Solution manual advanced accounting 10e by fischer taylor CH06

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CHAPTER 6
UNDERSTANDING THE ISSUES
1. (a) Investing activities—Purchase of S Company ($800,000 – $50,000) ....................
(b) Investing activities—Purchase of S Company ($500,000 – $50,000) ....................
Noncash financing activities—Issuance of notes payable .....................................
(c) Investing activities—Cash acquired in purchase of S Company ............................
Noncash financing activities—Issuance of stock....................................................

$

$(750,000)
$(450,000)
300,000
50,000
800,000

2. Any amortizations of the $200,000 excess of cost over book value will need to be included in cash–
operating activities as an adjustment to income. The means of purchasing S Company will not have
an effect on the consolidated statement of cash flows in subsequent years.
3. Determination and Distribution of Excess Schedule, Investment in Company S
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%)

$800,000

$640,000

$160,000

600,000

$600,000
80%
$480,000

$600,000
20%
$120,000

$200,000

$160,000

$ 40,000

Adjustment of identifiable accounts:

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

Adjustment
$200,000

Worksheet
Key
debit D3

Life

Amortization
per Year

(a) Investing activities—Purchase of S Company ($640,000 – $50,000) ....................
Noncash financing activities—Noncontrolling interest ...........................................
(b) Investing activities—Purchase of S Company ($400,000 – $50,000) ....................
Noncash financing activities—Issuance of notes payable .....................................
Noncash financing activities—Noncontrolling interest ...........................................
(c) Investing activities—Cash acquired in purchase of S Company ............................
Noncash financing activities—Issuance of stock....................................................
Noncash financing activities—Noncontrolling interest ...........................................
4. (a) Consolidated basic EPS = ($200,000 + $60,000) ÷ 100,000 shares = $2.60
(b) Consolidated basic EPS = [$200,000 + (80% × $60,000)] ÷ 100,000 shares = $2.48
5. (a) Consolidated DEPS = [$200,000 + (40,000 × $1.43)] ÷ 100,000 shares = $2.57

Subsidiary DEPS = $60,000 ÷ (40,000 + 2,000) = $1.43
(b) Consolidated DEPS = [$200,000 + (40,000 × $1.50)] ÷ (100,000 + 2,000) = $2.55
Subsidiary DEPS = $60,000 ÷ 40,000 shares = $1.50
(c) Consolidated DEPS = [$200,000 + (40,000 × $1.50)] ÷ (100,000 + 2,000) = $2.55
Subsidiary DEPS = $60,000 ÷ 40,000 shares = $1.50
6. (a) Consolidated net income = ($100,000 + $40,000) × 70% = $98,000
Distribution to NCI = ($40,000 × 20%) × 70% = $5,600
Distribution to controlling interest = [$100,000 + ($40,000 × 80%)] × 70% = $92,400

319

$

$(590,000)
160,000
$(350,000)
240,000
160,000
50,000
640,000
160,000


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(b) Consolidated net income = [($100,000 + $40,000) × 70%] – ($40,000 × 70% × 80% × 20% ×
30%) = $96,656
Distribution to NCI = ($40,000 × 20%) × 70% = $5,600
Distribution to controlling interest = {[$100,000 + ($40,000 × 80%)] × 70%} – ($40,000 × 70% ×
80% × 20% × 30%) = $91,056

7. (a) Taxes would not be paid on this intercompany profit. Taxes are based on consolidated income
after the elimination of the profit.
(b) Taxes will have been paid on this intercompany profit. The taxes paid become a deferred tax
asset (DTA) and are amortized over the period of depreciation. The following adjustment is
needed in the period of sale:
Deferred Tax Asset ($50,000 × 30%) .................
Provision for Income Tax .................................

15,000
15,000

At each period-end, the DTA would be converted to a tax expense as follows:
Provision for Income Tax ($15,000 ÷ 5) .............
Deferred Tax Asset ..........................................

320

3,000
3,000


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Ch. 6—Exercises

EXERCISES
EXERCISE 6-1
Determination and Distribution of Excess Schedule, Investment in Rocket Company
Company
Parent

NCI
Implied
Price
Value
Fair Value
(80%)
(20%)
Fair value of subsidiary .....................
$625,000
$500,000
$125,000
Less book value of interest acquired:
Common stock ............................
$200,000
Retained earnings .......................
300,000
Total equity ............................
$500,000
$500,000
$500,000
Interest acquired .........................
80%
20%
Book value ........................................
$400,000
$100,000
Excess of fair value over book
value............................................
$125,000
$100,000

$ 25,000
Adjustment of identifiable accounts:
Adjustment
Goodwill ($625,000 fair –
$500,000 book value)..................

Worksheet
Key

$125,000

321

debit D

Life

Amortization
per Year


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Ch. 6—Exercises

Exercise 6-1, Concluded
Batton Company and Subsidiary Rocket Company
Consolidated Statement of Cash Flows
For Year Ended December 31, 20X3
Cash flows from operating activities:

Consolidated net income ($145,000 + $10,000 NCI share) .......
Adjustments to reconcile net income to net cash:
Depreciation expense* .........................................................
Increase in inventory ($220,000 + $140,000 – $454,000)....
Increase in current liabilities [$284,000 –
($160,000 + $110,000)] .....................................................
Total adjustments ...........................................................
Net cash provided by operating activities .......................

