Solution manual advanced accounting 10e by fischer taylor CH05

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CHAPTER 5
UNDERSTANDING THE ISSUES
4. In the current year, consolidated net income will include a gain on retirement of
bonds of $5,000 ($100,000 – $95,000). In
the current and each of the next 4 years,
consolidated net income will be reduced by
$1,000 ($5,000 ÷ 5 years), which
represents amortization of the discount
paid by the parent. In the current year, the
NCI will receive $1,000 ($5,000 × 20%) of
the gain on the retirement of bonds. In the
current and each of the next 4 years, NCI
share of income will be reduced by $200
($1,000 × 20%).

1. The first approach that could be used to
reduce the overall consolidated interest
cost but maintain the subsidiary as the debtor would have the parent advancing
$1,000,000 to the subsidiary so that the
subsidiary may retire the bonds. The former
debt is retired, and a new long-term
intercompany debt originates. The intercompany interest expense would be eliminated during the consolidation process.
Another approach would have the parent
purchasing the subsidiary bonds from outside parties and holding them as an investment. From a consolidated viewpoint,
the debt is retired. Therefore, interest expense would be eliminated during the consolidation process.

5. It is true that intercompany operating leases eliminated during the consolidation
process will not have an effect on consolidated income. However, the excessive rent
expense amounts will still appear on the

subsidiary’s separately stated income
statement and will reduce the NCI share of
consolidated income. The high lease rates
will shift income from the NCI to the controlling interest.

2. At the 10% annual interest rate, a loss on
retirement of bonds will occur in the current
year since the parent paid a premium to retire the subsidiary’s bonds. In the current
and future years, consolidated net income
will be increased by the difference between
interest expense and interest revenue. This
amount represents the amortization of the
premium paid by the parent. At the 13%
annual interest rate, a gain on retirement of
bonds will occur in the current year since
the parent paid a discount to retire the subsidiary’s bonds. In the current and future
years, consolidated net income will be reduced by the difference between interest
revenue and interest expense. This amount
represents the amortization of the discount
paid by the parent to retire the bonds.

6. Either type of lease can shift income to the
controlling interest by incorporating a higher than market interest rate to calculate the
payments. In a sales-type lease, the controlling interest can shift additional income
by building a profit into the capitalized cost
of the leased asset.
7. There is no difference in the consolidated
company’s ability to recognize profit on selling equipment to its subsidiaries or leasing
the equipment to its subsidiaries (only if the
lease is sales-type). In both cases, the profit is deferred and amortized over the life of

the asset or life of the lease. The controlling
interest has the opportunity to increase its
profit by leasing the asset to the subsidiary.
The lessor can build in an interest rate in
excess of its cost of funds

3. Since Company S was the original issuer of
the bonds, it will absorb the loss that results
in the current year from the parent retiring
the bonds at a premium. The noncontrolling
interest will receive its share of this loss. In
the current and future years, the subsidiary’s income will be increased by the difference between interest expense and interest
revenue. The noncontrolling interest will receive its share of this amount.

247


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Ch. 5—Exercises

EXERCISES
EXERCISE 5-1
It is desirable to refinance for two reasons. First, interest rates are down, and it would be wise to
lock in at the lower rate. Second, the parent firm can borrow funds at a lower interest rate. The
simplest way to accomplish the refinancing is to have the parent incur the new debt and loan the
proceeds to the subsidiary; the subsidiary would use the funds to retire its debt with a gain on
retirement being recognized that would flow to the consolidated statements. The parent would
not only enjoy a lower interest rate, but it could also structure the loan terms, including the maturity date, to meet its needs. The parent could decide what rate to charge Patel Industries. The
rate charged would affect the reported income of Patel Industries and thus impact the distribution of income between the noncontrolling and controlling interests. The intercompany debt

would be eliminated in the preparation of consolidated statements.
Marcus could incur new debt and use the proceeds to purchase Patel Industries’ outstanding
bonds. The bonds would remain as debt on the separate statements of Patel Industries. The
bonds would also appear as an investment on the books of Marcus. The intercompany bonds,
however, would be eliminated in the consolidated statements. The consolidated income statement would show a gain on retirement in the year of the intercompany purchase. The NCI would
share in the gain, but this would be offset by interest adjustments in future periods.
EXERCISE 5-2
(a) (1) The consolidated income statement for 20X3 will include a gain on retirement of the
bonds of $32,000 ($968,000 paid for $1,000,000 debt). The interest expense of $80,000
will be eliminated as will the interest revenue of $84,000 ($80,000 nominal + $4,000
discount amortization) recorded by the parent.
(2) The subsidiary income distribution schedule will get the benefit of the retirement gain of
$32,000 in the year the bonds are purchased, but subsidiary income will be reduced
each year for the amortization of the purchase discount recorded by the parent
($4,000). The net effect for 20X3 is $28,000. The NCI would receive 20% of this increase. The balance flows to the controlling interest.
(b) (1) The consolidated income statement includes nothing relative to the bonds. From a consolidated viewpoint, the bonds were retired in the prior period. The interest expense
recorded by the subsidiary and the interest revenue recorded by the parent are eliminated.
(2) The income distribution of the subsidiary is reduced by $4,000 for the amortization of
the purchase discount recorded by the parent. In the end, this adjustment is shared
20% by the NCI and 80% by the controlling interest.

248


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Ch. 5—Exercises

EXERCISE 5-3
(1) Eliminations and Adjustments at December 31, 20X5:

Interest Revenue ......................................................................
Bonds Payable .........................................................................
Loss on Retirement...................................................................
Interest Expense ..................................................................
Investment in Bonds .............................................................
Discount on Bonds Payable .................................................

8,700
100,000
4,800c
9,500
101,500a
2,500b

Interest Payable ........................................................................
Interest Receivable ..............................................................
Loss remaining at year-end:
Carrying value of bonds at December 31, 20X5 ..................
Investment in bonds at December 31, 20X5 ........................
Loss amortized during the year:
Interest revenue eliminated (($100,000 × 9%) – $300) ........
Interest expense eliminated (($100,000 × 9%) + $500) .......
Loss at January 1, 20X5 ...................................................

