Solution manual fundamentals of advanced accounting 9e by fischertaylor ch 04

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CHAPTER 4
UNDERSTANDING THE ISSUES
1. The intercompany sale will cause both sales
and costs of goods sold to be overstated by
$40,000 on the consolidated income statement.
The amount remaining in ending inventory will
cause cost of goods sold to be understated by
$2,500 (1/4 × $10,000) on the consolidated income statement and inventory to be overstated
by $2,500 (1/4 × $10,000) on the consolidated
balance sheet.

($50,000 ÷ 5 years) each year for five years.
NCI will realize $2,000 (20% × $10,000) each
year.
5. a. Company S is better off borrowing the
funds from Company P since it will receive
a lower interest rate (9.5% instead of 10%).
Therefore, Company S will have lower annual interest charges.
b. During 20X2, Company P will record interest revenue and Company S will record interest expense of $47,500 ($500,000 ×
9.5%). However, the interest expense and
interest revenue are eliminated during the
consolidation process. Only the $40,000 of
external interest expense remains on the
consolidated statements.
c. Intercompany interest expense and interest
revenue should not appear in the 20X1
consolidated income statement. Only the
external interest expense of $40,000 will
appear in the consolidated income statement.

2. Debit Sales and credit Cost of Goods Sold for
$40,000. Debit Cost of Goods Sold and credit
Inventory for $2,500 (1/4 × $10,000).
3.
NCI
Controlling
Interest
Total profit

20X1
$ 0
0
$

0

20X2
$ 400 ($2,000 × 20%)
5,600 [$4,000 +
($2,000 × 80%)]
$6,000

4. Company S has realized a $50,000 profit; however, it is not immediate. The profit will be
realized over the five-year life of the asset.
Company S will realize the profit by reducing
consolidated depreciation expense by $10,000

187

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Ch. 4—Exercises

EXERCISES
EXERCISE 4-1
Painter Company and Subsidiary Solvent Company
Consolidated Income Statement
For the Year Ended December 31, 20X1
Sales ($250,000 + $500,000 – $100,000) ........................................................
Cost of goods sold [$150,000 + $310,000 – $100,000 + (40% × $20,000)] ......
Gross profit ......................................................................................................
Expenses ($45,000 + $120,000) ......................................................................
Consolidated net income .................................................................................
Distributed to NCI ............................................................................................
Distributed to controlling interest ......................................................................

$

650,000
368,000
$
282,000
165,000
$117,000
$
9,400
$
107,600

Solvent Income Distribution Schedule
Unrealized profit in ending
inventory (40% × $20,000) ......

Internally generated income ..........

$55,000

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

$47,000
× 20%
$ 9,400

$8,000

Painter Income Distribution Schedule
Internally generated income ..........
80% × Solvent’s adjusted
income of $47,000 ...................

$ 70,000

Controlling interest ........................

$107,600

37,600

Painter Company and Subsidiary Solvent Company
Consolidated Income Statement
For the Year Ended December 31, 20X2
Sales ($300,000 + $540,000 – $110,000) ........................................................
Cost of goods sold [$180,000 + $360,000 – $110,000 – (40% × $20,000)
+ (40% × $30,000)] ....................................................................................
Gross profit ......................................................................................................
Expenses ($56,000 + $125,000) ......................................................................
Consolidated net income .................................................................................
Distributed to NCI ............................................................................................
Distributed to controlling interest ......................................................................

188

$

$
$
$
$

730,000
434,000
296,000
181,000
115,000
12,000
103,000

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Ch. 4—Exercises

Exercise 4-1, Concluded
Solvent Income Distribution Schedule
Unrealized profit in ending
inventory (40% × $30,000) ......

$12,000

Internally generated net
income.....................................
Realized profit in beginning
inventory (40% × $20,000) ......

$64,000
8,000

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

$60,000
× 20%
$12,000

Painter Income Distribution Schedule
Internally generated net income ....
80% × Solvent’s adjusted

income of $60,000 ...................

$ 55,000

Controlling interest ........................

$103,000

48,000

EXERCISE 4-2
(1) Gross profit recorded on the separate books:
Gross profit—Hide:
Sales ................................................................................
Gross profit (20% × $400,000) .........................................
Gross profit—Seek:
Sales ................................................................................
Cost of goods sold (80% × $400,000) .............................
Add write-down of ending inventory .................................
Gross profit ......................................................................
(2) Consolidated gross profit:
Sales ................................................................................
Cost of goods sold to consolidated group* .......................
Gross profit ......................................................................
*Cost of goods sold is computed as follows:
Purchases at cost (80% × $400,000) ......................................
Less ending inventory at cost ($80,000 × 80%) .......................
(note that cost is less than market)
Cost of goods sold ...................................................................

189

$400,000
80,000
$416,000
$320,000
10,000
$

330,000
86,000
$416,000
256,000
$160,000

$320,000
64,000
$256,000


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Ch. 4—Exercises

EXERCISE 4-3
Source of income components:

Van

Nick

Sales ......................................................
................................................ (270,000)
Cost of goods sold ..................................