$155,000
$120,000
(94,000)
14,000
40,000
$195,000

Cash flows from investing activities:
Payment for purchase of Rocket Company,
net of cash acquired .............................................................
Cash flows from financing activities:
Sale of stock (5,000 shares × $60) ............................................
Dividend payments to controlling interests.................................
Dividend payments to NCI ($5,000 × 20%) ................................
Net cash used in financing activities ....................................
Net increase in cash ........................................................................
Cash at beginning of year ................................................................
Cash at year-end .............................................................................

(480,000)

$300,000
(10,000)
(1,000)
$

289,000
4,000
300,000
$304,000

*20X3 depreciation is equal to the difference between the sum of the December 31, 20X2, net
plant asset balances [$800,000 (parent) and $550,000 (subsidiary), or $1,350,000] and the
December 31, 20X3, consolidated net plant assets of $1,230,000.
Schedule of noncash investing activity:
Batton Company purchased 80% of the capital stock of Rocket Company for $500,000. In conjunction with the acquisition, liabilities were assumed and a noncontrolling interest created as
follows:
Adjusted value of assets acquired ($710,000 book
value + $125,000 excess) ..........................................................

$835,000

Cash paid .........................................................................................

500,000

Balance ............................................................................................

$335,000

Liabilities assumed...........................................................................

$210,000

Noncontrolling interest** ..................................................................

$125,000

**This is the NCI at the beginning of the year (date of acquisition). Current-year charges to the
total NCI are included in the consolidated net income and the dividends paid.

322


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Ch. 6—Exercises

EXERCISE 6-2
Determination and Distribution of Excess Schedule, Investment in Panda Corporation
Company
Parent
NCI
Implied
Price
Value
Fair Value
(80%)
(20%)
Fair value of subsidiary .....................
$306,250

$245,000*
$ 61,250
Less book value of interest acquired:
Common stock ($10 par).............
$150,000
Retained earnings .......................
50,000
Total equity ............................
$200,000
$200,000
$200,000
Interest acquired .........................
80%
20%
Book value ........................................
$160,000
$ 40,000
Excess of fair value over book
value............................................
$106,250
$ 85,000
$ 21,250
Adjustment of identifiable accounts:

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

Worksheet
Adjustment

Key
$
20,000 debit D1
86,250 debit D2
$106,250

*(5,000 shares × $18) + $155,000

323

Life
4

Amortization
per Year
$5,000


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Ch. 6—Exercises

Exercise 6-2 Concluded
Duckworth Corporation and Subsidiary Panda Corporation
Consolidated Statement of Cash Flows
For Year Ended December 31, 20X3
Cash flows from operating activities:
Consolidated net income............................................................
Adjustments to reconcile net income to net cash:
Depreciation ($92,000 + $28,000 + $5,000 of

equipment excess) ............................................................
Decrease in inventory ..........................................................
Increase in current liabilities .................................................
Total adjustments ...........................................................
Net cash provided by operating activities ........................................

$

Cash flows from investing activities:
Cash payment for purchase of Panda Corporation,
net of cash acquired .............................................................
Purchase of production equipment ..................................................
Net cash used in investing activities ................................................

$

103,200

$

135,800
239,000

125,000
5,800
5,000

$(125,000)
(76,000)
$(201,000)

Cash flows from financing activities:
Decrease in long-term debt ........................................................
Dividends paid:
By Duckworth Corporation .................................
$(30,000)
By Panda, to NCI ...............................................
(3,000)
Net cash used in financing activities ................................................

(10,000)

(33,000)
(43,000)

Net decrease in cash .......................................................................
Cash at beginning of year ................................................................
Cash at year-end .............................................................................

$
$

Schedule of noncash investing activity:
Company P acquired 80% of the common stock of Company S in exchange for $245,000. In
conjunction with the acquisition, liabilities were assumed and a noncontrolling interest was
created as follows:
Adjusted value of assets acquired ($270,000
book value + $106,250 excess) .................................................

$376,250

Cash payment ..................................................................................

155,000

Balance ............................................................................................

$221,250

Common stock issued......................................................................

$

90,000

Liabilities assumed...........................................................................

$

70,000

Noncontrolling interest (see D&D schedule) ....................................

$

61,250

324

(5,000)

100,000
95,000


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Ch. 6—Exercises

EXERCISE 6-3
(1) None, goodwill is not amortized.
(2) The cash from shares sold to the NCI shareholders, $90,000 (1,000 shares × $90), would
appear as cash flow in the financing activities section. The 1,000 shares purchased by the
parent would not appear in the cash flow statement.
(3) The bonds were held by parties outside the consolidated company. They are now retired by
the consolidated company. The $102,000 would appear as a cash outflow in the financing
activities section of the cash flow statement.
(4) This is a transaction within the consolidated company, and it would have no impact on the
consolidated statement of cash flows.

EXERCISE 6-4
Maria Company:
Provision for Income Tax ...........................................................
Income Tax Payable ............................................................
30% × $70,000 = $21,000.

21,000
21,000

Tuft Company:
Optional entry to record tax effect of subsidiary tax:

Subsidiary Investment Income ...................................................
Investment in Maria Company .............................................
80% × $21,000 tax.
Provision for Income Tax ...........................................................
Income Tax Payable ............................................................
Deferred Tax Liability ...........................................................

16,800
16,800
33,000

Internally generated income ....................................................................................
Tax at 30% ..............................................................................................................
Less DTL on goodwill [0.30 × ($64,000/15)] ...........................................................
Tax currently payable ..............................................................................................

