Solution manual advanced accounting 10e by fischer taylor CH05

PROBLEM 5-2 Patrick Company and Subsidiary Stunt Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X2 Interest Receivable .... Problem 5-2, Concluded

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CHAPTER 5 UNDERSTANDING THE ISSUES

1 The first approach that could be used to

reduce the overall consolidated interest

cost but maintain the subsidiary as the

deb-tor would have the parent advancing

$1,000,000 to the subsidiary so that the

subsidiary may retire the bonds The former

debt is retired, and a new long-term

intercompany debt originates The

inter-company interest expense would be

elimi-nated during the consolidation process

Another approach would have the parent

purchasing the subsidiary bonds from

out-side parties and holding them as an

in-vestment From a consolidated viewpoint,

the debt is retired Therefore, interest

ex-pense would be eliminated during the

con-solidation process

2 At the 10% annual interest rate, a loss on

retirement of bonds will occur in the current

year since the parent paid a premium to

re-tire the subsidiary’s bonds In the current

and future years, consolidated net income

will be increased by the difference between

interest expense and interest revenue This

amount represents the amortization of the

premium paid by the parent At the 13%

annual interest rate, a gain on retirement of

bonds will occur in the current year since

the parent paid a discount to retire the

sub-sidiary’s bonds In the current and future

years, consolidated net income will be

re-duced by the difference between interest

revenue and interest expense This amount

represents the amortization of the discount

paid by the parent to retire the bonds

3 Since Company S was the original issuer of

the bonds, it will absorb the loss that results

in the current year from the parent retiring

the bonds at a premium The noncontrolling

interest will receive its share of this loss In

the current and future years, the

subsidi-ary’s income will be increased by the

differ-ence between interest expense and interest

revenue The noncontrolling interest will

re-ceive its share of this amount

4 In the current year, consolidated net

in-come will include a gain on retirement of bonds of $5,000 ($100,000 – $95,000) In the current and each of the next 4 years, consolidated net income will be reduced by

$1,000 ($5,000 ÷ 5 years), which represents amortization of the discount paid by the parent In the current year, the NCI will receive $1,000 ($5,000 × 20%) of the gain on the retirement of bonds In the current and each of the next 4 years, NCI share of income will be reduced by $200 ($1,000 × 20%)

5 It is true that intercompany operating

leas-es eliminated during the consolidation process will not have an effect on consoli-dated income However, the excessive rent expense amounts will still appear on the subsidiary’s separately stated income statement and will reduce the NCI share of consolidated income The high lease rates will shift income from the NCI to the control-ling interest

6 Either type of lease can shift income to the

controlling interest by incorporating a

high-er than market inthigh-erest rate to calculate the payments In a sales-type lease, the con-trolling interest can shift additional income

by building a profit into the capitalized cost

of the leased asset

7 There is no difference in the consolidated

company’s ability to recognize profit on ing equipment to its subsidiaries or leasing the equipment to its subsidiaries (only if the lease is sales-type) In both cases, the prof-

sell-it is deferred and amortized over the life of the asset or life of the lease The controlling interest has the opportunity to increase its profit by leasing the asset to the subsidiary The lessor can build in an interest rate in excess of its cost of funds

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Ch 5—Exercises

EXERCISES EXERCISE 5-1

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

Marcus could incur new debt and use the proceeds to purchase Patel Industries’ outstanding bonds The bonds would remain as debt on the separate statements of Patel Industries The bonds would also appear as an investment on the books of Marcus The intercompany bonds, however, would be eliminated in the consolidated statements The consolidated income state-ment would show a gain on retirement in the year of the intercompany purchase The NCI would share in the gain, but this would be offset by interest adjustments in future periods

EXERCISE 5-2

(a) (1) The consolidated income statement for 20X3 will include a gain on retirement of the

bonds of $32,000 ($968,000 paid for $1,000,000 debt) The interest expense of $80,000 will be eliminated as will the interest revenue of $84,000 ($80,000 nominal + $4,000 discount amortization) recorded by the parent

(2) The subsidiary income distribution schedule will get the benefit of the retirement gain of

$32,000 in the year the bonds are purchased, but subsidiary income will be reduced each year for the amortization of the purchase discount recorded by the parent ($4,000) The net effect for 20X3 is $28,000 The NCI would receive 20% of this in-crease The balance flows to the controlling interest

