Chapter 6 Solutions

Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
CHAPTER 6
VARIABLE INTEREST ENTITIES, INTRA-ENTITY DEBT,
CONSOLIDATED CASH FLOWS, AND OTHER ISSUES
Answers to Problems
1. C
2. D
3. A
4. D
5. A
6. D Cash flow from operations:
Net income...................................................................
Depreciation.................................................................
Trademark amortization..............................................
Increase in accounts receivable................................
Increase in inventory...................................................
Increase in accounts payable....................................
Cash flow from operations.........................................
7. C
$45,000
10,000
15,000
(17,000)
(40,000)
12,000
Cash flow from financing activities:

Dividends to parents interest....................................
Dividends to noncontrolling interest (20% $5,000)
Reduction in long-term notes payable......................
Cash flow from financing activities...........................
(20,000)
$25,000
($12,000)
(1,000)
(25,000)
($38,000)
8. C
9. C Post-issue subsidiary valuation ($800,000 + $250,000)
Arcolas new ownership percentage (40,000 50,000)
Arcolas share of post-issue subsidiary valuation
Arcolas pre-issue equity balance
Increase to Arcolas investment account
10. D Jordans income from own operations.....................
Fey's income ...............................................................
Eliminate intra-entity interest income.......................
Eliminate intra-entity interest expense.....................
Recognize retirement gain on debt ($212,000 $199,000)
Consolidated net income .....................................
6-1
$1,050,000
80%
$ 840,000
800,000
$ 40,000
$200,000
80,000
(21,000)
22,000
13,000
$294,000
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
11. B Mattoons share of consolidated net income...........

Number of Mattoon common shares outstanding...
$465,000
100,000
Mattoons EPS = ($465,000 100,000 shares)..........
$4.65
6-2
12. B Ace net income ...........................................................

Less intra-entity dividends (initial value method)...
Byrd reported income ................................................
Gain on extinguishment of debt ($48,300 $46,600)
Eliminate interest expense on "retired" debt
($48,300 10%) .....................................................
Eliminate interest income on "retired" debt
($46,600 12%) .....................................................
Consolidated net income ..........................................
$400,000
(7,000) $393,000
100,000
1,700
4,830
(5,592)
$493,938
13. D 30% of Byrd's net income of $100,000; the intra-entity debt transaction is
attributed solely to the parent company.
14. A For 2013, the adjustment to beginning retained earnings should recognize
the gain on the retirement of the debt, the elimination of the 2012 interest
expense, and the elimination of the 2012 interest income.
Gain on Retirement of Bond:
Original book value ...............................................................
20092011 amortization ($600,000 20 yrs. 3 yrs.) ........
Book value, January 1, 2012 ................................................
Percentage of bonds retired ......................................
Book value of retired bonds ................................................
Cash received ($4,000,000 96.6%) ....................................
Gain on retirement of bonds ......................................
$10,600,000
(90,000)
$10,510,000
40%
$4,204,000
3,864,000
$ 340,000
Interest Expense on Intra-entity Debt2012

Cash interest expense (9% $4,000,000) ...........................
Premium amortization ($30,000 per year total 40%
retired portion of bonds) .................................................
Interest expense on intra-entity debt ..................................
$360,000
(12,000)
$348,000
Interest Income on Intra-entity Debt2012

Cash interest income (9% $4,000,000) .............................
Discount amortization (.034 $4,000,0000 17 years)......
Interest income on intra-entity debt ....................................
$360,000
8,000
$368,000
Adjustment to 1/1/13 Retained Earnings

Recognition of 2012 gain on extinguishment of debt (above).....
Elimination of 2012 intra-entity interest expense (above)............
Elimination of 2012 intra-entity interest income (above)..............
Increase in retained earnings, 1/1/13
........................................
$340,000
348,000
(368,000)
$320,000
6-3
15. D Consideration transferred for preferred stock .............................

Consideration transferred for common stock ..............................
Noncontrolling interest fair value for preferred ...........................
Noncontrolling interest fair value for common .............................
Acquisition-date fair value ..............................................................
Acquisition-date identified net asset fair value ............................
Goodwill ............................................................................................
$ 424,000
3,960,000
1,696,000
440,000
6,520,000
(6,000,000)
$ 520,000
16. D Consideration transferred for preferred stock ............................. $106,000

Consideration transferred for common stock ..............................
870,000
Noncontrolling interest fair value for common .............................
580,000
Acquisition-date fair value .............................................................. $1,556,000
Acquisition-date book value ........................................................... (1,460,000)
Excess fair over book value............................................................. $ 96,000
to building ...................................................................................
50,000
to goodwill.................................................................................... $ 46,000
17. A Parents reported sales ..............................................
Subsidiary's reported sales ......................................
Less: intra-entity transfers ........................................
Sales to outsiders .................................................
Eliminate increase in receivables (less cash collected)
Cash generated by sales ......................................
$300,000
200,000
(40,000)
$460,000
(30,000)
$430,000
18. B Subsidiarys unamortized fair value of prior to new share issue

(12,000 $49) ........................................................
Parent's ownership ....................................................
Unamortized subsidiary fair value ...........................
$588,000
100%
$588,000
Subsidiary unamortized fair value after issuing new

shares (above value plus 3,000 shares at $50 each)
Parent's ownership 12,000 15,000 shares) ...........
Unamortized subsidiary fair value after stock issue
$738,000
80%
$590,400
Investment in Veritable increases by $2,400 ($590,400 less $588,000).

19. A Because the parent acquired 80 percent of the new shares, its proportional
ownership remains the same. Because the amount the parent pays will
necessarily equal 80 percent of the increase in the subsidiary's book value,
no separate adjustment by the parent is required.
6-4
20. C Adjusted acquisition-date sub. fair value at 1/1/13

Consideration transferred .........................................................
Noncontrolling interest acquisition-date fair value ................
Increase in Stamford book value...............................................
Stock issue proceeds..................................................................
Subsidiary valuation basis 1/1/13....................................................
New parent ownership (32,000 shs. 50,000 shs.) ......................
Parents post-stock issue ownership balance...............................
Parent's investment account ($592,000 + [80% 80,000]) ..........
Required adjustment decrease .............................................
$592,000
148,000
80,000
150,000
970,000
64%
$620,800
656,000
$(35,200)
21. D Adjusted acquisition-date fair value ($820,000 $192,000) ........

New parent ownership (32,000 shs. 32,000 shs.) ......................
Fair value equivalency of parent's ownership .........................
Parent's investment account ($592,000 + [80% 80,000]) ..........
Required adjustmentdecrease...............................................
$628,000
100%
$628,000
656,000
$(28,000)
22. (10 minutes) (Qualification of Primary Beneficiary of a VIE)

Consolidation of a variable interest entity is required if a firm has a variable
interest that gives the firm
The power, through voting rights or similar rights, to direct the activities
of an entity that most significantly impact the entitys economic
performance.
The obligation to absorb a majority of the entity's expected losses if

they occur and/or the right to receive a majority of the entity's expected
residual returns if they occur
Because (1) HCO Medias losses are limited by contract, and (2)
Hillsborough has the right to receive the residual benefits of the sales
generated on the HCO Media internet site above $500,000, Hillsborough
should consolidate HCO Media.
23.
(30 minutes) (VIE Qualifications for Consolidation)

a. The purpose of consolidated financial statements is to present the financial
position and results of operations of a group of businesses as if they were a
single entity. They are designed to provide information useful for making
business and economic decisionsespecially assessing amounts, timing,
and uncertainty of prospective cash flows. Consolidated statements also
provide more complete information about the resources, obligations, risks,
and opportunities of an enterprise than separate statements.
b. An entity qualifies as a VIE and is subject to consolidation if either of the
following conditions exist.
6-5
23. (continued)
The total equity at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties. In most cases, if equity at risk is less than 10% of total assets,
the risk is deemed insufficient.
The equity investors in the VIE lack any one of the following three
characteristics of a controlling financial interest.
1. The power, through voting rights or similar rights, to direct the
activities of an entity that most significantly impact the entitys
economic performance.
2. The obligation to absorb the expected losses of the entity if they
occur (e.g., another firm may guarantee a return to the equity
investors)
3. The right to receive the expected residual returns of the entity (e.g.,
the investors' return may be capped by the entity's governing
documents or other arrangements with variable interest holders).
Consolidation of a variable interest entity is required if a firm has a variable

interest that gives the firm
The power, through voting rights or similar rights, to direct the activities
of an entity that most significantly impact the entitys economic
performance.
The obligation to absorb a majority of the entity's expected losses if

they occur and/or the right to receive a majority of the entity's expected
residual returns if they occur
c. Risks of the construction project that has TecPC has effectively shifted to
the owners of the VIE:
At the end of the 1st five-year lease term, if the parent opts to sell the facility,
and the proceeds are insufficient to repay the VIE investors, TecPC may be
required to pay up to 85% of the project's cost. Thus, a potential 15% risk.
Risks that remain with TecPC
Guarantees of return to VIE investors at market rate, if facility does not

perform as expected TecPC is still obligated to pay market rates.
If lease is not renewed, TecPC must either purchase the facility or sell it
on behalf of the VIE with a guarantee of Investors' (debt and equity)
balances representing a risk of decline in market value of asset
Debt guarantees
6-6
23. (continued)
d. TecPC possesses the following characteristics of a primary beneficiary:
Direct decision-making ability (end of five-year lease term).
Absorb a majority of the entity's expected losses if they occur (via debt
guarantees and guaranteed lease payments and residual value).
Receive a majority of the entity's expected residual returns if they occur