325

31,720
1,280

$
$

$110,000
33,000
(1,280)
31,720

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Ch. 6—Exercises

EXERCISE 6-5
Deko Company and Subsidiary Farwell Company
Consolidated Income Statement
For Year Ended December 31, 20X9
Sales (less $50,000 intercompany sales) ..........................................................
Cost of goods sold ($290,000 – $50,000 intercompany sales – $8,000
beginning inventory profit + $2,400 ending inventory profit) ........................
Expenses ($60,000 + $9,375 patent amortization from D&D – $1,000
depreciation adjustment) ..............................................................................
Income before taxes ..........................................................................................
Provision for income tax (see schedule) ............................................................
Consolidated net income ...................................................................................
Distributed to noncontrolling interest ..................................................................
Distributed to controlling interest........................................................................
Determination and Distribution of Excess Schedule
Company
Parent
Implied
Price
Fair Value
(80%)
Fair value of subsidiary .....................
$1,062,500
$850,000
Less book value of interest acquired:
Total equity ............................

968,750
$968,750
Interest acquired .........................
80%
Book value ........................................
$775,000
Excess of fair value over book
value............................................
$ 93,750
$ 75,000

$ 370,000
(234,400)
(68,375)
67,225
(20,730)
$ 46,495
309
$ 46,186
$

NCI
Value
(20%)
$212,500
$968,750
20%
$193,750
$ 18,750

Adjustment of identifiable accounts:

Patent................................................

Sales .........................
Cost of goods sold ....
Gain on machine .......
Expenses ..................
Amortization of patent
Income before tax .....
Tax provision.............
Net income ................
To NCI.......................
To controlling ............

Worksheet
Key
Adjustment
$93,750 debit D1

Life
10

Amortization
per Year
$9,375

Deko
Farwell
Dr.

Cr.
$(300,000)
$(120,000)
(IS)$50,000
200,000
90,000
(IS)
(EI)
2,400
(BI)
(5,000)
(F1)
5,000
40,000
20,000
(F2)
(A1)
9,375
$
(65,000)
$(10,000)

Consolidated
Income

$(370,0
$50,000
8,000
1,000

$
$

326

$
20,730
(46,495)
309
46,186

234,400
0
59,000
9,375
(67,225


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Ch. 6—Exercises

Exercise 6-5 Concluded
Tax provision:
Consolidated income before tax.....................................
Add nondeductible patent amortization on NCI..............
Taxable income ..............................................................
Tax at 30% .....................................................................

$67,225

1,875
$69,100
$20,730

Subsidiary Farwell Company Income Distribution
Ending inventory .........................
Patent amortization .....................

$2,400
9,375

Internally generated income ......
Beginning inventory...................

$10,000
8,000

Adjusted income........................
Tax provision (see schedule) ....
Net income ................................
NCI share (see schedule) .........
Controlling share .......................

$ 6,225
(2,4
$ 3,795
309
$ 3,486

Subsidiary tax schedule:

(1) Total adjusted income...................................
(2) NCI share of asset adjustments....................
(3) Taxable income ............................................
(4) Tax (30% of taxable income) ........................
(5) Net of tax share of income (line 1 – line 4) ...

Controlling
$4,980

$

$4,980
$1,494
$3,486

$
$
$

NCI
1,245
1,875
3,120
936
309

Total
$6,225*
1,875
$8,100

$2,430
$3,795

*From subsidiary’s IDS

Parent Deko Company Income Distribution
Machine gain...............................

$5,000

Internally generated income ......
Gain realized .............................

$ 65,000
1,000

Adjusted income........................
Tax provision ($61,000 × 30%)
Net of tax ...................................
Share of sub income (net of tax)
Controlling share .......................

$ 61,000
(18,300)
$ 42,700
3,486
$ 46,186

327

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Ch. 6—Exercises

EXERCISE 6-6
Dunker Company and Subsidiary Fennig Company
Consolidated Income Statement
For Year Ended December 31, 20X9
Sales (less $50,000 intercompany sales) ..........................................................
Cost of goods sold ($290,000 – $50,000 intercompany sales – $8,000
beginning inventory profit + $2,400 ending inventory profit) ........................
Expenses ($60,000 + $9,375 patent amortization from D&D – $1,000
depreciation adjustment) ..............................................................................
Income before taxes ..........................................................................................
Provision for income tax (see schedule) ............................................................
Consolidated net income ...................................................................................
Distributed to noncontrolling interest ..................................................................
Distributed to controlling interest........................................................................
Determination and Distribution of Excess Schedule
Company
Parent
Implied
Price
Fair Value
(80%)
Fair value of subsidiary .....................
$1,062,500
$850,000
Less book value of interest acquired:

Total equity ............................
968,750
$968,750
Interest acquired .........................
80%
Book value ........................................
$775,000
Excess of fair value over book
value............................................
$ 93,750
$ 75,000

$

370,000
(234,400)

(68,375)
67,225
(20,939)
$
46,286
309
$
45,977
$

NCI
Value
(20%)

$212,500
$968,750
20%
$193,750
$ 18,750

Adjustment of identifiable accounts:

Patent................................................

Dunker
$(300,000)
200,000

Sales .........................
Cost of goods sold ....
Gain on machine .......
Expenses ..................
Amortization of patent
Income before tax .....
Tax provision.............
Net income ................
To NCI.......................
To controlling ............

