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Chapter 10 - Additional Consolidation Reporting Issues

CHAPTER 10
ADDITIONAL CONSOLIDATION REPORTING ISSUES
ANSWERS TO QUESTIONS
Q10-1 The balance sheet, income statement, and statement of changes in retained earnings
are an integrated set and generally need to be completed as a unit. Once completed, these
statements can then be used in preparing a consolidated cash flow statement. Because both
the beginning and ending consolidated balance sheet totals are needed in determining cash
flows for the period, the cash flow statement cannot be easily incorporated into the existing
three-part worksheet format.
Q10-2 Consolidated retained earnings do not include the earnings assigned to noncontrolling
shareholders. As a result, dividends paid to noncontrolling shareholders are not included in the
consolidated retained earnings statement. On the other hand, all the cash generated by the
subsidiary is included in the consolidated cash flow statement and all uses of cash must also be
included, including that distributed to noncontrolling shareholders in the form of dividends.
Q10-3 The indirect method focuses on reconciling between net income and cash flows from
operations and does not attempt to report payments to suppliers or other specific uses of cash.
It does report the change in inventory and accounts payable which are included in determining
payments to suppliers. While adjusting net income for changes in inventory and accounts
payable leads to a correct reporting of cash flows from operations, it does not permit explicit
reporting of payments to suppliers.
Q10-4 Changes in inventory balances are used in computing the amount reported as
payments to suppliers and do not need to be separately reported.
Q10-5 Sales must be included in the consolidated cash flows worksheet when the direct
method is used. They are excluded from the worksheet when the indirect method is used.
Q10-6 (a) When the indirect method is used the changes in inventory are reported as a
reconciling item in the statement of cash flows. (b) When the direct method is used, changes in
inventory are included in the computation of payments to suppliers and not separately
disclosed.
Q10-7 Only sales subsequent to the date of acquisition are included. The acquired company
was not part of the consolidated entity prior to the date of acquisition.
Q10-8 Dividends paid by the acquired company to the noncontrolling shareholders following
the date of acquisition are included as a cash outflow in the consolidated statement of cash
flows. Dividends paid by the acquired company prior to acquisition are excluded. The acquired
company was not part of the consolidated entity.

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Chapter 10 - Additional Consolidation Reporting Issues

Q10-9 The revenues and expenses of the subsidiary for the full year are included in the
consolidated income statement when the acquisition occurs at the beginning of the year. When
a mid-year acquisition occurs, the revenues and expenses of the acquired company prior to the
date of acquisition were not transactions of the consolidated entity.As a result, an additional
elimination entry is made to close pre-acquisition accounts to retained earnings.
Q10-10 An accurate measure of the overall profit contribution from each segment of business
operations is often considered desirable in evaluating past operations and in planning future
strategy. In some cases the tax impact of operating a particular division is very different from
one or more other divisions, and that difference should be recognized in evaluating the
segment. Even when such differences do not exist, better knowledge of the approximate after
tax return from a particular subsidiary can be very helpful in assessing future investment and
operating strategies.
Q10-11 When a consolidated tax return is filed, all intercorporate transfers are eliminated in
computing taxable income and there should be no need to adjust recorded tax expense in
preparing consolidated financial statements for the period. When the companies do not file a
consolidated return, tax payments and expense accruals recorded by the individual companies
presumably will include gains and losses on intercompany transfers. If an unrealized gain or
loss is eliminated in consolidation, the amount reported as tax expense also should be adjusted
to reflect only the tax expense on those items included in the consolidated income statement.
Q10-12 Assuming an unrealized profit has been reported, an additional elimination entry is
needed to reduce tax expense and establish a deferred tax asset in the amount of the excess
payment. If a loss is eliminated, additional tax expense and taxes payable must be established
in the elimination process.
Q10-13 When one of the companies in the consolidated entity has recorded tax expense on
unrealized profit in a preceding period, its retained earnings balance at the start of the period
will be overstated by the amount of unrealized profit less the tax expense recorded thereon. In
the period in which the item is sold and the profit is considered realized, the eliminating entries
must include a debit to the Investment in Subsidiary account for the amount of the net
overstatement and a debit to tax expense for the proper amount of expense to be recognized.
Q10-14 When taxes are not considered, income assigned to noncontrolling shareholders is
reduced by a proportionate share of the unrealized profit. When taxes are considered, the
reduction is based on a proportionate share of the after tax balance of unrealized profits.
Q10-15 Perhaps the most important reason is that the earnings per share data reported by the
separate companies may include unrealized profits that must be eliminated in computing the
consolidated totals. Even without unrealized profits, simple addition could not be used when the
companies do not have an equal number of shares outstanding or when the parent does not
hold all the common or preferred shares of the subsidiary.

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Chapter 10 - Additional Consolidation Reporting Issues

Q10-16 The full amount of dividends paid to unaffiliated preferred shareholders of the parent
are deducted from consolidated net income in arriving at consolidated earnings per share.
Preferred dividends paid by the subsidiary to noncontrolling shareholders and income assigned
to noncontrolling common shareholders are deducted from consolidated revenue and expenses
in computing consolidated net income and earnings per share. Subsidiary preferred dividends
paid to the parent or other affiliates must be eliminated and are not deducted in computing
consolidated earnings per share.
Q10-17 A subsidiary's contribution to consolidated earnings per share may be different from its
contribution to consolidated net income if the subsidiary has convertible bonds or preferred
stock outstanding that are treated as if they had been converted, or if the treasury stock method
is used to include the dilutive effects of subsidiary stock rights or stock options outstanding.
Q10-18 The net of tax interest savings from the assumed conversion of the bond into common
stock is included in the numerator and the additional shares are added to the denominator of the
earnings per share computation for the subsidiary. In doing so, earnings per share of the
subsidiary will be reduced. Moreover, the additional shares added to the denominator will
potentially alter the ownership ratio held by the parent; thus, the amount of subsidiary income
included in the consolidated earnings per share computation is likely to be reduced.
Q10-19 Those rights, warrants, and options treated as stock outstanding in the denominator of
the earnings per share computation of the subsidiary will reduce the amount of subsidiary
income included in the consolidated earnings per share computation to the extent that the
ownership ratio held by the parent is reduced. The actual shares will not be reported as such,
because they are assumed to be either eliminated or assigned to the noncontrolling interest.
Q10-20 In the earnings per share computation, the amount of income assigned to
noncontrolling interest may change as it is assumed that convertible securities are converted or
rights, warrants, and options are exercised. Both the amount of subsidiary income included in
the numerator and the proportion of parent company ownership may vary, thereby changing the
amount of subsidiary income included in the consolidated earnings per share computation.

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Chapter 10 - Additional Consolidation Reporting Issues

SOLUTIONS TO CASES
C10-1 The Effect of Security Type on Earnings per Share
a. Until the securities are converted, the interest expense on bonds and the preferred dividends
must both be deducted in determining income available to common shareholders when basic
earnings per share is computed. Because interest expense is deductible for tax purposes and
preferred dividends are not, the increase in earnings available to common shareholders will be
less with conversion of the debentures. The decrease in earnings per share will be greater with
conversion of the convertible debentures since the two securities convert into an equal number
of common shares.
b. Interest expense is deducted in computing net income and preferred dividends are not. Thus,
conversion of the bonds will increase net income and conversion of the preferred stock will have
no effect on the reported net income of Stage Corporation. If Stage Corporation is a parent
company, consolidated net income will increase by the full amount of the interest saving (net of
tax) if the bonds are converted. In the event Stage Corporation is a subsidiary of another
company, consolidated net income again will increase if the bonds are converted, but the
amount of the increase depends on the percentage ownership of Stage by the parent.
Conversion of the preferred stock will increase consolidated net income because it increases
Stages income available to common shareholders, of which the parent is one. The increase will
be greater than the effect of the bond conversion because the preferred dividends have no tax
effect, but the amount of the increase will depend on the parents percentage ownership.
c. If the preferred shares are those of a parent company, they will be excluded entirely if (1) all
the shares are owned by its subsidiaries, or (2) the preferred shares are noncumulative and
have had no dividends declared during the period. If the shares are those of a subsidiary, the
preferred shares will have an effect on basic earnings per share unless (1) the parent or other
affiliates own all the common and preferred shares outstanding, or (2) the preferred shares are
noncumulative and have had no dividends declared during the period.
d. Interest expense will be deducted in computing Stage's net income. The preferred dividends
will then be deducted from net income in computing Stage's income available to common
shareholders. Assuming both securities are dilutive, interest expense (net of tax) will be added
back to Stage's net income, no preferred dividends will be deducted, and the increased number
of shares from the conversion of both securities will be added to the denominator in computing
Stages diluted earnings per share. These earnings per share amounts will then be used by
Prop Company in determining the income from the subsidiary to be included in its consolidated
earnings per share computations.