(via use of the facility and potential increase in its market value).
24. (10 minutes) (Consolidation of variable interest entity.)

a. Implied valuation and excess allocation for Softplus.
Noncontrolling interest fair value
Consideration transferred by Pantech
Total business fair value
Fair value of VIE net assets
Excess net asset value fair value
$ 60,000
20,000
80,000
100,000
$20,000
PanTech recognizes the $20,000 excess net asset fair value as a bargain purchase
and records all of SoftPlus assets and liabilities at their individual fair values.
Cash
$20,000
Marketing software
160,000
Computer equipment
40,000
Long-term debt
(120,000)
Noncontrolling interest
(60,000)
Pantech equity interest
(20,000)
Gain on bargain purchase
(20,000)
-0b. Implied valuation and excess allocation for Softplus.
60,000
Consideration transferred by Pantech
20,000
Total business fair value
80,000
Fair value of VIE net identifiable assets
60,000
Goodwill
$20,000
When the fair value of a VIE (that is a business) is greater than assessed
asset values, all identifiable assets and liabilities are reported at fair values
(unless a previously held interest) and the difference is treated as goodwill.
Cash
Marketing software
Computer equipment
Goodwill (excess business fair value)
Long-term debt
Pantech equity interest
6-7
$20,000
120,000
40,000
20,000
(120,000)
(60,000)
(20,000)
-0-
25. (40 minutes) (Acquisition-date consolidated worksheet for a parent and a

variable interest entity)
Anywhere
Cash
Investment in Cloud
Computing
Tech
45,000
Cloud
Computin
g
25,000
Consolidated
A&E
840,000
NCI
Balances
70,000
S 40,000
A 800,000
Capitalized software
Computer equipment
Communications
equipment
Research and
development asset
Patent
Goodwill
Total assets
965,000
1,050,000
140,000
40,000
1,105,000
1,090,000
900,000
320,000
1,220,000
3,800,000
700,000
1,800,000
175,000
200,000
5,660,000
Long-term debt
Common stockAnywhere Tech
Common stock-Cloud
Computing
Retained earnings
Total liabilities and equity
(925,000)
(600,000)
(1,525,000)
A1,800,000
175,000
A 200,000
(2,500,000)
(375,000)
(3,800,000)
Consideration transferred
Acquisition-date fair value
Book value
Excess fair over book value
Research and development asset
Goodwill
(2,500,000)
(25,000)
(75,000)
(700,000)
S
S
10,000
30,000
2,040,000
A 1,200,000
2,040,000
(15,000)
(45,000)
(1,200,000)
(375,000)
(1,260,000)
(5,660,000)
$ 840,000
1,260,000
$2,100,000
100,000
$2,000,000
1,800,000
$ 200,000
26. (25 Minutes) (Consolidation entry for three consecutive years to report effects
of intra-entity bond acquisition. Straight-line method used. Parent uses equity
method)
a. Book Value of Bonds Payable, January 1, 2012
Book value, January 1, 2010 ................................................... $1,050,000
Amortization20102011 ($5,000 per year
[$50,000 premium 10 years] for two years) ..................
10,000
Book value of bonds payable, January 1, 2012..................... $1,040,000
Book value of 40% of bonds payable
(intra-entity portion), January 1, 2012 ..............................
$416,000
6-8
Gain on Retirement of Bonds, January 1, 2012

Purchase price ($400,000 96%) ...........................................
Book value of liability (computed above) .............................
Gain on retirement of bonds ...................................................
$384,000
416,000
$ 32,000
Book Value of Bonds Payable, December 31, 2012

Book value, January 1, 2012 (computed above) .................. $1,040,000
Amortization for 2012...............................................................
5,000
Book value of bonds payable, December 31, 2012............... $1,035,000
Book value of 40% of bonds payable (intra-entity portion),
December 31, 2012..............................................................
$414,000
Book Value of Investment, December 31, 2012
Book value of investment, January 1, 2012 (purchase price)
Amortization for 2012 ($16,000 discount 8-yr. rem. life) .
Book value of investment, December 31, 2012 ....................
Intra-entity Interest Balances for 2012
Interest expense:
Cash payment ($400,000 9%) .........................................
Amortization of premium for 2012 ($5,000 per year
40% intra-entity portion) ............................................
Intra-entity interest expense .............................................
Interest income:
Cash collection ($400,000 9%) .......................................
Amortization of discount for 2012 (above) ......................
Intra-entity interest income ...............................................
$384,000
2,000
$386,000
$36,000
2,000
$34,000
$36,000
2,000
$38,000
26. (continued)
CONSOLIDATION ENTRY B (2012)
Bonds Payable ............................................................ 400,000
Premium on Bonds Payable ...................................... 14,000
Interest Income ........................................................... 38,000
Investment in Bonds...............................................
386,000
Interest Expense .....................................................
34,000
Gain on Retirement of Bonds ...............................
32,000
(To eliminate accounts stemming from intra-entity bonds [balances
computed above] and to recognize gain on the retirement of this debt.)
6-9
b. In 2013, because straight-line amortization is used, the interest accounts

remain unchanged at $38,000 and $34,000. However, the premium
associated with the bond payable as well as the discount on the
investment are affected by the $2,000 per year amortization. In addition,
the gain now has to be removed from the Investment in Hamilton account.
Concurrently, the two interest balances recorded by the individual
companies in 2012 are removed from the Investment in Hamilton because
they occurred after the intra-entity retirement. Gain of $32,000 plus
$34,000 expense removal less $38,000 income elimination yields a
$28,000 credit to the investment account.
CONSOLIDATION ENTRY *B (2013)
Bonds Payable .....................................................
400,000
Premium on Bonds Payable (net of $2,000 amortization) 12,000
Interest Income .....................................................
38,000
Investment in Bonds (net of $2,000 amortization)
388,000
Interest Expense ..............................................
34,000
Investment in Hamilton....................................
28,000
(To remove intra-entity bond accounts that remain on the individual
records of both companies. Both debt and bond investment balances
have been adjusted for 201213 amortization. Entry to Investment in
Hamilton brings the totals reported by the individual companies [interest
income and expense] to the balance of the original gain.)
c. As with part b, new premium and discount balances must be determined
and then removed. The adjustment made to the Investment in Hamilton
takes into account that another year of interest expense ($34,000) and
income ($38,000) have been incorporated into the investment account
through application of the equity method.
26. (continued)
CONSOLIDATION ENTRY *B (2014)
Bonds Payable ......................................................
Premium on Bonds Payable ................................
Interest Income ......................................................
Investment in Bonds .......................................
Interest Expense ..............................................
Investment in Hamilton....................................
6-10
400,000
10,000
38,000
390,000
34,000
24,000
(To remove intra-entity bond accounts that remain on the individual

records of both companies. Both debt and bond investment balances
have been adjusted for 20122014 amortization. Credit to Investment in
Hamilton brings the totals reported by the individual companies to the
balance of the original gain.)
27.
(12 Minutes) (Determine consolidated income statement accounts after

acquisition of intra-entity bonds.)
Interest Expense To Be Eliminated = $84,000 11% = $9,240
Interest Income To Be Eliminated = $108,000 8% = $8,640
Loss To Be Recognized = $108,000 $84,000 = $24,000
CONSOLIDATED TOTALS
28.
Revenues and Interest Income = $1,051,360 (add the two book values and
eliminate interest income on intra-entity bond)
Operating and Interest Expense = $751,760 (add the two book values and
eliminate interest expense on intra-entity bond)
Other Gains and Losses = $152,000 (add the two book values)
Loss on Retirement of Debt = $24,000 (computed above)
Net Income = $427,600 (consolidated revenues, interest income, and

gains less consolidated operating and interest expense and losses)
(30 Minutes) (Consolidation entry for two years to report effects of intraentity bond acquisition. Effective rate method applied.)
a. Loss on Repurchase of Bond
Cost of acquisition ..........................................
Book value ($668,778 1/8) ...........................
Loss on repurchase ........................................
$121,655
83,597
$ 38,058
Interest Balances for 2012

Interest income:
$121,655 6% .............................................
$7,299
Interest expense:
$83,597 (book value [above]) 10% ........
$8,360
6-11
Investment Balance, December 31, 2012

Original cost, 1/1/12.........................................
Amortization of premium:
Cash interest ($100,000 8%) ..................
Effective interest income (above) ............
Investment, 12/31/12..............................
Bonds Payable Balance, December 31, 2012
Book value, 1/1/12 (above) .............................
Amortization of discount:
Cash interest ($100,000 8%) ..................
Effective interest expense (above) ..........
Bonds payable, 12/31/12.......................
$121,655
$8,000
7,299
701
$120,954
$83,597
$8,000
8,360
360
$83,957
Entry B12/31/12
Bonds Payable .................................................
83,957
Interest Income ................................................
7,299
Loss on Retirement of Debt ...........................
38,058
Investment in Bonds ..................................
120,954
Interest Expense ........................................
8,360
(To eliminate intra-entity debt holdings and recognize loss on
retirement.)
b. Interest Balances for 2013
Interest income: $120,954 (investment
balance for the year) 6% .........................................
$7,257
Interest expense: $83,957 (liability balance

for the year) 10% .....................................................
$8,396
28. (continued)
Book value, January 1, 2013 (part a) ........................
Cash interest ($100,000 8%) .............................
Effective interest income (above) .......................
Investment balance, December 31, 2013.......
6-12
$120,954
$8,000
7,257
743
$120,211

