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Chapter 8 Test Bank

CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS

Multiple Choice Questions


LO1
1.

Which of the following is correct?


The direct sale
additional shares to the parent company from a subsidiary
a. decreases the parents interest and decreases
noncontrolling shareholders interest.
b. decreases the parents interest and increases
noncontrolling shareholders interest.
c. increases the parents interest and increases
noncontrolling shareholders interest.
d. increases the parents interest and decreases
noncontrolling shareholders interest.

of

the
the
the
the

Use the following information in answering questions 2 and 3.


On December 31, 2006, Giant-Petrel Corporations Investment in
Penguin Corporation account had a balance of $525,000. The balance
consisted of 80% of Penguins $600,000 stockholders equity on that
date and $45,000 of goodwill. On January 2, 2007, Penguin increased
its outstanding common stock from 15,000 to 18,000 shares.

LO1
2.

Assume that Penguin sold the additional 3,000 shares directly


to Giant-Petrel for $150,000 on January 2, 2007. Giant-Petrels
percentage ownership in Penguin immediately after the purchase
of the additional stock is
a.
b.
c.
d.

66-2/3%.
80%.
83-1/3%.
86-2/3%

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LO1
3.

Assume that Penguin sold the additional 3,000 shares to outside


interests for $150,000 on January 2, 2007. Giant-Petrels
percentage ownership immediately after the sale of stock would
be
a.
b.
c.
d.

66-2/3%.
75%.
80%.
83-1/3%.

Use the following information in answering questions 4 and 5.


Bristlebird Corporation purchased an 80% interest in Underbrush
Corporation on July 1, 2005 at its book value, and on January 1, 2006
its Investment in Underbrush account was $300,000, equal to its book
value. Underbrushs net income for 2006 was $99,000; no dividends
were declared. On March 1, 2006, Bristlebird reduced its interest in
Underbrush by selling a 20% interest, one-fourth of its investment,
for $84,000.
LO1
4.

If Bristlebird uses a beginning-of-the-year sale assumption,


its gain on sale and income from Underbrush for 2006 will be
a.
b.
c.
d.

LO1
5.

Gain on Sale
$5,700
$5,700
$9,000
$9,000

Income from Underbrush


$59,400.
$62,700.
$59,400.
$62,700.

If Bristlebird uses the actual-sale-date sales assumption,


its gain on the sale and income from Underbrush for 2006 will
be:
a.
b.
c.
d.

Gain on Sale
$21,360
$21,360
$26,640
$26,640

Income from Underbrush


$59,400
$62,700
$59,400
$62,700

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LO1
6.

On January 1, 2006, Finch Corporation owned a 90% interest in


Nest Corporation at which time the Investment in Nest account
had a balance of $350,000, which was 90% of Nests $370,000 in
stockholders equity and $17,000 of goodwill. During 2006, Nest
had income of $35,000 and paid dividends of $3,000 on June 1
and another $3,000 on November 1. On May 1, 2006, Finch sold
one-fifth of its interest in Nest for $92,000. If the
beginning-of-the-period sales assumption is used, the balance
in the Investment in Nest account on December 31, 2006 is
a.
b.
c.
d.

LO1
7.

$300,300.
$300,880.
$304,480.
$306,100.

On January 1, 2006, Finch Corporation owned a 90% interest in


Nest Corporation at which time the Investment in Nest account
had a balance of $350,000, which was 90% of Nests $370,000 in
stockholders equity and $17,000 of goodwill. During 2006, Nest
had income of $35,000 and paid dividends of $3,000 on June 1
and another $3,000 on November 1. What would be the balance in
the Investment in Nest account on December 31, 2006 if Finch
sold one-ninth of its interest in Nest on May 1, 2006 for
$47,000 and the beginning-of-the-period sales assumption is
used?
a.
b.
c.
d.

$333,333.
$334,311.
$336,333.
$336,711.

Use the following information for questions 8 and 9.


Button-quail Corporation owned a 70% interest in Savannah Corporation
on December 31, 2006, and Button-quails Investment in Savannah
account had a balance of $3,900,000. Savannahs stockholders equity
on this date was as follows:
Capital stock, $10 par value
Retained Earnings
Total Stockholders Equity

$
$

3,000,000
2,400,000
5,400,000

On January 1, 2007, Savannah issues 80,000 new shares of common stock


to Button-quail for $16 each.
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LO1
8.

What is Button-quails percentage ownership in Savannah after


Savannah issues its stock to Button-quail?
a.
b.
c.
d.