(b) (1) The consolidated income statement includes nothing relative to the bonds From a

con-solidated viewpoint, the bonds were retired in the prior period The interest expense recorded by the subsidiary and the interest revenue recorded by the parent are elimi-nated

(2) The income distribution of the subsidiary is reduced by $4,000 for the amortization of the purchase discount recorded by the parent In the end, this adjustment is shared 20% by the NCI and 80% by the controlling interest

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Carrying value of bonds at December 31, 20X5 $ 97,500b

Investment in bonds at December 31, 20X5 101,500a $(4,000) Loss amortized during the year:

Interest revenue eliminated (($100,000 × 9%) – $300) $ 8,700

Interest expense eliminated (($100,000 × 9%) + $500) 9,500 (800)

Loss at January 1, 20X5 $(4,800) a

$101,800 – $100,000 = $1,800 premium at 1/1/X5; $1,800 ÷ 6 years left = $300/yr

amortization; $101,800 – $300 = $101,500 investment balance at 12/31/X5

b

$100,000 – $95,000 = $5,000 discount at 1/1/X1; $5,000 ÷ 10 years = $500/yr

amortization; $500 × 5 years = $2,500

$95,000 + $2,500 = $97,500 book value at 12/31/X5

c$95,000 + ($500 × 4 years) = $97,000 book value at 1/1/X5; $97,000 – $101,800

investment at 1/1/X5 = $4,800 loss (to be amortized at $4,800/6 = $800/yr.)

(2) Eliminations and Adjustments at December 31, 20X6:

Investment in Bonds [$101,800 – ($300 × 2 yrs.)] 101,200

Discount on Bonds Payable ($2,500 balance, 1/1/X6 – $500) 2,000

*$4,800 original loss on 1/1/X5 – $800 amortization in 20X5 = $4,000 unamortized loss on

1/1/X6

Interest Payable 9,000

Interest Receivable 9,000 Loss remaining at year-end:

Carrying value of bonds at December 31, 20X6 $ 98,000

Investment in bonds at December 31, 20X6 101,200 $(3,200) Loss amortized during the year:

Interest revenue eliminated $ 8,700

Interest expense eliminated 9,500 (800)

Loss at January 1, 20X6 $(4,000)

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Ch 5—Exercises

EXERCISE 5-4

Gain on retirement (January 2, 20X6):

Balance on issuer’s books $48,734

Less purchase price (cost to retire bonds) 47,513

Gain on retirement $ 1,221

Schedule of interest adjustments:

Intercompany Interest, Recorded Interest, Interest Expense Year Effective Interest Effective Interest Adjustment to Issuer

Ending on Purchase (10%) on Issuance (9%) Income Distribution Schedule

*Book value of bonds on 1/2/X3 [$101,000 – ($1,000/10 × 2) = $100,800]

An alternative way to calculate the gain:

Gain remaining at year-end:

Carrying value of bonds at December 31, 20X3

(60% × $100,700) $60,420

Investment in bonds at December 31, 20X3 54,400 $6,020 Gain amortized during the year:

Interest expense eliminated 4,140 860

Gain at January 1, 20X3 $6,880

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Exercise 5-5, Concluded (2) Eliminations and Adjustments at December 31, 20X4:

An alternative way to calculate the unamortized gain:

(60% × $100,600) $60,360

Remaining gain at January 1, 20X4 $6,020

EXERCISE 5-6

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

January 2, 20X8 $94,005

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Ch 5—Exercises

Carrying value of bonds at December 31, 20X8 $105,972

Interest expense eliminated $ 8,460

Interest revenue eliminated 7,456 1,004

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EXERCISE 5-7

(1) Asset Under Operating Lease 60,000

Cash 60,000 Depreciation Expense 12,000

Accumulated Depreciation—Asset Under

Operating Lease ($60,000 ÷ 5 years) 12,000 Cash 15,000

Rental Revenue 15,000 (2) Rent Expense 15,000

Cash 15,000 (3) Fixed Asset 60,000

Accumulated Depreciation—Asset Under Operating Lease 12,000

Asset Under Operating Lease 60,000 Accumulated Depreciation 12,000 Rent Revenue 15,000

Rent Expense 15,000

To eliminate the intercompany lease transactions

EXERCISE 5-8

(1)