Book value, January 1, 2013 (part a) ........................
Cash interest ($100,000 8%) .............................
Effective interest expense (above) .....................
Bonds payable balance,
$83,957
$8,000
8,396
396
December 31, 2013 ..........................................
$84,353
Interest Balances for 2014

Interest income: $120,211 (investment.....................
balance for the year [above]) 6%
$7,213
Interest expense: $84,353 (liability balance

for the year [above]) 10% ..................................
Book value, January 1, 2014 (above) .......................
Cash interest ($100,000 8%) .............................
Effective interest income (above) .......................
Investment balance, December 31, 2014.......
Book value, January 1, 2014 (above) .......................
Cash interest ($100,000 8%) .............................
Effective interest expense (above) .....................
Bonds payable balance,
December 31, 2014 .....................................
$8,435
$120,211
$8,000
7,213
787
$119,424
$84,353
$8,000
8,435
435
$84,788
28. (continued)
Adjustment Needed to Investment in Bierman for Bond Retirement Loss:
Loss on retirement of debt (part a) .............................................
Amounts recognized in previous years:
Interest income:
2012
($7,299)
2013
(7,257)
($14,556)
Interest expense:
2012
$8,360
2013
8,396
16,756
6-13
$38,058
2,200
Adjustment needed to Investment in Bierman

to arrive at consolidated total ................................................
$35,858
Entry *B12/31/14
Bonds Payable ............................................................
Interest Income ...........................................................
Investment in Bierman ...............................................
Investment in Bonds .............................................
Interest Expense ...................................................
84,788
7,213
35,858
119,424
8,435
(To eliminate intra-entity bond holdings and adjust the Investment in

Bierman for the unrecognized loss on retirement. Amounts computed
above.)
29. (35 Minutes) (Consolidation procedures and balances related to intra-entity
bonds. Both straight-line and effective interest rate methods are used.)
a. Acquisition price of bonds ................................................................
Book value of bonds payable (see Schedule 1)
($443,497 50%) ............................................................................
Loss on retirement ..............................................................................
$283,550
(221,749)
$61,801
SCHEDULE 1Book Value of Bonds Payable
Date
2010
2011
2012
Book
Value
$435,763
$438,055
$440,622
Effective
Interest
(12% Rate)
$52,292
$52,567
$52,875
Cash
Interest
$50,000
$50,000
$50,000
Amortization
$2,292
$2,567
$2,875
b. Investment in Bloom Bonds

Purchase price12/31/12...........................................
Cash interest ($250,000 10%) .................................
Effective interest income ($283,550 8%) ...............
Amortization ..........................................................
Investment in Bloom bonds, 12/31/13 ......................
6-14
Year- End
Book Value
$438,055
$440,622
$443,497
$283,550
$25,000
22,684
2,316
$281,234
Bonds Payable
Book value12/31/12 (computed above) ................
Cash interest ($500,000 10%) .................................
Effective interest expense ($443,497 12%) ...........
Amortization ..........................................................
Bonds payable, 12/31/13 ............................................
$443,497
$50,000
53,220
3,220
$446,717
Although not required, the consolidation entry as of 12/31/13 is as follows. The

reduction in retained earnings represents the loss only; no intra-entity interest
was recognized in the previous year because the purchase was made on
December 31.
Entry *B (2013)
Bonds Payable ($446,717 50%) ..............................
Interest Income ...........................................................
Retained Earnings, 1/1/13 ..........................................
223,359
22,684
61,801
Interest Expense ($53,220 50%) .......................

Investment in Bloom Bonds ................................
26,610
281,234
29.(continued)
c. Loss on Retirement of Bond
Because Bloom uses the straight-line method of amortization, the loss on
retirement must be computed again.
Original issue price1/1/10..........................................................
Discount amortization (20102012) ([$64,237 11] 3 years).
Book value 12/31/12 ......................................................................
$435,763
17,519
$453,282
Intra-entity portion of bonds payable (50%) ...............................

Purchase price ...............................................................................
Loss on retirement ........................................................................
$226,641
283,550
$ 56,909
Investment in Bloom Bonds

Purchase price12/31/12 .............................................................
Premium amortization (2013) ($33,550 8) ................................
Book value 12/31/13 .................................................................
$283,550
(4,194)
$279,356
Interest Income
Cash interest ($250,000 10%) ....................................................
Premium amortization (above) .....................................................
Intra-entity interest income2013 .........................................
$25,000
(4,194)
$20,806
6-15
Bonds Payable
Original issue price 1/1/10.............................................................
Discount amortization (20102013) [($64,237 11) 4 years] .
Book value 12/31/13 .................................................................
Opus ownership .......................................................................
Intra-entity portion12/31/13 ............................................
$435,763
23,359
$459,122
50%
$229,561
Interest Expense
Cash interest ($250,000 10%) ....................................................
Discount amortization ([$64,237 11] 1/2) ..............................
Intra-entity interest expense2013 .......................................
$25,000
2,920
$27,920
The reduction in retained earnings represents the loss only; no intra-entity

interest was recognized in the previous year because the purchase was made
on December 31.
Entry *B (2013)
Bonds Payable ............................................................
Interest Income ...........................................................
Retained Earnings, 1/1/13 .........................................
Interest Expense ..................................................
Investment in Bloom Bonds ................................
229,561
20,806
56,909
27,920
279,356
30. (8 Minutes) (Determine goodwill for an acquisition in which subsidiary has both
common stock and preferred stock)
Problem assigned as graded homework, will supply solution after students turn
in their answer
31. (30 Minutes) (Consolidation entries with subsidiary cumulative preferred
stock.)
Problem assigned as graded homework, will supply solution after students turn
in their answer
32. (30 Minutes) (Prepare consolidation entries for an acquisition where subsidiary
has outstanding preferred stock)
Consideration transferred for common stock
Consideration transferred for preferred stock
Noncontrolling interest in common stock
Acquisition-date fair value for Young
Youngs book value
Excess fair over book value
6-16
$ 7,368,000
3,100,000
4,912,000
$15,380,000
15,000,000
380,000
to building (5-year life)

to equipment (10-year life)
to brand name (20-year life)
$200,000
(100,000)
100,000
$280,000
CONSOLIDATION ENTRIES
Entries S and A combined
Preferred Stock (Young) ............................................ 1,000,000
Common Stock (Young) ............................................. 4,000,000
Retained Earnings (Young) ....................................... 10,000,000
Brand Name.................................................................
280,000
Building ......................................................................
200,000
Equipment ..............................................................
Investment in Young's preferred stock (100%) . .
Investment in Young's common stock (60%) .....
Noncontrolling Interest ........................................
100,000
3,100,000
7,368,000
4,912,000
(To eliminate subsidiary stockholders equity, record excess acquisition-date

fair values, and record outside ownership of subsidiary's preferred stock at
acquisition-date fair value)
6-17
32. (continued)
Entry I1
Dividend Income .........................................................
80,000
Dividends Paid ......................................................
80,000
(To offset intra-entity preferred stock dividend payments recognized as
income by parent$1,000,000 par value 8% dividend rate.)
Entry I2
Dividend Income .........................................................
192,000
Dividends Paid ......................................................
192,000
(To eliminate intra-entity dividend payments [60% of $320,000] on common
stock. Because the $320,000 in dividends remaining after Entry I1 equals
exactly 8 percent of the common stock par value, the participation factor
does not affect the distribution.)
Entry E
Amortization Expense ................................................
44,000
Equipment ...................................................................
10,000
Building ..................................................................
Brand Name ...........................................................
(To record 2013 amortization of specific accounts
recognized within acquisition price of preferred stock.)
40,000
14,000
33. (15 Minutes) (The effect that various events have on a consolidated statement
of cash flows.)
Sale of building. The $44,000 in cash received from the sale is listed as a
cash inflow within the company's investing activities. If the company is
using the direct method in presenting cash flows from operating activities,
the $12,000 gain is not presented. However, if the indirect method is used,
the gain (a positive) must be eliminated from net income by a subtraction.
Intra-entity inventory transfers. Because these transactions do not occur

with any parties outside of the business combination, they are not reflected
in the consolidated statement of cash flows.
6-18
Dividend paid by the subsidiary. The $27,000 payment to the parent is

eliminated in consolidated statements and is not a cash outflow from the
consolidated entity. The remaining $3,000 payment to the noncontrolling
interest is reported as a cash outflow from a financing activity.
Amortization of intangible asset. This $16,000 noncash expense appears in

the consolidated income statement. If the combined companies are using
the direct method to present cash flows from operating activities, this
expense not presented. If the indirect method is used, the expense must be
removed by adding it back to consolidated net income.
Decrease in accounts payable. Cash payments have reduced this liability

balance during the period. If the direct method is used to present cash flows
from operating activities, the change is added to cost of goods sold as one
step in deriving the cash paid during the period for inventory (an outflow). If
the indirect method is applied, the decrease is subtracted from net income in
arriving at the net cash generated from operating activities during the period.
34. (20 Minutes) (Determine cash flows from operations for a consolidated entity.)
DIRECT METHOD
Cash revenues (add book values, eliminate intra-entity transfers,
and add decrease in accounts receivable) ...................................
$648,000
Cash inventory purchases (add book values, eliminate
intra-entity transfers, eliminate unrealized gains, add increase in
inventory, and add decrease in accounts payable).......................
(370,000)
Depreciation and amortization (omit as noncash expenses)............
-0Other expenses (add book values) ......................................................
(40,000)
Gain on sale of equipment (omit because this is an investing activity)
-0Equity in earnings of Knight (intra-entity so not included) ..............
-0Net cash flow from operating activities ...................................
$238,000
INDIRECT METHOD
Consolidated net income (computed below) .....................................
Adjustments:
Depreciation and amortization ..................................................
Gain on sale of equipment .........................................................
Increase in inventory ..................................................................
Decrease in accounts receivable ..............................................
Decrease in accounts payable ..................................................
Net cash flow from operating activities ..............................
6-19
$216,000
61,000
(30,000)
(11,000)
8,000
(6,000)
$238,000
Consolidated Net Income = $206,200 + 9,800 = $216,000 or computation below:

Revenues (add book values and subtract intra-entity transfers)
$640,000
Cost of goods sold (add book values, less intra-entity
transfers and beginning unrealized gain, plus ending
unrealized gain) ..........................................................................
(353,000)
Depreciation and amortization (add book values plus
amortization from excess fair value allocations) ....................
(61,000)
Other expenses (add book value) ..................................................
(40,000)
Gain on sale of equipment ..............................................................
30,000
Consolidated net income ...........................................................
$216,000
35. (30 Minutes) (Compute basic and diluted earnings per share for a parent and its
100 percent owned subsidiary, both with convertible bonds.)
Basic EPSPorter Company:
Porter's reported income ...........................................
Street's reported income ...........................................
Amortization expense ................................................
Consolidated net income (all to Porter)..............
Porter shares outstanding ...................................
Basic earnings per share ($270,000 60,000) .........
Diluted EPSStreet Company
Street earnings after amortization.............................
Shares outstanding ....................................................
Basic earnings per share (120,000 30,000) ...........
Street's earnings assuming conversion of its bonds
($120,000 + $24,000 interest saved net of tax) . .
Street's shares assuming conversion of its bonds
(30,000 + 10,000) ...................................................
Diluted earnings per share (144,000 40,000) ........
$150,000
130,000
(10,000)
$270,000
60,000
$4.50
$120,000
30,000
$4.00
$144,000
40,000
$3.60
Because diluted earnings per share is less than basic earnings per share, the
convertible bonds are dilutive and should be included.
Porters share of Streets diluted earnings:
Total shares assuming Street bond conversion .....
Shares owned by Porter.............................................
Porter's ownership percentage (30,000 40,000) ...
Street's earnings for diluted EPS (above) ...............
Porter's ownership percentage.................................
Earnings attributed to Porter company ...................
6-20
40,000
30,000
75%
$144,000
75%
$108,000
Porters earnings and shares for diluted EPS:

Porter's separate income ..........................................
Streets income applicable to Porter (above)...........
Interest saved (net of tax) on assumed
conversion of Porter's bonds ..............................
Diluted earnings to Porter..........................................
Porter shares outstanding ........................................
Additional shares from assumed bond conversion
Diluted shares .............................................................
$150,000
108,000
32,000
$290,000
60,000
8,000
68,000
Consolidated income statement EPS amounts for Porter Company:

Basic earnings per share (above).............................
$4.50
Diluted earnings per share ($290,000 68,000) ......
$4.26
36. (15 Minutes) (Compute diluted EPS. Subsidiary has stock warrants outstanding)
Figures For Sonston's Diluted EPS
Net Income ......................................................................
Shares outstanding .........................................................
Assumed conversion of stock warrants .......................
Repurchase of treasury stock with proceeds of stock
Warrants (10,000 $10 = $100,000 $20) .....................
Shares for diluted earnings per share computation.....
$200,000
40,000
10,000
(5,000)
5,000
45,000
Shares controlled by Primus: 40,000 + (20% of 5,000) =

41,000
Percentage of total held by Primus: 41,000 45,000 =
91%
(rounded)
Income to be included in parents diluted EPS = $200,000 91% = $182,000
Parents Diluted Earnings Per Share:
Net income Primus .......................................................
Net income included from Sonston ...............................
Earnings for diluted EPS ...........................................
Outstanding shares of Primus ..................................
$600,000
182,000
$782,000
100,000
PARENTS DILUTED EARNINGS PER SHARE = $782,000 100,000 = $7.82

37. (15 Minutes) (Compute diluted EPS. Subsidiary has convertible bonds.)
Figures for Simon's diluted EPS:
Net income ..........................................................................................
Interest (net of tax) saved from assumed conversion ....................
Earnings for diluted earnings per share ..........................................
6-21
$290,000
56,000
$346,000
Shares outstanding ............................................................................

Assumed conversion of bonds .........................................................
Subsidiary shares for parents share of diluted earnings...............
80,000
30,000
110,000
Shares controlled by Garfun = 80,000 110,000 = 73% (rounded)

Income to be included in parents diluted EPS = $346,000 73% = $252,580
Earnings for parents diluted earnings per share:
Net incomeGarfun
Dividends to Garfun's preferred stock
Net Income included from Simon (above)
Earnings for diluted EPS
$480,000
(15,000)
252,580
$717,580
PARENTS DILUTED EARNINGS PER SHARE = $717,580 80,000 = $8.97 (rounded)

38. (35 Minutes) (Compute basic and diluted earnings per share for parent
company. Subsidiary has stock warrants and convertible bonds.)
Basic EPSParent Company (Mason):
Reported income (separate)Mason ......................
Income of Dixon (80% [$90,000 25,000)) .............
Preferred stock dividends (5,000 $4) ....................
Masons earnings applicable to basic EPS .............
Mason's outstanding shares .....................................
Basic earnings per share ($142,000 50,000) .........
$110,000
52,000
(20,000)
$142,000
50,000
$2.84
Diluted EPSParent Company (Mason)

Subsidiary income for Masons EPS:
Net income after amortization ($90,000 25,000)....
$65,000
Interest (net of tax) saved assuming bond conversion
30,000
Income applicable to diluted EPS .......................
$95,000
Shares outstanding ....................................................
Assumed conversion of warrants ............................
Assumed acquisition of treasury stock with
proceeds of conversion [(10,000 $20) $25] ..
Assumed conversion of bonds .................................
Shares applicable to diluted EPS ........................
Shares controlled by parent:
(30,000 80%) plus (15% 20,000) .....................
Income used in diluted EPS computation ...............
Portion owned by parent (27,000 52,000) .............
Subsidiary income applicable to parentdiluted EPS
6-22
30,000
10,000
(8,000)
20,000
52,000
27,000
$95,000
52%
$49,400
(rounded)
Earnings applicable to Masons diluted EPS:

Reported income (separate)Mason.......................
Less: intra-entity interest revenue (net of tax).........
Masons income for diluted EPS................................
Income of Dixon (above) ...........................................
Because of assumed conversion, preferred stock
dividends would not be paid ...............................
Earnings applicable to diluted EPS ..........................
$110,000
(4,500)
$105,500
$ 49,400
-0$154,900
Mason's outstanding shares .....................................

Assumed conversion of preferred stock (5,000 4)
Shares applicable to diluted EPS .............................
50,000
20,000
70,000
Diluted earnings per share ($154,900 70,000) ......
$2.21
(rounded)
38. (continued)
Alternative derivation of Masons diluted EPS:
Consolidated net income
Consolidated interest saved (net of intra-entity interest)
Consolidated net income assuming bond conversion
Subsidiary net income
$(90,000)
Excess fair value amortization
25,000
Subsidiary interest saved
(30,000)
Income applicable to diluted EPS
$(95,000)
Noncontrolling interest share
0.48
Parent's net income applicable to diluted EPS
$(175,000)
(25,500)
(200,500)
(45,600)
$(154,900)
Shares for diluted EPS
70,000
Diluted EPS ($154,900 70,000 shares)
$2.21
39. (8 Minutes) (Effect of subsidiary stock issuance to public at a price above

reported value per share)
Equity method investment prior to share issue by Ricardo
Parent's ownership percentage......................................
Fair value ownership equivalency..................................
Adjusted subsidiary fair value after new share issue
(above value plus 10,000 shares at $15.75 each) ...
Parent's Ownership (40,000 50,000 shares) ...............
New ownership adjusted fair value.................................
6-23
$490,000
100%
$490,000
$647,500
80%
$518,000
Investment in Ricardo should be increased by $28,000 ($518,000 less $490,000)