LO1
9.

76.32%.
80.43%.
82.57%.
83.43%.

Assuming that Savannah has no fixed assets, what is the amount


of goodwill associated with the issuance of shares to Buttonquail?
a.
b.
c.
d.

$38,176.
$40,232.
$41,302.
$41,732.

Use the following information for questions 10, and 11.


Great Frigatebird Corporation acquired a 90% interest in Slipstream
Corporation at its $810,000 book value on December 31, 2005. A
summary of the stockholders equity for Slipstream at the end of 2005
and 2006 is as follows:
12/31/05
12/31/06
Capital stock, $10 par
$
600,000 $
600,000
Additional paid-in capital
30,000
30,000
Retained Earnings
270,000
420,000
Total stockholders equity
$
900,000 $ 1,050,000
On January 1, 2007, Slipstream sold 10,000 new shares of its $10 par
value common stock for $45 per share.
LO1
10.

If Slipstream sold the additional shares to the general public,


Great Frigatebirds Investment in Slipstream account after the
sale would be
a.
b.
c.
d.

$945,000.
$1,157,100.
$1,225,000.
$1,245,000.

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LO1
11.

If Slipstream sold the additional shares directly to Great


Frigatebird, Great Frigatebirds Investment in Slipstream
account after the sale would be
a.
b.
c.
d.

LO2
12.

$1,350,000.
$1,395,000.
$1,425,000.
$1,500,000.

Which of the following is correct about the treatment of


preacquisition earnings on consolidated financial statements?
I. Exclude the subsidiary sales and expenses
acquisition from consolidated sales and expenses.

prior

to

II. Include the subsidiary sales and expenses prior to


acquisition and deduct preacquisition income as a separate
item.

LO1
13.

a.
b.
c.
d.

I only.
II only.
I or II.
Neither I nor II.

If a parent company and outside investors purchase shares of a


subsidiary in relation to existing stock ownership (ratably)
a. there will be no adjustment to additional paid-in capital
regardless whether the stock is sold above or below book
value.
b. the transaction will requirement an investment account
adjustment.
c. the transaction will require the elimination of a gain if
it was conducted at economic arm's length.
d. the transaction will require the elimination of a loss if
it was conducted at economic arm's length.

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LO2
14.

Heron Corporation acquired 40% of WatersEdge Inc.s common


stock for $400,000 book value on January 1, 2006 when
WatersEdge equity consisted of $500,000 capital stock and
$500,000 retained earnings. On September 1, 2006 Heron bought
an additional 30% interest in WatersEdge for $210,000. In both
cases, Watersedge book value equaled the fair value.
WatersEdge had income of $120,000 earned evenly through 2006
and paid dividends quarterly of $25,000.
The consolidated income statement of Heron Corporation and
Subsidiary for the year 2006 should show pre-acquisition income
of:
a.
b.
c.
d.

$ 5,333.
$ 8,000.
$32,000.
$56,000.

Use the following information to answer questions 15 through 18.


Bowerbird Corporation purchased a 70% interest in Stage Corporation
on June 1, 2006 at a purchase price of $390,400. On this date,
Stages book values were equal to its fair values except for an
unrecorded copyright, and its stockholders equity consisted of
$290,000 of Common Stock and $210,000 of Retained Earnings. All costbook differentials were attributed to the copyright, which had an
estimated economic life of ten years.
During 2006, Stage earned $120,000 of net income earned uniformly
throughout the year and paid $6,000 of dividends on March 1 and
another $6,000 on September 1.
LO2
15.

Minority interest income for 2006 is


a.
b.
c.
d.

$36,000.
$32,400.
$61,200.
$50,000.

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LO2
16.

Preacquisition income for 2006 is


a.
b.
c.
d.

LO2
17.

The value of the copyright that is included


Investment in Stage account on June 1, 2006 is
a.
b.
c.
d.

LO2
18.

$50,000.
$35,000.
$44,000.
$36,000.
in

Bowerbird

$ 2,600.
$ 5,400.
$ 9,600.
$10,400.

The amortization expense recorded for the copyright in 2006 is:


a.
b.
c.
d.

$315.
$560.
$815.
$960.

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8-7

LO3
19.