Lease Payment Amortization Schedule

Interest at 12% on Reduction Principal Date Payment Previous Balance of Principal Balance

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Ch 5—Exercises

Interest Revenue (see amortization schedule) 3,459

Interest Expense 3,459

To eliminate intercompany interest revenue and expense

Obligations Under Capital Lease ($40,822 – $12,000 first payment) 28,822

Unearned Interest Income 3,719

Minimum Lease Payments Receivable 36,000

To eliminate intercompany debt recorded by lessee against

net intercompany receivable of lessor

Property, Plant, and Equipment 40,822

Accumulated Depreciation—Assets Under

Capital Lease ($40,822 ÷ 5 years) 8,164

Assets Under Capital Lease 40,822 Accumulated Depreciation—Property, Plant, and Equipment 8,164

To reclassify asset under capital lease and related

accumulated depreciation as a productive asset owned

by the consolidated entity

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

Interest Revenue (see amortization schedule) 2,434

Interest Expense 2,434

Obligations Under Capital Lease 20,281

Unearned Interest Income 1,285

To eliminate intercompany debt recorded by lessees

against net receivable of lessor

Accumulated Depreciation—Assets Under Capital

Lease (2 × $8,164) 16,328

accumulated depreciation as a productive asset

owned by the consolidated entity

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EXERCISE 5-9

Eliminations and Adjustments at December 31, 20X1:

Interest Income (see amortization schedule) 2,690

Interest Revenue 2,690

Obligations Under Capital Lease 26,904

Unearned Interest Income (see amortization) 4,790

To eliminate intercompany debt recorded by lessee

against net intercompany receivable of lessor

Accumulated Depreciation—Assets Under Capital Lease

($35,000/8 yrs.) 4,375

accumulated depreciation as a productive asset owned

by the consolidated entity Asset is depreciated over

8-year life

Sales Profit on Leases 10,000

To eliminate unrealized profit on intercompany “sale” and

to reduce asset to its cost to the consolidated entity

Accumulated Depreciation—Property, Plant, and Equipment

($10,000/8 yrs.) 1,250

Depreciation Expense 1,250

To reduce depreciation on leased asset to depreciation

based on cost to consolidated entity

Rental Income 1,000

Rent Expense 1,000

To eliminate intercompany rent revenue and

expense due to executory costs on lease

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Ch 5—Problems

PROBLEMS PROBLEM 5-1

(1) Bonds Payable 50,000

Interest Income ($4,500 + $200 amortization) 4,700

Investment in Bonds ($48,400 + $200 amortization) 48,600 Interest Expense 4,500

Gain on Extinguishment of Debt 1,600

(2) Justin Corporation and Subsidiary Drew Corporation

Consolidated Income Statement For Year Ended December 31, 20X6 Sales $3,040,000 Cost of goods sold 1,405,000

Gross profit $1,635,000 Other expenses ($720,000 + $105,000) (825,000)

Gain on debt retirement 1,600

Consolidated net income $ 811,600

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PROBLEM 5-2

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

Interest Receivable 4,000 (B2) 4,000

Other Current Assets 248,200 315,200 563,400 Investment in Stunt Company 351,000 (CV) 45,000 (EL) 360,000

(D) 36,000

Investment in Stunt Bonds 96,800 (B1) 96,800

Land 80,000 60,000 140,000 Buildings and Equipment 400,000 280,000 680,000 Accumulated Depreciation (120,000) (60,000) (180,000) Goodwill (D) 40,000 40,000 Interest Payable (4,000)(B2) 4,000

Other Current Liabilities (98,000) (56,000) (154,000) Bonds Payable (8%) (100,000)(B1) 100,000

Discount on Bonds Payable 4,800 (B1) 4,800

Other Long-Term Liabilities (200,000) (200,000) Common Stock—Patrick (100,000) (100,000) Other Paid-In Capital in Excess of Par—Patrick (200,000) (200,000) Retained Earnings—Patrick (365,000) (CV) 45,000

(B1) 1,620 (408,380)

Common Stock—Stunt (100,000)(EL) 90,000 (10,000)

Other Paid-In Capital in Excess of Par—Stunt (40,000)(EL) 36,000 (4,000)

Retained Earnings—Stunt (260,000)(EL) 234,000

(B1) 180 (NCI) 4,000 (29,820)

