CH 10 Additional Consolidation Reporting Issues

Chapter 10 - Additional Consolidation Reporting Issues
Chapter 10
Additional Consolidation Reporting Issues

Multiple Choice Questions

1. Which sections of the cash flow statement are affected by the difference in the direct and
indirect approaches of presenting a cash flow statement?

I. perating acti!ities section
II. In!esting acti!ities section
III. "inancing acti!ities section
A. I
#. II
C. III
$. I% II% and III

&. Which of the following obser!ations concerning the comparisons between the direct and
indirect approaches of presenting a cash flow statement is true?
A. 'he final number of cash flows from operating acti!ities is different under the two
approaches.
#. 'he direct approach pro!ides a clearer picture of cash flows related to operations.
C. Authoritati!e bodies ha!e generally e(pressed a preference for the indirect method.
$. A separate reconciliation of operating cash flows and net income is re)uired under the
indirect approach.

*igma Company de!elops and mar+ets organic food products to natural foods retailers. 'he
following information is a!ailable for the company for the year &00,-

10-1
.. #ased on the preceding information% what amount will be reported by the company as cash
recei!ed from customers during the year?
A. /011%000
#. /021%000
C. /010%000
$. /0&1%000

0. #ased on the preceding information% what amount will be reported by the company as cash
payments to suppliers for &00,?
A. /&3&%000
#. /.01%000
C. /&4&%000
$. /&1,%000

flows from operating acti!ities for &00,?
A. /121%000
#. /1..%000
C. /142%000
$. /&02%000

10-&
'ower Corporation5s controller has 6ust finished preparing a consolidated balance sheet%
income statement% and statement of changes in retained earnings for the year ended $ecember
.1% &003. 'ower owns ,0 percent of 7etwor+ Corporation5s stoc+% which it ac)uired at
underlying boo+ !alue on 7o!ember 1% &004. At that date% the fair !alue of the noncontrolling
interest was e)ual to &0 percent of 7etwor+ Corporation5s boo+ !alue. 'he following
information is a!ailable-
Consolidated net income for &003 was /140%000.
7etwor+ reported net income of /10%000 for &003.
'ower paid di!idends of /.0%000 in &003.
7etwor+ paid di!idends of /10%000 in &003.
'ower issued common stoc+ on "ebruary% 1,% &003% for a total of /100%000.
Consolidated wages payable decreased by /4%000 in &003.
Consolidated depreciation e(pense for the year was /11%000.
Consolidated accounts recei!able decreased by /&0%000 in &003.
#onds payable of 'ower with a boo+ !alue of /10&%000 were retired for /100%000 on
$ecember .1% &003.
Consolidated amorti8ation e(pense on patents was /10%000 for &003.
'ower sold land that it had purchased for /21%000 to a nonaffiliate for /,0%000 on 9une 10%
&003.
Consolidated accounts payable decreased by /2%000 during &003.
'otal purchases of e)uipment by 'ower and 7etwor+ during &003 were /1,0%000.
Consolidated in!entory increased by /.4%000 during &003.
'here were no intercompany transfers between 'ower and 7etwor+ in &003 or prior years
e(cept for 7etwor+5s payment of di!idends. 'ower uses the indirect method in preparing its
cash flow statement.

10-.
4. #ased on the preceding information% what amount will be reported in the consolidated cash
flow statement as net cash pro!ided by operating acti!ities for &003?
A. /&02%000
#. /14.%000
C. /1,0%000
$. /103%000

flow statement as net cash used in in!esting acti!ities for &003?
A. /1,0%000
#. /100%000
C. /&11%000
$. /110%000

,. #ased on the preceding information% what amount will be reported in the consolidated cash
flow statement as net cash used in financing acti!ities for &003?
A. /.&%000
#. /.,%000
C. /0&%000
$. /20%000

3. #ased on the preceding information% what was the change in cash balance for the
consolidated entity for &003?
A. Increase of /03%000
#. $ecrease of /44%000
C. Increase of /12%000
$. Increase of /.&%000

10-0
n 9uly 1% &00,% "air :ogic Corporation ac)uires 21 percent of Integrated *ystems Inc.
common stoc+ for its underlying boo+ !alue. At the time of ac)uisition% the fair !alue of the
noncontrolling interest is e)ual to its proportionate share of boo+ !alue of Integrated *ystems.
n 9anuary 1% &00, Integrated reported common stoc+ of /100%000 and retained earnings of
/1.0%000. "or the year &00,% Integrated reports the following items-

"air :ogic uses the e)uity method in accounting for this in!estment.

10. #ased on the preceding information% what is the boo+ !alue of shares ac)uired by "air
:ogic on 9uly 1% &00,?
A. /&00%000
#. /131%&10
C. /&.0%000
$. /1,0%000

11. #ased on the preceding information% what is the fair !alue of the noncontrolling interest at
the time of ac)uisition?
A. /02%,1.
#. /12%100
C. /40%000
$. /01%000

10-1
1&. #ased on the preceding information% what 6ournal entry would "air :ogic ma+e to record
e)uity method income for the year?

