Solution manual advanced accounting 10e by beams ch04

Chapter 4
CONSOLIDATION TECHNIQUES AND PROCEDURES
Answers to Questions
1

Consolidated financial statements are not affected by the method used by the parent company in
accounting for its subsidiary investments. Such statements are the same regardless of whether the parent
company uses the cost method, the equity method, or an incomplete equity method in accounting for its
subsidiary. The working paper adjustments will differ, however, depending on how the parent accounts
for its subsidiary.

2

The standard method of accounting for equity investments of 20 percent or more is the equity method.
But if the parent issues only consolidated financial statements as the statements of the primary reporting
entity, and the consolidated financial statements are correct, it makes no difference how the records of
the parent company are maintained. The Financial Accounting Standards Board (and its predecessor
organization) established standards for external reporting but not for maintenance of internal accounting
records.

3

Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its
subsidiary investment and income accounts. Since patents and patent amortization accounts are not
recorded on the parent’s books, they are created for consolidated statement purposes through working
paper entries.

4

Noncontrolling interest share is entered in the consolidation working papers by preparing a working
paper adjusting entry in which noncontrolling interest share is debited and noncontrolling interest is

credited. The noncontrolling interest share (debit) is carried to the consolidated income statement as a
deduction, and the credit to noncontrolling interest for noncontrolling interest share is added to the
beginning noncontrolling interest. The noncontrolling interest share is calculated based on the
subsidiary’s reported net income adjusted to reflect fair value through the amortization of the excess of
fair value over book value. This is the approach illustrated throughout this text.

5

Working paper procedures for the investment in subsidiary, income from subsidiary, and subsidiary
equity accounts are alike in regard to the objectives of consolidation. Regardless of the configuration of
the working paper entries, the final result of adjustments for these items is to eliminate them through
working paper entries. In other words, the investment in subsidiary, income from subsidiary, and the
capital stock, additional paid-in capital, retained earnings, and other stockholders’ equity accounts of the
subsidiary never appear in consolidated financial statements.

6

When the parent company does not amortize fair value/book value differentials on its separate books, the
parent company’s income from subsidiary and investment in subsidiary accounts are overstated in the
year of acquisition. In subsequent years, the income from the subsidiary, investment in subsidiary, and
parent’s beginning retained earnings will be overstated. The error may be corrected in the working
papers with the following entries:
Year of acquisition
Income from subsidiary
Investment in subsidiary
Subsequent year
Income from subsidiary
Retained earnings — parent
Investment in subsidiary

XXX
XXX
XXX

XXX

XXX

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Consolidation Techniques and Procedures

By entering a correcting entry, all other working paper entries are the same as if the parent provided for
amortization on its separate books.
If the errors are not corrected through the working paper entries suggested above, the entry to
eliminate the income from subsidiary in the year of acquisition is prepared in the usual manner without
further complications because neither the beginning investment nor retained earnings accounts are
affected by the omission. In subsequent years the entry to eliminate income from subsidiary and
dividends from subsidiary will have to be changed to correct the beginning-of-the-period retained
earnings as follows:
Income from subsidiary
Retained earnings — parent
Dividends (subsidiary)
Investment in subsidiary

XXX

XXX

XXX
XXX

7

No. Working paper adjustments are not entered in the general ledger of the parent company or any other
entity. They are used in the preparation of consolidated financial statements for a conceptual entity for
which there are no formal accounting records.

8

Working papers are tools of the accountant that facilitate the consolidation of parent and subsidiary
financial statements. Given the tools available, the accountant should select those that are most
convenient in the circumstances. If financial statements are to be consolidated, the financial statement
approach is the appropriate tool. The trial balance approach is most convenient when the data are
presented in the form of a trial balance. The accountant needs to be familiar with both approaches to
perform the work as efficiently as possible.

9

Working paper adjustment and elimination entries as illustrated in this text are exactly the same when
the trial balance approach is used as when the financial statement approach is used. This is possible
through a check-off system that nullifies the closing process when the financial statement approach is
used.