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Chapter 10 - Additional Consolidation Reporting Issues

C10-2 Evaluating Consolidated Statements


MEMO
To:
From:
Re:

Treasurer
Cowl Corporation
, Accounting Staff
Disclosure of Transfer of Cash from Subsidiary to Parent

The following comments are provided in response to your concern with respect to the transfer of
cash from Plum Corporation to the parent company. Intercompany borrowings often offer an
opportunity for one company to borrow money from an affiliate at rates favorable to both parties.
As a result, transfers of cash between affiliates are very common. These transactions are
eliminated in preparing the consolidated statements and the financial statement reader will be
unaware of them unless supplemental disclosures are made.
In general, the FASB does not require separate disclosure of transactions between consolidated
entities when they are eliminated in the preparation of consolidated or combined financial
statements. [FASB 57, Par. 2; ASC 850-10-50-4]
Nevertheless, the fact that Cowl Company is unable to generate sufficient cash from its
separate operations to pay its bills appears to be of sufficient importance that disclosure would
be appropriate in both the Management Discussion and Analysis (MD&A) section of Cowls
annual report and in the notes to the financial statements. The SEC establishes the disclosure
requirements for MD&A and requires discussion ofcurrently known trends, demands,
commitments, events, or uncertainties that are reasonably expected to have material effects on
the registrants financial condition or results of operations, or that would cause reported financial
information not to be necessarily indicative of future operating results or financial condition.
[SEC Regulation S-K, Item 303]
The SEC also requires discussion of both short- and long-term liquidity and capital resources.
[SEC Financial Reporting Release 36]
FASB Statement No. 95,Statement of Cash Flows, (ASC 230) does not specify those
situations in which a discussion of operating cash flows must be included in the notes to the
financial statements. However, if the negative cash flow from Cowl Companys operations
significantly affects the operating cash flows of the consolidated entity, one or more notes to the
financial statements should be used to provide information to the financial statement readers.
One possible form for doing so would be to include supplemental cash flow information if the
operations of the parent are identified as a separate reportable segment [FASB 131, Par. 16;
ASC 280-10-50-10].
Primary citations:
FASB 57, Par. 2; ASC 850-10-50-4
SEC Regulation S-K, Item 303
Secondary citations:
FASB 95; ASC 230
FASB 131, Par. 16; ASC 280-10-50-10

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Chapter 10 - Additional Consolidation Reporting Issues

C10-3 Income Tax Expense


a. When prior-period intercompany profits are realized through resale to a nonaffiliate in the
current period, tax expense reported by the consolidated entity will be greater than actual tax
payments made by the separate companies.
b. Two reporting procedures are usually discussed in dealing with income tax allocation for
consolidated entities. One procedure is to report the additional amount paid as a deferred tax
asset or as prepaid income tax in the consolidated balance sheet. An alternate approach is to
net the overpayment for unrealized profits against deferred income taxes payable.
c. Whenever separate tax returns are filed and unrealized profits are recorded on intercompany
transfers of land, buildings and equipment, or other assets, income tax expense reported in the
consolidated income statement in the period of the intercompany transfer will be less than tax
payments made. A similar effect occurs when one affiliate purchases the bonds of another
affiliate and a constructive loss on bond retirement is reported in the consolidated income
statement.
d. When unrealized profits from a prior period are realized in the current period, income tax
expense recognized in the current period will be greater than the actual tax payment made.
Also, when unrealized losses are recorded on intercompany transfers, tax expense reported in
the consolidated income statement in the period of the transfer will be greater than the actual
tax payment. A constructive gain on bond retirement on a purchase of an affiliate's bonds will
also result in an excess of consolidated tax expense over tax payments.

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Chapter 10 - Additional Consolidation Reporting Issues

C10-4 Consolidated Cash Flows


a. The factors contributing to the increase in net income over the prior period are key in this
case. One possible explanation is that operating earnings of the combined companies actually
declined and the increase in net income resulted from a substantial gain on sale of a division or
other assets in the current period. Another possibility would be a decrease in noncash charges
deducted in computing income. Cash generated by operations often is well above operating
earnings as a result of charges such as amortization of intangible assets or depreciation. A
decrease in these charges will increase net income but not change cash flows
Changes in the net amounts invested in receivables, inventories, and other current assets are
included in the computation of cash flows from operations. Increases in these balances can
substantially reduce the reported cash flows from operations without affecting net income.
b. Both sales and the balance in accounts receivable should increase when less stringent
criteria are used in extending credit. Similarly, both should decrease when credit terms are
tightened. If the companies have relaxed credit standards during the current period, net income
may be greater as a result of increased sales; however, cash flows are likely to increase to a
lesser degree as accounts receivable increase.
c. An inventory write-down under lower of cost or market and other noncash charges will not
reduce cash flows from operations. The amount expensed would be added back to consolidated
net income in arriving at cash generated by operating activities.
d. Assuming an allowance account is used, this particular write-off will not appear in either the
income statement or computation of cash flows from operations. There is no charge in the
income statement and no change in the net receivable balance as a result of a simple write-off
of an account receivable.
e. There are no significant differences between the preparation of a statement of cash flows for
a consolidated entity and a single corporate entity. However, for the consolidated entity, dividend
payments to the subsidiarys noncontrolling interest must be included in the financing section
because they use cash even though they are not viewed as dividends of the consolidated entity.

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Chapter 10 - Additional Consolidation Reporting Issues

SOLUTIONS TO EXERCISES
E10-1 Analysis of Cash Flows
a.

The consolidated cash balance at January 1, 20X2, was $83,000, computed as


follows:
Balance at December 31, 20X2
Decrease in cash balance during 20X2:
Cash flows from operations
Cash outflow for investment activities
Cash outflow for financing activities
Net cash outflow
Cash balance at January 1, 20X2

b.

$ 57,000
$284,000
(80,000)
(230,000)

Dividends of $48,000 were reported:


Dividends paid to Lamb shareholders
Dividends paid to noncontrolling interest of
Mint Company ($10,000 x .30)
Total cash payments

c.

26,000
$83,000

$45,000
3,000
$48,000

Consolidated net income was $207,000, computed as follows:


Cash flow from operations
Adjustments to reconcile consolidated net income
and cash provided by operations
Consolidated net income

10-8

$284,000
(77,000)
$207,000

Chapter 10 - Additional Consolidation Reporting Issues

E10-2 Statement of Cash Flows


a.

The noncontrolling interest received dividends of $6,000 ($15,000 x .40).

b.

A total of $320,000 will be reported as cash provided by operations, computed as follows:


Consolidated net income
Depreciation expense
Amortization of patents
Gain on bond retirement
Loss on sale of land
Decrease in accounts receivable
Increase in inventory
Decrease in accounts payable
Increase in wages payable
Total

c.

$271,000
21,000
13,000
(4,000)
8,000
32,000
(16,000)
(12,000)
7,000
$320,000

Cash used in investing activities will be reported at $161,000, computed as follows:


Purchases of equipment
Sale of land
Total

d.

$(295,000)
134,000
$(161,000)

Cash used in financing activities will be reported at $81,000, computed as follows:


Sale of stock
Bond retirement
Dividends paid to Becon Corporation shareholders
Dividends paid to noncontrolling interests
Total

e.

$150,000
(200,000)
(25,000)
(6,000)
$(81,000)

The cash balance increased by $78,000 ($320,000 - $161,000 - $81,000) in 20X4.

E10-3 Computation of Operating Cash Flows


Cash received from customers was $293,000 ($310,000 - $17,000). Cash payments to
suppliers was $193,000 ($180,000 - $8,000 + $21,000), resulting in cash flows from operations
of $100,000 ($293,000 - $193,000).

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Chapter 10 - Additional Consolidation Reporting Issues

E10-4 Consolidated Operating Cash Flows


a. Cash received from customers was $482,000 ($300,000 + $200,000 - $28,000 + $10,000).
b. Cash payments to suppliers was $288,000 ($160,000 + $95,000 + $35,000 - $15,000 +
17,000 - $4,000).
c. Cash flows from operating activities was $194,000 ($482,000 - $288,000).

E10-5 Preparation of Statement of Cash Flows


Consolidated Enterprises Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X3
Cash Flows from Operating Activities:
Consolidated Net Income
Noncash Expenses, Revenue, and Gains
Included in Income:
Depreciation Expense
Goodwill Impairment Loss
Gain on Sale of Equipment
Decrease in Accounts Receivable
Increase in Accounts Payable
Increase in Inventory
Net Cash Provided by Operating Activities

$ 464,000
73,000
3,000
(8,000)
23,000
5,000
(15,000)

Cash Flows from Investing Activities:


Equipment Purchased
Sale of Equipment
Net Cash Used in Investing Activities

$(380,000)
45,000

Cash Flows from Financing Activities:


Sale of Bonds
Repurchase of Common Stock
Dividends Paid:
To Parent Company Shareholders
To Noncontrolling Shareholders
Net Cash Provided by Financing Activities
Net Increase in Cash

$545,000

(335,000)

$ 120,000
(35,000)
(60,000)
(6,000)

10-10

19,000
$229,000

Chapter 10 - Additional Consolidation Reporting Issues

E10-6 Direct Method Cash Flow Statement


Consolidated Enterprises Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X3
Cash Flows from Operating Activities:
Cash Received from Customers
Cash Payments to Suppliers
Net Cash Provided by Operating Activities

$ 923,000 (a)
(378,000) (b)
$ 545,000

Cash Flows from Investing Activities:


Equipment Purchased
Sale of Equipment
Net Cash Used in Investing Activities

$(380,000)
45,000

Cash Flows from Financing Activities:


Sale of Bonds
Repurchase of Common Stock
Dividends Paid:
To Parent Company Shareholders
To Noncontrolling Shareholders
Net Cash Provided by Financing Activities
Net Increase in Cash

(335,000)

$120,000
(35,000)
(60,000)
(6,000)

19,000
$229,000

(a) $923,000 = $900,000 + $23,000


(b) $378,000 = $368,000 - $5,000 + $15,000
The FASB also requires the following reconciliation when the statement of cash flows is
prepared using the direct method:

Reconciliation of consolidated net income to net cash provided by operating


activities
Consolidated Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation Expense
Goodwill Impairment Loss
Gain on Sale of Equipment
Decrease in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable
Total Adjustments
Net Cash Provided by Operating Activities

10-11

$464,000
$73,000
3,000
(8,000)
23,000
(15,000)
5,000

81,000
$545,000

Chapter 10 - Additional Consolidation Reporting Issues

E10-7 Analysis of Consolidated Cash Flow Statement


a.