A. ption A
#. ption #
C. ption C
$. ption $

1.. "or a subsidiary to be eligible to be included in a consolidated ta( return% at least ;;;;; of
its stoc+ must be held by the parent company or another company included in the consolidated
return.
A. 10 percent
#. 00 percent
C. 21 percent
$. ,0 percent

9upiter Corporation5s consolidated cash flow statement for the year ended $ecember .1%
&00,% reported operating cash inflows of /140%000% financing cash outflows of /30%000% and
in!esting cash outflows /11%000% and an ending cash balance of /21%000. 9upiter ac)uired 21
percent of <anymede Company5s common stoc+ on 9uly 1% &004% at boo+ !alue. At that date%
the fair !alue of the noncontrolling interest was e)ual to &1 percent of <anymede Company5s
boo+ !alue. <anymede reported net income of /&0%000% paid di!idends of /,%000 in &00,% and
is included in 9upiter5s consolidated statements. 9upiter paid di!idends of /&1%000 in &00,.
'he indirect method is used in computing cash flow from operations.

10-4
10. #ased on the information pro!ided% what was the consolidated cash balance at 9anuary 1%
&00,?
A. /40%000
#. /,1%000
C. /11%000
$. /.,0%000

11. #ased on the information pro!ided% what amount was reported as di!idends paid in the
cash flow from financing acti!ities section of the consolidated statement of cash flows?
A. /&1%000
#. /..%000
C. /&2%000
$. /,%000

14. $i!idends paid to noncontrolling shareholders-

I. are reported as a cash outflow in the consolidated cash flow statement.
II. represent funds that are no longer a!ailable to the consolidated entity.
III. are reported in the consolidated retained earnings statement.
A. bser!ation I alone is true.
#. bser!ation III alone is true.
C. bser!ations I and II are true.
$. bser!ations I% II% and II are true.

10-2
7ew :ife Corporation has 6ust finished preparing a consolidated balance sheet% income
statement% and statement of changes in retained earnings for &003. 'he following items are
proposed for inclusion in the consolidated cash flow statement-

7ew :ife holds 21 percent of the !oting stoc+ of *hane =harmaceuticals% ac)uired at boo+
!alue on 9une &1% &004. n the date of the ac)uisition% the fair !alue of the noncontrolling
interest was e)ual to &1 percent of the boo+ !alue of *hane.

12. #ased on the preceding information% what amount will be reported in the consolidated
cash flow statement as net cash pro!ided by operating acti!ities for &003?
A. /.10%000
#. /04.%000
C. /..1%000
$. /0&1%000

10-,
1,. #ased on the preceding information% what amount will be reported in the consolidated
cash flow statement as net cash used in in!esting acti!ities for &003?
A. /&00%000
#. /10&%000
C. /111%000
$. /1.0%000

cash flow statement as net cash used in financing acti!ities for &003?
A. /00%000
#. /11%000
C. /30%000
$. /10%000

&0. #ased on the preceding information% what was the change in cash balance for the
A. $ecrease of /11.%000
#. Increase of /010%000
C. Increase of /&3.%000
$. Increase of /110%000

&1. Assume that 7ew :ife uses the direct method of computing cash flows from operating
acti!ities. #ased on the preceding information% what amount will be reported by the company
as cash recei!ed from customers during the year?
A. /,11%000
#. /2,1%000
C. /,00%000
$. /,.1%000

10-3
&&. Assume that 7ew :ife uses the direct method of computing cash flows from operating
as cash payments to suppliers for &003?
A. /.10%000
#. /.0,%000
C. /.1&%000
$. /.1&%000

Catalyst Corporation ac)uired 30 percent of 'rigger Corporation5s common stoc+ on
*eptember .0% &00, for /&&1%000. At that date% the fair !alue of the noncontrolling interest
was /&1%000. n 9anuary 1% &00,% 'rigger reported the following stoc+holders5 e)uity
balances-

'rigger reported net income of /,0%000 in &00,% earned uniformly throughout the year% and
declared and paid di!idends of /10%000 on 9une .0 and /.0%000 on $ecember .1% &00,.
Catalyst reported retained earnings of /&10%000 on 9anuary 1% &00,% and had &00, income of
/1&0%000 from its separate operations. Catalyst paid di!idends of /10%000 on $ecember .1%
&00,. Catalyst accounts for its in!estment in 'rigger Corporation using the basic e)uity
method.

&.. #ased on the information pro!ided% what is the consolidated net income reported for the
year &00,?
A. /1&0%000
#. /1.,%000
C. /100%000
$. /13&%000

10-10
&0. #ased on the information pro!ided% what is the consolidated income to the controlling
interest reported for the year &00,?
A. /13&%000
#. /1.,%000
C. /100%000
$. /1&0%000

&1. #ased on the information pro!ided% what is the amount of consolidated retained earnings
as of $ecember .1% &00,?
A. /.00%000
#. /&10%000
C. /..,%000
$. /.,,%000

&4. #ased on the information pro!ided% what is the balance of Catalyst5s in!estment in 'rigger
Corporation as of $ecember .1% &00,?
A. /&14%000
#. /&&1%000
C. /&1.%000
$. /&11%000

Company A holds 20 percent of the !oting shares of Company #. $uring &00,% Company #
sold land with a boo+ !alue of /1&1%000 to Company A for /110%000. Company A continues
to hold the land at the end of the year. 'he companies file separate ta( returns and are sub6ect
to a 00 percent ta( rate. Assume that Company A uses the basic e)uity method in accounting
for its in!estment in Company #.

