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CHAPTER 10

CONSOLIDATED FINANCIAL STATEMENTS: SPECIAL


PROBLEMS

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 10–1 Pinch Corporation (30 minutes, medium)


Working paper eliminations for parent company and partially owned subsidiary at end of year
following parent’s acquisition of part of minority stockholders’ common stock.
Pr. 10–2 Prime Corporation (40 minutes, medium)
Journal entries under equity method of accounting for wholly owned subsidiary’s operations,
and working paper eliminations, for subsidiary having treasury stock on date of business
combination.
Pr. 10–3 Pumble Corporation (40 minutes, medium)
Journal entries under equity method of accounting for partially owned subsidiary’s operations,
and working paper eliminations, for subsidiary that issued additional shares of common stock
to the parent company.
Pr. 10–4 Pronto Corporation (35 minutes, medium)
Journal entry for partially owned subsidiary’s issuance of additional common stock to parent
company, computation of balance of parent company’s Investment ledger account, and working
paper elimination.
Pr. 10–5 Pun Corporation (30 minutes, medium)
Working paper eliminations following partially owned subsidiary’s acquisition of treasury
stock.
Pr. 10–6 Peterson Corporation (40 minutes, medium)
Reconstruction of working paper eliminations from separate and consolidated financial
statements of parent company and wholly owned subsidiary. Income taxes are disregarded.
Pr. 10–7 Pomerania Corporation (90 minutes, strong)
Adjusting entries to account for parent company’s investment in a partially owned subsidiary’s
preferred and common stock by the equity method. Working paper for consolidated financial
statements and working paper eliminations for parent company and two partially owned
subsidiaries, one of which was acquired in installments. Income taxes are disregarded.
Pr. 10–8 Plover Corporation (90 minutes, strong)
Reconstruction of intercompany receivables (payables) that do not offset. Adjusting entries
derived from reconstruction. Working paper for consolidated financial statements and working
paper eliminations for parent and wholly owned subsidiary having a minority interest in its
preferred stock. Income taxes are disregarded.
Pr. 10–9 Pullard Corporation (90 minutes, strong)
Working paper for consolidated financial statements and working paper eliminations for parent
company and wholly owned subsidiary having a minority interest in its preferred stock. Income
taxes are disregarded.
ANSWERS TO REVIEW QUESTIONS
1. Given that purchase accounting is required for all business combinations, it stands to reason that
purchase accounting is appropriate for a parent company or a subsidiary’s acquisition of minority
interests, for such an action may be construed as “completing” the business combination.
2. If a parent company acquires the minority interest in net assets of a subsidiary at less than carrying
amount, the difference (assuming it is not material) may be offset against previously recognized
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Solutions Manual, Chapter 10 71
goodwill of the subsidiary. Although this procedure may have theoretical shortcomings, it is
appropriate from a practical and cost-benefit point of view.
3. A parent company recognizes a nonoperating gain when a subsidiary issues common stock to the
public at a price per share larger than the carrying amount per share of the parent company’s
investment in the subsidiary’s common stock, for the following reason. Although the parent
company’s percentage interest in the subsidiary has decreased, the net assets (book value) per share
of the subsidiary’s outstanding common stock is larger than before the additional common stock
was issued to the public. Because the parent company did not disburse any assets or incur any
liabilities for its increased per-share interest in the subsidiary, the parent company has realized a
nonoperating gain. The converse reasoning supports the parent company’s recognition of a
nonoperating loss when the subsidiary issues common stock to the public at a price less than the
per-share carrying amount of the parent’s investment in the subsidiary prior to the stock issuance.
4. A gain or loss recognized by a parent company on the disposal of part of its investment in common
stock of a subsidiary is not eliminated in the preparation of consolidated financial statements
because the gain or loss was realized in a transaction with an outsider.
5. When a parent company acquires less than 100% of a subsidiary’s preferred stock, together with
all or a majority of the subsidiary’s common stock, the preferences associated with the preferred
stock must be considered in determining the claims to the subsidiary’s net assets assignable to both
preferred and common minority stockholders. For cumulative, fully participating preferred stock,
any cumulative preferred dividends in arrears must be included in the minority interest of the
preferred stockholders in net assets of the subsidiary. In addition, the retained earnings remaining
after provision for the preferred dividend arrearage must be prorated to preferred and common
stockholders based on the participation preference of the preferred stock.
6. The declaration of a stock dividend by a subsidiary does not necessitate any special treatment in
working paper eliminations if the parent company uses the equity method of accounting for the
subsidiary’s operations. The balances of the subsidiary’s stockholders’ equity ledger accounts after
the stock dividend is recorded are reflected in the working paper elimination prepared subsequent
to the declaration and distribution of the stock dividend.
7. When a subsidiary acquires for its treasury all or part of its outstanding common stock owned by
minority stockholders of the subsidiary, the subsidiary debits the Treasury Stock ledger account for
the current fair value of the stock acquired. Any amount in excess of current fair value, such as is
paid in greenmail, is debited to a loss account.
8. The quotation is acceptable only if one adopts a liquidation approach, rather than a going-concern
approach, to consolidated financial statements. The treasury stock treatment of parent company
common stock owned by a subsidiary emphasizes economic substance over legal formthe
subsidiary has acquired common stock for the consolidated group’s treasury as agent for the parent
company. This approach does not involve allocation of a portion of the parent company’s net
income to minority stockholders of the subsidiary. On a going-concern basis, such an allocation is
unnecessary.
9. There is no inconsistency in the treatment of parent company stock owned by the subsidiary as
treasury stock of the consolidated entity. The dividends declared and paid by the parent company to
the subsidiary are eliminated in the preparation of consolidated financial statements; thus,
dividends displayed in the consolidated statement of retained earnings are those declared and paid
to the parent company’s outside stockholders only.

SOLUTIONS TO EXERCISES
Ex. 10–1 1. b 8. b
2. d 9. e
3. b 10. d
4. b 11. b
5. a 12. c
6. a 13. d
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72 Modern Advanced Accounting, 10/e
7. b 14. b
Ex. 10–2 Computation of goodwill and minority interest in net assets of subsidiary, Apr. l, 2006:

 500 
Goodwill: $65,400 + $10,000 –  $22,800 x  = $67,800
 1,500 * 
1,000
Minority interest: $22,800 x = $15,200
1,500
*Parent company’s 85% interest indicates minority interest of 15%, or 1,500 shares (10,000 x
0.15 = 1,500).
Ex. 10–3 Computation of nonoperating gain to Prester Company, Jan. 3, 2005:
Minority
Prester’s interest
Total share share
Carrying amount of Shire Company’s
identifiable net assets after common stock
 10   2 
issuance to public $51,000  12  $42,500  12  $8,500
   

Less: Carrying amount of Shire Company’s


identifiable net assets before common
 10 
stock issuance to public 40,000   40,000
 10 

Difference ($2,500 nonoperating gain to


Prester) $11,000 $ 2,500 $8,500

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Solutions Manual, Chapter 10 73
Ex. 10–4 a. Computation of nonoperating loss to Pinto Corporation, Oct. 31, 2006:
Minority
interest
Total Pinto’s share share
Carrying amount of Sorrell Company’s
identifiable net assets after common stock 5
issuance to Pinto $819,000  6 
 
$682,500 1
 6  $136,500
 

Less: Carrying amount of Sorrell Company’s


identifiable net assets before common  8   2 
stock issuance to Pinto 675,000  
 10 
540,000  
 10 
135,000

Difference ($1,500 nonoperating loss to


Pinto) $144,000 $142,500 $ 1,500
b. Journal entry for Pinto Corporation, Oct. 31, 2006:
Investment in Sorrell Company Common Stock 142,500
Loss from Subsidiary’s Issuance of Common Stock 1,500
Cash 144,000
To record acquisition of 2,000 shares of Sorrell Company’s
common stock at $72 a share, and to recognize nonoperating
loss on the transaction.

