05 Fischer10e SM Ch05 Final

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CHAPTER 5
UNDERSTANDING THE ISSUES
1. The first approach that could be used to 4. In the current year, consolidated net in-
reduce the overall consolidated interest come will include a gain on retirement of
cost but maintain the subsidiary as the deb- bonds of $5,000 ($100,000 $95,000). In
tor would have the parent advancing the current and each of the next 4 years,
$1,000,000 to the subsidiary so that the consolidated net income will be reduced by
subsidiary may retire the bonds. The former $1,000 ($5,000 5 years), which
debt is retired, and a new long-term represents amortization of the discount
intercompany debt originates. The inter- paid by the parent. In the current year, the
company interest expense would be elimi- NCI will receive $1,000 ($5,000 20%) of
nated during the consolidation process. the gain on the retirement of bonds. In the
Another approach would have the parent current and each of the next 4 years, NCI
purchasing the subsidiary bonds from out- share of income will be reduced by $200
side parties and holding them as an in- ($1,000 20%).
vestment. From a consolidated viewpoint,
5. It is true that intercompany operating leas-
the debt is retired. Therefore, interest ex-
es eliminated during the consolidation
pense would be eliminated during the con-
process will not have an effect on consoli-
solidation process.
dated income. However, the excessive rent
2. At the 10% annual interest rate, a loss on expense amounts will still appear on the
retirement of bonds will occur in the current subsidiarys separately stated income
year since the parent paid a premium to re- statement and will reduce the NCI share of
tire the subsidiarys bonds. In the current consolidated income. The high lease rates
and future years, consolidated net income will shift income from the NCI to the control-
will be increased by the difference between ling interest.
interest expense and interest revenue. This
6. Either type of lease can shift income to the
amount represents the amortization of the
controlling interest by incorporating a high-
premium paid by the parent. At the 13%
er than market interest rate to calculate the
annual interest rate, a gain on retirement of
payments. In a sales-type lease, the con-
bonds will occur in the current year since
trolling interest can shift additional income
the parent paid a discount to retire the sub-
by building a profit into the capitalized cost
sidiarys bonds. In the current and future
of the leased asset.
years, consolidated net income will be re-
duced by the difference between interest 7. There is no difference in the consolidated
revenue and interest expense. This amount companys ability to recognize profit on sell-
represents the amortization of the discount ing equipment to its subsidiaries or leasing
paid by the parent to retire the bonds. the equipment to its subsidiaries (only if the
lease is sales-type). In both cases, the prof-
3. Since Company S was the original issuer of
it is deferred and amortized over the life of
the bonds, it will absorb the loss that results
the asset or life of the lease. The controlling
in the current year from the parent retiring
interest has the opportunity to increase its
the bonds at a premium. The noncontrolling
profit by leasing the asset to the subsidiary.
interest will receive its share of this loss. In
The lessor can build in an interest rate in
the current and future years, the subsidi-
excess of its cost of funds
arys income will be increased by the differ-
ence between interest expense and interest
revenue. The noncontrolling interest will re-
ceive its share of this amount.
247
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Ch. 5Exercises
EXERCISES
EXERCISE 5-1
It is desirable to refinance for two reasons. First, interest rates are down, and it would be wise to
lock in at the lower rate. Second, the parent firm can borrow funds at a lower interest rate. The
simplest way to accomplish the refinancing is to have the parent incur the new debt and loan the
proceeds to the subsidiary; the subsidiary would use the funds to retire its debt with a gain on
retirement being recognized that would flow to the consolidated statements. The parent would
not only enjoy a lower interest rate, but it could also structure the loan terms, including the ma-
turity date, to meet its needs. The parent could decide what rate to charge Patel Industries. The
rate charged would affect the reported income of Patel Industries and thus impact the distribu-
tion of income between the noncontrolling and controlling interests. The intercompany debt
would be eliminated in the preparation of consolidated statements.
Marcus could incur new debt and use the proceeds to purchase Patel Industries outstanding
bonds. The bonds would remain as debt on the separate statements of Patel Industries. The
bonds would also appear as an investment on the books of Marcus. The intercompany bonds,
however, would be eliminated in the consolidated statements. The consolidated income state-
ment would show a gain on retirement in the year of the intercompany purchase. The NCI would
share in the gain, but this would be offset by interest adjustments in future periods.
EXERCISE 5-2
(a) (1) The consolidated income statement for 20X3 will include a gain on retirement of the
bonds of $32,000 ($968,000 paid for $1,000,000 debt). The interest expense of $80,000
will be eliminated as will the interest revenue of $84,000 ($80,000 nominal + $4,000
discount amortization) recorded by the parent.
(2) The subsidiary income distribution schedule will get the benefit of the retirement gain of
$32,000 in the year the bonds are purchased, but subsidiary income will be reduced
each year for the amortization of the purchase discount recorded by the parent
($4,000). The net effect for 20X3 is $28,000. The NCI would receive 20% of this in-
crease. The balance flows to the controlling interest.
(b) (1) The consolidated income statement includes nothing relative to the bonds. From a con-
solidated viewpoint, the bonds were retired in the prior period. The interest expense
recorded by the subsidiary and the interest revenue recorded by the parent are elimi-
nated.
(2) The income distribution of the subsidiary is reduced by $4,000 for the amortization of
the purchase discount recorded by the parent. In the end, this adjustment is shared
20% by the NCI and 80% by the controlling interest.
248
Ch. 5Exercises
EXERCISE 5-3
(1) Eliminations and Adjustments at December 31, 20X5:

Interest Revenue ...................................................................... 8,700
Bonds Payable ......................................................................... 100,000
Loss on Retirement................................................................... 4,800c
Interest Expense .................................................................. 9,500
Investment in Bonds ............................................................. 101,500a
Discount on Bonds Payable ................................................. 2,500b
Interest Payable ........................................................................ 9,000
Interest Receivable .............................................................. 9,000
Loss remaining at year-end:
Carrying value of bonds at December 31, 20X5 .................. $ 97,500b
Investment in bonds at December 31, 20X5 ........................ 101,500a $(4,000)
Loss amortized during the year:
Interest revenue eliminated (($100,000 9%) $300) ........ $ 8,700
Interest expense eliminated (($100,000 9%) + $500) ....... 9,500 (800)
Loss at January 1, 20X5 ................................................... $(4,800)
a
$101,800 $100,000 = $1,800 premium at 1/1/X5; $1,800 6 years left = $300/yr.
amortization; $101,800 $300 = $101,500 investment balance at 12/31/X5.
b
$100,000 $95,000 = $5,000 discount at 1/1/X1; $5,000 10 years = $500/yr.
amortization; $500 5 years = $2,500.
$95,000 + $2,500 = $97,500 book value at 12/31/X5.
c
$95,000 + ($500 4 years) = $97,000 book value at 1/1/X5; $97,000 $101,800
investment at 1/1/X5 = $4,800 loss (to be amortized at $4,800/6 = $800/yr.).

Bonds Payable ......................................................................... 100,000
Retained EarningsDien (80% $4,000*) .............................. 3,200
Retained EarningsCasper (20% $4,000*) .......................... 800
Investment in Bonds [$101,800 ($300 2 yrs.)] ............... 101,200
Discount on Bonds Payable ($2,500 balance, 1/1/X6 $500) 2,000
*$4,800 original loss on 1/1/X5 $800 amortization in 20X5 = $4,000 unamortized loss on
1/1/X6
Carrying value of bonds at December 31, 20X6 .................. $ 98,000
Investment in bonds at December 31, 20X6 ........................ 101,200 $(3,200)
Interest revenue eliminated .................................................. $ 8,700
Interest expense eliminated ................................................. 9,500 (800)
Loss at January 1, 20X6 ...................................................... $(4,000)
249
Ch. 5Exercises
EXERCISE 5-4
Gain on retirement (January 2, 20X6):

Balance on issuers books ......................................................... $48,734
Less purchase price (cost to retire bonds) ................................. 47,513
Gain on retirement ............................................................... $ 1,221
Schedule of interest adjustments:
Intercompany Interest, Recorded Interest, Interest Expense

Year Effective Interest Effective Interest Adjustment to Issuer
Ending on Purchase (10%) on Issuance (9%) Income Distribution Schedule
12/31/X6 $4,751 $4,386 $ 365
12/31/X7 4,826 4,421 405
12/31/X8 4,909 4,459 450
$1,220*
*Does not add to gain on retirement due to rounding.
EXERCISE 5-5
Interest Revenue [(7% $60,000) + ($6,400 8)] ......................... 5,000

Bonds Payable (60% $100,000) .................................................. 60,000
Premium on Bonds Payable (60% $700) .................................... 420
Interest Expense [($4,200 (60% $100)] ............................... 4,140
Investment in Bonds (balance at year-end $53,600 + $800) ..... 54,400
Gain on Retirement* ................................................................... 6,880
*Book value of bonds on 1/2/X3 [$101,000 ($1,000/10 2) = $100,800]
Purchased ($100,800 60%) ........ $60,480
Price paid ....................................... 53,600
Gain on retirement of bonds........... $ 6,880
Interest Payable ($60,000 7%) .................................................... 4,200

Interest Receivable .................................................................... 4,200
An alternative way to calculate the gain:

Gain remaining at year-end:
Carrying value of bonds at December 31, 20X3
(60% $100,700).................................................................... $60,420
Investment in bonds at December 31, 20X3 .............................. 54,400 $6,020
Gain amortized during the year:

Interest revenue eliminated ........................................................ $ 5,000
Interest expense eliminated ....................................................... 4,140 860
Gain at January 1, 20X3 ......................................................... $6,880
250
Ch. 5Exercises
Exercise 5-5, Concluded

Interest Revenue ............................................................................ 5,000
Bonds Payable ............................................................................... 60,000
Premium on Bonds Payable (60% $600) .................................... 360
Interest Expense ........................................................................ 4,140
Investment in Bonds (balance at year-end) ($54,400 + $800) ... 55,200
Retained EarningsMirage ($6,020* x 80%) ............................ 4,816
Retained EarningsCarlton ($6,020* x 20%) ............................ 1,204
*Unamortized gain on retirement = $6,880 ($860 amortization for 1 yr.) = $6,020
Interest Payable .............................................................................. 4,200
Interest Receivable .................................................................... 4,200
An alternative way to calculate the unamortized gain:
(60% $100,600).................................................................... $60,360
Remaining gain at January 1, 20X4 ........................................ $6,020
EXERCISE 5-6
Partial Schedule of Bond Premium Amortization

12-Year, 8% Bonds Sold to Yield 7% (Lift)
Carrying
Interest Premium Amount
Date Cash Paid Expense Amortized of Bonds
January 1, 20X5 ........ ....... ........ $107,943
January 1, 20X6 $8,000 $7,556 $444 107,499
January 1, 20X7 8,000 7,525 475 107,024
January 1, 20X8 8,000 7,492 508 106,516
January 1, 20X9 8,000 7,456 544 105,972
Partial Schedule of Bond Discount Amortization

12-Year, 8% Bonds Sold to Yield 9% (Shark)
Carrying
Cash Interest Discount Value
Date Received Revenue Amortized of Bonds
January 2, 20X8 ........ ....... ........ $94,005
January 1, 20X9 $8,000 $8,460 $460 94,465
251
Ch. 5Exercises

Bonds Payable ......................................................................... 100,000
Premium on Bonds Payable ..................................................... 5,972
Gain on Retirement .............................................................. 12,511
Investment in Bonds ............................................................. 94,465

Carrying value of bonds at December 31, 20X8 .................. $105,972
Investment in bonds at December 31, 20X8 ........................ 94,465 $11,507

Interest expense eliminated ................................................. $ 8,460
Interest revenue eliminated .................................................. 7,456 1,004
Gain at January 1, 20X8 ................................................... $12,511
(2)
Subsidiary Life Industries Income Distribution
Interest adjustment Internally generated net
($8,460 $7,456) ................... $1,004 income ................................... $500,000
Retirement gain on bonds............ 12,511
Adjusted income .......................... $511,507

NCI share..................................... 10%
NCI............................................... $ 51,151
252
Ch. 5Exercises
EXERCISE 5-7
(1) Asset Under Operating Lease ........................................................ 60,000

Cash ........................................................................................... 60,000
Depreciation Expense..................................................................... 12,000
Accumulated DepreciationAsset Under
Operating Lease ($60,000 5 years) ..................................... 12,000
Cash ............................................................................................... 15,000
Rental Revenue ......................................................................... 15,000
(2) Rent Expense ................................................................................. 15,000

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

Accumulated DepreciationAsset Under Operating Lease ........... 12,000
Asset Under Operating Lease .................................................... 60,000
Accumulated Depreciation ......................................................... 12,000
Rent Revenue ................................................................................. 15,000
Rent Expense ............................................................................. 15,000
To eliminate the intercompany lease transactions.
EXERCISE 5-8
(1)
Lease Payment Amortization Schedule
Interest at 12% on Reduction Principal
Date Payment Previous Balance of Principal Balance
January 1, 20X1 $40,822
January 1, 20X1 $12,000 $12,000 28,822
January 1, 20X2 12,000 $3,459 8,541 20,281
January 1, 20X3 12,000 2,434 9,566 10,715
January 1, 20X4 12,000 1,285* 10,715 0
Total $48,000 $ 7,178 $40,822
*Adjusted for rounding
253
Ch. 5Exercises

Interest Revenue (see amortization schedule) ............................... 3,459
To eliminate intercompany interest revenue and expense.
Obligations Under Capital Lease ($40,822 $12,000 first payment) 28,822
Unearned Interest Income .............................................................. 3,719
Minimum Lease Payments Receivable ...................................... 36,000
To eliminate intercompany debt recorded by lessee against
net intercompany receivable of lessor.
Property, Plant, and Equipment ...................................................... 40,822
Accumulated DepreciationAssets Under
Capital Lease ($40,822 5 years) ............................................... 8,164
Assets Under Capital Lease ....................................................... 40,822
Accumulated DepreciationProperty, Plant, and Equipment .... 8,164
To reclassify asset under capital lease and related
accumulated depreciation as a productive asset owned
by the consolidated entity.