40. (20 Minutes) (Effects of two different stock issuances by subsidiary.)
a. Prior to the issuance of the new shares, Albuquerque owns an 80% interest in
Marmon (16,000 shares out of 20,000 shares). The adjusted acquisition-date fair
value is $840,000 ($600,000 + $150,000 + $90,000). After the stock issue, the
adjusted acquisition-date fair value of the subsidiary will increase by $235,000
(the price of the stock) to $1,075,000. Albuquerque' ownership, however, will
only be 64% (16,000 25,000). The investments equity method balance before
stock issue is $672,000 (600,000 + [$90,000 80%]). The book value underlying
Albuquerque' investment is now $688,000 (64% of $1,075,000) so that a $16,000
increase is recorded by the parent.
Investment in Marmon ...............................................
Additional Paid-In Capital ....................................
16,000
16,000
40.(continued)
b. Albuquerque's adjusted acquisition-date fair value is $840,000 (see above) prior
to the issuance of the new shares. The 4,000 additional shares increase
subsidiary's total value by $132,000 (the price of the stock) to $972,000.
Albuquerque' ownership decreases to 2/3 (16,000 shares out of a total of
24,000) for a fair value equivalency of $648,000. Reducing the $672,000 (see a.)
to $648,000 requires a $24,000 decrease to the parents APIC.
Additional Paid-In Capital ..........................................
Investment in Marmon ..........................................
24,000
24,000
41. (55 Minutes) (Prepare consolidation entries following a subsidiary stock issue
to outside parties.)
Initially, Aronsen owns 18,000 shares (or 90%) of Siedel's outstanding shares
(the total number of shares can be determined by dividing the subsidiary's
common stock account by the $10 per share par value). After issuing 4,000
additional shares, the parent must prepare an adjustment to reflect the
change in its share of the subsidiarys unamortized acquisition-date fair
value. Because that entry has not been recorded, it is included on the
consolidation worksheet as Entry C1 (labeled in this manner as a correction).
Other consolidation procedures follow as described in previous chapters.
6-24
Excess Acquisition-Date Fair Value Allocation and Amortization

Fair value (consideration transferred plus NCI fair value) ..........
Acquisition-date book value............................................................
Fair value in excess of book value .................................................
Allocated to land based on fair value.............................................
Allocated to copyrights based on fair value..................................
Life of copyrights .............................................................................
Annual amortization .........................................................................
$649,000
(480,000)
$169,000
89,000
$80,000
16 yrs
$ 5,000
Adjustment for Stock Transaction

Adjusted acquisition-date fair value of subsidiary
on new issue date ($649,000 + $90,000 + $152,000) ............... $891,000
Adjusted parent ownership (18,000 shares 24,000 shares) .....
75%
Parents post-issue equity method value at 1/1/13 ................. $668,250
Equity method balance before new subsidiary stock issue
Consideration transferred........................................... 584,100
Increase in book value (90% $100,000)................... 90,000
Copyright amortization ($5,000 2 years 90%)......
(9,000) 665,100
Required increase (Entry C1) ..........................................................
$ 3,150
41. (continued)
Consolidation worksheet entries:
Entry *C
Investment in Siedel ...................................................
Retained Earnings, 1/1/13 (Aronsen) ..................
81,000
81,000
(To convert 1/1/13 balance to full accrual [$100,000 less

two years amortization expense $5,000 2] 90%)
Entry C1
Investment in Siedel ...................................................
Additional Paid-In Capital (Aronsen) ..................
3,150
3,150
(To record adjustment for subsidiary stock

transaction; computation shown above.)
Entry S
Common Stock (Siedel) .............................................
Additional Paid-In Capital (Siedel) ...........................
Retained Earnings, 1/1/13 (Siedel) ...........................
Investment in Siedel (75%) ...................................
Noncontrolling Interest in Siedel, 1/1/13 (25%). .
6-25
240,000
112,000
380,000
549,000
183,000
(To eliminate subsidiary stockholders' equity accounts
against Investment account and to recognize noncontrolling

interest. Stockholdersequity balances have been adjusted
for increase in book value during 20112012 and the issuance
by the subsidiary of 4,000 shares of stock on 1/1/13.)
Entry A
Land ............................................................................
Copyrights ...................................................................
Investment in Siedel (75%)....................................
Noncontrolling Interest (25%) ..............................
89,000
70,000
119,250
39,750
(To recognize acquisition price allocated to land and

copyrights. Copyrights balance has been reduced for
20112012 amortization to arrive at 1/1/13 balance.
NCI now reflects 25% of the unamortized 1/1/13 balance.)
Entry I
Dividend Income .........................................................
Dividends Paid ......................................................
15,000
15,000
(To eliminate intra-entity dividends recorded by

parent as income [75% $20,000].)
Entry E
Copyrights..............................................................
5,000
5,000
(To recognize current year amortization.)
6-26
42. (50 Minutes) (Prepare consolidation worksheet for business combination. Intraentity bond acquisition is made during the current year.)
Acquisition-date fair-value allocation and amortization:
Equipment
Trademarks
$30,000
$40,000
10-year life
20-year life
$3,000 annual amortization

$2,000 annual amortization
As indicated in the problem, the parent is applying the partial equity method.
Hence an Entry *C must be recorded on the worksheet to convert the recorded
figures (amortization is needed for the three years prior to 2014) to equity
balances:
Amortization expense ($5,000 3 years) = .............
$15,000 (Entry *C)
Unrealized gain in ending inventory (downstream):
Ending balance ...........................................................
Markup ($20,000 $100,000) .....................................
Unrealized gain to be eliminated ..............................
$10,000
20%
$ 2,000
(Entry G)
Loss on extinguishment of bonds:

Book value at date of repurchase ..................................
Percentage repurchased .................................................
Equivalent book value .....................................................
Amount paid .................................................................
Loss on extinguishment of bonds .................................
$282,000
50%
$141,000
145,500
$ 4,500
(Entry B)
Amortization during 2014 changed the carrying value of the bond payable from
$282,000 to $288,000 (found in the balance sheet) and the investment from
$145,500 to $147,000. This amortization also affects interest income and
expense accounts.
Entry A reflects remaining values after three years of amortizations.
6-27
42.(continued)
Pavin and Stabler

Consolidation Worksheet
Year Ending December 31, 2014
Accounts
Revenues...............................................
Cost of goods sold...............................
Expenses...............................................
Interest expensebonds ....................
Interest incomebond investment.....
Loss on extinguishment of bonds......
Equity in income of Stabler.................
Net income.........................................
Pavin
(740,000)
455,000
125,000
36,000
-0-0(123,000)
(247,000)
Retained earnings, 1/1/14.....................

Retained earnings, 1/1/14.....................
Net income (above)...............................
Dividends paid......................................
Retained earnings, 12/31/14.................
(345,000)
(247,000)
155,000
(437,000)
(361,000)
(123,000)
61,000
(423,000)
Cash and receivables...........................

Inventory................................................
Investment in Stabler...........................
217,000
175,000
613,000
35,000
87,000
-0-
Investment in Pavin .............................