Dividends paid to noncontrolling interest


Proportion of stock held by noncontrolling interest
Total dividends paid by Jones Delivery

$ 6,000

.40
$15,000

b.

When bonds are sold at a premium the annual cash payment is greater than
reported interest expense. The amount of premium amortized must therefore be
deducted from net income in determining the cash flow from operations.

c.

An increase in accounts receivable means that cash collections have been less
than sales for the period. The amount of the increase must be deducted from
operating income to determine the amount of cash actually made available from
current period operations.

d.

Dividends paid to noncontrolling shareholders are reported as a cash outflow in


the cash flow statement because they represent funds that have been distributed
during the period and are no longer available to the consolidated entity. On the
other hand, these same dividends are omitted from the retained earnings
statement. Only the income to the parent company shareholders is included in the
consolidated retained earnings statement and only dividends to the parent
company shareholders are deducted in deriving the ending consolidated retained
earnings balance.

e.

The loss occurred on a sale to a nonaffiliate. All profits and losses on sales to
affiliates are eliminated in the period of intercorporate sale and are considered
realized as the equipment is depreciated by the purchasing affiliate.

E10-8 Midyear Acquisition


a.

The retained earnings balance reported for the consolidated entity as of January 1,
20X1, would be $400,000.

b.

Separate earnings of Yarn Manufacturing


Net income reported by Spencer Corporation
Portion of year ownership was held by Yarn
Income earned following acquisition
Consolidated net income
Income to noncontrolling interest ($20,000 x .05)
Income to controlling interest

$60,000
x 4/12

$140,000
20,000
$160,000
(1,000)
$159,000

c.

Consolidated retained earnings, January 1, 20X1


Income to controlling interest
Dividends paid by Yarn Manufacturing
Consolidated retained earnings, December 31, 20X1

$400,000
159,000
(80,000)
$479,000

d.

Purchase price on August 30, 20X1


Equity method income
Dividends received from Spencer ($25,000 x .95)
Balance in investment account December 31, 20X1

$503,500
19,000
(23,750)
$498,750

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Chapter 10 - Additional Consolidation Reporting Issues

E10-9 Purchase of Shares at Midyear


a.

Journal entries recorded by Highbeam in 20X2:


Investment in Copper Co.
Cash
Record purchase of Copper Company Stock.

b.

319,500
319,500

Investment in Copper Co.


Income from Copper Co.
Record equity-method income.

27,000

Cash
Investment in Copper Co.
Record dividends from Copper Company.

13,500

27,000

13,500

Eliminating Entries:

Sales
Total Expenses
Dividends declared
Retained earnings

90,000
80,000
5,000
5,000

Book Value Calculations:

Original book value


+ Net Income
- Dividends

NCI
10%
35,500
3,000
(1,500)

Ending book value

37,000

Highbeam
Corp.
90%
319,500
27,000
(13,500)

Common
Stock
160,000

333,000

Basic elimination entry


Common stock
Additional paid-in capital
Retained earnings
Income from Copper Co.
NCI in NI of Copper Co.
Dividends declared
Investment in Copper Co.

160,00
0
40,000
155,00
0
27,000
3,000
15,000
333,00
0

10-13

160,000

Add.
Paid-In
Cap.
40,000

40,000

Retained
Earnings
155,000
30,000
(15,000)
170,000

Chapter 10 - Additional Consolidation Reporting Issues

NCI in NA of Copper Co.

37,000

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Chapter 10 - Additional Consolidation Reporting Issues

E10-10 Tax Deferral on Gains and Losses


Eliminating entries, December 31, 20X7:
Sales
COGS
Gross Profit
Gross Profit %

Total
90,000
60,000
30,000
33.33%

Eliminate inventory purchases:


Sales
Cost of Goods Sold
Inventory

Re-sold
30,000
20,000
10,000

Ending
Inventory
60,000
40,000
20,000

90,000
70,000
20,000

Eliminate tax expense on unrealized profit on inventory


transfer:
Deferred Tax Asset
8,000
Income Tax Expense
8,000
Eliminate gain on sale of land:
Gain on Sale of Land
Land

100,000
100,000

Eliminate tax expense on unrealized profit on land transfer:


Deferred Tax Asset
40,000
Income Tax Expense
40,000

E10-11 Unrealized Profits in Prior Year


Eliminating entries, December 31, 20X8:
Eliminate beginning inventory profit:
Investment in Holiday Services
12,000
Income Tax Expense
8,000
Cost of Goods Sold

20,000

Eliminate unrealized gain on sale of land:


Deferred Tax Asset
40,000
Investment in Holiday Services
45,000
NCI in NA of Holiday Services
15,000
Land

100,000

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Chapter 10 - Additional Consolidation Reporting Issues

E10-12 Allocation of Income Tax Expense


a.

Allocation of tax expense incurred in 20X5:


Item
Reported operating income
20X4 profits realized in 20X5
Unrealized profits in 20X5
sales
Realized income before tax
Income tax assigned:
($130,000 / $200,000) x $80,000
($30,000 / $200,000) x $80,000
($40,000 / $200,000) x $80,000

b.

Winter
Corporation

Ray Guard
Corporation

Block
Company

$100,000
40,000

$50,000

$30,000
20,000

(10,000)
$130,000

(20,000)
$30,000

(10,000)
$40,000

$ 52,000

$12,000

$16,000

Computation of consolidated net income and income to controlling interest:


Realized income before tax:
Winter Corporation
Ray Guard Corporation
Block Company
Consolidated income before tax
Income tax expense
Consolidated net income
Income to noncontrolling interests:
Ray Guard Corporation ($30,000 - $12,000) x 0.20
Block Company ($40,000 - $16,000) x 0.10
Income to controlling interest

10-16

$130,000
30,000
40,000
$200,000
(80,000)
$120,000
$ 3,600
2,400

(6,000)
$114,000

Chapter 10 - Additional Consolidation Reporting Issues

E10-13 Effect of Preferred Stock on Earnings per Share


Because both companies paid preferred dividends in 20X1 and neither issue is convertible, only
one basic consolidated earnings per share number will be reported for 20X1:
Operating income of Amber Corporation
Net income of Newtop Company
Less: Preferred dividends
Earnings available to Newtop common shareholders
Consolidated net income
Less: Income to noncontrolling interest ($40,000 x .30)
Income to common shareholders of Amber Corporation
Less: Preferred dividends of Amber Corporation
Earnings available to common shareholders
Consolidated earnings per share for 20X1
($78,000 / 12,000 shares)

$45,000
(5,000)

$59,000
40,000
$99,000
(12,000)
$87,000
(9,000)
$78,000
$6.50

E10-14 Effect of Convertible Bonds on Earnings per Share


Basic earnings per share:
Operating income of Crystal Corporation
Contribution to consolidated EPS from Evans Company
($30,000 / 10,000) x 6,000 shares
Earnings available to common shareholders
Consolidated earnings per share for 20X2
($63,000 / 30,000 shares)

$45,000
18,000
$63,000
$2.10

Diluted earnings per share:


Operating income of Crystal Corporation
Contribution to consolidated EPS from Evans Company:
$30,000 + $12,000 (a)
x 6,000 shares
10,000 shares + 10,000 shares
Earnings available to common shareholders
Consolidated earnings per share for 20X2
($57,600 / 30,000 shares)
(a) $12,000 = ($200,000 x 0.10) x (1 - 0.40)

10-17

$45,000

12,600
$57,600
$1.92

Chapter 10 - Additional Consolidation Reporting Issues

E10-15 Effect of Convertible Preferred Stock on Earnings per Share


Basic earnings per share:
Operating income of Eagle Corporation
Contribution to consolidated EPS from Standard Company:
$45,000 - $12,000
x 8,000 shares
10,000 shares
Earnings available to shareholders
Preferred dividends of Eagle Corporation
Earnings available to common shareholders
Consolidated earnings per share for 20X1
($70,400 / 10,000 shares)

$60,000

26,400
$86,400
(16,000)
$70,400
$7.04

Diluted earnings per share:


Operating income of Eagle Corporation
Contribution to consolidated EPS from Standard Company:
$45,000
x 8,000 shares
10,000 shares + 15,000 shares
Earnings available to shareholders
Preferred dividends of Eagle Corporation
Earnings available to common shareholders
Consolidated earnings per share for 20X1
($58,400 / 10,000 shares)

10-18

$60,000

14,400
$74,400
(16,000)
$58,400
$5.84

Chapter 10 - Additional Consolidation Reporting Issues

SOLUTIONS TO PROBLEMS
P10-16 Direct Method Computation of Cash Flows
Car Corporation and Subsidiary
Operating Cash Flows
For the Year Ended December 31, 20X1
Cash Flows from Operating Activities:
Cash Received from Customers
Cash Payments to Suppliers
Net Cash Provided by Operating Activities

$533,000
(268,000)
$265,000

Computation of payments received from customers


Sales of Car Corporation
Sales to outside parties by Bus Company ($240,000 - $100,000)
Increase in Car Corporation accounts receivable
Decrease in Bus Companys accounts receivable
Payments received from customers

$400,000
140,000
(9,000)
2,000
$533,000

Computation of payments to suppliers


Cost of goods sold by Car Corporation excluding sale of
inventory purchased from Bus Company ($235,000 - $40,000)
Cost of goods sold on sales by Bus Company
to outside parties ($105,000 - $70,000)
Cost of goods sold on intercompany sales
resold in period ($70,000 x 0.40)
Decrease in Car Corporation inventory
Increase in Bus Company inventory
Decrease in accounts payable of Car Corporation
Increase in accounts payable of Bus Company
Payment made to suppliers

10-19

$195,000
35,000
28,000
(22,000)
16,000
31,000
(15,000)
$268,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-17 Preparing a Statement of Cash Flows


a.