Worksheet
Key
Adjustment
$93,750 debit D1

(5,000)
40,000
$

(65,000)

Life
10

Amortization
per Year
$9,375

Fennig
Dr.
Cr.
$(120,000)
(IS)$50,000
90,000
(IS)
(EI)
2,400
(BI)
(F1)
5,000
20,000
(F2)
(A1)
9,375
$(10,000)

Consolidated
Income

$(370,0
$50,000
8,000
1,000

$
$

328

$
20,939
(46,286)
309
45,977

234,400
0
59,000
9,375
(67,225


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Ch. 6—Exercises

Exercise 6-6, Concluded
Tax provision:
Consolidated income before tax.....................................
Add nondeductible patent amortization on NCI..............
Taxable income ..............................................................
First tax at 30% ..............................................................
Second tax (from controlling IDS) ..................................
Total tax provision ..........................................................

$67,225
1,875
$69,100
$20,730
209
$20,939

Subsidiary Fennig Company Income Distribution
Ending inventory .........................
Patent amortization .....................

$2,400
9,375

Internally generated income ........
Beginning inventory.....................

$10,000
8,000

Adjusted income..........................
Tax provision (see schedule) ......
Net income ..................................
NCI share (see schedule) ...........
Controlling share .........................

$ 6,225
(2,430)
$ 3,795
309
$ 3,486

Subsidiary tax schedule:
(1) Total adjusted income...................................
(2) NCI share of asset adjustments....................
(3) Taxable income ............................................
(4) Tax (30% of taxable income) ........................
(5) Net of tax share of income (line 1 – line 4) ...

Controlling
$4,980

$

$4,980
$1,494
$3,486

$
$

$

NCI
1,245
1,875
3,120
936
309

Total
$6,225*
1,875
$8,100
$2,430
$3,795

*From subsidiary’s IDS

Parent Dunker Company Income Distribution
Machine gain...............................

$5,000

Internally generated income ........
Gain realized ...............................

$ 65,000
1,000

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

Tax provision ($61,000 × 30%) ...
Net of tax adjusted income..........
Share of sub income
(net of first tax) ......................
Second tax (0.2 × 0.3 × $3,486)..
Controlling interest ......................

$ 61,000
(18,300)
42,700

329

3,486
(209)
$ 45,977


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Ch. 6—Exercises

EXERCISE 6-7
Adjustment to January 1, 20X7, retained earnings:
Machine depreciation:
Retained Earnings—Cooper (1½ yrs. × $5,000 × 60%) .......
Retained Earnings—Varga (1½ yrs. × $5,000 × 40%) .........
Accumulated Depreciation—Equipment............................

4,500

3,000

Machine sale:
Retained Earnings—Cooper ................................................
Retained Earnings—Varga ..................................................
Equipment .........................................................................

2,400
1,600

7,500

4,000

Tax:
Deferred Tax Asset ..............................................................
Retained Earnings—Cooper .............................................
Retained Earnings—Varga................................................

2,651*
2,171*
480*

*Increase in Deferred Tax Assets:
Total
Gain on machine (net) ($4,000 × 30%) .....................................
Secondary tax ($4,000 × 70% × 60% × 30% × 20%)** .............
Equipment depreciation ($4,500 parent share × 30%)..............
1,350 .................................................................................
Total .....................................................................................

Controlling

$1,200
101
1,350
$2,651

$
101

NCI
720

$2,171$480

**100% – 80% dividend exclusion
Adjustments to income:
Sales ..........................................................................................
Cost of Goods Sold ..............................................................

15,000
15,000

Cost of Goods Sold ....................................................................
Inventory ..............................................................................

600
600

Depreciation Expense—Machine ...............................................
Accumulated Depreciation—Machine ..................................

5,000

Accumulated Depreciation—Machine ........................................
Depreciation Expense—Machine .........................................

1,000

5,000
1,000

Tax:
Deferred Tax Asset** .................................................................
Provision for Tax ..................................................................

755
755

**Increase in Deferred Tax Assets:
Total
Machine gain realized (30% × $1,000) ................................... $(300)
Secondary tax ($1,000 × 70% × 60% × 30% × 20%) .............
(25)
Inventory (30% × $600) ..........................................................
180
Machine depreciation (30% × $5,000 × 60%
parent share) ........................................................................
900

Total .................................................................................. $ 755

330

Controlling

NCI

$(180)
(25)
180

$(120)

900
$ 875

$(120)

$480


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Ch. 6—Problems

PROBLEMS
PROBLEM 6-1
Determination and Distribution of Excess Schedule, Investment in Marcus Company
Company

Parent
NCI
Implied
Price
Value
Fair Value
(80%)
(20%)
Fair value of subsidiary .....................
$800,000
$640,000
$160,000
Less book value of interest acquired:
Total equity ............................
650,000
$650,000
$650,000
Interest acquired .........................
80%
20%
Book value ........................................
$520,000
$130,000
Excess of fair value over book
value............................................
$150,000
$120,000
$ 30,000
Adjustment of identifiable accounts:

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

Worksheet
Key
Adjustment
$
25,000 debit D1
125,000 debit D2
$150,000

331

Life
5

Amortization
per Year
$5,000


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Ch. 6—Problems

Problem 6-1, Concluded
Luis Company and Subsidiary Marcus Company
Consolidated Statement of Cash Flows
For Year Ended December 31, 20X2