9,000
9,000
$

$

97,500b
101,500a
8,700
9,500

$(4,000)

(800)
$(4,800)

a

$101,800 – $100,000 = $1,800 premium at 1/1/X5; $1,800 ÷ 6 years left = $300/yr.
amortization; $101,800 – $300 = $101,500 investment balance at 12/31/X5.
b
$100,000 – $95,000 = $5,000 discount at 1/1/X1; $5,000 ÷ 10 years = $500/yr.
amortization; $500 × 5 years = $2,500.
$95,000 + $2,500 = $97,500 book value at 12/31/X5.
c
$95,000 + ($500 × 4 years) = $97,000 book value at 1/1/X5; $97,000 – $101,800
investment at 1/1/X5 = $4,800 loss (to be amortized at $4,800/6 = $800/yr.).
(2) Eliminations and Adjustments at December 31, 20X6:
Interest Revenue ......................................................................
Bonds Payable .........................................................................
Retained Earnings—Dien (80% × $4,000*) ..............................
Retained Earnings—Casper (20% × $4,000*) ..........................
Interest Expense ..................................................................
Investment in Bonds [$101,800 – ($300 × 2 yrs.)] ...............
Discount on Bonds Payable ($2,500 balance, 1/1/X6 – $500)

8,700
100,000
3,200
800
9,500
101,200
2,000

*$4,800 original loss on 1/1/X5 – $800 amortization in 20X5 = $4,000 unamortized loss on
1/1/X6
Interest Payable ........................................................................
Interest Receivable ..............................................................
Loss remaining at year-end:
Carrying value of bonds at December 31, 20X6 ..................
Investment in bonds at December 31, 20X6 ........................
Loss amortized during the year:
Interest revenue eliminated ..................................................
Interest expense eliminated .................................................
Loss at January 1, 20X6 ......................................................

249

9,000
9,000
$

$

98,000
101,200

8,700
9,500

$(3,200)

(800)
$(4,000)


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Ch. 5—Exercises

EXERCISE 5-4
Gain on retirement (January 2, 20X6):
Balance on issuer’s books .........................................................
Less purchase price (cost to retire bonds) .................................
Gain on retirement ...............................................................

$48,734
47,513
1,221

$

Schedule of interest adjustments:
Year
Ending
12/31/X6
12/31/X7

12/31/X8

Intercompany Interest,
Effective Interest
on Purchase (10%)

Recorded Interest,
Effective Interest
on Issuance (9%)

$4,751
4,826
4,909

Interest Expense
Adjustment to Issuer
Income Distribution Schedule

$4,386
4,421
4,459

$ 365
405
450
$1,220*

*Does not add to gain on retirement due to rounding.
EXERCISE 5-5
(1) Eliminations and Adjustments at December 31, 20X3:

Interest Revenue [(7% × $60,000) + ($6,400 ÷ 8)] .........................
Bonds Payable (60% × $100,000) ..................................................
Premium on Bonds Payable (60% × $700) ....................................
Interest Expense [($4,200 – (60% × $100)] ...............................
Investment in Bonds (balance at year-end $53,600 + $800) .....
Gain on Retirement* ...................................................................

5,000
60,000
420
4,140
54,400
6,880

*Book value of bonds on 1/2/X3 [$101,000 – ($1,000/10 × 2) = $100,800]
Purchased ($100,800 × 60%) ........
$60,480
Price paid .......................................
53,600
Gain on retirement of bonds........... $
6,880
Interest Payable ($60,000 × 7%) ....................................................
Interest Receivable ....................................................................

4,200
4,200

An alternative way to calculate the gain:
Gain remaining at year-end:
Carrying value of bonds at December 31, 20X3

(60% × $100,700)....................................................................
Investment in bonds at December 31, 20X3 ..............................
Gain amortized during the year:
Interest revenue eliminated ........................................................
Interest expense eliminated .......................................................
Gain at January 1, 20X3 .........................................................

250

$60,420
54,400
$

5,000
4,140

$6,020

860
$6,880


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Ch. 5—Exercises

Exercise 5-5, Concluded
(2) Eliminations and Adjustments at December 31, 20X4:
Interest Revenue ............................................................................
Bonds Payable ...............................................................................

Premium on Bonds Payable (60% × $600) ....................................
Interest Expense ........................................................................
Investment in Bonds (balance at year-end) ($54,400 + $800) ...
Retained Earnings—Mirage ($6,020* x 80%) ............................
Retained Earnings—Carlton ($6,020* x 20%) ............................

5,000
60,000
360
4,140
55,200
4,816
1,204

*Unamortized gain on retirement = $6,880 – ($860 amortization for 1 yr.) = $6,020
Interest Payable ..............................................................................
Interest Receivable ....................................................................

4,200
4,200

An alternative way to calculate the unamortized gain:
Gain remaining at year-end:
Carrying value of bonds at December 31, 20X4
(60% × $100,600)....................................................................
Investment in bonds at December 31, 20X4 ..............................
Gain amortized during the year:
Interest revenue eliminated ........................................................
Interest expense eliminated .......................................................
Remaining gain at January 1, 20X4 ........................................

$60,360
55,200
$

5,000
4,140

EXERCISE 5-6
Partial Schedule of Bond Premium Amortization
12-Year, 8% Bonds Sold to Yield 7% (Lift)

Date
January 1, 20X5
January 1, 20X6
January 1, 20X7
January 1, 20X8
January 1, 20X9

Cash Paid

Interest
Expense

........
$8,000
8,000
8,000
8,000

.......
$7,556
7,525
7,492
7,456

Premium
Amortized
........
$444
475
508
544

Carrying
Amount
of Bonds
$107,943
107,499
107,024
106,516
105,972

Partial Schedule of Bond Discount Amortization
12-Year, 8% Bonds Sold to Yield 9% (Shark)

Date
January 2, 20X8
January 1, 20X9

Cash
Received

Interest
Revenue

........
$8,000

.......
$8,460

251

Discount
Amortized
........
$460

Carrying
Value
of Bonds
$94,005
94,465

$5,160

860
$6,020

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Ch. 5—Exercises

Exercise 5-6, Concluded
(1) Eliminations and Adjustments at December 31, 20X8:
Interest Revenue ......................................................................
Bonds Payable .........................................................................
Premium on Bonds Payable .....................................................
Gain on Retirement ..............................................................
Interest Expense ..................................................................
Investment in Bonds .............................................................

8,460
100,000
5,972

Interest Payable ........................................................................
Interest Receivable ..............................................................

8,000

12,511
7,456
94,465
8,000

Gain remaining at year-end:
Carrying value of bonds at December 31, 20X8 ..................