Interest Revenue (see amortization schedule) ............................... 2,434
Obligations Under Capital Lease .................................................... 20,281
Unearned Interest Income .............................................................. 1,285
To eliminate intercompany debt recorded by lessees
against net receivable of lessor.
Accumulated DepreciationAssets Under Capital
Lease (2 $8,164) ....................................................................... 16,328
Accumulated DepreciationProperty, Plant, and Equipment .... 16,328
accumulated depreciation as a productive asset
owned by the consolidated entity.
254
Ch. 5Exercises
EXERCISE 5-9
Eliminations and Adjustments at December 31, 20X1:
Interest Income (see amortization schedule) ................................... 2,690

Interest Revenue ........................................................................ 2,690
Obligations Under Capital Lease ..................................................... 26,904

Interest Payable ............................................................................... 2,690
Unearned Interest Income (see amortization) .................................. 4,790
To eliminate intercompany debt recorded by lessee
against net intercompany receivable of lessor.
Property, Plant, and Equipment ....................................................... 35,000

Accumulated DepreciationAssets Under Capital Lease
($35,000/8 yrs.) ............................................................................. 4,375
Assets Under Capital Lease....................................................... 35,000
Accumulated DepreciationProperty, Plant, and Equipment.... 4,375
accumulated depreciation as a productive asset owned
by the consolidated entity. Asset is depreciated over
8-year life.
Sales Profit on Leases ..................................................................... 10,000

Property, Plant, and Equipment ................................................. 10,000
To eliminate unrealized profit on intercompany sale and
to reduce asset to its cost to the consolidated entity.
Accumulated DepreciationProperty, Plant, and Equipment

($10,000/8 yrs.) ............................................................................. 1,250
Depreciation Expense ................................................................ 1,250
To reduce depreciation on leased asset to depreciation
based on cost to consolidated entity.
Rental Income .................................................................................. 1,000

Rent Expense............................................................................. 1,000
To eliminate intercompany rent revenue and
expense due to executory costs on lease.
255
Ch. 5Problems
PROBLEMS
PROBLEM 5-1
(1) Bonds Payable ............................................................................... 50,000

Interest Income ($4,500 + $200 amortization) ................................ 4,700
Investment in Bonds ($48,400 + $200 amortization).................. 48,600
Gain on Extinguishment of Debt ................................................ 1,600
(2) Justin Corporation and Subsidiary Drew Corporation

Consolidated Income Statement
For Year Ended December 31, 20X6
Sales ..................................................................................................... $3,040,000
Cost of goods sold ................................................................................ 1,405,000
Gross profit ..................................................................................... $1,635,000
Other expenses ($720,000 + $105,000) ............................................... (825,000)
Gain on debt retirement ........................................................................ 1,600
Consolidated net income ...................................................................... $ 811,600
256
Ch. 5Problems
PROBLEM 5-2
Patrick Company and Subsidiary Stunt Company

Worksheet for Consolidated Financial Statements
Eliminations Consolidated Controlling Consolidated
Trial Balance and Adjustments Income Retained Balance
Patrick Stunt Dr. Cr. Statement NCI Earnings Sheet
Interest Receivable ................................ 4,000 .......... .......... (B2) 4,000 ......... .......... .......... ..........
Other Current Assets ............................. 248,200 315,200 .......... .......... ......... .......... .......... 563,400
Investment in Stunt Company ................ 351,000 .......... (CV) 45,000 (EL) 360,000 ......... .......... .......... ..........
.......... .......... .......... (D) 36,000 ......... .......... .......... ..........
Investment in Stunt Bonds ..................... 96,800 .......... .......... (B1) 96,800 ......... .......... .......... ..........
Land ....................................................... 80,000 60,000 .......... .......... ......... .......... .......... 140,000
Buildings and Equipment ....................... 400,000 280,000 .......... .......... ......... .......... .......... 680,000
Accumulated Depreciation ..................... (120,000) (60,000) .......... .......... ......... .......... .......... (180,000)
Goodwill ................................................. .......... .......... (D) 40,000 .......... ......... .......... .......... 40,000
Interest Payable ..................................... .......... (4,000)(B2) 4,000 .......... ......... .......... .......... ..........
Other Current Liabilities ......................... (98,000) (56,000) .......... .......... ......... .......... .......... (154,000)
Bonds Payable (8%) .............................. .......... (100,000)(B1) 100,000 .......... ......... .......... .......... ..........
Discount on Bonds Payable ................... .......... 4,800 .......... (B1) 4,800 ......... .......... .......... ..........
Other Long-Term Liabilities .................... (200,000) .......... .......... .......... ......... .......... .......... (200,000)
Common StockPatrick ........................ (100,000) .......... .......... .......... ......... .......... .......... (100,000)
Other Paid-In Capital in Excess of
ParPatrick ....................................... (200,000) .......... .......... .......... ......... .......... .......... (200,000)
Retained EarningsPatrick ................... (365,000) .......... .......... (CV) 45,000 ......... .......... .......... ..........
.......... .......... (B1) 1,620 .......... ......... .......... (408,380) ..........
Common StockStunt ........................... .......... (100,000)(EL) 90,000 .......... ......... (10,000) .......... ..........
Other Paid-In Capital in Excess of
ParStunt .......................................... .......... (40,000)(EL) 36,000 .......... ......... (4,000) .......... ..........
Retained EarningsStunt ...................... .......... (260,000)(EL) 234,000 .......... ......... .......... .......... ..........
.......... (B1) 180 (NCI) 4,000 ......... (29,820) .......... ..........
Net Sales ............................................... (640,000) (350,000) .......... .......... (990,000) .......... .......... ..........
Cost of Goods Sold ................................ 360,000 200,000 .......... .......... 560,000 .......... .......... ..........
Operating Expenses ............................... 168,400 71,400 .......... .......... 239,800 .......... .......... ..........
Interest Expense .................................... .......... 8,600 .......... (B1) 8,600 ......... .......... .......... ..........
Interest Income ...................................... (8,400) .......... (B1) 8,400 .......... ......... .......... .......... ..........
Dividend Income .................................... (27,000) .......... (CY2) 27,000 .......... ......... .......... .......... ..........
Dividends DeclaredPatrick ................. 50,000 .......... .......... .......... ......... .......... 50,000 ..........
Dividends DeclaredStunt .................... .......... 30,000 .......... (CY2) 27,000 ......... 3,000 ............. ..........
Total ................................................... 0 0 586,200 586,200 ......... .......... ............. ..........
Consolidated Net Income ............................................................................................................................... (190,200) .......... ............. ..........
To NCI (see distribution schedule) ............................................................................................................. 7,020 (7,020) ............ ..........
To Controlling Interest (see distribution schedule)...................................................................................... 183,180 .......... (183,180) ..........
Total NCI ............................................................................................................................................................................. (47,840) .......... (47,840)
Retained EarningsControlling Interest, December 31, 20X2 ................................................................................................................. (541,560) (541,560)
Totals .......................................................................................................................................................................................................................... 0
257
Ch. 5Problems
Problem 5-2, Continued
Eliminations and Adjustments:

(CV) Convert to simple equity method as of January 1, 20X2.
(CY2) Eliminate the current-year dividend income of parent against dividends declared
by subsidiary.
(EL) Eliminate 90% of the subsidiary company equity balances at the beginning of the
year against the investment account.
(D)/(NCI) Allocate the $36,000 excess of cost over book and $4,000 NCI adjustment to
goodwill.
(B1) Eliminate intercompany interest revenue and expense. Eliminate the balance in
the investment in bonds against bonds payable and the discount on bonds paya-
ble. The loss on retirement at the start of the year is calculated as follows:
Investment in bonds at
December 31, 20X2 .......................... $96,800
Bonds payable ........................................ $100,000
Discount on bonds .................................. (4,800) 95,200
$1,600
Loss amortized during year:
Interest expense eliminated.................... $ 8,600
Interest revenue eliminated .................... 8,400 200
Remaining loss on January 1, 20X2 ....... $1,800
Amortize loss 90% to controlling interest ($1,620) and 10% to NCI ($180).
(B2) Eliminate $4,000 of intercompany interest receivable and payable.
258
Ch. 5Problems
Problem 5-2, Concluded
Determination and Distribution of Excess Schedule

Company Parent NCI
Implied Price Value
Fair Value (90%) (10%)
Fair value of subsidiary ..................... $390,000 $351,000 $ 39,000
Less book value of interest acquired:
Total equity.................................. 350,000 $350,000 $350,000
Interest acquired ............................... 90% 10%
Book value ........................................ $315,000 $ 35,000
Excess of fair value over book value $ 40,000 $ 36,000 $ 4,000
Adjustment of identifiable accounts:

Worksheet Amortization
Adjustment Key Life per Year
Goodwill ............................................ $40,000 debit D
Subsidiary Stunt Company Income Distribution

Internally generated net
income................................... $70,000
Interest adjustment ..................... 200
Adjusted income ......................... $70,200

NCI share .................................... 10%
NCI .............................................. $ 7,020
Parent Patrick Company Income Distribution

income................................... $120,000
90% Stunt income of
$70,200 ................................. 63,180
Controlling interest ...................... $183,180
259
Ch. 5Problems
PROBLEM 5-3

Company Parent NCI
Implied Price Value
Fair value of subsidiary ..................... $2,125,000 $1,700,000 $ 425,000
Total equity.................................. 1,875,000 $1,875,000 $1,875,000
Book value ........................................ $1,500,000 $ 375,000
Excess of fair value over book
value............................................ $ 250,000 $ 200,000 $ 50,000

Goodwill ............................................ $250,000 debit D
260
Ch. 5Problems

General Appliance and Subsidiary Appliance Outlets
Trial Balance Eliminations Consolidated Controlling Consolidated
General Appliance and Adjustments Income Retained Balance
Appliances Outlets Dr. Cr. Statement NCI Earnings Sheet
Cash ................................................................ 401,986 72,625 ........... ........... ........... ........... ........... 474,611
Accounts Receivable (net) .............................. 752,500 105,000 ........... ........... ........... ........... ........... 857,500
Interest Receivable ......................................... 9,625 ............ ........... (LN2) 9,625 ........... ........... ........... ...........
Inventory ......................................................... 1,950,000 900,000 ........... ........... ........... ........... ........... 2,850,000
Investment in Appliance Outlets ..................... 1,700,000 .......... (CV) 256,000 (EL) 1,756,000 ........... ........... ...........
........... ............ ........... (D) 200,000 ........... ........... ........... ...........
Investment in 11% Bonds ............................... 256,000 ............ ........... (B) 256,000 ........... ........... ........... ...........
Investment in Mortgage .................................. 175,000 ............ ........... (LN1) 175,000 ........... ........... ........... ...........
Property, Plant, and Equipment ...................... 9,000,000 2,950,000 ........... (F1) 27,500 ........... ........... 11,922,500
Accumulated Depreciation .............................. (1,695,000) (940,000) (F2) 1,375 ........... ........... ........... ........... (2,633,625)
Goodwill .......................................................... ........... ............ (D) 250,000 ........... ........... ........... ........... 250,000
Accounts Payable ........................................... (670,000) (80,000) ........... ........... ........... ........... ........... (750,000)
Interest Payable .............................................. (18,333) (9,625)(LN2) 9,625 ........... ........... ........... ........... (18,333)
Bonds Payable, 11% ....................................... (2,000,000) (500,000) (B) 250,000 ........... ........... ........... ........... (2,250,000)
Discount on Bonds Payable ............................ 10,470 12,000 ........... (B) 6,000 ........... ........... ........... 16,470
Mortgage Payable ........................................... ........... (175,000)(LN1) 175,000 ........... ........... ........... ........... ...........
Common Stock ($5 par)
General Appliances..................................... (3,200,000)......... ........... ........... ........... ........... ........... (3,200,000
Paid-In Capital in Excess of Par
General Appliances..................................... (4,550,000)......... ........... ........... ........... ........... ........... (4,550,000
Retained EarningsGeneral Appliances ....... (1,011,123)......... ........... (CV) 256,000 ........... ........... ...........
........... ............ (B) 12,000 ........... ........... ........... (1,255,123) ...........
Common Stock ($10 par)Appliance Outlets ........... (800,000) (EL) 640,000 ........... ........... (160,000) ........... ...........
Appliance Outlets ........................................ ........... (625,000) (EL) 500,000 ........... ........... (125,000) ........... ...........
Retained EarningsAppliance Outlets........... ........... (770,000) (EL) 616,000 (NCI) 50,000 ........... ........... ........... ...........
........... ............ (B) 3,000 ........... ........... (201,000) ........... ...........
Sales ............................................................... (9,800,000) (3,000,000) ............... ........... (12,800,000) ........... ...........
Gain on Sale of Building ................................. (27,500) ............ (F1) 27,500 ........... ........... ........... ........... ...........
Interest Income ............................................... (35,625) ............ (B) 26,000 ........... ........... ........... ........... ...........
........... ............ (LN2) 9,625 ........... ........... ........... ........... ...........
Dividend Income ............................................. (48,000) ............ (CY2) 48,000 ........... ........... ........... ........... ...........
Cost of Goods Sold ......................................... 4,940,000 1,700,000 ........... ........... 6,640,000 ........... ...........
Depreciation Expense ..................................... 717,000 95,950 ........... (F2) 1,375 811,575 ........... ........... ...........
Interest Expense ............................................. 223,000 67,544 ........... (B) 29,000 ........... ........... ........... ...........
........... ............ ........... (LN2) 9,625 251,919 ........... ........... ...........
Other Expenses .............................................. 2,600,000 936,506 ........... ........... 3,536,506 ......... ........... ...........
Dividends Declared ......................................... 320,000 60,000 ........... (CY2) 48,000 ........... 12,000 320,000 ...........
0 0 2,824,125 2,824,125 ........... ........... ...........
Consolidated Net Income ..................................................................................................................................................... (1,560,000) ........ ........... ...........
To NCI (see distribution schedule)................................................................................................................................... 40,600 (40,600) ........... ...........
To Controlling Interest (see distribution schedule)........................................................................................................... 1,519,400 .........
(1,519,400).......................................................................................................................................................................
Total NCI ....................................................................................................................................................................................................... (514,600) ........... (514,600)
Retained EarningsControlling Interest, December 31, 20X6............................................................................................................................................. (2,454,523) (2,454,523)
261
Ch. 5Problems
Totals ........................................................................................................................................................................................................................................................ 0
262
Ch. 5Problems

(CV) Convert investment to equity, 80% ($770,000 $450,000) = $256,000.
(CY2) Eliminate dividend income.
(EL) Eliminate 80% of the subsidiary equity balances.
(D)/(NCI) Distribute the excess and the NCI adjustment according to the determination and dis-
tribution of excess schedule.
(B) Eliminate intercompany interest revenue and expense. Eliminate the balance in the
investment in bonds against the bonds payable. The loss on retirement at the start of
the year is calculated as follows:
Investment in bonds at December 31, 20X6 ............ $256,000
Net carrying value of bonds at December 31, 20X6 . 244,000 $12,000
Interest expense eliminated ..................................... $ 29,000
Interest revenue eliminated ...................................... 26,000 3,000
Remaining loss at January 1, 20X6 .................... $15,000
The remaining unamortized loss is allocated 80% to the controlling retained earnings
and 20% to the NCI retained earnings.
(F1) Eliminate the intercompany gain on sale of building.
(F2) Reduce depreciation expense on the building for one-half year, ($27,500 10) 1/2.
(LN1) Eliminate the intercompany mortgage.
(LN2) Eliminate the intercompany interest payable and receivable on mortgage. Eliminate
the intercompany interest revenue and expense on mortgage, 1/2 11% $175,000
= $9,625.
Subsidiary Appliance Outlets Income Distribution

income................................... $200,000
Interest adjustment
($29,000 $26,000) .............. 3,000
Adjusted income ......................... $203,000

NCI share .................................... 20%
NCI .............................................. $ 40,600
Parent General Appliances Income Distribution

Unrealized gain on sale Internally generated net
of building .............................. $27,500 income................................. $1,383,125
Gain realized through use of
building for one-half year ..... 1,375
80% Appliance Outlets adjusted
income of $203,000............. 162,400
Controlling interest .................... $1,519,400
263
Ch. 5Problems
PROBLEM 5-4

Company Parent NCI
Implied Price Value
Total equity.................................. 215,000 $215,000 $215,000
Interest acquired ......................... 80% 20%
Book value ........................................ $172,000 $ 43,000
value............................................ $222,500 $178,000 $ 44,500