Cash flows from operating activities:
Consolidated net income ($262,000 + $15,000) ........................
Adjustments to reconcile net income to net cash:
Depreciation expense ($1,282,000 – $1,081,000) ...............
Increase in inventory ............................................................
Increase in accounts receivable ...........................................
Increase in accounts payable ...............................................
Equity income from Charles Corporation in excess
of dividends* ......................................................................
Total adjustments ...........................................................
Net cash provided by operating activities .............................
Cash flows from investing activities:
Purchase of building...................................................................
Purchase of equipment ..............................................................
Investment in Charles ................................................................
Net cash used in investing activities ....................................
Cash flows from financing activities:
Proceeds of bond sale ...............................................................
Dividend payments to controlling interests.................................
Dividend payments to NCI ($15,000 × 20%) ..............................
Net cash provided by financing activities .............................
Net increase in cash ........................................................................
Cash at beginning of year ................................................................
Cash at year-end .............................................................................

$
$

277,000

201,000
(40,000)
(100,000)
83,000
(14,500)
$

129,500
406,500

$(300,000)
(50,000)
(230,000)
(580,000)
$

300,000
(100,000)
(3,000)
$
$

197,000
23,500
16,000
39,500

*Equity income from the investment in Charles provides funds only to the extent of dividends
received. The excess equity income must be deducted from consolidated net income in determining funds provided by net income.
30% of reported Charles income (30% × $80,000) ........................

Less amortization of excess {[$230,000 –
($700,000 × 30%)]/10 years} .....................................................
Equity income .................................................................................
Less dividends received (30% × $25,000) .....................................
Noncash income.............................................................................

332

$24,000
2,000
$22,000
7,500
$14,500


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Ch. 6—Problems

PROBLEM 6-2
Determination and Distribution of Excess Schedule, Investment in Rush Company
Company
Parent
NCI
Implied
Price
Value
Fair Value
(90%)
(10%)

Fair value of subsidiary .....................
$550,000
$495,000
$ 55,000
Less book value of interest acquired:
Common stock ($10 par).............
$150,000
Retained earnings .......................
300,000
Total equity ............................
$450,000
$450,000
$450,000
Interest acquired .........................
90%
10%
Book value ........................................
$405,000
$ 45,000
Excess of fair value over book
value............................................
$100,000
$ 90,000
$ 10,000
Adjustment of identifiable accounts:

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

Worksheet
Adjustment
Key
$
20,000 debit D1
80,000 debit D2
$100,000

333

Life
5

Amortization
per Year
$4,000


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Ch. 6—Problems

Problem 6-2, Concluded
Billing Enterprises and Subsidiary Rush Corporation
Consolidated Statement of Cash Flows
For Year Ended December 31, 20X1
Cash flows from operating activities:
Consolidated net income............................................................
Adjustments to reconcile net income to net cash:
Depreciation expense (includes amortization

of excess on equipment) ................................................
Decrease in accounts receivable .........................................
Decrease in accounts payable .............................................
Total adjustments ...........................................................
Net cash provided by operating activities .............................
Cash flows from investing activities:
Payment for purchase of Rush Corporation, $95,000 cash net
of $60,000 cash acquired .....................................................
Cash flows from financing activities:
Sale of bonds ($500,000 increase – $400,0000
issued to Rush) ....................................................................
Dividends paid to noncontrolling shareholders ..........................
Decrease in long-term liabilities .................................................
Net increase in cash...................................................................
Cash at beginning of year ..........................................................
Cash at year-end........................................................................

$

$

92,300

72,400*
54,000
(17,000)
109,400
$201,700

(35,000)

$

100,000
(1,000)
(160,000)

(61,000)
$105,700
82,000
$187,700

*$870,000 Billing + $460,000 Rush + $20,000 adjustment for excess less current balance of
$1,277,600 = $72,400 depreciation.
Schedule of noncash investing activity:
Billing Enterprises acquired 90% of the capital stock of Rush Corporation for $495,000. In conjunction with the acquisition, liabilities were assumed and a noncontrolling interest created as
follows:
Adjusted value of assets acquired ($615,000
book value + $100,000 excess) .................................................

$715,000

Cash paid .........................................................................................

95,000

Balance ............................................................................................

$620,000

Bonds issued ...................................................................................

$400,000

Liabilities assumed...........................................................................

$

165,000

Noncontrolling interest (see D&D schedule) ....................................

$

55,000

334


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Ch. 6—Problems

PROBLEM 6-3
Bush, Inc. and Subsidiary Dorr Corporation
Consolidated Statement of Cash Flows
For Year Ended December 31, 20X6
Cash flows from operating activities:
Consolidated net income............................................................
Adjustments to reconcile net income to net cash:

Gain on sale of equipment ...................................................
Depreciation expense ..........................................................
Increase in allowance for marketable securities ..................
Decrease in accounts receivable .........................................
Increase in inventory ............................................................
Increase in accounts payable ...............................................
Increase in deferred income tax ...........................................
Total adjustments ...........................................................
Net cash provided by operating activities .............................
Cash flows from investing activities:
Purchase of equipment ..............................................................
Sale of equipment ......................................................................
Net cash used in investing activities ....................................
Cash flows from financing activities:
Sale of treasury stock.................................................................
Dividend payments to controlling interests.................................
Dividend payments to NCI .........................................................
Payment on long-term note payable ..........................................
Net cash used in financing activities ....................................
Net increase in cash ........................................................................
Cash at beginning of year ................................................................
Cash at year-end .............................................................................