The acquisition of treasury stock by a subsidiary above book


value
a. decreases
decreases
b. decreases
increases
c. increases
decreases
d. increases
increases

LO3
20.

the
the
the
the
the
the
the
the

parents
parents
parents
parents
parents
parents
parents
parents

share of
ownership
share of
ownership
share of
ownership
share of
ownership

subsidiary book
percentage.
subsidiary book
percentage.
subsidiary book
percentage.
subsidiary book
percentage.

value and
value and
value and
value and

A stock dividend by a subsidiary causes


a.
b.
c.
d.

the
the
the
any

parent company
parent company
parent company
noncontrolling

investment account
investment account
investment account
interest equity to

to decrease.
to remain the same.
to decrease.
increase.

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8-8

LO1
Exercise 1
At December 31, 2004, the stockholders equity of Goshawk Corporation
and its 80%-owned subsidiary, Treetop Corporation, are as follows:
Common stock, $10 par value
Retained earnings
Totals

$
$

Goshawk
20,000
8,000
28,000

$
$

Treetop
12,000
6,000
18,000

Goshawks investment in Treetops account balance is equal to the


Treetop book value. Treetop Corporation issued 225 additional shares
of common stock directly to Goshawk on January 1, 2005 at $18 per
share.
Required: Compute the following:
1. Compute the balance in Goshawks Investment in Treetop account
on January 1, 2005 after the new investment is recorded.
2. Determine the goodwill (if any) from Goshawks new investment in
the 225 Treetop shares.
LO1
Exercise 2
At the beginning of 2006, Starling Corporation held an 80% interest
in Twig Corporation. The investment account balance was $900,000,
consisting of 80% of Twigs $1,095,000 of net assets and $24,000 of
goodwill.
During 2006, Twig uniformly earned $234,000 and paid dividends of
$37,500 on April 1 and again on October 1. On August 1, 2006,
Starling sold 30% of its investment in Twig for $262,500, thereby
reducing its interest in Twig to 56%.
Required: Compute
assumption:

the

following

using

the

actual

sales

1. Gain or loss on sale.


2. Income from Twig for 2006.
3. Noncontrolling interest for 2006.
LO1
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8-9

date

Exercise 3
At the beginning of 2006, Flycatcher Corporation held a 60% interest
in Lichen Corporation. The investment account balance was $2,100,000,
consisting of 60% of Lichens $3,226,666 of net assets and $164,000
of goodwill.
During 2006, Lichen earned $300,000 and paid dividends of $110,000 on
November 1. On October 1, 2006, Flycatcher sold 10% of its investment
in Lichen for $364,000, thereby reducing its interest in Lichen to
54%.
Required: Compute
assumption:

the

following

using

the

actual

sales

date

1. Gain or loss on sale.


2. Income from Lichen for 2006.
3. Noncontrolling interest expense for 2006.
LO1
Exercise 4
At December 31, 2005 year-end, Lapwing Corporations investment in
Openground Inc. was 200,000 consisting of 80% of Opengrounds
$250,000 stockholders equity on that date.
On April 1, 2006,
Lapwing sold 20% interest (one-fourth of its holdings) in Openground
for $65,000. During 2006, Openground had net income of $75,000 and
on July 1, 2006, Openground paid dividends of $40,000.
Required:
1. Record the journal entries before year-end 2006 assuming the
equity method.

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8-10

LO1
Exercise 5
On April 1, 2006, Gouldian Corporation paid $120,000 for a 25%
interest in Termite Mound Corporation. On July 1, 2006, Gouldian
acquired an additional 45% (based on the January 1, 2006 number of
Termite Mound shares outstanding) for $236,400. Termite Mounds
stockholders equity on January 1, 2006 consisted of $300,000 of $10
par value Common Stock and $100,000 of Retained Earnings. Termite
Mounds net income for 2006 was $144,000 earned uniformly throughout
the year.
Required: Calculate each of the following amounts:
1. Gouldians income from Termite Mound for 2006.
2. The amount of minority interest income that will appear on the
consolidated income statement of Gouldian and Subsidiary for
2006.
LO2
Exercise 6
Catbird Corporation paid $240,000 on April 1, 2006 for all of the
common stock of Bug Corporation in a business acquisition. Bugs
stockholders equity at April 1 consisted of the $195,000 January 1,
2006 stockholders equity of Bug plus first quarter income less
dividends. Dividends are paid quarterly. Any excess cost over book
value acquired is goodwill with a 10-year amortization period.
Additional information:
1. Catbird sold equipment with a 5-year remaining useful life to
Bug on July 1, 2006 for a gain of $10,000.
2. Bugs accounts payable balance at December 31 includes $5,000
due to Catbird from the sale of equipment.
3. Catbird accounts for its investment in Bug using the equity
method as a one-line consolidation.
Required:
Complete the working papers to consolidate the financial statements
of Catbird and Bug Corporations for the year 2006.

