You are on page 1of 128

----------------------- Page 1-----------------------

CHAPTER 8

UNDERSTANDING THE ISSUES

1. The stock dividend will result in the follow(a) If the parent buys less than its current
ing entry being made by the subsidiary:
ownership percentage of shares, it will
increase its equity to the extent others
Retained Earnings
pay more than book value. The in(10,000 shares
crease will normally go to paid-in capi$60 per share) ............ 600,000
tal in excess of par.
Common Stock

($1 par, 10,000


(b) If the parent maintains its percentage,
shares $1)................
there is no impact other than an in-

10,000

Paid-In Capital in
crease in the investment account equal
Excess of Par
to the price paid. The parent will supply
($600,000, $10 par) .....
90% of the funds and will own 90% of

590,000

the equity provided by the new funds.


The parent need make no adjustment to its
investment account since there has been
(c) If the parent buys more than 90% of
no change in the total subsidiary equity.
the shares issued, it will adjust its investment based on the impact of the
When eliminating the investment in subsidsale. A sale at more than book value
iary account, the parent will now simply
will cause a reduction in the investeliminate its share of the revised (but equal
ment; a sale at less than book value
in total) subsidiary equity accounts.
will cause an increase in the invest-

2. The parents share in any equity increases


ment.
from the excess of the current book value
4.
Control, in this example, is a chain link
of

$40

per

share

($4,000,000/100,000

process. If A controls B and B, in turn,


shares) that the subsidiary receives. The
controls C, then all three are under comparent does not record as income the inmon ownership, and B and C are controlled
crease in equity that results. Rather, it is an
by A.
increase in the parents paid-in capital in

excess of par. The calculation in this case


In the distribution of Company Cs $10,000
would be as follows:
income, 40% (or $4,000) will flow to the
NCI of Company C, and 60% (or $6,000)
Equity after sale
will flow to Company B, the controlling in{(90,000 shares/120,000
terest. That $6,000 will flow as follows: 40%
shares = 75%)
(or $2,400) will flow to the NCI of Company
[$4,000,000 + ($50
B, and 60% (or $3,600) will flow to Compa 20,000 shares)]} ..............

$3,750,000

ny A, the controlling interest.


Equity prior to sale
(90% $4,000,000) ...........
he 2% holding in Company P shares,

3,600,000

Increase in equity interest .....


$
owned by Company S, is best treated as

150,000

treasury stock. This approach views the


3. The

subsidiary

is

selling

the

additional

subsidiary as the parents agent in purchasshares at $50 each, which is in excess of


ing parent company shares. As treasury
the current book value of $40 per share
stock, the 2,000 shares will not share in the

5.

($4,000,000/100,000 shares).
distribution of income and will not create a

separate excess of cost or book value.

417
----------------------- Page 2-----------------------

Ch. 8Exercises

EXERCISES

EXERCISE 8-1

(1) Retained Earnings (3,000 $35) ..............................................


.......
105,000
Common Stock ..........................................................
..................
30,000
Paid-In Capital in Excess of Par ......................................
............
75,000
To record stock dividend distributed on July 1, 20X1.

Lamp Company
Stockholders Equity
December 31, 20X1

Common stock ($10 par) ....................................................

....................

$330,000

Paid-in capital in excess of par ..........................................


....................
225,000
Retained earnings [$200,000 original balance +
$120,000 income $105,000 stock dividend
(33,000 share $0.50 = $16,500 cash dividend)] .........................
198,500

....

Total stockholders equity ..................................................


.....................
$753,500

(2) Memo: Investment in Lamp Company now includes 2,700 (30,000 90% 10%) additio
nal
shares for a total of 29,700 shares.

Cash ......................................................................
...........................
14,850
Investment in Lamp Company ............................................
14,850

.........

To record receipt of cash dividend (29,700 shares $0.50).

Investment in Lamp Company ................................................


.........
108,000
Subsidiary Income .....................................................
..................
108,000
To record 90% interest in Lamp Companys $120,000 net
income for 20X1.
(3) Subsidiary Income .........................................................
...................
108,000
Investment in Lamp Company ............................................
93,150

.........

Dividends, Lamp Company................................................


..........
14,850
To eliminate current-year entries to investment account.

Goodwill ..................................................................

.........................

250,000

Common Stock [($300,000 + $30,000) 90%] ................................


297,000
Paid-In Capital in Excess of Par [($150,000 + $75,000) 90%] ......
202,500
Retained Earnings [($200,000$105,000) 90%] .........................
85,500
Investment in Lamp Company (includes $225,000 from D&D) ....
810,000
Retained EarningsLamp Company (NCI adjustment) ..............
25,000

418
----------------------- Page 3-----------------------

Ch. 8Exercises

Exercise 8-1, Concluded

Determination and Distribution of Excess Schedule


Company
Parent

NCI

Price

Value

Implied
Fair Value
(90%)

(10%)

Fair value of subsidiary


$810,000
$ 90,000

$900,000

Less book value of interest acquired:


Common stock ($10 par)
Paid-in capital in excess of par

$300,000
150,000

Retained earnings
Total equity
$650,000
Interest acquired
90%
Book value
$585,000

200,000
$650,000
$650,000
10%
$ 65,000

Excess of fair value over book value


$225,000
$ 25,000

$250,000

Adjustment of identifiable accounts:

Worksheet
Adjustment
Key
Goodwill

$250,000
debit D

EXERCISE 8-2

Investment in Trail ............................................................


......................
57,750
Subsidiary Income .........................................................
...................
57,750

Calculation:
..

90% first 6 months income of $35,000 .......................................


$31,500
75%* second 6 months income of $35,000 ..................................
26,250

Total ..........................................................................
.............................
$57,750

Investment in Trail ............................................................


......................
32,250
Paid-In Capital in Excess of Par ..........................................
.............
32,250
Calculation:
Interest after sale
Trail, January 1, equity ..............................................
..................
$550,000
Income, first 6 months ................................................
.................
35,000
Sale of shares (2,000 $80) ............................................
...........
160,000
Total stockholders equity ..........................................
..............
$745,000
Interest ..............................................................
........................... 75%
$558,750
Interest prior to sale [($550,000 + $35,000) 90%] .........................
526,500
Increase in ownership interest ............................................
.............
$ 32,250

*(10,000 shares 90%)/(10,000 shares + 2,000 shares)

419
----------------------- Page 4-----------------------

Ch. 8Exercises

EXERCISE 8-3

Maintain
Interest

Increase
Interest

Decrease
Interest

Shares purchased by parent ..........................................


8,000
9,000
5,000
Total shares owned by parent after purchase ................
24,000
25,000

21,000

Total subsidiary shares outstanding after issue .............


30,000
30,000

30,000

Subsidiary equity after sale ($450,000 + $50,000


income + $50,000 goodwill + $400,000 sale) ...........
$950,000
$950,000
$950,000

Parents ownership percent after purchase ...................

80%
83.33%

70%

Parents new equity interest after purchase ...................


$760,000
$791,635
$665,000

Subsidiary equity prior to sale (after fair value adjustment)


($450,000 + $50,000 income + $50,000 goodwill) ...
$550,000
$550,000

Parents ownership percent before purchase ................

80%

80%

$550,000

80%

Parents equity interest before purchase .......................


$440,000
$440,000
$440,000
Price paid ($40 per share) .............................................
320,000
360,000
200,000
Total investment .............................................................
$760,000
$800,000
$640,000
Net adjustment ...............................................................
$
0
$ (8,365)
$ 25,000

Maintain ownership percentage interest:


Investment in Cat Company ................................................
..........
320,000
Cash .................................................................
........................
320,000

Increase ownership percentage interest:


Investment in Cat Company ................................................
..........
351,635
Retained EarningsTom Company (assumes no paid-in capital
in excess of par) ....................................................
...................
8,365
Cash .................................................................
........................
360,000

Decrease ownership percentage interest:


Investment in Cat Company ................................................
..........
225,000
Cash .................................................................
........................
200,000
Paid-In Capital in Excess of ParTom Company ....................
25,000

420

----------------------- Page 5-----------------------

Ch. 8Exercises

EXERCISE 8-4

Investment in Nolan ............................................................


................
81,360
Retained EarningsTarman ...................................................
81,360

......

To convert investment from cost to equity for income.

Income equity adjustment:


Jan. 1, 20X1 to Jan. 1, 20X3 increase in retained earning ($42,000 60%)
$25,200
Jan. 1, 20X3 to Jan. 1, 20X5 increase in retained earnings ($78,000 72%*)
56,160
Total ........................................................................
...................................
$81,360

*(60% 30,000 shares)/(30,000 5,000 treasury stock shares)

Retained EarningsTarman Company ..............................................


5,760
Investment in Nolan ......................................................
................
5,760

Adjustment for treasury stock purchase:


Equity after treasury stock purchase (72% $327,000) ............................
..
$235,440
Equity prior to treasury stock purchase (60% $402,000) .........................
.
241,200
Increase (decrease) in investment ..............................................
.................
$ (5,760)

Elimination:
Common StockNolan (72% $300,000 ..........................................
216,000
Paid-In Capital in Excess of ParNolan (72% $60,000) .................
43,200

Retained EarningsNolan (72% $120,000) ....................................


86,400
Investment in Nolan ($216,000* + $81,360 $5,760) ..................
291,600
..

Treasury Stock (at cost, 72% $75,000) ....................................


54,000
To eliminate the investments against the subsidiarys equity.

*60% 30,000 shares $12

421
----------------------- Page 6-----------------------

Ch. 8Exercises

EXERCISE 8-5

(1)
Company As Books
Company Bs Books

December 31, 20X1


4,000

Cash ........................................
Investment in B ........................

12

,000
Subsidiary IncomeB ..........
16,000

December 31, 20X2


4,000

Cash ........................................
Cash .............................

..............
,000
........

3,000
Investment in B ........................ 32
Investment in C ...................
12,000
Subsidiary IncomeB ..........
Subsidiary IncomeC ..........

36,000
15,000

Income:
80% ($30,000 +
$15,000 from C).

December 31, 20X3


4,000
..............
,400
........

Cash ........................................
Cash .............................
3,000
Investment in B ........................ 42
Investment in C ...................
15,000
Subsidiary IncomeB ..........
Subsidiary IncomeC ..........

46,400
18,000

Income:
80% ($40,000 +
$18,000 from C).

(2)
Company As Books
Company Bs Books

December 31, 20X1


Investment in C ..................
.........

7,000
Subsidiary IncomeC ..........
7,000

December 31, 20X2

Cash .............................
..............

3,500
Investment in C ...................

........

14,000
Subsidiary IncomeC ..........
17,500

December 31, 20X3


4,500
..............
,400
........

Cash ........................................
Cash .............................
3,500
Investment in B ........................ 50
Investment in C ...................
17,500
Subsidiary IncomeB ..........
Subsidiary IncomeC ..........

54,900
21,000

Income:
90% ($40,000 +
$21,000 from C).