Investment in bonds at December 31, 20X8 ........................
Gain amortized during the year:
Interest expense eliminated .................................................
Interest revenue eliminated ..................................................
Gain at January 1, 20X8 ...................................................

$105,972
94,465
$

8,460
7,456

$11,507

1,004
$12,511

(2)
Subsidiary Life Industries Income Distribution
Interest adjustment
($8,460 – $7,456) ...................

$1,004

Internally generated net
income ................................... $500,000
Retirement gain on bonds............
12,511
Adjusted income .......................... $511,507

NCI share..................................... × 10%
NCI............................................... $ 51,151

252


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Ch. 5—Exercises

EXERCISE 5-7
(1) Asset Under Operating Lease ........................................................
Cash ...........................................................................................

60,000

Depreciation Expense.....................................................................
Accumulated Depreciation—Asset Under
Operating Lease ($60,000 ÷ 5 years) .....................................

12,000

Cash ...............................................................................................
Rental Revenue .........................................................................

15,000

(2) Rent Expense .................................................................................
Cash ...........................................................................................

15,000

(3) Fixed Asset .....................................................................................
Accumulated Depreciation—Asset Under Operating Lease ...........
Asset Under Operating Lease ....................................................
Accumulated Depreciation .........................................................

60,000
12,000

Rent Revenue .................................................................................
Rent Expense .............................................................................
To eliminate the intercompany lease transactions.

15,000

60,000

12,000
15,000

15,000

60,000
12,000
15,000

EXERCISE 5-8
(1)
Lease Payment Amortization Schedule

Date

Payment

January 1, 20X1
January 1, 20X1
January 1, 20X2
January 1, 20X3
January 1, 20X4
Total

$12,000
12,000
12,000
12,000
$48,000

Interest at 12% on
Previous Balance

$

*Adjusted for rounding

253

$3,459
2,434
1,285*
7,178

Reduction
of Principal
$12,000
8,541
9,566
10,715
$40,822

Principal
Balance
$40,822
28,822
20,281
10,715
0


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Ch. 5—Exercises

Exercise 5-8, Concluded
(2) Eliminations and Adjustments at December 31, 20X1:
Interest Revenue (see amortization schedule) ...............................
Interest Expense ........................................................................
To eliminate intercompany interest revenue and expense.

3,459
3,459

Obligations Under Capital Lease ($40,822 – $12,000 first payment)
Interest Payable ..............................................................................
Unearned Interest Income ..............................................................
Minimum Lease Payments Receivable ......................................
To eliminate intercompany debt recorded by lessee against
net intercompany receivable of lessor.

28,822
3,459
3,719

Property, Plant, and Equipment ......................................................
Accumulated Depreciation—Assets Under
Capital Lease ($40,822 ÷ 5 years) ...............................................
Assets Under Capital Lease .......................................................
Accumulated Depreciation—Property, Plant, and Equipment ....
To reclassify asset under capital lease and related
accumulated depreciation as a productive asset owned
by the consolidated entity.

40,822

36,000

8,164
40,822
8,164

(3) Eliminations and Adjustments at December 31, 20X2:

Interest Revenue (see amortization schedule) ...............................
Interest Expense ........................................................................
To eliminate intercompany interest revenue and expense.

2,434

Obligations Under Capital Lease ....................................................
Interest Payable ..............................................................................
Unearned Interest Income ..............................................................
Minimum Lease Payments Receivable ......................................
To eliminate intercompany debt recorded by lessees
against net receivable of lessor.

20,281
2,434
1,285

Property, Plant, and Equipment ......................................................
Accumulated Depreciation—Assets Under Capital
Lease (2 × $8,164) .......................................................................
Assets Under Capital Lease .......................................................
Accumulated Depreciation—Property, Plant, and Equipment ....
To reclassify asset under capital lease and related
accumulated depreciation as a productive asset
owned by the consolidated entity.

40,822

254

2,434

24,000

16,328
40,822
16,328


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Ch. 5—Exercises

EXERCISE 5-9
Eliminations and Adjustments at December 31, 20X1:
Interest Income (see amortization schedule) ...................................
Interest Revenue ........................................................................
To eliminate intercompany interest revenue and expense.

2,690

Obligations Under Capital Lease .....................................................
Interest Payable ...............................................................................
Unearned Interest Income (see amortization) ..................................
Minimum Lease Payments Receivable ......................................
To eliminate intercompany debt recorded by lessee
against net intercompany receivable of lessor.

26,904
2,690

4,790

Property, Plant, and Equipment .......................................................
Accumulated Depreciation—Assets Under Capital Lease
($35,000/8 yrs.) .............................................................................
Assets Under Capital Lease.......................................................
Accumulated Depreciation—Property, Plant, and Equipment....
To reclassify asset under capital lease and related
accumulated depreciation as a productive asset owned
by the consolidated entity. Asset is depreciated over
8-year life.

35,000

Sales Profit on Leases .....................................................................
Property, Plant, and Equipment .................................................
To eliminate unrealized profit on intercompany “sale” and
to reduce asset to its cost to the consolidated entity.

10,000

Accumulated Depreciation—Property, Plant, and Equipment
($10,000/8 yrs.) .............................................................................
Depreciation Expense ................................................................
To reduce depreciation on leased asset to depreciation
based on cost to consolidated entity.
Rental Income ..................................................................................
Rent Expense.............................................................................
To eliminate intercompany rent revenue and
expense due to executory costs on lease.

255

2,690

34,384

4,375
35,000
4,375

10,000

1,250
1,250

1,000
1,000


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Ch. 5—Problems

PROBLEMS
PROBLEM 5-1
(1) Bonds Payable ...............................................................................
Interest Income ($4,500 + $200 amortization) ................................
Investment in Bonds ($48,400 + $200 amortization)..................
Interest Expense ........................................................................

Gain on Extinguishment of Debt ................................................

(2)

Justin Corporation and Subsidiary Drew Corporation
Consolidated Income Statement
For Year Ended December 31, 20X6
Sales .....................................................................................................
Cost of goods sold ................................................................................
Gross profit .....................................................................................
Other expenses ($720,000 + $105,000) ...............................................
Gain on debt retirement ........................................................................
Consolidated net income ......................................................................