Land, buildings, and equipment (net)
Trademarks............................................
Total assets........................................
Accounts payable.................................
Bonds payable......................................
Discount on bonds...............................
Common stock......................................
Retained earnings (above)...................
Total liabilities and stockholders equity
Stabler
(505,000)
240,000
158,500
-0(16,500)
-0-0(123,000)
-0245,000
-01,250,000
147,000
541,000
-0810,000
(225,000)
(300,000)
12,000
(300,000)
(437,000)
(1,250,000)
(167,000)
(100,000)
-0(120,000)
(423,000)
(810,000)
6-28
Consolidation Entries
Debit
Credit
(TI)100,000
(G) 2,000
(TI) 100,000
(E) 5,000
(B)
18,000
(B) 16,500
(B) 4,500
(I) 123,000
(*C) 15,000
(S) 361,000
(D)
(D) 61,000
(A) 21,000
(A) 34,000
61,000
(P)
33,000
(G)
2,000
(*C) 15,000
(S) 481,000
(A)
55,000
(I)
123,000
(B) 147,000
(E)
3,000
(E)
2,000
(P) 33,000
(B) 150,000
(B)
6,000
(S) 120,000
1,046,000
1,046,000
Consolidated
Totals
(1,145,000)
597,000
288,500
18,000
-04,500
-0(237,000)
(330,000)
-0(237,000)
155,000
(412,000)
219,000
260,000
-0-0804,000
32,000
1,315,000
(359,000)
(250,000)
6,000
(300,000)
(412,000)
(1,315,000)
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
43. (45 Minutes) (Prepare consolidation entries after intra-entity bond acquisition.)
a. Allocation of Acquisition-date Excess Fair Value
Consideration transferred
$312,000
208,000
Acquisition-date fair value
$520,000
Book value acquired
300,000
Fair value in excess of book value $220,000
Annual Excess
Excess allocated to patents based
Life
Amortizations
on fair value
90,000 12 years
$7,500
Customer list
$130,000 10 years
13,000
Total
$20,500
CONSOLIDATION ENTRIES
Entry *TL
Investment in Herman ................................................
7,000
Land ......................................................................
7,000
(To eliminate unrealized gain created by previous intra-entity transfer.
Investment is adjusted here because transfer was downstream and equity
method has been applied by parent. Thus, retained earnings have already
been corrected.)
Entry *G
Retained Earnings 1/1/13 (Herman) ..........................
8,000
Cost of Goods Sold ..............................................
8,000
(To remove unrealized inventory gain from prior year so that it can be
properly realized in current year. Amount is computed as shown below.)
Intra-entity profit2012 .............................................
Transfer price2012 ..................................................
Markup ($25,000 $125,000) .....................................
Unrealized gain in 1/1/13 inventory
($40,000 20%) .....................................................
$25,000
$125,000
20%
$8,000
Entry S
Common Stock (Herman) ..........................................
100,000
Retained Earnings, 1/1/13 (Herman)
(adjusted for Entry *G) .........................................
292,000
Investment in Herman (60%) ..........................
235,200
Noncontrolling Interest in Herman (40%) ......
156,800
(To eliminate Herman's stockholders' equity accounts and to record
beginning of year balance for noncontrolling interest.)
6-29
43. a. (continued)
Entry A
Patents ......................................................................
75,000
Customer List..............................................................
104,000
Investment in Herman ...........................................
107,400
Noncontrolling Interest ........................................
71,600
(To recognize unamortized balances as of 1/1/13 of amounts allocated within
original acquisition price. Allocations have been reduced by two years of
amortizations.)
Entry I
Equity income of Herman...........................................
3,000
Investment in Herman......................................
(To eliminate intra-entity equity income accrual)
Hermans income.............................................................. $25,000
Excess amortizations....................................................... (20,500)
2012 intra-entity inventory gross profit..........................
8,000
2013 intra-entity inventory gross profit..........................
(7,500)
Accrual-based income..................................................... $5,000
Freds ownership percentage..........................................
60%
Equity in earnings of Herman.......................................... $3,000
Entry D
Investment in Herman ................................................
Dividends Paid ......................................................
(To eliminate intra-entity dividend payments.)
Entry E
Patents....................................................................
Customer List.........................................................
(To recognize current year amortization expense.)
2,400
2,400
20,500
Entry P
Accounts Payable ......................................................
60,000
Accounts Receivable ............................................
(To remove intra-entity debt created by inventory transfers.)
6-30
3,000
7,500
13,000
60,000
43. a. (continued)
Entry B
Bonds Payable ............................................................
Premium on Bonds Payable ......................................
Interest Income ...........................................................
Investment in Parent Bonds ................................
Gain on Retirement of Bonds...............................
20,000
1,069
1,873
19,005
1,283
2,654
(To eliminate effect created by bond acquisition and recognize the related
retirement gain [$21,386 $18,732]. Amounts are calculated below.)
Investment
Liability
Book
Value
(given)
Effective
Interest
$18,732
21,386
$1,873 (10%)
1,283 (6%)
Cash
Interest
(8%)
$1,600
1,600
Excess
Amortizations
$273
317
Entry Tl
Sales ............................................................................
120,000
Cost of Goods Sold (or purchases) ....................
(To eliminate intra-entity transfers made during current year.)
Year- End
Book
Value
$19,005
21,069
120,000
Entry G
Cost of Goods Sold ....................................................
7,500
Inventory.................................................................
7,500
(To defer intra-entity inventory profits until 2013 as calculated below):
Intra-entity profit .........................................................................
Transfer price 2013 .....................................................................
Markup ($30,000 $120,000) .....................................................
Unrealized gain in ending inventory ($30,000 25%) .............
$30,000
$120,000
25%
$7,500
b. Herman's reported income for 2013 .........................................

Excess fair value amortization ..................................................
2012 unrealized gain recognized in 2013 (Entry *G) ...............
2013 unrealized gain (Entry G) ..................................................
Herman's realized income for 2013...........................................
NCI ownership .............................................................................
NCIs share of the subsidiary's income.....................................
$25,000
(20,500)
8,000
(7,500)
$5,000
40%
$2,000
Noncontrolling interest, 1/1/13 (Entries S and A) ....................

NCIs share of Herman's income (above) .................................
NCIs share of Herman's dividends ($4,000 40%) ................
Noncontrolling interest, 12/31/13...............................................
6-31
$228,400
2,000
(1,600)
$228,800
43. (continued)
c. The balances in the individual records as of December 31, 2014 pertaining to
the Intra-entity bonds are as follows:
Investment
Liability
Beginning
Book
Value
(see part a.)
Effective
Interest
$19,005
21,069
$1,901 (10%)
1,264 (6%)
Cash
Interest
(8%)
$1,600
1,600
Excess
Amortizations
$301
336
Year- End
Book
Value
$19,306
20,733
The adjustment to recognize the original gain by the parent can be computed as
follows:
Original gain on retirement (see part a) ........................
Interest income recorded on investment in 2013
(see part a) ..................................................................
Interest expense recorded on liability in 2013
(see part a) .................................................................
Required increase as of January 1, 2014 ......................
Entry *B (as of December 31, 2014)
Bonds Payable.............................................................
Premium on Bonds Payable ......................................
Interest Income ...........................................................
Investment in Herman ...........................................
Investment in Freds bonds .................................
$2,654
$1,873
1,283
590
$2,064
20,000
733
1,901
2,064
19,306
1,264
(To remove accounts pertaining to intra-entity bonds. "Investment in

Herman" is adjusted here rather than retained earnings because equity
method is being applied and gain is attributed to the parent.)
44. (50 Minutes) (Prepare consolidation entries for intra-entity preferred stock and
bonds. Determine specified account balances. Preferred stock is a debt
instrument.)
a. Consideration transferred for common stock...................
Consideration transferred for preferred stock..................
Noncontrolling interest in common stock.........................
Noncontrolling interest in preferred stock........................
Lisas acquisition-date fair value........................................
Book value of Lisa................................................................
Excess assigned to franchises...........................................
$552,800
65,000
138,200
34,000
$790,000
750,000
$ 40,000
CONSOLIDATION ENTRIES 1/1/12
6-32
Entry S and A combined:

Preferred Stock (Lisa) ................................................
Common Stock (Lisa) ................................................
Retained Earnings, 1/1/12 (Lisa) ...............................
Franchises ...................................................................
Investment in Lisa-Common Stock................
Investment in Lisa-Preferred Stock................
Noncontrolling Interest in Lisa, Inc................
100,000
200,000
450,000
40,000
552,800
65,000
172,200
(To eliminate subsidiary stockholders equity, record excess acquisition-date

fair values, and record outside ownership of subsidiary's preferred and
common stock at acquisition-date fair values.)
b. Acquisition price of bonds, 1/2/12 ............................
Book value of bonds payable (one-half acquired) .
Loss on extinguishment of debt .........................
Interest incomeMona ($53,310 8%) ....................
Interest expenseLisa ($44,175 14%) ..................
Investment in bonds of Lisa (book value):
Book valuedate of acquisition, 1/2/12 .............
Cash interest ($50,000 10%) .............................
Effective interest (above) .....................................
Investment in Bonds of Lisa
(book value as of 12/31/12) ............................
44. b. (continued)
Bonds payable (book value)
Book valuedate of acquisition, 1/2/12 .............
Cash interest ($50,000 10%) .............................
Effective interest (above) .....................................
Bonds payable (book value as of 12/31/12). .
CONSOLIDATION ENTRY BDecember 31, 2012
(all figures computed above)
Bonds Payable ............................................................
Interest Income (or other revenues) .........................
Loss on Retirement of Bonds ...................................
Discount on Bonds Payable ($50,000 $45,360)
Interest Expense....................................................
Investment in Bonds of Lisa ................................
6-33
(rounded)
(rounded)
$53,310
(44,175)
$9,135
$4,265
$6,185
$53,310
$5,000
4,265
735
$52,575
$44,175
$5,000
6,185
1,185
$45,360
50,000
4,265
9,135
4,640
6,185
52,575
c. December 31, 2012 book values based on historical cost figures:

Cost of fixed assets ...................................................
$100,000
Depreciation expense ($40,000 book value over
a 10-year life) .........................................................
4,000
Accumulated depreciation (including current
expense) ................................................................
64,000
December 31, 2012 book values based on transfer price:
Cost of fixed assets ...................................................
$120,000
Depreciation expense (10-year life) .........................
12,000
Accumulated depreciation ........................................
12,000
Gain on transfer of fixed assets
($120,000 $40,000) book value .........................
80,000
CONSOLIDATION ENTRY TADecember 31, 2012
Gain on Transfer of Fixed Assets (to remove) ........
Accumulated Depreciation ($64,000 $12,000).
Depreciation Expense ($12,000 $4,000) .........
Fixed Assets ($120,000 $100,000) ....................
80,000
52,000
8,000
20,000
44. (continued)
d. Original allocation to franchises (given) .......................
Amortization at $1,000/year (20122013) .................
Consolidated franchises12/31/13 .........................
$40,000
(2,000)
$38,000
Fixed assets (book values):

Mona, Inc. .................................................................... $1,100,000
Lisa Co. ......................................................................
800,000
Reduction necessitated by intra-entity sale
($120,000 transfer price reduced to $100,000
original cost) (see part c) .....................................
(20,000)
Consolidated fixed assets12/31/13 ....................... $1,880,000
Accumulated depreciation (book values):
Mona, Inc......................................................................
Lisa Co. ......................................................................
Increase needed to eliminate intra-entity
sale ($60,000 accumulated depreciation at time
of transfer less excess depreciation expense
[$12,000 - $4,000] for 2012 and 2013) .......................
Consolidated Acc. Depr.12/31/13..........................
6-34
$300,000
200,000
44,000
$544,000
Expenses (book values):

Mona, Inc.................................................................
$220,000
Lisa Co. ..................................................................
120,000
Recognition of amortization on franchises .............
1,000
Elimination of interest expense on intercompany debt ($45,360 [see part b] 14%) (rounded)
(6,350)
Elimination of excess depreciation from
intra-entity transfer of fixed assets
($12,000 $4,000) ..................................................
(8,000)
Consolidated expenses ...........................................
$326,650
45. (35 Minutes) (Prepare statement of cash flows for a business combination.)
(Note: before working this problem, students may wish to review the statement
of cash flows in an intermediate accounting textbook.)
RODRIGUEZ COMPANY AND CONSOLIDATED SUBSIDIARY MOLINA
Consolidated Statement of Cash Flows
CASH FROM OPERATING ACTIVTIES
Consolidated net income...........................................
Adjustment from accrual to cash:
Depreciation and amortization ............................
Gain on sale of building .......................................
Decrease in accounts receivable ........................
Increase in inventory ............................................
Decrease in accounts payable ............................
Net cash flow from operating activities ...................
$230,000
100,000
(20,000)
10,000
(140,000)
(40,000)
$140,000
CASH FLOWS FROM INVESTING ACTIVITIES

Sale of building ...........................................................
Purchase of equipment ..............................................
Net cash flow from investing activities...............
$50,000
(175,000)
CASH FLOWS FROM FINANCING ACTIVITIES

Dividends paid ............................................................
Issuance of bonds ......................................................
Issuance of common stock .......................................
Net cash flow from financing activities ..............
$(102,000)
100,000
57,000
Net increase in cash during 2013 ...................................