422
----------------------- Page 7-----------------------

Ch. 8Exercises

EXERCISE 8-6

(1)

Determination and Distribution of Excess Schedule


Company
Parent

NCI

Price

Value

(60%)

(40%)

Implied
Fair Value
Fair value of subsidiary
00,000
$2,520,000

$4,2
$1,680,000

Less book value interest acquired:


Common stock

400,00

0
Paid-in capital in excess of par
100,000

1,

Retained earnings
000,000

2,

00,000

Total equity
$3,500,000

$3,5
$3,500,000

Interest acquired
60%

40%

Book value
$2,100,000

$1,400,000

Excess of fair value over book value


$ 420,000
$ 280,000

700,00

Adjustment of identifiable accounts:

Worksheet
Adjustment
Key
Company S-2 equipment
00

debit D1

Company S-1 building (40%)


0*

debit D2

Goodwill
00

debit D3

160,00
460,0
Total

80,0

700,00

*NCI of Company S-2 is also increased by $40,000.

(2) Eliminations and Adjustments:

Retained EarningsP ($12,000 80% 60%) ............................


5,760
Retained EarningsS-1 ($12,000 80% 40%) ........................
3,840
Retained EarningsS-2 ($12,000 20%) for S-2s NCI ..............
2,400
Accumulated Depreciation ..................................................
..........
3,000
Machine ...............................................................
.....................
15,000
To eliminate the remaining gain and restore machine value.

Accumulated Depreciation ..................................................


..........
3,000
Depreciation Expense ..................................................
.............
3,000
To recognize gain for current year.

423
----------------------- Page 8-----------------------

Ch. 8Exercises

EXERCI
SE 8-7

Companies
A, B, and C
Consolidated Incom
e Statement
For Year Ended Decembe
r 31, 20X5

Sales [($300,000 + $400,000 + $100,000)


intercompany sales of $75,000] ..........................................
$7

....
25,000

Cost of goods sold [$200,000 + $300,000 + $60,000


intercompany sales of $75,000 realized profit
in beginning inventory of $1,800 + unrealized profit
in ending inventory of ($6,000 + $720)] .................................
.
489,920
Gross profit ...................................................................
................
$
235,080
Expenses ($60,000 + $30,000 + $10,000 $4,000
depreciation adjustment for deferred gain on equipment) .......
96,000
Consolidated net income ........................................................
......
$
139,080
To NCICompany C ..........................................................
$
9,600

....

To NCICompany B ..........................................................
17,680

....
27,280

To controlling interest ........................................................


............
$
111,800

Subsidiary Company C Income Dis


tribution

Unrealized profit in ending


Internally generated net
inventory ..................................
income .....................................

$6,000
$

30,000

Adjusted net income ......................

24,000
NCI share ......................................

40%
NCI ................................................

9,600

Subsidiary Company B Income Dist


ribution*

Internally generated net income ....


70,000
60% Company C adjusted
income of $24,000 ...................
14,400
Gain realized through

depreciation .............................
4,000

Adjusted net income ......................

88,400
NCI share ......................................

20%
NCI ................................................

17,680

*There is no impact shown for the ending inventory held by Company C since the g
ross profit was written down to
zero under LCM.

Parent Company A Income Dist


ribution

Unrealized profit in ending


Internally generated net
inventory ..................................
income .....................................

80% Company B adjusted


income of $88,400 ...................
70,720
Realized profit in beginning
inventory ..................................
1,800

$72
$ 40,000

Controlling interest .........................

$111,800

424
----------------------- Page 9-----------------------

Ch. 8Exercises

EXERCISE 8-8

Determination and Distribution of Excess Schedule


Company
Parent

NCI

Price

Value

(60%)

(40%)

Implied
Fair Value
Fair value of subsidiary
$384,000
$256,000

$640,000

Less book value of interest acquired:


Common stock ($5 par)

$200,000

Paid-in capital in excess of par

100,000

Retained earnings

150,000

Remaining excess ($25,000

$5,000 amortization)
Total equity
$470,000

20,000
$470,000
$470,000

Interest acquired
60%
Book value
$282,000

40%
$188,000

Excess of fair value over book value


$102,000
$ 68,000

$170,000

Adjustment of identifiable accounts:

Amortization

Worksheet
Adjustment

per Year

Life

Key

Font inventory (80%)


$16,000

debit D1

$ 16,000*

Hartland equipment
6,000

debit D2

30,000

Goodwill

124,000
debit D3
Total

$170,000

*NCI of Font is also increased by $4,000.

EXERCISE 8-9

(1) Company Ns books:


Cash ..................................................................
.......................
2,000
Investment in Company O ...............................................
14,000

.........

Subsidiary Income (40% $40,000) ...................................

16,000

Company Ms books:
Cash ..................................................................
.......................
9,000
Investment in Company N ...............................................
86,400

.........

Subsidiary Income [90% ($90,000 + $16,000)] .................


95,400
Cash ..................................................................
.......................
1,000
Investment in Company O ...............................................
7,000

.........
.

Subsidiary Income (20% $40,000) ...................................


8,000

(2) Internally generated incomes ($200,000 + $90,000 + $40,000) ...


$330,000
Beginning inventory profit ................................................
..............
7,000
Ending inventory profit ...................................................
...............
(9,000)
Consolidated net income ...................................................
............
$328,000

NCICompany O ...........................................................
..........
$
15,400
NCICompany N ...........................................................
..........
10,490
25,890
To controlling interest ...............................................
................
$302,110

425
----------------------- Page 10-----------------------

Ch. 8Exercises

Exercise
8-9, Concluded

Subsidiary O Company Income


Distribution

Unrealized gross profit in


Internally generated income ..........
$40,000
6,000

ending inventory ......................


Realized gross profit in

beginning inventory ..................


4,500

Adjusted income ............................


$38,500

NCI share ......................................


40%

NCI ................................................
$15,400

Subsidiary N Company Income


Distribution

Unrealized gross profit in


Internally generated income ........
$ 90,000
$3,000

ending inventory ......................


Share of O income
(40% $38,500) ....................
15,400
Realized gross profit in
beginning inventory ................
2,500

Adjusted income ..........................


$104,900

NCI share ....................................


10%

NCI ..............................................
$ 10,490

Parent Company M Income


Distribution

Internally generated net


income .....................................
0
20% O adjusted income

$200,00

of $38,500 ................................
7,700
90% N adjusted income
of $104,900 ..............................
94,410

Controlling interest .........................

$302,110

426
----------------------- Page 11-----------------------

Ch. 8Exercises

EXERCISE 8-10

(1)

Determination and Distribution of Excess Schedule


Company

Parent

NCI

Price

Value

ue

(60%)

(40%)

Implie
Fair Val
Fair value of subsidiary
0,000
$348,000

$58
$232,000

Less book value of interest acquired:

Common stock ($10 par)

$500

,000
Retained earnings
50,000

,000

Total equity
$550,000

$550
$550,000

Interest acquired
60%

40%

Book value
$330,000
Excess of fair value over book value
30,000
$ 18,000

$220,000
$
$ 12,000

Adjustment of identifiable accounts:

Amortization
per Year
Equipment
30,000

(2)
rporation

Worksheet
Life

Adjustment
Key
$

$1,500

20

debit D

Myles Corporation and Subsidiary Downer Co

Consolidated Income Sta


tement
For Year Ended December 31,
20X3

Sales ....................................................................
........................................
$1,
150,000
Less cost of goods sold ..................................................
..............................
840,0
00
Gross profit .............................................................
......................................
$
310,0
00
Less expenses (including equipment depreciation of $1,500) ...............
231,5

......
00

Consolidated net income ..................................................


............................
$
78,
500
To NCI .............................................................
.......................................
$
11,
400
To controlling interest ............................................
.................................
67,
100

Subsidiary Downer Corporation Income Distr


ibution

Equipment depreciation ................


Internally generated net income ....

Adjusted net income ......................


NCI share ......................................

$1,500
$30,000

$28,500

40%

NCI ................................................

$11,400

Parent Myles Corporation Income Distri


bution

Internally generated net income ....


60% Downer income of $28,500

Controlling interest .........................

$50,000
17,100

$67,100

42
7
----------------------- Page 12-----------------------

Ch. 8Exercises

EXERCISE 8-11

(1)

Determination and Distribution of Excess Schedule


Company
Parent

NCI

Price

Value

(60%)

(40%)

Implied
Fair Value
Fair value of subsidiary
$348,000
$232,000

$580,000

Less book value of interest acquired:


Common stock ($10 par)

$500,000

Retained earnings
Total equity
$550,000

50,000
$550,000
$550,000

Interest acquired
60%
Book value
$330,000

40%
$220,000

Excess of fair value over book value


$ 18,000
$ 12,000

$ 30,000

Adjustment of identifiable accounts:

Amortization

Worksheet
Adjustment

per Year
Equipment
$1,500

Life

Key

20

debit D

$30,000

(2) Excess of cost or book value due to swap


Equity after swap:
Subsidiary equity prior to swap ...........................
$600,000

Remaining excess ($30,000 2 yrs. $1,500


amortization)...................................................
27,000
$627,000
Market value of shares issued .........................................
150,000

.........

Total .............................................................
........................
$777,000
Ownership interest (40,000/60,000) ........................................
......

2/3
$518,000

Equity prior to swap:


Subsidiary equity prior to swap .......................................
..........
$627,000
Ownership interest (30,000/50,000) ....................................

60%
376,200

.....

Increase in interest ......................................................


..................
$141,800
Market value of shares issued .............................................
.........
150,000
Debit Myles retained earnings for decrease in equity ...................
$
8,200

428
----------------------- Page 13-----------------------

Ch. 8Problems

PROBLEMS

PROBLEM 8-1

Zee Corporation booked entries for adjustments to investment in Tomline Company:

20X1
(1)* December 31 Investment in Tomline (80% $40,000) .............
32,000
.............

Subsidiary Income ...........................


32,000
To record parents share of subsidiary
income.

(2)* Memo: All calculations are now based on 8,800 shares.


20X2
July 1

.............

Investment in Tomline (80% $25,000) .............


20,000
Subsidiary Income ...........................
20,000
To record parents share of subsidiary
income for one-half year.

20X2
(3)* July 1
...........
.......

Investment in Tomline .............................


10,720
Paid-In Capital in Excess of Par ............
10,720
To adjust investment for subsidiary sal

e
of stock to noncontrolling interest.

20X2
(4)* December 31 Investment in Tomline ........................................
16,000
Subsidiary Income ...........................
16,000

.............

To record 64% parent share of subsidiar


y
income for one-half year.

*Calculations are on page 431.

429
----------------------- Page 14-----------------------

Ch. 8Problems

Problem 8-1, Continue


d

Zee Corporation booked entries for adjustments to investment in Sandel Company:

20X1
(5)* July 1
.............
..............

Investment in Sandel .............................


9,000
Subsidiary Income ..........................
9,000
To record 60% parent share of subsidia

ry
income for one-half year.

20X1
(6)* July 1
.............

Investment in Sandel .............................


70,300

..

Retained Earnings (decrease in equity) ...........


3,700

......................

Cash .......................................
74,000
To record purchase of 3,700 additional
subsidiary shares.

20X1
(7)* December 31 Investment in Sandel .........................................
.
9,300
..............

Subsidiary Income ..........................


9,300
To record 62% parent share of subsidia

ry
income for one-half year.

20X2

(8)*January 1
..............
.............

Retained Earnings ................................


10,335
Investment in Sandel .......................
10,335
To record decrease in equity due to
treasury stock purchase.

(9)* December 31 Investment in Sandel .........................................

28,933
Subsidiary Income ..........................
28,933

..............

To record parents share of subsidiary


income.

*Calculations are on page 431.