Buildings ........................................... $ 75,000 debit D1 20 $ 3,750
Equipment ......................................... 60,000 debit D2 5 12,000
Goodwill ............................................ 87,500 debit D3
Total ............................................ $222,500
Account Adjustments Annual Current Prior

to Be Amortized Life Amount Year Years Total Key
Buildings ............................... 20 $ 3,750 $ 3,750 $ 3,750 $7,500
...... (A1)
Equipment ............................. 5 12,000 12,000 12,000 24,000
...... (A2)
Total amortizations ........ $15,750 $15,750 $15,750 $31,500
Intercompany Inventory Profit Deferral

Parent Parent Parent Sub Sub Sub
Amount Percent Profit Amount Percent Profit
Beginning .............................. $15,000 30% $4,500 0%
Ending ................................... 20,000 30 6,000 0
264
Ch. 5Problems
Subsidiary Stack Company Income Distribution

Loss on bond retirement ............... $ 2,899 Internally generated net
Buildings depreciation ................... 3,750 income..................................... $24,672
Equipment depreciation ................ 12,000 Interest adjustmentbonds .......... 483
Adjusted income ........................... $ 6,506

NCI share ...................................... 20%
NCI ................................................ $ 1,301
Parent Packard Company Income Distribution

Ending inventory profit .................. $6,000 Internally generated net
income..................................... $42,845
80% share of Stack
adjusted income of $6,506 ...... 5,205
Beginning inventory profit ............. 4,500
Controlling interest ........................ $46,550
Proof for Bond Elimination

Investment in bonds at December 31, 20X5 .............................. $100,775
Carrying value at December 31, 20X5 ....................................... 98,359 $2,416

Interest expense eliminated ....................................................... $ 8,328
Interest revenue eliminated ........................................................ 7,845 483
Loss at January 1, 20X5 ...................................................... $2,899
265
Ch. 5Problems

Packard Company and Subsidiary Stack Company
Packard Stack Dr. Cr. Statement NCI Earnings Sheet
Cash ................................................................ 71,070 32,031 ........... ........... ........... ........... ............... 103,101
Accounts Receivable ...................................... 90,000 60,000 ........... (IA) 10,000 ........... ........... ............... 140,000
Inventory ......................................................... 100,000 30,000 ........... (EI) 6,000 ........... ........... ............... 124,000
Land ................................................................ 150,000 45,000 ........... ........... ........... ........... ............... 195,000
Investment in Stack ......................................... 385,738 ............ ........... (CY1) 19,738 ........... ........... ............... ...........
........... ............ (CY2) 8,000 ........... ........... ........... ............... ...........
........... ............ ........... (EL) 196,000 ........... ........... ............... ...........
........... ............ ........... (D) 178,000 ........... ........... ............... ...........
Investment in Stack Bonds ............................. 100,775 ............ ........... (B) 100,775 ........... ........... ............... ...........
Buildings ......................................................... 500,000 250,000 (D1) 75,000 ........... ........... ........... ............... 825,000
Accumulated Depreciation .............................. (300,000) (70,000) ........... (A1) 7,500 ........... ........... ............... (377,500)
Equipment ....................................................... 200,000 120,000 (D2) 60,000 ........... ........... ........... ............... 380,000
Accumulated Depreciation .............................. (100,000) (84,000) ........... (A2) 24,000 ........... ........... ............... (208,000)
Goodwill .......................................................... ........... ............ (D3) 87,500 ........... ........... ........... ............... 87,500
Accounts Payable ........................................... (55,000) (25,000) (IA) 10,000 ........... ........... ........... ............... (70,000)
Bonds Payable ................................................ ........... (100,000) (B) 100,000 ........... ........... ........... ............... ...........
Discount (premium) ......................................... ........... 1,641 ........... (B) 1,641 ........... ........... ............... ...........
Common Stock ($10 par)Stack ................... ........... (10,000) (EL) 8,000 ........... ........... (2,000) ............... ...........
Paid-In Capital in Excess of ParStack ......... ........... (90,000) (EL) 72,000 ........... ........... (18,000) ............... ...........
Retained EarningsStack .............................. ........... (145,000) (EL) 116,000 (NCI) 44,500 ........... ........... ............... ...........
........... ............ (A1A2) 3,150 ........... ........... (70,350) ............... ...........
Common Stock ($10 par)Packard ............... (100,000) ............ ........... ........... ........... ........... ........... (100,000)
Paid-In Capital in Excess of ParPackard..... (600,000) ............ ........... ........... ........... ........... ........... (600,000)
Retained EarningsPackard .......................... (400,000) ............ (A1A2) 12,600 ........... ........... ........... ........... ...........
............ (BI) 4,500 ........... ........... ........... (382,900) ...........
Loss (gain) on bond retirement ....................... ............ (B) 2,899 ........... 2,899 ........... ........... ...........
Sales ............................................................... (600,000) (220,000) (IS) 50,000 ........... (770,000) ........... ........... ...........
Cost of Goods Sold ......................................... 410,000 120,000 ........... (IS) 50,000 ........... ........... ........... ...........
........... ............ (EI) 6,000 (BI) 4,500 481,500 ........... ........... ...........
Depreciation ExpenseBuildings................... 30,000 10,000 (A1) 3,750 ........... 43,750 ........... ........... ...........
Depreciation ExpenseEquipment ................ 15,000 12,000 (A2) 12,000 ........... 39,000 ........... ........... ...........
Other Expenses .............................................. 110,000 45,000 ........... ........... 155,000 ........... ........... ...........
Interest Expense ............................................. ........... 8,328 ........... (B) 8,328 ........... ........... ........... ...........
Interest Revenue ............................................. (7,845) ............ (B) 7,845 ........... ........... ........... ........... ...........
Subsidiary Income .......................................... (19,738) ............ (CY1) 19,738 ........... ........... ........... ........... ...........
Dividends DeclaredStack ............................ ........... 10,000 ........... (CY2) 8,000 ........... 2,000 ........... ...........
Dividends DeclaredPackard ........................ 20,000 ............ ........... ........... ........... ........... 20,000 ...........
Totals .......................................................... 0 0 658,982 658,982 ........... ........... ........... ...........
Consolidated Net Income ..................................................................................................................................................... (47,851) ........... ........... ...........
To NCI (see distribution schedule)................................................................................................................................... 1,301 (1,301) ........... ...........
To Controlling Interest (see distribution schedule)........................................................................................................... 46,550 ........... (46,550) ...........
Total NCI ....................................................................................................................................................................................................... (89,651) ........... (89,651)
Retained EarningsControlling Interest, December 31, 20X5............................................................................................................................................. (409,450) (409,450)
Totals ........................................................................................................................................................................................................................................................ 0
266
Ch. 5Problems

(CY1) Current-year subsidiary income.
(CY2) Current-year dividend.
(EL) Eliminate controlling interest in subsidiary equity.
(D)/(NCI) Distribute excess and NCI adjustment.
(A1) Amortize excessbuildings.
(A2) Amortize excessequipment.
(IS) Eliminate intercompany sale during current period.
(IA) Eliminate intercompany unpaid trade accounts.
(BI) Defer beginning inventory profit.
(EI) Defer ending inventory profit.
(B) Eliminate intercompany bonds.
PROBLEM 5-5

Company Parent NCI
Implied Price Value
Total equity.................................. 215,000 $215,000 $215,000
Book value ........................................ $172,000 $ 43,000
value............................................ $222,500 $178,000 $ 44,500

Buildings ........................................... $ 75,000 debit D3 20 $ 3,750
Equipment ......................................... 60,000 credit D4 5 12,000
Goodwill ............................................ 87,500 debit D5
Total ............................................ $222,500

Buildings ............................... 20 $ 3,750 $ 3,750 $ 7,500
...... $11,250 .......................... (A1)
Equipment ............................. 5 12,000 12,000 24,000 36,000
...... (A2)
Total amortizations .......... $15,750 $15,750 $31,500 $47,250
267
Ch. 5Problems

Beginning .............................. $20,000 30% $6,000 0%
Ending ................................... 25,000 30 7,500 0
Subsidiary Stack Company Income Distribution

Buildings depreciation ................. $ 3,750 Internally generated net
Equipment depreciation .............. 12,000 income................................... $31,672
Interest adjustmentbonds ........ 483
Adjusted income ......................... $16,405

NCI share .................................... 20%
NCI .............................................. $ 3,281
Parent Packard Company Income Distribution

Ending inventory profit ................ $7,500 Internally generated net
income..................................... $57,845
80% share of Stack
adjusted income of $16,405 .... 13,124
Proof for Bond Retirement

Investment in bonds at December 31, 20X6 .............................. $100,620
Carrying value at December 31, 20X6 ....................................... 98,687 $1,933

Interest expense eliminated ....................................................... $ 8,328
Interest revenue eliminated ........................................................ 7,845 483
Remaining loss at January 1, 20X6 ..................................... $2,416
268
Ch. 5Problems

Packard Company and Subsidiary Stack Company
Packard Stack Dr. Cr. Statement NCI Earnings Sheet
Cash ................................................................ 101,710 61,031 ........... ........... ........... ........... ........... 162,741
Accounts Receivable ...................................... 110,000 60,000 ........... (IA) 12,000 ........... ........... ........... 158,000
Inventory ......................................................... 120,000 45,000 ........... (EI) 7,500 ........... ........... ........... 157,500
Land ................................................................ 150,000 45,000 ........... ........... ........... ........... ........... 195,000
Investment in Stack 403,075 ............ ........... (CY1) 25,337 ........... ........... ........... ...........
........... ............ (CY2) 8,000 ........... ........... ........... ........... ...........
........... ............ ........... (EL) 207,738 ........... ........... ........... ...........
........... ............ ........... (D) 178,000 ........... ........... ........... ...........
Investment in Stack Bonds ............................. 100,620 ............ ........... (B) 100,620 ........... ........... ........... ...........
Buildings ......................................................... 500,000 250,000 (D1) 75,000 ........... ........... ........... ........... 825,000
Accumulated Depreciation .............................. (330,000) (80,000) ........... (A1) 11,250 ........... ........... ........... (421,250)
Equipment ....................................................... 200,000 120,000 (D2) 60,000 ........... ........... ........... ........... 380,000
Goodwill .......................................................... ........... ............ (D3) 87,500 ........... ........... ........... ........... 87,500
Accounts Payable ........................................... (35,000) (25,000) (IA) 12,000 ........... ........... ........... ........... (48,000)
Bonds Payable ................................................ ........... (100,000) (B) 100,000 ........... ........... ........... ........... ...........
Discount (premium) ......................................... ........... 1,313 ........... (B) 1,313 ........... ........... ........... ...........
Common Stock ($10 par)Stack ................... ........... (10,000) (EL) 8,000 ........... ........... (2,000) ........... ...........
Paid-In Capital in Excess of ParStack ......... ........... (90,000) (EL) 72,000 ........... ........... (18,000) ........... ...........
Retained EarningsStack .............................. ........... (159,672) (EL) 127,738 (NCI) 44,500 ........... ........... ........... ...........
........... ............ (B) 483 ........... ........... (69,651) ........... ...........
........... ............ (A1A2) 6,300 ........... ........... ........... ........... ...........
Common Stock ($10 par)Packard ............... (100,000) ............ ........... ........... ........... ........... ........... (100,000)
Paid-In Capital in Excess of ParPackard..... (600,000) ............ ........... ........... ........... ........... ........... (600,000)
Retained EarningsPackard .......................... (442,223) ............ (A1A2) 25,200 ........... ........... ........... ........... ...........
........... ............ (BI) 6,000 ........... ........... ........... (409,090) ...........
........... ............ (B) 1,933 ........... ........... ........... ........... ...........
Sales ............................................................... (700,000) (230,000) (IS) 60,000 ........... (870,000) ........... ........... ...........
........... ............ (EI) 7,500 (BI) 6,000 546,500 ........... ........... ...........
Other Expenses .............................................. 125,000 43,000 ........... ........... 168,000 ........... ........... ...........
Dividends DeclaredStack ............................ ........... 10,000 ........... (CY2) 8,000 ........... 2,000 ........... ...........
Dividends DeclaredPackard ........................ 20,000 ............ ........... ........... ........... ........... 20,000 ...........
Totals .......................................................... 0 0 706,586 706,586 ........... ........... ........... ...........
To NCI (see distribution schedule)....................................................................................................................................... 3,281 (3,281) ........... ...........
To Controlling Interest (see distribution schedule)............................................................................................................... 69,469 ........... (69,469) ...........
Total NCI ....................................................................................................................................................................................................... (90,932) ........... (90,932)
Totals ........................................................................................................................................................................................................................................................ 0
269
Ch. 5Problems

(EL) Eliminate controlling interest in subsidiary equity.
(D)/(NCI) Distribute excess and adjust NCI.
(A) Amortize excess.
(IS) Eliminate intercompany sales during current period.
PROBLEM 5-6

Company Parent NCI
Implied Price Value
Fair value of subsidiary ..................... $500,000 $400,000 $100,000
Common stock ($1 par)............... $ 10,000
Paid-in capital in excess of par ... 90,000
Retained earnings ....................... 100,000
Total equity ............................ $200,000 $200,000 $200,000
Book value ........................................ $160,000 $ 40,000
value............................................ $300,000 $240,000 $ 60,000

Buildings ........................................... $130,000 debit D1 20 $ 6,500
Goodwill ............................................ 120,000 debit D3
Total ............................................ $300,000
270
Ch. 5Problems
Problem 5-6 Continued

Buildings ............................... 20 $ 6,500 $ 6,500 $ 6,500
...... $13,000 .......................... (A1)
Equipment ............................. 5 10,000 10,000 10,000 20,000
...... (A2)

Beginning .............................. 0% $9,000 25% $2,250
Ending ................................... 0 12,000 25 3,000
Subsidiary Spartan Company Income Distribution

Amortizations .............................. $16,500 Internally generated net
Ending inventory profit ................ 3,000 income..................................... $27,324
Interest adjustment, bonds.......... 920 Beginning inventory profit ............. 2,250
Gain on bond retirement ............... 6,833
Adjusted income ........................... $15,987

