solusi manual advanced acc zy Chap010

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.

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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

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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.

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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.

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C10-2 Evaluating Consolidated Statements

MEMO

To: TreasurerCowl 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]

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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. 2SEC Regulation S-K, Item 303

Secondary citations:FASB 95FASB 131, Par. 131

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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.

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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.

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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

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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:

Consolidated net income $271,000 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).

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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 SubsidiaryConsolidated 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

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E10-6 Direct Method Cash Flow Statement

Consolidated Enterprises Inc. and SubsidiaryConsolidated Statement of Cash Flows


Cash Flows from Operating Activities: Cash Received from Customers $ 923,000 (a) Cash Payments to Suppliers (378,000) (b) 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

(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 $464,000Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Expense $73,000 Goodwill Impairment Loss 3,000 Gain on Sale of Equipment (8,000) Decrease in Accounts Receivable 23,000 Increase in Inventory (15,000) Increase in Accounts Payable 5,000 Total Adjustments 81,000 Net Cash Provided by Operating Activities $545,000

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E10-7 Analysis of Consolidated Cash Flow Statement

a. Dividends paid to noncontrolling interest $ 6,000Proportion 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.

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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 $60,000Portion of year ownership was held by Yarn x 4/12 Income earned following acquisition 20,000 Consolidated net income $160,000 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

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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 Investment in Copper Company Stock 13,500 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 3,000 Dividends Declared 1,500 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 160,000Additional Paid-In Capital 40,000Retained Earnings, January 1 150,000Sales 90,000 Total Expenses 80,000 Dividends Declared 5,000 Investment in Copper Company Stock 319,500 Noncontrolling Interest 35,500 Eliminate beginning investment balance.

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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.

E(4) Deferred Tax Asset 40,000 Income Tax Expense 40,000 Eliminate tax expense on unrealized intercompany profit on land transfer.

E10-11 Unrealized Profits in Prior Year

Eliminating entries, December 31, 20X8:

E(1) Retained Earnings, January 1 12,000Income Tax Expense 8,000 Cost of Goods Sold 20,000 Eliminate beginning inventory profit.

E(2) Deferred Tax Asset 40,000Retained Earnings, January 1 45,000Noncontrolling Interest 15,000 Land 100,000 Eliminate unrealized gain on sale of land.

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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 )Consolidated net income $120,000 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 )Income to controlling interest $114,000

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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 Consolidated net income $99,000 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 Earnings available to common shareholders $63,000


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

Earnings available to common shareholders $57,600


(a) $12,000 = ($200,000 x .10) x (1 - .40)

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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)Earnings available to common shareholders $70,400


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)Earnings available to common shareholders $58,400


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SOLUTIONS TO PROBLEMS

P10-16 Direct Method Computation of Cash Flows

Car Corporation and SubsidiaryOperating Cash Flows


Cash Flows from Operating Activities: Cash Received from Customers $533,000 Cash Payments to Suppliers (268,000) Net Cash Provided by Operating Activities $265,000

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

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P10-17 Preparing a Statement of Cash Flows

a. Metal Corporation and Ocean CompanyConsolidated Cash Flow Workpaper

Year Ended December 31, 20X3

Balance Balance Item 1/1/X3 Debit Credit 12/31/X3

Cash 68,500 (a) 32,000 100,500Accounts Receivable 82,000 (b) 15,000 97,000Inventory 115,000 (c) 8,000 123,000Land 45,000 (d) 10,000 55,000Buildings and Equipment 515,000 (e) 35,000 550,000Patents 5,000 (f) 1,000 4,000

830,500 929,500

Accumulated Depreciation 186,500 (g) 36,500 223,000Accounts Payable 61,000 (h) 5,000 66,000Wages Payable 26,000 (i) 6,000 20,000Notes Payable 250,000 (j) 15,000 265,000Common Stock 150,000 150,000Retained Earnings 130,000 (k) 30,000 (l) 74,500 174,500Noncontrolling Interest 27,000 (m) 5,000 (l) 9,000 31,000