430

----------------------- Page 15-----------------------

Ch. 8Problems

Pr
oblem 8-1, Concluded

Schedules to Determine Zee Corporati


ons Adjustments to Its Investment

Change in

Total
Total

Controlling

Change in
Parents
Controlling
Interest
Investment

Subsidiary

Equity

Subsidiary
Subsidiary
Shares
Equity

Parents
Share of
Shares
Equity

Tomline

January 1, 20X1, Balances .........


80%
...........
000
............

10,000
$220,000

8,000
$176,

20X1 Income ...............................


80
$40,000
,000 (1)
$32,000

10,000
260,000

8,000
208

December 31, 20X1, Stock Dividend


80
...........
,000
............

11,000
260,000

8,800
208

JanuaryJune 20X2, Income ......


80
25,000
00 (2)
20,000

11,000
285,000

8,800
228,0

July 1, 20X2, Stock Sale .............


64
88,000
,720* (3)

13,750
373,000

8,800
238

13,750
398,000

8,800
254,7

......................................... 10,720
JulyDecember 20X2, Income ....
64
25,000
20 (4)
16,000

Sandel

January 1, 20X1, Balances .........


60
...........
,000
............

30,000
400,000

18,000
240

JanuaryJune 20X1, Income ......


60
15,000
00 (5)
9,000

30,000
415,000

18,000
249,0

July 1, 20X1, Stock Sale .............


62
100,000
,300** (6)

35,000
515,000

21,700
319

35,000
530,000

21,700
328,6

30,000
440,000

21,700
318

......................................... 70,300
JulyDecember 20X1, Income ....
62
15,000
00 (7)
9,300
January 1, 20X2, Purchase of
Treasury Stock ......................
72.333
(90,000)
,265***(8)

(10,335)
20X2 Income ...............................
72.333
40,000
,198 (9)
28,933

30,000
480,000

21,700
347

*$373,000 64% = $238,720; balance after $238,720 balance before $228,000


= $10,720 increase.
**$515,000 62% = $319,300; balance after $319,300 balance before $249,000
= $70,300 increase.
$70,300 increase in investment $74,000 paid for new shares = $3,700 dec
rease in Zees equity.
***$440,000 72.333% = $318,265; balance after $318,265 balance before $328,
600 = $10,335 decrease.

431
----------------------- Page 16-----------------------

Ch. 8Problems

432
----------------------- Page 17-----------------------

Ch. 8Problems

PROBLEM 8-2

Bear Corporation purchase of Kelly Company Shares:

Determination and Distribution of Excess Schedule


Company
rent

Pa

NCI

ice

Implied

Pr

Fair Value

(6

Value

0%)

(40%)

Fair value of subsidiary


000
$150,000

$375,000

$225,

Less book value of interest acquired:


Common stock ($10 par)

$200,000

Paid-in capital in excess of par


Retained earnings

100,000

Total equity
$350,000

000

50,000

$350,000

$350,

Interest acquired
60%
40%
Book value
000
$140,000

$210,

Excess of fair value over book value


,000
$ 10,000

$ 25,000

Adjustment of identifiable accounts:

Worksheet
Adjustment
Key
Goodwill

$25,000
debit D

$ 15

Bear Corporation purchase of Samco Company Shares:

Determination and Distribution of Excess Schedule


Company
rent

Pa

NCI

ice

Implied

Pr

Fair Value

(8

Value

0%)

(20%)

Fair value of subsidiary


000
$ 62,500

$312,500

$250,

Less book value of interest acquired:


Common stock ($20 par)

$200,000

Retained earnings

100,000

Total equity
$300,000

000

$300,000

$300,

Interest acquired
80%
20%
Book value
000
$ 60,000

$240,

Excess of fair value over book value


,000
$
2,500

$ 12,500

Adjustment of identifiable accounts:

Worksheet
Adjustment
Key
Goodwill

$12,500
debit D

433

$ 10

----------------------- Page 18-----------------------

Ch. 8Problems

Problem 8-2, Continued

*Entry to convert investment in Kelly Company to simple equity method as of Dece


mber 31,
20X3:

Investment in Kelly .....................................................


........
78,750
Additional Paid-In Capital in Excess of ParBear
Corporation ..........................................................
12,750

..........

Retained Earnings ................................................


91,500

......

*Entry to convert investment in Samco Company to simple equity method as of Dece


mber 31,
20X3:

.....

Investment in Samco .....................................................


78,500
Additional Paid-In Capital in Excess of ParBear
Corporation ..........................................................
9,000

..........
......

Retained Earnings ................................................


87,500

*Calculations are from the following two schedules.

434
----------------------- Page 19-----------------------

Ch. 8Problems

Problem 8-2, Continued

Schedules of Equity Adjustments f


or January 1, 20X1December 31, 20X3

Adjustments

Reflected

an Increase to
Controlling
Additional

in
Parents
Retained

Total
Share of

Increase in
Total
Paid-In Capital
Subsidiary
in Excess

Kelly Common Stock


Interest
Equity
Earnings
of Par

Subsidiary
Subsidiary

Subsidiary

Equity

January 1, 20X1, Balances ..................


60%
..............
$375,000*
.
............
............

Shares
Equity

Shares
Increase
Held by
Controlling
Parent
Investmen

20,000
12,000
$225,000 ............

JanuaryJune 20X1, Income ...............


60
$
25,000
400,000
$
15,000 $ 15,000

20,000
240,000

12,000

.............................................................
July 1, 20X1, Sale of stock ...................
60
100,000
500,000
60,000** ..........
............

25,000

July 20X1December 20X2, Income ...


60
85,000
,000
51,000 ............

25,000
351,000

15,000

25,000

15,000

December 31, 20X2, Cash dividend ....


60
(25,000)
15,000)
(15,000) ............

585,000

15,000
300,000

560,000

51

336,000

JanuaryJuly 20X3, Income .................


60
30,000
590,000
,000
18,000 ............

25,000
354,000

15,000

July 1, 20X3, Treasury stock purchase


75
(135,000)
12,750) ............

20,000

15,000

455,000

18

341,250***

............................................. $(12,750)
JulyDecember 20X3, Income .............
75
30,000
485,000
,500
22,500 ............

20,000
363,750

15,000
22

Total adjustments .........................................................


................................................................................
......................... $ 91,500 $(12,750)

*From D&D
**Required debit to investment account and credit to Cash for $60,000 to rec
ord additional purchase.
***After (75% $455,000 = $341,250) before $354,000 = $12,750 decrease in equi
ty.

435
----------------------- Page 20-----------------------

Ch. 8Problems

Problem 8-2, Concluded

Schedules of Equity Adjustments


for January 1, 20X1December 31, 20X3

Adjustments

Reflected

an Increase to
Controlling
Paid-In
Increase in
Capital

in

ng

nt

Parents
Retained

Subsidiary
in Excess

Samco Common Stock


Interest
Equity
Earnings
of Par

Total
Share of

Total

Subsidiary

Shares
Increase

Subsidiary
Held by
Subsidiary
Controlli
Shares

Equity

Parent
Investme

Equity

January 1, 20X1, Balances ..........


10,000
8,000
80%
..............
$312,500*
$250,000 ...........
..
............
............
Income, 20X1 ...............................
10,000
80
40,000
352,500
$32,000
$32,000 ............

282,000

December 31, 20X1, Stock dividend


80
..............
...
............
............

8,800
282,000 ..........

JanuarySeptember 20X2, Income


80
22,500
18,000
18,000 ............
October 1, 20X2, Sale of stock ....

11,000
352,500

8,000

11,000
375,000

8,800
300,000

15,000

9,000

60
(3,000)** .........

120,000

495,000

297,000

..................................... $(9,000)**
October 20X2December 20X3,
Income ......................................
15,000
60
62,500
557,500
37,500
37,500 ............

9,000
334,500

Total adjustments .........................................................


................................................................................
......................... $87,500 $(9,000)

*From D&D
**The investment has been increased by $6,000 (cost of the stock purchased by t
he parent), while the controlling share of equity has decreased by
$3,000. The total decrease of $9,000 is deducted from additional paid-in cap
ital in excess of par. The adjustment shown reduces the investment account (and additional paid-in capital in excess of par) to reconcile it with
the parents share of the subsidiary equity.

436
----------------------- Page 21-----------------------

Ch. 8Problems

PROBLEM 8-3

Determination and Distribution of Excess Schedule


Company
nt

NCI

Pare

ce

Value

(20%)

Fair value of subsidiary


0
$175,000

Implied

Pri

Fair Value

(80%

$875,000

$700,00

Less book value of interest acquired:


Common stock ($2 par)

$200,000

Paid-in capital in excess of par

400,000

Retained earnings

100,000

Total equity
$700,000

$700,000

$700,00

Interest acquired
80%
Book value
0

20%
$560,00
$140,000

Excess of fair value over book value


0
$ 35,000

$175,000

$140,00

Adjustment of identifiable accounts:


Amortizat
ion

Worksheet
Adjustment

ear
Building
00

Life

$ 60,000
20

per Y

Key
debit D1

Goodwill

115,000
debit D2
Total

$175,000

437

$3,0

----------------------- Page 22-----------------------

Ch. 8Problems

Problem 8-3, Continued

Pepka Company and Subsidiary Sheck Company


Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X4

Eliminations
Controlling

Consolidated
Consolidated
Trial Balance

and Adjustments
Income

Retained

Balance
Pepka
Cr.

Sheck
Statement

Dr.
NCI

Earnings

Sheet

Cash ...............................................................
179,040
55,000 ...............
.
................
.................
.................
...........
......
.......................................................... 234,040
Accounts Receivable (net) .............................
280,000
190,000 .............
................
.................
.................
......
.......................................................... 470,000
Inventory ........................................................
325,000
175,000 .............

.
...........

(EI)

............. 10,000 ...............

...........

......
.......................................................................
00

490,0

Investment in Sheck Company.......................


700,000 .............
(CVa)
64,000
(
EL)
659,200 ....
.................
...........
......
.................
............. .................
D)
112,000 ....
......
.................
.............
......

(CVb)

................
960
.................
.................

....
(
...........

8,160
.................

....
(adj)
...........

.................
.................

Property, Plant, and Equipment .....................


2,450,000
1,400,000
(D1)
0,000 ......
.................
.................
......

6
...........

....................................................... 3,910,000
Accumulated Depreciation .............................
(1,256,000)
(536,000) ...........
(A)
............... 9,000 ...............
......

...........

.......................................................................
1,000)
Goodwill .........................................................
............. .................
(D2)
115,000
................
.................
.................
......

(1,80

....
.
...........

.......................................................... 115,000
Liabilities ........................................................
(750,000)
(210,000) ...........
.
................
.................
.................
...........
......
....................................................... (960,000)
Common Stock ($10 par)Pepka .................
(1,500,000) .....
.................
..............
.................
.................
....

...
.............

.................................................... (1,500,000)
Paid-In Capital in Excess of ParPepka .......
........... .................
.................
8,160 ...............
.................

......
(CVb)
.............

....
........................................................... (8,160)
Retained EarningsPepka ............................
(375,000) ............
(A)
64,000 ......
.................
(434,200) ..

3,840 (CVa)

.......................................................................
....
............. .................
(adj)
960
.
................
.................
.................
...........
......
.................
Common Stock ($2 par)Sheck ....................
...........
(250,000)
(EL)
..........
.................
(90,000) ..............

......
160,000 .....
............

.......................................................................
Paid-In Capital in Excess of ParSheck .......
...........
(600,000)
(EL)
.........
.................
16,000) ..............