10

The retained earnings of the parent company will equal consolidated retained earnings if the equity

method of accounting has been correctly applied. In consolidating the financial statements of affiliated
companies, the beginning retained earnings of the parent are used as beginning consolidated retained
earnings. If the equity method has not been correctly applied, parent beginning retained earnings will
not equal beginning consolidated retained earnings. In this case, retained earnings of the parent are
adjusted to a correct equity basis in order to establish the correct amount of beginning consolidated
retained earnings. Thus, working paper adjustments to beginning retained earnings of the parent are
needed whenever the beginning retained earnings of the parent do not correctly reflect the equity
method.

11

The noncontroling interest that appears in the consolidated balance sheet can be checked first adjusting
the the equity of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for
any unamortized excess of fair value over book value) and then multiplying by the noncontrolling
interest percentage. Consolidated retained earnings at a balance sheet date can be checked by comparing
the amount with the parent’s retained earnings on the same date. If consolidated retained earnings and
parent retained earnings are not equal, either consolidated retained earnings have been computed
incorrectly, or parent retained earnings do not reflect a correct equity method of accounting.

12

Consolidated assets and liabilities are reported for all equity holders—noncontrolling as well as
controlling. Therefore, the change in net assets from operations for a period results from noncontrolling
interest share and consolidated net income.

13

No. It relates to all interests in the consolidated entity. This difference is one of many inconsistencies in
the concepts underlying consolidated financial statements. Consider, for example, the error that could
result from dividing cash provided by operations by outstanding parent company shares to get a

computation of cash flow per share.

SOLUTIONS TO EXERCISES
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Chapter 4

4-3

Solution E4-1
1
d
2
a
3
a
4
d
5
b

6
7
8
9
10

d
b

b
a
b

Solution E4-2
Preliminary computations
Investment cost January 2
Implied total fair value of Sally Forth ($300,000 / 80%)
Less: Book value
Excess fair value over book value
Excess allocated to:
Inventory
Remainder to goodwill
Excess fair value over book value
1

2

3

4

5

$300,000
$375,000
(250,000)
$125,000
$ 12,500
112,500

$125,000

Income from Sally Forth
Sally Forth’s reported net income
Less: Excess allocated to inventory (sold in 2009)
Sally Forth adjusted income
Ponder’s 80% share

$ 70,000
(12,500)
$ 57,500
$ 46,000

Noncontrolling interest share
Sally Forth’s adjusted income $57,500 × 20% noncontrolling
interest

$ 11,500

Noncontrolling interest December 31
Sally Forth’s equity book value
Add: Unamortized excess (Goodwill)
Sally Forth’s equity fair value
20% noncontrolling interest

$260,000
112,500
$372,500
$ 74,500

Investment in Sally Forth December 31
Investment cost January 2
Add: Income from Sally Forth (given)*
Less: Dividends ($60,000 × 80%)
Investment in Sally Forth December 31
* Assumes this is based on Sally Forth’s adjusted income
Consolidated net income
Noncontrolling interest share
Controlling interest share equals Parent NI under equity
method.

$300,000
50,000
(48,000)
$302,000
$191,700
$ 11,500
$180,200

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4-4

Consolidation Techniques and Procedures

Solution E4-3
1
$350,000

($150,000 + $220,000 - $20,000 intercompany)

Preliminary computations for 2 and 3
Investment cost on January 1, 2009
Implied total fair value of Starman ($14,000 / 70%)
Book value of Starman
Excess allocated entirely to Goodwill

$14,000
$20,000
15,000
$ 5,000

2

Primrose’s separate income for 2011
Loss from investment in Starman ($500 × 70%)
Controlling share of consolidated net income

$12,000
(350)
$11,650

3

Investment cost January 1, 2009
Add: Share of income less dividends 2009 — 2011
($700 income - $500 dividends) × 70%
Investment balance December 31, 2011

$14,000
140
$14,140

Solution E4-4
Preliminary computations
Investment cost
Implied total fair value of Stine ($580,000 / 80%)
Book value
Total excess fair value over book value