NCI share ...................................... 20%
NCI ................................................ $ 3,197
Parent Postman Company Income Distribution

income..................................... $173,596
80% Sparton adjusted income
of $15,987 ............................... 12,790
271
Ch. 5Problems
Postman Company and Subsidiary Spartan Company
Postman Spartan Dr. Cr. Statement NCI Earnings Sheet
Cash ................................................................ 144,486 99,347 ........... ........... ........... ........... ........... 243,833
Inventory ......................................................... 120,000 55,000 ........... (EI) 3,000 ........... ........... ........... 172,000
Land ................................................................ 200,000 60,000 ........... ........... ........... ........... ........... 260,000
Investment in Spartan ..................................... 429,859 ............ ........... (CY1) 21,859 ........... ........... ........... ...........
........... ............ (CY2) 8,000 ........... ........... ........... ........... ...........
........... ............ ........... (EL) 176,000 ........... ........... ........... ...........
........... ............ ........... (D) 240,000 ........... ........... ........... ...........
Investment in Spartan Bonds .......................... 96,110 ............ ........... (B) 96,110 ........... ........... ........... ...........
Buildings ......................................................... 600,000 100,000 (D1) 130,000 ........... ........... ........... ........... 830,000
Equipment ....................................................... 150,000 80,000 (D2) 50,000 ........... ........... ........... ........... 280,000
Goodwill .......................................................... ........... ............ (D3) 120,000 ........... ........... ........... ........... 120,000
Bonds Payable .... ........................................... ........... (100,000) (B) 100,000 ........... ........... ........... ........... ...........
Discount (Premium) ........................................ ........... (2,023) (B) 2,023 ........... ........... ........... ........... ...........
........... ............ ........... ........... ........... ........... ........... ...........
Common Stock ($1 par)Spartan .................. ........... (10,000) (EL) 8,000 ........... ........... (2,000) ........... ...........
Paid-In Capital in Excess of ParSpartan ..... ........... (90,000) (EL) 72,000 ........... ........... (18,000) ........... ...........
Retained EarningsSpartan .......................... ........... (120,000) (EL) 96,000 (NCI) 60,000 ........... ........... ........... ...........
........... ............ (A1A2) 3,300 ........... ........... ........... ........... ...........
........... ............ (BI) 450 ........... ........... (80,250) ........... ...........
Common Stock ($1 par)Postman ................ (100,000) ............ ........... ........... ........... ........... ........... (100,000)
Paid-In Capital in Excess of ParPostman.... (800,000) ............ ........... ........... ........... ........... ........... (800,000)
Retained EarningsPostman ......................... (300,000) ............ (A1A2) 13,200 ........... ........... ........... ........... ...........
........... ............ (BI) 1,800 ........... ........... ........... (285,000) ...........
Gain on Bond Retirement ............................... ........... ............ ........... (B) 6,833 (6,833) ........... ........... ...........
Sales ............................................................... (850,000) (320,000) (IS) 20,000 ........... (1,150,000) ........ ........... ...........
........... ............ (EI) 3,000 (BI) 2,250 680,750 ........... ........... ...........
Other Expenses .............................................. 140,000 70,000 ........... ........... 210,000 ........... ........... ...........
Dividends DeclaredSpartan ......................... ........... 10,000 ........... (CY2) 8,000 ........... 2,000 ........... ...........
Dividends DeclaredPostman ....................... 20,000 ............ ........... ........... ........... ........... 20,000 ...........
Totals .............................................................. 0 0 681,728 681,728 ........... ........... ........... ...........
To NCI (see distribution schedule)....................................................................................................................................... 3,197 (3,197) ........... ...........
Total NCI ....................................................................................................................................................................................................... (101,447) ........... (101,447)
Totals ............................................................................................................................................................................................................................................................ 0
272
Ch. 5Problems

(EL) Eliminate controlling interest in Sub equity.
Proof for Bond Retirement

Carrying value at December 31, 20X5 ....................................... $102,023
Gain at January 1, 20X5 ...................................................... $6,833
273
Ch. 5Problems
PROBLEM 5-7

Company Parent NCI
Implied Price Value
Common stock ($1 par)............... $ 10,000
Total equity ............................ $200,000 $200,000 $200,000
Book value ........................................ $160,000 $ 40,000
value............................................ $300,000 $240,000 $ 60,000

Buildings ........................................... $130,000 debit D1 20 $ 6,500
Goodwill ............................................ 120,000 debit D3
Total ............................................ $300,000

Buildings ............................... 20 $ 6,500 $ 6,500 $13,000
...... $19,500 .......................... (A1)
Equipment ............................ 5 10,000 10,000 20,000 30,000
...... (A2)
Total amortizations ........ $16,500 $16,500 $33,000 $49,500
274
Ch. 5Problems

Beginning .............................. 0% $12,000 25% $3,000
Ending ................................... 0 10,000 25 2,500
Subsidiary Spartan Company Income Distribution

Amortizations .............................. $16,500 Internally generated net
Ending inventory profit ................ 2,500 income..................................... $17,348
Interest adjustment, bonds.......... 998 Beginning inventory profit ............. 3,000
Adjusted income ........................... $ 350

NCI share ...................................... 20%
NCI ................................................ $ 70
Parent Postman Company Income Distribution

income..................................... $178,650
80% Sparton adjusted income
of $350 .................................... 280
275
Ch. 5Problems
Postman Company and Subsidiary Spartan Company
Postman Spartan Dr. Cr. Statement NCI Earnings Sheet
Cash ................................................................ 290,486 99,347 ........... ........... ........... ........... ........... 389,833
Inventory ......................................................... 140,000 55,000 ........... (EI) 2,500 ........... ........... ........... 192,500
Land ................................................................ 200,000 60,000 ........... ........... ........... ........... ........... 260,000
Investment in Spartan ..................................... 435,737 ............ ........... (CY1) 13,878 ........... ........... ........... ...........
........... ............ (CY2) 8,000 ........... ........... ........... ........... ...........
........... ............ ........... (EL) 189,859 ........... ........... ........... ...........
........... ............ ........... (D) 240,000 ........... ........... ........... ...........
Investment in Spartan Bonds .......................... 96,760 ............ ........... (B) 96,760 ........... ........... ........... ...........
Buildings ........................................................ 600,000 100,000 (D1) 130,000 ........... ........... ........... ........... 830,000
Equipment ....................................................... 150,000 80,000 (D2) 50,000 ........... ........... ........... ........... 280,000
Goodwill .......................................................... ........... ............ (D3) 120,000 ........... ........... ........... ........... 120,000
Bonds Payable ................................................ ........... (100,000) (B) 100,000 ........... ........... ........... ........... ...........
Discount (Premium) ........................................ ........... (1,675) (B) 1,675 ........... ........... ........... ........... ...........
........... ............ ........... ........... ........... ........... ........... ...........
Common Stock ($1 par)Spartan .................. ........... (10,000) (EL) 8,000 ........... ........... (2,000) ........... ...........
Paid-In Capital in Excess of ParSpartan ..... ........... (90,000) (EL) 72,000 ........... (18,000) ........... ...........
Retained EarningsSpartan .......................... ........... (137,324) (EL) 109,859 (NCI) 60,000 ........... ........... ........... ...........
........... ............ (A1A2) 6,600 (B) 1,183 ........... ........... ........... ...........
........... ............ (BI) 600 ........... ........... (81,448) ........... ...........
Common Stock ($1 par)Postman ................ (100,000) ............ ........... ........... ........... ........... ........... (100,000)
Paid-In Capital in Excess of ParPostman.... (800,000) ............ ........... ........... ........... ........... ........... (800,000)
Retained EarningsPostman ......................... (475,455) ............ (A1A2) 26,400 ........... ........... ........... ........... ...........
........... ............ (BI) 2,400 ........... ........... ........... (451,385) ...........
........... ............ ........... (B) 4,730 ........... ........... ........... ...........
Sales ............................................................... (900,000) (350,000) (IS) 25,000 ........... (1,225,000) ........ ........... ...........
........... ............ (EI) 2,500 (BI) 3,000 734,500 ........... ........... ...........
Other Expenses .............................................. 155,000 80,000 ........... ........... 235,000 ........... ........... ...........
Dividends DeclaredSpartan ......................... ........... 10,000 ........... (CY2) 8,000 ........... 2,000 ........... ...........
Dividends DeclaredPostman ....................... 20,000 ............ ........... ........... ........... ........... 20,000 ...........
Totals .............................................................. 0 0 708,062 708,062 ........... ........... ........... ...........
To NCI (see distribution schedule)....................................................................................................................................... 70 (70) ........... ...........
Total NCI ....................................................................................................................................................................................................... (99,518) ........... (99,518)
Totals ............................................................................................................................................................................................................................................................ 0
276
Ch. 5Problems

$5,913 = $1,183 NCI portion + $4,730 controlling portion
Proof:
Carrying value at December 31, 2006 ....................................... $101,675
Investment in bonds at December 31, 2006 .............................. 96,760 $4,915

Remaining gain at January 1, 2006 ..................................... $5,913
277
Ch. 5Problems
PROBLEM 5-8
(1) (a) $14,000 decrease in income. The $21,000 gain is eliminated. Depreciation expense is
reduced by 1/3 of the gain, $7,000.
(b) $10,000 decrease in income. The gain on the ending inventory is deferred. The profit
would be 1/3 1/2 $60,000.
(c) $9,000 increase. The intercompany bonds are retired on the worksheet which creates a
$9,000 gain in 20X2.
(2) a 1
b 2
c 5
d 2
e 6
f 3 (Shaws 10% is included in NCI.)
g 3 (Shaws 10% is included in NCI; however, the NCI may appear in a separate
column of a retained earnings statement.)
h 3 [Same note as for (g) above.]
i 6
j 2
k 4
l 2
278
Ch. 5Problems
PROBLEM 5-9

Company Parent NCI
Implied Price Value
Total equity.................................. 600,000 $600,000 $600,000
Book value ........................................ $540,000 $ 60,000
value............................................ $150,000 $135,000 $ 15,000

Goodwill ............................................ $150,000 debit D
Income Distribution Schedules
Subsidiary Sundown Company Income Distribution

Interest adjustment Internally generated net
($10,702 $9,621) ................ $1,081 income................................... $8,758
Realized equipment gain ............ 2,000
Adjusted income ......................... $9,677

NCI share .................................... 20%
NCI .............................................. $ 968
Parent Princess Company Income Distribution

income..................................... $60,702
90% Sundown adjusted income
of $9,677 ................................. 8,709
279
Ch. 5Problems
Princess Company and Subsidiary Sundown Company

Princess Sundown Dr. Cr. Statement NCI Earnings Sheet
Inventory ................................................ 25,000 80,000 .......... (EI) 6,000 ......... .......... .......... 99,000
Equipment .............................................. 371,190 1,522,413 .......... (F1) 10,000 .......... ..........
Accumulated Depreciation ..................... (200,000) (600,000)(F1) 4,000 .......... ......... .......... .......... (794,000)
.......... .......... (F2) 2,000 .......... ......... .......... .......... ..........
Investment in Sundown Stock ................ 675,000 .......... (CV) 180,000 (EL) 720,000 ......... .......... .......... ..........
.......... .......... (D) 135,000 ......... .......... .......... ..........
Investment in Sundown Bonds ............... 90,888 .......... .......... (B) 90,888 ......... .......... .......... ..........
Goodwill ................................................. .......... .......... (D) 150,000 .......... ......... .......... .......... 150,000
Bonds Payable, 9% ................................ .......... (200,000) (B) 100,000 .......... ......... .......... .......... (100,000)
Discount on Bonds Payable ................... .......... 6,345 .......... (B) 3,173 ......... .......... .......... 3,172
Common Stock ($10 par)
Princess .............................................. (200,000) .......... .......... .......... ......... .......... .......... (200,000)
Princess .............................................. (300,000) .......... .......... .......... ......... .......... .......... (300,000)
Retained Earnings, January 1, 20X6
Princess .............................................. (401,376) .......... .......... (CV) 180,000 ......... .......... (582,294) ..........
.......... .......... (F1) 5,400 (B) 6,318 ......... .......... .......... ..........
Common Stock ($10 par)Sundown ..... .......... (200,000)(EL) 180,000 .......... ......... (20,000) .......... ..........
Sundown ............................................ .......... (100,000)(EL) 90,000 .......... ......... (10,000) .......... ..........
Sundown ............................................ .......... (500,000)(EL) 450,000 (B) 702 ......... .......... .......... ..........
.......... .......... (F1) 600 (NCI) 15,000 ......... (65,102) .......... ..........
Sales ...................................................... (300,000) (260,000)(IS) 50,000 .......... (510,000) .......... .......... ..........
Cost of Goods Sold ................................ 100,000 72,000 (EI) 6,000 (IS) 50,000 128,000 .......... .......... ..........
Interest Income ...................................... (10,702) .......... (B) 10,702 .......... ......... .......... .......... ..........
Other Expenses ..................................... 150,000 160,000 .......... (F2) 2,000 308,000 .......... .......... ..........
Interest Expense .................................... ........... 19,242 .......... (B) 9,621 9,621 .......... .......... ..........
0 0 1,228,702 1,228,702 .......... .......... ..........
Consolidated Net Income ............................................................................................................................... (64,379) .......... .......... ..........
To NCI (see distribution schedule) ............................................................................................................. 968 (968) .......... ..........
To Controlling Interest (see distribution schedule)...................................................................................... 63,411 .......... (63,411) ..........
Total NCI ............................................................................................................................................................................. (96,070) .......... (96,070)
Totals .......................................................................................................................................................................................................................... 0
280
Ch. 5Problems

(CV) Conversion entry, 90% ($500,000 $300,000) = $180,000.
(EL) Eliminate pro rata share of subsidiary equity balances against the investment account.
(D)/(NCI) Distribute the excess and adjust NCI according to the determination and distribution of
excess schedule.
(F1) Reduce machine to cost to consolidated entity. Unrecognized gain of $6,000 remain-
ing at beginning of year is split 90% to controlling retained earnings and 10% to NCI
retained earnings.
(F2) Reduce current-year depreciation expense due to sale of machine, $10,000 5 years
= $2,000.
(B) Eliminate intercompany interest revenue and expense. Eliminate the balance in the
investment in bonds against the bonds payable. The gain on retirement at the start of
the year is calculated as follows:
[($200,000 $6,345) ] ................................................. $96,827
Investment in bonds at December 31, 20X6 ........................ 90,888 $5,939
Interest revenue eliminated ($89,186 12%) .............................. $10,702
Interest expense eliminated [($200,000 $7,582) 10%].... 9,621 1,081
Remaining gain at January 1, 20X6 ..................................... $7,020
The remaining unamortized gain is allocated 90% to the controlling retained earnings
and 10% to the NCI retained earnings.
(IS) Eliminate intercompany merchandise sales.
(EI) Eliminate intercompany profit in ending inventory, 30% $20,000 = $6,000.
281
Ch. 5Problems
PROBLEM 5-10
Paratec Corporation and Subsidiary Sym Corporation
Consolidated Controlling Consolidated
Trial Balance Eliminations and Adjustments Income Retained Balance
Paratec Sym Dr. Cr. Statement Earnings Sheet
Cash ................................................. 190,000 40,000 ............. ............. ............. ............ 230,000
Accounts Receivable (net) ............... 738,350 142,000 ............. ............. ............. ............ 880,350
Inventory .......................................... 500,000 75,000 ............. ............. ............. ............ 575,000
Prepaid Rent on Equipment ............. ............. 7,000 ............. (CL1) 7,000 ............. ............ ............
Investment in Bonds ......................... 250,000 65,000 ............. ............. ............. ............ 315,000
Investment in Sym Corporation ........ 400,000 ............ (CV) 160,000 ............. ............. ............ ............
............. ............ ............. (EL) 510,000 ............. ............ ............
............. ............ ............. (D) 50,000 ............. ............ ............
Land ................................................. 250,000 85,000 ............. ............. ............. ............ 335,000
Plant and Equipment ........................ 1,950,000 295,000(CL2) 120,000 ............. ............. ............ 2,365,000
Accumulated Depreciation
Plant and Equipment .................... (250,000) (60,000) ............. (CL2) 36,000 ............. ............ (346,000)
Equipment Under Operating Lease .. 120,000 ............ ............. (CL2) 120,000 ............. ............ ............
Assets Under Operating Lease ..... (36,000) ............ (CL2) 36,000 ............. ............. ............ ............
Goodwill ........................................... ............. ............ (D) 50,000 ............. ............. ............ 50,000
Accounts Payable ............................ (385,000) (52,000) ............. ............. ............. ............ (437,000)
Deferred Rent Revenue ................... (7,000) ............ (CL1) 7,000 ............. ............. ............ ............
Common Stock (no par)Paratec ... (2,000,000) ....... ............. ............. ............. ............ (2,000,00
Paratec ...................................... (1,076,350) ....... ............. (CV) 160,000
(1,236,350) ...................................
Common Stock (no par)Sym ........ ............. (200,000)(EL) 200,000 ............. ............. ............ ............
Sym ........................................... ............. (310,000)(EL) 310,000 ............. ............. ............ ............
Sales ................................................ (4,720,000) (500,000) ............. ............. (5,220,000) ....... ............
Rental Income .................................. (12,000) ............ (CL1) 12,000 ............. ............. ............ ............
Cost of Goods Sold .......................... 3,068,000 300,000 ............. ............. 3,368,000......... ............
Rent Expense ................................... ............. 12,000 ............. (CL1) 12,000 ............. ............ ............
Other Expenses ............................... 725,000 101,000 ............. ............. 826,000 ............ ............
Dividends Declared .......................... 295,000 ............ ............. ............. ............. 295,000 ............
Total .............................................. 0 0 895,000 895,000 ............. ............ ............
Consolidated Net Income ..................................................................................................................................... (1,026,000) (1,026,000) .......
Consolidated Retained Earnings, December 31, 20X8 ................................................................................................................ (1,967,350) (1,967,350)
282
Ch. 5Problems
Totals ............................................................................................................................................................................................................... 0
283
Ch. 5Problems