Ex. 10–5 a. Aggregate call price of preferred stock (100,000 x $1.10) $110,000
Add: Cumulative preferred dividends in arrears ($8,000 x 2) 16,000
Total callable value of preferred stock $126,000
Portion acquired by Panay Corporation equals amount of total cost
assignable to preferred stock ($126,000 x 0.50) $ 63,000

b. Minority interest of preferred stockholders ($126,000 x 0.50) $ 63,000

c. Total cost of Panay Corporation investment in Stegg Company $1,030,500


Less: Cost assignable to preferred stock (see a) 63,000
Cost assignable to common stock $ 967,500
Panay Corporation’s share of current fair value of Stegg Company’s
identifiable net assets attributable to common stock [($1,200,000 –
$126,000) x 0.75] 805,500
Goodwill acquired by Panay Corporation $ 162,000

d. Current fair value of Stegg Company’s identifiable net assets (common


stock) ($1,200,000 – $126,000) $1,074,000
Minority common stockholders' interest ($1,074,000 x 0.25) $ 268,500
Ex. 10–6 Allocation of Simplex Company’s net income, year ended May 31, 2006:
Net income to Minority
Total parent interest
To preferred stockholders:
10,000 shares x $12, in ratio of 70% and 30% $120,000 $ 84,000 $36,000
To common stockholders: in ratio of 75%
(6/8) and 25% (2/8) 222,800 167,100 55,700
Net income of Simplex Company $342,800 $251,100 $91,700
Ex. 10–7 a. Revised working paper elimination for Placard Corporation and subsidiary, Sept. 30,
2006:
(a) Common Stock, $2 parSabro [$80,000 + (6,000 x $2)] 92,000
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74 Modern Advanced Accounting, 10/e
Additional Paid-in CapitalSabro [$40,000 + (6,000 x $3)] 58,000
Retained EarningsSabro ($130,000 – $10,000) 120,000
Retained Earnings of SubsidiaryPlacard 10,000
Intercompany Investment IncomePlacard 70,000
GoodwillSabro 20,000
Investment in Sabro Company Common Stock
Placard 340,000
Dividends DeclaredSabro (6,000 x $5) 30,000
b. Closing entry for Placard Corporation, Sept. 30, 2006:
Net Sales 840,200
Intercompany Investment Income 70,000
Costs and Expenses 668,500
Retained Earnings of Subsidiary ($70,000 – $30,000) 40,000
Retained Earnings ($241,700 – $40,000) 201,700
Ex. 10–8 Working paper elimination for Portland Corporation and subsidiary, Dec. 31, 2005:
(a) Common StockSalem (500 x $5) 2,500
Additional Paid-in CapitalSalem [500 x ($8 – $5)] 1,500
Retained EarningsSalem [500 x ($11 – $8)] 1,500
Treasury StockSalem 5,500
To account for subsidiary’s treasury stock as though it had been
retired.
Ex. 10–9 Working paper eliminations for Priam Corporation and subsidiary, Feb. 28, 2005:
(a) Common StockStocker (2,000 x $5) 10,000
Retained EarningsStocker (2,000 x $3) 6,000
Treasury StockStocker 16,000

(b) Common StockStocker ($250,000 – $10,000) 240,000


Retained EarningsStocker ($600,000 – $6,000) 594,000
GoodwillStocker ($900,000 – $834,000) 66,000
Investment in Stocker Company Common StockPriam 900,000
Ex. 10–10 Working paper eliminations for Private Corporation and subsidiary, May 31, 2005:
Common StockSergeant (500 x $10) 5,000
Additional Paid-in CapitalSergeant (500 x $5) 2,500
Treasury StockSergeant 7,500

Common StockSergeant ($100,000 – $5,000) 95,000


Additional Paid-in CapitalSergeant ($50,000 – $2,500) 47,500
Retained Earnings of SubsidiaryPrivate 150,000
Investment in Sergeant Company Common StockPrivate 292,500

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Solutions Manual, Chapter 10 75
Ex. 10–11 Working paper eliminations for Parson Corporation and subsidiary, Feb. 28, 2005:
Common StockSibley (5,000 x $2) 10,000
Retained EarningsSibley (5,000 x $8) 40,000
GoodwillSibley ($60,000 – $50,000) 10,000
Treasury StockSibley 60,000

Common StockSibley ($160,000 – $10,000) 150,000


Retained EarningsSibley ($640,000 – $40,000) 600,000
GoodwillSibley ($790,000 – $750,000) 40,000
Investment in Sibley Company Common StockParsons 790,000
Ex. 10–12 a. Journal entries for Prince Corporation for Year 2005:
Investment in Sabine Company Common Stock (80,000 x 0.40) 32,000
Intercompany Investment Income 32,000

Intercompany Dividends Receivable (4,000 x $2) 8,000


Investment in Sabine Company Common Stock 8,000
b. Journal entries for Samnite Company for Year 2005:
Investment in Sabine Company Common Stock ($80,000 x 0.60) 48,000
Intercompany Investment Income 48,000

Intercompany Dividends Receivable (6,000 x $2) 12,000


Investment in Sabine Company Common Stock 12,000
Ex. 10–13 Working paper eliminations for Peaches Corporation and subsidiary, May 31, 2007:
(b) Treasury StockPeaches 100,000
Investment in Peaches Corporation Common StockSugar 100,000

(c) Intercompany Dividends RevenueSugar 5,000


Dividends DeclaredPeaches 5,000
Ex. 10–14 Working paper elimination for Pressman Corporation and subsidiary, July 31, 2006:
Treasury StockPressman 15,000
Investment in Pressman Corporation Common Stock
Sycamore 15,000
To transfer subsidiary’s investment in parent company’s common stock
to treasury stock category.
Note to Instructor: A working paper elimination is not required for the subsidiary’s stock dividend under
the equity method of accounting because the parent company’s accounting records include the growth in the
subsidiary’s retained earnings subsequent to the date of the business combination, in both the Investment
ledger account and the Retained Earnings of Subsidiary account.