......
384,000 ......
.......... (2

.......................................................................
Retained EarningsSheck ............................
...........
(180,000)
(EL)
(NCI)
............. 63,000
....
(125,640) ..

......
115,200
.............

.......................................................................
............. .................
(A)
................
.................
......
.................

....
.
...........

2,160
.................

Sales ..............................................................
(1,600,000)
(750,000)
(IS)
2
00,000 ....
.............. (2,150,000) .......
.
.................
.......................................................................
Subsidiary Dividend Income ...........................
(23,040) ............
(CY)
............
.................
.................
......
.................

23,040 .....
...........

.......................................................................

438

----------------------- Page 23-----------------------

Ch.
8Problems

Cost of Goods Sold ........................................


1,120,000
450,000
(EI)
00 (IS)
200,000 ...............
.................

10,0
1,380,000 .

.......................................................................
Other Expenses .............................................
405,000
220,000
(A)
3,00
0 ........
........... 628,000 ................
.................
.......................................................................
Dividends Declared ........................................
45,000
36,000 ...............
(CY)
............. 23,040
12,960 ......
............................................................ 45,000

0
.

1,149,360 .
.................

0
.................

1,149,360
................

Consolidated Net Income ........................................................


................................................................................
(142,000) ..............
................
.
.................
To NCI (see distribution schedule) .............................................
.............................................................................
24,120
(24,120) ....
.................
To Controlling Interest (see distribution schedule) ............................
......................................................................
117,880 ...............
(117,880) ..
Total NCI ......................................................................
................................................................................
..................................
(442,800) ...............

(442,800)
Retained EarningsControlling Interest, December 31, 20X4 ........................
................................................................................
.....................
(507,0
80)
(507,080)
Totals .....................................................................
................................................................................
................................................................................
0

439
----------------------- Page 24-----------------------

Ch. 8Problems

Problem 8-3, Concl


uded

Eliminations and Adjustments:

(CVa)
ncome [80%

Convert the investment to the equity method for share of prior i


($180,000 $100,000)].

(CVb)
Convert the investment to the equity method for the result of th
e subsidiary stock sale:

Controlling interest in subsidiary equity after sale


(64% {$780,000 + $250,000 sale + $115,000 goodwill
+ [$60,000 ($3,000 2) = $54,000 building]}) ...............
$767,3

.....................
60

Controlling interest in subsidiary equity before sale


ding)]
9,200

[80% ($780,000 + $115,000 goodwill + $54,000 remaining buil


75

Net increase in paid-in capital in excess of parparent ..........


..................
$
8,160
(CY)

Eliminate intercompany dividends.

(EL)
%).

Eliminate parents share of subsidiary equity (80,000 125,000 = 64

(adj)
Adjust for change in parent amortization for prior years ($3,000
2 years 16% =
$960).
(D)/(NCI) Distribute $112,000 (64% $175,000) excess and $63,000 (36% $175,000) N
CI
adjustment according to the determination and distribution of ex
cess schedule.
(1) Building, $60,000 and (2) Goodwill, $115,000.
(A)
Amortize excess for current year and two prior years: Building =
$3,000 per year. Distribute to retained earnings, 64% controlling, 36% NCI.
(IS)

Eliminate intercompany sale of $200,000.

(EI)

Eliminate profit in ending inventory ($50,000 20% = $10,000).

Subsidiary Sheck Company Income Distri


bution

Profit in ending inventory ...............


Internally generated net
Building amortization .....................
income .....................................

$10,000
3,000
$80,000

Adjusted net income ......................

$67,000

NCI share ......................................

NCI ................................................

$24,120

36%

Parent Pepka Company Income Distrib


ution

Internally generated net


income .....................................

$ 75,000

64% Sheck adjusted


income of $67,000 ...................

Controlling interest .........................

42,880

$117,880

440
----------------------- Page 25-----------------------

Ch. 8Problems

PROBLEM 8-4

Determination and Distribution of Excess Schedule


Company
t

NCI

Value

(40%)

Fair value of subsidiary


0
$104,000

Paren

Implied

Pric

Fair Value

(60%

$260,000

$156,00

Less book value of interest acquired:


Common stock ($5 par)
Paid-in capital in excess of par

50,000

Retained earnings

80,000

Total equity
$230,000

$100,000

$230,000

$230,00

Interest acquired
60%
40%
Book value
0
$ 92,000
Excess of fair value over book value
00
$ 12,000

Adjustment of identifiable accounts:

$138,00
$ 30,000

$ 18,0

Worksheet
Adjustment
Key
Goodwill

$ 30,000
debit D

441
----------------------- Page 26-----------------------

Ch. 8Problems

Problem 8-4, Continued

Mitta Corporation and Subsidiary Train Company


Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X3

Eliminations
olling

Consolidated
Consolidated
Trial Balance

Contr

and Adjustments
Income

ined
Mitta
Cr.
nings

Reta

Balance
Train
Statement
Sheet

Dr.
NCI

Ear

Cash ...............................................................
106,200
63,500 ...............
.................
.................
.................
............

.....

.......................................................... 169,700
Accounts Receivable ......................................
113,600
60,000 ...............
.................
.................
.................
............

.....

.......................................................... 173,600
Inventory ........................................................
350,000
80,000 ...............
(EIa)
............... 2,000 ...............
............

.....

.......................................................................
,400
..............
............

.................
600
.................
.................

.................
.................

427

...
(EIb)
.....

Investment in Train Company ........................


......... 280,800 .............
.................
(CY1)
32,000 ......
.................
............
.................
..............

.................
.................

............

.................
4,320 ...............
.................

..............
(EL)
............

.................
(CY2)
231,680 ....
.................

6,400
.................

..
.....
...
(CV)
.....
...
.....
...

..............
............

.................
19,200 ...............
.................

.................
.................

Property, Plant, and Equipment .....................


1,800,000
360,000 .............
.................
.................
.................
............

(D)
.....

.....

....................................................... 2,160,000
Accumulated Depreciation .............................
(600,000)
(89,500) .............
.................
.................
.................
............

.....

....................................................... (689,500)
Goodwill .........................................................
..............
.................
(D)
30,000
.................
.................
.................
............
.................

...
.....
...

..............
.................
.................
.................
............
30,000

.................
.................

.....

Accounts Payable ..........................................


(180,000)
(64,000) .............
.................
.................
.................
............

.....

....................................................... (244,000)
Other Current Liabilities .................................
(26,000)
(8,000) ...............
.................
.................
.................
............

.....

......................................................... (34,000)
Bonds Payable ...............................................
(500,000) ............
.................
.................
.................
.................
............

.....

....................................................... (500,000)
Common Stock ($10 par)Mitta ....................
(1,000,000) .....
.................
.................
.................
.................
..........

.......

.................................................... (1,000,000)
Retained EarningsMitta ..............................
(212,600) ............
(CV)
................
.................
.................
..........
.................

4,320 .
.......
...

..............
.................
(BIa)
.................
.................
(205,628) ..

1,500
.................

..............
.................
(Blb)
.................
.................
............
.................

1,152
.................

...

Common Stock ($5 par)Train .....................


............
(125,000)
(EL)
..............
.................
......(45,000) ..............

.....

.....
80,000 ...
......

.......................................................................
Paid-In Capital in Excess of ParTrain .........
............
(125,000)
(EL)
..............
.................
......(45,000) ..............

.....
80,000 ...
......

.......................................................................
Retained EarningsTrain ..............................
............
(112,000)
(EL)
(NCI)
............. 10,800 ...............
..........
.................

.....
71,680
.......

.......................................................................
...
648
(50,472) .......

..............
.................
(BIb)
.................
.................
........
.................

Sales ..............................................................
(1,950,000)
(600,000)
(ISa)
30,000 ......
.................
.................
............
.................

.....

.......................................................................

442
----------------------- Page 27-----------------------

Ch. 8Problems

.....
............
.................
.................
.......
.................

(ISb)

20,000
(2,500,000)

..........

Subsidiary Income ..........................................


(32,000) ............
(CY1)
32,000
.................
.................
.................
..........
.......
.................

Cost of Goods Sold ........................................


1,170,000
420,000
(EIa)
2,000 (BIa)
............... 1,500 ...............
.......
.................

..........

.......................................................................
............
.......
............
.......
............
.......

.................
(EIb)
30,000 ...............
.................

600
.................

.....
(ISa)
..........

.................
1,800 ...............
.................

.................
.................

.....
(BIb)
..........

.................
1,539,300 .

.....
(ISb)
..........

.................
20,000
.................

443
----------------------- Page 28-----------------------

Ch. 8Problems

Problem 8-4, Continued

Mit
ta Corporation and Subsidiary Train Company
Wor
ksheet for Consolidated Financial Statements
For Year Ended December 31, 20X3
(Concluded)

Eliminations

Consolidat

ed

Controlling

lance

Consolidated

and Adjustments
Retained
Train

NCI

Dr.
Earnings

Trial Ba
Income
Balance
Mitta
Statemen

Cr.
Sheet

Other Expenses .............................................


630,000
130,000 .............
.................
........... 760,000 ................
.................
.......................................................................
Dividends Declared ........................................
10,000 ...............
(CY2)
....... 6,400
3,600 ........

50,000
........

............................................................ 50,000
0
.................

...

360,300
.................

0
360,300 .
.................

Consolidated Net Income ........................................................


................................................................................
(200,700) ..............
.................
.................
To NCI (see distribution schedule) ..........................................
............................................................................
18,432
(18,432) ....
.................
To Controlling Interest (see distribution schedule) .........................
......................................................................
182,268 ...............
(182,268) ..
Total NCI ......................................................................
................................................................................
..................................
(155,304) ...............
(155,304)
Retained EarningsControlling Interest, December 31, 20X3 ........................
................................................................................
.....................
(337,896)
(337,896)
Totals ......................................................................
................................................................................
................................................................................
...
0

Eliminations and Adjustments:


(CV)

Conversion entry for stock sale:


Interest after sale [64% ($262,000 + $30,000 goodwill +

$100,000 proceeds)]
$250,880
Interest prior to sale [60% ($262,000 + $30,000 goodwill
)]
175,200
Increase/(Decrease)
$

75,680
Price paid (4,000 $20)
(80,000)
Total decrease in equity and investment

(4,320)

(CY1)

Eliminate the current-year entries for income.

(CY2)

Eliminate the current-year entries for dividends.

(EL)

Eliminate parents 64% share of subsidiary equity.

(D)/(NCI) Distribute original excess (64% $30,000) and NCI adjustment (3


6% $30,000).
(BIa)

Eliminate profit on Mittas goods in Trains beginning inven

tory
($6,000 25% = $1,500). Distribute to retained earnings.
(ISa)

Eliminate 20X3 sales of $30,000.

(EIa)
Eliminate profit on Mittas goods in Trains ending inventor
y ($8,000 25% = $2,000).
Sales from Train to Mitta:
(BIb)
Eliminate profit on Trains goods in Mittas beginning inven
tory ($6,000 30% = $1,800), allocate 64% and 36%.

444

----------------------- Page 29-----------------------

Ch. 8Problems

(ISb)

Eliminate 20X3 sales of $20,000.

(EIb)
Eliminate profit on Trains goods in Mittas ending inventory ($2,000
30% = $600).