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8-11

Catbird Corporation and Subsidiary


Consolidation Working Papers
for the year ended December 31, 2006
Eliminations
Catbird
Bug
Debit
Credit
INCOME STATEMENT
Net Sales
Income from
Bug
Gain on sale of
Equipment
Cost of sales
Depreciation
Other expenses
Preacquisition
Income
Net income
Retained
Earnings 1/1
Add: Net income
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Receivables
Inventories
Equipment-net
Investment in
Bug
Goodwill
TOTAL ASSETS
LIAB. & EQUITY
Accounts and
notes payable
Capital stock
Paid-in capital
Retained
Earnings
Noncontrolling
Interest
TOTAL LIAB. &
EQUITY

$ 500,000

Noncntl

$170,000

21,000
10,000
(230,000) ( 90,000)
(113,000) ( 30,000)
( 30,000) ( 10,000)
158,000

40,000

75,000
50,000
158,000
40,000
( 30,000) ( 20,000)
$ 203,000

$70,000

47,000
80,000
120,000
80,000

30,000
50,000
90,000
80,000

246,000
$ 573,000

$250,000

140,000
200,000
30,000

35,000
100,000
45,000

203,000

70,000

573,000

$250,000

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8-12

Consolidated

LO2
Exercise 7
Swallow
Corporation
paid
$62,000
to
acquire
100%
of
Gully
Corporations outstanding voting common stock at book value on May 1,
2006. The stockholders equity of Gully on January 1, 2006 consisted
of $40,000 Capital Stock and $20,000 Retained Earnings. Gullys total
dividends for 2006 were $6,000, paid equally on April 1 and October
1. Gullys net income was earned uniformly throughout 2006.
During 2006, Swallow made sales of $10,000 to Gully at a gross profit
of $3,000. One-half of this merchandise was inventoried by Gully at
year-end, and one-half of the 2006 intercompany sales were unpaid at
year-end 2006.
Swallow sold equipment with a ten-year remaining useful life to Gully
at a $2,000 gain on December 31, 2006. The straight-line depreciation
method is used.
Financial statements of Swallow and Gully Corporations
appear in the first two columns of the partially
consolidation working papers.

for 2006
completed

Required:
Complete the working papers for Swallow Corporation and Subsidiary
for the year 2006.

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8-13

Swallow Corporation and Subsidiary


Consolidation Working Papers
for the year ended December 31, 2006
Eliminations
Swallow
Gully
Debit
Credit
INCOME STATEMENT
Net Sales
Income from Gully
Gain on sale of
Equipment
Cost of sales
Depreciation
Other expenses
Preacquisition
Income
Net income
Retained
Earnings
Add: Net income
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Receivables-net
Inventories
Other assets
Land
Buildings-net
Investment in
Gully
Equipment-net
TOTAL ASSETS
LIAB & EQUITY
Accounts payable
Other debt
Common stock
Retained
Earnings
Noncontrolling
Interest
TOTAL LIAB. &
EQUITY

80,000
6,500

Noncontl

$40,000

2,000
( 40,000) ( 15,000)
( 11,000) ( 4,000)
( 12,500) ( 6,000)
25,000

15,000

60,000
20,000
25,000
15,000
( 10,000) ( 6,000)
$

75,000

$29,000

19,000
10,000
10,500
5,000
20,000

16,000
8,000
14,000
5,000
15,000

65,500
40,000
$ 170,000

22,000
$80,000

16,000
19,000
60,000

10,000
1,000
40,000

75,000

29,000

170,000

$80,000

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8-14

Consolidated

LO2
Exercise 8
Swift Corporation paid $40,000 cash for an 80% interest in the voting
common stock of Weather Front Corporation on July 1, 2005, when
Weather Fronts stockholders equity consisted of $30,000 of $10 par
common stock and $15,000 retained earnings. The excess cost over the
book value of the investment was assigned $2,000 to undervalued
inventory items that were sold in 2005, with the remaining excess
being assigned to goodwill. During the last half of 2005, Weather
Front reported $4,000 net income and declared dividends of $2,000,
and Swift reported income from Weather Front of $1,100.
There were no intercompany sales during the last half of 2005, but
during 2006 Swift sold inventory items that cost $8,000 to Weather
Front for $12,000. Half of these inventory items were included in
Weather Front Corporations Inventory at December 31, 2006, with
$1,000 unpaid by Weather Front at December 31, 2006.
On January 5, 2006, Swift sold a plant asset with a book value of
$2,500 and a remaining useful life of 5 years to Weather Front for
$4,000. Weather Front Corporation owned the plant asset at year-end.