CASES
Case 10–1 The belief of Wayne Cartwright that SEC pronouncements should prevail over preferences of the
FASB tentatively appears contrary to the evidence derived from the references cited in the case. For
example, Section l0l of the SEC’s Codification of Financial Reporting Policies includes the
following:
Various Acts of Congress administered by the Securities and Exchange Commission clearly
state the authority of the Commission to prescribe the methods to be followed in the
preparation of accounts and the form and content of financial statements to be filed under the

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76 Modern Advanced Accounting, 10/e
Acts . . . the Commission has historically looked to the standard-setting bodies designated by
the profession to provide leadership in establishing and improving the accounting principles.
Further, in Section 103 of the Codification, the SEC explains the limited role of Staff Accounting
Bulletins as follows:
The statements in the Bulletin[s] are not rules or interpretations of the Commission nor are they
published as bearing the Commission’s official approval . . .
Further evidence contrary to Cartwright’s belief is found in the following excerpt from paragraph
25 of FASB Statement No. 111, “Rescission of FASB Statement No. 32 and Technical
Corrections”:
The chart below summarizes the [generally accepted accounting principles] for financial
statements of nongovernmental agencies . . .
Established Accounting Principles
Category (a )FASB Statements and Interpretations, APB Opinions, and AICPA Accounting
Research Bulletins . . .
An appended footnote reads in part as follows:
Rules and interpretive releases of the Securities and Exchange Commission (SEC) have an
authority similar to category (a) pronouncements for SEC registrants. In addition, the SEC
staff issues Staff Accounting Bulletins that represent practices followed by the staff in
administering SEC disclosure requirements. (Emphasis added.)
However, although Rule 203, “Accounting Principles,” and Appendix A of the AICPA Code of
Professional Conduct (Chapter l of the textbook) obligate AICPA member Wilma Reynolds to
comply with FASB pronouncements in Category (a) above, the FASB has not yet issued a
statement on consolidation procedures. Thus, the $150,000 increase in Premium Corporation’s
investment in Service Company may be accounted for as a nonoperating gain by Premium, in
accordance with standards established by the SEC.
Case 10–2 The $700,000 difference between the $1,800,000 carrying amount and the $2,500,000 offering
price for the minority interest of Mary Phillips in Bank of Provence is extraordinarily large, given
that most assets of banks are monetary assets with carrying amounts equal to or approximating
current fair values. Accordingly, before opining on the need for Banking Enterprises, Inc. to
recognize a greenmail-type loss for all or part of the $700,000 difference, the partner of Crandall &
Lowe, CPAs, should seek answers to the following:
(l) What was the basis for Banking’s board of directors to make the $2,500,000 offer? Was it
based on an appraisal of the current fair value of a 40% interest in the net assets of Bank of
Provence, or was it an inducement to get rid of Phillips because of irreconcilable differences?
(2) Has approval been obtained from federal banking regulators for the significant outlay?
(3) Have legal counsel for Banking and Bank of Provence reviewed and approved the offer?
Above all, the Crandall & Lowe partner should exercise professional skepticism in judging the need
for recognition of a loss, rather than goodwill, for all or part of the $700,000 amount.
Case 10–3 Student Ross may be overly “picky” in his distinction between the “noncontrollership” of a
subsidiary’s preferred stockholders, who seldom have voting rights, and that of its common
stockholders other than the parent company. Although those common stockholders do have the right
to vote at stockholders’ meetings, they generally will be outvoted on controversial issues by the
parent companythe controlling stockholder. Accordingly, student Kerry’s position is the
supportable one, especially because the so-called “mezzanine” area of a consolidated balance sheet,
between liabilities and stockholders’ equity, has no official standing under generally accepted
accounting principles.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 77
30 minutes, Medium
Pinch Corporation Pr. 10–1
Pinch Corporation and Subsidiary
Working Paper Eliminations
March 31, 2006
(a) Common Stock—Scrip (10,000 x $5) 5 0 0 0 0
Additional Paid-in Capital—Scrip [($300,000 x ½) –
$50,000] 1 0 0 0 0 0
Retained Earnings—Scrip ($300,000 x ½) 1 5 0 0 0 0
Intercompany Investment Income—Pinch ($90,000 x
0.90) 8 1 0 0 0
Goodwill—Pinch [$40,000 + $44,000 –
($60,000 x ½) ] 5 4 0 0 0
Investment in Scrip Company Common
Stock—Pinch [$280,000 + $44,000 +
$81,000 – (9,000 x $3)] 3 7 8 0 0 0
Dividends Declared—Scrip (10,000 x $3) 3 0 0 0 0
Minority Interest in Net Assets of Subsidiary
[$60,000 – $30,000 – (1,000 x $3)] 2 7 0 0 0
To eliminate intercompany investment and equity
accounts of subsidiary at beginning of year; to
allocate excess of cost over current fair values (equal
to carrying amounts) of identifiable net assets
acquired to unimpaired goodwill; and to establish minority
interest in net assets of subsidiary at beginning
of year ($60,000), less minority interest acquired
($30,000) and minority interest in dividends. (Income
tax effects are disregarded.)

(b) Minority Interest in Net Income of Subsidiary


($90,000 x 0.10) 9 0 0 0
Minority Interest in Net Assets of Subsidiary 9 0 0 0
To establish minority interest in net income of
subsidiary for year ended Mar. 31, 2006.

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78 Modern Advanced Accounting, 10/e
40 Minutes, Medium
Prime Corporation Pr. 10–2
a. Prime Corporation
Journal Entries

20 05
Dec 29 Intercompany Dividends Receivable [(400,000 –
20,000) x $0.10] 3 8 0 0 0
Investment in Showboat Company Common
Stock 3 8 0 0 0
To record dividend declared by Showboat Company,
payable in Year 2006.

31 Investment in Showboat Company Common Stock 9 0 0 0 0


Intercompany Investment Income 9 0 0 0 0
To record 100% of Showboat Company’s net income
for the year ended Dec. 31, 2005. (Income tax effects
are disregarded.)

b. Prime Corporation and Subsidiary


Working Paper Eliminations
December 31, 2005
(a) Common Stock—Showboat (20,000 x $1) 2 0 0 0 0
Additional Paid-in Capital—Showboat (20,000 x $0.75) 1 5 0 0 0
Retained Earnings—Showboat (20,000 x $0.75) 1 5 0 0 0
Treasury Stock—Showboat 5 0 0 0 0
To account for subsidiary’s treasury stock as though
it had been retired.

(b) Common Stock—Showboat ($400,000 – $20,000) 3 8 0 0 0 0


Additional Paid-in Capital—Showboat ($300,000 –
$15,000) 2 8 5 0 0 0
Retained Earnings—Showboat ($250,000 – $15,000) 2 3 5 0 0 0
Intercompany Investment Income—Prime 9 0 0 0 0
Investment in Showboat Company Common
Stock—Prime ($900,000 – $38,000 +
$90,000) 9 5 2 0 0 0
Dividends Declared—Showboat 3 8 0 0 0
To eliminate intercompany investment, related
accounts for stockholders’ equity of subsidiary, and
investment income from subsidiary.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 79
40 Minutes, Medium
Pumble Corporation Pr. 10–3
a. Pumble Corporation
Journal Entries

20 07
Oct 31 Intercompany Dividends Receivable [(9,800 + 1,000) x
$2] 2 1 6 0 0
Investment in Salton Company Common
Stock 2 1 6 0 0
To record dividend declared by Salton Company.

31 Investment in Salton Company Common Stock


($35,000 x 0.9818) 3 4 3 6 3
Intercompany Investment Income 3 4 3 6 3
To record 98.18% of Salton Company’s net income for
year ended Oct. 31, 2007. (Income tax effects are
disregarded.)

b. Pumble Corporation
Working Paper Eliminations
October 31, 2007
(a) Common Stock—Salton ($10,000 + $1,000) 1 1 0 0 0
Additional Paid-in Capital—Salton ($60,000 + $19,000) 7 9 0 0 0
Retained Earnings—Salton [($80,000 + $40,000 –
$10,000) x 0.02] 2 2 0 0
Retained Earnings of Subsidiary—Pumble ($78,400 +
$39,200 – $9,800) 1 0 7 8 0 0
Intercompany Investment Income—Pumble ($35,000 x
0.9818) 3 4 3 6 3
Investment in Salton Company Common
Stock—Pumble ($176,400 + $19,960* +
$34,363 – $21,600) 2 0 9 1 2 3
Dividends Declared—Salton (11,000 x $2) 2 2 0 0 0
Minority Interest in Net Assets of Subsidiary
[$2,800 + $800 + $40 – (200 x $2)] 3 2 4 0
To eliminate intercompany investment and related
accounts for stockholders’ equity of subsidiary at
beginning of year, and investment income from
subsidiary; and to establish minority interest in net
assets of subsidiary at beginning of year, less minority
interest in dividends.