$580,000
$725,000
600,000
$125,000

Excess allocated to:
Equipment (5-year life)
Patents (10-year amortization period)
Total excess fair value over book value

$ 50,000
75,000
$125,000

Income from Stine
Stine’s reported net income
Less: Depreciation of excess allocated to equipment
Less: Amortization of patents
Stine’s adjusted income

Income from Stine (80%)

2010
$120,000
(10,000)
(7,500)
$102,500
$82,000

2011
$150,000
(10,000)
(7,500)
$132,500
$106,000

1a

Consolidated net income for 2010
Penair’s net income = controlling share of consolidated net
income under equity method
$340,000

1b

Investment in Stine December 31, 2010
Cost January 1
Add: Income from Stine — 2010
Less: Dividends from Stine — 2010 ($80,000 × 80%)
Investment in Stine December 31

$580,000
82,000
(64,000)
$598,000

Noncontrolling interest share — 2010
($102,500 adjusted income × 20%)

$ 20,500

Noncontrolling interest December 31, 2011
Stine’s equity book value at acquisition date
Add: Income less dividends for 2010 and 2011 (see note)
Stine’s equity book value at December 31, 2011

$600,000
100,000
700,000

1c

1d

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Chapter 4

4-5

Unamortized excess at December 31, 2011
Stine’s equity fair value at December 31, 2011
Noncontrolling interest percentage
Noncontrolling interest December 31, 2011
Solution E4-4 (continued)

90,000
$790,000
20%
$158,000

Note: Stine’s income less dividends:
2010 Net Income
2010 Dividends
2011 Net Income
2011 Dividends
Total

$ 120
(80)
150
(90)
$ 100

Solution E4-5
1
2
3
4

5

c
a
b
c
d

Solution E4-6
Party Corporation and Subsidiary
Partial Consolidated Cash Flows Statement
for the year ended December 31,
Cash Flows from Operating Activities
Controlling interest share of consolidated net income
Adjustments to reconcile net income to cash
provided by operating activities:
Noncontrolling interest share
Undistributed income of equity investees
Loss on sale of land
Depreciation expense
Patents amortization
Increase in accounts receivable
Increase in inventories
Decrease in accounts payable
Net cash flows from operating activities

$75,000
$25,000
(2,500)
5,000

60,000
8,000
(52,500)
(22,500)
(10,000)

10,500
$85,500

Solution E4-7
Prolax Corporation and Subsidiary
Partial Consolidated Cash Flows Statement
for the year ended December 31,
Cash Flows from Operating Activities
Cash received from customers
Dividends received from equity investees
Less: Cash paid to suppliers
Cash paid to employees
Cash paid for other operating items

$322,500
7,000
$182,500
27,000
23,500

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4-6

Consolidation Techniques and Procedures

Cash paid for interest expense
Net cash flows from operating activities

12,000

245,000
$ 84,500

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Chapter 4

4-7

SOLUTIONS TO PROBLEMS
Solution P4-1 (in thousands of $)
Preliminary computations
Investment in Seine (75%) January 1, 2009
Implied fair value of Seine ($2,400 / 75%)
Book value of Seine
Total excess of fair value over book value
Excess allocated:
10% to inventories (sold in 2009)
40% to plant assets (use life 8 years)
50% to goodwill
Total excess of fair value over book value

1

Goodwill at December 31, 2013 (not amortized)

2

Noncontrolling interest share for 2013
Net income ($1,000 sales - $600 expenses)
Less: Amortization of excess
Plant assets ($320 / 8 yrs.)
Adjusted Seine income
25% Share

3

4

5

6

7

$2,400
$3,200
(2,400)
$ 800
$
$

80
320
400
800

$

400

$

400

$
$

(40)
360
90

Consolidated retained earnings December 31, 2012
Equal to Pearl’s December 31, 2012 retained earnings
Since this a trial balance, reported retained earnings
equals beginning of 2013 retained earnings.