(220,000)

Other income ..........................................
Other expenses ......................................
.................................................... 47,000
Consolidated net income ........................
Distributed to NCI ...................................
Distributed to controlling interest .............

(5,000)
40,000

150,000

Eliminations

(120,000)
90,000
(BI)
(EI)
(S)
12,000

Consolidated
Income
Statement

(IS)

70,000

(IS)
(70,000)
(3,750)
5,000
171,250
5,000
(S)
(5,000)
(51,750)
3,350
(48,400)

Eliminations and Adjustments:
(IS) Elimination of intercompany sales.
(BI) Elimination of 25% profit from beginning inventory; debit would be to Retained Earnings; allocated 80% to the controlling interest and 20% to the NCI.
(EI) Elimination of 25% profit from ending inventory; credit would be to inventory account.
(S) Elimination of consulting services transaction.
Note: The above format and presentation is not to be expected of the student. All that is required is
the final consolidated income statement and its distribution to controlling and noncontrolling interests. This format is presented to aid explanation of the exercise as it shows the sources of
the numbers that determine the income statement. This form will be used for future exercises
and problems to aid the instructor.
Subsidiary Nick Company Income Distribution
Unrealized ending inventory
profit................................... (EI)

$5,000

Internally generated net
income...............................
Realized beginning inventory
profit ..................................
Adjusted income......................
NCI share ................................
NCI ..........................................

$18,000
(BI)

3,750
$16,750
× 20%
$ 3,350

Parent Van Corporation Income Distribution
Internally generated net
income...............................
80% × Nick adjusted income
of $16,750 .........................

190

$35,000
13,400

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Ch. 4—Exercises

Controlling interest ..................

191

$48,400


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Ch. 4—Exercises

EXERCISE 4-4
(1) In the year of sale, eliminate the $15,000 gain on the sale of the machine, and adjust the machine
to its net book value on the date of the sale. Reduce Depreciation Expense and Accumulated Depreciation by $3,000 to reflect depreciation based on the consolidated book value.
For 20X3 to 20X6, eliminate unamortized gain as reflected in Jungle’s beginning retained earnings.
Adjust Machinery to reflect book value on the date of the sale.
(2) Gain on Sale of Machinery ......................................................
Machinery ..........................................................................

15,000

Accumulated Depreciation .......................................................
Depreciation Expense ........................................................

3,000

(3) Retained Earnings—Jungle Company .....................................
Accumulated Depreciation .......................................................

Machinery ..........................................................................

12,000
3,000

Accumulated Depreciation .......................................................
Depreciation Expense ........................................................

3,000

15,000
3,000

15,000
3,000

EXERCISE 4-5
(1) Gain on Sale of Land ...............................................................
Gain on Building ......................................................................
Land ..................................................................................
Building ..............................................................................
To defer unrealized gain on sale of land and
on building and reduce the assets to the cost
to the consolidated entity.

50,000
150,000

(2) Retained Earnings—Sayner* ...................................................
Retained Earnings—Wavemasters** .......................................

Accumulated Depreciation ($150,000 ÷ 20 years) ...................
Building ..............................................................................
Land ..................................................................................

38,500
154,000
7,500

50,000
150,000

150,000
50,000

*[$50,000 land + (19 ÷ 20 × $150,000 on building)] × 20%
**$192,500 × 80%
Accumulated Depreciation .......................................................
Depreciation Expense ........................................................

192

7,500
7,500


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Ch. 4—Exercises

EXERCISE 4-6

Sales ......................................................
................................................ (920,000)
Cost of goods sold ..................................
...................................................590,000
Other expenses ......................................

Dark
Light
Eliminations
(700,000) (280,000)
(F1)

Other income ..........................................
Consolidated net income ........................
Distributed to NCI ...................................
Distributed to controlling interest .............

450,000
180,000

190,000
70,000
(F2b)

Consolidated
Income
Statement
60,000

(F1)

(50,000)

(F2a)
(4,000)

(2,000)
244,000
(20,000)
(106,000)
(1,200)
(104,800)

(20,000)

Eliminations and Adjustments:
(F1)
Eliminate the gain on the intercompany machine sale. The machine account is credited for
the $10,000 gain.
(F2a)
Reduce Machine Depreciation Expense to reflect depreciation based on the consolidated
book value of the asset ($10,000 profit ÷ 5 years = $2,000 per year). The debit is to Accumulated Depreciation.
(F2b)
Reduce Building Depreciation Expense to reflect depreciation based on the consolidated
book value of the asset ($80,000 profit ÷ 20 years = $4,000 per year). The debit is to Accumulated Depreciation.

Subsidiary Light Company Income Distribution
Unrealized gain on sale
of machine ......................... (F1)

$10,000

Internally generated net
income...............................
Realized gain through use
of machine .........................
Adjusted income......................
NCI share ................................
NCI ..........................................

$20,000
(F2a)

2,000
$12,000
× 10%
$ 1,200

Parent Dark Company Income Distribution
Internally generated net
income...............................
$ 90,000
Gain realized on use of building
sold to subsidiary ............... (F2b)
4,000
90% × Light adjusted
income of $12,000 .............
10,800
Controlling interest ..................