Cash, January 1, 2013 .....................................................
Cash, December 31, 2013 ...............................................
6-35
(125,000)
55,000
70,000
80,000
$150,000
The above statement uses the indirect method for computing cash flows from
operations. Under the direct method, the following computation is appropriate.
CASH FROM OPERATING ACTIVITIES
Revenues .....................................................................
Purchases ...................................................................
Expenses .....................................................................
Cash from operations ................................................
$990,000
(820,000)
(30,000)
$140,000
45. (continued)
Development of Cash Flow Balances via Direct Method
OPERATING ACTIVITIES
Revenues (the consolidated balance plus the decrease in
accounts receivable) ........................................................................
Cost of goods sold (cash purchases) (the consolidated
balance plus the increase in inventory plus the
decrease in accounts payable) .......................................................
Depreciation and amortization (not cash expenses) .........................
Gain on sale of building (sales price is shown below as
an investing activity) ........................................................................
Interest expense (the consolidated balance) .....................................
Cash flows from operating activities...................................................
INVESTING ACTIVITIES
Sale of building ($30,000 book value sold at a $20,000 gain)...........
Purchase of equipment (Buildings and Equipment account
increased by $50,000. Building with a $30,000 book value
was sold [a decrease]. Depreciation [without Databases
amortization] was $95,000 [a decrease]. Only a purchase
of $175,000 would turn these two decreases of $125,000 into
an increase of $50,000) ....................................................................
Cash flows from investing activities....................................................
FINANCING ACTIVITIES
Dividends paid by parent (the consolidated balance) ......................
Dividends paid by subsidiary (amount paid to
noncontrolling interest20%) ........................................................
Issuance of bonds .................................................................................
Issuance of common stock by the parent (increase in
common stock and additional paid-in capital) .............................
Cash flows from financing activities....................................................
6-36
$990,000
820,000
-0-030,000
$140,000
$50,000
(175,000)
$(125,000)
$(100,000)
(2,000)
100,000
57,000
$55,000
46. (40 Minutes) (Compute basic and diluted earnings per share. Subsidiary has
stock warrants outstanding and convertible debt.)
Basic EPSAustin, Inc.
Consolidated net income to parent................................
Austins preferred dividends ..........................................
Earnings applicable to Austins basic EPS .............
$284,000
(40,000)
$244,000
Austin's outstanding common shares ..........................
50,000
Basic earnings per share ($244,000 50,000) ...................
$4.88
Diluted EPSAustin, Inc.

Subsidiary earnings and shares for Austins diluted EPS calculation:
Rio Grande net income after amortization.....................
$105,000
Interest saved assuming conversion of bonds
(net of tax) ...................................................................
22,000
Income applicable to diluted EPS ..................................
$127,000
Shares outstanding .........................................................
Assumed conversion of warrants ..................................
Assumed treasury stock acquisition using proceeds
from warrant conversion ([5,000 $10] $20) ........
Assumed conversion of bonds ......................................
Subsidiary shares applicable to diluted EPS ...............
30,000
5,000
(2,500)
10,000
42,500
Shares controlled by parent (24,000 plus 50% of increment created by warrants [or 1,250]) .......................
25,250
Portion owned by parent (25,250 42,500) ...................
59.4%
Income applicable to parentdiluted EPS

(59.4% $127,000) ......................................................
$75,438
(rounded)
Austins income and shares for diluted EPS calculation:

Austins separate income................................................
$200,000
Income of Rio Grande to parent (computed above) ....
75,438
Preferred dividends (assumed converted) ...................
-0Earnings applicable to diluted EPS ...............................
$275,438
Austin's outstanding common shares ..........................
Assumed conversion of preferred stock
(10,000 2 shares) .....................................................
Shares applicable to diluted EPS ..................................
50,000
Diluted earnings per share ($275,438 70,000) .................
$3.93
6-37
20,000
70,000
(rounded)
47. (50 Minutes) (Determine consolidated totals. Subsidiary has preferred shares
outstanding that are equity instruments.)
Consideration transferred for common and preferred stock
Skylers book value
Excess fair value assigned to intangible asset (10-year life)
$560,000
450,000
$110,000
Annual amortization
$11,000
Ending Unrealized Gain

Ending inventory (at transfer price) ...............................
Markup ($30,000 $90,000) .......................................
Ending unrealized gain (increase made to cost
of goods sold to defer gain) ................................
$18,000
33%
$6,000
Effect of Intra-Entity Equipment Transfer:

Transfer price:
Recorded value.................................................................................
Depreciation expense ($20,000 4)................................................
Accumulated depreciation...............................................................
Gain on sale ($20,000 $12,000).....................................................
$20,000
$5,000
$5,000
$8,000
Historical cost:
Recorded value.................................................................................
Depreciation expense ($12,000 4)................................................
Accumulated depreciation ($18,000 + $3,000)...............................
$30,000
$3,000
$21,000
6-38
47. (continued)
Accounts
Sales................................................
Cost of goods sold..........................
Expenses.........................................
Gain on sale of equipment.............
Net income....................................
Paisley, Inc. and Skyler Corp.

Consolidation Worksheet
Consolidation Entries
Paisley, Inc.
Skyler Corp.
Debit
Credit
(800,000)
(400,000)
(TI) 90,000
528,000
260,000
(G)
6,000 (TI) 90,000
180,000
130,000
(E) 11,000
(ED) 2,000
(8,000)
-0(TA)
8,000
(100,000)
(10,000)
Retained earnings, 1/1....................

Net income.......................................
Dividends paid................................
Retained earnings, 12/31.............
(400,000)
(100,000)
60,000
(440,000)
(150,000)
(10,000)
-0(160,000)
Cash.................................................
Accounts receivable.......................
Inventory..........................................
Investment in Skyler Corp..............
30,000
300,000
260,000
560,000
40,000
100,000
180,000
-0-
Land, buildings, and equipment....

Accumulated depreciation.............
Intangible Asset...............................
Total assets..................................
680,000
(180,000)
-01,650,000
500,000
(90,000)
-0730,000
(140,000)
(240,000)
-0(620,000)
(210,000)
(440,000)
(1,650,000)
(90,000)
(180,000)
(100,000)
(200,000)
-0(160,000)
(730,000)
Accounts payable...........................
Long-term liabilities........................
Preferred stock...............................
Common stock................................
Additional paid-in capital................
Retained earnings, 12/31................
Total liab. and stockholders equity
6-39
(S) 150,000
(400,000)
(87,000)
60,000
(427,000)
(P) 28,000
(G)
6,000
(S) 450,000
(A) 110,000
(TA) 10,000
(ED) 2,000
(A) 110,000
(P)
(TA) 18,000
(E) 11,000
28,000
(S) 100,000
(S) 200,000
715,000
Consolidated
Totals
(1,110,000)
704,000
319,000
-0(87,000)
715,000
70,000
372,000
434,000
-01,190,000
(286,000)
99,000
1,879,000
(202,000)
(420,000)
-0(620,000)
(210,000)
(427,000)
(1,879,000)
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
47. (continued)
CONSOLIDATED TOTALS
Sales = $1,110,000 (add book values and eliminate intra-entity transfers)