10-11
&2. #ased on the information gi!en% which eliminating entry relating to the intercorporate sale
of land is to be entered in the consolidation wor+paper prepared at the end of &00,?

A. ption A
#. ption #
C. ption C
$. ption $

&,. Assume the Company A holds the land at the end of &003. #ased on the information
gi!en% the eliminating entry relating to the intercorporate sale of land to be entered in the
consolidation wor+paper prepared at the end of &003 will include-
A. a debit to Retained >arnings for /2%100.
#. a debit to 7oncontrolling Interest for /0%100.
C. a credit to :and for /110%000.
$. a credit to :and for /11%000.

&3. Assume the Company A holds the land at the end of &003. 'he eliminating entry relating
to the intercorporate sale of land to be entered in the consolidation wor+paper prepared at the
end of &003 will include a debit to Retained >arnings for-
A. /0%100.
#. /2%100.
C. /11%000.
$. /10%100.

10-1&
>lectric Corporation holds ,0 percent of ?tility Company5s !oting common shares% ac)uired
at boo+ !alues% but none of its preferred shares. At the date of ac)uisition% the fair !alue of the
noncontrolling interest was e)ual to &0 percent of the boo+ !alue of ?tility Company.
*ummary balance sheets for the companies on $ecember .1% &00,% are as follows-

7either of the preferred issues is con!ertible. >lectric5s preferred pays a , percent annual
di!idend% and ?tility5s preferred pays a 1& percent di!idend. ?tility reported net income of
/.0%000 and paid a total of /10%000 of di!idends in &00,. >lectric reported income from its
separate operations of /20%000 and paid total di!idends of /&1%000 in &00,.

.0. #ased on the preceding information% what is the amount of earnings a!ailable to common
shareholders reported in the consolidated financial statements for the year?
A. /,3%&00
#. /,2%000
C. /31%000
$. /,&%,00

10-1.
.1. #ased on the preceding information% what is the consolidated earnings per share for
&00,?
A. 0.04
#. 0.10
C. 0..1
$. 0.11

"lyer Corporation holds 30 percent of @ite Company5s common shares but none of its
preferred shares. n the date of ac)uisition% the fair !alue of the noncontrolling interest was
e)ual to 10 percent of the boo+ !alue of @ite Company. *ummary balance sheets for the
companies on $ecember .1% &00,% are as follows-

"lyer5s preferred pays a , percent annual di!idend% and @ite5s preferred pays a 10 percent
di!idend. @ite5s preferred shares can be con!erted into &0%000 shares of common stoc+ at any
time. @ite reported net income of /.1%000 and paid a total of /10%000 of di!idends in &00,.
"lyer reported income from its separate operations of /,0%000 and paid total di!idends of
/&1%000 in &00,.

10-10
.&. #ased on the information pro!ided% what is the basic earnings per share for the
consolidated entity for &00,?
A. 1.00
#. 1.&0
C. ..,0
$. 1.1,

... #ased on the information pro!ided% what is the diluted earnings per share for the
A. 0.1.
#. 0...
C. 0.00
$. ..,0

Company A owns ,1 percent of Company #5s stoc+ and ,0 percent of Company C5s stoc+. All
ac)uisitions were made at boo+ !alue. 'he fair !alues of noncontrolling interests at the time
of ac)uisition were e)ual to the proportionate share of the boo+ !alues of the companies. 'he
companies file a consolidated ta( return each year and in &003 paid a total ta( of /11&%000.
>ach company is in!ol!ed in a number of intercompany in!entory transfers each period.
Information on the companies5 acti!ities for &003 is as follows-

Company A does not record income ta( e(pense on income from subsidiaries because a
consolidated ta( return is filed.

10-11
.0. #ased on the information pro!ided% what amount of income ta( e(pense should be
assigned to Company A?
A. /2&%000
#. /44%000
C. /11&%000
$. /4&%000

assigned to Company C?
A. /&0%000
#. /.1%&00
C. /13%&00
$. /.0%000

.4. #ased on the information pro!ided% what amount of consolidated net income will be
reported for the year &003?
A. /14,%000
#. /&,0%000
C. /141%000
$. /&10%000

.2. #ased on the information pro!ided% income to the controlling interest for &003 is-
A. /111%.20.
#. /14%000.
C. /14,%000.
$. /&10%000.

Essay Questions

10-14
.,. :ocus Corporation ac)uired ,0 percent ownership of *tereo Company on 9anuary 1% &004%
at underlying boo+ !alue. At that date% the fair !alue of the noncontrolling interest was e)ual
to &0 percent of the boo+ !alue of *tereo Company. Consolidated balance sheets at 9anuary 1%
&00,% and $ecember .1% &00,% are as follows-

'he consolidated income statement for &00, contained the following amounts-

:ocus and *tereo paid di!idends of /&1%000 and /11%000% respecti!ely% in &00,.
Re)uired-
1A =repare a wor+paper to de!elop a consolidated statement of cash flows for &00, using the
10-12
indirect method of computing cash flows from operations.
&A =repare a consolidated statement of cash flows for &00,.

.3. ?sing the data presented in )uestion .,-

direct method of computing cash flows from operations.