193

$104,800


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Ch. 4—Exercises

EXERCISE 4-7
20X1
Subsidiary Sandbar Company Income Distribution
Unrealized profit in ending
inventory (40% × $15,000) ......

$6,000

Internally generated net
income.....................................

$250,000

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

$244,000
×
20%
$ 48,800

Parent Peninsula Company Income Distribution
Gain on sale of real
estate ......................................

$200,000

Internally generated net
income.....................................
Realized gain on use of
sold real estate
[(80% × $200,000)/20] .............
80% × Sandbar adjusted
income of $244,000 .................
Controlling interest ........................

$520,000

8,000
195,200
$523,200

20X2
Subsidiary Sandbar Company Income Distribution
Unrealized profit in ending
inventory (40% × $20,000) ......

$8,000

Internally generated net
income.....................................

Realized profit in beginning
inventory ..................................
Adjusted income............................
Minority share................................
Minority interest .............................

$235,000
6,000
$233,000
×
20%
$ 46,600

Parent Peninsula Company Income Distribution
Internally generated net
income.....................................
Realized gain on use of
sold real estate ........................
80% × Sandbar adjusted
income of $233,000 .................
Controlling interest ..................

194

$340,000
8,000
186,400
$534,400

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Ch. 4—Exercises

EXERCISE 4-8
(1)

Saratoga
Notes Receivable ...........
Cash ..........................
To record receipt
of note on May 1,
20X3.
Accrued Interest
Receivable ...................
Interest Revenue ........
Year-end interest
accrual.

Windsor
50,000

Cash .................................
Notes Payable ..............
To record receipt
of cash on May 1,
20X3.

50,000

Interest Expense ..............

Accrued Interest
2,000
Payable .....................
Year-end interest
accrual.

2,000

50,000

2,000*

50,000

2,000

*$50,000 × 6% × 8/12
(2) Eliminations:
LN1

LN2

Notes Payable ...............................................................
Accrued Interest Payable...............................................
Notes Receivable.....................................................
Accrued Interest Receivable ....................................
To eliminate intercompany note and accrued
interest applicable to the note.

50,000

2,000

Interest Revenue ...........................................................
Interest Expense ......................................................
To eliminate intercompany interest revenue
and expense.

2,000

50,000
2,000

2,000

EXERCISE 4-9
(1)

Saratoga
May

July

July

1

1

1

Notes Receivable................................................................
Cash...............................................................................
To record receipt of note.
Accrued Interest Receivable ...............................................
Interest Revenue ............................................................
To accrue interest for two months
(6% × $50,000 × 2/12).
Interest Expense (loss on discounting) ...............................
Cash ...................................................................................
Notes Receivable ...........................................................
Accrued Interest Receivable ...........................................
To record proceeds of discounting note at 8%.
(See schedule of computation of proceeds.)

195

50,000
50,000
500
500

1,033
49,467
50,000
500


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Ch. 4—Exercises

Exercise 4-9, Concluded

Apr.

1

June 30

Windsor
Cash ...................................................................................
Notes Payable ................................................................
To record receipt of cash.

50,000
50,000

Interest Expense .................................................................
Interest Payable .............................................................
To record year-end accrual
(6% × $50,000 × 8/12).

2,000
2,000

Computation of Proceeds
Principal of note ....................................................................
Interest due at maturity, 6% × $50,000 ..................................
Total maturity value ...............................................................
Less maturity value multiplied by 8% discount rate
for 10/12 of period .........................................................

Net proceeds of note .............................................................

$50,000
3,000
$53,000
3,533
$49,467

(2) Eliminations:
LN1

LN2

Notes Receivable Discounted ........................................
Notes Receivable.....................................................
To eliminate intercompany note and reclassify
the discounted note receivable as a note
payable at its face value.
Interest Revenue ...........................................................
Interest Expense ......................................................
To eliminate intercompany interest prior to the
discounting.

196

50,000
50,000

500
500

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Ch. 4—Problems

PROBLEMS
PROBLEM 4-1
Plaid Corporation and Subsidiary Solid Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X1

Cash...........................................................
Accounts Receivable..................................
Inventory ....................................................
Property, Plant, and Equipment (net) .........
Investment in Solid Company ....................
Accounts Payable ......................................
Common Stock ($10 par)—Plaid................
Paid-In Capital in Excess of Par—Plaid .....
Retained Earnings—Plaid ..........................

Eliminations
Consolidated
Controlling
Consolidated
Trial Balance
and Adjustments
Income
Retained
Balance

Plaid
Solid
Dr.
Cr.
Statement
Earnings
Sheet
810,000
170,000
.................
.................
.................
.................
425,000
365,000
.................
(IA)
25,000 ......
.................
600,000
275,000
.................
(EI)
30,000 ......
.................
4,000,000
2,300,000
(D)
400,000 (A)
............. 40,000 .................

3,410,000 ..........
.................
(CY1) 210,000 .................
.................
.................
.................
.................
.................
(EL)
2,800,000 ..........
.................
.................
.................
.................
.................
(D)
400,000 .................
.................
.................
(35,000)
(100,000)
(IA)
25,000 ......
.................
.................
(1,000,000) .........
.................
.................
.................
.................