$
$

234,000

(6,000)
82,000

(11,000)
22,000
(70,000)
121,000
12,000
$

150,000
384,000

$(127,000)
40,000
(87,000)
$

44,000
(58,000)
(15,000)
(150,000)
$
$

(179,000)
118,000
195,000
313,000

Schedule of noncash investing and financing activities:
Bush, Inc., issued 10,000 shares of its common stock for land with a fair value of $215,000 on
January 20, 20X6.

335


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Ch. 6—Problems

Problem 6-3, Concluded
Bush, Inc. and Subsidiary Dorr Corporation
Worksheet for Analysis of Cash Flows: Indirect Method
For Year Ended December 31, 20X6

Marketable Equity Securities ...........
Allowance, Lower Cost or Market....
Accounts Receivable (net) ..............
Inventory .........................................
Land ................................................
Plant and Equipment .......................
Accumulated Depreciation ..............
Goodwill (net) ..................................
Current Portion, Long-Term Debt ....
Accounts Payable and Accrued
Liabilities ..................................
Note Payable, Long-Term ...............
Deferred Income Taxes ...................
NCI ..................................................
Common Stock ($10 par) ................
Paid-In Capital in Excess of Par ......

Account Change
Debit
Credit
0
..........
11,000 ..........
(9)
..........
22,000
70,000 ..........
(12)
215,000 ..........
(2)
65,000 ..........
(5)
54,000 (6)
..........
0
..........
0

Credit
Balance
.........
0
.........
0
22,000
0
.........

0
.........
0
62,000
0
82,000
0
.........
0
.........
0

121,000
..........
(14)
12,000
18,000 (7)
100,000
123,000
..........
143,000 (4)
36,000
629,000
0

..........
(13)
150,000
..........
(8)

15,000 (1)
..........
(2)
..........
(2)
..........
(3)
58,000 (1)
..........
(3)
674,000
118,000

121,000
.........
12,000
33,000
100,000
115,000
8,000
201,000
36,000
792,000
0

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

..........

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

234,000
..........
(6)
12,000

.........
6,000
.........

Net Cash from Operations ..............

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

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

..........
(9)
22,000
82,000
..........
(12)
121,000
471,000
384,000

11,000
.........
.........
70,000
.........
87,000
.........

Cash from Investing:
Purchase Equipment .......................
Sale of Equipment ...........................
Net Cash from Investing ..................

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

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

..........
(5)
40,000
..........

127,000
.........
(87,000)

Net Cash from Financing ................

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

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

44,000
..........
(4)
..........

(7)
..........
(14)
..........
..........

.........
58,000
15,000
150,000
223,000
179,000

Net Cash Provided ..........................

..........

..........

Retained Earnings...........................
Treasury Stock (at cost) ..................
Net Change in Cash ........................
Cash from Operations:
Net Income ......................................
Gain on Equipment .........................
Increase in Deferred Tax .................
Decrease in Allowance—Short-Term
Marketable Securities ..................
Decrease in Accounts Receivable...
Depreciation Expense .....................

Increase in Inventory .......................
Increase in Accounts Payable .........

Cash from Financing:
Sale of Treasury Stock ....................
Pay Dividend ...................................
Subsidiary Dividend ........................
Payment on Long-Term Note Payable

..........
150,000
..........
..........
..........
..........
..........

Explanations
Debit
..........
11,000
..........
(10)
70,000
215,000
127,000 (6)
28,000 (11)
..........
..........

.........
511,000
118,000

Schedule of noncash investing and financing activities:
Explanation

Item

Stock for land ..................................

(2)

Amount
215,000

336

(1)
(8)

(10)
(11)
(13)

(6)

(3)

..........

118,000

0
0
0
0
0
0
0
0


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Ch. 6—Problems

PROBLEM 6-4
Subsidiary calculations:
BEPS

=

DEPS =

$56,000

$4,000 preferred dividends
= $4.33
12,000

$52,000 + $4,000 preferred dividends
= $4.12
12,000 + 1,600 a

a

Preferred stock is dilutive, $4,000 ÷ 1,600 = $2.50
Shares = 800 preferred shares × 2 shares of common

Consolidated calculations:
BEPS =
=

$55,000

$55,000

$500 preferred dividends + (9,600 b × $4.33)
20,000

$500 + $41,568
20,000

= $4.80
b

12,000 Sunny shares × 80% interest

DEPS =

=

$55,000

$500 preferred dividends + (10,560 c × $4.12 Sunny DEPS)
20,000 + 245 d

$55,000
$500 + $43,507
20,000 + 245

= $4.84
c

9,600 common stock shares + 60% of 1,600 common shares assumed issued on conversion of convertible preferred stock

d

Quarter
1
2
3
4

Dilutive
no
no
yes
yes

Shares
Outstanding

3,000
3,000

Total Shares
Acquired

Share
Adjustment

$36,000 ÷ 13 = 2,769
$36,000 ÷ 16 = 2,250

231
750
981
245

Average (for four quarters) =

337


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Ch. 6—Problems

PROBLEM 6-5
Determination and Distribution of Excess Schedule, Investment in Rush Company
Company
Parent
NCI
Implied
Price
Value
Fair Value
(80%)
(20%)
Fair value of subsidiary .....................
$300,000
$240,000
$ 60,000
Less book value of interest acquired:
Common stock ($2 par)...............
$ 20,000
Paid-in capital in excess of par ...
50,000
Retained earnings .......................
100,000
$170,000
$170,000
Total equity ............................
$170,000
Interest acquired .........................
80%
20%
$ 34,000

Book value ........................................
$136,000
Excess of fair value over book
value............................................
$130,000
$104,000
$ 26,000
Adjustment of identifiable accounts:

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

Sales .....................................
Less cost of goods sold ........