10-1,
00. #oycott Company holds 21 percent ownership of "red Corporation. 'he consolidated
balance sheets as of $ecember .1% &00,% and $ecember .1% &003% are as follows-

'he &003 consolidated income statement contained the following amounts-

#oycott ac)uired its in!estment in "red on 9anuary 1% &004% for /1&0%000. At that date% the fair
!alue of the noncontrolling interest was /00%000% and "red reported net assets of /1.0%000. A
total of /&0%000 of the differential was assigned to goodwill. 'he remainder of the differential
was assigned to e)uipment with a remaining life of 10 years from the date of
10-13
combination. #oycott sold /100%000 of bonds on $ecember .1% &003% to assist in generating
additional funds. "red reported net income of /&0%000 for &003 and paid di!idends of
/10%000. #oycott reported &003 e)uity-method net income of /21%000 paid di!idends of
/&0%000 for the year.
Re)uired-
1A =repare a wor+paper to de!elop a consolidated statement of cash flows for &003 using the
&A =repare a consolidated statement of cash flows for &003.

10-&0
01. "or the first )uarter of &00,% Binyl Corporation reported sales of /110%000 and operating
e(penses of /100%000% and paid di!idends of /&0%000. Binyl Company operates on a calendar-
year basis. n April 1% &00,% *ignature Corporation ac)uired ,0 percent of Binyl5s common
stoc+ for /.&0%000. At that date% the fair !alue of the noncontrolling interest was /,0%000% and
Binyl had &0%000 shares of /1 par common stoc+ outstanding% originally issued at /1& per
share. 'he differential is related to goodwill. n $ecember .1% &00,% the management of
*ignature Corporation re!iewed the amount attributed to goodwill as a result of its ac)uisition
of Binyl common stoc+ and concluded that goodwill was not impaired. Binyl5s retained
earnings statement for the full year &00, appears as follows-

*ignature uses the e)uity-method in accounting for this in!estment-
Re)uired-
1A =repare all entries that *ignature would ha!e recorded in accounting for its in!estment in
Binyl during &00,.
&A =resent all eliminating entries needed in a wor+paper to prepare a complete set of
consolidated financial statements for the year &00,.

10-&1
0&. n $ecember .1% &002% =lanet Corporation ac)uired ,0 percent of #roadway Company5s
stoc+% at underlying boo+ !alue. At that date% the fair !alue of the noncontrolling interest was
e)ual to &0 percent of the boo+ !alue of #roadway Company. 'he two companies5 balance
sheets on $ecember .1% &003% are as follows-

n $ecember .1% &003% =lanet holds in!entory purchased from #roadway for /00%000.
#roadway5s cost of producing the merchandise was /&1%000. #roadway5s ending in!entory
also contains /.0%000 of purchases from =lanet that had cost it /&0%000 to produce.
n $ecember .0% &003% #roadway sold e)uipment to =lanet for /00%000. #roadway had
purchased the e)uipment for /40%000 se!eral years earlier. At the time of sale to =lanet% the
e)uipment had a boo+ !alue of /&0%000. 'he two companies file separate ta( returns and are
sub6ect to a 00 percent ta( rate. =lanet does not record ta( e(pense on its share of #roadway5s
undistributed earnings.
Re)uired-
1A =repare the eliminating entries necessary to complete a consolidated balance sheet
wor+paper as of $ecember .1% &003.
&A Complete a consolidated balance sheet wor+paper as of $ecember .1% &003.
.A =repare a consolidated balance sheet as of $ecember .1% &003.
10-&&

0.. =ower Corporation owns 21 percent of 'ransmitter Company5s common stoc+. At the date
of ac)uisition the fair !alue of the noncontrolling interest was e)ual to the boo+ !alue of
'ransmitter Company5s common stoc+. 'he following balance sheet data are presented for
$ecember .1% &00,-

'ransmitter reported net income of /30%000 in &00, and paid di!idends of /.0%000. Its bonds
ha!e an annual interest rate of 10 percent and are con!ertible into 1&%000 common shares. Its
preferred shares pay an 1& percent annual di!idend and con!ert into 1%000 shares of common
stoc+. In addition% 'ransmitter has warrants outstanding for 1&%000 shares of common stoc+ at
/11 per share. 'he &00, a!erage price of 'ransmitter common shares was /&1.
=ower reported income of /1,0%000 from its own operations for &00, and paid di!idends of
/00%000. Its 3 percent bonds con!ert into ,%000 shares of its common stoc+. 'he companies
file separate ta( returns and are sub6ect to income ta(es of 00 percent.
Re)uired-
Compute basic and diluted earnings per share for the consolidated entity for &00,.

10-&.
Chapter 10 Additional Consolidation Reporting Issues Answer @ey

Multiple Choice Questions

1. Which sections of the cash flow statement are affected by the difference in the direct and
indirect approaches of presenting a cash flow statement?

I. perating acti!ities section
II. In!esting acti!ities section
III. "inancing acti!ities section
A. I
#. II
C. III
$. I% II% and III

AACSB: Reflective Thinking
AICPA: Decision Making

&. Which of the following obser!ations concerning the comparisons between the direct and
indirect approaches of presenting a cash flow statement is true?
A. 'he final number of cash flows from operating acti!ities is different under the two
approaches.
B. 'he direct approach pro!ides a clearer picture of cash flows related to operations.
C. Authoritati!e bodies ha!e generally e(pressed a preference for the indirect method.
$. A separate reconciliation of operating cash flows and net income is re)uired under the
indirect approach.