$1,670

Consolidated retained earnings December 31, 2013
Pearl’s retained earnings December 31, 2012
Add: Pearl’s net income for 2013

Less: Pearl’s dividends for 2013
Consolidated retained earnings December 31

$1,670
1,085
(500)
$2,255

Consolidated net income for 2013
Consolidated sales
Less: Consolidated expenses ($3,785 + $40 depreciation)
Total consolidated income
Less: Noncontrolling interest share
Controlling share of consolidated net income for 2013

$5,000
(3,825)
1,175
(90)
$1,085

Noncontrolling interest December 31, 2012
Seine’s stockholders’ equity at book value
Unamortized excess after four years:
Inventory
Plant assets ($320 - $160)
Goodwill
Seine’s stockholders’ equity at fair value
25% Seine’s stockholders’ equity at fair value
Noncontrolling interest December 31, 2013

Seine’s stockholders’ equity at book value
Unamortized excess after five years:
Inventory

$2,400
0
160
400
$2,960
$ 740
$2,600

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0


4-8

Consolidation Techniques and Procedures

Plant assets ($320 - $200)
Goodwill
Seine’s stockholders’ equity at fair value
25% Seine’s stockholders’ equity at fair value

120
400
$3,120
$ 780

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Chapter 4

4-9

Solution P4-2
1

Palm Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2009
80%
Sail

Palm
Income Statement
Sales
Income from Sail
Cost of goods sold
Operating expenses
Consolidated NI
Noncontrol. share

$ 310,000
10,500
200,000 *
77,000 *

($15,000 × 30%)
Net income –
Control. share

$

43,500

Retained Earnings
Retained earnings
— Palm

$

65,000

265,000 *
97,000 *
$ 48,000

$

4,500 *

4,500

15,000

11,000

b 11,000
15,000
10,000 *

43,500

$

65,000

43,500
a
c

7,000
3,000

30,000 *

78,500

$

16,000

$

78,500

$

45,500
60,000
24,000
120,000
49,000

$

15,000
30,000
20,000
35,000

$

60,500
90,000
44,000
155,000

a 3,500
b 45,500

$ 298,500

$ 100,000

$ 349,500

$

$

$

30,000
20,000
150,000

18,000
12,000
50,000

20,000
4,000
b
78,500
16,000
$ 298,500
$ 100,000

48,000
32,000
150,000

b 50,000
4,000

20,000

78,500

Noncontrolling interest January 1

b 19,500

Noncontrolling interest December 31

c

*

$

$

Investment in Sail

Other liabilities
Capital stock
Other paid-in
capital
Retained earnings

$ 410,000

65,000 *
20,000 *

43,500

30,000 *

Inventories
PP&E — net

Accounts payable

Consolidated
Statements

a 10,500

$

Net income
Dividends

Balance Sheet
Cash
Acc. Receiv. — net

$ 100,000

c

Retained earnings
— Sail

Retained earnings
December 31

Adjustments and
Eliminations

1,500

21,000
$ 349,500

Deduct

Working paper entries
a To eliminate income from Sail and dividends received from Sail and adjust
the investment in Sail account to its beginning of the period balance.
b To eliminate reciprocal investment in Sail and equity amounts of Sail and
to enter beginning noncontrolling interest.

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Consolidation Techniques and Procedures
c

To enter noncontrolling interest share of subsidiary income and dividends.

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Chapter 4

4-11

Solution P4-2 (continued)
2

Palm Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2009
Sales
Less: Cost of goods sold
Gross profit
Operating expenses
Total consolidated income
Less: Noncontrolling interest share
Controlling share of consolidated net income

$410,000
265,000
145,000
97,000
48,000
4,500
$ 43,500

Palm Corporation and Subsidiary
Consolidated Retained Earnings Statement
for the year ended December 31, 2009
Consolidated retained earnings January 1

Add: Controlling share of onsolidated net income
Less: Dividends of Palm
Consolidated retained earnings December 31

$ 65,000
43,500
(30,000)
$ 78,500

Palm Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2009
Assets
Current assets:
Cash
Receivables — net
Inventories
Plant assets — net
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable
Other liabilities
Stockholders’ equity:
Capital stock, $10 par
Other paid-in capital
Consolidated retained earnings
Add: Noncontrolling interest
Total liabilities and stockholders’ equity