830,500 141,000 141,000 929,500

Cash Flows from Operating Activities: 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

Cash Flows from Investing Activities: Purchase of Land (d) 10,000 Purchase of Buildings and Equipment (e) 35,000

Cash Flows from Financing Activities: Increase in Notes Payable (j) 15,000 Dividends Paid: To Metal Corporation Shareholders (k) 30,000 To Ocean Company Shareholders (m) 5,000Increase in Cash (a) 32,000

141,000 141,000

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P10-17 (continued)

b. Consolidated statement of cash flows for 20X3

Metal Corporation and SubsidiaryConsolidated Statement of Cash Flows


Cash Flows from Operating Activities Consolidated Net Income $ 83,500 Noncash Expenses, Revenue, Losses, and Gains Included in Income: Depreciation Expense 36,500 Amortization Expense 1,000 Increase in Accounts Receivable (15,000) Increase in Inventory (8,000) Increase in Accounts Payable 5,000 Decrease in Wages Payable (6,000 ) Net Cash Provided by Operating Activities $97,000

Cash Flows from Investing Activities: Purchase of Land $(10,000) Purchase of Buildings and Equipment (35,000 ) Net Cash Used in Investing Activities (45,000)

Cash Flows from Financing Activities: 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 )

Net Increase in Cash $ 32,000 Cash at Beginning of Year 68,500 Cash at End of Year $100,500

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P10-18 Preparing a Statement of Cash Flows – Direct Method

a. Metal Corporation and Ocean CompanyConsolidated Cash Flow Workpaper



Cash 68,500 (a) 32,000 100,500Accounts Receivable 82,000 (b) 15,000 97,000Inventory 115,000 (c) 8,000 123,000Land 45,000 (d) 10,000 55,000Buildings and Equipment 515,000 (e) 35,000 550,000Patents 5,000 (f) 1,000 4,000

830,500 929,500

Accumulated Depreciation 186,500 (g) 36,500 223,000Accounts Payable 61,000 (c) 5,000 66,000Wages Payable 26,000 (h) 6,000 20,000Notes Payable 250,000 (j) 15,000 265,000Common Stock 150,000 150,000Retained Earnings 130,000 (k) 30,000 (l) 74,500 174,500Noncontrolling Interest 27,000 (m) 5,000 (l) 9,000 31,000

830,500 141,000 141,000 929,000

Sales 490,000 (b)490,000Cost of Goods Sold 259,000 (c)259,000Wage Expense 55,000 (h) 55,000Depreciation Expense 36,500 (g) 36,500Interest Expense 16,000 (i) 16,000Amortization Expense 1,000 (f) 1,000Other Expenses 39,000 (c) 39,000

406,500Consolidated Net Income 83,500 (l) 83,500

490,000 490,000

10-23


P10-18 (continued)

Cash Flows from Operating Activities: 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

Cash Flows from Investing Activities: Purchase of Land (d) 10,000 Purchase of Buildings and Equipment (e) 35,000

Cash Flows from Financing Activities: 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

490,000 490,000

b. Consolidated statement of cash flows for 20X3

Metal Corporation and SubsidiaryConsolidated Statement of Cash Flows


Cash Flows from Operating Activities: Cash Received from Customers $475,000 Cash Paid to Suppliers $301,000 Cash Paid to Employees 61,000 Cash Paid for Interest on Notes Payable 16,000 (378,000 ) Net Cash Provided by Operating Activities $ 97,000

Cash Flows from Investing Activities: Purchase of Land $(10,000) Purchase of Buildings and Equipment (35,000 ) Net Cash Used in Investing Activities (45,000)

Cash Flows from Financing Activities: 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 )

Net Increase in Cash $ 32,000 Cash at Beginning of Year 68,500 Cash at End of Year $100,500