(1,500,000) .........
.................
.................
.................
.................
(5,500,000) .........
.................
.................
.................
(5,500,000) .........

Common Stock ($10 par)—Solid................
Paid-In Capital in Excess of Par—Solid .....
Retained Earnings—Solid ..........................
Sales ..........................................................
Cost of Goods Sold ....................................
Other Expenses .........................................
Subsidiary Income......................................

980,000
765,000
845,000

(1,000,00
(1,500,00

.................
(400,000)
(EL)
400,000 .............

.................
.................
.................
.................
(200,000)
(EL)
200,000 .............
.................
.................
.................
.................
(2,200,000)
(EL)
2,200,000 .
.................
.................
.................
(12,000,000)
(1,000,000) (IS)
400,000 ....
............ (12,600,000).........
7,000,000
750,000
(EI)
30,000 (IS)
400,000 ............... 7,380,000 ..........
4,000,000
40,000
(A)
40,000 ......

............... 4,080,000 ..........
(210,000)
(CY1) 210,000
.................
.................
.................
.................
0
0
3,905,000
3,905,000...
.................
.................
Consolidated Net Income .............................................................................................................................................
(1,140,000)
(1,140,000) .........
Retained Earnings—Controlling Interest, December 31, 20X1 .............................................................................................................
(6,640,000)
(6,640,000)
0

197


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Ch. 4—Problems

Problem 4-1, Concluded

Determination and Distribution of Excess Schedule

Price paid for investment .............................
Less book value of interest acquired:
Common stock ($10 par) ......................
Paid-in capital in excess of par .............
Retained earnings ................................
Total stockholders’ equity ..............
Interest acquired ..................................

$3,200,000
$ 400,000
200,000
2,200,000
$2,800,000
×
100% 2,800,000

Amortization
Periods
Amortization
$ 400,000 Dr.
10
$40,000

Equipment ............................................

Eliminations and Adjustments:
(CY1)
Eliminate the entry recording the parent’s share (100%) of the subsidiary’s net income.
(EL)
Eliminate the subsidiary’s equity balances.

(D)
Distribute excess to equipment.
(A)
Increase depreciation expense.
(IS)
Eliminate the intercompany sale of $400,000.
(IA)
Eliminate the intercompany trade balances of $25,000.
(EI)
Eliminate the intercompany profit (30%) applicable to $100,000 ($400,000 – $300,000)
of intercompany goods in Plaid’s ending inventory.
Note: An income distribution schedule is not needed because all income goes to the 100% controlling interest.

198


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Ch. 4—Problems

PROBLEM 4-2
(1)

Baxter Corporation and Subsidiary Crystal Company
Worksheet for Consolidated Financial Statements
For Year Ended March 31, 20X3
Eliminations
and Adjustments

Trial Balance
Baxter

Crystal
Cash ..............................................................
......................................................... 260,500
Accounts Receivable (net) ............................
......................................................................
Inventory .......................................................
......................................................................
Investment in Crystal Company ....................
......................................................................
Land ..............................................................
...................................................... 1,231,000
Building and Equipment ................................
...................................................... 2,250,000
Accumulated Depreciation ............................
.................................................... (1,150,000)
Goodwill ........................................................
......................................................... 165,000
Accounts Payable..........................................
......................................................................
Bonds Payable ..............................................
....................................................... (400,000)
Common Stock—Baxter ................................
....................................................... (250,000)
Paid-In Capital in Excess of Par—Baxter ......
.................................................... (1,250,000)
Retained Earnings, April 1, 20X2—Baxter ....
Common Stock—Crystal ...............................
......................................................................
Paid-In Capital in Excess of Par—Crystal .....
......................................................................

Retained Earnings, April 1, 20X2—Crystal....
......................................................................

Dr.

Cr.

Consolidated
Income
Statement

NCI

Controlling
Retained
Earnings

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

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

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

............. 10,000 ...............

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

216,200

44,300 ...............

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

290,000

97,000 ...............

(IAP)

................. .................
372,000
310,000

.................
80,000 ...............

................. .................
425,000 .............

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

................. .................
1,081,000

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

(IAS)

5,000 ...............

(EIS)
32,000

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

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

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

(EIP)

............... 1,320 ...............

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

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

750
(EL)

.................
.................
........... 352,000 ...............

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

387,930

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

105,000 ...............
.................
.................

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

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

400,000 .............

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

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

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

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

(210,000) ...........

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

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

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

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

105,000 ...............

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

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

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

(106,300) (IAP)

10,000 ......

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

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

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

(IAS)

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

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

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

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

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

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

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

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

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

(250,000) ............

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

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

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

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

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

(1,250,000) .....

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

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

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

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

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

(1,105,000) .....
.................
(CV)
................. ................. (BIP)
1,350
.................
................. ................. (BIS)
560
.................
.................
(200,000) (EL)
160,000 ...............

32,000 ......
.................
.................
.................

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

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

.................
(1,135,090)........
............ (40,000) ..............

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

(100,000)

(EL)

80,000 .................

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

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

(140,000)

(EL)

112,000 ...............

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

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

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

1,850,000
(940,000)

60,000 .............
(242,200)
................. .................
(333,500)
(400,000) ............