256

50,000
4,700
48,600
4,500
1,600

$3,040,000
1,405,000
$1,635,000
(825,000)
1,600
$
811,600

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Ch. 5—Problems

PROBLEM 5-2

Interest Receivable ................................
Other Current Assets .............................
Investment in Stunt Company ................
Investment in Stunt Bonds .....................
Land .......................................................
Buildings and Equipment .......................
Accumulated Depreciation .....................
Goodwill .................................................
Interest Payable .....................................
Other Current Liabilities .........................
Bonds Payable (8%) ..............................
Discount on Bonds Payable ...................
Other Long-Term Liabilities ....................
Common Stock—Patrick ........................
Other Paid-In Capital in Excess of
Par—Patrick .......................................
Retained Earnings—Patrick ...................

Patrick Company and Subsidiary Stunt Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X2
Eliminations
Consolidated

Trial Balance
and Adjustments
Income
Patrick
Stunt
Dr.
Cr.
Statement
4,000 ..........
..........
(B2)
4,000 .........
248,200
315,200
..........
..........
.........
351,000 ..........
(CV)
45,000 (EL)
360,000 .........
..........
..........
..........
(D)
36,000 .........
96,800 ..........
..........
(B1)
96,800 .........

80,000
60,000
..........
..........
.........
400,000
280,000
..........
..........
.........
(120,000)
(60,000)
..........
..........
.........
..........
..........
(D)
40,000
..........
.........
..........
(4,000)(B2)
4,000
..........
.........
(98,000)
(56,000)
..........
..........

.........
..........
(100,000)(B1)
100,000
..........
.........
..........
4,800
..........
(B1)
4,800 .........
(200,000) ..........
..........
..........
.........
(100,000) ..........
..........
..........
.........
..........
..........
(CV)
1,620
90,000

(200,000)
..........
..........
..........

..........
(40,000)(EL)
36,000
..........
.........
(4,000) ..........
..........
(260,000)(EL)
234,000
..........
.........
..........
..........
..........
(B1)
180
(NCI)
4,000 .........
(29,820) ..........
Net Sales ...............................................
(640,000)
(350,000)
..........
..........
(990,000) ..........
..........
Cost of Goods Sold ................................
360,000
200,000
..........

..........
560,000 ..........
..........
Operating Expenses ...............................
168,400
71,400
..........
..........
239,800 ..........
..........
Interest Expense ....................................
..........
8,600
..........
(B1)
8,600 .........
..........
..........
Interest Income ......................................
(8,400) ..........
(B1)
8,400
..........
.........
..........
..........
Dividend Income ....................................
(27,000) ..........
(CY2)
27,000

..........
.........
..........
..........
Dividends Declared—Patrick .................
50,000 ..........
..........
..........
.........
..........
50,000
30,000
..........
(CY2)
27,000 .........
3,000 .............
Dividends Declared—Stunt ....................
..........
0
586,200
586,200 .........
..........
.............
Total ...................................................
0
Consolidated Net Income ...............................................................................................................................
(190,200) ..........
.............
To NCI (see distribution schedule) .............................................................................................................
7,020

(7,020) ............
(183,180)
To Controlling Interest (see distribution schedule)......................................................................................
183,180 ..........
Total NCI .............................................................................................................................................................................
(47,840) ..........
Retained Earnings—Controlling Interest, December 31, 20X2 .................................................................................................................
(541,560)
Totals ..........................................................................................................................................................................................................................

..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
(47,840)
(541,560)
0

257

..........
45,000
..........
..........

.........
.........
.........
.........

Consolidated
Balance
Sheet
..........
563,400
..........
..........
..........
140,000
680,000
(180,000)
40,000
..........
(154,000)
..........
..........
(200,000)
(100,000)

..........
..........
..........
..........
..........
(408,380)
(10,000) ..........

Common Stock—Stunt ...........................
Other Paid-In Capital in Excess of
Par—Stunt ..........................................
Retained Earnings—Stunt ......................

(200,000) ..........
(365,000) ..........
..........
..........
(B1)
..........
(100,000)(EL)

NCI
..........
..........
..........
..........
..........
..........
..........
..........

..........
..........
..........
..........
..........
..........
..........

Controlling
Retained
Earnings
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........


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Ch. 5—Problems

Problem 5-2, Continued
Eliminations and Adjustments:
(CV)
Convert to simple equity method as of January 1, 20X2.
(CY2)
Eliminate the current-year dividend income of parent against dividends declared
by subsidiary.
(EL)
Eliminate 90% of the subsidiary company equity balances at the beginning of the
year against the investment account.
(D)/(NCI) Allocate the $36,000 excess of cost over book and $4,000 NCI adjustment to
goodwill.
(B1)
Eliminate intercompany interest revenue and expense. Eliminate the balance in
the investment in bonds against bonds payable and the discount on bonds payable. The loss on retirement at the start of the year is calculated as follows:
Loss remaining at year-end:
Investment in bonds at
December 31, 20X2 ..........................
Bonds payable ........................................
Discount on bonds ..................................
$1,600
Loss amortized during year:
Interest expense eliminated....................
Interest revenue eliminated ....................
Remaining loss on January 1, 20X2 .......
(B2)

$96,800

$100,000
(4,800)

$

95,200

8,600
8,400

Amortize loss 90% to controlling interest ($1,620) and 10% to NCI ($180).
Eliminate $4,000 of intercompany interest receivable and payable.

258

200
$1,800


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Ch. 5—Problems

Problem 5-2, Concluded
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary .....................
Less book value of interest acquired:

Total equity..................................
Interest acquired ...............................
Book value ........................................
Excess of fair value over book value

Parent
Price
(90%)

NCI
Value
(10%)

$390,000

$351,000

$ 39,000

350,000

$ 40,000

$350,000
90%
$315,000
$ 36,000

$350,000
10%

$ 35,000
$ 4,000

Adjustment

Worksheet
Key

Adjustment of identifiable accounts:

Goodwill ............................................

$40,000

Life

Amortization
per Year

debit D

Subsidiary Stunt Company Income Distribution
Internally generated net
income...................................
Interest adjustment .....................

$70,000
200

Adjusted income .........................

NCI share ....................................
NCI ..............................................

$70,200
× 10%
$ 7,020

Parent Patrick Company Income Distribution
Internally generated net
income...................................
90% × Stunt income of
$70,200 .................................
Controlling interest ......................