Gross profit ...........................
Expenses ..............................
Income before tax .................
Less provision for tax ...........
Consolidated net income ......
Less NCI ...............................
Controlling interest ................

Worksheet
Adjustment
Key
$
20,000 debit D1
110,000 debit D2

$130,000

Life
8

Amortization
per Year
$2,500

Eliminations
Consolidated
and
Income
Morgan
Adjustments
Statement
Delta
$(1,000,000)$(600,000)(IS)
$50,000
$(1,550,000)
800,000
375,000 (IS)
(50,000)
(BI)
(1,425)
(EI)
2,430
1,126,005
$
(423,995)

80,000
185,000 (F2)
(8,000)
(A)
2,500
259,500
$
(164,495)
49,498
$
(114,997)
(5,083)
$
(109,914)

Tax provision:
Consolidated income before tax.....................................
Add, amortization applicable to NCI, 20% × $2,500 ......
Taxable income ..............................................................
Tax provision at 30%......................................................

338

$

$164,495
500
$164,995
49,498

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Ch. 6—Problems

Problem 6-5 Concluded
Eliminations and Adjustments:
(IS)
(BI)

Eliminate intercompany sales.
Adjustment for beginning inventory profit:
Sold by Morgan (0.25 × $2,500) = $ 625
Sold by Delta (0.40 × $2,000)
=
800
Total
$1,425

(EI)

Adjustment for ending inventory profit:
Sold by Morgan (0.25 × $3,000) = $ 750
Sold by Delta (0.40 × $4,200)
=
1,680
Total
$2,430

(F2)

(A)

Reduce depreciation for profit on machine sale, $40,000 ÷ 5 = $8,000.
Amortize $2,500 excess.
Subsidiary Morgan Company Income Distribution

Profit in ending inventory ...... (EI)
Depreciation adjustment ....... (A)

$ 750
2,500

Internally generated income ...
$40,000
Profit, beginning inventory ..... (BI)
625
Adjusted income ....................
Tax provision (see schedule)
Net income .............................
NCI share of income
(see schedule)..................

Subsidiary tax schedule:
(1) Total adjusted income...................................
(2) NCI share of asset adjustments....................
(3) Taxable income ............................................
(4) Tax ................................................................
(5) Net of tax share of income (line 1 – line 4) ...

Controlling

$29,900

$

$29,900
8,970
$20,930

$37,375
11,362
$26,013
$ 5,083

NCI
$7,475
500
$7,975
$2,392
$5,083

Total
$37,375*
500
$37,875
$11,362
$26,013

*From subsidiary’s IDS
Parent Delta Corporation Income Distribution
Profit in ending inventory ...... (EI)

$1,680

Internally generated income ...
$120,000
Profit, beginning inventory ..... (BI)
800
Gain realized through use
of machine........................ (F2)
8,000
Adjusted income ....................
Tax provision (30%) ...............
Net income .............................
Share of sub net-of-tax income
(see schedule)..................
Controlling interest .................

339

$127,120
38,136
$ 88,984
20,930
$109,914


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Ch. 6—Problems

PROBLEM 6-6
Determination and Distribution of Excess Schedule, Investment in Rush Company
Company
Parent
NCI
Implied
Price
Value
Fair Value
(80%)
(20%)
Fair value of subsidiary .....................
$337,500
$270,000
$ 67,500
Less book value of interest acquired:
$300,000
$300,000
Total equity ............................
300,000
20%
Interest acquired .........................
80%
$ 60,000
Book value ........................................
$240,000
Excess of fair value over book
$ 30,000
$ 7,500
value............................................

$ 37,500
Adjustment of identifiable accounts:

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

Worksheet
Adjustment
Key
$37,500 debit D

340

Life

Amortization
per Year


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Ch. 6—Problems

Problem 6-6, Continued
Pepper Company and Subsidiary Salty Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X1
Eliminations
Consolidated
Controlling
Consolidated

Trial Balance
and Adjustments
Income
Retained
Balance
Pepper
Salty
Dr.
Cr.
Statement
NCI
Earnings
Sheet
Inventory, December 31 .........................
100,000
50,000
..........
(EI)
4,000 .........
..........
..........
146,000
Other Current Assets .............................
198,000
200,000
..........
..........
.........
..........
..........

398,000
Investment in Salty Company ................
302,000 ..........
(CY2)
8,000(CY1)
40,000 .........
..........
..........
..........
..........
..........
..........
(EL)
240,000 .........
..........
..........
..........
..........
..........
..........
(D)
30,000 .........
..........
..........
..........
Land .......................................................
240,000
100,000
..........
(F1)

10,000 .........
..........
..........
330,000
Buildings and Equipment .......................
300,000
200,000
..........
..........
.........
..........
..........
500,000
Accumulated Depreciation .....................
(80,000)
(60,000)
..........
..........
.........
..........
..........
(140,000)
Goodwill .................................................
..........
..........
(D)
37,500
..........
.........
..........