10-&0
*igma Company de!elops and mar+ets organic food products to natural foods retailers. 'he
following information is a!ailable for the company for the year &00,-

.. #ased on the preceding information% what amount will be reported by the company as cash
recei!ed from customers during the year?
A. /011%000
#. /021%000
C. /010%000
D. /0&1%000

AACSB: Analytic
AICPA: Measurement

payments to suppliers for &00,?
A. /&3&%000
#. /.01%000
C. /&4&%000
$. /&1,%000

AACSB: Analytic
AICPA: Measurement

10-&1
flows from operating acti!ities for &00,?
A. /121%000
B. /1..%000
C. /142%000
$. /&02%000

AACSB: Analytic
AICPA: Measurement

10-&4
'ower Corporation5s controller has 6ust finished preparing a consolidated balance sheet%
income statement% and statement of changes in retained earnings for the year ended $ecember
.1% &003. 'ower owns ,0 percent of 7etwor+ Corporation5s stoc+% which it ac)uired at
underlying boo+ !alue on 7o!ember 1% &004. At that date% the fair !alue of the noncontrolling
interest was e)ual to &0 percent of 7etwor+ Corporation5s boo+ !alue. 'he following
information is a!ailable-
Consolidated net income for &003 was /140%000.
7etwor+ reported net income of /10%000 for &003.
'ower paid di!idends of /.0%000 in &003.
7etwor+ paid di!idends of /10%000 in &003.
'ower issued common stoc+ on "ebruary% 1,% &003% for a total of /100%000.
Consolidated wages payable decreased by /4%000 in &003.
Consolidated depreciation e(pense for the year was /11%000.
Consolidated accounts recei!able decreased by /&0%000 in &003.
#onds payable of 'ower with a boo+ !alue of /10&%000 were retired for /100%000 on
$ecember .1% &003.
Consolidated amorti8ation e(pense on patents was /10%000 for &003.
'ower sold land that it had purchased for /21%000 to a nonaffiliate for /,0%000 on 9une 10%
&003.
Consolidated accounts payable decreased by /2%000 during &003.
'otal purchases of e)uipment by 'ower and 7etwor+ during &003 were /1,0%000.
Consolidated in!entory increased by /.4%000 during &003.
'here were no intercompany transfers between 'ower and 7etwor+ in &003 or prior years
e(cept for 7etwor+5s payment of di!idends. 'ower uses the indirect method in preparing its
cash flow statement.

10-&2
flow statement as net cash pro!ided by operating acti!ities for &003?
A. /&02%000
#. /14.%000
C. /1,0%000
D. /103%000

AACSB: Analytic
AICPA: Measurement

flow statement as net cash used in in!esting acti!ities for &003?
A. /1,0%000
B. /100%000
C. /&11%000
$. /110%000

AACSB: Analytic
AICPA: Measurement

,. #ased on the preceding information% what amount will be reported in the consolidated cash
flow statement as net cash used in financing acti!ities for &003?
A. /.&%000
#. /.,%000
C. /0&%000
$. /20%000

AACSB: Analytic
AICPA: Measurement

10-&,
3. #ased on the preceding information% what was the change in cash balance for the
A. Increase of /03%000
#. $ecrease of /44%000
C. Increase of /12%000
$. Increase of /.&%000

AACSB: Analytic
AICPA: Measurement

n 9uly 1% &00,% "air :ogic Corporation ac)uires 21 percent of Integrated *ystems Inc.
common stoc+ for its underlying boo+ !alue. At the time of ac)uisition% the fair !alue of the
noncontrolling interest is e)ual to its proportionate share of boo+ !alue of Integrated *ystems.
n 9anuary 1% &00, Integrated reported common stoc+ of /100%000 and retained earnings of
/1.0%000. "or the year &00,% Integrated reports the following items-

"air :ogic uses the e)uity method in accounting for this in!estment.

10. #ased on the preceding information% what is the boo+ !alue of shares ac)uired by "air
:ogic on 9uly 1% &00,?
A. /&00%000
#. /131%&10
C. /&.0%000
D. /1,0%000

AACSB: Analytic
AICPA: Measurement

10-&3
11. #ased on the preceding information% what is the fair !alue of the noncontrolling interest at
the time of ac)uisition?
A. /02%,1.
#. /12%100
C. /40%000
$. /01%000

AACSB: Analytic
AICPA: Measurement

1&. #ased on the preceding information% what 6ournal entry would "air :ogic ma+e to record
e)uity method income for the year?

A. ption A
B. ption #
C. ption C
$. ption $

AACSB: Analytic
AICPA: Measurement

1.. "or a subsidiary to be eligible to be included in a consolidated ta( return% at least ;;;;; of
its stoc+ must be held by the parent company or another company included in the consolidated
return.
A. 10 percent
#. 00 percent
C. 21 percent
D. ,0 percent


10-.0
9upiter Corporation5s consolidated cash flow statement for the year ended $ecember .1%
&00,% reported operating cash inflows of /140%000% financing cash outflows of /30%000% and
in!esting cash outflows /11%000% and an ending cash balance of /21%000. 9upiter ac)uired 21
percent of <anymede Company5s common stoc+ on 9uly 1% &004% at boo+ !alue. At that date%
the fair !alue of the noncontrolling interest was e)ual to &1 percent of <anymede Company5s
boo+ !alue. <anymede reported net income of /&0%000% paid di!idends of /,%000 in &00,% and
is included in 9upiter5s consolidated statements. 9upiter paid di!idends of /&1%000 in &00,.
'he indirect method is used in computing cash flow from operations.