445
----------------------- Page 30-----------------------

Ch. 8Problems

Problem 8
-4, Concluded

Subsidiary Train Company Income


Distribution

Unrealized profit in
Internally generated net
$600

ending inventory ......................


income .....................................
$50,000
Realized profit in
beginning inventory ..................
1,800

Adjusted net income ......................


$51,200
NCI share ......................................
36%

NCI ................................................
$18,432

Parent Mitta Corporation Inco


me Distribution

Unrealized profit in
Internally generated net
2,000

ending inventory ......................


income .....................................

64% Train adjusted


income of $51,200 ...................
32,768
Realized profit in
beginning inventory ..................
1,500

$
$150,000

Controlling interest .........................

$182,268

446
----------------------- Page 31-----------------------

Ch. 8Problems

PROBLEM 8-5

Investment in Webo Company, January 1, 20X1:

Determination and Distribution of Excess Schedule


Company
ent

NCI

ice

Value

0%)

(20%)

Fair value of subsidiary


000
$ 80,000

Implied

Pr

Fair Value

(8

$400,000

Less book value of interest acquired:


Common stock ($50 par)
Retained earnings

Par

$250,000
150,000

$320,

000

Total equity
$400,000

$400,000

$400,

Interest acquired
80%
20%
Book value
,000

$320
$ 80,000

Excess of fair value over book value


0
$
0

447
----------------------- Page 32-----------------------

Ch. 8Problems

Problem 8-5, Continued

Barns Company a
nd Subsidiaries Webo Company and Elcam Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X2

Consoli-

Consolidated

Eliminations
Controlling

dated
Trial B

alance
Income

and Adjustments
Retained
Barns

Balance
We

bo

Elcam
Statement

Dr.
NCI

Cr.
Earnings

Cash ................................................
26,000
165,200 ...............
.......
.................
.............
.............

Sheet

110,000
........

301,200
Accounts Receivable .......................
73,500
105,000 ...............
52,000 ......
.............
.............

85,000
(IA)

211,500
Inventories ......................................
163,000
150,000 ...............
15,000 ......
.............
.............

138,000
(EI)

436,000
Investment in Webo Company
Stock ..........................................
320,000 .......
......
.................
(CVW)
37,333
(ELW)
357,333 ....
.............
.............
.............
..
Investment in Elcam Company
Stock ..........................................
......
.................
................
44,000 ......
.............
.............
.

600,000 .......
(CVE)
..............

.................
....
.............
.................
................ (ELE)
556,000 ..............
.............
.............
..............
.
Investment in Elcam Company
Bonds ........................................
.................
148,000 ..............
................
(B)
148,000 ....
.............
.............
.............
..
Property, Plant, and Equipment ......
525,000
834,000 ................
2,000 ........
.............
.............

700,000
(F1)

2,057,000
Accumulated Depreciation ..............
(325,000)
(240,000)
.......
.................
.............

(402,000)
(F2)
.............

100 ..

(966,900)
Accounts Payable ...........................
(150,500)
(86,900) (IA)
.......
.................
.............

(202,000)
52,000
........
.............

(387,400)
Dividends Payable ..........................
.......
.................
...............
.......
.................
.............
.............

(12,000) .....
........

(12,000)
Bonds Payable ................................
......
(200,000)
(B)
0 ..
.................
.............
.............

(400,000) ......
150,00

(450,000)
Unamortized Bond Discount ...........
.................
.............
800
...............
(B)
600 .................
.............
.............
Capital StockBarns ......................
....
.................
...............
...... .................
.............
.............

....
200

(600,000) ........
..........

(600,000)
Capital StockWebo ......................
.................
(250,000) .............
(ELW)
222,222 ............
.... .................
.............
.............
...............

.............
.................
........ .................
..

.................
....
...............
........
(27,778) ..........
.............

Capital StockElcam .....................


.................
......
...........
(500,000)
(ELE)
400,000 ...........
..... .................
(100,000)
...............

Paid-In Capital in Excess of


ParBarns ................................
.................
...........
.................
...............
(CVE)
31,000 ..............
.............
.............

......

(31,000)
Paid-In Capital in Excess of
ParElcam ................................
.................
......
...........
(70,000)
(ELE)
56,000
..........
.....
.................
(14,000)
...............

Retained EarningsBarns ..............


(302,200) .........
...
.................
(CVE)
75,000
(CVW)
40,000 ......
.............
.............
...............
.................
....
2,667
........
(264,533) ...........

.............
................. (CVW)
.......
.................
.............

Retained EarningsWebo ..............


.................
(200,000) .............
(ELW)
177,778 ............
...
.................
.............
.............
...............
.................
....
.............
.................
...............
........
.......
.................
........ (22,222) ..........
.............
..

448
----------------------- Page 33-----------------------

Ch. 8Pr
oblems

Retained EarningsElcam .............


..............
(125,000)
...............
.................
...............
Dividends DeclaredBarns ............
..........
.................
...............
.................
24,000 ....

.................
...
100,000
(25,000)

(ELE)

24,000 ...
...............
.............

Dividends DeclaredWebo ............


22,500 ..............
(CY2)
20,000 ......
...............

.................
...............
2,500 ....

Dividends DeclaredElcam ...........


..............
10,000
(CY2)
8,000 ........
...............

.................
...............
2,000 ....

...

Treasury Stock (at cost) ..................


48,000 ..............
(ELW)
42,667 ......
...............
Gain on Sale of Equipment .............
............
.................
...............
.................
.
...............

.................
...............
5,333 ....
(2,000)
2,000
............

(F1)
.............

Sales ...............................................
(2,950,
000)
(1,550,000)
(1,750,000) (IS)
......... 385,000
.............
..........
(5,865,000) ....
...................................................
Interest Income on Bonds ...............
(13,000) .............
...............
.................
.
...............

.................
(B)
13,000
.............
............

Dividend Income .............................


............
.................
...............
.................
.
...............

(CY2)
.............

Cost of Goods Sold .........................


000
1,200,000
1,400,000
15,000(IS)
385,000 ...........
...............

(28,000)
28,000
............
2,500,
(EI)
4,730,000

...................................................

449
----------------------- Page 34-----------------------

Ch. 8Problems

Problem 8-5, Continued

Barns Company and


Subsidiaries Webo Company and Elcam Company
Wo

rksheet for Consolidated Financial Statements


For Year Ended December 31, 20X2
(Concluded)

ConsoliEliminations
Controlling
dated

Consolidated

Trial Bala
nce

and Adjustments
Retained
Balance

Income

Barns
Elcam
Statement

NCI

Dr.
Earnings

Webo
Cr.

Sheet

Operating Expenses ........................


280,000
290,500 ...............
100
975,400
.............

405,000
(F2)
...............

Interest Expense .............................


2,500
16,400
...............
12,300
22,800 ..
.............

16,200
(B)
...............

Gain on Bond Retirement ................


........
,100

.................
(2,100) ..

0
1,716,100 .

.............

.................

...............
.............

.........
(B)
2
...............

0
1,716,100
.............
...............

Consolidated Net Income ........................................................


................................................................................
............
(138,900) ..........
.............
...............
To NCI for both Webo and Elcam (see distribution schedule) ....................
........................................................................
17,844
(17,844)
...............
To Controlling Interest (see distribution schedule) ............................
................................................................................
..
121,056 ...........
(121,056)
Total NCI ......................................................................
................................................................................
.............................................
(197,011) ..........

(197,011)
Retained EarningsControlling Interest, December 31, 20X2 ........................
................................................................................
............................
(361,589)
(361,589)
Totals .....................................................................
................................................................................
................................................................................
.....
0

Eliminations and Adjustments:

(CVW)

Convert investment in Webo to equity balance on January 1, 20X2,


80% ($50,000 Retained Earnings increase) ................
$
40,000
Treasury stock purchase:
Equity after sale [4,000/4,500 ($450,000 $48,000)]
$357,333
Equity before sale (80% $450,000) ........................
360,000

.
...............
7)

Decrease in equity .............................................


(2,66

....

Net change in investment account ...............................


$
37,333

(CVE)
:

Convert investment in Elcam to equity balance on January 1, 20X2

........

Change in retained earnings ....................................


$
(75,000)
Change in paid-in capital in excess of par:

.................

Interest prior to sale ....................................


$525,000
Interest after sale {8/10 [$525,000 + ($85 2,000 shares)]}
556,000

31,000

....

Net change to investment account ...............................


$
(44,000)

450
----------------------- Page 35-----------------------

Ch. 8Problems

Problem 8-5, Continu


ed

(CY2)
Eliminate intercompany dividends (4,000/4,500 $22,500 = $20,000
for Webo dividends and 80% $10,000 = $8,000 for Elcam dividends).
(ELW)
Eliminate 4,000/4,500 interest in Webo equity accounts, includi
ng treasury stock
against the investment account.
(ELE)
am account.

Eliminate 80% of Elcam equity accounts against investment in Elc

(B)
Eliminate intercompany interest income and expense. Eliminate b
alance of investment
in bonds against 75% of the bonds payable. The gain on retireme
nt as of the beginning of the year is calculated as follows:

Gain remaining at year-end:


Carrying value of bonds at December 31, 20X2

[($200,000 $800) 75%] ..........................


$149,400

......

Investment in bonds at December 31, 20X2 ...........


148,000
$
1,
400
Gain amortized during the year:
...........

Interest revenue eliminated ...........................


$
13,000
Interest expense eliminated {[($200,000
8%) + ($1,200/3)] 75%} ................................
12,300
700

......
..........
,100

(F1)
(F2)

Gain at January 1, 20X2.........................................


$
2

Eliminate gain on sale of equipment as of June 30, 20X2.


Reduce depreciation on equipment [1/2 ($2,000 10) = $100].

(IS)

Eliminate intercompany sales.

(EI)
Barns

Eliminate profit in ending inventory relating to sales made by


($60,000 25% = $15,000).

(IA)

Eliminate intercompany debt.

Subsidiary Elcam Company Income Distribu


tion

Interest adjustment
Internally generated net
($13,000 $12,300) ................
Income .....................................
Gain on bonds retired ....................

$700
$43,100
2,100

Adjusted net income ......................

$44,500

NCI share ......................................


NCI ................................................

20%

$ 8,900

451

----------------------- Page 36-----------------------

Ch. 8Problems

Problem
8-5, Concluded

Subsidiary Webo Company Income


Distribution

Internally generated net


Income ...............................
$

80,500

Adjusted net income ................


80,500

NCI share ................................


11.11%

NCI ..........................................
8,944

Parent Barns Company Income


Distribution

Unrealized profit in
Internally generated net
,000

ending inventory ......................


income ..................................
$ 30,800

Gain on equipment sale ................


2,000
80% Elcam adjusted
income of $44,500 ................
35,600
88.8888% Webo adjusted
income of $80,500 ................
71,556
Equipment gain realized .............
100

$15

Controlling interest ......................