(b) Minority Interest in Net Income of Subsidiary


($35,000 x 0.0182) 6 3 7
Minority Interest in Net Assets of Subsidiary 6 3 7
To establish minority interest in net income of
subsidiary for year ended Oct. 31, 2007.

*($200,000 x 0.9818) – ($180,000 x 0.98) = $19,960

The McGraw-Hill Companies, Inc., 2006


80 Modern Advanced Accounting, 10/e
35 Minutes, Medium
Pronto Corporation Pr. 10–4
a. Speedy Company
Journal Entry

20 06
Mar 1 Cash 3 2 0 0 0
Common Stock (2,000 x $1) 2 0 0 0
Paid-in Capital in Excess of Par 3 0 0 0 0
To record issuance of 2,000 shares of common stock
to Pronto Corporation.

b. Pronto Corporation
Computation of Balance of Investment in Speedy Company Common Stock
Ledger Account
March 1, 2006
Balance, Feb. 28, 2006 $ 7 5 0 0 0
Add: Acquisition of 2,000 shares, Mar. 1, 2006 3 2 0 0 0
Subtotal $ 1 0 7 0 0 0
Less: Nonoperating loss on acquisition of 2,000 shares
[$32,000 – [($132,000 x 0.66 2/3) – ($100,000 x
0.60)]} 4 0 0 0
Balance. Mar 1, 2006 $ 1 0 3 0 0 0

c. Pronto Corporation and Subsidiary


Working Paper Elimination
March 1, 2006
(a) Common Stock, $1 par—Speedy ($10,000 + $2,000) 1 2 0 0 0
Additional Paid-in Capital—Speedy ($30,000 +
$30,000) 6 0 0 0 0
Retained Earnings—Speedy ($60,000 – $9,000) 5 1 0 0 0
Retained Earnings of Subsidiary—Pronto 9 0 0 0
Goodwill—Pronto 1 5 0 0 0
Investment in Speedy Company Common
Stock—Pronto 1 0 3 0 0 0
Minority Interest in Net Assets of Subsidiary
($40,000 + $4,000) 4 4 0 0 0
To eliminate intercompany investment and related
equity accounts of subsidiary; to record unimpaired
goodwill; and to provide for minority interest in net
assets of subsidiary.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 81
30 Minutes, Medium
Pun Corporation Pr. 10–5
Pun Corporation and Subsidiary
Working Paper Eliminations
November 1, 2006
(a) Common Stock—Sim [1,000 x ($500,000 ÷ 10,000)] 5 0 0 0 0
Retained Earnings—Sim [1,000 x ($660,000 ÷ 10,000)] 6 6 0 0 0
Goodwill—Sim (1,000 x $54) 5 4 0 0 0
Treasury Stock—Sim 1 7 0 0 0 0
To account for subsidiary’s treasury stock as though
it had been retired.

(b) Common Stock—Sim ($500,000 – $50,000) 4 5 0 0 0 0


Retained Earnings—Sim ($660,000 – $66,000 –
$48,000) 5 4 6 0 0 0
Retained Earnings of Subsidiary—Pun 4 8 0 0 0
Goodwill—Pun 8 0 0 0 0
Investment in Sim Company Common
Stock—Pun 1 0 0 8 0 0 0
Minority Interest in Net Assets of Subsidiary
[($1,100,000 + $60,000) x 0.10], or
($232,000 – $116,000) 1 1 6 0 0 0
To eliminate intercompany investment and equity
accounts of subsidiary; to allocate excess of cost over
current fair value of identifiable net assets to
unimpaired goodwill; and to establish minority interest
in net assets of subsidiary (1,000 of 10,000
issued shares = 10%).

The McGraw-Hill Companies, Inc., 2006


82 Modern Advanced Accounting, 10/e
40 Minutes, Medium
Peterson Corporation Pr. 10–6
Peterson Corporation and Subsidiary
Working Paper Eliminations
May 31, 2007
(a) Common Stock, $10 par—Swanson 1 5 0 0 0 0
Retained Earnings—Swanson ($825,000 – $122,500)
(beginning) 7 0 2 5 0 0
Retained Earnings of Subsidiary—Peterson 1 2 2 5 0 0
Other Revenue—Peterson 2 5 0 0 0 0
Goodwill—Swanson 5 0 0 0 0
Investment in Swanson Company Common
Stock—Peterson 1 1 0 0 0 0 0
Dividends Declared—Swanson 1 7 5 0 0 0

(b) Treasury Stock—Peterson 2 0 0 0 0


Other Revenue—Swanson (1,000 x $3) 3 0 0 0
Short-Term Investments—Swanson 2 0 0 0 0
Dividends Declared—Peterson ($300,000 x
0.01) 3 0 0 0

(c) Net Sales—Peterson 1 7 0 0 0 0 0


Retained Earnings—Peterson (beginning) 1 3 2 0 0
Cost of Good Sold—Peterson ($1,700,000 x
0.67) 1 1 3 9 0 0 0
Cost of Goods Sold—Swanson 5 5 7 7 0 0
Inventories—Swanson 1 6 5 0 0

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 83
90 Minutes, Strong
Pomerania Corporation Pr. 10–7
a. Pomerania Corporation
Adjusting Entries
December 31, 2005
Investment in Sylvania Company Perferred Stock 4 0 0
Investment in Sylvania Company Common Stock 1 1 2 0 0
Intercompany Investment Income 1 1 6 0 0
To record share of net income of Sylvania Company,
as follows:
 $50,000 
Preferred stock:  x $20,000 x 0.10  $ 400
 $250,000 
 $200,000 
Common stock:  x $20,000 x 0.70  11,200
 $250,000 

Total investment income $11,600


(Income tax effects are disregarded.)