10-24


P10-18 (continued)



Consolidated Net Income $83,500Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation Expense $36,500 Amortization Expense 1,000 Increase in Accounts Receivable (15,000)Increase in Inventory (8,000)Increase in Accounts Payable 5,000 Decrease in Wages Payable (6,000)

Total Adjustments 13,500 Net Cash Provided by Operating Activities $97,000

10-25


P10-19 Consolidated Statement of Cash Flows

a. Traper Company and Arrow CompanyConsolidation Cash Flow Workpaper



Cash 83,000 (a) 98,000 181,000Accounts Receivable 210,000 (b) 35,000 175,000Inventory 320,000 (c) 50,000 370,000Land 190,000 (d) 30,000 160,000Buildings and Equipment 850,000 (e)130,000 980,000Goodwill 40,000 (f) 12,000 28,000

1,693,000 1,894,000

Accum. Depreciation 280,000 (g) 45,000 325,000Accounts Payable 52,000 (h) 22,000 74,000Interest Payable 45,000 (i) 15,000 30,000Bonds Payable 400,000 (j) 100,000 500,000Bond Premium 18,000 (k) 2,000 16,000Common Stock 300,000 300,000Additional Paid-In Capital 70,000 70,000Retained Earnings 488,000 (l) 25,000 (m) 72,000 535,000Noncontrolling Interest 40,000 (n) 3,000 (m) 7,000 44,000

1,693,000 323,000 323,000 1,894,000

Cash Flows from Operating Activities: 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 Inventory (c) 50,000 Increase in Accounts Payable (h) 22,000 Decrease in Interest Payable (i) 15,000

Cash Flows from Investing Activities: Sale of Land (d) 10,000 Purchase of Buildings and Equipment (e)130,000

Cash Flows from Financing Activities: Sale of Bonds (j)100,000 Dividends Paid: To Traper Shareholders (l) 25,000 To Noncontrolling Shareholders (n) 3,000 Increase in Cash (a) 98,000

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 SubsidiaryConsolidated Statement of Cash FlowsFor Year Ended December 31, 20X4

Cash Flows from Operating Activities: Consolidated Net Income $79,000 Noncash Expenses, Revenue, Losses, and Gains Included in Income: Depreciation Expense 45,000 Goodwill Impairment Loss 12,000 Amortization of Bond Premium (2,000) Loss on Sale of Land 20,000 Decrease in Accounts Receivable 35,000 Increase in Inventory (50,000) Increase in Accounts Payable 22,000 Decrease in Interest Payable (15,000 ) Net Cash Provided by Operating Activities $146,000

Cash Flows from Investing Activities: Sale of Land $ 10,000 Purchase of Buildings and Equipment (130,000) Net Cash Used in Investing Activities (120,000)

Cash Flows from Financing Activities: Sale of Bonds $100,000 Dividends Paid: To Parent Company Shareholders (25,000) To Noncontrolling Shareholders (3,000 ) Net Cash Provided by Financing Activities 72,000

Net Increase in Cash $ 98,000 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 CompanyConsolidation Cash Flow Workpaper



Cash 83,000 (a) 98,000 181,000Accounts Receivable 210,000 (b) 35,000 175,000Inventory 320,000 (c) 50,000 370,000Land 190,000 (d) 30,000 160,000Buildings and Equipment 850,000 (e)130,000 980,000Goodwill 40,000 (f) 12,000 28,000

1,693,000 1,894,000

Accum. Depreciation 280,000 (g) 45,000 325,000Accounts Payable 52,000 (c) 22,000 74,000Interest Payable 45,000 (h) 15,000 30,000Bonds Payable 400,000 (i) 100,000 500,000Bond Premium 18,000 (h) 2,000 16,000Common Stock 300,000 300,000Additional Paid-In 70,000 70,000 CapitalRetained Earnings 488,000 (j) 25,000 (k) 72,000 535,000Noncontrolling 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) 600,000Cost of Goods Sold 375,000 (c)375,000Depreciation Expense 45,000 (g) 45,000Interest Expense 69,000 (h) 69,000Loss on Sale of Land 20,000 (d) 20,000Goodwill Impairment Loss 12,000 (f) 12,000