$121,056

452
----------------------- Page 37-----------------------

Ch. 8Problems

PROBLEM 8-6

Marys investment in John on January 1, 20X2 (9,000 shares):

Determination and Distribution of Excess Schedule


Company
Parent

NCI

Price

Value

Implied
Fair Value
(60%)

(40%)

Fair value of subsidiary


04,000
$136,000

$340,000

Less book value of interest acquired:


Common stock ($10 par)
Paid-in capital in excess of par

$150,000
75,000

$2

Retained earnings

00,000

75,000

Total equity
$300,000

$300,000

$3

Interest acquired
60%
40%
Book value
80,000

$1
$120,000

Excess of fair value over book value


24,000
$ 16,000

$ 40,000

Adjustment of identifiable accounts:

Worksheet
Adjustment
Key
Goodwill

$40,000
debit D

Johns investment in Joan on January 1, 20X3 (5,000 shares):

Determination and Distribution of Excess Schedule


Company
Parent

NCI

Price

Value

Implied
Fair Value
(50%)

(50%)

Fair value of subsidiary


75,000
$ 75,000
Less book value of interest acquired:

$150,000

Common stock ($10 par)

$100,000

Retained earnings

50,000

Total equity
$150,000

$150,000

150,000

Interest acquired
50%
50%
Book value
75,000

$
$ 75,000

Excess of fair value over book value


0 $
0

453
----------------------- Page 38-----------------------

Ch. 8Problems

Problem 8-6, Continued

Marys investment in Joan on January 1, 20X4 (4,000 shares plus effective control
of 5,000
shares):

Determination and Distribution of Excess Schedule


Company
Parent

NCI
Implied

Price

Value

(90%)

(10%)

Fair Value
Fair value of subsidiary
$162,000*
$ 18,000

$180,000

Less book value of interest acquired:


Common stock ($10 par)

$100,000

Retained earnings
Total equity
$180,000
Interest acquired
90%
Book value
$162,000

80,000
$180,000
$180,000
10%
$ 18,000

Excess of fair value over book value


$
0
$
0

January 1, 20X4, market value per share of Joans stock:

$72,000 paid by Mary/4,000 shares acquired = $18 per share

Prior investment was adjusted as follows:


Original cost (Johns investment in Joan) ................................
$75,000
Equity income (50% $30,000 increase in
retained earnings) ...................................................
...........
15,000
Total .....................................................................
.................... $90,000
..

Fair value (5,000 shares $18) .............................................


$90,000

No further adjustment was required.

*4,000 shares acquired by Mary + 5,000 shares owned by John and controlled by Ma
ry = 9,000

total shares (90% of Joans controlling shares); 9,000 shares $18 market value per
share =
$162,000.

454
----------------------- Page 39-----------------------

Ch. 8Problems

Problem 8-6, Continued

Mary Company
and Subsidiaries John Company and Joan Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X4

ConsoliEliminations
Controlling

Consolidated

dated
Trial B

alance

and Adjustments
Retained

Income

Balance

Mary
ohn

Joan
Statement

Dr.
NCI

Cr.
Earnings

Cash ................................................
60,000
30,000
................

Sheet

62,500
........

.......

.................

.............

.............

152,500
Accounts Receivable .......................
55,000
30,000
................
3,000 ........
.............
.............

200,000
(IA)

282,000
Inventory .........................................
80,000
50,000
................
1,500 ........
.............
.............

360,000
(EI)

488,500
Investment in John Company ..........
......
.................
................
33,000 ......
.............
.............

270,000 .......
(CY1)
...............

.................
....
.............
.................
................ (EL1)
213,000 ..............
.............
.............
...............
.................
....
.............
.................
................ (D)
24,000 ..............
.............
.............
...............
Investment in Joan CompanyMary
.....
.................
................
14,000 ......
.............
.............

86,000 ........
(CY2)
...............

.................
....
.............
.................
................ (EL2)
72,000 ..............
.............
.............
...............
Investment in Joan CompanyJohn
.................
107,500 ..............
................
(CY3)
17,500 ......
.............
.............
...............
.................
....
.............
.................
................ (EL3)
90,000 ..............
.............
.............
...............
Property, Plant, and Equipment ......
850,000
350,000 ...............
10,000 ......
.............
.............
Accumulated Depreciation ..............
(377,500)
(121,800)
....... .................
.............

2,250,000
(F1)
3,440,000
(938,000)

(F2)
.............

2,000

(1,435,300)
Intangibles .......................................
.......
.................
...............
........ .................
.............
.............

15,000 ......
........

15,000
Goodwill ..........................................
.................
....
.............
................. (D)
40,000
........
........ .................
.............
.............
40,000
Accounts Payable ...........................
(61,000)
(22,000) (IA)
........ .................
.............

(215,500)
3,000
........
.............

(295,500)
Accrued Expenses ..........................
(4,000)
(1,200)
...............
........ .................
.............
.............

(12,000)
........

(17,200)
Bonds Payable ................................
(500,000)
(300,000)
(100,000) ..............
........
........ .................
.............
.............
(900,000)
Common Stock ($5 par)Mary .......
....
.................
...............
...... .................
.............
.............

(500,000) ........
..........

(500,000)
Paid-In Capital in Excess of
ParMary..................................
...
.................
...............
...... .................
.............
.............

(700,000) .........
..........

(700,000)
Retained EarningsMary ...............
....
.................
...............
...... .................
.............
Common Stock ($10 par)John .....
(150,000) .............
...... .................

(290,000) ........
..........
(290,000)

.................
90,000
..........
(60,000)
...............

(EL1)

Paid-In Capital in Excess of


ParJohn ..................................
(75,000) .............
(EL1)

.................
45,000
..........

......

.................

(30,000)

...............

455
----------------------- Page 40-----------------------

Ch. 8Problems

Retained EarningsJohn ...............


(130,000) .............
(NCI)
16,000 ......
...............
Common Stock ($10 par)Joan .....
...............
(100,000)
................ .................
...
...............

.................
(EL1)
78,000
(68,000)
.................
..
(EL2)
40,000
.............
..........
.................
50,000
(10,000)

.................
.................
(EL3)
................ .................
...............
Retained EarningsJoan ...............
...............
(80,000)
................ .................
...
...............

.................
..
(EL2)
32,000
.............
..........
.................
40,000
(8,000) .

.................
.................
(EL3)
................ .................
.
...............

Sales ...............................................
(1,800
,000)
(500,000)
(300,000)
(IS)
20,000 .....
.......... (2,580,000) ....
...............
...................................................
Gain on Sale of Equipment .............
.................
(10,000)
00
................ .................
.....
...............
Subsidiary IncomeMary ...............
...........
.................
................ .................
...
...............

.................
(F1)
10,0
.............
........

(CY1)
.............

(58,000) .
42,000
..........

.................
16,000
.............
........

.................
.................
(CY2)
................ .................
.....
...............
Subsidiary IncomeJohn ...............
(20,000) .............
................ .................
...
...............

.................
(CY3)
20,000
.............
..........

456
----------------------- Page 41-----------------------

Ch. 8Problems

Problem 8-6, Continued

Mary Company and S


ubsidiaries John Company and Joan Company
Work
sheet for Consolidated Financial Statements
For Year Ended December 31, 20X4
(Concluded)

Consoli-

nsolidated

Eliminations
Controlling
dated

Co
Trial Balanc

e
Income

and Adjustments
Retained
Balance

Mary
Joan
Statement

NCI

Dr.
Earnings

Cost of Goods Sold .........................


350,000
180,000 (EI)
,000
1,681,500
.............

John
Cr.

Sheet

1,170,000
1,500
(IS)
...............

Other Expenses ..............................


525,000
100,000
90,000
................
(F2)
000
713,000
.............
...............

20

2,

Dividends Declared .........................


75,000 ...........
..
.................
................
...............
.................
.............
75,000 ....
5,000 ..............
000 ........
.............

.................
................
(CY1)
.............
...............

1
9,

.........
000 ........

.................
................
(CY2)
.............
...............

........
2,

5,000
.............

.................
.....
.................
..............
0
9,500 ....

0
.............

............... (CY3)
6,500 ....
...............
0
529,500
.............
...............

............
2,500

52

Consolidated Net Income ........................................................


................................................................................
............
(185,500) ..........
.............
...............
To NCI (John and Joan) (see distribution schedule) .............................
..............................................................................
29,000
(29,000)
...............
To Controlling Interest (see distribution schedule) ............................
................................................................................
..
156,500 ...........
(156,500) ...........
Total NCI ......................................................................
................................................................................
.............................................
(198,500) ..........
(198,500)
Retained EarningsControlling Interest, December 31, 20X4 ........................
................................................................................
............................
(371,500)
(371,500)

Totals .....................................................................
................................................................................
................................................................................
.....
0

Eliminations and Adjustments:


(CY1)
Eliminate current-year entries for Marys investment in
John. Income: $70,000 60% = $42,000.
(EL1)

Eliminate Marys interest in Johns equity.

(D)/(NCI)
Distribute the excess and NCI adjustment according to
the determination and distribution of excess schedule.
(CY2)
Eliminate current-year entries for Marys investment in
Joan, $40,000 40% = $16,000.
(EL2)

Eliminate Marys interest in Joans equity.

(CY3)
Eliminate current-year entries for Johns investment in
Joan, $40,000 50% = $20,000.
(EL3)

Eliminate Johns interest in Joans equity.

(F1)

Eliminate gain on sale of machine from Joan to Mary.

(F2)

Adjust depreciation on the machine for 20X4.

(IS)

Eliminate intercompany sale of goods from John to Joan

.
(EI)
Eliminate profit in ending inventory of goods sold by
John to Joan, $5,000 30% = $1,500.
(IA)

Eliminate intercompany payable and receivable due to s

ale.

457
----------------------- Page 42-----------------------

Ch. 8Problems

Problem 8
-6, Concluded

Subsidiary Joan Company Income


Distribution

Gain on sale of machine ...............


,000
Internally generated net

$10

income .....................................
$40,000
Gain on machine realized
through use ..............................
2,000

Adjusted income ............................


$32,000

NCI share ......................................


10%

NCI ................................................
$ 3,200

Subsidiary John Company Income


Distribution

Gross profit in ending


Internally generated net
inventory ..................................

$1,500

income .....................................
$50,000
50% Joan adjusted
income of $32,000 ...................
16,000

Adjusted income ............................


$64,500
NCI share ......................................
40%

NCI ................................................
$25,800

Parent Mary Company Income


Distribution

Internally generated net


income .....................................
0
40% Joan adjusted
income of $32,000 ...................
12,800
60% John adjusted

$105,00

income of $64,500 ...................


38,700

Controlling interest .........................

$156,500

458
----------------------- Page 43-----------------------

Ch. 8Problems

PROBLEM 8-7

Shelby investment in Borner Company on January 1, 20X1:

Determination and Distribution of Excess Schedule


Company
rent

NCI

rice

Value

90%)

(10%)

Fair value of subsidiary

Pa

Implied

Fair Value

$670,000

$603

,000

$ 67,000

Less book value of interest acquired:


Common stock

$200,000

Paid-in capital in excess of par

80,000

Retained earnings

,000

300,000

Total equity
$580,000

$580,000

$580

Interest acquired
90%
10%
Book value
,000

$522
$ 58,000

Excess of fair value over book value


1,000
$ 9,000

$ 90,000

$ 8

Adjustment of identifiable accounts:


Amorti
zation

Worksheet
Adjustment

Year

Life

Plant assets
5,000

per

Key
$ 50,000

10

debit D3

Goodwill

40,000
debit D4
Total

$ 90,000

DeNoma Company investment in Shelby Corporation on January 1, 20X3:

Determination and Distribution of Excess Sch


edule
Company
Parent

NCI

Implied
Price

Value

(60%)

(40%)

Fair Value
Fair value of subsidiary
$ 750,000
$

$1,250,000
500,000

Less book value of interest acquired:


Common stock

500,000

Paid-in capital in excess of par

150,000

Retained earnings

500,000

Plant asset depreciation (2 years


$5,000 90%)
Total equity
$1,141,000

(9,000)
$1,141,000
$1,141,000

Interest acquired
60%
Book value
$ 684,600

40%
$

456,400

Excess of fair value over book value


$
65,400
$
43,600

109,000

Adjustment of identifiable accounts:

Amortization

Worksheet
Adjustment

per Year
Plant assets
$
5,000

Life

Key
$

10

50,000

debit D1

Goodwill

59,000
debit D2
Total

109,000

459
----------------------- Page 44-----------------------

Ch. 8Problems

Problem 8-7, Continued

DeNoma Company
and Subsidiaries Shelby Corporation and Borner Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X4

ConsoliEliminations
Controlling

Consolidated
dated
Trial Balance

and Adjustments
Retained

Income
Balance

DeNoma
Shelby
Cr.
Sheet

Borner
Statement

Dr.
NCI

Earnings

Inventory .........................................
75,000
60,000
40,000
...............
(EI)
8,000 ........
.............
............
.
167,000
Other Current Assets ......................
2,000
390,000 ...............
................ .................
.............
.