Note to Instructor: There is no goodwill or other asset amortization associated with Pomerania
Corporation’s Investment in Sylvania Company because the investments were equal to the carrying
amount of the stock acquired, computed as follows:
Carrying amount
and cost
Preferred stock:
  $50,000 
$50,000 +  x $100,000  x 0.10 $ 7,000
  $250,000 

Common stock:
  $200,000 
$200,000 +  x $100,000  x 0.70 $196,000
  $ 250,000 

The McGraw-Hill Companies, Inc., 2006


84 Modern Advanced Accounting, 10/e
Pomerania Corporation (continued) Pr. 10–7
b. Pomerania Corporation and Subsidiaries
Working Paper for Consolidated Financial Statements
For Year Ended December 31, 2005
Eliminations
Pomerania Slovakia Sylvania increase
Corporation Company Company (decrease) Consolidated
Income Statement
Revenue:
Net sales 1 1 2 0 0 0 0 9 0 0 0 0 0 7 0 0 0 0 0 2 7 2 0 0 0 0
Intercompany sales 1 4 0 0 0 0 (c)( 1 4 0 0 0 0 )
Intercompany investment income 5 5 6 0 0 (a) ( 4 4 0 0 0 )
(b) ( 1 1 6 0 0 )
Gain on extinguishment of bonds (d) 2 2 0 0 2 2 0 0
Total revenue 1 3 1 5 6 0 0 9 0 0 0 0 0 7 0 0 0 0 0 ( 1 9 3 4 0 0 ) 2 7 2 2 2 0 0
Costs and expenses and minority interest:
Cost of goods sold 8 0 0 0 0 0 6 5 0 0 0 0 5 5 0 0 0 0 (c) ( 3 3 6 0 0 ) 1 9 6 6 4 0 0
Intercompany cost of goods sold 1 0 0 0 0 0 (c)( 1 0 0 0 0 0 )
Operating expenses and income taxes expense 3 0 0 0 0 0 1 5 0 0 0 0 1 3 0 0 0 0 5 8 0 0 0 0
Minority interest in net income of subsidiaries (e) 6 4 8 4 0 6 4 8 4 0
Total costs and expenses and minority interest 1 2 0 0 0 0 0 8 0 0 0 0 0 6 8 0 0 0 0 ( 6 8 7 6 0 )* 2 6 1 1 2 4 0
Net income 1 1 5 6 0 0 1 0 0 0 0 0 2 0 0 0 0 ( 1 2 4 6 4 0 ) 1 1 0 9 6 0

Statement of Retained Earnings


Retained earnings, beginning of year 1 2 6 2 0 0 1 0 7 0 0 0 1 0 0 0 0 0 (a)( 1 0 7 0 0 0 ) 1 2 6 2 0 0
(b)( 1 0 0 0 0 0 )
Net income 1 1 5 6 0 0 1 0 0 0 0 0 2 0 0 0 0 ( 1 2 4 6 4 0 ) 1 1 0 9 6 0
Subtotal 2 4 1 8 0 0 2 0 7 0 0 0 1 2 0 0 0 0 ( 3 3 1 6 4 0 ) 2 3 7 1 6 0
Dividends declared 2 2 0 0 0 7 5 0 0 0 (a) ( 7 5 0 0 0 )† 2 2 0 0 0
Retained earnings, end of year 2 1 9 8 0 0 1 3 2 0 0 0 1 2 0 0 0 0 ( 2 5 6 6 4 0 ) 2 1 5 1 6 0

* A decrease in costs and expenses and an increase in net income.


† A decrease in dividends and an increase in retained earnings. (Continued on page 342.)

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 85
Pomerania Corporation (continued) Pr. 10–7
b. Pomerania Corporation and Subsidiaries
Working Paper for Consolidated Financial Statements (concluded)
For Year Ended December 31, 2005
Eliminations
Pomerania Slovakia Sylvania increase
Corporation Company Company (decrease) Consolidated
Balance Sheet
Assets
Intercompany receivables (payables) 6 3 4 0 0 ( 4 1 0 0 0 ) ( 2 2 4 0 0 )
Inventories 2 9 0 0 0 0 9 0 0 0 0 1 1 5 0 0 0 (c) ( 6 4 0 0 ) 4 8 8 6 0 0
Investment in Slovakia Company common stock 3 0 5 6 0 0 (a)( 3 0 5 6 0 0 )
Investment in Slovakia Company bonds 2 0 8 0 0 (d) ( 2 0 8 0 0 )
Investment in Sylvania Company preferred stock 7 4 0 0 (b) ( 7 4 0 0 )
Investment in Sylvania Company common stock 2 0 7 2 0 0 (b)( 2 0 7 2 0 0 )
Other assets 8 3 6 4 0 0 5 5 5 0 0 0 5 1 0 0 0 0 1 9 0 1 4 0 0
Total assets 1 7 3 0 8 0 0 6 0 4 0 0 0 6 0 2 6 0 0 ( 5 4 7 4 0 0 ) 2 3 9 0 0 0 0

Liabilities & Stockholders’ Equity


Dividends payable 2 2 0 0 0 6 0 0 0 2 8 0 0 0
Bonds payable 2 8 5 0 0 0 1 2 5 0 0 0 1 2 5 0 0 0 5 3 5 0 0 0
Intercompany bonds payable 2 5 0 0 0 (d) ( 2 5 0 0 0 )
Discount on bonds payable ( 8 0 0 0 ) ( 1 0 0 0 0 ) ( 1 8 0 0 0 )
Discount on intercompany bonds payable ( 2 0 0 0 ) (d) ( 2 0 0 0 )*
Other liabilities 2 1 2 0 0 0 7 8 0 0 0 1 0 7 6 0 0 3 9 7 6 0 0
Preferred stock, $20 par 4 0 0 0 0 0 5 0 0 0 0 (b) ( 5 0 0 0 0 ) 4 0 0 0 0 0
Common stock, $10 par 6 0 0 0 0 0 2 5 0 0 0 0 2 0 0 0 0 0 (a)( 2 5 0 0 0 0 ) 6 0 0 0 0 0
(b)( 2 0 0 0 0 0 )
(a) 2 0 4 0 0
Minority interest in net assets of subsidiaries (b) 1 4 7 0 0 0 2 3 2 2 4 0
(e) 6 4 8 4 0
Retained earnings 2 1 9 8 0 0 1 3 2 0 0 0 1 2 0 0 0 0 ( 2 5 6 6 4 0 ) 2 1 5 1 6 0
Total liabilities & stockholders’ equity 1 7 3 0 8 0 0 6 0 4 0 0 0 6 0 2 6 0 0 ( 5 4 7 4 0 0 ) 2 3 9 0 0 0 0

* A decrease in discount and an increase in total liabilities & stockholders’ equity.

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86 Modern Advanced Accounting, 10/e
Pomerania Corporation (continued) Pr. 10–7
Pomerania Corporation and Subsidiary
Working Paper Eliminations
December 31, 2005
(a) Common Stock—Slovakia 2 5 0 0 0 0
Retained Earnings—Slovakia 1 0 7 0 0 0
Intercompany Investment Income—Pomerania 4 4 0 0 0
Investment in Slovakia Company Common
Stock—Pomerania 3 0 5 6 0 0
Dividends Declared—Slovakia 7 5 0 0 0
Minority Interest in Net Assets of
Subsidiaries 2 0 4 0 0
To eliminate intercompany investment and related
equity accounts of Slovakia at beginning of year; to
eliminate intercompany investment income and
dividends of Slovakia, and to establish minority interest
in net assets of Slovakia less minority interest in
dividends, computed as follows:
Minority interest, Jan. 2, 2005
($357,000 x 0.80) $285,600
Minority interest share of June 30, 2005
dividend ($45,000 x 0.80) (36,000)
Minority interest acquired by Pomerania
July 1, 1999 {[$285,600 – $36,000 +
($60,000 x 0.80)] x 60/80] (223,200)
Minority interest share of Dec. 31, 2005
dividend ($30,000 x 0.20) (6,000)
Net minority interest $ 20,400

(b) Preferred Stock—Sylvania 5 0 0 0 0


Common Stock—Sylvania 2 0 0 0 0 0
Retained Earnings—Sylvania 1 0 0 0 0 0
Intercompany Investment Income—Pomerania 1 1 6 0 0
Investment in Sylvania Company Preferred
Stock—Pomerania 7 4 0 0
Investment in Sylvania Company Common
Stock—Pomerania 2 0 7 2 0 0
Minority Interest in Net Assets of Subsidiaries 1 4 7 0 0 0
To eliminate intercompany investment and related
equity accounts of Sylvania at beginning of year; to
eliminate intercompany investment income; and to
establish minority interest in net assets of Sylvania at
beginning of year, computed as follows:
Minority interest in preferred stock:
  $50,000 
$50,000 +  x $100,000  x 0.90 $ 63,000
  $250,000 
  $200,000 
$200,000 +  x $100,000  x 0.30 84,000
  $250,000 
Total minority interest $147,000
(Continued on page 344.)