Metal Corporation and Ocean Company


Consolidated Cash Flow Worksheet
Year Ended December 31, 20X3
Item

Balance
1/1/X3

Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Patents

68,500
82,000
115,000
45,000
515,000
5,000
830,500

Accumulated Depreciation
Accounts Payable
Wages Payable
Notes Payable
Common Stock
Retained Earnings
Noncontrolling Interest

186,500
61,000
26,000
250,000
150,000
130,000
27,000
830,500

Cash Flows from Operating Activities:


Consolidated Net Income
Depreciation Expense
Amortization of Patent
Increase in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable
Decrease in Wages Payable

Debit
(a)32,000
(b) 15,000
(c) 8,000
(d)10,000
(e)35,000

(i) 6,000
(k) 30,000
(m) 5,000
141,000
(l) 83,500
(g) 36,500
(f) 1,000
(h) 5,000

Cash Flows from Investing Activities:


Purchase of Land
Purchase of Buildings and Equipment

Credit

(f) 1,000
(g) 36,500
(h) 5,000
(j) 15,000
(l) 74,500
(l) 9,000
141,000

(b) 15,000
(c) 8,000
(i) 6,000
(d) 10,000
(e) 35,000

Cash Flows from Financing Activities:


Increase in Notes Payable
Dividends Paid:
To Metal Corporation Shareholders
To Ocean Company Shareholders
Increase in Cash

(j) 15,000

141,000

10-20

(k) 30,000
(m) 5,000
(a) 32,000
141,000

Balance
12/31/X3
100,500
97,000
123,000
55,000
550,000
4,000
929,500
223,000
66,000
20,000
265,000
150,000
174,500
31,000
929,500

Chapter 10 - Additional Consolidation Reporting Issues

P10-17 (continued)
b.

Consolidated statement of cash flows for 20X3


Metal Corporation and Subsidiary
Consolidated Statement of Cash Flows
Year Ended December 31, 20X3
Cash Flows from Operating Activities
Consolidated Net Income
Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Depreciation Expense
Amortization Expense
Increase in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable
Decrease in Wages Payable
Net Cash Provided by Operating Activities

$ 83,500
36,500
1,000
(15,000)
(8,000)
5,000
(6,000)

Cash Flows from Investing Activities:


Purchase of Land
Purchase of Buildings and Equipment
Net Cash Used in Investing Activities

$(10,000)
(35,000)

Cash Flows from Financing Activities:


Increase in Notes Payable
Dividends Paid to Parent Company Shareholders
Dividends Paid to Noncontrolling Shareholders
Net Cash Used in Financing Activities

$ 15,000
(30,000)
( 5,000)

Net Increase in Cash


Cash at Beginning of Year
Cash at End of Year

$97,000

(45,000)

(20,000)
$ 32,000
68,500
$100,500

10-21

Chapter 10 - Additional Consolidation Reporting Issues

P10-18 Preparing a Statement of Cash Flows Direct Method


a.

Metal Corporation and Ocean Company


Consolidated Cash Flow Worksheet
Year Ended December 31, 20X3
Item

Balance
1/1/X3

Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Patents

68,500
82,000
115,000
45,000
515,000
5,000
830,500

Accumulated Depreciation
Accounts Payable
Wages Payable
Notes Payable
Common Stock
Retained Earnings
Noncontrolling Interest

186,500
61,000
26,000
250,000
150,000
130,000
27,000
830,500

Sales
Cost of Goods Sold
Wage Expense
Depreciation Expense
Interest Expense
Amortization Expense
Other Expenses

490,000
259,000
55,000
36,500
16,000
1,000
39,000
406,500
83,500

Consolidated Net Income

Debit
(a)
(b)
(c)
(d)
(e)

32,000
15,000
8,000
10,000
35,000

(h) 6,000
(k) 30,000
(m) 5,000
141,000
(c)259,000
(h) 55,000
(g) 36,500
(i) 16,000
(f) 1,000
(c) 39,000

10-22

(l) 83,500
490,000

Credit

(f)

1,000

(g) 36,500
(c) 5,000
(j) 15,000
(l) 74,500
(l) 9,000
141,000
(b)490,000

490,000

Balance
12/31/X3
100,500
97,000
123,000
55,000
550,000
4,000
929,500
223,000
66,000
20,000
265,000
150,000
174,500
31,000
929,500

Chapter 10 - Additional Consolidation Reporting Issues

P10-18 (continued)
Cash Flows from Operating Activities:
Cash Received from Customers
Cash Paid to Suppliers
Cash Paid to Employees
Cash Paid for Interest on Notes Payable

(b)475,000

Cash Flows from Investing Activities:


Purchase of Land
Purchase of Buildings and Equipment

(d) 10,000
(e) 35,000

Cash Flows from Financing Activities:


Increase in Notes Payable
Dividends Paid:
To Metal Corporation Shareholders
To Ocean Company Shareholders
Increase in Cash

b.

(c)301,000
(h) 61,000
(i) 16,000

(j) 15,000

490,000

(k) 30,000
(m) 5,000
(a) 32,000
490,000

Consolidated statement of cash flows for 20X3


Metal Corporation and Subsidiary
Consolidated Statement of Cash Flows
Year Ended December 31, 20X3
Cash Flows from Operating Activities:
Cash Received from Customers
Cash Paid to Suppliers
Cash Paid to Employees
Cash Paid for Interest on Notes Payable
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Purchase of Land
Purchase of Buildings and Equipment
Net Cash Used in Investing Activities

$301,000
61,000
16,000

$(10,000)
(35,000)

Cash Flows from Financing Activities:


Increase in Notes Payable
Dividends Paid to Parent Company Shareholders
Dividends Paid to Noncontrolling Shareholders
Net Cash Used in Financing Activities
Net Increase in Cash
Cash at Beginning of Year
Cash at End of Year

$15,000
(30,000)
( 5,000)

$475,000
(378,000)
$ 97,000

(45,000)

(20,000)
$ 32,000
68,500
$100,500

10-23

Chapter 10 - Additional Consolidation Reporting Issues

P10-18 (continued)
The FASB also requires the following reconciliation when the statement of cash flows is
prepared using the direct method:
Reconciliation of consolidated net income to net cash provided by operating
activities
Consolidated Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation Expense
Amortization Expense
Increase in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable
Decrease in Wages Payable
Total Adjustments
Net Cash Provided by Operating Activities

10-24

$83,500
$36,500
1,000
(15,000)
(8,000)
5,000
(6,000)

13,500
$97,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-19 Consolidated Statement of Cash Flows


a.

Traper Company and Arrow Company


Consolidation Cash Flow Worksheet
Year Ended December 31, 20X4
Balance
1/1/X4

Item
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Goodwill

83,000
210,000
320,000
190,000
850,000
40,000
1,693,000

Accum. Depreciation
Accounts Payable
Interest Payable
Bonds Payable
Bond Premium
Common Stock
Additional Paid-In Capital
Retained Earnings
Noncontrolling Interest

280,000
52,000
45,000
400,000
18,000
300,000
70,000
488,000
40,000
1,693,000

Cash Flows from Operating Activities:


Consolidated Net Income
Depreciation Expense
Goodwill Impairment Loss
Amortization of Bond Premium
Loss on Sale of Land
Decrease in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable
Decrease in Interest Payable

Debit
(a) 98,000
(c) 50,000
(e)130,000

(i) 15,000
(k) 2,000
(l) 25,000
(n) 3,000
323,000
(m) 79,000
(g) 45,000
(f) 12,000
(d) 20,000
(b) 35,000
(h) 22,000

Cash Flows from Investing Activities:


Sale of Land
Purchase of Buildings and Equipment

(d) 10,000

Cash Flows from Financing Activities:


Sale of Bonds
Dividends Paid:
To Traper Shareholders
To Noncontrolling Shareholders
Increase in Cash

Credit
(b) 35,000
(d) 30,000
(f) 12,000
(g) 45,000
(h) 22,000
(j) 100,000

(m) 72,000
(m) 7,000
323,000

(k)

2,000

(c) 50,000
(i) 15,000

(e)130,000

(j)100,000

323,000

10-25

(l) 25,000
(n) 3,000
(a) 98,000
323,000

Balance
12/31/X4
181,000
175,000
370,000
160,000
980,000
28,000
1,894,000
325,000
74,000
30,000
500,000
16,000
300,000
70,000
535,000
44,000
1,894,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-19 (continued)
Explanation of Worksheet Entries:
(a)

Increase in cash balance

(b)

Decrease in accounts receivable

(c)

Increase in inventory

(d)

Sale of land

(e)

Purchase of buildings and equipment

(f)

Goodwill impairment loss recognized in 20X4

(g)

Depreciation charges for 20X4

(h)

Increase in accounts payable

(i)

Decrease in interest payable

(j)

Sale of bonds

(k)

Amortize bond premium

(l)

Traper Company dividend $25,000

(m
)

Consolidated net income $79,000

(n)

Arrow Company dividend $15,000 x 0.20

10-26

Chapter 10 - Additional Consolidation Reporting Issues

P10-19 (continued)
b.