Net Sales (640,000) (350,000) (990,000)

Cost of Goods Sold 360,000 200,000 560,000

Operating Expenses 168,400 71,400 239,800

Interest Expense 8,600 (B1) 8,600

Interest Income (8,400) (B1) 8,400

Dividend Income (27,000) (CY2) 27,000

Dividends Declared—Patrick 50,000 50,000

Dividends Declared—Stunt 30,000 (CY2) 27,000 3,000

Total 0 0 586,200 586,200

Consolidated Net Income (190,200)

To NCI (see distribution schedule) 7,020 (7,020)

To Controlling Interest (see distribution schedule) 183,180 (183,180)

Total NCI (47,840) (47,840) Retained Earnings—Controlling Interest, December 31, 20X2 (541,560) (541,560) Totals 0

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Ch 5—Problems

Problem 5-2, Continued

Eliminations and Adjustments:

(CV) Convert to simple equity method as of January 1, 20X2

(CY2) Eliminate the current-year dividend income of parent against dividends declared

by subsidiary

(EL) Eliminate 90% of the subsidiary company equity balances at the beginning of the

year against the investment account

(D)/(NCI) Allocate the $36,000 excess of cost over book and $4,000 NCI adjustment to

goodwill

(B1) Eliminate intercompany interest revenue and expense Eliminate the balance in

the investment in bonds against bonds payable and the discount on bonds ble The loss on retirement at the start of the year is calculated as follows:

paya-Loss remaining at year-end:

Investment in bonds at December 31, 20X2 $96,800

Bonds payable $100,000

Discount on bonds (4,800) 95,200

$1,600 Loss amortized during year:

Interest expense eliminated $ 8,600 Interest revenue eliminated 8,400 200 Remaining loss on January 1, 20X2 $1,800 Amortize loss 90% to controlling interest ($1,620) and 10% to NCI ($180)

(B2) Eliminate $4,000 of intercompany interest receivable and payable

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Problem 5-2, Concluded

Determination and Distribution of Excess Schedule

Fair value of subsidiary $390,000 $351,000 $ 39,000

Less book value of interest acquired:

Total equity 350,000 $350,000 $350,000

Interest acquired 90% 10%

Book value $315,000 $ 35,000

Excess of fair value over book value $ 40,000 $ 36,000 $ 4,000

Adjustment of identifiable accounts:

Goodwill $40,000 debit D

Subsidiary Stunt Company Income Distribution

Internally generated net

Parent Patrick Company Income Distribution

90% × Stunt income of

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Ch 5—Problems

PROBLEM 5-3 Determination and Distribution of Excess Schedule

Fair value of subsidiary $2,125,000 $1,700,000 $ 425,000

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General Appliance and Subsidiary Appliance Outlets Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X6

Cash 401,986 72,625 474,611

Accounts Receivable (net) 752,500 105,000 857,500

Interest Receivable 9,625 (LN2) 9,625

Inventory 1,950,000 900,000 2,850,000 Investment in Appliance Outlets 1,700,000 (CV) 256,000 (EL) 1,756,000

(D) 200,000

Investment in 11% Bonds 256,000 (B) 256,000

Investment in Mortgage 175,000 (LN1) 175,000

Property, Plant, and Equipment 9,000,000 2,950,000 (F1) 27,500 11,922,500 Accumulated Depreciation (1,695,000) (940,000) (F2) 1,375 (2,633,625) Goodwill (D) 250,000 250,000 Accounts Payable (670,000) (80,000) (750,000) Interest Payable (18,333) (9,625)(LN2) 9,625 (18,333) Bonds Payable, 11% (2,000,000) (500,000) (B) 250,000 (2,250,000) Discount on Bonds Payable 10,470 12,000 (B) 6,000 16,470 Mortgage Payable (175,000)(LN1) 175,000

Common Stock ($5 par)— General Appliances (3,200,000) (3,200,000 Paid-In Capital in Excess of Par— General Appliances (4,550,000) (4,550,000 Retained Earnings—General Appliances (1,011,123) (CV) 256,000

(B) 12,000 (1,255,123)

Common Stock ($10 par)—Appliance Outlets (800,000) (EL) 640,000 (160,000)

Paid-In Capital in Excess of Par— Appliance Outlets (625,000) (EL) 500,000 (125,000)