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

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

(D)

(BIS)

(D)

Consolidated
Balance
Sheet

5,000

140

199

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

............ (20,000) ..............
.................

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

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

(27,860) ...............

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


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Ch. 4—Problems
Sales .............................................................
......................................................................

(880,000)
.................

Dividend Income from Crystal .......................
Cost of Goods Sold .......................................
......................................................................

Other Expenses ............................................
......................................................................
Dividends Declared .......................................
........................................................... 25,000

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

(24,000) ............

704,000
................. .................
................. .................
................. .................
130,000
25,000

(630,000) (ISP)

32,000 ......

(ISS)

30,000

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

(CY2) 24,000
504,000
(EIP)

.................
1,320 (BIP)

(EIS)

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

(CY2)

0
0
594,120
Consolidated Net Income ........................................................................................................................................

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

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

(1,448,000)

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

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

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

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

.................
..................
.................
..................
1,146,020 .
..................
........... 211,000 ................

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

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

.................
.................
............... 1,350 ...............

750 (ISP)
32,000 ...............
................. (BIS)
700
.................
................. (ISS)
30,000
81,000 .......... (A)
.................
30,000 ...............

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

............. 24,000
594,120 ....
.................
90,980 ...............

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

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

To NCI (see distribution schedule) ..........................................................................................................................
8,990
(8,990) .....
.................
To Controlling Interest (see distribution schedule) ..................................................................................................
81,990 ...............
(81,990) ....
Total NCI ........................................................................................................................................................................................
(90,850) ..............
.......................................................................................................................................................................................... (90,850)
Retained Earnings—Controlling Interest, March 31, 20X3 ....................................................................................................................................
(1,192,080)
............................................................................................................................................................................................................ (1,192,080)
0

200


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Ch. 4—Problems

Problem 4-2, Continued
Eliminations and Adjustments:
(CV)
Convert to equity method:
Change in equity × 80% = $40,000 × 80% = $32,000.
(CY2)

Eliminate intercompany dividends.
(EL)
Eliminate parent’s share of subsidiary equity.
(D)
Distribute excess to goodwill, according to determination and distribution of excess
schedule.
(BIP)
Eliminate intercompany profit from beginning inventory on sales from Baxter to Crystal,
$9,000 × 15% = $1,350.
(ISP)
Eliminate sales from Baxter to Crystal from April 20X2–March 20X3 ($32,000).
(EIP)
Eliminate intercompany profit from ending inventory on sales from Baxter to Crystal,
$6,000 × 22% = $1,320.
(IAP)
Eliminate intercompany trade balances on sales from Baxter to Crystal.
(BIS)
Eliminate intercompany profit from beginning inventory on sales from Crystal to Baxter,
$3,500 × 20% = $700.
(ISS)
Eliminate sales from Crystal to Baxter.
(EIS)
Eliminate intercompany profit from ending inventory on sales from Crystal to Baxter,
$3,000 × 25% = $750.
(IAS)
Eliminate intercompany trade balances on sales from Crystal to Baxter.

Determination and Distribution of Excess Schedule
Price paid......................................................................................
Less interest acquired:

Total stockholders’ equity ......................................................
Interest acquired ...................................................................
Goodwill ........................................................................................

$425,000
$400,000
×
80%

320,000
$105,000Dr.

Subsidiary Crystal Company Income Distribution
Unrealized profit in ending
inventory .................................

$750

Internally generated net
income.....................................
Realized profit in beginning
inventory ..................................
Adjusted income............................
NCI share ......................................
NCI ................................................

201

$45,000
700

$44,950
× 20%
$ 8,990


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Ch. 4—Problems

Problem 4-2, Concluded
Parent Baxter Corporation Income Distribution
Unrealized profit in ending
inventory .................................

$1,320

Internally generated net
income.....................................
Realized profit in beginning
inventory ..................................
80% × Crystal adjusted
income of $44,950 ...................
Controlling interest ..................

(2)

$46,000
1,350
35,960
$81,990

Baxter Corporation and Subsidiary Crystal Company
Consolidated Income Statement
For Year Ended March 31, 20X3
Sales ..........................................................................................................
Cost of goods sold .....................................................................................
Gross profit ................................................................................................
Expenses ...................................................................................................
Consolidated net income............................................................................
Distributed to NCI.......................................................................................
Distributed to controlling interest ................................................................

$
$
$

$1,448,000
1,146,020
301,980
211,000
90,980
8,990
81,990

PROBLEM 4-3

(1)

Intercompany Merchandise Sales

Common Information:

Ownership interest ...........................................................................................
Price paid (including direct acquisition costs) ...................................................
Year of consolidation (1 = year of purchase) ....................................................

202

70%
$350,000
2


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Ch. 4—Problems

Problem 4-3, Continued
Spider Corporation’s Balance Sheet before Purchase
Book
Value

Fair
Value

Book
Value

Life

Priority assets:
Accounts receivable ....................
60,000 60,0001

Accounts payable ........
Inventory .....................................
40,000
40,000 1 Bonds payable ..........
Total priority assets ............... 100,000 100,000
Total liabilities ........
Nonpriority assets:
Land ............................................
Buildings ......................................
Accumulated depreciation ...........
Equipment ...................................
Accumulated depreciation ...........
Total nonpriority assets .........
Existing goodwill ..........................
Total assets ...............................