Consolidated statement of cash flows for 20X4:


Traper Company and Subsidiary
Consolidated Statement of Cash Flows
For Year Ended December 31, 20X4

Cash Flows from Operating Activities:


Consolidated Net Income
Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Depreciation Expense
Goodwill Impairment Loss
Amortization of Bond Premium
Loss on Sale of Land
Decrease in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable
Decrease in Interest Payable
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Sale of Land
Purchase of Buildings and Equipment
Net Cash Used in Investing Activities

$79,000
45,000
12,000
(2,000)
20,000
35,000
(50,000)
22,000
(15,000)

$ 10,000
(130,000)

Cash Flows from Financing Activities:


Sale of Bonds
Dividends Paid:
To Parent Company Shareholders
To Noncontrolling Shareholders
Net Cash Provided by Financing Activities
Net Increase in Cash
Cash Balance at Beginning of Year
Cash Balance at End of Year

$146,000

(120,000)

$100,000
(25,000)
(3,000)

10-27

72,000
$ 98,000
83,000
$181,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-20 Consolidated Statement of Cash Flows Direct Method


a.

Traper Company and Arrow Company


Consolidation Cash Flow Worksheet
Year Ended December 31, 20X4
Item

Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Goodwill
Accum. Depreciation
Accounts Payable
Interest Payable
Bonds Payable
Bond Premium
Common Stock
Additional Paid-In
Capital
Retained Earnings
Noncontrolling Interest
Sales
Cost of Goods Sold
Depreciation Expense
Interest Expense
Loss on Sale of Land
Goodwill Impairment Loss
Consolidated Net Income

Balance
1/1/X4
83,000
210,000
320,000
190,000
850,000
40,000
1,693,000
280,000
52,000
45,000
400,000
18,000
300,000
70,000

Debit
(a) 98,000
(c) 50,000
(e)130,000

(h) 15,000
(h)

488,000
40,000
1,693,000
600,000
375,000
45,000
69,000
20,000
12,000
521,000
79,000

2,000

(j) 25,000
(l) 3,000
323,000
(c)375,000
(g) 45,000
(h) 69,000
(d) 20,000
(f) 12,000
(k) 79,000
600,000

10-28

Credit
(b) 35,000
(d) 30,000
(f) 12,000
(g) 45,000
(c) 22,000

Balance
12/31/X4
181,000
175,000
370,000
160,000
980,000
28,000
1,894,000

(i) 100,000

325,000
74,000
30,000
500,000
16,000
300,000
70,000

(k) 72,000
(k) 7,000
323,000

535,000
44,000
1,894,000

(b)600,000

600,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-20 (continued)
Cash Flows from Operating Activities:
Cash Received from Customers
Cash Paid to Suppliers
Cash Paid for Interest on
Bonds Payable

(b)635,000

(c)403,000
(h) 86,000

Cash Flows from Investing Activities:


Sale of Land
Purchase of Buildings and Equipment

(d) 10,000

Cash Flows from Financing Activities:


Sale of Bonds
Dividends Paid:
To Traper Shareholders
To Noncontrolling Shareholders
Increase in Cash

(e)130,000

(i) 100,000

745,000

Explanation of Worksheet Entries:


(a) Increase in cash balance
(b) Payments received from customers
(c) Payments to suppliers
(d) Sale of land
(e) Purchase of buildings and equipment
(f) Goodwill impairment loss recognized in 20X4
(g) Depreciation charges for 20X4
(h) Payment of interest
(i)Sale of bonds
(j) Traper Company dividend $25,000
(k) Consolidated net income $79,000
(l) Arrow Company dividend $15,000 x 0.20

10-29

(j) 25,000
(l) 3,000
(a) 98,000
745,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-20 (continued)
b.

Consolidated statement of cash flows for 20X4:


Traper Company and Subsidiary
Consolidated Statement of Cash Flows
For Year Ended December 31, 20X4

Cash Flows from Operating Activities:


Cash Received from Customers
Cash Payments to Suppliers
Cash Payments of Interest
Net Cash Provided by Operating Activities

$403,000
86,000

Cash Flows from Investing Activities:


Sale of Land
Purchase of Buildings and Equipment
Net Cash Used in Investing Activities

$ 10,000
(130,000)

Cash Flows from Financing Activities:


Sale of Bonds
Dividends Paid:
To Parent Company Shareholders
To Noncontrolling Shareholders
Net Cash Provided by Financing Activities
Net Increase in Cash
Cash Balance at Beginning of Year
Cash Balance at End of Year

$635,000
(489,000)
$146,000

(120,000)

$100,000
(25,000)
(3,000)

72,000
$ 98,000
83,000
$181,000

The FASB also requires the following reconciliation when the statement of cash flows is
prepared using the direct method:
Reconciliation of consolidated net income to net cash provided by operating
activities
Consolidated Net Income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation Expense
Goodwill Impairment Loss
Amortization of Bond Premium
Loss on Sale of Land
Decrease in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable
Decrease in Interest Payable
Total Adjustments
Net Cash Provided by Operating Activities

10-30

$ 79,000
$45,000
12,000
(2,000)
20,000
35,000
(50,000)
22,000
(15,000)

67,000
$146,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-21 Consolidated Statement of Cash Flows


Weatherbee Company and Sun Corporation
Consolidation Cash Flow Worksheet
Year Ended December 31, 20X6
Balance
1/1/X6

Item
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment

54,000
121,000
230,000
95,000
800,000
1,300,000

Accumulated Depreciation
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Noncontrolling Interest

290,000
90,000
300,000
300,000
290,000
30,000
1,300,000

Cash Flows from Operating Activities:


Consolidated Net Income
Depreciation Expense
Gain on Sale of Equipment
Decrease in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable

Debit
(a) 21,000
(c)130,000
(d) 5,000

(e)100,000
(h) 50,000
(i) 65,000
(k) 4,000
375,000

(j)160,000
(f) 40,000
(b) 10,000
(g) 15,000

Cash Flows from Investing Activities:


Sale of Buildings and Equipment
Purchase of Land

(e) 80,000

Cash Flows from Financing Activities:


Bond Retirement
Dividends Paid:
To Weatherbee Company Shareholders
To Noncontrolling Shareholders
Increase in Cash

Credit
(b) 10,000
(e)150,000
(f) 40,000
(g) 15,000
(j) 148,000
(j) 12,000
375,000

(e) 30,000
(c)130,000

(d)

5,000

(h) 50,000

305,000

10-31

(i) 65,000
(k) 4,000
(a) 21,000
305,000

Balance
12/31/X6
75,000
111,000
360,000
100,000
650,000
1,296,000
230,000
105,000
250,000
300,000
373,000
38,000
1,296,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-22 Consolidated Statement of Cash Flows Direct Method


Weatherbee Company and Sun Corporation
Consolidation Cash Flow Worksheet
Year Ended December 31, 20X6
Balance
1/1/X6

Item

Debit

Credit

Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment

54,000 (a) 21,000


121,000
230,000 (c) 130,000
95,000 (d)
5,000
800,000
1,300,000

Accumulated Depreciation
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Noncontrolling Interest

290,000 (e) 100,000


90,000
300,000 (g) 50,000
300,000
290,000 (h) 65,000
30,000 (j)
4,000
1,300,000
375,000

(f)
(c)

Sales
Gain on Sale of Equipment

1,070,000
30,000
1,100,000
750,000
40,000
150,000
940,000
160,000

(b)1,070,000
(e) 30,000

Cost of Goods Sold


Depreciation Expense
Other Expenses
Consolidated Net Income

10,000

(e) 150,000
40,000
15,000

(i) 148,000
(i) 12,000
375,000

(c) 750,000
(f) 40,000
(c) 150,000
(i) 160,000
1,100,000

Cash Flows from Operating Activities:


Cash Received from Customers
Cash Paid to Suppliers

(b)1,080,000

Cash Flows from Investing Activities:


Sale of Buildings and Equipment
Purchase of Land

(e) 80,000

Cash Flows from Financing Activities:


Bond Retirement
Dividends Paid
To Weatherbee Company Shareholders
To Noncontrolling Shareholders
Increase in Cash

(b)

1,160,000

10-32

1,100,000

(c)1,015,000

(d)

5,000

(g)

50,000

(h) 65,000
(j)
4,000
(a) 21,000
1,160,000

Balance
12/31/X6
75,000
111,000
360,000
100,000
650,000
1,296,000
230,000
105,000
250,000
300,000
373,000
38,000
1,296,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-23 Consolidated Statement of Cash Flows [AICPA Adapted]


Brimer, Inc., and Subsidiary
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X6
Cash Flows from Operating Activities:
Consolidated Net Income
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation
Goodwill Impairment Loss
Gain on Sale of Equipment
Decrease in Allowance to Reduce
Marketable Securities to Market
Decrease in Accounts Receivable
Increase in Inventories
Increase in Accounts Payable
and Accrued Liabilities
Increase in Deferred Income Taxes
Total Adjustments
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Purchase of Equipment
Sale of Equipment
Net Cash Used in Investing Activities

$231,000
82,000 [1]
3,000
(6,000)
(11,000)
22,000
(70,000)
121,000
12,000

$(127,000)
40,000

Cash Flows from Financing Activities:


Payment on Note Payable
Sale of Treasury Stock
Cash Dividend Paid by Parent Company
Cash Dividend Paid to Minority Stockholders
of Subsidiary
Net Cash Used in Financing Activities
Net Increase in Cash
Cash at Beginning of Year
Cash at End of Year

153,000
$384,000

(87,000)

$(150,000)
44,000
(58,000)
(15,000) [2]

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

Supplemental Schedule of Noncash Investing and Financing Activities:


Issuance of Common Stock to PurchaseLand

10-33

$215,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-23 (continued)
Explanations of Amounts:
[1]

[2]

Depreciation:
Accumulated depreciation, Dec. 31, 20X6
Accumulated depreciation on equipment sold
($62,000 - $34,000)

$199,000

Deduct accumulated depreciation, Dec. 31, 20X5


Depreciation for 20X6

28,000
227,000
(145,000)
$ 82,000

Cash dividends paid to minority stockholders of subsidiary:


Cash dividend paid by Dore Corporation
Minority ownership
Cash dividend paid to minority stockholders in 20X6

$ 50,000
x
0.30
$ 15,000

10-34

Chapter 10 - Additional Consolidation Reporting Issues

P10-24 Statement of Cash Flows Prepared from Consolidation Worksheet


a.