259

$120,000
63,180
$183,180


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Ch. 5—Problems

PROBLEM 5-3
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value

Fair value of subsidiary .....................
Less book value of interest acquired:
Total equity..................................
Interest acquired ...............................
Book value ........................................
Excess of fair value over book
value............................................

Parent
Price
(80%)

NCI
Value
(20%)

$2,125,000

$1,700,000

$ 425,000

1,875,000

$1,875,000
80%
$1,500,000

$1,875,000
20%

$ 375,000

$ 250,000

$ 200,000

$

Adjustment

Worksheet
Key

50,000

Adjustment of identifiable accounts:

Goodwill ............................................

$250,000

260

debit D

Life

Amortization
per Year

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Ch. 5—Problems

Problem 5-3, Continued
General Appliance and Subsidiary Appliance Outlets
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X6
Trial Balance
General
Appliance
Appliances
Outlets
Cash ................................................................
Accounts Receivable (net) ..............................
Interest Receivable .........................................
Inventory .........................................................
Investment in Appliance Outlets .....................
Investment in 11% Bonds ...............................
Investment in Mortgage ..................................
Property, Plant, and Equipment ......................
Accumulated Depreciation ..............................
Goodwill ..........................................................
Accounts Payable ...........................................
Interest Payable ..............................................
Bonds Payable, 11% .......................................
Discount on Bonds Payable ............................
Mortgage Payable ...........................................
Common Stock ($5 par)—

General Appliances.....................................
Paid-In Capital in Excess of Par—
General Appliances.....................................
Retained Earnings—General Appliances .......
Common Stock ($10 par)—Appliance Outlets
Paid-In Capital in Excess of Par—
Appliance Outlets ........................................
Retained Earnings—Appliance Outlets...........

401,986
72,625
752,500
105,000
9,625 ............
1,950,000 900,000
1,700,000 ..........
...........
............
256,000 ............
175,000 ............
9,000,000
2,950,000
(1,695,000) (940,000) (F2)
...........
............
(D)
(670,000)
(80,000)
(18,333)
(9,625)(LN2)

(2,000,000) (500,000) (B)
10,470
12,000
...........
(175,000)(LN1)
(3,200,000).........
(4,550,000).........
(1,011,123).........
...........
............
(B)
...........
(800,000) (EL)

Eliminations
and Adjustments
Dr.

Cr.

Consolidated
Income
Statement

NCI

Controlling
Retained
Earnings

Consolidated
Balance
Sheet

...........
...........
...........
(LN2)
...........
(CV)
256,000
...........
(D)
...........
(B)
...........
(LN1)
...........
1,375
250,000
...........
9,625
250,000
...........
(B)
175,000

...........
...........
9,625

...........
(EL)
200,000
256,000
175,000
(F1)
...........
...........
...........
...........
...........
6,000
...........

...........
...........
...........
...........
1,756,000
...........
...........
...........
27,500
...........
...........
...........
...........
...........
...........
...........

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

...........
...........
...........
...........

...........

...........

...........

...........

...........

(3,200,000

...........
...........
12,000
640,000

...........
(CV)
...........
...........

...........
256,000
...........

...........

...........
...........
...........
(160,000)

...........
...........
...........
(1,255,123) ...........
...........
...........

(4,550,000

...........
(625,000) (EL)
500,000
...........
...........
(125,000)
...........
(770,000) (EL)
616,000 (NCI)
50,000
...........
...........
...........
............

(B)
3,000
...........
...........
(201,000)
Sales ...............................................................
(9,800,000)
(3,000,000)
...............
...........
(12,800,000)
Gain on Sale of Building .................................
(27,500) ............
(F1)
27,500
...........
...........
...........
Interest Income ...............................................
(35,625) ............
(B)
26,000
...........
...........
...........
...........
............
(LN2)
9,625
...........

...........
...........
Dividend Income .............................................
(48,000) ............
(CY2)
48,000
...........
...........
...........
Cost of Goods Sold .........................................
4,940,000
1,700,000
...........
...........
6,640,000
Depreciation Expense .....................................
717,000
95,950
...........
(F2)
1,375
811,575
...........
Interest Expense .............................................
223,000
67,544
...........
(B)
29,000
...........

...........
...........
............
...........
(LN2)
9,625
251,919
...........
Other Expenses ..............................................
2,600,000 936,506
...........
...........
3,536,506 .........
60,000
...........
(CY2)
48,000
...........
12,000
Dividends Declared .........................................
320,000
0
2,824,125
2,824,125
...........
0
Consolidated Net Income .....................................................................................................................................................
(1,560,000) ........
To NCI (see distribution schedule)...................................................................................................................................
40,600

(40,600)
To Controlling Interest (see distribution schedule)...........................................................................................................
1,519,400 .........
(1,519,400).......................................................................................................................................................................
Total NCI .......................................................................................................................................................................................................
(514,600)
Retained Earnings—Controlling Interest, December 31, 20X6.............................................................................................................................................

261

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
320,000
...........
...........
...........

...........
(2,454,523)

474,611
857,500
...........
2,850,000
...........
...........
...........
...........

11,922,500
(2,633,625)
250,000
(750,000)
(18,333)
(2,250,000)
16,470
...........

...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

...........
...........
...........
...........
...........
...........

(514,600)
(2,454,523)


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Ch. 5—Problems
Totals ........................................................................................................................................................................................................................................................

262

0


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Ch. 5—Problems

Problem 5-3, Concluded
Eliminations and Adjustments:
(CV)
Convert investment to equity, 80% × ($770,000 – $450,000) = $256,000.
(CY2)

Eliminate dividend income.
(EL)
Eliminate 80% of the subsidiary equity balances.
(D)/(NCI) Distribute the excess and the NCI adjustment according to the determination and distribution of excess schedule.
(B)
Eliminate intercompany interest revenue and expense. Eliminate the balance in the
investment in bonds against the bonds payable. The loss on retirement at the start of
the year is calculated as follows:
Loss remaining at year-end:
Investment in bonds at December 31, 20X6 ............
$256,000
Net carrying value of bonds at December 31, 20X6 .
244,000
$12,000
Loss amortized during the year:
Interest expense eliminated .....................................
$
29,000
Interest revenue eliminated ......................................
26,000
3,000
Remaining loss at January 1, 20X6 ....................
$15,000
The remaining unamortized loss is allocated 80% to the controlling retained earnings
and 20% to the NCI retained earnings.
(F1)
Eliminate the intercompany gain on sale of building.
(F2)
Reduce depreciation expense on the building for one-half year, ($27,500 ÷ 10) × 1/2.
(LN1)

Eliminate the intercompany mortgage.
(LN2)
Eliminate the intercompany interest payable and receivable on mortgage. Eliminate
the intercompany interest revenue and expense on mortgage, 1/2 × 11% × $175,000
= $9,625.
Subsidiary Appliance Outlets Income Distribution
Internally generated net
income...................................
Interest adjustment
($29,000 – $26,000) ..............
Adjusted income .........................
NCI share ....................................
NCI ..............................................