Swift Corporation uses the equity method to account for its


investment in Weather Front, and the changes in Swifts Investment in
Weather Front account from
Acquisition until year-end 2006 are as follows:
Investment in Weather Front, July 1, 2005
$
Income from Weather Front July 1 December 31, 2005
Less: Share of dividends received
(
Investment in Weather Front at December 31, 2005
Add: Income from Weather Front for 2006
Less: Dividends received
(
Investment in Weather Front at December 31, 2006
$

40,000
1,200
1,600 )
39,600
4,800
3,200 )
41,200

Required:
Complete the working papers at the end of the year December 31, 2006
that are given below.

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8-15

Swift Corporation and Subsidiary


Consolidation Working Papers
for the year ended December 31, 2006
Weather
Eliminations
Swift
Front
Debit
Credit
INCOME STATEMENT
Net Sales
$
Income from
Weather Front
Gain on sale of
Equipment
Cost of sales
(
Depreciation
(
Other expenses
(
Noncntl. expense
Net income
Retained
Earnings
Add: Net income
Dividends
(
Retained
Earnings 12/31
$
BALANCE SHEET
Cash
Net Receivables
Dividends Rec
Inventories
Plant assets-net
Investment in
Weather Front
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Dividends
Payable
Common stock
Retained
Earnings
Noncontrolling
Interest
TOTAL LIAB. &
$
EQUITIES

60,000
4,800

Noncntl

$34,000

1,500
27,000) ( 16,000)
5,000) ( 3,000)
12,100) ( 5,000)
22,200

10,000

10,100
17,000
22,200
10,000
12,000) ( 4,000)
20,300

$23,000

2,300
7,000
800
7,000
22,000

7,000
5,000
5,000
43,000

41,200
80,300

$60,000

17,000

6,000

3,000
40,000

1,000
30,000

20,300

23,000

80,300

$60,000

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8-16

Consolidated

LO2
Exercise 9
On September 1, 2006, Warbler Corporation acquired an 80% interest in
Reed Corporation for $700,000. Reeds stockholders equity at January
1, 2006 consisted of $200,000 of Common Stock and $600,000 of
Retained Earnings. The book values of its assets and liabilities were
equal to their respective fair values on this date. All excess
purchase cost was attributed to goodwill.
During 2006, Reed uniformly earned $78,000 and paid dividends of
$9,000 on each of four dates: February 1, June 1, August 1, and
December 1.
Required: Compute the following:
1. Warblers income from Reed for 2006.
2. Preacquisition income that will appear on the consolidated
income statement of Warbler Corporation and Subsidiary for 2006.
3. Minority interest income for 2006.
LO3
Exercise 10
At January 1, 2005, the stockholders equity of Raven Corporation and
its 60%-owned subsidiary, Trunk Corporation, are as follows:
Common stock, $10 par value
Retained earnings
Totals

$
$

Raven
700,000
800,000
1,500,000

$
$

Trunk
400,000
50,000
450,000

Trunks net income for 2005 was $40,000. Ravens Investment in Trunk
account balance on December 31, 2005 was equal to its underlying
equity on December 31, 2005. Trunk Corporation issued 10,000
additional shares of common stock directly to Raven on January 1,
2006 at $12 per share.
Required: Compute the following:
1. Compute the balance in Ravens Investment in Trunk account on
January 1, 2006 after its purchase of the additional Trunk
shares.
2. Calculate any positive or negative goodwill
Ravens investment in the 10,000 Trunk shares.

stemming

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8-17

from

Solutions
Multiple Choice Questions
1

(15,000 shares/18,000 shares) =

83.33%

(12,000 shares/18,000 shares) =

66.67%

Selling price
Book value of interest sold
$300,000 x (20%/80%) =
Gain on sale
Income from Underbrush
$99,000 x (80% - 20%) =

Selling price
Book value of interest sold:
Beginning balance
Income for 2 months
$99,000 x 1/6 x 80% =
Adjusted book value
Percentage of interest sold
Book value applied
Gain on sale