Worksheet for consolidated statement of cash flows:


Detecto Corporation and Strand Company
Consolidation Cash Flow Worksheet
Year Ended December 31, 20X3
Item

Balance
1/1/X3

Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment

92,000
135,000
140,000
75,000
400,000

Patents

30,000
872,000

Accumulated Depreciation
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Noncontrolling Interest

210,000
114,200
90,000
100,000
273,000
84,800
872,000

Cash Flows from Operating Activities:


Consolidated Net Income
Amortization Expense
Depreciation Expense
Decrease in Accounts Receivable
Increase in Inventory
Decrease in Accounts Payable

Debit

(c) 59,000
(d) 5,000
(e)100,000
(f) 40,000

(i) 19,200
(k) 50,000
(m) 8,000
281,200
(l) 91,000
(g) 5,000
(h) 40,000
(b) 15,000

Cash Flows from Investing Activities:


Purchase of Land
Acquisition of Buildings and
Equipment from Bond Issue
Purchase of Buildings and Equipment
Cash Flows from Financing Activities:
Dividends Paid:
To Detecto Corp. Shareholders
To Noncontrolling Shareholders
Issuance of Bonds for Buildings
and Equipment
Decrease in Cash

Credit
(a) 30,200
(b) 15,000

(g) 5,000
(h) 40,000
(j) 100,000
(l) 79,400
(l) 11,600
281,200

(c) 59,000
(i) 19,200
(d)

5,000

(e)100,000
(f) 40,000

(k) 50,000
(m) 8,000
(j) 100,000
(a) 30,200
281,200

10-35

281,200

Balance
12/31/X3
61,800
120,000
199,000
80,000
540,000
25,000
1,025,800
250,000
95,000
190,000
100,000
302,400
88,400
1,025,800

Chapter 10 - Additional Consolidation Reporting Issues

P10-24 (continued)
b.

Consolidated cash flow statement for 20X3:


Detecto Corporation and Subsidiary
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X3

Cash Flows from Operating Activities:


Consolidated Net Income
Noncash Expenses, Revenue, Losses and Gains
Included in Income:
Amortization Expense
Depreciation Expense
Decrease in Accounts Receivable
Increase in Inventory
Decrease in Accounts Payable
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Purchase of Land
Purchase of Buildings and Equipment
Net Cash Used in Investing Activities

$ 91,000
5,000
40,000
15,000
(59,000)
(19,200)

$ (5,000)
(40,000)

Cash Flows from Financing Activities:


Dividends Paid:
To Parent Company Shareholders
To Noncontrolling Shareholders
Net Cash Received from
Financing Activities
Net Decrease in Cash
Cash Balance at Beginning of Year
Cash Balance at End of Year

$ 72,800

(45,000)

$(50,000)
(8,000)
(58,000)
$(30,200)
92,000
$ 61,800

Supplemental Schedule of Noncash Investing and Financing Activities:


Issuance of Bonds to Purchase Equipment

$100,000

10-36

Chapter 10 - Additional Consolidation Reporting Issues

P10-25 Midyear Purchase of Controlling Interest


a.

Equity-method entries recorded by Mega Theaters during 20X1:


Investment in BlaseCo.
Cash
Record purchase of Blase Company stock.

765,000
765,000

Investment in BlaseCo.
97,750
Income from Blase Co.
Record equity-method income: ($175,000 - $60,000) x 0.85

97,750

Cash
25,500
Investment in Blase Co.
Record dividends from Blase Company: $30,000 x 0.85

25,500

10-37

Chapter 10 - Additional Consolidation Reporting Issues

P10-25 (continued)
b. Eliminating entries, December 31, 20X1:
Sales
Operating Expenses
Dividends declared
Retained earnings

240,000
180,000
10,000
50,000

Book Value Calculations:

Original book value


+ Net Income
- Dividends
Ending book value

NCI
15%
120,000
17,250
(4,500)
132,750

Basic elimination entry


Common stock
Additional paid-in capital
Retained earnings
Income from Blase Co.
NCI in NI of Blase Co.
Dividends declared
Investment in Blase Co.
NCI in NA of Blase Co.

Mega
Theaters
85%
680,000
97,750
(25,500)
752,250

Common
Stock
100,000

100,000

Add.
Paid-In
Cap.
500,000
500,000

Retained
+
Earnings
200,000
115,000
(30,000)
285,000

100,000
500,000
200,000
97,750
17,250
30,000
752,250
132,750

Excess Value (Differential) Calculations:


Beginning balance
Changes
Ending balance

NCI 15%
15,000
0
15,000

Mega Theaters
85%
85,000
0
85,000

Goodwill
100,000
0
100,000

Excess value (differential) reclassification entry:


Goodwill
100,000
Investment in Blase Co.
85,000
NCI in NA of Blase Co.
15,000

Computation of differential
Compensation given by Mega Theaters
Fair value of noncontrolling interest
Total fair value
Book value of Blase stock:
Common stock
Additional paid-in capital
Retained earnings, January 1
First quarter undistributed
earnings ($60,000 - $10,000)
Book value, April 1
Goodwill

$765,000
135,000
$900,000
$100,000
500,000
150,000
50,000
(800,000)
$100,000

10-38

Chapter 10 - Additional Consolidation Reporting Issues

10-39

Chapter 10 - Additional Consolidation Reporting Issues

P10-26 Consolidation Involving a Midyear Purchase


a.

Journal entries recorded by Famous Products:


Investment in Sanford Co.
Common Stock
Additional Paid-In Capital
Record purchase of Sanford Company stock:
$80,000 = $10 x 8,000 shares
$167,500 = $247,500 - $80,000

247,500
80,000
167,500

Investment in Sanford Co.


13,500
Income from Sanford Co.
Record equity-method income: $13,500 = $15,000 x 0.90

13,500

Cash
9,000
Investment in Sanford Co.
Record dividend received from Sanford: $9,000 = $10,000 x 0.90
b. Eliminating entries, December 31, 20X2:
Pre-acquisition income and dividend elimination entry:
Sales
205,000
Cost of Goods Sold
126,000
Depreciation Expense
16,000
Other Expenses
18,000
Dividends declared
20,000
Retained earnings
25,000
Book Value Calculations:

Original book value


+ Net Income
- Dividends
Ending book value

NCI
10%
27,500
1,500
(1,000)
28,000

Basic elimination entry


Common stock
Retained earnings
Income from Sanford Co.
NCI in NI of Sanford Co.
Dividends declared
Investment in Sanford Co.
NCI in NA of Sanford Co.

Famous
Products
90%
247,500
13,500
(9,000)
252,000

Common
Stock
150,000

150,000

150,000
125,000
13,500
1,500
10,000
252,000
28,000

10-40

Retained
Earnings
125,000
15,000
(10,000)
130,000

9,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-26 (continued)
c.
Elimination Entries
DR
CR

Famous
Products

Sanford
Co.

390,000
(305,000)
(25,000)
(14,000)
13,500
59,500

250,000
(145,000)
(20,000)
(25,000)
0
60,000

59,500

60,000

Statement of Retained Earnings


Beginning Balance
Net Income
Less: Dividends Declared

135,000
59,500
(40,000)

100,000
60,000
(30,000)

125,000
220,000

Ending Balance

154,500

130,000

345,000

85,000
100,000
150,000
400,000
(105,000)
252,000
882,000

50,000
60,000
100,000
340,000
(65,000)
0
485,000

40,000
70,000
250,000
200,000
167,500
154,500

50,000
55,000
100,000
150,000
0
130,000

882,000

485,000

Income Statement
Sales
Less: COGS
Less: Depreciation Expense
Less: Other Expenses
Income from Sanford Co.
Consolidated Net Income
NCI in Net Income
Controlling Interest in Net Income

Balance Sheet
Cash
Accounts Receivable
Inventory
Buildings and Equipment
Less: Accumulated Depreciation
Investment in Sanford Co.
Total Assets
Accounts Payable
Taxes Payable
Bonds Payable
Common Stock
Additional Paid-In Capital
Retained Earnings
NCI in NA of Sanford Co.
Total Liabilities & Equity

10-41

205,000
126,000
16,000
18,000
13,500
218,500
1,500
220,000

160,000
160,000

25,000
160,000
10,000
20,000
215,000

495,000

435,000
(324,000)
(29,000)
(21,000)
0
61,000
(1,500)
59,500

135,000
59,500
(40,000)
154,500

252,000
252,000

135,000
160,000
250,000
740,000
(170,000)
0
1,115,000

215,000
28,000
243,000

90,000
125,000
350,000
200,000
167,500
154,500
28,000
1,115,000

150,000
345,000

Consolidated

Chapter 10 - Additional Consolidation Reporting Issues

P10-27 Tax Allocation in Consolidated Balance Sheet


In changing this problem to the fully adjusted equity method, we failed to change two
numbers. The Investment in Brown Company Stock should be $235,600 and Retained
Earnings of Acme Powder Corp. should be $530,000. If these changes are not made, the
Investment in Brown Company Stock account is not fully eliminated. We present the
worksheet with and without the correction below.
Elimination entries (not required):
Book Value Calculations:

Ending book value

NCI
30%
120,000

Acme
Powder
70%
280,000

Common
Stock
150,000

Retained
Earnings
250,000

Deferred Gain Calculations:

Upstream GP Deferral (net of taxes)


Downstream GP Deferral (net of taxes)
Upstream Gain on Asset Sale (net of taxes)
Total

Basic elimination entry


Common stock
150,000
Retained earnings
250,000
Income from Brown Co.
NCI in NI of Brown Co.
Investment in Brown Co.
NCI in NA of Brown Co.