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 87
Pomerania Corporation (concluded) Pr. 10–7
Pomerania Corporation and Subsidiary
Working Paper Eliminations (concluded)
December 31, 2005
(c) Intercompany Sales—Pomerania 1 4 0 0 0 0
Intercompany Cost of Goods Sold—Pomerania 1 0 0 0 0 0
Cost of Goods Sold—Sylvania ($117,600 x 2/7) 3 3 6 0 0
Inventories—Sylvania ($22,400 x 2/7) 6 4 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized profits in inventories. (Income tax
effects are disregarded.)

(d) Intercompany Bonds Payable—Slovakia 2 5 0 0 0


Discount on Intercompany Bonds Payable—
Slovakia 2 0 0 0
Investment in Slovakia Company Bonds—
Pomerania 2 0 8 0 0
Gain on Extinguishment of Bonds—Slovakia 2 2 0 0
To eliminate intercompany investment in bonds and to
provide for realized gain on extinguishment of bonds.
(Income tax effects are disregarded.)

(e) Minority Interest in Net Income of Subsidiaries 6 4 8 4 0


Minority Interest in Net Assets of Subsidiaries 6 4 8 4 0
To provide for minority interest in net income of
subsidiaries, computed as follows:
Slovakia Company [($60,000 x 0.80) +
($42,200 x 0.20)] $56,440
Sylvania Company:
Preferred stock ($20,000 x 1/5 x 0.90) 3,600
Common stock ($20,000 x 4/5 x 0.30) 4,800
Total minority interest $64,840

The McGraw-Hill Companies, Inc., 2006


88 Modern Advanced Accounting, 10/e
90 Minutes, Strong
Plover Corporation Pr. 10–8
a. Plover Corporation and Starling Company
Analysis of Intercompany Receivables (Payables) Accounts
December 31, 2006
Plover Starling
Corporation Company
Mortgage note receivable (payable) [$12,000 –
($2,270 x 2) + $851] $ 8 3 1 1 $ ( 8 3 1 1 )
Cost and estimated earnings in excess of billings on
uncompleted contract [$45,000 + ($20,000 x 0.60)] 5 7 0 0 0
Dividend receivable (payable) ($2,500 x 0.20) 5 0 0 ( 5 0 0 )
Accounts receivable (payable) for merchandise
($238,000 – $211,000) 2 7 0 0 0 ( 2 7 0 0 0 )
Balance of intercompany accounts, Dec. 31, 2006 $ 3 5 8 1 1 $ 2 1 1 8 9

b. Plover Corporation
Adjusting Entry
December 31, 2006
Other Plant Assets 5 7 0 0 0
Intercompany Payables 5 7 0 0 0
To record liability to subsidiary for costs and earnings
on contract for construction in progress on Dec. 31, 2006
computed as follows:
Cost $45,000
Add: Earnings[($95,000 – $75,000) x 45/75] 12,000
Total costs and earnings $57,000

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 89
Plover Corporation (continued) Pr. 10–8
c. Plover Corporation and Subsidiary
Working Paper for Consolidated Financial Statements
For Year Ended December 31, 2006
Eliminations
Plover Starling increase
Corporation Company (decrease) Consolidated
Income Statement
Revenue:
Net sales 1 5 6 2 0 0 0 1 5 6 2 0 0 0
Intercompany sales 2 3 8 0 0 0 (e)( 2 3 8 0 0 0 )
Contract revenue 1 2 1 0 0 0 0 1 2 1 0 0 0 0
Intercompany contract revenue 7 9 0 0 0 (c) ( 2 2 0 0 0 )
(d) ( 5 7 0 0 0 )
Interest revenue 1 9 1 4 9 1 9 1 4 9
Intercompany investment
income 4 2 5 0 0 (a) ( 4 2 5 0 0 )
Intercompany dividend revenue 5 0 0 (a) ( 5 0 0 )
Intercompany gain on sale of
land 4 0 0 0 (a) ( 4 0 0 0 )
Intercompany interest revenue
(expense) 8 5 1 ( 8 5 1 )
Total revenue 1 8 6 7 0 0 0 1 2 8 8 1 4 9 ( 3 6 4 0 0 0 ) 2 7 9 1 1 4 9
Costs and expenses and minority
interest:
Cost of goods sold 9 4 2 5 0 0 9 4 2 5 0 0
Intercompany cost of goods
sold 2 1 2 5 0 0 (e)( 2 1 2 5 0 0 )
Cost of contract revenue 7 8 9 5 0 0 (e) ( 2 4 3 0 0 ) 7 6 5 2 0 0
Intercompany cost of contract (c) ( 1 7 5 0 0 )
revenue 6 2 5 0 0 (d) ( 4 5 0 0 0 )
Operating expenses and
income taxes expense 4 9 7 0 0 0 3 6 0 0 0 0 (c) ( 2 2 5 ) 8 5 6 7 7 5
Interest expense 4 9 0 0 0 3 1 1 4 9 8 0 1 4 9
Minority interest in net income
of subsidiary (f) 2 0 0 0 2 0 0 0
Total costs and expenses
and minority interest 1 7 0 1 0 0 0 1 2 4 3 1 4 9 ( 2 9 7 5 2 5 )* 2 6 4 6 6 2 4
Net income 1 6 6 0 0 0 4 5 0 0 0 ( 6 6 4 7 5 ) 1 4 4 5 2 5

Statement of Retained Earnings


Retained earnings, beginning of
year 1 3 9 3 1 1 4 9 5 0 0 (a) ( 4 1 0 0 0 ) 1 4 7 8 1 1
Net income 1 6 6 0 0 0 4 5 0 0 0 ( 6 6 4 7 5 ) 1 4 4 5 2 5
Subtotal 3 0 5 3 1 1 9 4 5 0 0 ( 1 0 7 4 7 5 ) 2 9 2 3 3 6
Dividends declared 2 5 0 0 (a) ( 2 5 0 0 )†
Retained earnings, end of year 3 0 5 3 1 1 9 2 0 0 0 ( 1 0 4 9 7 5 ) 2 9 2 3 3 6

* A decrease in costs and expenses and an increase in net income.


† A decrease in dividends and an increase in retained earnings.

(Continued on page 347.)