Fair
Value

Life

40,000 40,0001
100,000 100,0005
140,000 140,000

60,000 60,000—
200,000 300,00020
(50,000)
72,000 100,0005
(30,000)

252,000 460,000

Stockholders’ equity:
Common stock, $1 par
Paid-in capital in
excess of par ............
Retained earnings ....
Total equity ...............

90,000
112,000
212,000

352,000 560,000

Value of net assets ....

212,000 420,000

10,000

Intercompany Merchandise Information
Parent
Sales

Parent
Percent

Subsidiary
Subsidiary

Sales
Percent
$30,000
6,000
8,000
25%
6,000
30%

Current-year sales .................................
Unpaid account balance, year-end.........
Beginning inventory ...............................
Ending inventory ....................................

Group
Total

Zone Analysis
Priority accounts ...............................
Nonpriority accounts .........................

$

(40,000)
460,000

Ownership
Portion
$

(28,000)
322,000

Cumulative
Total
$

(28,000)
294,000

Price Analysis
Price ...................................................................................
Assign to priority accounts ..................................................
Assign to nonpriority accounts ............................................
Goodwill ..............................................................................

203

$350,000
(28,000)
322,000
56,000

full value
full value


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Ch. 4—Problems

Problem 4-3, Continued
Determination and Distribution of Excess Schedule
Price paid for investment .............................
Less book value interest acquired:
Common stock .....................................
Paid-in capital in excess of par .............
Retained earnings ................................
Total equity....................................
Interest acquired ..................................
Excess of cost over book value (debit) .........

$350,000
$ 10,000
90,000
112,000
$212,000
×
70%

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

(2)

148,400
$201,600
$105,000
40,600

56,000
$201,600

20 debit D1
5 debit D2
debit D3

Amortization
$5,250
8,120

Amortization Schedules
Year of Consolidation
2
Annual
Current
Life
Amount
Year

Account Adjustments
To Be Amortized
Buildings ...........................................
Equipment ........................................
Total amortizations .......................

20
5

$

5,250 $
8,120
$13,370

Prior
Years

5,250 $
8,120
$13,370

Total

5,250
8,120
$13,370

Key

$10,500 A1
16,240 A2
$26,740

Intercompany inventory profit deferral:

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

Parent

Amount

Parent
Percent

Parent
Profit

Sub.
Amount

Sub.
Percent

Sub.
Profit

—
—

0%
0%

—
—

$8,000
6,000

25%

30%

$2,000
1,800

Subsidiary Spider Income Distribution
Ending inventory profit ..................

$1,800

Internally generated net
income.....................................
Beginning inventory profit ..............

$20,000
2,000

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

$20,200
× 30%
$ 6,060

204


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Ch. 4—Problems

Problem 4-3, Continued
Parent Panther Income Distribution
Buildings depreciation ...................
Equipment depreciation ................

$5,250
8,120

Internally generated net
income.....................................
70% share of Spider adjusted
income of $20,200 ...................
Controlling interest ..................

205

$165,000
14,140
$165,770


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Ch. 4—Problems

Problem 4-3, Continued
Year of Consolidation
Trial Balance
Panther
Spider

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

Buildings........................................................
Accumulated Depreciation ............................
....................................................... (295,500)
Equipment .....................................................
Accumulated Depreciation ............................
....................................................... (152,240)
Goodwill ........................................................
Accounts Payable..........................................
....................................................... (156,000)
Bonds Payable ..............................................
....................................................... (100,000)
Discount (premium) .......................................
Common Stock—Spider ................................
Paid-In Capital in Excess of Par—Spider ......
......................................................................
Retained Earnings—Spider ...........................
......................................................................
Common Stock—Panther..............................
....................................................... (100,000)
Paid-In Capital in Excess of Par—Panther ....
....................................................... (800,000)
Retained Earnings—Panther.........................
Sales .............................................................
......................................................................

Cost of Goods Sold .......................................
Depreciation Expense—Buildings .................
Depreciation Expense—Equipment ..............
Other Expenses ............................................
Interest Expense ...........................................
Subsidiary Income .........................................
......................................................................
Dividends Declared—Spider .........................

2

Eliminations
Dr.

116,000
132,000
90,000
45,000
120,000
56,000
100,000
60,000
378,000
.............
..............
.............
..............
.............
..............
.............

800,000
200,000
(220,000)

..............
..............
..............
..............
..............
(CY2)
7,000
..............
..............
(D1) 105,000
(65,000) ...........

150,000
72,000
(90,000)
..............
.............
(60,000)

Cr.

Consolidated
Net
Income

NCI

Controlling
Retained
Earnings

Consolidated
Balance
Sheet

..............
6,000
1,800
..............
(CY1) 14,000
..............
(EL) 169,400
(D)
201,600
..............
(A1)

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

...... 10,500

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

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

248,000
129,000
174,200
160,000
................ .
.................