900,000
............

1,292,000
Plant Assets ....................................
000
800,000
600,000 ...............
(F1)
15,000 ......
.............
.
2,685,000
................
................. (D1)
................ .................
.
...............
................
................. (D3)
................ .................
.
...............

1,200,
............

.................
.
50,000
.............
............
.................
.
50,000
.............
............

Accumulated Depreciation ..............


(300,000)
(200,000)
3,000 ......
.................
.............
.

(450,000)
(F1)
............

(974,000)
................
................. (F2)
(D3)
9,000 ........
.
...............
................
.

.................
11,000 ..............
...............

................
.

.................
10,000 ..............
...............

.................
.
3,000
.............
............
.................
.
................
(A3)
.............
............
.................
.
................
(A1)
.............
............

Investment in Shelby Corporation ...


............
.................
(CY1)
72,000 ......
.
...............

894,000 .
................
.............
............

................

.................
.
................
(EL1)
.............
............

.................
756,600 ..............
...............

................
.................
2)
65,400 ..............
.
...............
Investment in Borner Company .......
828,000 ..............
(Adj)
9,000 ........
.
...............

.................
.
................
(D1, D
.............
............
.................
................
.............
............

................
.

.................
45,000 ..............
...............

................
.

.................
702,000 ..............
...............

................
.................
4)
72,000 ..............
.
...............

.................
.
................
(CY2)
.............
............
.................
.
................
(EL2)
.............
............
.................
.
................
(D3, D
.............
............

Goodwill ..........................................
.................
.
................
................. (D2)
59,000
...............
.................
.............
............
.
99,000
................
................. (D4)
...............
.................
.
...............
Common StockDeNoma ..............
0) .....
.................
................ .................

.................
.
40,000
.............
............
(1,500,00
...............
.............
.............

(1,500,000)
Retained EarningsDeNoma .........
.........
.................
................ .................
(908,560)
................
................. (A1)
................ .................
.
...............
................
.................
................ .................
.
...............
................
................. (BI)
................ .................
.
...............
Common StockShelby .................
(500,000) .............
................
.................
..............

(F1)
.............

(922,000) ...
7,200

.................
.
3,000
.............
............
.................
.
...............
.............
............
.................
.
3,240
.............
............
.................
300,000
(200,000)
.

(EL1)

Paid-In Capital in Excess of


ParShelby ...............................
(150,000) .............
................ .................
...............
Retained EarningsShelby ............
(620,000) .............
(NCI1)
43,600 ......
..............

................
................. (EL1)
................ .................
.
...............

.................
90,000
(60,000)

(EL1)

.................
(Adj)
9,000
.............
(274,540)
.

.................
.
366,600
.............
............

460
----------------------- Page 45-----------------------

Ch. 8Probl
ems

.................
..
...............
.................
(A3)
4,500
................ .................
.............
.............
...............
.................
..
...............
.................
(A1)
2,000
................ .................
.............
.............
...............
.................
..
...............
.................
(BI)
2,160
................ .................
.............
.............
...............
.................
..
...............
.................
(F1)
4,800
................ .................
.............
.............
...............
Common StockBorner .................

.................

....

.............
...............
...............

(200,000)
.................

(EL2)

180,000 .
(20,000)

Paid-In Capital in Excess of


ParBorner ...............................
.............
(80,000)
................ .................
...............

.................
....
72,000
(8,000) ..

(EL2)

461
----------------------- Page 46-----------------------

Ch. 8Problems

Problem 8-7, Continued

DeNoma Company an
d Subsidiaries Shelby Corporation and Borner Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X4
(Concluded)

C
onsoli-

Consolidated

Eliminations
Controlling

dated
Tr
ial Balance
Income

and Adjustments
Retained

Balance
DeNoma

Shelby
Cr.
Sheet

Borner
Statement

Retained EarningsBorner ............


...............
(500,000)
2)
9,000 ........
..............

Dr.
NCI

Earnings

.................
..
(EL2)
450,000 (NCI
(56,900) ..........
.

................
................. (A3)
................ .................
.............
..............
................
................. (BI)
................ .................
.............
...............

.................
1,500
.............

.................
600
.............

Sales ...............................................
(900,000)
(700,000)
(600,000)
(IS)
125,000 ...
.......... (2,075,000) ....
...............
...................................................
Cost of Goods Sold .........................
425,000
400,000 (EI)
(IS)
125,000
1,272,000
...............

................

.................
6,000 ..............

570,000
8,000
.............

.................
............... (BI)
.............
.............

.
.

..............
Expenses ........................................
200,000
150,000 (A1)
(F2)
3,000
562,000
..............
................
................. (A3)
................ .................
.............
..............
Subsidiary Income ...........................
...........
.................
(CY1)
................ .................
.............
..............

205,000
5,000
.............
.................
5,000
.............

.
.
.

(72,000) .
72,000
.............
.
.................

(45,000) .............
...............
.................
..............
0

(CY2)
.............

45,000
.............

.............

0
1,961,600
.............

0
1,961,600 .

..............
Consolidated Net Income ........................................................
................................................................................
............
(241,000) ..........
.............
.
..............
To NCIBorner (see distribution schedule) ........................................
................................................................................
4,300
(4,300) ..
....
...........
To NCIShelby (see distribution schedule) ........................................
...............................................................................
44,680
(44,680)
....
...........
Consolidated Net Income ........................................................
................................................................................
............
192,020 ...........
(192,020) .
..........
Total NCI ......................................................................
................................................................................
.............................................
(668,420) ..........
(668,420)
Retained EarningsControlling Interest, December 31, 20X4 ........................
................................................................................
............................
(1,100,58
0)
(1,100,580)
Totals ....................................................................
................................................................................
................................................................................
......
0

462
----------------------- Page 47-----------------------

Ch. 8Problems

Problem 8-7, Continued

Eliminations and Adjustments:

(Adj)
ngsShelby for

Adjust Investment in Borner Company and Retained Earni


20X1 and 20X2 amortizations of excesses.

(CY1)
of Shelby income.

Eliminate the entry made by DeNoma to record its share

(EL1)
ent) against investment

Eliminate 60% of Shelby equity balances (after adjustm


in Shelby.

(D1, D2)/NCI1)
t according to

Distribute the excess of cost over book value and NCI adjustmen
the determination and distribution of excess schedule

for Investment in Shelby


Corporation.
(A1)

Amortize the excess for the current and past years:

Depreciation:
Current
$5,000

(CY2)

Prior

Total

Shelby: $50,000 10 years ...........


$5,000
$10,000

Eliminate the entry made by Shelby to record its share

of Borner income.
(EL2)
vestment in Borner.

Eliminate 90% of the Borner equity balances against in

(D3, D4)/(NCI2) Distribute the remaining excesses and NCI adjustment [i.e., the
original excess
less the amount of the adjustment made in (Adj)].
(A3)

Amortize excess as follows:


Borner retained earnings, 3 years 10% $5,000 .....
$1,500
Shelby retained earnings, 1 year (2 years are in the

............

adjustment), 90% $5,000 ........................


4,500

.........................

Expense ..............................................
5,000

(IS)
le.

Eliminate the current-year intercompany merchandise sa

(BI)
nning inventory. The

Eliminate Borners gross profit contained in Shelbys begi


correction of Retained Earnings must be prorated betwe

en noncontrolling and
controlling interests:

$7,500 80% = $6,000

..............

Borner: 10% $6,000 ...................................


$
600

.......

Shelby: 40% 90% $6,000 ...............................


2,160

....

DeNoma: 60% 90% $6,000 ...............................


3,240
$6,000

(EI)
ending inventory,

Eliminate the intercompany profit contained in Shelbys


$10,000 80% = $8,000.

(F1)
reduce accumulated

Adjust to remove gain on intercompany sale of assets,


depreciation by the prior-year amortization of the gai

n, and reduce Shelbys


(40%) and DeNomas (60%) retained earnings by the gain r
emaining at the beginning of the year.
(F2)
s.

Recognize current-year gain through use of plant asset

463
----------------------- Page 48-----------------------

Ch. 8Problems

Problem
8-7, Concluded

Subsidiary Borner Company Income


Distribution

Ending inventory profit ..................


$8,000
Internally generated
Depreciation on excess .................
5,000
income .....................................
$50,000
Beginning inventory profit ..............
6,000

Adjusted income ............................


$43,000
NCI share ......................................
10%

NCI ................................................
$ 4,300

Subsidiary Shelby Corporation Inco


me Distribution

Depreciation on excess .................


$5,000
Internally generated
income .....................................
,000
Share of Borner income
(90% $43,000) ......................
38,700
Gain realized through plant
asset use .................................
3,000

$ 75

Adjusted income ............................

$111,700

NCI share ......................................


40%
NCI ................................................

$ 44

,680

Parent DeNoma Company Income D


istribution

Internally generated
income .....................................

$125,

000
Share of Shelby income
(60% $111,700) ....................
67,020

Controlling interest .........................

$192,020

464
----------------------- Page 49-----------------------

Ch. 8Problems

PROBLEM 8-8

Determination and Distribution of Excess Schedule

Determination and Distribution of Excess Schedule


Company
rent

NCI

rice

Value

0%)

(20%)

Fair value of subsidiary


,000
$100,000

Pa

Implied

Fair Value

(8

$500,000

$400

Less book value of interest acquired:


Common stock ($10 par)
Paid-in capital in excess of par
Retained earnings

,000

Total equity
$410,000

$ 50,000
140,000
220,000
$410,000

$410

Interest acquired
80%
20%
Book value
,000
$ 82,000
Excess of fair value over book value
2,000
$ 18,000

$328
$ 90,000

$ 7

Adjustment of identifiable accounts:

Worksheet
Adjustment
Key
Goodwill

$ 90,000
debit D

465
----------------------- Page 50-----------------------

Ch. 8Problems

Problem 8-8, Continued

Pepe Company and Subsidiary Salida Company


Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X2

Consolidated
Consolidated
Trial Balance

Eliminations
Controlling

and Adjustments
Income

Retained

Balance
Pepe
Cr.

Salida
Statement

Dr.
NCI

Earnings

Sheet

Inventory ........................................................
170,000
120,000 .............
(EI)
............... 4,000 ...............
......

...........

.......................................................................
00
Other Current Assets .....................................
216,000
256,000 .............
................
.................
.................
......