$ 60,500
90,000
44,000

$ 48,000
32,000
$150,000
20,000
78,500
248,500
21,000

$194,500
155,000
$349,500

$ 80,000

269,500
$349,500

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4-12

Consolidation Techniques and Procedures

Solution P4-3
Pan Corporation and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2009
(in thousands)
Pan
Income Statement
Sales
Income from Saf
Cost of sales
Other expenses
Consolidated Net Income
Noncontrolling share
Controlling shae of NI
Retained Earnings
Retained earnings — Pan
Retained earnings — Saf
Controlling share of NI
Dividends
Retained earnings
December 31
Balance Sheet
Cash
Accounts receivable
Dividends receivable
from Saf
Inventories
Note receivable from Pan
Land
Buildings — net
Equipment — net
Investment in Saf

$400
13.8
250*
97*

$ 66.8

$100
50*
26*

13.8

c

5.6

f

4.6

$180
$ 34
24
16*

b

34

66.8
a
f

12
4*

50*

$196.8

$ 42

$196.8

$ 53
86

$ 15
20

$ 68
106

6
95
65
170
130
181.8

10
5
30
80
50

$786.8

$210

$ 85
5

$ 10

500
196.8
$786.8

Noncontrolling interest January 1
Noncontrolling interest December 31

8
150
42
$210

e

6

d

5

105
95
250
180

b

Accounts payable
Note payable to Saf
Dividends payable
Capital stock, $10 par
Retained earnings

300 *
128.6 *
$ 71.4
4.6*
$ 66.8

$180
66.8
50*

Consolidated

Statements
$500

a

$ 24

Patents

•

Adjustments and
Eliminations

Saf 75%

56

a
1.8
b 180
c
5.6

50.4
$854.4
$ 95

d
5

e
6
b 150

2
500
196.8
b
f

60
.6

60.6
$854.4

Deduct

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Chapter 4

4-13

Solution P4-3 (continued)
Supporting Calculations
Saf’s value at acquisition
Book value at December 31, 2009
Less: 2009 Net income

Add: 2009 Dividends
Book value on January 1, 2009
Fair value of patents
Saf’s fair value on January 1, 2009

$192
(24)
16
$184
56
$240

Purchase price (fair value) of Pan’s 75% share
Noncontrolling interest (25%)

$180
$ 60

Patents have a ten-year life, so amortization is $5,600 per year.
Saf’s Adjusted Income
Saf’s net income
Less: Amortization of Patents
Saf’s adjusted income
Pan’s 75% share
Noncontrolling interest 25% share

$24
(5.6)
$18.4
$13.8

$ 4.6

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4-14

Consolidation Techniques and Procedures

Solution P4-4
Pal Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2009
(in thousands)
Pal
Income Statement
Sales
Income from Sun
Cost of sales
Other expenses
Consolidated NI
Noncontrolling share
Controlling share of NI
Retained Earnings
Retained earnings — Pal
Retained earnings — Sun
Controlling share of NI
Dividends

$400

18
250*
97*

$100

$ 71

$ 24

50*
26*

$ 59
80
6
95
65
170
130
186

$ 34
24
16*

6

b

71
a
c

12
4

50*
$201

$ 15
20

$ 74
100

10
5
30
80
50

e

6

d

5

105
95
250
180
a
6
b 180
b

$210

$ 85
5

$ 10

500
201
$791

34

$ 42

$791

Noncontrolling interest January 1
Noncontrolling interest December 31
*

300*
123*
$ 77
6*
$ 71

$180

Goodwill

Accounts payable
Note payable to Sun
Dividends payable
Capital stock, $10 par
Retained earnings

18

$180
71
50*

Consolidated
Statements
$500

a

c

Retained earnings – Dec 31 $201
Balance Sheet
Cash
Accounts receivable
Dividends receivable
from Sun
Inventories
Note receivable from Pal
Land
Buildings — net
Equipment — net
Investment in Sun