Income from
Jan 1 Mar
Mar 1 Dec
Income from
6

84,000

75,000
9,000

59,400
84,000

62,640
21,360

300,000
13,200
313,200
20%
62,640

Underbrush:
1 $16,500 x 80% =
31 $82,500 x 60% =
Underbrush

Selling price
Book value of interest sold:
($350,000 x 20%)
Gain on sale
Finchs share of Nests
Income: $35,000 x (90%-18%) =
Finchs Investment account
balance at December 31, 2006:
Jan 1, 2006 balance

13,200
49,500
62,700

92,000

70,000
22,000

25,200

350,000

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8-18

Less: Book value of interest


sold
Plus: Income from Nest
Less: Dividends $6,000 x 72%
Investment account balance at
12/31/2006
7

70,000 )
25,200
4,320 )

Selling price
Book value of interest sold:
($350,000 x 1/9)
Gain on sale
Finchs share of Nests
Income: $35,000 x (90%-10%) =
Finchs Investment account
balance at December 31, 2006:
Jan 1, 2006 balance
Less: Book value of interest
sold
Plus: Income from Nest
Less: Dividends $6,000 x 80%
Investment account balance at
12/31/2006

(210,000 shares + 80,000


shares)/380,000 shares

Savannahs equity after the


issuance of the new shares
($5,400,000 + $1,280,000)
Button-quails ownership
percentage
Button-quails share of
Savannahs equity now
Button-quails previous share of
Savannahs equity ($5,400,000 x
70%)
Savannahs equity acquired in the
purchase
Amount spent to acquire stock
Goodwill purchased

47,000

38,889
8,111

28,000

38,889 )
28,000
4,800 )

300,880

350,000

$
=

76.32%

6,680,000
76.32%

$ 5,098,176
3,780,000
$
$

1,318,176
1,280,000
38,176

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8-19

334,311

10

11

Slipstreams stockholders equity


prior to the stock issuance
Plus: Capital received from new
stock issued
New stockholders equity
Great Frigatebirds ownership
percentage
Great Frigatebirds adjusted
investment in Slipstream
Investment balance at 12/31/2006
($1,050,000 x 90%)
Additional investment (10,000
Shares x $45)
Investment account balance

1,050,000

450,000
1,500,000
77.14%

1,157,100

945,000

450,000
1,395,000

32,000

12

13

14

$120,000 net income x 2/3 year x


40%

15

$120,000 x 30% =

36,000

16

($120,000/12 months) x 5 months


x 70%

35,000

17

Cost of 70% interest


Book value of interest
Acquired:
January 1 balance
Add: 5 months of income
Less:
Dividends
paid
before June 1
Total book value at 6/1
Majority percentage
Book value of interest
Acquired
Copyright value

18

500,000
50,000

6,000 )
544,000
70%

390,400

380,800
9,600

From Question 17:


($9,600/120 months) x
7 months

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560

19

20

Exercise 1
Requirement 1
Cost of investment ($18,000 x 80%)
Plus: Purchase of 225 Treetop
shares at $18 on January 1, 2005
Investment account balance`

Requirement 2
Treetops stockholders equity at
January 1, 2005
Plus: Additional capital from the
shares issued
Total stockholders equity after
issuance of the new shares
Goshawks percentage
(960 + 225)/1425 =
Goshawks share of Treetops
equity after issuance
Goshawks share of Treetops
equity before stock issuance
Equity acquired in the purchase
Cost of interest acquired
Positive goodwill

14,400

4,050
17,450

18,000
4,050

22,050
83%

18,302

14,400
4,702
4,050
652

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Exercise 2
Preliminary computations
Investment balance, January 1
Income from Twig ($234,000 x 7/12
x 80%)
Less: April 1 dividends ($37,500 x
80%)
Book value at July 31, 2006

900,000
109,200
(

30,000 )

979,200

262,500

$ (

293,760
31,260 )

109,200

Requirement 1
Proceeds from sale
Book value of interest sold
($979,200 x 30%)
Loss on sale
Requirement
Income from
through
$109,200
Income from
($234,000 x

2
Twig from Jan 1
July 31 (from above)
August 1 December 31
5/12 x 56%)

54,600

Income from Twig for 2006

163,800

Requirement 3
Noncontrolling interest expense:
Jan 1 to Jul 31 ($234,000 x 7/12 x
20%)
Aug 1 to Dec 31 ($234,000 x 5/12 x
44%)
Noncontrolling interest expense