..........
37,500
Current Liabilities ...................................
(150,000)
(50,000)
..........
..........
.........
..........
..........
(200,000)
Long-Term Liabilities ..............................
(200,000)
(100,000)
..........
..........
.........
..........
..........
(300,000)
Common Stock—Pepper .......................
(100,000) ..........
..........
..........
.........
..........
..........
(100,000)
Paid-In Capital in Excess of Par—Pepper
(180,000) ..........

..........
..........
.........
..........
..........
(180,000)
Retained Earnings—Pepper ..................
(320,000) ..........
..........
..........
.........
..........
(320,000)
..........
Common Stock—Salty ...........................
..........
(50,000)(EL)
40,000
..........
.........
(10,000) ..........
..........
Paid-In Capital in Excess of Par—Salty
..........
(100,000)(EL)
80,000
..........
.........
(20,000) ..........
..........

Retained Earnings—Salty ......................
..........
(150,000)(EL)
120,000(NCI)
7,500 .........
(37,500) ..........
..........
Sales ......................................................
(500,000)
(300,000)(IS)
50,000
..........
(750,000) ..........
..........
..........
Cost of Goods Sold ................................
300,000
180,000 (EI)
4,000 (IS)
50,000
434,000 ..........
..........
..........
Operating Expenses ...............................
100,000
80,000
..........
..........
180,000 ..........
..........

..........
Subsidiary Income..................................
(40,000) ..........
(CY1)
40,000
..........
.........
..........
..........
..........
Gain on Sale of Land .............................
..........
(10,000)(F1)
10,000
..........
.........
..........
..........
..........
Dividends Declared—Pepper .................
30,000 ..........
..........
..........
.........
..........
30,000
..........
2,000 ..........
..........
Dividends Declared—Salty ....................

..........
10,000
..........
(CY2)
8,000 .........
Consolidated Income Before Tax ...........
..........
..........
..........
..........
(136,000) ..........
..........
..........
Provision for Income Taxes, 30%...........
..........
..........
(T)
40,800
..........
40,800 ..........
..........
..........
Income Taxes Payable...........................
..........
..........
(DTL)
600
(T)
40,800 .........
..........

..........
(40,200)
DTL ........................................................
..........
..........
..........
(DTL)
600
.........
..........
..........
(600)
0
430,900
430,900 .........
..........
..........
..........
0
Consolidated Net Income ...............................................................................................................................
(95,200) ..........
..........
..........
To NCI (see distribution schedule) .............................................................................................................
5,600
(5,600) ..........
..........
To Controlling Interest (see distribution schedule)......................................................................................
89,600 ..........
(89,600)

..........
(71,100)
Total NCI .............................................................................................................................................................................
(71,100) ...........
Retained Earnings—Controlling Interest, December 31, 20X1 .................................................................................................................
(379,600)
(379,600)
Totals ..........................................................................................................................................................................................................................
0

341


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Ch. 6—Problems

Problem 6-6, Concluded
Subsidiary Salty Company Income Distribution
Gain on sale of land .............. (F1) $10,000

Internally generated income ........

$50,000

Adjusted income .........................
Tax provision (30%) ....................
Net income ..................................
NCI share ....................................
NCI ..............................................

$40,000
12,000
$28,000
× 20%
$ 5,600

Parent Pepper Company Income Distribution
Profit, ending inventory ......... (EI)

$4,000

Internally generated income ........

$100,000

Adjusted income .........................
Tax at 30% ..................................
80% × Salty net income
of $28,000 .............................
Controlling interest ......................

$ 96,000
(28,8
22,400
$ 89,600

Eliminations and Adjustments:
(CY1)
(CY2)

(EL)

Eliminate the current-year subsidiary income against the investment account.
Eliminate parent’s share of subsidiary’s dividends.
Eliminate 80% of the Salty Company equity balances at the beginning of the year
against the investment account.
(D)/(NCI) Allocate the $30,000 excess of cost and $7,500 NCI adjustment over book value to
goodwill.
(IS)
Eliminate intercompany sales of $50,000.
(EI)
Eliminate the $4,000 of gross profit in the ending inventory.
(F1)
Eliminate the $10,000 gain on the sale of land against the land account.
(T)
Record 30% provision for income tax
(DTL)
Goodwill amortization for tax is $30,000 ÷ 15 years = $2,000.
Tax deferral, 30% = $600

342


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Ch. 6—Problems

PROBLEM 6-7
Determination and Distribution of Excess Schedule
Company

Implied
Fair Value
Fair value of subsidiary .....................
$1,112,500
Less book value of interest acquired:
Total equity ............................
800,000
Interest acquired .........................
Book value ........................................
Excess of fair value over book
value............................................
$ 312,500

Parent
Price
(80%)
$890,000

NCI
Value
(20%)
$222,500

$800,000
80%
$640,000

$800,000
20%
$160,000

$250,000

$ 62,500

Adjustment of identifiable accounts:

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

Account Adjustments
to Be Amortized

Worksheet
Adjustment
Key
$200,000 debit D1
112,500 debit D2
$312,500

Life

Buildings ...............................
(A1)
Total amortizations ..........

20

Annual

Amount

Current
Year

Life
20

Prior
Years

$40,000
30,000

Total

Key

$10,000

$10,000

$20,000

$30,000

$10,000

$10,000

$20,000

$30,000

Intercompany Inventory Profit Deferral
Parent
Parent
Parent
Sub
Amount
Percent
Profit
Amount

Beginning ..............................
Ending ...................................

Amortization
per Year
$10,000

50%
50

343

$20,000
15,000

—

—

Sub
Sub
Percent Profit

0%
0

—
—