521,000Consolidated Net Income 79,000 (k) 79,000

600,000 600,000

10-29


P10-20 (continued)

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

Cash Flows from Investing Activities: Sale of Land (d) 10,000 Purchase of Buildings and Equipment (e)130,000

Cash Flows from Financing Activities: Sale of Bonds (i) 100,000 Dividends Paid: To Traper Shareholders (j) 25,000 To Noncontrolling Shareholders (l) 3,000 Increase in Cash (a) 98,000

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 SubsidiaryConsolidated Statement of Cash FlowsFor Year Ended December 31, 20X4

Cash Flows from Operating Activities: Cash Received from Customers $635,000 Cash Payments to Suppliers $403,000 Cash Payments of Interest 86,000 (489,000) Net Cash Provided by Operating Activities $146,000

Cash Flows from Investing Activities: Sale of Land $ 10,000 Purchase of Buildings and Equipment (130,000) Net Cash Used in Investing Activities (120,000)

Cash Flows from Financing Activities: Sale of Bonds $100,000 Dividends Paid: To Parent Company Shareholders (25,000) To Noncontrolling Shareholders (3,000 ) Net Cash Provided by Financing Activities 72,000

Net Increase in Cash $ 98,000 Cash Balance at Beginning of Year 83,000 Cash Balance at End of Year $181,000



Consolidated Net Income $ 79,000Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation Expense $45,000 Goodwill Impairment Loss 12,000 Amortization of Bond Premium (2,000)Loss on Sale of Land 20,000 Decrease in Accounts Receivable 35,000 Increase in Inventory (50,000)Increase in Accounts Payable 22,000 Decrease in Interest Payable (15,000)

Total Adjustments 67,000 Net Cash Provided by Operating Activities $146,000

10-31


P10-21 Consolidated Statement of Cash Flows

Weatherbee Company and Sun CorporationConsolidation Cash Flow Workpaper



Cash 54,000 (a) 21,000 75,000Accounts Receivable 121,000 (b) 10,000 111,000Inventory 230,000 (c)130,000 360,000Land 95,000 (d) 5,000 100,000Buildings and Equipment 800,000 (e)150,000 650,000

1,300,000 1,296,000

Accumulated Depreciation 290,000 (e)100,000 (f) 40,000 230,000Accounts Payable 90,000 (g) 15,000 105,000Bonds Payable 300,000 (h) 50,000 250,000Common Stock 300,000 300,000Retained Earnings 290,000 (i) 65,000 (j) 148,000 373,000Noncontrolling Interest 30,000 (k) 4,000 (j) 12,000 38,000

1,300,000 375,000 375,000 1,296,000

Cash Flows from Operating Activities: Consolidated Net Income (j) 160,000 Depreciation Expense (f) 40,000 Gain on Sale of Equipment (e) 30,000 Decrease in Accounts Receivable (b) 10,000 Increase in Inventory (c)130,000 Increase in Accounts Payable (g) 15,000

Cash Flows from Investing Activities: Sale of Buildings and Equipment (e) 80,000 Purchase of Land (d) 5,000

Cash Flows from Financing Activities: Bond Retirement (h) 50,000 Dividends Paid: To Weatherbee Company Shareholders (i) 65,000 To Noncontrolling Shareholders (k) 4,000 Increase in Cash (a) 21,000

305,000 305,000

10-32


P10-22 Consolidated Statement of Cash Flows — Direct Method

Weatherbee Company and Sun CorporationConsolidation Cash Flow Workpaper



Cash 54,000 (a) 21,000 75,000Accounts Receivable 121,000 (b) 10,000 111,000Inventory 230,000 (c) 130,000 360,000Land 95,000 (d) 5,000 100,000Buildings and Equipment 800,000 (e) 150,000 650,000