Total
(12,000)
(15,000)
(30,000)
(57,000)

44,400
12,600
235,600
107,400

Acme
Powder's
share
(8,400)
(15,000)
(21,000)
(44,400)

NCI's
share
(3,600)
(9,000)
(12,600)

Original amount invested (100%)


Beginning balance in RE
Acme Powders share GP Deferrals - Gain
NCI share of GP Deferral - Gain
Acme Powder's share of BV - GP Deferrals - Gain
NCI share of BV of net assets - GP Def. - Gain

10-42

Chapter 10 - Additional Consolidation Reporting Issues

Sales
COGS
Gross Profit
Gross Profit %

Total
70,000
50,000
20,000
28.57%

Re-sold
0
0
0

Eliminate inventory purchases:


Sales
Cost of Goods Sold
Inventory

Ending Inventory
70,000
50,000
20,000

70,000
50,000
20,000

Eliminate tax expense on unrealized profit on inventory


transfer:
Deferred Tax Asset
8,000
Income Tax Expense
8,000

10-43

Chapter 10 - Additional Consolidation Reporting Issues

P10-27 (continued)
Sales
COGS
Gross Profit
Gross Profit %

Total
85,000
60,000
25,000
29.41%

Re-sold
0
0
0

Eliminate inventory purchases:


Sales
Cost of Goods Sold
Inventory

Ending Inventory
85,000
60,000
25,000

85,000
60,000
25,000

Eliminate tax expense on unrealized profit on inventory


transfer:
Deferred Tax Asset
10,000
Income Tax Expense
10,000

Acme Powder
Brown Co.

Equipment
90,000
30,000
120,000

Accumulated
Depreciation
Actual

0
80,000
80,000

"As If"

Eliminate the gain on Equipment and correct asset's basis:


Gain on sale
50,000
Equipment
30,000
Accumulated Depreciation
80,000

Eliminate tax expense on unrealized profit from asset


transfer:
Deferred Tax Asset
20,000
Income Tax Expense
20,000

10-44

Chapter 10 - Additional Consolidation Reporting Issues

P10-27 (continued)
BASED ON CORRECTED NUMBERS:
a.

Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Less: Accumulated Depreciation
Investment in Brown Co.
Deferred Tax Asset

Acme
Powder

Brown
Co.

44,400
120,000
170,000

20,000
60,000
120,000

90,000
500,000
(180,000)
235,600

30,000
300,000
(80,000)
0

Total Assets

980,000

450,000

Accounts Payable
Wages Payable
Bonds Payable
Common Stock
Retained Earnings

70,000
80,000
200,000
100,000
530,000

20,000
30,000
0
150,000
250,000

NCI in NA of Brown Co.


Total Liabilities & Equity

980,000

450,000

**Note: Numbers in red are the corrected amounts

10-45

Elimination Entries
DR
CR

20,000
25,000
30,000
80,000
235,600
8,000
10,000
20,000
68,000

150,000
250,000
70,000
85,000
50,000

605,000

360,600

44,400
12,600
50,000
8,000
60,000
10,000
20,000
107,400
312,400

Consolidated
64,400
180,000
245,000
120,000
830,000
(340,000)
0
38,000

1,137,400
90,000
110,000
200,000
100,000
530,000

107,400
1,137,400

Chapter 10 - Additional Consolidation Reporting Issues

P10-27 (continued)
b.

Acme Powder Corporation and Subsidiary


Consolidated Balance Sheet
December 31, 20X9

Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Less: Accumulated Depreciation
Deferred Tax Asset
Total Assets

$830,000
(340,000)

Accounts Payable
Wages Payable
Bonds Payable
Stockholders' Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Noncontrolling Interest
Total Stockholders Equity
Total Liabilities and Stockholders' Equity

64,400
180,000
245,000
120,000

490,000
38,000
$1,137,400
$ 90,000
110,000
200,000

$100,000
530,000
$630,000
107,400

10-46

737,400
$1,137,400

Chapter 10 - Additional Consolidation Reporting Issues

P10-27 (continued)
BASED ON UNCORRECTED NUMBERS:
a.

Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Less: Accumulated Depreciation
Investment in Brown Co.
Deferred Tax Asset

Acme
Powder

Brown
Co.

44,400
120,000
170,000

20,000
60,000
120,000

90,000
500,000
(180,000)
280,000

30,000
300,000
(80,000)
0

Elimination Entries
DR
CR

20,000
25,000
30,000
80,000
235,600
8,000
10,000
20,000

Total Assets

1,024,40
0

450,000

Accounts Payable
Wages Payable
Bonds Payable
Common Stock
Retained Earnings

70,000
80,000
200,000
100,000
574,400

20,000
30,000
0
150,000
250,000

68,000

150,000
250,000
70,000
85,000
50,000

NCI in NA of Brown Co.


Total Liabilities & Equity

1,024,40
0

450,000

10-47

605,000

360,600

44,400
12,600
50,000
8,000
60,000
10,000
20,000
107,400
312,400

Consolidated
64,400
180,000
245,000
120,000
830,000
(340,000)
44,400
38,000

1,181,800
90,000
110,000
200,000
100,000
574,400

107,400
1,181,800

Chapter 10 - Additional Consolidation Reporting Issues

P10-27 (continued)
b.

Acme Powder Corporation and Subsidiary


Consolidated Balance Sheet
December 31, 20X9

Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Less: Accumulated Depreciation
Investment in Brown Co.
Deferred Tax Asset
Total Assets

$830,000
(340,000)

Accounts Payable
Wages Payable
Bonds Payable
Stockholders' Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Noncontrolling Interest
Total Stockholders Equity
Total Liabilities and Stockholders' Equity

64,400
180,000
245,000
120,000

490,000
44,400
38,000
$1,181,800
$ 90,000
110,000
200,000

$100,000
574,400
$674,400
107,400

10-48

781,800
$1,181,800

Chapter 10 - Additional Consolidation Reporting Issues

P10-28 Computations Involving Tax Allocation


a.

b.

Basic equity-method journal entries recorded by Broom Manufacturing:


Investment in Satellite Industries
142,500
Income from Satellite Industries
Record equity-method income for 20X5: $190,000 x 0.75

142,500

Cash
112,500
Investment in Satellite Industries
Record dividends for 20X5: $150,000 x 0.75

112,500

Income assigned to noncontrolling interest:


Net income of Satellite Industries
Unrealized inventory profit ($30,000 x 0.60)
Unrealized profit on sale of land ($120,000 x 0.60)
Satellite's realized net income
Proportion of stock held by noncontrolling interest
Income to noncontrolling interest

c.

Consolidated net income and income to controlling Interest:


Operating income of Broom Manufacturing
Inventory profits realized in 20X5
Realized operating income of Broom Manufacturing
Realized income of Satellite Industries
Consolidated income before provision for taxes
Provision for income taxes on:
Operating income ($720,000 x 0.40)
Income from Satellite Industries($112,500 x 0.20 x 0.40)
Consolidated Net Income
Income to noncontrolling interest
Income to controlling interest

d.

$190,000
(18,000)
(72,000)
$100,000
x
0.25
$ 25,000

$700,000
20,000
$720,000
100,000
$820,000
$288,000
9,000

(297,000)
$523,000
(25,000)
$498,000

Net assets assigned to noncontrolling interest in consolidated balance sheet at


December 31, 20X5:
Net assets reported by Satellite Industries
Less: Unrealized inventory profits ($30,000 x 0.60)
Unrealized profit on land ($120,000 x 0.60)
Realized net assets of Satellite Industries
Proportion of stock held by noncontrolling interest
Net assets assigned to noncontrolling interest

10-49

$900,000
(18,000)
(72,000)
$810,000
x
.25
$202,500

Chapter 10 - Additional Consolidation Reporting Issues

P10-29 Worksheet Involving Tax Allocation


In changing this problem to the fully adjusted equity method, we failed to change three
numbers. The Investment in Custom Pizza Common Stock should be $138,700, Retained
Earnings of Hardtack Bread Co. should be $370,000, and Income from Custom Pizza
should be $9,900. If these changes are not made, the Investment in Custom Pizza
Common Stock and Income from Custom Pizza accounts are not fully eliminated. We
present the worksheet with and without the correction below.
a. Elimination entries:
Book Value Calculations:

Original book value


+ Net Income
- Dividends
Ending book value

NCI
30%
60,000
10,800
(3,000)
67,800

Hardtack
Bread
70%
140,000
25,200
(7,000)
158,200

Common
Stock
50,000

50,000

Retained
Earnings
150,000
36,000
(10,000)
176,000

Deferred Gain Calculations:

Upstream X6 GP Reversal (net of taxes)


Upstream X7 GP Deferral (net of taxes)
Downstream Gain on Asset Sale (net of taxes)
Total

Basic elimination entry


Common stock
Retained earnings
Income from Custom Pizza
NCI in NI of Custom Pizza
Dividends declared
Investment in Custom Pizza
NCI in NA of Custom Pizza

Total
6,000
(15,000)
(9,000)
(18,000)

50,000
150,000
9,900
8,100

Custom
Pizza's
share
4,200
(10,500)
(9,000)
(15,300)

NCI's share
1,800
(4,500)
(2,700)

Original amount invested (100%)


Beginning balance in RE
Hardtack Breads share of NI + GP Reversal - GP Def. - Gain
NCI share of Tarp Co.'s NI + GP Reversal - GP Def.