(CV) Convert to equity method as of January 1, 20X8, 100% ($310,000 $150,000).
(EL) Eliminate the parents investment in the subsidiary and the subsidiary equity accounts.
(D) Establish the goodwill.
(CL1) Eliminate the prepaid rent, the deferred rent revenue, and the current-year rent ex-
pense and income.
(CL2) Reclassify the equipment under operating lease and its related accumulated deprecia-
tion to the plant and equipment account and related accumulated depreciation.
PROBLEM 5-11

Company Parent NCI
Implied Price Value
Common stock ($1 par)............... $ 10,000
Total equity ............................ $390,000 $390,000 $390,000
Book value ........................................ $312,000 $ 78,000
value............................................ $172,500 $138,000 $34,500

Buildings ........................................... $100,000 debit D1 20 $5,000
Goodwill ............................................ 72,500 debit D2
Total ............................................ $172,500

Buildings ............................... 20 $5,000 $5,000 $5,000
$10,000 ........................... (A1)
284
Ch. 5Problems

Beginning .............................. 0% $10,000 25% $2,500
Ending ................................... 0 12,000 25 3,000
Subsidiary Simon Company Income Distribution

Amortization ................................ 5,000 income..................................... $40,804
Adjusted income ........................... $35,304

NCI share ...................................... 20%
NCI ................................................ $ 7,061
Parent Press Company Income Distribution

income..................................... $174,196
80% Simon adjusted income
of $35,304 ............................... 28,243
285
Ch. 5Problems
Press Company and Subsidiary Simon Company

Press Simon Dr. Cr. Statement NCI Earnings Sheet
Cash ................................................. 72,363 73,637 ......... ......... ........ ......... ......... 146,000
Accounts Receivable........................ 72,000 45,000 ......... (IA) 6,000 ........ ......... ......... 111,000
Inventory........................................... 120,000 56,000 ......... (EI) 3,000 ........ ......... ......... 173,000
Land ................................................. 100,000 100,000 ......... ......... ........ ......... ......... 200,000
Investment in Simon......................... 506,643 ......... ......... (CY1) 32,643 ........ ......... ......... ........
......... ......... (CY2) 8,000 ......... ........ ......... ......... ........
......... ......... ......... (EL) 344,000 ........ ......... ......... ........
......... ......... ......... (D) 138,000 ........ ......... ......... ........
Minimum Lease Payments
Receivable .................................... 103,452 ......... ......... (CL2) 103,452 ........ ......... ......... ........
Unearned Interest ............................ (17,619) ......... (CL2) 17,619 ......... ........ ......... ......... ........
Buildings .......................................... 800,000 400,000(D1) 100,000 ......... ........ ......... ......... 1,300,000
Accumulated Depreciation ............... (220,000) (220,000) ......... (A1) 10,000 ........ ......... ......... (450,000)
Equipment ........................................ 150,000 100,000 ......... ......... ........ ......... ......... 350,000
......... ......... (CL3) 100,000 ......... ........ ......... ......... ........
Accumulated Depreciation ............... (90,000) (50,000) ......... ......... ........ ......... ......... ........
......... ......... ......... (CL3) 18,000 ........ ......... ......... (158,000)
EquipmentCapital Lease .............. ......... 100,000 ......... (CL3) 100,000 ........ ......... ......... ........
Capital Lease ................................ ......... (18,000)(CL3) 18,000 ......... ........ ......... ......... ........
Goodwill............................................ ......... ......... (D2) 72,500 ......... ........ ......... ......... 72,500
Accounts Payable ............................ (60,000) (40,000)(IA) 6,000 ......... ........ ......... ......... (94,000)
Bonds Payable ................................. ......... ......... ......... ......... ........ ......... ......... ........
Discount (Premium) ......................... ......... ......... ......... ......... ........ ......... ......... ........
Obligation Under Capital Lease ....... ......... (76,637)(CL2) 76,637 ......... ........ ......... ......... ........
Accrued InterestCapital Lease ..... ......... (9,196)(CL2) 9,196 ......... ........ ......... ......... ........
Common Stock ($1 par)Simon ..... ......... (10,000)(EL) 8,000 ......... ........ (2,000) ......... ........
Simon ........................................ ......... (190,000)(EL) 152,000 ......... ........ (38,000) ......... ........
Retained EarningsSimon .............. ......... (230,000)(EL) 184,000 ......... ........ ......... ......... ........
......... ......... (BI) 500 (NCI) 34,500 ........ ......... ......... ........
......... ......... (A1) 1,000 ......... ........ ......... ......... ........
......... ......... ......... ......... ........ (79,000) ......... ........
286
Ch. 5Problems

Concluded
Common Stock ($1 par)Press ...... (100,000) ......... ......... ......... ........ ......... ......... (100,000)
Press ......................................... (800,000) ......... ......... ......... ........ ......... ......... (800,000)
Retained EarningsPress ............... (450,000) ......... (A1) 4,000 ......... ........ ......... ......... ........
......... ......... (BI) 2,000 ......... ........ ......... ......... ........
......... ......... ......... ......... ........ ......... (444,000) ........
Sales ................................................ (800,000) (400,000)(IS) 40,000 ......... (1,160,000) ... ......... ........
Cost of Goods Sold .......................... 450,000 240,000 ......... (IS) 40,000 ........ ......... ......... ........
......... ......... (EI) 3,000(BI) 2,500 650,500 ......... ......... ........
Depreciation ExpenseBuildings .... 30,000 10,000(A1) 5,000 ......... 45,000 ......... ......... ........
Depreciation ExpenseEquipment 15,000 28,000 ......... ......... ........ ......... ......... ........
......... ......... ......... ......... 43,000 ......... ......... ........
Other Expenses ............................... 140,000 72,000 ......... ......... 212,000 ......... ......... ........
Interest Expense .............................. ......... 9,196 ......... (CL1) 9,196 ........ ......... ......... ........
Interest Revenue .............................. (9,196) ......... (CL1) 9,196 ......... ........ ......... ......... ........
......... ......... ......... ......... ........ ......... ......... ........
Subsidiary Income............................ (32,643) ......... (CY1) 32,643 ......... ........ ......... ......... ........
Dividends DeclaredSimon ............ ......... 10,000 ......... (CY2) 8,000 ........ 2,000 ......... ........
Dividends DeclaredPress ............. 20,000 ......... ......... ......... ........ ......... 20,000 ........
Totals................................................ 0 0 849,291 849,291 ........ ......... ......... ........
Consolidated Net Income ................................................................................................................ (209,500) ......... ......... ........
To NCI (see distribution schedule) .................................................................................................. 7,061 (7,061) ......... ........
To Controlling Interest (see distribution schedule) ......................................................................... 202,439 .........
........................................................................................................................................ (202,439)
Total NCI ............................................................................................................................................................ (124,061) ......... (124,061
Retained EarningsControlling Interest, December 31, 20X2 ............................................................................................. (626,439) (626,439)
Totals.......................................................................................................................................................................................................... 0
287
Ch. 5Problems
Problem 5-11 Concluded

(D)/(NCI) Distribute excess.
CL1 Intercompany interest on capital lease.
CL2 Eliminate Obligation under capital lease plus accrued interest against minimum lease
payments receivable and unearned interest.
CL3 Reclassify leased asset as owned asset.
288
Ch. 5Problems
PROBLEM 5-12

Company Parent NCI
Implied Price Value
Common stock ($1 par) .............. $ 10,000
Total equity ........................... $390,000 $390,000 $390,000
Book value ........................................ $312,000 $ 78,000
value ........................................... $172,500 $138,000 $ 34,500

Goodwill ............................................ 72,500 debit D2
Total ............................................ $172,500

Buildings ............................... 20 $5,000 $5,000 $10,000
$15,000 ........................... (A1)
Total amortizations ......... $5,000 $5,000 $10,000
$15,000 ...........................

Beginning .............................. 0% $12,000 25% $3,000
Ending .................................. 0 8,000 25 2,000
289
Ch. 5Problems

Amortization ................................ 5,000 income ..................................... $22,504
Beginning inventory profit .............. 3,000
Adjusted income ............................ $18,504

NCI share....................................... 20%
NCI................................................. $ 3,701

income ..................................... $152,496
80% x Simon adjusted income
of $18,504 ................................ 14,803
Controlling interest ......................... $167,299
290
Ch. 5Problems

Cash ................................................. 140,000 78,274 ............. ............ ............ ............ ............. 218,274
Accounts Receivable........................ 87,000 55,000 ............. (IA) 7,000 ........... ............ ............. 135,000
Inventory........................................... 170,000 66,000 ............. (EI) 2,000 ........... ............ ............. 234,000
Land ................................................. 168,726 100,000 ............. ............ ............ ............ ............. 268,726
Investment in Simon......................... 516,646 ........... ............. (CY1) 18,003. ............ ............. ............
............ ............ (CY2) 8,000 ............ ............ ............ ............. ............
............ ............ ............. (EL) 368,643 ........... ............ ............. ............
............ ............ ............. (D) 138,000 ........... ............ ............. ............
Receivable .................................... 80,089 ........... ............. (CL2) 80,089. ............ ............. ............
Unearned InterestMinimum Lease
Payment ........................................ (10,123) .......... (CL2) 10,123 ............ ............ ............ ............. ............
Buildings .......................................... 800,000 400,000(D1) 100,000 ............ ............ ............ ............. 1,300,000
Accumulated DepreciationBldg. ... (250,000) (230,000) ............. (A1) 15,000 ........... ............ ............. (495,000
Equipment ........................................ 150,000 100,000 ............. ............ ............ ............ ............. 350,000
............ ............ (CL3) 100,000 ............ ............ ............ ............. ............
Accumulated DepreciationEquip. (105,000) (60,000) ............. (CL3) 36,000 ........... ............ ............. (201,000
EquipmentCapital Lease .............. ............ 100,000 ............. (CL3) 100,000 ........... ............ ............. ............
Capital Lease ................................ ............ (36,000)(CL3) 36,000 ............ ............ ............ ............. ............
Goodwill............................................ ............ ............ (D2) 72,500 ............ ............ ............ ............. 72,500
Accounts Payable ............................ (60,000) (30,000)(IA) 7,000 ............ ............ ............ ............. (83,000)
Bonds Payable ................................. ............ ............ ............. ............ ............ ............ ............. ............
Discount (Premium) ......................... ............ ............ ............. ............ ............ ............ ............. ............
............ ............ ............. ............ ............ ............ ............. ............
Obligation Under Capital Lease ....... ............ (62,470)(CL2) 62,470 ............ ............ ............ ............. ............
Accrued InterestCapital Lease ..... ............ (7,496)(CL2) 7,496 ............ ............ ............ ............. ............
291
Ch. 5Problems

Concluded
Common Stock ($1 par)Simon ..... ............ (10,000)(EL) 8,000 ............ ............ (2,000) ........... ............
Paid-In Capital in Excess of
ParSimon ................................... ............ (190,000)(EL) 152,000 ............ ............ (38,000) ........... ............
Retained EarningsSimon .............. ............ (260,804)(EL) 208,643 ............ ............ ............ ............. ............
............ ............ (BI) 600 (NCI) 34,500 ........... ............ ............. ............
............ ............ (A1) 2,000 ............ ............ ............ ............. ............
............ ............ ............. ............ ............ (84,061) ........... ............
Common Stock ($1 par)Press ...... (100,000) .......... ............. ............ ............ ............ ............. (100,000
Press ......................................... (800,000) .......... ............. ............ ............ ............ ............. (800,000
Retained EarningsPress ............... (636,839) .......... (A1) 8,000 ............ ............ ............ ............. ............
............ ............ (BI) 2,400 ............ ............ ............ ............. ............
............ ............ ............. ............ ............ ............ (626,439) ............
Sales ................................................ (900,000) (450,000)(IS) 35,000 ............ (1,315,000) ... ............. ............
Cost of Goods Sold .......................... 550,000 290,000 ............. (IS) 35,000 ........... ............ ............. ............
............ ............ (EI) 2,000(BI) 3,000 804,000 ........... ............. ............
Depreciation ExpenseBuildings .... 30,000 10,000(A1) 5,000 ............ 45,000 ........... ............. ............
Depreciation ExpenseEquipment 15,000 28,000 ............. ............ ............ ............ ............. ............
............ ............ ............. ............ 43,000............ ............. ............
Other Expenses ............................... 160,000 92,000 ............. ............ 252,000............ ............. ............
Interest Expense .............................. ............ 7,496 ............. (CL1) 7,496 ........... ............ ............. ............
Interest Revenue .............................. (7,496) .......... (CL1) 7,496 ............ ............ ............ ............. ............
................ ............ ............. ............ ............ ............ ............. ............
Subsidiary Income............................ (18,003) (CY1) 18,003 ............ ............ ............ ............. ............
Dividends DeclaredSimon ............ ............ 10,000 ............. (CY2) 8,000 2,000 ... ............
Dividends DeclaredPress ............. 20,000 ........... ............. ............ ............ ............ 20,000.
Totals................................................ 0 0 852,731 852,731 ........... ............ ............. ............
Consolidated Net Income ................................................................................................................ (171,000) .......... ............. ............
To NCI (see distribution schedule) .................................................................................................. 3,701 (3,701) ........... ............
To Controlling Interest (see distribution schedule) ......................................................................... 167,299............
(167,299) ......................................................................................................................................
Total NCI ............................................................................................................................................................ (125,762) ........... (125,762
292
Ch. 5Problems
Totals ...................................................................................................................................................................................................... 0
293
Ch. 5Problems

(D) Distribute excess.
(CL1) Intercompany interest on capital lease.
(CL2) Eliminate obligation under capital lease plus accrued interest against minimum lease
(CL3) Reclassify leased asset as owned asset.
PROBLEM 5-13