27,300

42,900
70,200

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Exercise 3
Preliminary computations
Investment balance, January 1
Income from Lichen ($300,000 x
9/12 x 60%)
Book value at September 30, 2006
Requirement 1
Proceeds from sale
Book value of interest sold
($1,965,000 x 10%)
Gain on sale
Requirement 2
Income from Lichen from Jan 1
through September 30 (from above)

2,100,000
135,000

2,235,000

364,000

223,500
140,500

135,000

Income from October 1December 31


($300,000 x 3/12 x 54%)

40,500

Income from Lichen for 2006

175,500

Requirement 3
Noncontrolling interest expense:
Jan 1 to Sep 30 ($300,000 x 9/12 x
40%)
Oct 1 to Dec 31 ($300,000 x 3/12 x
46%)
Noncontrolling interest

90,000

34,500
124,500

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Exercise 4
Requirement
April 1
Investment in Openground
Income from Openground

Debit

Cash
Investment in Openground
Gain from sale of investment in
Openground

18,750

18,750

65,000
43,750
21,250

July 1
Cash
Investment in Openground

24,000

December 31
Investment in Openground
Income from Openground

33,750

Selling price
Book value of interest sold:
Beginning balance
Income for 3 months
$75,000 x 1/4 x 80% =
Adjusted book value
Percentage of interest sold
Book value applied
Gain on sale

Credit

24,000

33,750

65,000

43,750
21,250

200,000
18,750
218,750
20%
43,750

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Exercise 5
Preliminary computations:
Purchase 1:
Purchase price
Book value at April 1st:
Stockholders equity at January 1
Plus: Income through March
Total book value
Interest acquired
Book value of interest acquired

$
$

400,000
36,000
436,000
25%
109,000

Goodwill
Purchase 2:
Purchase price
Stockholders equity at January 1
Income through June 30
Total book value
Interest acquired
Book value of interest acquired

400,000
72,000
472,000
45%
212,400

Goodwill

109,000
$ $

11,000

$ $

236,400

212,400
$

Requirement 1
Gouldians income from Termite
Mound:
$144,000 x 9/12 x 25%
$144,000 x 6/12 x 45%

27,000
32,400

Income from Termite Mound

59,400

Requirement 2
Minority interest income:
$144,000 x 30% =

43,200

120,000

24,000

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Exercise 6
Catbird Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Eliminations
Catbird
Bug
Debit
Credit
INCOME STATEMENT
Net Sales
Income from
Bug
Gain on sale of
equipment
Cost of sales
Depreciation
Other expenses
Preacquisition
income
Net income
Retained
Earnings
Add: Net income
Dividends
Preacquisition
dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Receivables
Inventories
Equipment-net
Investment in
Bug
Goodwill
TOTAL ASSETS
LIAB. & EQUITY
Accounts and
notes payable
Capital stock
Paid-in capital
Retained
Earnings
Noncontrolling
interest
TOTAL LIAB. &
EQUITY

$ 500,000

Min
Int

$170,000

21,000

Consolidated
$670,000

c $ 21,000

10,000
a
(230,000) ( 90,000)
(113,000) ( 30,000)
( 30,000) ( 10,000)

10,000

10,000

( 10,000)
158,000

75,000
50,000 d
158,000
40,000
( 30,000) ( 20,000)

50,000

75,000
158,000
( 30,000)

158,000

1,000

40,000

15,000

5,000

(320,000)
(142,000)
( 40,000)

$ 203,000

$70,000

$203,000

47,000
80,000
120,000
80,000

30,000
50,000
90,000
80,000

77,000
125,000
210,000
151,000

246,000
d
$ 573,000

$250,000

140,000
200,000
30,000

35,000
100,000
45,000

203,000

70,000

573,000

$250,000

e
d
d

5,000

1,000 a
c
d
40,000

10,000
6,000
240,000

5,000
100,000
45,000

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8-26

40,000
$603,000
170,000
200,000
30,000
203,000
$603,000

Exercise 7
Swallow Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Eliminations
Swallow
Gully
Debit
Credit
INCOME STATEMENT
Net Sales
$
Income from
Gully
Gain on sale of
equipment
Cost of sales
(
Depreciation
(
Other expenses
(
Preacquisition
income
Net income
Retained
Earnings
Add: Net income
Dividends
(
Retained
Earnings 12/31

80,000
6,500

$40,000

a $ 10,000
d
6,500

2,000
c
40,000) ( 15,000) b
11,000) ( 4,000)
12,500) ( 6,000)

5,000

60,000
20,000 e
25,000
15,000
10,000) ( 6,000)