Adjustments and
Eliminations

Sun 75%

8
150
42
$210

56

56
$860
$ 95

d

5
e
6
b 150

2
500
201
b
c

60
2

62
$860

Deduct

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Chapter 4

4-15

Solution P4-4(continued)
Supporting Calculations
Sun’s value at acquisition:
Book value at December 31, 2009

Less: 2009 Net income
Add: 2009 Dividends
Book value on January 1, 2009

$192
(24)
16
$184

Purchase price of Pal’s 75% share
Implied fair value of Sun ($180 / 75%)
Sun’s book value
Excess allocated to Goodwill
Noncontrolling interest (25% x $240)

$180
$240
184
$ 56
$ 60

Saf’s Adjusted Income
Saf’s net income
Less: Amortization of Goodwill
Saf’s adjusted income
Pan’s 75% share
Noncontrolling interest 25% share

$24
(0)

$24
$18
$ 6

Solution P4-5
Preliminary computations
Allocation of excess fair value over book value
Cost of 70% interest January 1
Implied fair value of Soul ($490,000 / 70%)
Book value of Soul
Excess fair value over book value
Noncontrolling interest – 30% of fair value at acquisition
Excess allocated
Undervalued inventory items sold in 2009
Undervalued buildings (7 year life)
Undervalued equipment (3 year life)
Patents
Remainder to Goodwill
Excess fair value over book value
Calculation of income from Soul
Soul’s net income
Less: Undervalued inventories sold in 2009
Less: Additional Depreciation on building ($14,000/7 years)
Less: Additional Depreciation on equipment ($21,000/3 years)
Less: Patent amortization ($40,000/40 years)
Soul’s adjusted income
Pari’s 70% share
Noncontrolling interest’s 30% share

$490,000

$700,000
(600,000)
$100,000
$210,000
$

5,000
14,000
21,000
40,000
20,000
$100,000
$100,000
(5,000)
(2,000)
(7,000)
(1,000)
$ 85,000
$ 59,500
$ 25,500

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4-16

Consolidation Techniques and Procedures

Solution P4-5 (continued)
Working paper entries for 2009

a

b

c

d
e
f
g
h
i

Income from Soul
Dividends (Soul)
Investment in Soul
Capital stock (Soul)
Retained earnings (Soul) January 1
Unamortized excess
Investment in Soul
Noncontrolling interest January 1
Cost of sales (for inventory items)
Buildings — net
Equipment — net
Patents
Goodwill
Unamortized excess

59,500
35,000

24,500
500,000
100,000
100,000
490,000
210,000
5,000
14,000
21,000
40,000
20,000
100,000

Depreciation expense
Buildings — net

2,000

Depreciation expense
Equipment — net

7,000

Other expenses
Patents

1,000

2,000
7,000

1,000

Accounts payable
Accounts receivable

10,000

Dividends payable
Dividends receivable

14,000

Noncontrolling Interest Share
Dividends — Soul
Noncontrolling Interest

25,500

10,000
14,000

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15,000
10,500


Chapter 4

4-17

Solution P4-5 (continued)
Pari Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2009
(in thousands)
Pari
Income Statement
Sales
Income from Soul
Cost of sales
Depreciation expense
Other expenses
Consolidated NI
Noncontrolling share
Controlling share of NI
Retained Earnings
Retained earnings — Pari
Retained earnings — Soul
Net income
Dividends

$

800
59.5
300 *
154 *

$ 700

400 *
60*

160 *

140 *

Consolidated
Statements
$1,500

a
c
d
e
f

59.5
5
2
7
1

705 *
223 *

$

301 *
271

25.5 *
245.5

$

300

$
i
$

245.5

$

300
250
200 *

Retained earnings – Dec 31 $

345.5

$ 150

Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories

Other current assets
Land
Buildings — net
Equipment — net
Investment in Soul

86
100
14
150
70
50
140
570
514.5

$

$

25.5 *

$ 100

$ 100
100
50*

b 100
245.5

a
i

100
30
100
160
330

$ 850

$

$

200
100
49
1,000
345.5
$1,694.5

Noncontrolling interest January 1
Noncontrolling interest December 31

85
20
95
500
150

$ 850

200 *
345.5

$
g
h

c
c

14
21

c 40
c 20
b 100
$1,694.5

35
15
$

60
70

Patents
Goodwill
Unamortized excess

Accounts payable
Dividends payable
Other liabilities
Capital stock, $10 par
Retained earnings