Company Parent NCI
Implied Price Value
Common stock ($1 par)............... $ 10,000
Total equity ............................ $390,000 $390,000 $390,000
Book value ........................................ $312,000 $ 78,000
value............................................ $172,500 $138,000 $ 34,500
294
Ch. 5Problems

Goodwill ............................................ 72,500 debit D2
Total ............................................ $172,500

Buildings ............................... 20 $5,000 $5,000 $5,000 $10,000

Beginning .............................. 0% $10,000 25% $2,500
Ending ................................... 0 12,000 25 3,000

Adjusted income ........................... $35,304

NCI share ...................................... 20%
NCI ................................................ $ 7,061

Equipment gain ........................... $15,000 Internally generated net
income..................................... $174,196
of $35,304 ............................... 28,243
Realized gain ................................ 3,000
295
Ch. 5Problems

Cash ................................................. 72,363 73,637 ............. ............ ............ ............ ............. 146,000
Inventory........................................... 120,000 56,000 ............. (EI) 3,000 ........... ............ ............. 173,000
Land ................................................. 100,000 100,000 ............. ............ ............ ............ ............. 200,000
............ ............ (CY2) 8,000 ............ ............ ............ ............. ............
............ ............ ............. (EL) 344,000 ........... ............ ............. ............
............ ............ ............. (D) 138,000 ........... ............ ............. ............
Receivable .................................... 103,452 ........... ............. (CL2) 103,452 ............ ............. ............
Unearned Interest ............................ (17,619) .......... (CL2) 17,619 ............ ............ ............ ............. ............
Buildings ........................................... 800,000 400,000(D1) 100,000 ............ ............ ............ ............. 1,300,000
Accumulated Depreciation ............... (220,000) (220,000) ............. (A1) 10,000 ........... ............ ............. (450,000
Equipment ........................................ 150,000 100,000 ............. (F1) 15,000 ........... ............ ............. 335,000
............ ............ (CL3) 100,000 ............ ............ ............ ............. ............
Accumulated Depreciation ............... (90,000) (50,000) ............. ............ ............ ............ ............. ............
............ ............ ............. ............ ............ ............ ............. ............
............ ............ (F2) 3,000 ............ ............ ............ ............. ............
............ ............ ............. (CL3) 18,000 ........... ............ ............. (155,000
Capital Lease ................................ ............ (18,000)(CL3) 18,000 ............ ............ ............ ............. ............
Goodwill............................................ ............ ............ (D2) 72,500 ............ ............ ............ ............. 72,500
Bonds Payable ................................. ............ ............ ............. ............ ............ ............ ............. ............
Discount (Premium) ......................... ............ ............ ............. ............ ............ ............ ............. ............
............ ............ ............. ............ ............ ............ ............. ............
296
Ch. 5Problems

Concluded
Simon ....................................... ............ (190,000)(EL) 152,000 ............ ............ (38,000) ........... ............
............ ............ (BI) 500 (NCI) 34,500 ........... ............ ............. ............
............ ............ (A1) 1,000 ............ ............ ............ ............. ............
............ ............ ............. ............ ............ (79,000) ........... ............
Press ......................................... (800,000) .......... ............. ............ ............ ............ ............. (800,000
............ ............ (BI) 2,000 ............ ............ ............ ............. ............
............ ............ ............. ............ ............ ............ (444,000) ............
Sales ................................................ (800,000) (400,000)(IS) 40,000 ............ (1,160,000) ... ............. ............
...................................................... (EI) 3,000(BI) 2,500 665,500............ ............. ............
Depreciation ExpenseBuildings .... 30,000 10,000(A1) 5,000 ............ 45,000............ ............. ............
Depreciation ExpenseEquipment 15,000 28,000 ............. ............ ............ ............ ............. ............
...................................................... ............. (F2) 3,000 40,000 ........... ............. ............
Other Expenses ............................... 140,000 72,000 ............. ............ 212,000 ........... ............. ............
Interest Expense .............................. 9,196 ............. (CL1) 9,196 ........... ............ ............. ............
Interest Revenue .............................. (9,196) (CL1) 9,196 ............ ............ ............ ............. ............
Gain on Fixed Asset Sale................. (15,000) (F1) 15,000 ............ ............ ............ ............. ............
Subsidiary Income............................ (32,643) (CY1) 32,643 ............ ............ ............ ............. ............
Dividends DeclaredSimon ............ 10,000 ............. (CY2) 8,000 ........... 2,000 ... ............
Totals ............................................ 0 0 867,291 867,291 ........... ............ ............. ............
To NCI (see distribution schedule) .................................................................................................. 7,061 (7,061) ........... ............
To Controlling Interest (see distribution schedule) ......................................................................... 190,439............
(190,439) ......................................................................................................................................
Total NCI ............................................................................................................................................................ (124,061) ........... (124,061
297
Ch. 5Problems

Totals .......................................................................................................................................................................................................................... 0
298
Ch. 5Problems

(F1) Fixed asset profit at beginning of year.
(F2) Fixed asset profit realized.
(CL2) Eliminate obligation under capital lease plus accrued interest against minimum lease
PROBLEM 5-14
Company Parent NCI

Implied Price Value
Value Analysis Schedule Fair Value (100%) (0%)
Company fair value .................................................. $562,500 $450,000 $112,500
Fair value of net assets excluding goodwill .............. 490,000 392,000 98,000
Goodwill ................................................................... $ 72,500 $ 58,000 $ 14,500
Gain on acquisition

Company Parent NCI
Implied Price Value
Common stock ($1 par)............... $ 10,000
Total equity ............................ $390,000 $390,000 $390,000
Book value ........................................ $312,000 $ 78,000
value............................................ $172,500 $138,000 $ 34,500
299
Ch. 5Problems

Goodwill ............................................ 72,500 debit D2
Total ............................................ $172,500

Buildings ............................... 20 $5,000 $5,000 $10,000 $15,000

Beginning .............................. 0% $12,000 25% $3,000
Ending ................................... 0 8,000 25 2,000

Adjusted income ........................... $18,504

NCI share ...................................... 20%
NCI ................................................ $ 3,701

income..................................... $152,496
of $18,504 ............................... 14,803
Realized gain ................................ 3,000
Total .............................................. $170,299
300
Ch. 5Problems

Cash ................................................. 140,000 78,274 ............. ............ ............ ............ ............. 218,274
Inventory........................................... 170,000 66,000 ............. (EI) 2,000 ........... ............ ............. 234,000
Land ................................................. 168,726 100,000 ............. ............ ............ ............ ............. 268,726
............ ............ (CY2) 8,000 ............ ............ ............ ............. ............
............ ............ ............. (EL) 368,643 ........... ............ ............. ............
............ ............ ............. (D) 138,000 ........... ............ ............. ............
Receivable .................................... 80,089 ........... ............. (CL2) 80,089. ............ ............. ............
Unearned Interest ............................ (10,123) .......... (CL2) 10,123 ............ ............ ............ ............. ............
Buildings ........................................... 800,000 400,000(D1) 100,000 ............ ............ ............ ............. 1,300,000
Accumulated Depreciation ............... (250,000) (230,000) ............. (A1) 15,000 ........... ............ ............. (495,000
Equipment ........................................ 150,000 100,000 ............. (F1) 15,000 ........... ............ ............. 335,000
(CL3) 100,000 ............ ............ ............ ............. ............
Accumulated Depreciation ............... (105,000) (60,000) ............. ............ ............ ............ ............. ............
............ ............ (F1) 3,000 ............ ............ ............ ............. ............
............ ............ (F2) 3,000 ............ ............ ............ ............. ............
............ ............ ............. (CL3) 36,000 ........... ............ ............. (195,000
Capital Lease ................................ ............ (36,000)(CL3) 36,000 ............ ............ ............ ............. ............
Goodwill............................................ ............ ............ (D2) 72,500 ............ ............ ............ ............. 72,500
Bonds Payable ................................ ............ ............ ............. ............ ............ ............ ............. ............
Discount (Premium) ........................ ............ ............ ............. ............ ............ ............ ............. ............
............ ............ ............. ............ ............ ............ ............. ............
301
Ch. 5Problems

Concluded
Simon ....................................... ............ (190,000)(EL) 152,000 ............ ............ (38,000) ........... ............
............ ............ (BI) 600 (NCI) 34,500 ........... ............ ............. ............
............ ............ (A1) 2,000 ............ ............ (84,061) ........... ............
Press ......................................... (800,000) .......... ............. ............ ............ ............ ............. (800,000
............ ............ (BI) 2,400 ............ ............ ............ ............. ............
............ ............ (F1) 12,000 ............ ............ ............ (614,439) ............
Sales ................................................ (900,000) (450,000)(IS) 35,000 ............ (1,315,000) ... ............. ............
............ ............ (EI) 2,000(BI) 3,000 804,000 ........... ............. ............
Depreciation ExpenseBuildings .... 30,000 10,000(A1) 5,000 ............ 45,000 ........... ............. ............
Depreciation ExpenseEquipment 15,000 28,000 ............. (F2) 3,000 40,000............ ............. ............
Other Expenses ............................... 160,000 92,000 ............. ............ 252,000 ........... ............. ............
Interest Expense .............................. ............ 7,496 ............. (CL1) 7,496 ........... ............ ............. ............
Interest Revenue .............................. (7,496) .......... (CL1) 7,496 ............ ............ ............ ............. ............
............ ............ ............. ............ ............ ............ ............. ............
Subsidiary Income............................ (18,003) .......... (CY1) 18,003 ............ ............ ............ ............. ............
Dividends DeclaredSimon ............ ............ 10,000 ............. (CY2) 8,000 ........... 2,000 ... ............
Totals................................................ 0 0 870,731 870,731 ........... ............ ............. ............
To NCI (see distribution schedule) .............................................................................................. 3,701 (3,701) ........... ............
To Controlling Interest (see distribution schedule) ...................................................................... 170,299 ...........
(170,299) ......................................................................................................................................
Total NCI ............................................................................................................................................................ (125,762) ........... (125,762
Totals ...................................................................................................................................................................................................... 0
302
Ch. 5Problems

(F1) Fixed asset profit at beginning of year.
(F2) Fixed asset profit realized.
(CL2) Eliminate Obligation under capital lease plus accrued interest against minimum lease
PROBLEM 5-15

Company Parent NCI
Implied Price Value
Total equity ............................ 380,000 $380,000 $380,000
Book value ........................................ $304,000 $ 76,000
value............................................ $ 20,000 $ 16,000 $ 4,000

Goodwill ............................................ $20,000 debit D
303
Ch. 5Problems
Subsidiary Slammer Company Income Distribution

income................................. $42,937
Adjusted income ....................... $42,937

NCI share .................................. 20%
NCI ............................................ $ 8,587
Parent Plessor Industries Income Distribution

Sales profit on leases.................. $7,298 Internally generated net
income................................. $129,361
Profit realized through use
of machine........................... 912
80% Slammer adjusted
income of $42,937............... 34,350
Controlling interest .................... $157,325
304
Ch. 5Problems
Plessor Industries and Subsidiary Slammer Company

Plessor Slammer Dr. Cr. Statement NCI Earnings Sheet
Cash....................................................... 60,000 40,745 .......... .......... ......... .......... .......... 100,745
Accounts Receivable.............................. 97,778 76,000 .......... .......... ......... .......... .......... 173,778
Inventory ................................................ 140,000 120,000 .......... .......... ......... .......... .......... 260,000
Minimum Lease Payments Receivable .. 127,000 .......... .......... (CL2a) 80,000 ......... .......... .......... .............
.......... .......... .......... (CL2b) 47,000 ......... .......... .......... .............
Unearned Interest Income ...................... (14,417) .......... (CL2a) 9,191 .......... ......... .......... .......... .............
.......... .......... (CL2b) 5,226 .......... ......... .......... .......... .............
Investment in Slammer Company .......... 320,000 .......... (CV) 40,000 (EL) 344,000 ......... .......... .......... .............
.......... .......... .......... (D) 16,000 ......... .......... .......... .............
Assets Under Capital Lease ................... .......... 156,068 .......... (CL3a) 103,770 ......... .......... .......... .............
.......... .......... .......... (CL3b) 52,298 ......... .......... .......... .............
Accumulated DepreciationAssets
Under Capital Lease .............................. .......... (27,291)(CL3a) 20,754 .......... ......... .......... .......... .............
.......... (CL3b) 6,537 .......... ......... .......... .......... .............
Property, Plant, and Equipment ............. 1,900,000 310,000(CL3a) 103,770 (F1) 7,298 ......... .......... .......... .............
.......... .......... (CL3b) 52,298 .......... ......... .......... .......... 2,358,770
Accumulated DepreciationProperty,
Plant, and Equipment ......................... (1,077,000) (72,000)(F2) 912 (CL3a) 20,754 ......... .......... .......... .............
.......... .......... .......... (CL3b) 6,537 ......... .......... .......... (1,175,379)
Goodwill ................................................. .......... .......... (D) 20,000 .......... ......... .......... .......... 20,000
Accounts Payable .................................. (148,000) (45,065)(CL2a) 7,587 .......... ......... .......... .......... .............
.......... .......... (CL2b) 4,476 .......... ......... .......... .......... (181,002)
Obligations Under Capital Lease............ .......... (100,520)(CL2a) 63,222 .......... ......... .......... .......... .............
.......... .......... (CL2b) 37,298 .......... ......... .......... .......... .............
305
Ch. 5Problems

Plessor Industries and Subsidiary Slammer Company
Concluded
Plessor Slammer Dr. Cr. Statement NCI Earnings Sheet
Common Stock ($10 par)Plessor........ (700,000) .......... .......... .......... ......... .......... .......... (700,000)
Plessor ............................................ (325,000) .......... .......... .......... ......... .......... .......... (325,000)
Retained EarningsPlessor .................. (295,000) .......... .......... (CV) 40,000 ......... .......... (335,000) .............
Common Stock ($10 par)Slammer ..... .......... (300,000)(EL) 240,000 .......... ......... (60,000) .......... .............
Retained EarningsSlammer ................ .......... (130,000)(EL) 104,000(NCI) 4,000 ......... (30,000) .......... .............
Sales ...................................................... (1,400,000)(600,000) .......... .......... (2,000,000)...... .......... .............
Sales Profit on Leases ........................... (7,298) .......... (F1) 7,298 .......... ......... .......... .......... .............
Interest Income ...................................... (12,063) .......... (CL1a) 7,587 .......... ......... .......... .......... .............
.......... .......... (CL1b) 4,476 .......... ......... .......... .......... .............
Cost of Goods Sold ................................ 780,000 380,000 .......... .......... 1,160,000 ....... .......... .............
Interest Expense .................................... .......... 12,063 .......... (CL1a) 7,587 ......... .......... .......... .............
.......... .......... .......... (CL1b) 4,476 ......... .......... .......... .............
Other Expenses ..................................... 510,000 165,000 .......... (F2) 912 674,088 .......... .......... .............
Dividend Income .................................... (12,000) .......... (CY2) 12,000 .......... ......... .......... .......... .............
Dividends Declared ................................ 56,000 15,000 .......... (CY2) 12,000 ......... 3,000 56,000 .............
0 0 746,632 746,632 ......... .......... .......... .............
Consolidated Net Income ............................................................................................................................... (165,912) .......... .......... .............
To NCI (see distribution schedule) ............................................................................................................. 8,587 (8,587) .......... .............
To Controlling Interest (see distribution schedule)...................................................................................... 157,325 .......... (157,325) .............
Total NCI ............................................................................................................................................................................. (95,587) .......... (95,587)
Totals .......................................................................................................................................................................................................................... 0