$200,000
3,000
$203,000
× 20%
$ 40,600

Parent General Appliances Income Distribution
Unrealized gain on sale
of building ..............................

$27,500

Internally generated net
income................................. $1,383,125
Gain realized through use of
building for one-half year .....

1,375
80% × Appliance Outlets adjusted
income of $203,000.............
162,400
Controlling interest .................... $1,519,400

263


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Ch. 5—Problems

PROBLEM 5-4
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary .....................
$437,500
Less book value of interest acquired:
Total equity..................................
215,000
Interest acquired .........................
Book value ........................................
Excess of fair value over book
value............................................
$222,500

Parent

Price
(80%)
$350,000

NCI
Value
(20%)
$ 87,500

$215,000
80%
$172,000

$215,000
20%
$ 43,000

$178,000

$ 44,500

Adjustment of identifiable accounts:

Buildings ...........................................
Equipment .........................................
Goodwill ............................................
Total ............................................

Account Adjustments
to Be Amortized

Worksheet
Adjustment
Key
$
75,000 debit D1
60,000 debit D2
87,500 debit D3
$222,500

Life

Buildings ...............................
...... (A1)
Equipment .............................
...... (A2)
Total amortizations ........

20
5

Annual
Amount
$

Current
Year

3,750
12,000

$15,750

$

Life
20
5

Prior
Years

$15,000
20,000

30%
30

264

Total

Key

3,750 $

3,750 $7,500

12,000

12,000 24,000

$15,750

$15,750

Intercompany Inventory Profit Deferral
Parent
Parent
Parent
Sub
Amount
Percent
Profit
Amount
Beginning ..............................
Ending ...................................

Amortization
per Year
$
3,750
12,000

$4,500
6,000

—
—

$31,500

Sub
Sub
Percent Profit
0%
0

—
—


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Ch. 5—Problems

Problem 5-4, Continued
Subsidiary Stack Company Income Distribution
Loss on bond retirement ...............
Buildings depreciation ...................
Equipment depreciation ................

$ 2,899
3,750
12,000

Internally generated net
income.....................................
Interest adjustment—bonds ..........

$24,672

483

Adjusted income ...........................
NCI share ......................................
NCI ................................................

$ 6,506
× 20%
$ 1,301

Parent Packard Company Income Distribution
Ending inventory profit ..................

$6,000

Internally generated net
income.....................................
80% share of Stack
adjusted income of $6,506 ......
Beginning inventory profit .............
Controlling interest ........................

$42,845
5,205
4,500
$46,550

Proof for Bond Elimination
Loss remaining at year-end:
Investment in bonds at December 31, 20X5 ..............................

Carrying value at December 31, 20X5 .......................................
Loss amortized during the year:
Interest expense eliminated .......................................................
Interest revenue eliminated ........................................................
Loss at January 1, 20X5 ......................................................

265

$100,775
98,359

$

8,328
7,845

$2,416

483
$2,899


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Ch. 5—Problems

Problem 5-4, Continued
Packard Company and Subsidiary Stack Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X5

Trial Balance
Packard
Stack
Cash ................................................................
Accounts Receivable ......................................
Inventory .........................................................
Land ................................................................
Investment in Stack .........................................

Eliminations
and Adjustments
Dr.

71,070
90,000
100,000
150,000
385,738
...........
...........
...........
100,775
500,000
(300,000)
200,000
(100,000)
...........
(55,000)
...........
...........

...........
...........
...........
...........
(100,000)
(600,000)
(400,000)

Cr.

Consolidated
Income
Statement

NCI

Controlling
Retained
Earnings

32,031
...........
...........
...........
...........
...............
60,000
...........
(IA)
10,000

...........
...........
...............
30,000
...........
(EI)
6,000
...........
...........
...............
45,000
...........
...........
...........
...........
...............
............
...........
(CY1)
19,738
...........
...........
...............
............
(CY2)
8,000
...........
...........
...........
...............

............
...........
(EL)
196,000
...........
...........
...............
............
...........
(D)
178,000
...........
...........
...............
Investment in Stack Bonds .............................
............
...........
(B)
100,775
...........
...........
...............
Buildings .........................................................
250,000 (D1)
75,000
...........
...........
...........
...............
Accumulated Depreciation ..............................

(70,000)
...........
(A1)
7,500
...........
...........
...............
Equipment .......................................................
120,000 (D2)
60,000
...........
...........
...........
...............
Accumulated Depreciation ..............................
(84,000)
...........
(A2)
24,000
...........
...........
...............
Goodwill ..........................................................
............
(D3)
87,500
...........
...........
...........
...............

Accounts Payable ...........................................
(25,000) (IA)
10,000
...........
...........
...........
...............
Bonds Payable ................................................
(100,000) (B)
100,000
...........
...........
...........
...............
Discount (premium) .........................................
1,641
...........
(B)
1,641
...........
...........
...............
Common Stock ($10 par)—Stack ...................
(10,000) (EL)
8,000
...........
...........
(2,000) ...............
Paid-In Capital in Excess of Par—Stack .........
(90,000) (EL)

72,000
...........
...........
(18,000) ...............
Retained Earnings—Stack ..............................
(145,000) (EL)
116,000 (NCI)
44,500
...........
...........
...............
............
(A1–A2)
3,150
...........
...........
(70,350) ...............
Common Stock ($10 par)—Packard ...............
............
...........
...........
...........
...........
...........
Paid-In Capital in Excess of Par—Packard.....
............
...........
...........
...........
...........

...........
Retained Earnings—Packard ..........................
............
(A1–A2)
12,600
...........
...........
...........
...........
............
(BI)
4,500
...........
...........
...........
(382,900)
Loss (gain) on bond retirement .......................
............
(B)
2,899
...........
2,899
...........
...........
Sales ...............................................................
(600,000)
(220,000) (IS)
50,000
...........
(770,000) ...........