Adjustments and
Eliminations

Soul 70%

146
160

10
14

250
100
150
312
914

d
2
e
7
a 24.5
b 490

f
1

39
20

c 100
$2,091

g
h

10
14

$

b 500

275
106
144
1,000
345.5

b 210
i 10.5

©2009 Pearson Education, Inc. publishing as Prentice Hall

220.5


4-18

Consolidation Techniques and Procedures
$2,091

*

Deduct

©2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 4

4-19

Solution P4-6
Supporting computations
Ownership percentage 13,500/15,000 shares = 90%
Investment cost (13,500 shares × $15)
Implied fair value of Syn ($202,500 / 90%)
Book value of Syn
Excess fair value over book value

$202,500
$225,000
165,000

$ 60,000

Excess allocated to
Land
Remainder to patents
Excess fair value over book value

$ 20,000
40,000
$ 60,000

Income from Syn
Syn’s reported net income
Less: Patents amortization
Syn’s adjusted income

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

Pen’s share of Syn’s income (90%)
Noncontrolling interest share (10%)

$ 18,000
$ 2,000

Investment in Syn December 31, 2010
Cost January 1, 2009
Pen’s share of the change in Syn’s retained earnings
($42,000 - $15,000) × 90%

Less: Pen’s share (90%) of Patents amortization for 2 years
Investment in Syn December 31

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

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4-20

Consolidation Techniques and Procedures

Solution P4-6 (continued)
Pen Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2010
(in thousands)
Pen
Income Statement
Sales
Income from Syn
Cost of sales
Other expenses
Consolidated NI
Noncontrolling share
Controlling share of NI
Retained Earnings

Retained earnings — Pen
Retained earnings — Syn
Net income
Dividends

$ 400
18
250 *
100.6 *

$ 100

$

$

24

$

34
24
16*

67.4

$

18
80

7.2
95

18

c

4

g

2

b

34

300 *
130.6 *
$ 69.4
2 *
$ 67.4

$

42

$

15

20

67.4

10
5

65
170
130

30
80
50

$ 784.8

$ 210

$

$

85.4
5

500
194.4
$ 784.8

10

8
150
42
$ 210

a
g

14.4
1.6

f
d

5
7.2

50*
$ 194.4

$

33
95
105

e
5

a
3.6
b 216

219.6

Noncontrolling interest January 1
Noncontrolling interest December 31
*

a

$ 177

67.4
50*

Land
Buildings — net
Equipment — net
Patents
Accounts payable
Note payable to Syn
Dividends payable
Capital stock
Retained earnings

50*
26*

Consolidated
Statements
$ 500

$ 177

Retained earnings – Dec 31 $ 194.4
Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Note receivable — Pen
Investment in Syn

Adjustments and
Eliminations

90% Syn

b

20

b

36

c

115
250
180
32
$ 810

4

f
5
e
5
d
7.2
b 150

$

90.4
.8
500
194.4

b
g

24
.4

24.4

$ 810

Deduct

©2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 4

4-21

Solution P4-7
Preliminary computations
Allocation of excess fair value over book value
Cost of 70% interest January 1
Implied fair value of Sol ($490,000 / 70%)
Book value of Sol
Excess fair value over book value

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

Excess allocated
Undervalued inventory items sold in 2009
Undervalued buildings (7 year life)
Undervalued equipment (3 year life)
Remainder to goodwill
Excess fair value over book value