(CV) Conversion to equity as of beginning of year, 80% ($130,000 $80,000) = $40,000.
(CY2) Eliminate the intercompany dividends.
(EL) Eliminate 80% of the subsidiary equity.
(D)/(NCI) Distribute the excess and NCI adjustment to goodwill.
306
Ch. 5Problems
(CL1a) Eliminate the intercompany interest expense and revenue on factory lease:
Original balance ........................................................................... $103,770
First lease payment ...................................................................... (25,000)
First-year interest (12% $78,770) .............................................. 9,452
Second lease payment ................................................................. (25,000)
Balance for second year ....................................................... $ 63,222
Interest for second year (12% $63,222) ............................ $ 7,587
(CL2a) Eliminate obligation under capital lease plus accrued interest payable against mini-
mum lease payments receivable and unearned interest income:
Obligations balance, January 1, 20X3:
Principal, January 1, 20X2 ........................................................... (25,000)
Principal, January 1, 20X3 ($25,000 $9,452) ............................ (15,548)
Balance ................................................................................ $ 63,222
Accrued interest payable ...................................................... $ 7,587
Minimum lease payments, January 1, 20X3:
3 $25,000 plus $5,000 option .................................................... $ 80,000
Unearned interest income, January 1, 20X3:
Original balance, $130,000* $103,770 principal balance .......... $ 26,230
Earned in 20X2............................................................................. (9,452)
Earned in 20X3............................................................................. (7,587)
Balance ................................................................................ $ 9,191
*($25,000 5) + $5,000
(CL3a) Reclassify asset under capital lease and related accumulated depreciation for 2 years.
Depreciation is $103,770 10, or $10,377 per year.
(CL1b) Eliminate the intercompany interest expense and revenue on equipment lease. Inter-
est is 12% ($52,298 original balance $15,000 first payment), or $4,476.
(CL2b) Eliminate obligation under capital lease ($52,298 $15,000, or $37,298) and accrued
interest payable, $4,476, against minimum lease payments receivable (3 $15,000 +
$2,000 purchase option, or $47,000) and unearned interest income:
Unearned interest income at December 31, 20X3:
Original balance, $62,000* $52,298 principal balance .............. $ 9,702
Earned in 20X3............................................................................. 4,476
Balance ................................................................................ $ 5,226
*($15,000 x 4) + $2,000
(CL3b) Reclassify the asset and related accumulated depreciation. Depreciation is $52,298
8, or $6,537 per year.
(F1) Eliminate the sales profit on intercompany equipment lease and reduce equipment to
its cost to the consolidated entity.
(F2) Reduce the depreciation to depreciation based on cost of equipment to consolidated
entity:
Recorded depreciation expense for 1 year ($52,298 8) ............ $ 6,537
Depreciation expense based on cost ($45,000 8) ..................... 5,625
Depreciation adjustment ....................................................... $ 912
307
Ch. 5Problems
PROBLEM 5-16

Company Parent NCI
Implied Price Value
Total equity ............................ 500,000 $500,000 $500,000
Book value ........................................ $400,000 $100,000
value............................................ $100,000 $ 80,000 $ 20,000

Goodwill ............................................ $100,000 debit D
Subsidiary Swing Company Income Distribution

income................................... $17,440
Realized gain on machine ........... 509
Adjusted income ......................... $17,949

NCI share .................................... 20%
NCI .............................................. $ 3,590
Parent Patter, Inc. Income Distribution

Internally generated loss ............... $16,440 80% Swing adjusted
income of $17,949................. $14,359
Controlling interest ........................ $ 2,081
308
Ch. 5Problems
Patter, Inc. and Subsidiary Swing Company

Patter Swing Dr. Cr. Statement NCI Earnings Sheet
Cash....................................................... 91,013 26,050 .......... .......... ......... .......... .......... 117,063
Inventory ................................................ 70,000 20,000 .......... .......... ......... .......... .......... 90,000
Property, Plant, and Equipment ............. 320,000 50,000(OL2) 140,000 (F1) 3,560 ......... .......... .......... ..........
.......... .......... (CL3a) 17,560 .......... ......... .......... .......... ..........
.......... .......... (CL2b) 23,116 .......... ......... .......... .......... 547,116
Plant, and Equipment ......................... (70,000) (20,000)(F1) 509 (OL2) 18,000 ......... .......... .......... ..........
.......... .......... (F2) 509 (CL3a) 5,017 ......... .......... .......... ..........
.......... .......... .......... (CL3b) 5,779 ......... .......... .......... (117,778)
Assets Under Capital Lease ................... 40,676 .......... .......... (CL3a) 17,560 ......... .......... .......... ..........
.......... .......... .......... (CL2b) 23,116 ......... .......... .......... ..........
Under Capital Lease ........................... (10,796) .......... (CL3a) 5,017 .......... ......... .......... .......... ..........
.......... .......... (CL3b) 5,779 .......... ......... .......... .......... ..........
Assets Under Operating Lease .............. .......... 420,000 .......... (OL2) 140,000 ......... .......... .......... 280,000
Assets Under Operating Lease........... .......... (80,000)(OL2) 18,000 .......... ......... .......... .......... (62,000)
Minimum Lease Payments Receivable .. .......... 412,000 .......... (CL2a) 12,000 ......... .......... .......... ..........
........................................................... .......... .......... (CL2b) 21,000 ......... .......... .......... 379,000
Unearned Interest Income on Leases .... .......... (4,000)(CL2a) 1,139 .......... ......... .......... .......... ..........
.......... .......... (CL2b) 2,861 .......... ......... .......... .......... ..........
Goodwill ................................................. .......... .......... (D) 100,000 .......... ......... .......... .......... 100,000
Investment in Swing Company ............... 480,000 .......... (CV) 101,288 (EL) 501,288 ......... .......... .......... ..........
.......... .......... .......... (D) 80,000 ......... .......... .......... ..........
Accounts Payable .................................. (130,000) (180,000) .......... .......... ......... .......... .......... (310,000)
Obligations Under Capital Lease............ (24,560) .......... (CL2a) 9,444 .......... ......... .......... .......... ..........
.......... .......... (CL2b) 15,116 .......... ......... .......... .......... ..........
Interest Payable ..................................... (4,440) .......... (CL2a) 1,417 .......... ......... .......... .......... ..........
.......... .......... (CL2b) 3,023 .......... ......... .......... .......... ..........
Common Stock ($10 par)Patter .......... (200,000) .......... .......... .......... ......... .......... .......... (200,000)
Paid-In Capital in Excess of ParPatter (300,000) .......... .......... .......... ......... .......... .......... (300,000)
Retained EarningsPatter .................... (278,333) .......... .......... (CV) 101,288 ......... .......... .......... ..........
.......... (F1) 2,441 .......... ......... .......... (377,180) ..........
309
Ch. 5Problems
Patter, Inc. and Subsidiary Swing Company

Concluded
Patter Swing Dr. Cr. Statement NCI Earnings Sheet
Common Stock ($10 par)Swing .......... .......... (100,000)(EL) 80,000 .......... ......... (20,000) .......... ..........
Paid-In Capital in Excess of ParSwing .......... (300,000)(EL) 240,000 .......... ......... (60,000) .......... ..........
Retained EarningsSwing .................... .......... (226,610)(EL) 181,288(NCI) 20,000 ......... .......... .......... ..........
.......... .......... (F1) 610 .......... ......... (64,712) .......... ..........
Sales ...................................................... (300,000) (130,000) .......... .......... (430,000) .......... .......... ..........
Rent Income ........................................... .......... (34,000)(OL1) 11,000 .......... (23,000) .......... .......... ..........
Interest IncomeCapital Lease ............. .......... (4,440)(CL1a) 1,417 .......... ......... .......... .......... ..........
.......... .......... (CL1b) 3,023 .......... ......... .......... .......... ..........
Depreciation Expense ............................ 41,000 23,000 .......... (CL5a) 509 ......... .......... .......... ..........
.......... .......... .......... .......... 63,491 .......... .......... ..........
Interest Expense .................................... 4,440 .......... .......... (F2) 1,417 ......... .......... .......... ..........
.......... .......... .......... (CL1b) 3,023 ......... .......... .......... ..........
Selling and General Expense ................. 70,000 38,000 .......... .......... 108,000 .......... .......... ..........
Cost of Goods Sold ................................ 190,000 90,000 .......... .......... 280,000 .......... .......... ..........
Rent Expense......................................... 11,000 .......... .......... (OL1) 11,000 ......... .......... .......... ..........
........................................................... 0 0 964,557 964,557 ......... .......... .......... ..........
Consolidated Net Income ............................................................................................................................... (1,509) .......... .......... ..........
To NCI (see distribution schedule) ............................................................................................................. 3,590 (3,590) .......... ..........
To Controlling Interest (see distribution schedule)...................................................................................... (2,081) .......... 2,081 ..........
Total NCI ............................................................................................................................................................................. (148,302) .......... (148,302)
Totals .......................................................................................................................................................................................................................... 0
310
Ch. 5Problems

(CV) Conversion to equity at the beginning of the year [80% ($226,610 $100,000)].
(EL) Eliminate the 80% ownership portion of the subsidiary equity accounts against the in-
vestment.
(D)/(NCI) Distribute the excess cost to goodwill.
(OL1) Eliminate the intercompany rent revenue and expense on operating lease.
(OL2) Reclassify the asset under the operating lease and the related accumulated deprecia-
tion to productive asset owned by the consolidated entity (3 years at $6,000).
(CL1a) Eliminate the intercompany interest expense/revenue on machine:
First lease payment ...................................................................... (5,000)
First-year interest (15% $12,560) .............................................. 1,884
Second lease payment ................................................................. (5,000)
Balance ................................................................................ $ 9,444
Interest for second year (15% $9,444) .............................. $ 1,417
(CL2a) Eliminate the obligation under capital lease plus accrued interest payable against min-
imum lease payments receivable and unearned interest income:
Obligations balance, January 1, 20X5:
Original balance ................................................................... $17,560
Principal, January 1, 20X4 ................................................... (5,000)
Principal, January 1, 20X5 ($5,000 $1,884) ...................... (3,116)
Balance........................................................................... $ 9,444
Minimum lease payments, January 1, 20X5:
(2 $5,000) + $2,000 option ................................................ $12,000
Unearned interest income, January 1, 20X5:
Original balance ($22,000* $17,560) ................................. $ 4,440
Earned in 20X5 ..................................................................... (1,884)
Earned in 20X4 ..................................................................... (1,417)
Balance........................................................................... $ 1,139
*($5,000 x 4) + $2,000
(CL3a) Reclassify the machine under the capital lease and related depreciation. Cost,
$17,560; accumulated depreciation, [($17,560 7) 2] = $5,017.
(F1) Defer remaining gain on asset at the beginning of the year, $3,560* less 1 years
amortization of $509** = $3,051. Because profit was recorded by the subsidiary, the
retained earnings adjustment is allocated to NCI ($3,051 20% = $610) and control-
ling interest ($3,051 80% = $2,441).
*$17,560 $14,000 = $3,560
** $3,560/7 = $509
(F2) Adjust the current years depreciation for 1/7 of the gain, $509.
311
Ch. 5Problems
(CL1b) Eliminate intercompany interest expense/revenue on truck lease:

Original balance ............................................................... $23,116
Initial payment .................................................................. 8,000
Balance .................................................................... $15,116
First-year interest at 20% ................................................. 3,023 Entry
(CL1b)
Payment at start of second year....................................... (8,000)
Balance .................................................................... $10,139
Remaining minimum payments ($8,000 + $5,000) .......... 13,000
Future unearned interest .......................................... $ 2,861 Entry
(CL2b)
(CL2b) Eliminate present value of obligation under capital lease, $15,116; current interest
payable, $3,023; and future unearned interest of $2,861 against minimum lease
payments of $21,000 [($8,000 2) + $5,000]. Reclassify the asset as an owned
productive asset.
(CL3b) Reclassify and adjust the depreciation as applicable to the owned asset,
$23,116 4 = $5,779.
312
Ch. 5Problems
APPENDIX PROBLEMS
PROBLEM 5A-1
Paulz Heavy Equipment and Subsidiary Steven Truck Company
Paulz Steven Dr. Cr. Statement NCI Earnings Sheet
Cash....................................................... 90,485 123,307 .......... .......... ......... .......... .......... 213,792
Accounts Receivable (net) ..................... 228,000 120,000 .......... .......... ......... .......... .......... 348,000
Inventory ................................................ 200,000 140,000 .......... .......... ......... .......... .......... 340,000
Minimum Lease Payments Receivable .. 97,000 10,000 .......... (CL2s) 10,000 ......... .......... .......... .............
.......... .......... .......... (CL2p) 97,000 ......... .......... .......... .............
Unguaranteed Residual Value ............... .......... 6,000 .......... (CL2s) 6,000 ......... .......... .......... .............
Unearned Interest Income ...................... (9,673) (444) (CL2s) 1,237(CL1s) 412 ......... .......... .......... .............
.......... .......... (CL2p) 9,673(CL1s) 381 ......... .......... .......... .............
Assets Under Capital Lease ................... 27,833 109,388 .......... (CL2s) 27,833 ......... .......... .......... .............
.......... .......... .......... (CL3p) 109,388 ......... .......... .......... .............
Under Capital Lease ........................... (18,556) (13,674)(CL3s) 18,556 .......... ......... .......... .......... .............
.......... .......... (CL3p) 13,674 .......... ......... .......... .......... .............
Property, Plant, and Equipment ............. 2,075,000 1,145,000 (CL2s) 32,596 (F1) 60,000 .......... .......... .............
.......... .......... (CL3p) 109,388 .......... ......... .......... .......... 3,301,984
Plant, and Equipment ......................... (713,000) (160,000)(F2) 750 (CL3s) 17,730 ......... .......... ..........
.......... .......... .......... (CL3p) 13,674 ......... .......... .......... (903,654)
Investment in Steven Truck Company ... 1,045,800 ....... (CY2) 28,000 (CY1) 124,000 .......... .......... .............
.......... .......... .......... (EL) 949,800 ......... .......... .......... .............
Accounts Payable .................................. (100,000) (85,000) .......... .......... ......... .......... .......... (185,000)
Interest Payable ..................................... (740) (7,939)(CL2s) 740 .......... ......... .......... .......... .............
.......... .......... (CL2p) 7,939 .......... ......... .......... .......... .............
Obligations Under Capital Lease............ (9,260) (79,388)(CL2s) 9,260 .......... ......... .......... .......... .............
.......... .......... (CL2p) 79,388 .......... ......... .......... .......... .............
Common Stock ($5 par)Paulz............. (1,800,000) ...... .......... .......... ......... .......... .......... (1,800,00
Retained EarningsPaulz ..................... (864,834) .......... (CL1s) 305 (CL3s) 330 ......... .......... (864,859) .............
Common Stock ($5 par)Steven .......... .......... (800,000)(EL) 640,000 .......... ......... (160,000) .......... .............
Retained EarningsSteven ................... .......... (387,250)(EL) 309,800(CL3s) 83 ......... (77,457) .......... .............
.......... .......... (CL1s) 76 .......... ......... .......... .......... .............
Sales ...................................................... (3,200,000) (1,400,000) .......... .......... (4,600,000) .......... .............
Gain on Sale of Assets........................... .......... (60,000)(F1) 60,000 .......... ......... .......... .......... .............
Interest Income ...................................... (7,939) (1,152)(CL1s) 1,152 .......... ......... .......... .......... .............
.......... .......... (CL1p) 7,939 .......... ......... .......... .......... .............
313
Ch. 5Problems
Problem 5A-1 Continued