10. #ased on the information pro!ided% what was the consolidated cash balance at 9anuary 1%
&00,?
A. /40%000
#. /,1%000
C. /11%000
$. /.,0%000

AACSB: Analytic
AICPA: Measurement

11. #ased on the information pro!ided% what amount was reported as di!idends paid in the
cash flow from financing acti!ities section of the consolidated statement of cash flows?
A. /&1%000
#. /..%000
C. /&2%000
$. /,%000

AACSB: Analytic
AICPA: Measurement

10-.1
14. $i!idends paid to noncontrolling shareholders-

I. are reported as a cash outflow in the consolidated cash flow statement.
II. represent funds that are no longer a!ailable to the consolidated entity.
III. are reported in the consolidated retained earnings statement.
A. bser!ation I alone is true.
#. bser!ation III alone is true.
C. bser!ations I and II are true.
$. bser!ations I% II% and II are true.

AICPA: Reporting

7ew :ife Corporation has 6ust finished preparing a consolidated balance sheet% income
statement% and statement of changes in retained earnings for &003. 'he following items are
proposed for inclusion in the consolidated cash flow statement-

7ew :ife holds 21 percent of the !oting stoc+ of *hane =harmaceuticals% ac)uired at boo+
!alue on 9une &1% &004. n the date of the ac)uisition% the fair !alue of the noncontrolling
interest was e)ual to &1 percent of the boo+ !alue of *hane.

10-.&
cash flow statement as net cash pro!ided by operating acti!ities for &003?
A. /.10%000
B. /04.%000
C. /..1%000
$. /0&1%000

AACSB: Analytic
AICPA: Measurement

1,. #ased on the preceding information% what amount will be reported in the consolidated
cash flow statement as net cash used in in!esting acti!ities for &003?
A. /&00%000
#. /10&%000
C. /111%000
D. /1.0%000

AACSB: Analytic
AICPA: Measurement

cash flow statement as net cash used in financing acti!ities for &003?
A. /00%000
#. /11%000
C. /30%000
$. /10%000

AACSB: Analytic
AICPA: Measurement

10-..
&0. #ased on the preceding information% what was the change in cash balance for the
A. $ecrease of /11.%000
#. Increase of /010%000
C. Increase of /&3.%000
$. Increase of /110%000

AACSB: Analytic
AICPA: Measurement

&1. Assume that 7ew :ife uses the direct method of computing cash flows from operating
as cash recei!ed from customers during the year?
A. /,11%000
#. /2,1%000
C. /,00%000
$. /,.1%000

AACSB: Analytic
AICPA: Measurement

&&. Assume that 7ew :ife uses the direct method of computing cash flows from operating
as cash payments to suppliers for &003?
A. /.10%000
#. /.0,%000
C. /.1&%000
D. /.1&%000

AACSB: Analytic
AICPA: Measurement

10-.0
Catalyst Corporation ac)uired 30 percent of 'rigger Corporation5s common stoc+ on
*eptember .0% &00, for /&&1%000. At that date% the fair !alue of the noncontrolling interest
was /&1%000. n 9anuary 1% &00,% 'rigger reported the following stoc+holders5 e)uity
balances-

'rigger reported net income of /,0%000 in &00,% earned uniformly throughout the year% and
declared and paid di!idends of /10%000 on 9une .0 and /.0%000 on $ecember .1% &00,.
Catalyst reported retained earnings of /&10%000 on 9anuary 1% &00,% and had &00, income of
/1&0%000 from its separate operations. Catalyst paid di!idends of /10%000 on $ecember .1%
&00,. Catalyst accounts for its in!estment in 'rigger Corporation using the basic e)uity
method.

&.. #ased on the information pro!ided% what is the consolidated net income reported for the
year &00,?
A. /1&0%000
#. /1.,%000
C. /100%000
$. /13&%000

AACSB: Analytic
AICPA: Measurement

10-.1
&0. #ased on the information pro!ided% what is the consolidated income to the controlling
interest reported for the year &00,?
A. /13&%000
B. /1.,%000
C. /100%000
$. /1&0%000

AACSB: Analytic
AICPA: Measurement

&1. #ased on the information pro!ided% what is the amount of consolidated retained earnings
as of $ecember .1% &00,?
A. /.00%000
#. /&10%000
C. /..,%000
$. /.,,%000

AACSB: Analytic
AICPA: Measurement

&4. #ased on the information pro!ided% what is the balance of Catalyst5s in!estment in 'rigger
Corporation as of $ecember .1% &00,?
A. /&14%000
#. /&&1%000
C. /&1.%000
$. /&11%000

AACSB: Analytic
AICPA: Measurement

Company A holds 20 percent of the !oting shares of Company #. $uring &00,% Company #
sold land with a boo+ !alue of /1&1%000 to Company A for /110%000. Company A continues
to hold the land at the end of the year. 'he companies file separate ta( returns and are sub6ect
to a 00 percent ta( rate. Assume that Company A uses the basic e)uity method in accounting
for its in!estment in Company #.

10-.4
&2. #ased on the information gi!en% which eliminating entry relating to the intercorporate sale
of land is to be entered in the consolidation wor+paper prepared at the end of &00,?