1,300,000 1,296,000

Accumulated Depreciation 290,000 (e) 100,000 (f) 40,000 230,000Accounts Payable 90,000 (c) 15,000 105,000Bonds Payable 300,000 (g) 50,000 250,000Common Stock 300,000 300,000Retained Earnings 290,000 (h) 65,000 (i) 148,000 373,000Noncontrolling 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)1,070,000Gain on Sale of Equipment 30,000 (e) 30,000

1,100,000Cost of Goods Sold 750,000 (c) 750,000Depreciation Expense 40,000 (f) 40,000Other Expenses 150,000 (c) 150,000

940,000 Consolidated Net Income 160,000 (i) 160,000

1,100,000 1,100,000

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

Cash Flows from Investing Activities: Sale of Buildings and Equipment (e) 80,000 Purchase of Land (d) 5,000

Cash Flows from Financing Activities: Bond Retirement (g) 50,000 Dividends Paid To Weatherbee Company Shareholders (h) 65,000 To Noncontrolling Shareholders (j) 4,000 Increase in Cash (a) 21,000

1,160,000 1,160,000

10-33


P10-23 Consolidated Statement of Cash Flows [AICPA Adapted]

Brimer, Inc., and SubsidiaryConsolidated Statement of Cash Flows


Cash Flows from Operating Activities: Consolidated Net Income $231,000 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 82,000 [1] Goodwill Impairment Loss 3,000 Gain on Sale of Equipment (6,000) Decrease in Allowance to Reduce Marketable Securities to Market (11,000) Decrease in Accounts Receivable 22,000 Increase in Inventories (70,000) Increase in Accounts Payable and Accrued Liabilities 121,000 Increase in Deferred Income Taxes 12,000 Total Adjustments 153,000

Net Cash Provided by Operating Activities $384,000

Cash Flows from Investing Activities: Purchase of Equipment $(127,000) Sale of Equipment 40,000

Net Cash Used in Investing Activities (87,000)

Cash Flows from Financing Activities: 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 Cash Used in Financing Activities (179,000)

Net Increase in Cash $118,000 Cash at Beginning of Year 195,000 Cash at End of Year $313,000

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 CompanyConsolidation Cash Flow Workpaper



Cash 92,000 (a) 30,200 61,800Accounts Receivable 135,000 (b) 15,000 120,000Inventory 140,000 (c) 59,000 199,000Land 75,000 (d) 5,000 80,000Buildings and Equipment 400,000 (e)100,000

(f) 40,000 540,000Patents 30,000 (g) 5,000 25,000

872,000 1,025,800

Accumulated Depreciation 210,000 (h) 40,000 250,000Accounts Payable 114,200 (i) 19,200 95,000Bonds Payable 90,000 (j) 100,000 190,000Common Stock 100,000 100,000Retained Earnings 273,000 (k) 50,000 (l) 79,400 302,400Noncontrolling Interest 84,800 (m) 8,000 (l) 11,600 88,400

872,000 281,200 281,200 1,025,800

Cash Flows from Operating Activities: Consolidated Net Income (l) 91,000 Amortization Expense (g) 5,000 Depreciation Expense (h) 40,000 Decrease in Accounts Receivable (b) 15,000 Increase in Inventory (c) 59,000 Decrease in Accounts Payable (i) 19,200

Cash Flows from Investing Activities: Purchase of Land (d) 5,000 Acquisition of Buildings and Equipment from Bond Issue (e)100,000 Purchase of Buildings and Equipment (f) 40,000

Cash Flows from Financing Activities: 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 SubsidiaryConsolidated Statement of Cash Flows