20,000

10,000

$29,000

19,000
10,000
10,500
5,000
20,000

16,000
8,000
14,000
5,000
15,000

( 46,500)
( 15,000)
( 18,500)
(

15,000

75,000

Consolidated
$110,000

2,000
1,500 a $

e
25,000

Min
Int

5,000)
25,000
60,000
25,000

d
e

3,000
3,000

( 10,000)
$75,000

BALANCE SHEET

Receivables-net
Inventories
Other assets
Land
Buildings-net
Investment in
Gully
Equipment-net
TOTAL ASSETS

f
b

5,000
1,500

d
e
c

3,500
62,000
2,000

30,000
16,500
24,500
10,000
35,000

65,500
40,000
$ 170,000

22,000
$80,000

16,000
19,000
60,000

10,000
1,000
40,000

75,000

29,000

75,000

$ 170,000

$80,000

$176,000

60,000
$176,000

EQUITIES

Accounts payable
Other debt
Common stock
Retained
Earnings
Minority
interest
TOTAL EQUITIES

5,000

40,000

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8-27

21,000
20,000
60,000

Exercise 8

Swift Corporation and Subsidiary


Consolidation Working Papers
for the year ended December 31, 2006
Eliminations
Swift
Weather
Debit
Credit
Front

INCOME STATEMENT
Net Sales
Income from
Weather Front
Gain on sale of
Equipment
Cost of sales
Depreciation
Other expenses
Noncntl. expense
Net income
Retained
Earnings
Add: Net income
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Net Receivables
Dividends Rec
Inventories
Plant assets-net
Investment in
Weather Front
Goodwill
TOTAL ASSETS
LIAB & EQUITY
Accounts payable
Dividends
Payable
Common stock
Retained
Earnings
Noncntl Interest
January 1
Noncntl Interest
December 31
TOTAL LIAB. &
EQUITY

60,000
4,800

$34,000

a $ 12,000
e
4,800

1,500
c
( 27,000) ( 16,000) b
( 5,000) ( 3,000)
( 12,100) ( 5,000)
22,200

20,300

$23,000

2,300
7,000
800
7,000
22,000

7,000
5,000

1,500
2,000 a $ 12,000
d
300

( 33,000)
( 7,700)
( 17,100)
$ 2,000 ( 2,000)
22,200

17,000
e

3,200(

10,100
22,200
800) ( 12,000)
$20,300
9,300
11,000

h
g
b
300 c
e
f
2,000

6,000

1,000

22,000

3,000
40,000

1,000
30,000

g
f

800
30,000

3,200
40,000

20,300

23,000

5,000
43,000

41,200
$

80,300

$60,000

17,000

1,000
800
2,000
1,500
1,600
39,600

10,000
63,800
2,000
$96,100

20,300
f

9,400

9,400
10,600

Consolidated
$82,000

10,000

10,100
17,000 f
22,200
10,000
( 12,000) ( 4,000)
$

Noncntl.

80,300

$60,000

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8-28

10,600
$96,100

Exercise 9
Cost of investment
Book value acquired:
Stockholders equity, Jan 1
Income Jan 1 Aug 31
($78,000/12 months x 8 months)
Preacquisition dividends
Book value at September 1
Interest acquired

$
$
(

700,000

800,000
52,000
27,000 )
825,000
80%

660,000

Goodwill

40,000

Requirement 1
Income from Reed
Share of Reedss net income
($78,000 x 1/3 x 80%)

20,800

Requirement 2
Preacquisition income
($78,000 x 80% x 2/3) or
($6,500 x 8 months x 80%)

41,600

Requirement 3
Minority interest income
($78,000 x 20%)

15,600

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Exercise 10
Requirement 1
Cost of investment ($450,000 x
60%)
Share of Trunks income for 2005
($40,000 x 60%)
Investment in Trunk balance at
December 31, 2005
Plus: Purchase of 10,000 Trunk
shares at $12 on January 1, 2006
Investment account balance`

Requirement 2
Trunks stockholders equity at
January 1, 2006 ($450,000 +
$40,000 of 2005 net income)
Plus: Additional capital from the
shares issued
Total stockholders equity after
issuance of the new shares
Ravens percentage
(24,000 + 10,000)/50,000 =
Ravens share of Trunks equity
after issuance
Ravens share of Trunks equity
before stock issuance
Equity acquired in the purchase
Cost of interest acquired
Goodwill

270,000
24,000
294,000

120,000
414,000

490,000
120,000

610,000
68%

414,800

294,000
120,800
120,000
800

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