10,000
142,900
65,100

10-50

100% of Tarp Co.'s dividends


Hardtack Bread's share of BV + GP Reversal - GP Def. - Gain
NCI share of BV of net assets + GP Reversal - GP Def.

Chapter 10 - Additional Consolidation Reporting Issues

Eliminate beginning inventory profit:


Investment in Custom Pizza
4,200
NCI in NA of Custom Pizza
1,800
Income Tax Expense
4,000
Cost of Goods Sold

Eliminate inventory purchases:


Sales
Cost of Goods Sold
Inventory

10,000

120,000
95,000
25,000

Eliminate tax expense on unrealized profit on inventory


transfer:
Deferred Tax Asset
10,000
Income Tax Expense
10,000

P10-29 (continued)

Custom Pizza
Hardtack Bread

Equipment
65,000
85,000
150,000

Accumulated
Depreciation
Actual
"As If"

Eliminate the gain on Equipment and correct asset's basis:


Gain on sale
15,000
Equipment
85,000
Accumulated Depreciation
100,000
Eliminate tax expense on unrealized profit from asset
transfer:
Deferred Tax Asset
6,000
Income Tax Expense
6,000

10-51

0
100,000
100,000

Chapter 10 - Additional Consolidation Reporting Issues

P10-29 (continued)
BASED ON CORRECTED NUMBERS:
b.
Hardtack
Bread

Custom
Pizza

580,000
(435,000)

300,000
(210,000)

Less: Depreciation Expense


Less: Tax Expense

(40,000)
(44,000)

(20,000)
(24,000)

Less: Other Expenses


Income from Custom Pizza
Gain on Sale of Equipment
Consolidated Net Income
NCI in Net Income
Controlling Interest in Net Income

(11,400)
9,900
15,000
74,500

(10,000)
0
0
36,000

74,500

36,000

370,000
74,500
(20,000)
424,500

150,000
36,000
(10,000)
176,000

35,800
130,000
220,000
60,000
450,000
(150,000)
70,000
138,700

56,000
40,000
60,000
20,000
400,000
(160,000)
0
0

Total Assets

954,500

416,000

Accounts Payable
Wages Payable
Bonds Payable
Deferred Income Taxes
Common Stock
Retained Earnings
NCI in NA of Custom Pizza
Total Liabilities & Equity

40,000
70,000
200,000
120,000
100,000
424,500

30,000
20,000
100,000
40,000
50,000
176,000

954,500

416,000

Income Statement
Sales
Less: COGS

Statement of Retained Earnings


Beginning Balance
Net Income
Less: Dividends Declared
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Less: Accumulated Depreciation
Patents
Investment in Custom Pizza
Deferred Tax Asset

**Note: Numbers in red are the corrected amounts

10-52

Elimination Entries
DR
CR
120,000
10,000
95,000
4,000

9,900
15,000
148,900
8,100
157,000

150,000
157,000
307,000

10,000
6,000

(60,000)
(56,000)

121,000

121,000
10,000
131,000

370,000
74,500
(20,000)
424,500

121,000

85,000
100,000

50,000
307,000
1,800
358,800

760,000
(540,000)

(21,400)
0
0
82,600
(8,100)
74,500

25,000

4,200
10,000
6,000
105,200

Consolidated

142,900

91,800
170,000
255,000
80,000
935,000
(410,000)
70,000
0
16,000

267,900

1,207,800

131,000
65,100
196,100

70,000
90,000
300,000
160,000
100,000
424,500
63,300
1,207,800

Chapter 10 - Additional Consolidation Reporting Issues

P10-29 (continued)
BASED ON UNCORRECTED NUMBERS:
b.
Hardtack
Bread

Custom
Pizza

580,000
(435,000)

300,000
(210,000)

Less: Depreciation Expense


Less: Tax Expense

(40,000)
(44,000)

(20,000)
(24,000)

Less: Other Expenses


Income from Custom Pizza
Gain on Sale of Equipment
Consolidated Net Income
NCI in Net Income
Controlling Interest in Net Income

(11,400)
25,200
15,000
89,800

(10,000)
0
0
36,000

89,800

36,000

374,200
89,800
(20,000)
444,000

150,000
36,000
(10,000)
176,000

35,800
130,000
220,000
60,000
450,000
(150,000)
70,000
158,200

56,000
40,000
60,000
20,000
400,000
(160,000)
0
0

Total Assets

974,000

416,000

Accounts Payable
Wages Payable
Bonds Payable
Deferred Income Taxes
Common Stock
Retained Earnings
NCI in NA of Custom Pizza
Total Liabilities & Equity

40,000
70,000
200,000
120,000
100,000
444,000

30,000
20,000
100,000
40,000
50,000
176,000

974,000

416,000

Income Statement
Sales
Less: COGS

Statement of Retained Earnings


Beginning Balance
Net Income
Less: Dividends Declared
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Less: Accumulated Depreciation
Patents
Investment in Custom Pizza
Deferred Tax Asset

10-53

Elimination Entries
DR
CR
120,000
10,000
95,000
4,000

9,900
15,000
148,900
8,100
157,000

150,000
157,000
307,000

10,000
6,000

(60,000)
(56,000)

121,000

121,000
10,000
131,000

374,200
89,800
(20,000)
444,000

121,000

85,000
100,000

50,000
307,000
1,800
358,800

760,000
(540,000)

(21,400)
15,300
0
97,900
(8,100)
89,800

25,000

4,200
10,000
6,000
105,200

Consolidated

142,900

91,800
170,000
255,000
80,000
935,000
(410,000)
70,000
19,500
16,000

267,900

1,227,300

131,000
65,100
196,100

70,000
90,000
300,000
160,000
100,000
444,000
63,300
1,227,300

Chapter 10 - Additional Consolidation Reporting Issues

P10-30 Earnings per Share with Convertible Securities


Basic earnings per share
Branch Manufacturing income from operations
Short Retail Stores net income
Preferred dividends ($100,000 x 0.08)
Earnings available
Short shares outstanding
Computed EPS for Short
Shares held by Branch Manufacturing
Contribution to Branch Manufacturing earnings
Total earnings of Branch Manufacturing
Preferred dividends of Branch Manufacturing
Earnings to Branch common shareholders
Branch Manufacturing shares outstanding
Basic earnings per share

$49,200
(8,000)
$41,200
20,000
$ 2.06
x16,000

$100,000

32,960
$132,960
(22,000)
$110,960
15,000
$
7.40

Diluted earnings per share


Branch Manufacturing income from operations
Short Retail Stores net income
Assumed conversion of bonds:
$20,000 x 0.60
Earnings available
Short shares outstanding
20,000
Assumed conversion of bonds
8,000
Assumed conversion of preferred
12,000
Total shares
Computed EPS for Short
Shares held by Branch Manufacturing
Contribution to Branch Manufacturing earnings
Total earnings of Branch Manufacturing
Preferred dividends of Branch Manufacturing
Earnings to Branch common shareholders
Branch Manufacturing shares outstanding
Diluted earnings per share

10-54

$49,200

$100,000

12,000
$61,200

40,000
$ 1.53
x16,000

24,480
$124,480
(22,000)
$102,480
15,000
$
6.83

Chapter 10 - Additional Consolidation Reporting Issues

P10-31 Comprehensive Earnings per Share


Basic earnings per share
Mighty Corporation operating income
Longfellow net income
Preferred dividends ($200,000 x 0.11)
Earnings available to common shareholders

$115,000
(22,000)
$
93,000
40,000
$
2.325
x 32,000

Longfellow shares outstanding


Computed EPS for Longfellow
Shares held by Mighty Corporation
Contribution to Mighty Corporation earnings
Total earnings of Mighty Corporation
Mighty Corporation shares outstanding
Basic earnings per share

$300,000

74,400
$374,400
100,000
$ 3.74

Diluted earnings per share


Mighty Corporation operating income
Longfellow net income
Assumed conversion of bonds
($500,000 x 0.08) x 0.60
Earnings available to common
Longfellow shares outstanding
Assumed conversion of bonds
Assumed conversion of preferred
Exercise of warrants:
10,000 - [($8 x 10,000) / $40]
Total shares
Computed EPS for Longfellow
Shares held by Mighty Corporation
Contribution to Mighty Corporation Earnings
Total earnings of Mighty Corporation
Interest savings on assumed conversion
of bonds ($800,000 x 0.10) x 0.60
Mighty Corporation shares
Diluted earnings per share

10-55

$115,000

40,000
30,000
20,000
8,000

$300,000

24,000
$139,000

98,000
$ 1.418
x 32,000

45,376
$345,376
48,000
$393,376
125,000
$
3.15