Retained Earnings—Appliance Outlets (770,000) (EL) 616,000 (NCI) 50,000

(B) 3,000 (201,000)

Sales (9,800,000) (3,000,000) (12,800,000)

Gain on Sale of Building (27,500) (F1) 27,500

Interest Income (35,625) (B) 26,000

(LN2) 9,625

Dividend Income (48,000) (CY2) 48,000

Cost of Goods Sold 4,940,000 1,700,000 6,640,000

Depreciation Expense 717,000 95,950 (F2) 1,375 811,575

Interest Expense 223,000 67,544 (B) 29,000

(LN2) 9,625 251,919

Other Expenses 2,600,000 936,506 3,536,506

Dividends Declared 320,000 60,000 (CY2) 48,000 12,000 320,000

0 0 2,824,125 2,824,125

Consolidated Net Income (1,560,000)

To Controlling Interest (see distribution schedule) 1,519,400

(1,519,400)

Total NCI (514,600) (514,600)

Retained Earnings—Controlling Interest, December 31, 20X6 (2,454,523) (2,454,523)

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Ch 5—Problems

Totals 0

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Problem 5-3, Concluded Eliminations and Adjustments:

(CV) Convert investment to equity, 80% × ($770,000 – $450,000) = $256,000

(CY2) Eliminate dividend income

(EL) Eliminate 80% of the subsidiary equity balances

(D)/(NCI) Distribute the excess and the NCI adjustment according to the determination and

dis-tribution of excess schedule

(B) Eliminate intercompany interest revenue and expense Eliminate the balance in the

investment in bonds against the bonds payable The loss on retirement at the start of

the year is calculated as follows:

Loss remaining at year-end:

Net carrying value of bonds at December 31, 20X6 244,000 $12,000

Loss amortized during the year:

Interest revenue eliminated 26,000 3,000

Remaining loss at January 1, 20X6 $15,000

The remaining unamortized loss is allocated 80% to the controlling retained earnings

and 20% to the NCI retained earnings

(F1) Eliminate the intercompany gain on sale of building

(F2) Reduce depreciation expense on the building for one-half year, ($27,500 ÷ 10) × 1/2

(LN1) Eliminate the intercompany mortgage

(LN2) Eliminate the intercompany interest payable and receivable on mortgage Eliminate

the intercompany interest revenue and expense on mortgage, 1/2 × 11% × $175,000

= $9,625

Subsidiary Appliance Outlets Income Distribution

income of $203,000 162,400

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Ch 5—Problems

Intercompany Inventory Profit Deferral

Beginning $15,000 30% $4,500 — 0% —

Ending 20,000 30 6,000 — 0 —

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Problem 5-4, Continued Subsidiary Stack Company Income Distribution Loss on bond retirement $ 2,899 Internally generated net

Buildings depreciation 3,750 income $24,672

Equipment depreciation 12,000 Interest adjustment—bonds 483

Proof for Bond Elimination Loss remaining at year-end:

Carrying value at December 31, 20X5 98,359 $2,416

Interest revenue eliminated 7,845 483

Loss at January 1, 20X5 $2,899

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Ch 5—Problems

Packard Company and Subsidiary Stack Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X5

Cash 71,070 32,031 103,101

Inventory 100,000 30,000 (EI) 6,000 124,000

Land 150,000 45,000 195,000

Investment in Stack 385,738 (CY1) 19,738

(CY2) 8,000

(EL) 196,000

(D) 178,000

Investment in Stack Bonds 100,775 (B) 100,775

Buildings 500,000 250,000 (D1) 75,000 825,000 Accumulated Depreciation (300,000) (70,000) (A1) 7,500 (377,500) Equipment 200,000 120,000 (D2) 60,000 380,000 Accumulated Depreciation (100,000) (84,000) (A2) 24,000 (208,000) Goodwill (D3) 87,500 87,500 Accounts Payable (55,000) (25,000) (IA) 10,000 (70,000) Bonds Payable (100,000) (B) 100,000

Discount (premium) 1,641 (B) 1,641

Common Stock ($10 par)—Stack (10,000) (EL) 8,000 (2,000)

Paid-In Capital in Excess of Par—Stack (90,000) (EL) 72,000 (18,000)