.................
.................
1,105,000

(D2)
40,600
(46,000) ...........

..............
(A2)

................ .
...... 16,240

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

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

262,600

(D3)
56,000
(102,000) (IA)

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

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

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

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

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

56,000

(IA)
(EI)

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

(100,000)

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

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

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

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

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

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

.............
(10,000)
(90,000)

..............
(EL)
(EL)

..............
7,000 ..............
63,000 .............

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

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

..............
(3,000)...
(27,000)

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

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

(142,000)

(EL)

99,400 .............

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

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

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

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

600
..............

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

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

(42,000) ..............
.............
..............

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

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

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

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

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

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

(A1–A2)13,370
1,400
..............
(350,000) (IS)

..............
..............
..............
30,000 ...

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

.............
.............
.............
(1,120,000)

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

.................
(310,230)...............
..............
.................

..............
.............
(100,000) ............

(BI)

(800,000) ............
(325,000) ............
..............
.............
..............
.............
(800,000)
450,000
208,500
..............
.............
30,000
7,500
15,000
8,000
140,000
98,000
..............
8,000

(14,000) ............
..............

10,000

(BI)

(EI)
(A1)
(A2)

..............
1,800
5,250
8,120
..............
..............
(CY1)

(IS)
(BI)

30,000
2,000
..............
..............
..............
..............
14,000 .............

.................
628,300
42,750
31,120
238,000
8,000
.................

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

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

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

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

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

(CY2)

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

3,000

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

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

206

7,000


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Ch. 4—Problems
Dividends Declared—Panther .......................
20,000
.............
..............
..............
.................
.............
20,000
.................

Totals .........................................................
0
0
458,540
458,540
.................
.............
..............
.................
Consolidated Net Income ........................................................................................................................................
(171,830) .............
..............
.................
NCI Share ...............................................................................................................................................................
6,060
(6,060) ..............
.................
Controlling Share ....................................................................................................................................................
165,770 .............
(165,770)...............
NCI .................................................................................................................................................................................................
(75,060) .............
(75,060)
Controlling Retained Earnings ...............................................................................................................................................................................
(456,000)
(456,000)
Totals ........................................................................................................................................................................................................................................
0

207

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Ch. 4—Problems

Problem 4-3, Concluded
Eliminations and Adjustments:
(CY1)
Current-year subsidiary income.
(CY2)
Current-year dividend.
(EL)
Eliminate controlling interest in subsidiary equity.
(D)
Distribute excess.
(A)
Amortize excess.
(IS)
Eliminate intercompany sales during current period.
(IA)
Eliminate intercompany unpaid trade accounts.
(BI)
Defer beginning inventory profit.
(EI)
Defer ending inventory profit.

PROBLEM 4-4
(1)

Intercompany Merchandise Sales

Common Information:
Ownership interest ...........................................................................................
Price paid (including direct acquisition costs) ...................................................
Year of consolidation (1 = year of purchase) ....................................................

70%
$350,000
2

Acquired Company's Balance Sheet before Purchase
Book
Value
Priority assets:
Accounts receivable ...............
Inventory .................................
Total priority assets ..........
Nonpriority assets:
Land ........................................
Buildings .................................
Accumulated depreciation ......
Equipment ..............................
Accumulated depreciation ......
Total nonpriority assets ...
Existing goodwill .....................
Total assets ...........................

Fair
Value

60,000

40,000
100,000
60,000
200,000
(50,000)
72,000
(30,000)
252,000
352,000

Book
Value

Life

60,0001
Accounts payable .........
40,000 1 Bonds payable .......
100,000
Total liabilities .........
60,000— Stockholders’ equity:
300,00020 Common stock, $1 par .
Paid-in capital in
100,0005
excess of par .............
Retained earnings .....
460,000
Total equity ................

560,000

Value of net assets .....

Fair
Value

Life

40,000 40,0001
100,000 100,0005
140,000 140,000

10,000
90,000
112,000
212,000
212,000 420,000

Intercompany Merchandise Information

Current-year sales ..................................
Unpaid account balance, year-end .........
Beginning inventory ................................
Ending inventory .....................................

Parent
Sales
$60,000
12,000
15,000

22,000

208

Parent
Percent

40%
35%

Subsidiary
Sales
$40,000
11,000
10,000
6,000

Subsidiary
Percent

25%
30%


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Ch. 4—Problems

Problem 4-4, Continued
Group
Total

Zone Analysis
Priority accounts ...............................
Nonpriority accounts .........................

$

Ownership
Portion

(40,000)
460,000

$

Cumulative
Total

(28,000)
322,000

$

(28,000)
294,000

Price Analysis
Price ...................................................................................
Assign to priority accounts ..................................................
Assign to nonpriority accounts ............................................

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

$350,000
(28,000) full value
322,000 full value
56,000

Determination and Distribution of Excess Schedule
Price paid for investment .............................
Less book value interest acquired:
Common stock .....................................
Paid-in capital in excess of par .............
Retained earnings ................................
Total equity....................................
Interest acquired ..................................
Excess of cost over book value (debit) .........

