Manufacturing (22,000)
Earnings to Branch common shareholders $110,960
Branch Manufacturing shares outstanding ÷ 15,000
Basic earnings per share $ 7.40
Diluted earnings per share
Branch Manufacturing income from operations $100,000

Short Retail Stores net income $49,200
Assumed conversion of bonds:
$20,000 x .60 12,000
Earnings available $61,200
Short shares outstanding 20,000
Assumed conversion of bonds 8,000
Assumed conversion of preferred 12,000
Total shares ÷40,000
Computed EPS for Short $ 1.53
Shares held by Branch Manufacturing x16,000
Contribution to Branch Manufacturing earnings 24,480
Total earnings of Branch Manufacturing $124,480
Preferred dividends of Branch Manufacturing (22,000)
Earnings to Branch common shareholders $102,480
Branch Manufacturing shares outstanding ÷ 15,000
Diluted earnings per share $ 6.83
10-49
P10-31 Comprehensive Earnings per Share
Basic earnings per share
Mighty Corporation operating income $300,000

Longfellow net income $115,000
Preferred dividends ($200,000 x .11) (22,000)
Earnings available to common shareholders $ 93,000
Longfellow shares outstanding ÷ 40,000
Computed EPS for Longfellow $ 2.325
Shares held by Mighty Corporation x 32,000
Contribution to Mighty Corporation earnings 74,400
Total earnings of Mighty Corporation $374,400
Mighty Corporation shares outstanding ÷100,000
Basic earnings per share $ 3.74
Diluted earnings per share
Mighty Corporation operating income $300,000

Longfellow net income $115,000
Assumed conversion of bonds
($500,000 x .08) x .60 24,000
Earnings available to common $139,000
Longfellow shares outstanding 40,000
Assumed conversion of bonds 30,000
Assumed conversion of preferred 20,000
Exercise of warrants:
10,000 - [($8 x 10,000) / $40] 8,000
Total shares ÷ 98,000
Computed EPS for Longfellow $ 1.418
Shares held by Mighty Corporation x 32,000
Contribution to Mighty Corporation Earnings 45,376
Total earnings of Mighty Corporation $345,376
Interest savings on assumed conversion
of bonds ($800,000 x .10) x .60 48,000
$393,376
Mighty Corporation shares ÷125,000
Diluted earnings per share $ 3.15
10-50

Chap 010

Diunggah oleh

Informasi Dokumen

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Chap 010

Diunggah oleh

Hak Cipta:

Format Tersedia

www.downloadslide.

ADDITIONAL CONSOLIDATION REPORTING ISSUES

Q10-2 Consolidated retained earnings do not include the earnings assigned to

assigned to noncontrolling common shareholders are deducted from consolidated revenue

C10-1 The Effect of Security Type on Earnings per Share

C10-2 Evaluating Consolidated Statements

From: , Accounting Staff

Re: Disclosure of Transfer of Cash from Subsidiary to Parent

C10-3 Income Tax Expense

C10-4 Consolidated Cash Flows

E10-1 Analysis of Cash Flows

a. The consolidated cash balance at January 1, 20X2, was $83,000, computed as

Balance at December 31, 20X2 $ 57,000

b. Dividends of $48,000 were reported:

Dividends paid to Lamb shareholders $45,000

c. Consolidated net income was $207,000, computed as follows:

Cash flow from operations $284,000

E10-2 Statement of Cash Flows

a. The noncontrolling interest received dividends of $6,000 ($15,000 x .40).

b. A total of $320,000 will be reported as cash provided by operations, computed as

Consolidated net income $271,000

c. Cash used in investing activities will be reported at $161,000, computed as follows:

Purchases of equipment $(295,000)

d. Cash used in financing activities will be reported at $81,000, computed as follows:

Sale of stock $150,000

e. The cash balance increased by $78,000 ($320,000 - $161,000 - $81,000) in 20X4.

E10-3 Computation of Operating Cash Flows

E10-4 Consolidated Operating Cash Flows

a. Cash received from customers was $482,000 ($300,000 + $200,000 - $28,000 +

b. Cash payments to suppliers was $288,000 ($160,000 + $95,000 + $35,000 - $15,000 +

c. Cash flows from operating activities was $194,000 ($482,000 - $288,000).

E10-5 Preparation of Statement of Cash Flows

Consolidated Enterprises Inc. and Subsidiary

Cash Flows from Operating Activities:

Cash Flows from Investing Activities:

Cash Flows from Financing Activities:

Net Increase in Cash $229,000

E10-6 Direct Method Cash Flow Statement

Consolidated Enterprises Inc. and Subsidiary

Cash Flows from Operating Activities:

Cash Flows from Investing Activities:

Cash Flows from Financing Activities:

Net Increase in Cash $ 229,000

(a) $923,000 = $900,000 + $23,000

Reconciliation of consolidated net income to net cash provided by operating

Consolidated Net Income $464,000

E10-7 Analysis of Consolidated Cash Flow Statement

a. Dividends paid to noncontrolling interest $ 6,000

d. Dividends paid to noncontrolling shareholders are reported as a cash outflow in

E10-8 Midyear Acquisition

b. Separate earnings of Yarn Manufacturing $140,000

c. Consolidated retained earnings, January 1, 20X1 $400,000

d. Purchase price on August 30, 20X1 $503,500

E10-9 Purchase of Shares at Midyear

a. Journal entries recorded by Highbeam in 20X2:

(1) Investment in Copper Company Stock 319,500

(2) Cash 13,500

(3) Investment in Copper Company Stock 27,000

E(1) Income from Subsidiary 27,000

E(2) Income to Noncontrolling Interest 3,000

E(3) Common Stock — Copper Company 160,000

E10-10 Tax Deferral on Gains and Losses

Eliminating entries, December 31, 20X7:

E(1) Sales 90,000