Solution manual advanced accounting 10e by fischer taylor CH06

EXERCISE 6-1 Determination and Distribution of Excess Schedule, Investment in Rocket Company Fair value of subsidiary ..... 6—Exercises Exercise 6-1, Concluded Batton Company and Subsid

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UNDERSTANDING THE ISSUES

1 (a) Investing activities—Purchase of S Company ($800,000 – $50,000) $(750,000)

(b) Investing activities—Purchase of S Company ($500,000 – $50,000) $(450,000)

Noncash financing activities—Issuance of notes payable 300,000

(c) Investing activities—Cash acquired in purchase of S Company $ 50,000

Noncash financing activities—Issuance of stock 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

Fair value of subsidiary $800,000 $640,000 $160,000

Less book value of interest acquired:

(a) Investing activities—Purchase of S Company ($640,000 – $50,000) $(590,000)

Noncash financing activities—Noncontrolling interest 160,000

(b) Investing activities—Purchase of S Company ($400,000 – $50,000) $(350,000)

Noncash financing activities—Issuance of notes payable 240,000

Noncash financing activities—Noncontrolling interest 160,000

(c) Investing activities—Cash acquired in purchase of S Company $ 50,000

Noncash financing activities—Issuance of stock 640,000

Noncash financing activities—Noncontrolling interest 160,000

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

(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%) 15,000

Provision for Income Tax 15,000

At each period-end, the DTA would be converted to a tax expense as follows:

Provision for Income Tax ($15,000 ÷ 5) 3,000

Deferred Tax Asset 3,000

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

Fair value of subsidiary $625,000 $500,000 $125,000

Less book value of interest acquired:

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) $155,000 Adjustments to reconcile net income to net cash:

Payment for purchase of Rocket Company,

net of cash acquired (480,000) Cash flows from financing activities:

Sale of stock (5,000 shares × $60) $300,000

Dividend payments to controlling interests (10,000)

Dividend payments to NCI ($5,000 × 20%) (1,000)

Net cash used in financing activities 289,000 Net increase in cash $ 4,000 Cash at beginning of year 300,000 Cash at year-end $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

con-junction with the acquisition, liabilities were assumed and a noncontrolling interest created as

**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

Determination and Distribution of Excess Schedule, Investment in Panda Corporation

Fair value of subsidiary $306,250 $245,000* $ 61,250

Less book value of interest acquired:

Common stock ($10 par) $150,000

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 $ 103,200 Adjustments to reconcile net income to net cash:

Cash payment for purchase of Panda Corporation,

net of cash acquired $(125,000)

Purchase of production equipment (76,000)

Net cash used in investing activities $(201,000) Cash flows from financing activities:

Decrease in long-term debt (10,000)

Dividends paid:

By Duckworth Corporation $(30,000)

By Panda, to NCI (3,000) (33,000) Net cash used in financing activities (43,000) Net decrease in cash $ (5,000) Cash at beginning of year 100,000 Cash at year-end $ 95,000 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

(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 21,000

Income Tax Payable 21,000

30% × $70,000 = $21,000

Tuft Company:

Optional entry to record tax effect of subsidiary tax:

Subsidiary Investment Income 16,800

Investment in Maria Company 16,800 80% × $21,000 tax

Provision for Income Tax 33,000

Income Tax Payable 31,720 Deferred Tax Liability 1,280 Internally generated income $110,000 Tax at 30% $ 33,000 Less DTL on goodwill [0.30 × ($64,000/15)] (1,280) Tax currently payable $ 31,720

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) $ 370,000

Cost of goods sold ($290,000 – $50,000 intercompany sales – $8,000

beginning inventory profit + $2,400 ending inventory profit) (234,400)

Expenses ($60,000 + $9,375 patent amortization from D&D – $1,000

depreciation adjustment) (68,375)

Income before taxes $ 67,225

Provision for income tax (see schedule) (20,730)

Consolidated net income $ 46,495

Distributed to noncontrolling interest 309

Distributed to controlling interest $ 46,186

Determination and Distribution of Excess Schedule

Fair value of subsidiary $1,062,500 $850,000 $212,500

Less book value of interest acquired:

Tax provision:

Consolidated income before tax $67,225

Add nondeductible patent amortization on NCI 1,875

(1) Total adjusted income $4,980 $ 1,245 $6,225*

(2) NCI share of asset adjustments 1,875 1,875

(3) Taxable income $4,980 $ 3,120 $8,100

(4) Tax (30% of taxable income) $1,494 $ 936 $2,430

(5) Net of tax share of income (line 1 – line 4) $3,486 $ 309 $3,795

*From subsidiary’s IDS

Parent Deko Company Income Distribution Machine gain $5,000 Internally generated income $ 65,000

Tax provision ($61,000 × 30%) (18,300)Net of tax $ 42,700 Share of sub income (net of tax) 3,486

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) $ 370,000

Cost of goods sold ($290,000 – $50,000 intercompany sales – $8,000

beginning inventory profit + $2,400 ending inventory profit) (234,400)

Expenses ($60,000 + $9,375 patent amortization from D&D – $1,000

depreciation adjustment) (68,375)

Income before taxes $ 67,225

Provision for income tax (see schedule) (20,939)

Consolidated net income $ 46,286

Distributed to noncontrolling interest 309

Distributed to controlling interest $ 45,977

Determination and Distribution of Excess Schedule

Fair value of subsidiary $1,062,500 $850,000 $212,500

Less book value of interest acquired:

Tax provision:

Consolidated income before tax $67,225

Add nondeductible patent amortization on NCI 1,875

Taxable income $69,100

First tax at 30% $20,730

Second tax (from controlling IDS) 209

Total tax provision $20,939

Subsidiary Fennig Company Income Distribution Ending inventory $2,400 Internally generated income $10,000

Patent amortization 9,375 Beginning inventory 8,000

(1) Total adjusted income $4,980 $ 1,245 $6,225*

(2) NCI share of asset adjustments 1,875 1,875

(3) Taxable income $4,980 $ 3,120 $8,100

(4) Tax (30% of taxable income) $1,494 $ 936 $2,430

(5) Net of tax share of income (line 1 – line 4) $3,486 $ 309 $3,795

*From subsidiary’s IDS

Parent Dunker Company Income Distribution Machine gain $5,000 Internally generated income $ 65,000

Tax provision ($61,000 × 30%) (18,300)Net of tax adjusted income 42,700 Share of sub income

(net of first tax) 3,486 Second tax (0.2 × 0.3 × $3,486) (209)

Ch 6—Exercises

EXERCISE 6-7

Adjustment to January 1, 20X7, retained earnings:

Machine depreciation:

Retained Earnings—Cooper (1½ yrs × $5,000 × 60%) 4,500

Retained Earnings—Varga (1½ yrs × $5,000 × 40%) 3,000

Deferred Tax Asset 2,651*

Retained Earnings—Cooper 2,171* Retained Earnings—Varga 480*

*Increase in Deferred Tax Assets:

Gain on machine (net) ($4,000 × 30%) $1,200 $ 720 $480 Secondary tax ($4,000 × 70% × 60% × 30% × 20%)** 101 101

Equipment depreciation ($4,500 parent share × 30%) 1,350

Cost of Goods Sold 15,000

Cost of Goods Sold 600

Inventory 600

Depreciation Expense—Machine 5,000

Accumulated Depreciation—Machine 5,000 Accumulated Depreciation—Machine 1,000

Depreciation Expense—Machine 1,000 Tax:

Deferred Tax Asset** 755

Provision for Tax 755

**Increase in Deferred Tax Assets:

Machine gain realized (30% × $1,000) $(300) $(180) $(120)

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

Fair value of subsidiary $800,000 $640,000 $160,000

Less book value of interest acquired:

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) $ 277,000 Adjustments to reconcile net income to net cash:

Depreciation expense ($1,282,000 – $1,081,000) $ 201,000

Increase in inventory (40,000)

Increase in accounts receivable (100,000)

Increase in accounts payable 83,000

Equity income from Charles Corporation in excess

Proceeds of bond sale $ 300,000

Dividend payments to controlling interests (100,000)

Dividend payments to NCI ($15,000 × 20%) (3,000)

Net cash provided by financing activities 197,000 Net increase in cash $ 23,500 Cash at beginning of year 16,000 Cash at year-end $ 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

deter-mining funds provided by net income

30% of reported Charles income (30% × $80,000) $24,000

Less amortization of excess {[$230,000 –

($700,000 × 30%)]/10 years} 2,000

Equity income $22,000

Less dividends received (30% × $25,000) 7,500

Noncash income $14,500

Determination and Distribution of Excess Schedule, Investment in Rush Company

Fair value of subsidiary $550,000 $495,000 $ 55,000

Less book value of interest acquired:

Common stock ($10 par) $150,000

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 $ 92,300 Adjustments to reconcile net income to net cash:

Depreciation expense (includes amortization

of excess on equipment) $ 72,400*

Decrease in accounts receivable 54,000

Decrease in accounts payable (17,000)

Sale of bonds ($500,000 increase – $400,0000

issued to Rush) $ 100,000

Dividends paid to noncontrolling shareholders (1,000)

Decrease in long-term liabilities (160,000) (61,000) Net increase in cash $105,700 Cash at beginning of year 82,000 Cash at year-end $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 junction with the acquisition, liabilities were assumed and a noncontrolling interest created as follows:

con-Adjusted value of assets acquired ($615,000

book value + $100,000 excess) $715,000

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 $ 234,000 Adjustments to reconcile net income to net cash:

Gain on sale of equipment $ (6,000)

Depreciation expense 82,000

Increase in allowance for marketable securities (11,000)

Decrease in accounts receivable 22,000

Increase in inventory (70,000)

Increase in accounts payable 121,000

Increase in deferred income tax 12,000

Sale of treasury stock $ 44,000

Dividend payments to controlling interests (58,000)

Dividend payments to NCI (15,000)

Payment on long-term note payable (150,000)

Net cash used in financing activities (179,000) Net increase in cash $ 118,000 Cash at beginning of year 195,000 Cash at year-end $ 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

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

Accounts Payable and Accrued

Cash from Operations:

Cash from Investing:

Cash from Financing:

Schedule of noncash investing and financing activities:

Explanation Item Amount

preferred

$4,000

$56,000

= $4.33

1,600+12,000

dividendspreferred

$4,000+

$52,000

a

aPreferred stock is dilutive, $4,000 ÷ 1,600 = $2.50

Shares = 800 preferred shares × 2 shares of common

Consolidated calculations:

20,000

$4.33)(9,600

dividends

preferred

$500

=

20,000

$41,568

$500

245 20,000

DEPS)Sunny

$4.12(10,560

dividends

preferred

$500

$55,000

+

×+

245 20,000

$43,507

$500

$55,000

++

c9,600 common stock shares + 60% of 1,600 common shares assumed issued on sion of convertible preferred stock

Ch 6—Problems

PROBLEM 6-5 Determination and Distribution of Excess Schedule, Investment in Rush Company

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

Tax provision:

Consolidated income before tax $164,495

Add, amortization applicable to NCI, 20% × $2,500 500

Taxable income $164,995

Tax provision at 30% $ 49,498

Eliminations and Adjustments:

(IS) Eliminate intercompany sales

(BI) Adjustment for beginning inventory profit:

(F2) Reduce depreciation for profit on machine sale, $40,000 ÷ 5 = $8,000

(A) Amortize $2,500 excess

Subsidiary Morgan Company Income Distribution Profit in ending inventory (EI) $ 750 Internally generated income $40,000

Depreciation adjustment (A) 2,500 Profit, beginning inventory (BI) 625

(1) Total adjusted income $29,900 $7,475 $37,375*

(2) NCI share of asset adjustments 500 500

(3) Taxable income $29,900 $7,975 $37,875

(4) Tax $ 8,970 $2,392 $11,362

(5) Net of tax share of income (line 1 – line 4) $20,930 $5,083 $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) 800Gain realized through use

Ch 6—Problems

PROBLEM 6-6 Determination and Distribution of Excess Schedule, Investment in Rush Company

Fair value of subsidiary $337,500 $270,000 $ 67,500

Less book value of interest acquired:

Pepper Company and Subsidiary Salty Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X1

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

Eliminations and Adjustments:

(CY1) Eliminate the current-year subsidiary income against the investment account

(CY2) Eliminate parent’s share of subsidiary’s dividends

(EL) 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

Determination and Distribution of Excess Schedule

Fair value of subsidiary $1,112,500 $890,000 $222,500

Less book value of interest acquired:

Buildings 20 $10,000 $10,000 $20,000 $30,000

(A1)

Total amortizations $10,000 $10,000 $20,000 $30,000

Intercompany Inventory Profit Deferral

Beginning $40,000 50% $20,000 — 0% —

Ending 30,000 50 15,000 — 0 —