The McGraw-Hill Companies, Inc., 2006


90 Modern Advanced Accounting, 10/e
Plover Corporation (continued) Pr. 10–8
Plover Corporation and Subsidiary
Working Paper for Consolidated Financial Statements (concluded)
For Year Ended December 31, 2006
Eliminations
Plover Starling increase
Corporation Company (decrease) Consolidated
Balance Sheet
Assets
Intercompany receivables
(payables) ( 2 1 1 8 9 ) 2 1 1 8 9
Costs and estimated earnings
in excess of billings on
uncompleted contracts 3 0 1 0 0 3 0 1 0 0
Inventories 2 1 7 0 0 0 1 1 7 5 0 0 (e) ( 1 2 0 0 ) 3 3 3 3 0 0
Investment in Starling Company
common stock 2 0 2 0 0 0 (a)( 2 0 2 0 0 0 )
Land 3 4 0 0 0 4 2 0 0 0 (b) ( 4 0 0 0 ) 7 2 0 0 0
Other plant assets (net) 7 7 4 0 0 0 4 0 8 0 0 0 (c) ( 4 2 7 5 ) 1 1 6 5 7 2 5
(d) ( 1 2 0 0 0 )
Other assets 1 5 3 0 0 0 8 4 2 1 1 2 3 7 2 1 1
Total assets 1 3 5 8 8 1 1 7 0 3 0 0 0 ( 2 2 3 4 7 5 ) 1 8 3 8 3 3 6

Liabilities & Stockholders’ Equity


Dividends payable 2 0 0 0 2 0 0 0
Mortgage notes payable 5 9 2 0 0 0 3 8 9 0 0 0 9 8 1 0 0 0
Other liabilities 2 0 3 0 0 0 7 0 0 0 0 2 7 3 0 0 0
5% noncumulative,
nonparticipating preferred
stock, $1 par 5 0 0 0 0 (a) ( 5 0 0 0 0 )
Common stock, no par 2 5 0 0 0 0 1 0 0 0 0 0 (a)( 1 0 0 0 0 0 ) 2 5 0 0 0 0
Minority interest in net assets (a) 3 8 0 0 0 4 0 0 0 0
of subsidiary (f) 2 0 0 0
Retained earnings 3 0 5 3 1 1 9 2 0 0 0 ( 1 0 4 9 7 5 ) 2 9 2 3 3 6
Retained earnings of subsidiary 8 5 0 0 (a) ( 8 5 0 0 )
Total liabilities &
stockholders’ equity 1 3 5 8 8 1 1 7 0 3 0 0 0 ( 2 2 3 4 7 5 ) 1 8 3 8 3 3 6

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 91
Plover Corporation (continued) Pr. 10–8
Plover Corporation and Subsidiary
Working Paper Eliminations
December 31, 2006
(a) 5% Noncumulative, Nonparticipating Preferred Stock—
Starling 5 0 0 0 0
Common Stock—Starling 1 0 0 0 0 0
Retained Earnings—Starling ($49,500 – $8,500) 4 1 0 0 0
Retained Earnings of Subsidiary—Plover 8 5 0 0
Intercompany Investment Income—Plover 4 2 5 0 0
Intercompany Dividend Revenue—Plover 5 0 0
Investment in Starling Company Preferred
and Common Stock—Plover 2 0 2 0 0 0
Dividends Declared—Starling 2 5 0 0
Minority Interest in Net Assets of Subsidiary 3 8 0 0 0
To eliminate intercompany investment and related
equity accounts of subsidiary at beginning of year;
to eliminate intercompany investment income and
dividends of subsidiary; and to establish minority
interest in preferred stock as follows:
Minority interest, Jan. 1, 2006
($50,000 x 0.80) $40,000
Less: Minority interest in preferred dividend
($2,500 x 0.80) 2,000
Net minority interest $38,000

(b) Intercompany Gain on Sale of Land—Plover ($15,000


– $11,000) 4 0 0 0
Land—Starling 4 0 0 0
To eliminate unrealized intercompany gain in land.
(Income tax effects are disregarded.)

(c) Intercompany Contract Revenue—Starling 2 2 0 0 0


Intercompany Cost of Contract Revenue—
Starling 1 7 5 0 0
Operating Expenses—Plover ($4,500 x 0.10
x ½) 2 2 5
Other Plant Assets (net)—Plover ($4,500 –
$225) 4 2 7 5
To eliminate unrealized intercompany gain in office
equipment and related depreciation, and applicable
intercompany revenue and expense. (Income tax
effects are disregarded.)

(d) Intercompany Contract Revenue—Starling 5 7 0 0 0


Intercompany Cost of Contract Revenue—
Starling 4 5 0 0 0
Other Plant Assets (net)—Plover 1 2 0 0 0
To eliminate unrealized intercompany gain in
equipment under construction on Dec. 31, 2006, and
applicable intercompany revenue and expense.
(Income tax effects are disregarded.)
(Continued on page 349.)

The McGraw-Hill Companies, Inc., 2006


92 Modern Advanced Accounting, 10/e
Plover Corporation (concluded) Pr. 10–8
Plover Corporation and Subsidiary
Working Paper Eliminations (concluded)
December 31, 2006
(e) Intercompany Sales—Plover 2 3 8 0 0 0
Intercompany Cost of Goods Sold—Plover 2 1 2 5 0 0
Cost of Contract Revenue—Starling
($226,800 x 12/112) 2 4 3 0 0
Inventories—Starling ($11,200 x 12/112) 1 2 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized profits in inventories. (Income tax
effects are disregarded.)

(f) Minority Interest in Net Income of Subsidiary 2 0 0 0


Minority Interest in Net Assets of Subsidiary 2 0 0 0
To provide for minority interest of preferred
stockholders, represented by dividend to preferred
stockholders ($2,500 x 0.80 = $2,000).

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 93
90 Minutes, Strong
Pullard Corporation Pr. 10–9
Pullard Corporation and Subsidiary
Working Paper for Consolidated Financial Statements
For Period Ended October 31, 2005
Eliminations
Pullard Staley increase
Corporation Company (decrease) Consolidated
Income Statement
Revenue:
Net sales 18 0 4 2 0 0 0 5 5 3 0 0 0 0 23 5 7 2 0 0 0
Intercompany sales 1 5 8 0 0 0 2 3 0 0 0 0 (c)( 1 5 8 0 0 0 )
(d)( 2 3 0 0 0 0 )
Intercompany investment
income 5 0 5 1 5 0 (a)( 5 0 5 1 5 0 )
Interest revenue 2 6 2 5 0 1 7 0 0 2 7 9 5 0
Intercompany interest
revenue (expense) 7 8 7 5 0 ( 7 8 7 5 0 )
Total revenue 18 8 1 0 1 5 0 5 6 8 2 9 5 0 ( 8 9 3 1 5 0 ) 23 5 9 9 9 5 0
Costs and expenses:
Cost of good sold 10 4 4 2 0 0 0 3 0 1 0 5 0 0 (a)( 1 2 8 0 0 0 ) 13 2 4 8 2 0 0
(d) ( 7 6 3 0 0 )
Intercompany cost of goods
sold 1 5 8 0 0 0 1 4 9 5 0 0 (c)( 1 5 8 0 0 0 )
(d)( 1 4 9 5 0 0 )
Depreciation expense 1 1 0 3 0 0 0 5 8 8 7 5 0 (a) 2 5 0 0 0 0 1 9 4 1 7 5 0
Operating expenses and
income taxes expense 3 4 4 8 5 0 0 1 0 6 3 9 0 0 (a) 5 2 5 0 0 4 5 6 4 9 0 0
Interest expense 8 0 6 0 0 0 1 9 0 6 5 0 9 9 6 6 5 0
Total costs and expenses 15 9 5 7 5 0 0 5 0 0 3 3 0 0 ( 2 0 9 3 0 0 )* 20 7 5 1 5 0 0
Net income 2 8 5 2 6 5 0 6 7 9 6 5 0 ( 6 8 3 8 5 0 ) 2 8 4 8 4 5 0

Statement of Retained Earnings


Retained earnings, beginning
of period 12 6 8 3 5 0 0 1 0 0 6 0 0 0 (a)(1 0 0 6 0 0 0 ) 12 6 8 3 5 0 0
Net income 2 8 5 2 6 5 0 6 7 9 6 5 0 ( 6 8 3 8 5 0 ) 2 8 4 8 4 5 0
Retained earnings, end of
period 15 5 3 6 1 5 0 1 6 8 5 6 5 0 (1 6 8 9 8 5 0 ) 15 5 3 1 9 5 0

* A decrease in costs and expenses and an increase in net income.