Cash Flows from Operating Activities: Consolidated Net Income $ 91,000 Noncash Expenses, Revenue, Losses and Gains Included in Income: Amortization Expense 5,000 Depreciation Expense 40,000 Decrease in Accounts Receivable 15,000 Increase in Inventory (59,000) Decrease in Accounts Payable (19,200

) Net Cash Provided by Operating Activities $ 72,800

Cash Flows from Investing Activities: Purchase of Land $ (5,000) Purchase of Buildings and Equipment (40,000 ) Net Cash Used in Investing Activities (45,000)

Cash Flows from Financing Activities: Dividends Paid: To Parent Company Shareholders $(50,000) To Noncontrolling Shareholders (8,000 ) Net Cash Received from Financing Activities (58,000 )

Net Decrease in Cash $(30,200)Cash Balance at Beginning of Year 92,000 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 Dividends Declared 25,500 Investment in Blase Company Common Stock 72,250 Eliminate income from subsidiary: $25,500 = ($40,000 - $10,000) x .85

E(2) Income to Noncontrolling Interest 17,250 Dividends Declared 4,500 Noncontrolling Interest 12,750 Assign income to noncontrolling interest: $17,250 = ($175,000 - $60,000) x .15 $4,500 = ($40,000 - $10,000) x .15

E(3) Common Stock 100,000Additional Paid-In Capital 500,000Retained Earnings, January 1 150,000Sales 240,000Differential 100,000 Operating Expense 180,000 Dividends Declared 10,000 Investment in Blase Company Common Stock 765,000 Noncontrolling Interest 135,000 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 Additional Paid-In Capital 167,500 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 Income from Subsidiary 13,500 Record equity-method income: $13,500 = $15,000 x .90

b. Eliminating entries, December 31, 20X2:

E(1) Income from Subsidiary 13,500 Dividends Declared 9,000 Investment in Sanford Company Stock 4,500 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 1,500 Dividends Declared 1,000 Noncontrolling Interest 500 Assign income to noncontrolling interest: $1,500 = $15,000 x .10 $1,000 = $10,000 x .10

E(3) Common Stock — Sanford Company 150,000Retained Earnings, January 1 100,000Sales 205,000 Cost of Goods Sold 126,000 Depreciation Expense 16,000 Other Expenses 18,000 Dividends Declared 20,000 Investment in Sanford Company Stock 247,500 Noncontrolling Interest 27,500 Eliminate beginning investment balance, subsidiary stockholders’ equity, and subsidiary preacquisition income and dividends.

10-40


P10-26 (continued)

c. Famous Products Corporation and Sanford CompanyConsolidation 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 CompanyConsolidated Balance Sheet Workpaper

December 31, 20X9

Acme Powder Brown Eliminations Consol-

Item Corp. Co. Debit Credit idated

Cash 44,400 20,000 64,400Accounts Receivable 120,000 60,000 180,000Inventory 170,000 120,000 (2) 20,000

(3) 25,000 245,000Land 90,000 30,000 120,000Buildings and Equipment 500,000 300,000 (4) 30,000 830,000Investment in Brown Company Stock 280,000 (1)280,000Deferred 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) 80,000 340,000Accounts Payable 70,000 20,000 90,000Wages Payable 80,000 30,000 110,000Bonds Payable 200,000 200,000Common Stock 100,000 150,000 (1)150,000 100,000Retained 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 150,000Retained Earnings 250,000 Investment in Brown Company Stock 280,000 Noncontrolling Interest 120,000 Eliminate investment balance.