$350,000
$ 10,000
90,000
112,000
$212,000
×
70%

Buildings ......................................................
Equipment ...................................................
Goodwill .......................................................
Total adjustments...................................
(2)

148,400
$201,600

Amortization
Periods
20 debit D1
5 debit D2
debit D3

$105,000
40,600
56,000
$201,600

Amortization Schedules
Year of Consolidation 2
Annual
Current
Life
Amount
Year

Account Adjustments
To Be Amortized
Buildings ...............................
$10,500 ........................ A1
Equipment ............................
A2
Total amortizations ...........

20

$

5,250

5

$

Prior
Years

Total

5,250 $

8,120
$13,370

Amortization
$5,250
8,120

8,120
$13,370

Key

5,250
8,120

$13,370

16,240
$26,740

Intercompany inventory profit deferral:
Parent
Amount
Beginning..............................
Ending ..................................

Parent
Percent

$15,000 40%
22,000 35%

209

Parent
Profit
$6,000
7,700

Sub.
Amount

Sub.
Percent

$10,000 25%
6,000 30%

Sub.
Profit
$2,500
1,800


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Ch. 4—Problems

Problem 4-4, Continued
Subsidiary Spider Income Distribution
Ending inventory profit ..................

$1,800

Internally generated net
income.....................................
Beginning inventory profit ..............

$20,000
2,500

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

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

$20,700
× 30%
$ 6,210

Parent Panther Income Distribution
Buildings depreciation ...................
Equipment depreciation ................
Ending inventory profit ..................

$5,250
8,120
7,700

Internally generated net
income.....................................
70% share of Spider adjusted
income of $20,700 ...................
Beginning inventory profit ..............
Controlling interest ..................

210

$165,000
14,490
6,000
$164,420

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Ch. 4—Problems

Problem 4-4, Continued
Year of Consolidation

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

Buildings........................................................
Accumulated Depreciation ............................
....................................................... (295,500)
Equipment .....................................................
Accumulated Depreciation ............................
....................................................... (152,240)
Goodwill ........................................................
Accounts Payable..........................................
....................................................... (139,000)
Bonds Payable ..............................................
....................................................... (100,000)
Discount (premium) .......................................
Common Stock—Spider ................................
Paid-In Capital in Excess of Par—Spider ......
......................................................................
Retained Earnings—Spider ...........................
......................................................................
Common Stock—Panther..............................

....................................................... (100,000)
Paid-In Capital in Excess of Par—Panther ....
....................................................... (800,000)
Retained Earnings—Panther.........................
Sales .............................................................
......................................................................
Cost of Goods Sold .......................................
Depreciation Expense—Buildings .................
Depreciation Expense—Equipment ..............
Other Expenses ............................................
Interest Expense ...........................................
Subsidiary Income .........................................
Dividends Declared—Spider .........................
Dividends Declared—Panther .......................

2

.................
.................
.................
.................
.................
.................
.................
.................
.................
...... 10,500

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

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

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

.................
(A2)

.................
...... 16,240

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

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

262,600

.................
23,000 ......

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

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

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

56,000

Trial Balance
Eliminations
Panther
Spider
Dr.
Cr.
116,000
132,000

.................
.................
90,000
45,000
................. (IA)
23,000
120,000
56,000
................. (EI)
9,500
100,000
60,000
.................
.................
378,000 .................
................. (CY1)
14,000
................. ................. (CY2)
7,000
.................
................. .................
................. (EL)
169,400
................. .................
................. (D)
201,600
800,000
200,000 (D1)
105,000
.................

(220,000)
(65,000) .............
(A1)
150,000
72,000 (D2)
40,600
(90,000)
(46,000) .............
................. .................
(60,000)

(D3)
56,000
(102,000)
(IA)

Consolidated
Net

Income

Consolidated
Balance
Sheet
248,000
112,000
166,500
160,000
.................
.................

.................
.................
1,105,000

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

(100,000)

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

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

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

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

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

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

.................
(10,000)
(90,000)

.................
(EL)
(EL)

.................
7,000 .................
63,000 .................

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

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

..................
(3,000) ......
.... (27,000)

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

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

(142,000)

(EL)

99,400 .................

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

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

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

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

750
.................

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

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

(41,850) ...............
.................
..................

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

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

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

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

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

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

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

.................
.................
100,000 ....

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

.................
.................
.................
(1,050,000)

..................
.................
..................
.................
(303,880)...............
..................
.................

450,000
208,500
................. (IS)
100,000
................. ................. (EI)
9,500 (BI)
8,500
30,000
7,500 (A1)

5,250
.................
15,000
8,000 (A2)
8,120
.................
140,000
98,000
.................
.................
.................
8,000
.................
.................
(14,000) ............
(CY1)14,000
.................
.................
10,000
................. (CY2)
7,000
20,000 .................
.................
.................

.................
559,500
42,750
31,120
238,000

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

.................
.................
.................
.................
.................
.................
.................
3,000
.................

..................
..................
..................
..................
..................
..................
..................
..................
20,000

................. .................
(100,000) ............

(BI)

(800,000) ............
(325,000) ............
................. .................
................. .................
(800,000)

(A1–A2)13,370
7,750
.................
(350,000)
(IS)
(BI)

211

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