Retained Earnings—Stack (145,000) (EL) 116,000 (NCI) 44,500

(A1–A2) 3,150 (70,350)

Common Stock ($10 par)—Packard (100,000) (100,000) Paid-In Capital in Excess of Par—Packard (600,000) (600,000) Retained Earnings—Packard (400,000) (A1–A2) 12,600

(BI) 4,500 (382,900)

Loss (gain) on bond retirement (B) 2,899 2,899

Sales (600,000) (220,000) (IS) 50,000 (770,000)

Cost of Goods Sold 410,000 120,000 (IS) 50,000

(EI) 6,000 (BI) 4,500 481,500

Depreciation Expense—Buildings 30,000 10,000 (A1) 3,750 43,750

Depreciation Expense—Equipment 15,000 12,000 (A2) 12,000 39,000

Other Expenses 110,000 45,000 155,000

Interest Expense 8,328 (B) 8,328

Interest Revenue (7,845) (B) 7,845

Subsidiary Income (19,738) (CY1) 19,738

Dividends Declared—Stack 10,000 (CY2) 8,000 2,000

Dividends Declared—Packard 20,000 20,000

Totals 0 0 658,982 658,982

Total NCI (89,651) (89,651) Retained Earnings—Controlling Interest, December 31, 20X5 (409,450) (409,450) Totals 0

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(CY1) Current-year subsidiary income

(CY2) Current-year dividend

(EL) Eliminate controlling interest in subsidiary equity

(D)/(NCI) Distribute excess and NCI adjustment

(A1) Amortize excess—buildings

(A2) Amortize excess—equipment

(IS) Eliminate intercompany sale during current period

(IA) Eliminate intercompany unpaid trade accounts

(BI) Defer beginning inventory profit

(EI) Defer ending inventory profit

(B) Eliminate intercompany bonds

to Be Amortized Life Amount Year Years Total Key

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Ch 5—Problems

Problem 5-5, Continued Intercompany Inventory Profit Deferral

Proof for Bond Retirement Loss remaining at year-end:

Carrying value at December 31, 20X6 98,687 $1,933

Interest revenue eliminated 7,845 483

Remaining loss at January 1, 20X6 $2,416

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Packard Company and Subsidiary Stack Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X6

Retained Earnings—Stack (159,672) (EL) 127,738 (NCI) 44,500

(A1–A2) 6,300

Common Stock ($10 par)—Packard (100,000) (100,000)

Retained Earnings—Packard (442,223) (A1–A2) 25,200

Other Expenses 125,000 43,000 168,000

Dividends Declared—Stack 10,000 (CY2) 8,000 2,000

Total NCI (90,932) (90,932)

Retained Earnings—Controlling Interest, December 31, 20X6 (458,559) (458,559)

Totals 0

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Ch 5—Problems

(EL) Eliminate controlling interest in subsidiary equity

(D)/(NCI) Distribute excess and adjust NCI

(A) Amortize excess

(IS) Eliminate intercompany sales during current period

Fair value of subsidiary $500,000 $400,000 $100,000

Common stock ($1 par) $ 10,000

Paid-in capital in excess of par 90,000

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Problem 5-6 Continued

Beginning — 0% — $9,000 25% $2,250

Ending — 0 — 12,000 25 3,000

Subsidiary Spartan Company Income Distribution Amortizations $16,500 Internally generated net

Ending inventory profit 3,000 income $27,324

Interest adjustment, bonds 920 Beginning inventory profit 2,250

Gain on bond retirement 6,833

Parent Postman Company Income Distribution

80% × Sparton adjusted income

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Ch 5—Problems

Postman Company and Subsidiary Spartan Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X5

Retained Earnings—Spartan (120,000) (EL) 96,000 (NCI) 60,000

(A1–A2) 3,300

Common Stock ($1 par)—Postman (100,000) (100,000)

Retained Earnings—Postman (300,000) (A1–A2) 13,200

Other Expenses 140,000 70,000 210,000

Total NCI (101,447) (101,447)

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(EL) Eliminate controlling interest in Sub equity

(A) Amortize excess

Proof for Bond Retirement Gain remaining at year-end:

Carrying value at December 31, 20X5 $102,023

Investment in bonds at December 31, 20X5 96,110 $5,913 Loss amortized during the year:

Gain at January 1, 20X5 $6,833

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Ch 5—Problems

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Problem 5-7 Continued

Beginning — 0% — $12,000 25% $3,000

Ending — 0 — 10,000 25 2,500

Subsidiary Spartan Company Income Distribution Amortizations $16,500 Internally generated net

Ending inventory profit 2,500 income $17,348

Interest adjustment, bonds 998 Beginning inventory profit 3,000

Parent Postman Company Income Distribution

80% × Sparton adjusted income

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Ch 5—Problems

Postman Company and Subsidiary Spartan Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X6

Retained Earnings—Spartan (137,324) (EL) 109,859 (NCI) 60,000

Common Stock ($1 par)—Postman (100,000) (100,000)

Retained Earnings—Postman (475,455) (A1–A2) 26,400

Other Expenses 155,000 80,000 235,000

To NCI (see distribution schedule) 70 (70)

Total NCI (99,518) (99,518)

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(EL) Eliminate controlling interest in Sub equity

(A) Amortize excess

$5,913 = $1,183 NCI portion + $4,730 controlling portion

Proof:

Carrying value at December 31, 2006 $101,675

Investment in bonds at December 31, 2006 96,760 $4,915 Loss amortized during the year:

Remaining gain at January 1, 2006 $5,913

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Ch 5—Problems

PROBLEM 5-8

(1) (a) $14,000 decrease in income The $21,000 gain is eliminated Depreciation expense is

reduced by 1/3 of the gain, $7,000

(b) $10,000 decrease in income The gain on the ending inventory is deferred The profit would be 1/3 × 1/2 × $60,000

(c) $9,000 increase The intercompany bonds are retired on the worksheet which creates a

f – 3 (Shaw’s 10% is included in NCI.)

g – 3 (Shaw’s 10% is included in NCI; however, the NCI may appear in a separate

column of a retained earnings statement.)

h – 3 [Same note as for (g) above.]

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Trang 34

Ch 5—Problems

Princess Company and Subsidiary Sundown Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X6

Common Stock ($10 par)—

Paid-In Capital in Excess of Par—

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(CV) Conversion entry, 90% × ($500,000 – $300,000) = $180,000

(EL) Eliminate pro rata share of subsidiary equity balances against the investment account

(D)/(NCI) Distribute the excess and adjust NCI according to the determination and distribution of

excess schedule

(F1) Reduce machine to cost to consolidated entity Unrecognized gain of $6,000

remain-ing at beginnremain-ing of year is split 90% to controllremain-ing retained earnremain-ings and 10% to NCI

retained earnings

(F2) Reduce current-year depreciation expense due to sale of machine, $10,000 ÷ 5 years

= $2,000

(B) Eliminate intercompany interest revenue and expense Eliminate the balance in the

investment in bonds against the bonds payable The gain on retirement at the start of

the year is calculated as follows:

[($200,000 – $6,345) × ½] $96,827

Interest revenue eliminated ($89,186 × 12%) $10,702

Interest expense eliminated [($200,000 – $7,582) × ½ × 10%] 9,621 1,081 Remaining gain at January 1, 20X6 $7,020 The remaining unamortized gain is allocated 90% to the controlling retained earnings

and 10% to the NCI retained earnings

(IS) Eliminate intercompany merchandise sales

(EI) Eliminate intercompany profit in ending inventory, 30% × $20,000 = $6,000

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Ch 5—Problems

PROBLEM 5-10

Paratec Corporation and Subsidiary Sym Corporation Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X8

Accumulated Depreciation—

Retained Earnings, January 1, 20X8

Consolidated Retained Earnings, December 31, 20X8 (1,967,350) (1,967,350)

Trang 37

Totals 0

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Ch 5—Problems

(CV) Convert to equity method as of January 1, 20X8, 100% × ($310,000 – $150,000)

(EL) Eliminate the parent’s investment in the subsidiary and the subsidiary equity accounts

(D) Establish the goodwill

(CL1) Eliminate the prepaid rent, the deferred rent revenue, and the current-year rent

ex-pense and income

(CL2) Reclassify the equipment under operating lease and its related accumulated

deprecia-tion to the plant and equipment account and related accumulated depreciadeprecia-tion

Buildings 20 $5,000 $5,000 $5,000

$10,000 (A1)

Total amortizations $5,000 $5,000 $5,000 $10,000

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