Paulz Heavy Equipment and Subsidiary Steven Truck Company
Concluded
Paulz Steven Dr. Cr. Statement NCI Earnings Sheet
Rent Income ........................................... (2,182) .......... (CL4p) 2,182 .......... ......... .......... .......... .............
Cost of Goods Sold ................................ 1,882,000 770,000 .......... .......... 2,652,000 ....... .......... .............
Interest Expense .................................... 740 7,939 .......... (CL1s) 740 ......... .......... .......... .............
.......... .......... .......... (CL1p) 7,939 ......... .......... .......... .............
Depreciation Expense ............................ 135,000 45,000 .......... (F2) 750 ......... .......... .......... .............
.......... .......... .......... (CL3s) 413 178,837 .......... .......... .............
Other Expenses ..................................... 924,326 483,213 .......... (CL4p) 2,182 1,405,357....... .......... .............
Subsidiary Income.................................. (124,000) .......... (CY1) 124,000 .......... ......... .......... .......... .............
Dividends Declared ................................ 144,000 35,000 .......... (CY2) 28,000 ......... 7,000 144,000 .............
0 0 1,456,655 1,456,655 .......... .......... .............
Consolidated Net Income ............................................................................................................................... (363,806) .......... .......... .............
To NCI (see distribution schedule) ............................................................................................................. 19,150 (19,150) .......... .............
To Controlling Interest (see distribution schedule)...................................................................................... 344,656 .......... (344,656) .............
Total NCI ............................................................................................................................................................................. (249,607) ............
Retained EarningsControlling Interest, December 31, 20X6 ................................................................................................................. (1,065,515) (1,065,515)
Totals .......................................................................................................................................................................................................................... 0

(CY1) Eliminate the current-year subsidiary income to the investment account.
(CY2) Eliminate the current-year dividends to the investment account.
(EL) Eliminate 80% of the subsidiary equity balances.
(CL1s) Eliminate intercompany interest expense/revenue recorded on truck, $740, and interest on residual value. [See table in
entry (CL2s).] Eliminate the interest on the unguaranteed residual value recorded in 20X5.
(CL2s) Eliminate the intercompany debt, the unguaranteed residual value, and reclassify the asset at cost:
Lessee Lessor
Interest Interest Interest
Date Payment (8%) Balance Payment (8%) Balance Difference
January 1, 20X5 $10,000 ............ $17,833 $10,000 ............ $22,596 ..........
January 1, 20X6 10,000 $1,427 9,260 10,000 $1,808 14,404 $ 381
January 1, 20X7 10,000 740 ............ 10,000 1,152 5,556 412
January 1, 20X8 ............ ............ ............ 6,000 444 ............ 444
$1,237
314
Ch. 5Problems
Problem 5A-1, Continued
(CL3s) Reclassify and adjust the depreciation on the truck, ($27,833 3) versus 1/3
($32,596 $6,000 residual). Adjust past and current year by $413 ($9,278 $8,865).
(CL1p) Eliminate interest revenue and expense on equipment lease, 10% ($109,388 origi-
nal balance $30,000 payment, January 1, 20X6), or $7,939.
(CL2p) Eliminate obligation under capital lease ($109,388 $30,000) plus accrued interest
payable ($7,939) against minimum lease payments receivable, [(3 $30,000) +
$7,000 purchase option, or $97,000], and unearned interest income, computed as fol-
lows:
Original balance of payments receivable ......................... $127,000
Original principal balance ................................................. 109,388 $17,612
Interest earned in 20X6 ............................................ (7,939)
Unearned interest income, December 31, 20X6 ...... $ 9,673
(CL3p) Reclassify the equipment under capital lease and related accumulated depreciation
for one year. Annual depreciation is $109,388 8, or $13,674.
(CL4p) Eliminate the intercompany rent revenue and expense, $2,182, which is $1,500 ex-
ecutory costs plus $682 contingent payment, computed as follows:
Previous growth rate of net income ......................................................... 8%
(20X5 net income, $81,650 20X4 net income of $75,600, or 1.08;
20X4 net income, $75,600 20X3 net income of $70,000, or 1.08)
20X6 net income, excluding gain on asset sale ...................................... $95,000
Less 1.08 $81,650, 20X5 net income ................................................... 88,182
Increase in income due to cost saving ............................................ $ 6,818
Contingent payment, 10% of increase ............................................ $ 682
(F1) Eliminate the gain on the intercompany sale of warehouse and reduce the asset to its
cost to the consolidated entity.
(F2) Adjust current years depreciation for one-quarter year, or $750 ($60,000 gain 20-
year life = $3,000 annual depreciation adjustment).
315
Ch. 5Problems
Problem 5A-1, Concluded
Subsidiary Steven Truck Company Income Distribution

Unrealized gain on sale Internally generated net
of warehouse......................... $60,000 income................................. $155,000
Unearned interest on Gain realized through use
residual.................................. 412 of warehouse....................... 750
Adjustment of depreciation
on lease............................... 413
Adjusted income ....................... $ 95,751

NCI share .................................. 20%
NCI ............................................ $ 19,150
Parent Paulz Heavy Equipment Income Distribution

income................................. $268,055
80% Steven adjusted
income of $95,751............... 76,601
Controlling interest .................... $344,656
PROBLEM 5A-2

Interest Income ............................................................................... 5,136
Unearned Interest Income .......................................................... 513
Property, Plant, and Equipment (original cost to lessor)................. 50,098
Unearned Interest Income (includes above $513 adjustment) ....... 4,279
Unguaranteed Residual Value ................................................... 5,000
To eliminate intercompany debt, the unguaranteed
residual value, and the asset under the capital lease.
Accumulated DepreciationAssets Under Capital Lease
(1/3 $46,894) ........................................................................... 15,631
Accumulated DepreciationProperty, Plant, and
Equipment [1/3 ($50,098 $5,000 residual)] ................. 15,033
Depreciation Expense .......................................................... 598
To reclassify accumulated depreciation.
316
Ch. 5Problems
Problem 5A-2, Concluded

Interest Income ............................................................................... 3,078
Retained EarningsPenn .............................................................. 513
To adjust for interest income recorded on residual
value in 20X1.
Unearned Interest Income (includes $513 and $595 adjustments) 1,796
Unguaranteed Residual Value ................................................... 5,000
To eliminate intercompany debt, the unguaranteed
residual value, and the asset under the capital lease.
Accumulated DepreciationAssets Under
Capital Lease (2 $15,631) ....................................................... 31,262
Accumulated DepreciationProperty, Plant, and
Equipment (2 $15,033) ................................................... 30,066
Depreciation Expense .......................................................... 598
Retained EarningsPenn .................................................... 598
To reclassify accumulated depreciation.
317
Ch. 5Cases
CASES
CASE 5-1
First, lets consider the existing outstanding bonds. There is a major difference in interest rates
between those available to Power Pro and Swift-Craft. To the extent possible, the debt should
be directly or indirectly retired. Direct retirement would be accomplished by Power Pro lending
funds to Swift-Craft, which Swift-Craft would in turn use to retire the bonds. The other alternative
is for Power Pro to purchase the existing bonds that it could then hold as an investment. Assum-
ing the current borrowing rate is 11% for Swift-Craft, the bonds would trade near face value.
The direct borrowing route would allow the parent to choose the interest rate it wanted to
charge. Any rate under 11% would benefit the NCI share of income because it would increase
the subsidiarys reported income. The intercompany debt and interest revenue/expense would
be eliminated in consolidation.
The indirect route (purchasing the Swift-Craft bonds) would probably leave the NCI sharehold-
ers in the same position they are in now. The parent receives the 11% interest and can borrow
at 7.5%. The bonds are retired for consolidation purposes in the period in which they are pur-
chased by Power Pro. The intercompany interest revenue/expense on the bonds is eliminated.
It would appear that Power Pro will build and equip the new plant. It can add a reasonable profit.
The higher the price, the greater the shift of income from the subsidiary to the parent. When
consolidating, the profit is removed from the gain account and the asset accounts. It is deferred
over the period of use as a decrease in Depreciation Expense.
Power Pro could sell the assets to Swift-Craft in return for a long-term mortgage. Again, any rate
under 11% is a bonus to the NCI shareholders. Again, the intercompany debt and interest reve-
nue/expense are eliminated in the consolidation process.
The best situation might be for Power Pro to lease the assets to Swift-Craft under a financing-
type lease. It would be a sales-type lease; thus, the profit would be deferred in the same man-
ner as if the asset were sold to Swift-Craft. This would allow Power Pro to determine the interest
rate and would provide it with control over the accounting for the assets. Any rate below 11% is
beneficial to the NCI, and any profit below that charged by outside parties is a plus to the NCI
shareholders.
The intercompany debt and the interest revenue/expense resulting from the lease are eliminat-
ed in the consolidation process. The assets under the lease are reclassified to appear as nor-
mal, owned assets.
318
Ch. 5Cases
CASE 5-2
(1) Option 1:
Sales ..................................................................................................... $ 320,000
Cost of goods sold ................................................................................ (220,000)
Gross profit ..................................................................................... $ 100,000
Expenses .............................................................................................. (40,000)
Interest expense ................................................................................... (20,000)
Gain on bond retirement ....................................................................... 15,000
Net income...................................................................................... $ 55,000
Consolidated Balance Sheet

Assets Liabilities and Equity
Cash .................................... $ 173,000................ Current liabilities $
45,000
Other current assets ............ 250,000.................................... NCI
82,000*
Plant and equipment ............ 1,300,000... Common stock (par)
300,000
Accumulated depreciation ... (500,000) ........... Retained earnings
796,000**
Total ............................... $1,223,000.................................... Total
$1,223,000
*NCI = 20% ($100,000 + $285,000 + $10,000 income + $15,000 gain on bond
retirement).
**Retained earnings = $746,000 + $30,000 Magna income + [80% ($10,000 Metros
income + $15,000 gain on bond retirement)].
(2) Option 2:
There would be no difference. The bonds would still be retired from a consolidated view-
point with the parent paying $185,000 to retire the bonds. The gain would still be credited to
the subsidiary income distribution schedule and thus would be allocated 20% to the NCI
and 80% to the parent. The bonds would still be eliminated from the consolidated balance
sheet.
319
Ch. 5Cases
CASE 5-3
(1) Entries:
Pannier:
Note Receivable ............................................................................. 125,000
Sales .......................................................................................... 125,000
Cost of Goods Sold......................................................................... 100,000
Inventory .................................................................................... 100,000
Jodestar:
Equipment....................................................................................... 125,000
Note Payable .............................................................................. 125,000
(2) Consolidated statements:

Sales ..................................................................................................... $ 320,000
Cost of goods sold ................................................................................ (220,000)
Gross profit ..................................................................................... $ 100,000
Expenses .............................................................................................. (40,000)
Interest expense ................................................................................... (20,000)
Net income...................................................................................... $ 40,000
Consolidated Balance Sheet

Assets Liabilities and Equity
Cash .................................... $ 358,000................ Current liabilities $
45,000
Inventory .............................. 90,000.................. Long-term debt
200,000
Other current assets ............ 210,000.................................... NCI
79,000*
Plant and equipment ............ 1,250,000... Common stock (par)
300,000
Accumulated depreciation ... (500,000) ........... Retained earnings
784,000
Total ............................... $1,408,000.................................... Total
$1,408,000
*NCI = 20% ($100,000 + $285,000 + $10,000 Jodestar income).
Inventory is reduced by $100,000 and equipment is increased by $100,000 for the cost of
the equipment sold to the subsidiary.
320
Ch. 5Cases
Case 5-3, Concluded
(3) Entries:
Pannier:
Minimum Lease Payments Receivable (4 $29,977) .................... 119,908
Cash ............................................................................................... 29,977
Inventory .................................................................................... 100,000
Unearned Interest Income .......................................................... 24,885
Sales-Type Profit on Lease ........................................................ 25,000
Jodestar:
Asset Under Capital Lease ............................................................. 125,000
Cash ........................................................................................... 29,977
Obligation Under Capital Lease ................................................. 95,023
(4) There would be no difference in the consolidated statements.
321

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UNDERSTANDING THE ISSUES

(1) Eliminations and Adjustments at December 31, 20X5:

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

Gain on retirement (January 2, 20X6):

Schedule of interest adjustments:

Intercompany Interest, Recorded Interest, Interest Expense

(1) Eliminations and Adjustments at December 31, 20X3:

Interest Revenue [(7% $60,000) + ($6,400 8)] ......................... 5,000

Interest Payable ($60,000 7%) .................................................... 4,200

An alternative way to calculate the gain:

Gain amortized during the year:

Exercise 5-5, Concluded

(2) Eliminations and Adjustments at December 31, 20X4:

Partial Schedule of Bond Premium Amortization

Partial Schedule of Bond Discount Amortization

Exercise 5-6, Concluded

(1) Eliminations and Adjustments at December 31, 20X8:

Gain remaining at year-end:

Gain amortized during the year:

Adjusted income .......................... $511,507

(1) Asset Under Operating Lease ........................................................ 60,000

(2) Rent Expense ................................................................................. 15,000

(3) Fixed Asset ..................................................................................... 60,000

Exercise 5-8, Concluded

(2) Eliminations and Adjustments at December 31, 20X1:

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

Eliminations and Adjustments at December 31, 20X1:

Interest Income (see amortization schedule) ................................... 2,690

Obligations Under Capital Lease ..................................................... 26,904

Property, Plant, and Equipment ....................................................... 35,000

Sales Profit on Leases ..................................................................... 10,000

Accumulated DepreciationProperty, Plant, and Equipment

Rental Income .................................................................................. 1,000

(1) Bonds Payable ............................................................................... 50,000

(2) Justin Corporation and Subsidiary Drew Corporation

Patrick Company and Subsidiary Stunt Company

Problem 5-2, Continued

Eliminations and Adjustments:

Problem 5-2, Concluded

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

Subsidiary Stunt Company Income Distribution

Adjusted income ......................... $70,200

Parent Patrick Company Income Distribution

Controlling interest ...................... $183,180

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

Problem 5-3, Continued

Problem 5-3, Concluded

Eliminations and Adjustments:

Subsidiary Appliance Outlets Income Distribution

Adjusted income ......................... $203,000

Parent General Appliances Income Distribution

Controlling interest .................... $1,519,400

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

Account Adjustments Annual Current Prior

Intercompany Inventory Profit Deferral

Problem 5-4, Continued

Subsidiary Stack Company Income Distribution

Adjusted income ........................... $ 6,506

Parent Packard Company Income Distribution

Controlling interest ........................ $46,550