...........
Cost of Goods Sold .........................................
410,000
120,000
...........
(IS)
50,000
...........
...........
...........
...........
............
(EI)
6,000 (BI)
4,500
481,500
...........
...........
Depreciation Expense—Buildings...................
30,000
10,000 (A1)
3,750
...........
43,750
...........
...........
Depreciation Expense—Equipment ................
15,000
12,000 (A2)
12,000

...........
39,000
...........
...........
Other Expenses ..............................................
110,000
45,000
...........
...........
155,000
...........
...........
Interest Expense .............................................
...........
8,328
...........
(B)
8,328
...........
...........
...........
Interest Revenue .............................................
(7,845) ............
(B)
7,845
...........
...........
...........
...........
Subsidiary Income ..........................................

(19,738) ............
(CY1)
19,738
...........
...........
...........
...........
Dividends Declared—Stack ............................
...........
10,000
...........
(CY2)
8,000
...........
2,000 ...........
...........
...........
...........
...........
20,000
Dividends Declared—Packard ........................
20,000 ............
0
658,982
658,982
...........
...........
...........
Totals ..........................................................
0

...........
Consolidated Net Income .....................................................................................................................................................
(47,851) ...........
To NCI (see distribution schedule)...................................................................................................................................
1,301
(1,301) ...........
...........
(46,550)
To Controlling Interest (see distribution schedule)...........................................................................................................
46,550
Total NCI .......................................................................................................................................................................................................
(89,651) ...........
Retained Earnings—Controlling Interest, December 31, 20X5.............................................................................................................................................
(409,450)
Totals ........................................................................................................................................................................................................................................................

266

Consolidated
Balance
Sheet
103,101
140,000
124,000
195,000
...........
...........
...........
...........
...........

825,000
(377,500)
380,000
(208,000)
87,500
(70,000)
...........
...........
...........
...........
...........
...........
(100,000)
(600,000)
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

...........
...........
(89,651)
(409,450)
0


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Ch. 5—Problems

Problem 5-4, Concluded
Eliminations and Adjustments:
(CY1)
(CY2)
(EL)
(D)/(NCI)
(A1)
(A2)
(IS)
(IA)
(BI)
(EI)
(B)

Current-year subsidiary income.
Current-year dividend.
Eliminate controlling interest in subsidiary equity.
Distribute excess and NCI adjustment.
Amortize excess—buildings.

Amortize excess—equipment.
Eliminate intercompany sale during current period.
Eliminate intercompany unpaid trade accounts.
Defer beginning inventory profit.
Defer ending inventory profit.
Eliminate intercompany bonds.
PROBLEM 5-5

Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary .....................
$437,500
Less book value of interest acquired:
Total equity..................................
215,000
Interest acquired ...............................
Book value ........................................
Excess of fair value over book
value............................................
$222,500

Parent
Price
(80%)
$350,000

NCI
Value

(20%)
$ 87,500

$215,000
80%
$172,000

$215,000
20%
$ 43,000

$178,000

$ 44,500

Adjustment of identifiable accounts:

Buildings ...........................................
Equipment .........................................
Goodwill ............................................
Total ............................................

Account Adjustments
to Be Amortized
Buildings ...............................
...... $11,250 ..........................
Equipment .............................
...... (A2)
Total amortizations ..........

Worksheet
Adjustment
Key
$
75,000 debit D3
60,000 credit D4
87,500 debit D5
$222,500

Life

Annual
Amount

20 $
(A1)
5

Current
Year

3,750
12,000
$15,750

267

$

Life

20
5

Prior
Years

Total

3,750 $
12,000

$15,750

Amortization
per Year
$
3,750
12,000

Key

7,500
24,000 36,000

$31,500

$47,250


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Ch. 5—Problems

Problem 5-5, Continued
Intercompany Inventory Profit Deferral
Parent
Amount
Beginning ..............................
Ending ...................................

Parent
Percent

$20,000
25,000

30%
30

Parent
Profit

Sub
Amount

$6,000
7,500

Sub
Sub

Percent Profit

—
—

0%
0

—
—

Subsidiary Stack Company Income Distribution
Buildings depreciation .................
Equipment depreciation ..............

$ 3,750
12,000

Internally generated net
income...................................
Interest adjustment—bonds ........

$31,672
483

Adjusted income .........................
NCI share ....................................
NCI ..............................................

$16,405

× 20%
$ 3,281

Parent Packard Company Income Distribution
Ending inventory profit ................

$7,500

Internally generated net
income.....................................
80% share of Stack
adjusted income of $16,405 ....
Beginning inventory profit .............
Controlling interest ........................

$57,845
13,124
6,000
$69,469

Proof for Bond Retirement
Loss remaining at year-end:
Investment in bonds at December 31, 20X6 ..............................
Carrying value at December 31, 20X6 .......................................
Loss amortized during the year:
Interest expense eliminated .......................................................
Interest revenue eliminated ........................................................
Remaining loss at January 1, 20X6 .....................................

268

$100,620
98,687

$

8,328
7,845

$1,933

483
$2,416


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Ch. 5—Problems

Problem 5-5, Continued
Packard Company and Subsidiary Stack Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X6
Trial Balance
Packard
Stack

Eliminations
and Adjustments
Dr.

Cash ................................................................
Accounts Receivable ......................................
Inventory .........................................................
Land ................................................................
Investment in Stack

Cr.

Consolidated
Income
Statement

NCI

Controlling
Retained
Earnings

101,710
61,031
...........
...........
...........
...........
...........
110,000
60,000
...........
(IA)

12,000
...........
...........
...........
120,000
45,000
...........
(EI)
7,500
...........
...........
...........
150,000
45,000
...........
...........
...........
...........
...........
403,075 ............
...........
(CY1)
25,337
...........
...........
...........
...........
............
(CY2)
8,000

...........
...........
...........
...........
...........
............
...........
(EL)
207,738
...........
...........
...........
...........
............
...........
(D)
178,000
...........
...........
...........
Investment in Stack Bonds .............................
100,620 ............
...........
(B)
100,620
...........
...........
...........
Buildings .........................................................
500,000

250,000 (D1)
75,000
...........
...........
...........
...........
Accumulated Depreciation ..............................
(330,000)
(80,000)
...........
(A1)
11,250
...........
...........
...........
Equipment .......................................................
200,000
120,000 (D2)
60,000
...........
...........
...........
...........
Accumulated Depreciation ..............................
(115,000)
(96,000)
...........
(A2)
36,000
...........