$

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

Calculation of income from Sol
Sol’s reported net income
Less: Undervalued inventories sold in 2009
Less: Depreciation on building ($14,000/7 years)
Less: Depreciation on equipment ($21,000/3 years)
Adjusted income from Soul
Par’s 70% controlling share
30% Noncontrolling interest share
Working paper entries for 2009
a
Income from Sol
Dividends (Sol)
Investment in Sol
b

c

d
e
f

g

Capital stock (Sol)
Retained earnings (Sol) - January 1
Unamortized excess
Investment in Sol
Noncontrolling interest - January 1
Cost of sales (for inventory items)
Buildings — net
Equipment — net
Goodwill
Unamortized excess

$100,000
(5,000)
(2,000)
(7,000)
$ 86,000
$ 60,200
$ 25,800
60,200
35,000
25,200
500,000
100,000
100,000
500,000
200,000
5,000
14,000

21,000
60,000
100,000

Depreciation expense
Buildings — net

2,000

Depreciation expense
Equipment — net

7,000

2,000
7,000

Noncontrolling Interest Share
Dividends — Sol
Noncontrolling Interest

25,800

Accounts payable
Accounts receivable

10,000

15,000
10,800

10,000

©2009 Pearson Education, Inc. publishing as Prentice Hall


4-22

h

Consolidation Techniques and Procedures

Dividends payable
Dividends receivable

14,000
14,000

©2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 4

4-23

Solution P4-7 (continued)
Par Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2009
(in thousands)
Par

Income Statement
Sales
Income from Sol
Gain on equipment
Cost of sales
Depreciation expense
Other expenses
Consolidated NI
Noncontrolling share
Controlling share of NI
Retained Earnings
Retained earnings — Par
Retained earnings — Sol
Controlling share of NI
Dividends

$

800
60.2
10
300 *
155 *

$ 700

400 *
60*

160 *

Consolidated
Statements
$1,500

a
c
d
e

60.2
10
705 *
224 *

5
2
7

140 *

$

300 *
281
25.8 *
255.2

$

300

$
f
$

255.2

$

300
255.2
200 *

$ 100
100
50*

355.2

$ 150

Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Other current assets
Land
Buildings — net

Equipment — net
Investment in Sol

96
100
14
150
70
50
140
570
515.2

$

$

25.8

$ 100

Retained earnings – Dec 31 $

b 100
255.2
a
f

100
30

100
160
330

$ 850

$

$

200
100
50
1,000
355.2
$1,705.2

Noncontrolling interest January 1

85
20
95
500
150
$ 850

200*
355.2

$

g
h

c
c

14
21

c 60
b 100
$1,705.2

35
15
$

60
70

Goodwill
Unamortized excess
Accounts payable
Dividends payable
Other liabilities
Capital stock, $10 par
Retained earnings

Adjustments and
Eliminations

Sol 70%

156
160

10
14

250
100
150
312
914

d
2
e
7
a 25.2
b 490

60
c 100
$2,102

g
h

10

14

$

b 500

275
106
145
1,000
355.2

b 210

©2009 Pearson Education, Inc. publishing as Prentice Hall


4-24

Consolidation Techniques and Procedures

Noncontrolling interest December 31
*

f

10.8

220.8
$2,102

Deduct

©2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 4

4-25

Solution P4-8
Supporting computations
Ownership percentage

13,500/15,000 shares = 90%

Investment cost (13,500 shares × $15)
Implied fair value of Son ($202,500 / 90%)
Book value of Son
Excess fair value over book value

$202,500
$225,000
165,000
$ 60,000

Excess allocated to
Land
Remainder to goodwill
Excess fair value over book value

$ 20,000
40,000
$ 60,000

Income from Son
Pun’s share of Son’s income ($24,000 × 90%)

$ 21,600

Investment in Son December 31, 2010
Cost January 1, 2009
Pun’s share of the change in Son’s retained earnings
($42,000 - $15,000) × 90%
Investment in Son December 31
Noncontrolling interest at December 31, 2010 (10% of fair value)
(($225,000 + $42,000 - $15,000) x 10%)

$202,500
24,300
$226,800
$ 25,200

©2009 Pearson Education, Inc. publishing as Prentice Hall