Cost of Goods Sold = $704,000 (add book values, eliminate intra-entity
transfers, and eliminate ending unrealized gain [computed above])
Expenses = $319,000 (add book values and include amortization of
intangibles and eliminate $2,000 excess equipment depreciation)
Gain on Sale of Equipment = $0 (intra-entity balance is eliminated)
Net Income = $87,000 (consolidated revenues less consolidated expenses)
Retained Earnings, 1/1 = $400,000 (parent company figure only because
subsidiary was not acquired until current year)
Dividends Paid = $60,000 (parent balance only)
Retained Earnings, 12/31 = $427,000 (consolidated beginning retained
earnings plus net income less dividends paid)
Cash = $70,000 (add book values)
Accounts Receivable = $372,000 (add book values after eliminating intraentity balance)
Inventory = $434,000 (add book values after eliminating unrealized gain)
Investment in Skyler Corporation = 0 (intra-entity account is eliminated so
that individual asset and liability accounts of subsidiary can be included)
Land, Buildings, and Equipment = $1,190,000 (add book values and increase
transferred asset from transfer price to historical cost [see above])
Accumulated Depreciation = $286,000 (add book values and adjust balance
for transferred asset from transfer price figure to historical cost (see above])
Intangible Asset = $99,000 (original allocations less one year amortization)
Total Assets = $1,879,000 (summation of consolidated accounts)
Accounts Payable = $202,000 (add book values and remove intra-entity
balance)
Long-Term Liabilities = $420,000 (add book values)
Preferred Stock = $0 (subsidiary outstanding shares are eliminated)
Common Stock = $620,000 (parent balance only)
Additional Paid-in Capital = $210,000 (parent balance only)
Retained Earnings, 12/31 = $427,000 (computed above)
Total Liabilities and Equities = $1,879,000 (summation of consolidated
accounts)
6-49
47.(continued): Consolidation entries and explanations:

Entry S
Preferred Stock (Skyler)....................................................
Common Stock (Skyler)....................................................
Retained Earnings, 1/1......................................................
Investment in Skyler Corp...........................................
(To eliminate subsidiary stockholders equity accounts.)
100,000
200,000
150,000
450,000
Entry A
Intangible Asset ................................................................
110,000
Investment in Skyler Corp...........................................
(To recognize excess fair value attributed to intangible asset.)
Entry E
Amortization Expense.......................................................
Intangible Asset............................................................
(To record current years amortization of intangible asset.)
Entry P
Accounts Payable..............................................................
Accounts Receivable...................................................
(To eliminate intra-entity debt.)
110,000
11,000
11,000
28,000
28,000
Entry TA
Equipment..........................................................................
10,000
Gain on Sale of Equipment...............................................
8,000
Accumulated Depreciation..........................................
18,000
(To eliminate effects as of 1/1 created by intra-entity transfer of equipment.)
Entry TI
Sales .................................................................................
90,000
Cost of Goods Sold......................................................
(To eliminate intra-entity inventory transfers for the current year.)
90,000
Entry G
Cost of Goods Sold...........................................................
6,000
Inventory.......................................................................
6,000
(To defer unrealized intra-entity gain remaining at the end of the current year.
Markup is 33% [30,000 gross profit 90,000 transfer price] indicating that the
ending inventory of 18,000 contains an unrealized profit of 6,000 [18,000 33%].)
Entry ED
Accumulated Depreciation................................................
2,000
Depreciation Expense.................................................
2,000
(To eliminate excess depreciation resulting from intra-entity gain of 8,000 on
transfer of equipment [see Entry TA]. Equipment is being depreciated over a
remaining life of four years.)
6-50
48. (30 minutes) (Consolidated Cash Flow Statement with current year business
combination)
Plaster Inc. and Subsidiary Stucco Company
Consolidated Statement of Cash Flows
For the year ended 12/31/13
CASH FLOW FROM OPERATING ACTIVITIES
Consolidated net income
Depreciation expense
Amortization expense
Decrease in accounts receivable (net of acquisition)
Increase in inventory (net of acquisition)
Decrease in accounts payable (net of acquisition)
Net cash flow provided by operating activities
$274,000
187,500
8,750
3,600
(102,000)
(8,000)
CASH FLOW FROM INVESTING ACTIVITIES

Purchase of Stucco Company assets (net of cash acquired)
Net cash flow used in investing activities
CASH FLOW FROM FINANCING ACTIVITIES
Issue long-term debt
Dividends
Net cash flow provided by financing activities
89,850
$363,850
(856,000)
800,000
(108,000)
$692,000
Increase in cash 1/1/13 to 12/31/13
$199,850
Beginning cash, 1/1/13

Ending cash, 12/31/13
43,000
$242,850
Excel CaseIntra-entity Bonds

Bonds with a stated rate of 11% sold to yield 12%
Eff. Yield
12%
2011
2012
2013
2014
2015
2016
2017
1,000,000.00
110,000.00
943,497.77
946,717.50
950,323.60
954,362.43
958,885.93
963,952.24
969,626.51
0.32197
5.65022
113,219.73
113,606.10
114,038.83
114,523.49
115,066.31
115,674.27
116,355.18
6-51
321,973.24
621,524.53
943,497.77
56,502.23
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
3,219.73
3,606.10
4,038.83
4,523.49
5,066.31
5,674.27
6,355.18
2018
2019
2020
975,981.69
983,099.49
991,071.43
1,000,000.00
117,117.80
117,971.94
118,928.57
110,000.00
110,000.00
110,000.00
Consolidated Worksheet Entry 12/31/13

Bonds Payable
954,362.43
Interest Income
117,523.20
Loss on Retirement
0.00
Gain on Retirement
Investment in Bonds
Interest Expense
46,299.01
911,547.79
114,038.83
Bonds retired by affiliate on 1/1/13 at

Eff. Yield
13%
1,000,000.00
0.37616
110,000.00
4.79877
2013
2014
2015
2016
2017
2018
2019
2020
904,024.59
911,547.79
920,049.00
929,655.37
940,510.57
952,776.95
966,637.95
982,300.88
1,000,000.00
117,523.20
118,501.21
119,606.37
120,855.20
122,266.37
123,861.00
125,662.93
127,699.12
6-52
7,117.80
7,971.94
8,928.57
56,502.23
904,024.59
376,159.86
527,864.73
904,024.59
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
95,975.41
7,523.20
8,501.21
9,606.37
10,855.20
12,266.37
13,861.00
15,662.93
17,699.12
95,975.41

Chapter 6 Solutions

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 6 Solutions

Uploaded by

Copyright:

Available Formats

Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Cash flow from financing activities:

11. B Mattoons share of consolidated net income...........

Mattoons EPS = ($465,000 100,000 shares)..........

12. B Ace net income ...........................................................

Interest Expense on Intra-entity Debt2012

Interest Income on Intra-entity Debt2012

Adjustment to 1/1/13 Retained Earnings

15. D Consideration transferred for preferred stock .............................

16. D Consideration transferred for preferred stock ............................. $106,000

18. B Subsidiarys unamortized fair value of prior to new share issue

Subsidiary unamortized fair value after issuing new

Investment in Veritable increases by $2,400 ($590,400 less $588,000).

20. C Adjusted acquisition-date sub. fair value at 1/1/13

21. D Adjusted acquisition-date fair value ($820,000 $192,000) ........

22. (10 minutes) (Qualification of Primary Beneficiary of a VIE)

The obligation to absorb a majority of the entity's expected losses if

(30 minutes) (VIE Qualifications for Consolidation)

Consolidation of a variable interest entity is required if a firm has a variable

The obligation to absorb a majority of the entity's expected losses if

Guarantees of return to VIE investors at market rate, if facility does not

Receive a majority of the entity's expected residual returns if they occur

24. (10 minutes) (Consolidation of variable interest entity.)

25. (40 minutes) (Acquisition-date consolidated worksheet for a parent and a

Gain on Retirement of Bonds, January 1, 2012

Book Value of Bonds Payable, December 31, 2012

b. In 2013, because straight-line amortization is used, the interest accounts

(To remove intra-entity bond accounts that remain on the individual

(12 Minutes) (Determine consolidated income statement accounts after

Interest Expense To Be Eliminated = $84,000 11% = $9,240

Interest Income To Be Eliminated = $108,000 8% = $8,640

Loss To Be Recognized = $108,000 $84,000 = $24,000

Loss on Retirement of Debt = $24,000 (computed above)

Net Income = $427,600 (consolidated revenues, interest income, and

Interest Balances for 2012

Investment Balance, December 31, 2012

Interest expense: $83,957 (liability balance

Bonds Payable Balance, December 31, 2013

December 31, 2013 ..........................................

Interest Balances for 2014

Interest expense: $84,353 (liability balance

Adjustment needed to Investment in Bierman

(To eliminate intra-entity bond holdings and adjust the Investment in

SCHEDULE 1Book Value of Bonds Payable

b. Investment in Bloom Bonds

Although not required, the consolidation entry as of 12/31/13 is as follows. The

Interest Expense ($53,220 50%) .......................

Intra-entity portion of bonds payable (50%) ...............................

Investment in Bloom Bonds

The reduction in retained earnings represents the loss only; no intra-entity

to building (5-year life)

(To eliminate subsidiary stockholders equity, record excess acquisition-date

Intra-entity inventory transfers. Because these transactions do not occur

Dividend paid by the subsidiary. The $27,000 payment to the parent is

Amortization of intangible asset. This $16,000 noncash expense appears in

Decrease in accounts payable. Cash payments have reduced this liability

Consolidated Net Income = $206,200 + 9,800 = $216,000 or computation below:

Porters earnings and shares for diluted EPS:

Consolidated income statement EPS amounts for Porter Company:

Shares controlled by Primus: 40,000 + (20% of 5,000) =

PARENTS DILUTED EARNINGS PER SHARE = $782,000 100,000 = $7.82

Shares outstanding ............................................................................

Shares controlled by Garfun = 80,000 110,000 = 73% (rounded)

PARENTS DILUTED EARNINGS PER SHARE = $717,580 80,000 = $8.97 (rounded)