A. ption A
#. ption #
C. ption C
$. ption $

AACSB: Analytic
AICPA: Measurement

&,. Assume the Company A holds the land at the end of &003. #ased on the information
gi!en% the eliminating entry relating to the intercorporate sale of land to be entered in the
consolidation wor+paper prepared at the end of &003 will include-
A. a debit to Retained >arnings for /2%100.
B. a debit to 7oncontrolling Interest for /0%100.
C. a credit to :and for /110%000.
$. a credit to :and for /11%000.

AACSB: Analytic
AICPA: Measurement

10-.2
&3. Assume the Company A holds the land at the end of &003. 'he eliminating entry relating
to the intercorporate sale of land to be entered in the consolidation wor+paper prepared at the
end of &003 will include a debit to Retained >arnings for-
A. /0%100.
#. /2%100.
C. /11%000.
D. /10%100.

AACSB: Analytic
AICPA: Measurement

>lectric Corporation holds ,0 percent of ?tility Company5s !oting common shares% ac)uired
at boo+ !alues% but none of its preferred shares. At the date of ac)uisition% the fair !alue of the
noncontrolling interest was e)ual to &0 percent of the boo+ !alue of ?tility Company.
*ummary balance sheets for the companies on $ecember .1% &00,% are as follows-

7either of the preferred issues is con!ertible. >lectric5s preferred pays a , percent annual
di!idend% and ?tility5s preferred pays a 1& percent di!idend. ?tility reported net income of
/.0%000 and paid a total of /10%000 of di!idends in &00,. >lectric reported income from its
separate operations of /20%000 and paid total di!idends of /&1%000 in &00,.

10-.,
.0. #ased on the preceding information% what is the amount of earnings a!ailable to common
shareholders reported in the consolidated financial statements for the year?
A. /,3%&00
#. /,2%000
C. /31%000
D. /,&%,00

AACSB: Analytic
AICPA: Measurement

.1. #ased on the preceding information% what is the consolidated earnings per share for
&00,?
A. 0.04
B. 0.10
C. 0..1
$. 0.11

AACSB: Analytic
AICPA: Measurement

10-.3
"lyer Corporation holds 30 percent of @ite Company5s common shares but none of its
preferred shares. n the date of ac)uisition% the fair !alue of the noncontrolling interest was
e)ual to 10 percent of the boo+ !alue of @ite Company. *ummary balance sheets for the
companies on $ecember .1% &00,% are as follows-

"lyer5s preferred pays a , percent annual di!idend% and @ite5s preferred pays a 10 percent
di!idend. @ite5s preferred shares can be con!erted into &0%000 shares of common stoc+ at any
time. @ite reported net income of /.1%000 and paid a total of /10%000 of di!idends in &00,.
"lyer reported income from its separate operations of /,0%000 and paid total di!idends of
/&1%000 in &00,.

.&. #ased on the information pro!ided% what is the basic earnings per share for the
A. 1.00
#. 1.&0
C. ..,0
$. 1.1,

AACSB: Analytic
AICPA: Measurement

10-00
... #ased on the information pro!ided% what is the diluted earnings per share for the
A. 0.1.
B. 0...
C. 0.00
$. ..,0

AACSB: Analytic
AICPA: Measurement

Company A owns ,1 percent of Company #5s stoc+ and ,0 percent of Company C5s stoc+. All
ac)uisitions were made at boo+ !alue. 'he fair !alues of noncontrolling interests at the time
of ac)uisition were e)ual to the proportionate share of the boo+ !alues of the companies. 'he
companies file a consolidated ta( return each year and in &003 paid a total ta( of /11&%000.
>ach company is in!ol!ed in a number of intercompany in!entory transfers each period.
Information on the companies5 acti!ities for &003 is as follows-

Company A does not record income ta( e(pense on income from subsidiaries because a
consolidated ta( return is filed.

10-01
assigned to Company A?
A. /2&%000
B. /44%000
C. /11&%000
$. /4&%000

AACSB: Analytic
AICPA: Measurement

assigned to Company C?
A. /&0%000
#. /.1%&00
C. /13%&00
D. /.0%000

AACSB: Analytic
AICPA: Measurement

.4. #ased on the information pro!ided% what amount of consolidated net income will be
reported for the year &003?
A. /14,%000
#. /&,0%000
C. /141%000
$. /&10%000

AACSB: Analytic
AICPA: Measurement

.2. #ased on the information pro!ided% income to the controlling interest for &003 is-
A. /111%.20.
#. /14%000.
C. /14,%000.
$. /&10%000.