...........
...........
Goodwill ..........................................................
...........
............
(D3)
87,500
...........
...........
...........
...........
Accounts Payable ...........................................
(35,000)
(25,000) (IA)
12,000
...........
...........
...........
...........
Bonds Payable ................................................
...........
(100,000) (B)
100,000
...........
...........
...........
...........
Discount (premium) .........................................
...........
1,313

...........
(B)
1,313
...........
...........
...........
Common Stock ($10 par)—Stack ...................
...........
(10,000) (EL)
8,000
...........
...........
(2,000) ...........
Paid-In Capital in Excess of Par—Stack .........
...........
(90,000) (EL)
72,000
...........
...........
(18,000) ...........
Retained Earnings—Stack ..............................
...........
(159,672) (EL)
127,738 (NCI)
44,500
...........
...........
...........
...........
............

(B)
483
...........
...........
(69,651) ...........
...........
............
(A1–A2)
6,300
...........
...........
...........
...........
Common Stock ($10 par)—Packard ...............
(100,000) ............
...........
...........
...........
...........
...........
Paid-In Capital in Excess of Par—Packard.....
(600,000) ............
...........
...........
...........
...........
...........
Retained Earnings—Packard ..........................
(442,223) ............
(A1–A2)

25,200
...........
...........
...........
...........
...........
............
(BI)
6,000
...........
...........
...........
(409,090)
...........
............
(B)
1,933
...........
...........
...........
...........
Sales ...............................................................
(700,000)
(230,000) (IS)
60,000
...........
(870,000) ...........
...........
Cost of Goods Sold .........................................
480,000

125,000
...........
(IS)
60,000
...........
...........
...........
...........
............
(EI)
7,500 (BI)
6,000
546,500
...........
...........
Depreciation Expense—Buildings...................
30,000
10,000 (A1)
3,750
...........
43,750
...........
...........
Depreciation Expense—Equipment ................
15,000
12,000 (A2)
12,000
...........
39,000
...........

...........
Other Expenses ..............................................
125,000
43,000
...........
...........
168,000
...........
...........
Interest Expense .............................................
...........
8,328
...........
(B)
8,328
...........
...........
...........
Interest Revenue .............................................
(7,845) ............
(B)
7,845
...........
...........
...........
...........
Subsidiary Income ..........................................
(25,337) ............
(CY1)
25,337

...........
...........
...........
...........
Dividends Declared—Stack ............................
...........
10,000
...........
(CY2)
8,000
...........
2,000 ...........
...........
...........
...........
...........
20,000
Dividends Declared—Packard ........................
20,000 ............
0
706,586
706,586
...........
...........
...........
Totals ..........................................................
0
...........
Consolidated Net Income .....................................................................................................................................................
(72,750) ...........

To NCI (see distribution schedule).......................................................................................................................................
3,281
(3,281) ...........
...........
(69,469)
To Controlling Interest (see distribution schedule)...............................................................................................................
69,469
Total NCI .......................................................................................................................................................................................................
(90,932) ...........
Retained Earnings—Controlling Interest, December 31, 20X6.............................................................................................................................................
(458,559)
Totals ........................................................................................................................................................................................................................................................

269

Consolidated
Balance
Sheet
162,741
158,000
157,500
195,000
...........
...........
...........
...........
...........
825,000
(421,250)
380,000

(247,000)
87,500
(48,000)
...........
...........
...........
...........
...........
...........
...........
(100,000)
(600,000)
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........
...........

(90,932)
(458,559)
0


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Ch. 5—Problems

Problem 5-5, Concluded
Eliminations and Adjustments:
(CY1)
(CY2)
(EL)
(D)/(NCI)
(A)
(IS)
(IA)
(BI)
(EI)
(B)

Current-year subsidiary income.
Current-year dividend.
Eliminate controlling interest in subsidiary equity.
Distribute excess and adjust NCI.
Amortize excess.
Eliminate intercompany sales during current period.
Eliminate intercompany unpaid trade accounts.
Defer beginning inventory profit.

Defer ending inventory profit.
Eliminate intercompany bonds.
PROBLEM 5-6

Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary .....................
$500,000
Less book value of interest acquired:
Common stock ($1 par)...............
$ 10,000
Paid-in capital in excess of par ...
90,000
Retained earnings .......................
100,000
Total equity ............................
$200,000
Interest acquired .........................
Book value ........................................
Excess of fair value over book
value............................................
$300,000

Parent
Price
(80%)
$400,000

NCI
Value
(20%)
$100,000

$200,000
80%
$160,000

$200,000
20%
$ 40,000

$240,000

$ 60,000

Adjustment of identifiable accounts:

Buildings ...........................................
Equipment .........................................
Goodwill ............................................
Total ............................................

Worksheet
Adjustment
Key
$130,000 debit D1
50,000 debit D2
120,000 debit D3

$300,000

270

Life
20
5

Amortization
per Year
$
6,500
10,000


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Ch. 5—Problems

Problem 5-6 Continued
Account Adjustments
to Be Amortized

Life

Buildings ...............................
...... $13,000 ..........................
Equipment .............................
...... (A2)
Total amortizations ..........

Annual
Amount

20 $
(A1)
5

Current
Year

6,500

$

10,000
$16,500

Prior
Years
6,500 $
10,000

$16,500

—
—

0%
0

—
—

$9,000
12,000

Key

6,500
10,000 20,000

$16,500

Intercompany Inventory Profit Deferral
Parent
Parent
Parent
Sub
Amount
Percent
Profit
Amount
Beginning ..............................
Ending ...................................

Total

$33,000

Sub
Percent

Sub
Profit

25%
25

Subsidiary Spartan Company Income Distribution
Amortizations ..............................
Ending inventory profit ................
Interest adjustment, bonds..........

$16,500
3,000
920

Internally generated net
income.....................................
Beginning inventory profit .............
Gain on bond retirement ...............

$27,324
2,250
6,833

Adjusted income ...........................
NCI share ......................................
NCI ................................................

$15,987
× 20%
$ 3,197

Parent Postman Company Income Distribution
Internally generated net
income..................................... $173,596
80% × Sparton adjusted income
of $15,987 ...............................
12,790
Controlling interest ........................ $186,386

271

$2,250
3,000