10-42


P10-27 (continued)

E(2) Deferred Tax Asset 8,000 Retained Earnings 8,400 Noncontrolling Interest 3,600 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

E(3) Deferred Tax Asset 10,000 Retained Earnings 15,000 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 Retained Earnings 21,000 Noncontrolling Interest 9,000 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 SubsidiaryConsolidated Balance Sheet

December 31, 20X9

Cash $ 64,400Accounts Receivable 180,000Inventory 245,000Land 120,000Buildings and Equipment $830,000 Less: Accumulated Depreciation (340,000 ) 490,000Deferred Tax Asset 38,000 Total Assets $1,137,400

Accounts Payable $ 90,000Wages Payable 110,000Bonds Payable 200,000Stockholders' Equity: Controlling Interest: Common Stock $100,000 Retained Earnings 530,000 Total Controlling Interest $630,000 Noncontrolling Interest 107,400 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 Income from Subsidiary 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)

Consolidated Net Income $523,000 Income to noncontrolling interest (25,000 )Income to controlling interest $498,000

d. Net assets assigned to noncontrolling interest in consolidatedbalance 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:

E(1) Income from Subsidiary 25,200 Dividends Declared 7,000 Investment in Custom Pizza Common Stock 18,200 Eliminate income from subsidiary: $25,200 = $36,000 x .70

E(2) Income to Noncontrolling Interest 8,100 Dividends Declared 3,000 Noncontrolling Interest 5,100 Assign income to noncontrolling interest: $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 50,000Retained Earnings, January 1 150,000 Investment in Custom Pizza Common Stock 140,000 Noncontrolling Interest 60,000 Eliminate beginning investment balance.

E(4) Tax Expense 4,000Retained Earnings, January 1 4,200Noncontrolling Interest 1,800 Cost of Goods Sold 10,000 Eliminate unrealized profits in beginning inventory on upstream sale.

E(5) Sales 120,000 Cost of Goods Sold 95,000 Inventory 25,000 Eliminate unrealized profits in ending inventory on upstream sale.

E(6) Deferred Tax Asset 10,000 Tax Expense 10,000 Eliminate tax expense on unrealized intercompany profit: $25,000 x .40

E(7) Buildings and Equipment 85,000Gain on Sale of Equipment 15,000 Accumulated Depreciation 100,000 Eliminate unrealized profit on downstream sale of equipment.

E(8) Deferred Tax Asset 6,000 Tax Expense 6,000 Eliminate income tax expense on unrealized gain on equipment: $15,000 x .40

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10-47


P10-29 (continued)

b. Hardtack Bread Company and Custom Pizza CorporationConsolidation 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) 15,000Income 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

10-48


P10-29 (continued)

Custom Hardtack Pizza Eliminations Consol-

Item Bread Co. Corp. Debit Credit idated

Cash 35,800 56,000 91,800Accounts Receivable 130,000 40,000 170,000Inventory 220,000 60,000 (5) 25,000 255,000Land 60,000 20,000 80,000Buildings and Equipment 450,000 400,000 (7) 85,000 935,000Patents 70,000 70,000Investment in Custom Pizza Stock 158,200 (1) 18,200

(3)140,000Deferred 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)100,000 410,000Accounts Payable 40,000 30,000 70,000Wages Payable 70,000 20,000 90,000Bonds Payable 200,000 100,000 300,000Deferred Income Tax 120,000 40,000 160,000Common Stock 100,000 50,000 (3) 50,000 100,000Retained Earnings, from above 444,000 176,000 326,500 131,000 424,500Noncontrolling 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

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10-50


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 20,000Assumed conversion of bonds 8,000Assumed conversion of preferred 12,000Total 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

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10-52


P10-31 Comprehensive Earnings per Share

Basic earnings per share

Mighty Corporation operating income $300,000Longfellow 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 $374,400Mighty Corporation shares outstanding ÷100,000Basic earnings per share $ 3.74

Diluted earnings per share

Mighty Corporation operating income $300,000Longfellow 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 40,000Assumed conversion of bonds 30,000Assumed conversion of preferred 20,000Exercise 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 $345,376Interest savings on assumed conversion of bonds ($800,000 x .10) x .60 48,000

$393,376Mighty Corporation shares ÷125,000Diluted earnings per share $ 3.15

10-53

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