AACSB: Analytic
AICPA: Measurement

10-0&

Essay Questions

10-0.
.,. :ocus Corporation ac)uired ,0 percent ownership of *tereo Company on 9anuary 1% &004%
at underlying boo+ !alue. At that date% the fair !alue of the noncontrolling interest was e)ual
to &0 percent of the boo+ !alue of *tereo Company. Consolidated balance sheets at 9anuary 1%
&00,% and $ecember .1% &00,% are as follows-

'he consolidated income statement for &00, contained the following amounts-

:ocus and *tereo paid di!idends of /&1%000 and /11%000% respecti!ely% in &00,.
Re)uired-
10-00
10-01
1A
10-04

10-02

AACSB: Analytic
AICPA: Measurement

10-0,
.3. ?sing the data presented in )uestion .,-

direct method of computing cash flows from operations.
10-03

10-10

&A
10-11

10-1&

AACSB: Analytic
AICPA: Measurement

10-1.
00. #oycott Company holds 21 percent ownership of "red Corporation. 'he consolidated
balance sheets as of $ecember .1% &00,% and $ecember .1% &003% are as follows-

'he &003 consolidated income statement contained the following amounts-

#oycott ac)uired its in!estment in "red on 9anuary 1% &004% for /1&0%000. At that date% the fair
!alue of the noncontrolling interest was /00%000% and "red reported net assets of /1.0%000. A
total of /&0%000 of the differential was assigned to goodwill. 'he remainder of the differential
was assigned to e)uipment with a remaining life of 10 years from the date of
10-10
combination. #oycott sold /100%000 of bonds on $ecember .1% &003% to assist in generating
additional funds. "red reported net income of /&0%000 for &003 and paid di!idends of
/10%000. #oycott reported &003 e)uity-method net income of /21%000 paid di!idends of
/&0%000 for the year.
Re)uired-
1A =repare a wor+paper to de!elop a consolidated statement of cash flows for &003 using the
&A =repare a consolidated statement of cash flows for &003.
10-11

10-14
Wor+paper entries-

10-12

AACSB: Analytic
AICPA: Measurement

10-1,
01. "or the first )uarter of &00,% Binyl Corporation reported sales of /110%000 and operating
e(penses of /100%000% and paid di!idends of /&0%000. Binyl Company operates on a calendar-
year basis. n April 1% &00,% *ignature Corporation ac)uired ,0 percent of Binyl5s common
stoc+ for /.&0%000. At that date% the fair !alue of the noncontrolling interest was /,0%000% and
Binyl had &0%000 shares of /1 par common stoc+ outstanding% originally issued at /1& per
share. 'he differential is related to goodwill. n $ecember .1% &00,% the management of
*ignature Corporation re!iewed the amount attributed to goodwill as a result of its ac)uisition
of Binyl common stoc+ and concluded that goodwill was not impaired. Binyl5s retained
earnings statement for the full year &00, appears as follows-

*ignature uses the e)uity-method in accounting for this in!estment-
Re)uired-
1A =repare all entries that *ignature would ha!e recorded in accounting for its in!estment in
Binyl during &00,.
&A =resent all eliminating entries needed in a wor+paper to prepare a complete set of
consolidated financial statements for the year &00,.
10-13
1A >)uity-method entries recorded during &00,-

&A

10-40

AACSB: Analytic
AICPA: Measurement

10-41
0&. n $ecember .1% &002% =lanet Corporation ac)uired ,0 percent of #roadway Company5s
stoc+% at underlying boo+ !alue. At that date% the fair !alue of the noncontrolling interest was
e)ual to &0 percent of the boo+ !alue of #roadway Company. 'he two companies5 balance
sheets on $ecember .1% &003% are as follows-

n $ecember .1% &003% =lanet holds in!entory purchased from #roadway for /00%000.
#roadway5s cost of producing the merchandise was /&1%000. #roadway5s ending in!entory
also contains /.0%000 of purchases from =lanet that had cost it /&0%000 to produce.
n $ecember .0% &003% #roadway sold e)uipment to =lanet for /00%000. #roadway had
purchased the e)uipment for /40%000 se!eral years earlier. At the time of sale to =lanet% the
e)uipment had a boo+ !alue of /&0%000. 'he two companies file separate ta( returns and are
sub6ect to a 00 percent ta( rate. =lanet does not record ta( e(pense on its share of #roadway5s
undistributed earnings.
Re)uired-
1A =repare the eliminating entries necessary to complete a consolidated balance sheet
wor+paper as of $ecember .1% &003.
&A Complete a consolidated balance sheet wor+paper as of $ecember .1% &003.
.A =repare a consolidated balance sheet as of $ecember .1% &003.
10-4&
1A >liminating entries-

&A
10-4.

10-40

AACSB: Analytic
AICPA: Measurement

10-41
0.. =ower Corporation owns 21 percent of 'ransmitter Company5s common stoc+. At the date
of ac)uisition the fair !alue of the noncontrolling interest was e)ual to the boo+ !alue of
'ransmitter Company5s common stoc+. 'he following balance sheet data are presented for
$ecember .1% &00,-

'ransmitter reported net income of /30%000 in &00, and paid di!idends of /.0%000. Its bonds
ha!e an annual interest rate of 10 percent and are con!ertible into 1&%000 common shares. Its
preferred shares pay an 1& percent annual di!idend and con!ert into 1%000 shares of common
stoc+. In addition% 'ransmitter has warrants outstanding for 1&%000 shares of common stoc+ at
/11 per share. 'he &00, a!erage price of 'ransmitter common shares was /&1.
=ower reported income of /1,0%000 from its own operations for &00, and paid di!idends of
/00%000. Its 3 percent bonds con!ert into ,%000 shares of its common stoc+. 'he companies
file separate ta( returns and are sub6ect to income ta(es of 00 percent.
Re)uired-
Compute basic and diluted earnings per share for the consolidated entity for &00,.
10-44

AACSB: Analytic
AICPA: Measurement

10-42

CH 10 Additional Consolidation Reporting Issues

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Chapter 10 - Additional Consolidation Reporting Issues

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