(Continued on page 351.)

The McGraw-Hill Companies, Inc., 2006


94 Modern Advanced Accounting, 10/e
Pullard Corporation (continued) Pr. 10–9
Pullard Corporation and Subsidiary
Working Paper for Consolidated Financial Statements (concluded)
For Period Ended October 31, 2005
Eliminations
Pullard Staley increase
Corporation Company (decrease) Consolidated
Balance Sheet
Assets
Cash 8 2 2 0 0 0 5 3 0 0 0 0 1 3 5 2 0 0 0
Notes receivable 8 5 0 0 0 8 5 0 0 0
Trade accounts receivable (net) 2 7 2 3 7 0 0 1 3 4 6 4 0 0 4 0 7 0 1 0 0
Intercompany receivables
(payables) 1 2 3 0 0 ( 1 2 3 0 0 )
Inventories 3 2 0 4 0 0 0 1 1 8 2 0 0 0 (d) ( 4 2 0 0 ) 4 3 8 1 8 0 0
Investment in Staley Company
common stock 6 3 5 5 1 5 0 (a)(6 3 5 5 1 5 0 )
Investment in Staley Company
preferred stock 1 5 0 0 0 0 (a) (1 5 0 0 0 0 )
Investment in Staley Company
bonds 1 5 0 0 0 0 0 (b)(1 5 0 0 0 0 0 )
Land 4 0 0 0 0 0 0 1 5 6 0 0 0 0 (a) 5 4 0 0 0 0 6 1 0 0 0 0 0
Other plant assets 17 1 6 1 0 0 0 7 8 5 0 0 0 0 (a)2 7 5 0 0 0 0 27 7 6 1 0 0 0
Accumulated depreciation (6 6 7 3 0 0 0 ) (3 8 3 8 7 5 0 ) (a)1 0 0 0 0 0 0 * (11 5 1 1 7 5 0 )
Other assets 2 6 3 0 0 0 1 4 0 0 0 0 (a) ( 9 0 0 0 0 ) 3 1 3 0 0 0
Goodwill (a)1 3 4 7 5 0 0 1 3 4 7 5 0 0
Total assets 29 5 1 8 1 5 0 8 8 4 2 3 5 0 (4 4 6 1 8 5 0 ) 33 8 9 8 6 5 0

Liabilities & Stockholders’ Equity


Notes payable 1 1 5 0 0 0 1 1 5 0 0 0
Trade accounts payable 1 3 4 2 0 0 0 1 6 9 7 0 0 1 5 1 1 7 0 0
7% bonds payable 3 5 0 0 0 0 0 3 5 0 0 0 0 0
Intercompany 7% bonds payable 1 5 0 0 0 0 0 (b)(1 5 0 0 0 0 0 )
Long-term debt 10 0 0 0 0 0 0 10 0 0 0 0 0 0
Preferred stock, $5 par 7 5 0 0 0 0 (a)( 7 5 0 0 0 0 )
Common stock, $10 par 2 4 0 0 0 0 0 1 0 0 0 0 0 0 (a)(1 0 0 0 0 0 0 ) 2 4 0 0 0 0 0
Additional paid-in capital 2 4 0 0 0 0 1 2 2 0 0 0 (a)( 1 2 2 0 0 0 ) 2 4 0 0 0 0
Minority interest in net assets
of subsidiary (a) 6 0 0 0 0 0 6 0 0 0 0 0
Retained earnings 15 5 3 6 1 5 0 1 6 8 5 6 5 0 (1 6 8 9 8 5 0 ) 15 5 3 1 9 5 0
Total liabilities &
stockholders’ equity 29 5 1 8 1 5 0 8 8 4 2 3 5 0 (4 4 6 1 8 5 0 ) 33 8 9 8 6 5 0

* An increase in accumulated depreciation and a decrease in total assets.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 10 95
Pullard Corporation (concluded) Pr. 10–9
Pullard Corporation and Subsidiary
Working Paper Eliminations
October 31, 2005
(a) Preferred Stock—Staley 7 5 0 0 0 0
Common Stock—Staley 1 0 0 0 0 0 0
Additional Paid-in Capital—Staley 1 2 2 0 0 0
Retained earnings—Staley 1 0 0 6 0 0 0
Intercompany Investment Income—Pullard 5 0 5 1 5 0
Land—Staley ($2,100,000 – $1,560,000) 5 4 0 0 0 0
Other Plant Assets—Staley ($10,600,000 – $7,850,000) 2 7 5 0 0 0 0
Goodwill—Staley ($1,400,000 – $52,500) 1 3 4 7 5 0 0
Depreciation Expense—Staley [($2,000,000 ÷ 6) x ¾] 2 5 0 0 0 0
Operating Expenses—Staley [($1,400,000 ÷ 20) x ¾] 5 2 5 0 0
Cost of Goods Sold—Staley ($828,000 –
$700,000) 1 2 8 0 0 0
Accumulated Depreciation—Staley
[($4,000,000 – $3,250,000) + $250,000] 1 0 0 0 0 0 0
Other Assets—Staley ($140,000 – $50,000) 9 0 0 0 0
Investment in Staley Company Common
Stock—Pullard 6 3 5 5 1 5 0
Investment in Staley Company Preferred
Stock—Pullard 1 5 0 0 0 0
Minority interest in Net Assets of Subsidiary
($750,000 – $150,000) 6 0 0 0 0 0
To eliminate intercompany investment and related equity
accounts of subsidiary on date of business combination;
to eliminate intercompany investment income and
subsidiary dividends; to provide for unamortized
differences between current fair values and carrying
amount of subsidiary’s identifiable net assets
on date of business combination, and related
amortization; to recognize unimpaired goodwill;
and to provide for minority interest in subsidiary’s
preferred stock on date of business combination.
(Income tax effects are disregarded.)

(b) Intercompany 7% Bonds Payable—Staley 1 5 0 0 0 0 0


Investment in Staley Company Bonds—Pullard 1 5 0 0 0 0 0
To eliminate subsidiary’s bonds owned by parent
company.

(c) Intercompany Sales—Pullard 1 5 8 0 0 0


Intercompany Cost of Goods Sold—Pullard 1 5 8 0 0 0
To eliminate parent company’s sales to subsidiary.

(d) Intercompany Sales—Staley 2 3 0 0 0 0


Intercompany cost of Goods Sold—Staley 1 4 9 5 0 0
Cost of Goods Sold—Pullard ($218,000 x 0.35) 7 6 3 0 0
Inventories—Pullard ($12,000 x 0.35) 4 2 0 0
To eliminate intercompany sales, cost of good sold, and
unrealized gross profit in inventories for subsidiary’s sales
to parent company. (Income tax effects are disregarded.)

The McGraw-Hill Companies, Inc., 2006


96 Modern Advanced Accounting, 10/e