286,0

.
...........

.......................................................... 472,000
Investment in Salida Company.......................
400,000 .............
(CV)
(EL)
........... 360,000 ...............
......
.................

32,000
...........

.......................................................................
.................
.................

....
(D)
...........

Investment in Pepe Company ........................


.............
40,000
.................
TS)
40,000 ......
.................
......
.................

....
(
...........

.............
......

.................
72,000 ...............
.................

Land ...............................................................
80,000
70,000 ...............
.
................
.................
.................
...........
......
.......................................................... 150,000
Buildings and Equipment ...............................
400,000
280,000 .............
................
.................
.................
......

.
...........

.......................................................... 680,000
Accumulated Depreciation .............................
(180,000)
(90,000) .............
................
.................
.................
......

.
...........

....................................................... (270,000)
Goodwill .........................................................
....
............. .................
(D)
90,000
.
................
.................
.................
...........
......
............................................................ 90,000
Current Liabilities ...........................................
(98,000)
(74,000) .............
................
.................
.................
......

.
...........

....................................................... ( 172,000)
Long-Term Liabilities ......................................
(250,000)
(100,000) ...........
................
.................
.................
......

.
...........

....................................................... (350,000)
Common Stock ($10 par)Pepe ...................
(100,000) ............
.................
..............
.................
.................
....

...
.............

....................................................... ( 100,000)
Paid-In Capital in Excess of ParPepe .........
(200,000) ............
.................
..............
.................
.................
....

...
.............

....................................................... (200,000)
Retained EarningsPepe ..............................
(350,000) ............
.................
)
32,000 ......
.................
(382,000) ..
Common Stock ($10 par)Salida ..................
...........
(50,000)
(EL)
...........
.................
(10,000) ..............

(CV

......
40,000 ......
............

.......................................................................
Paid-In Capital in Excess of ParSalida .......
...........
(140,000)
(EL)
.........
.................
(28,000) ..............

......
112,000 ......
............

.......................................................................
Retained EarningsSalida ............................
...........
(260,000)
(EL)
(NCI)
............. 18,000
....
(70,000) ....

......
208,000
.............

.......................................................................
Net Sales .......................................................
(640,000)
(350,000)
(IS)
4
0,000 ......
.......... (950,000) .............
..
.................
.......................................................................
Cost of Goods Sold ........................................
360,000
200,000
(EI)
,000
(IS)
40,000 ...............
.
.................

4
524,000 ...

.......................................................................

466
----------------------- Page 51-----------------------

Ch. 8Problems

Operating Expenses .......................................


160,000
90,000 ...............
.................
........... 250,000 ............
....
.................
.......................................................................
Dividend Income ............................................
(8,000)
(2,000)
(CY1) 8,000 ........
.........
.................
.................
..........
.......
.................
....
.............
.................
(CY2)
.................
.................
.......
.................

2,000
.................

..........

Dividends DeclaredPepe ............................


40,000 .............
.................
Y2)
2,000 ........
.................
38,000 ......

(C

Dividends DeclaredSalida ..........................


............
10,000
.................

.....
(C

Y1)
..

8,000 ........
.................

2,000 ......

Treasury Stock ...............................................


.............
.................
(TS)
40,000
.................
.................
.................
.......

....
..........

............................................................ 40,000
Total ...............................................................
0
0
576,000
576,000 ....
.................
..........
.......
.................
Consolidated Net Income ........................................................
................................................................................
(176,000) ..............
..........
.......
.................
To NCI (see distribution schedule) .........................................
.............................................................................
12,000
(12,000) .
...
.................
To Controlling Interest (see distribution schedule) ........................
.......................................................................
164,000 ...............
(164,000) ..
Total NCI ......................................................................
................................................................................
..................................
(118,000) .............
..
(118,000)
Retained EarningsControlling Interest, December 31, 20X2 ........................
................................................................................
.....................
(
508,000)
(508,000)
Totals .....................................................................
................................................................................
................................................................................
....
0

467
----------------------- Page 52-----------------------

Ch. 8Problems

Problem 8-8, Conc


luded

Eliminations and Adjustments:


(CV)

Convert to the simple equity method as of January 1, 2

(CY1)
inst dividends declared

Eliminate the current-year dividend income of Pepe aga

0X2.

by Salida.
(EL)
the beginning of the

Eliminate 80% of the Salida Company equity balances at


year against the investment account.

(D)
and $18,000 NCI adjust-

Distribute the $72,000 excess of cost over book value


ment to Goodwill.

(IS)
(EI)
inventory of Salida.

Eliminate the intercompany sale and purchase.


Eliminate the intercompany gross profit in the ending

(CY2)
Eliminate the current-year dividend income of Salida a
gainst dividends declared
by Pepe.
(TS)
k account.

Transfer Investment in Pepe Company to a treasury stoc

Subsidiary Salida Company Income Distr


ibution

Internally generated net

income .....................................

$60,000

NCI share ......................................

NCI ................................................

20%

$12,000

Parent Pepe Company Income Distri


bution

Ending inventory profit ..................


Internally generated net
income .....................................

$4,000

$120,000

80% of Salida income ....................

Controlling interest .........................

468
----------------------- Page 53-----------------------

48,000

$164,000

Ch. 8Problems

PROBLEM 8-9

Determination and Distribution of Excess Schedule


Company
arent

NCI

Price

Value

Implied
Fair Value
(80%)

(20%)

Fair value of subsidiary


0,000
$100,000

$500,000

$40

Less book value of interest acquired:


Common stock ($10 par)

$ 50,000

Paid-in capital in excess of par


Retained earnings

0,000

140,000
220,000

Total equity
$410,000

$410,000

$41

Interest acquired
80%
20%
Book value
8,000

$32
$ 82,000

Excess of fair value over book value


72,000
$ 18,000

$ 90,000

Adjustment of identifiable accounts:

Worksheet
Adjustment

Key
Goodwill

$ 90,000
debit D1

469
----------------------- Page 54-----------------------

Ch. 8Problems

Problem 8-9, Continued

Pepe Company and Subsidiary Salida Company


Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X2

Eliminations
Controlling

Consolidated
Consolidated
Trial Balance

and Adjustments
Income

Retained

Balance
Pepe
Cr.

Salida
Statement
Sheet

Dr.
NCI

Earnings

Inventory ........................................................
170,000
120,000 .............
(EI)
............... 4,000 ...............
............
.....
.......................................................................
00
Other Current Assets .....................................
216,000
296,000 .............
...............
.................
.................
.....

286,0

..
............

.......................................................... 512,000
Investment in Salida Company.......................
400,000 .............
(CV)
(EL)
........... 458,333 ...............
.....
.................

32,000
............

.......................................................................
100,000
.................

....
(D
............

.................
.................

....
(D2)
............

Investment in Pepe Company ........................


.............
100,000
.................
R)
100,000 ....
.................
.....
.................

....
(T
............

............. .................
1)
72,000 ......
.....
.................
.............
.....

.................
1,667 ...............
.................

(TR)

Land ...............................................................
80,000
70,000 ...............
..
...............
.................
.................
............
.....
.......................................................... 150,000
Buildings and Equipment ...............................
400,000
280,000 .............
...............
.................
.................
.....

..
............

.......................................................... 680,000
Accumulated Depreciation .............................
(180,000)
(90,000) .............
...............
.................
.................
.....

..
............

....................................................... (270,000)
Goodwill .........................................................
............. .................
(D1)
90,000

....
..

...............
.....

.................

.................

............

............................................................ 90,000
Current Liabilities ...........................................
(98,000)
(74,000) .............
...............
.................
.................
.....

..
............

....................................................... ( 172,000)
Long-Term Liabilities ......................................
(250,000)
(100,000) ...........
...............
.................
.................
.....

..
............

....................................................... (350,000)
Common Stock ($10 par)Pepe ...................
(100,000) ............
.................
.............
.................
.................
...

....
..............

....................................................... ( 100,000)
Paid-In Capital in Excess of ParPepe .........
(200,000) ............
(D2)
...........
.................
.................
...

1,667 ......
..............

....................................................... ( 198,333)
Retained Earnings, January 1Pepe ............
(350,000) ............
.................
)
32,000 ......
.................
(382,000) ..
Common Stock ($10 par)Salida ..................
...........
(60,000)
(EL)
..........
.................
10,000) ..............

(CV

......
50,000 .......
............(

.......................................................................
Paid-In Capital in Excess of ParSalida .......
...........
(230,000)
(EL)
.........
.................
38,333) ..............

......
191,666 ......
............(

.......................................................................
Retained Earnings, January 1Salida ..........
...........
(260,000)
(EL)
(NCI)
............. 18,000
...
(61,334) ....

......
216,667
..............

.......................................................................
Net Sales .......................................................

(640,000)
,000 ......
..
.................

(350,000)
(IS)
40
.......... (950,000) .............

.......................................................................

470
----------------------- Page 55-----------------------

Ch. 8Problems

Cost of Goods Sold ........................................


360,000
200,000
(EI)
4,000
(IS)
40,000 ...............
..
.................

524,000 ..

.......................................................................
Operating Expenses .......................................
160,000
90,000 ...............
.................
........... 250,000 ............
....
.................
.......................................................................
Dividend Income ............................................
(8,000)
(2,000)
(CY2) 8,000 ........
.........
.................
.................
..........
.......
.................
....
.............
.................
(CY2)
.................
.................
.......
.................

2,000
.................

Dividends DeclaredPepe ............................


40,000 .............
.................
Y2)
2,000 ........
.................
38,000 ......

(CY2)
....

10,000
8,000 ........
.................

..........

(C

.................

Dividends DeclaredSalida ..........................

2,000 ....
.....

............
Total ...............................................................
0
0
736,000
736,000 ....
.................
..........
.......
.................
Consolidated Net Income ........................................................
................................................................................
(176,000) ..............
..........
.......
.................
To NCI .....................................................................
................................................................................
............
10,000
(10,000) .
...
.................
To Controlling Interest ....................................................
................................................................................
.....
166,000 ...............
(166,000) ..
Total NCI ......................................................................
................................................................................
..................................
(117,667) .............
..
(117,667)
Total Controlling Retained Earnings ............................................
................................................................................
..........................................
(510,000)
(510,000)
Totals .....................................................................
................................................................................
................................................................................
....
0

471
----------------------- Page 56-----------------------

Ch. 8Problems

Problem 8-9, Conclu

ded

Eliminations and Adjustments:

(CV)
ease in retained

Convert 80% interest to equity method, 80% $40,000 incr


earnings.

(TR)

Transfer investment in parent to investment in subsidia

(CY2)

Eliminate intercompany dividends paid by parent and sub

ry.
sidiary.
(EL)

Eliminate combined 5/6 ownership in subsidiary.

(D)/(NCI) Distribute excess to goodwill: (D1) is original goodwill; (D2)


is reduction in Pepe
paid-in capital in excess of par*.
(IS)

Eliminate intercompany merchandise sales.

(EI)

Eliminate intercompany profit in ending inventory.

*Analysis of Investment in Pepe:


Equity after swap:
........

Common stock ($10 par) ........................................


$ 60,000

.........

Paid-in capital in excess of par ..............................


230,000

.............

Retained earnings .............................................


260,000

......................

Total .................................................
$550,000

Ownership interest (5,000/6,000) ..............................

5/6
$458,333

.....

Equity prior to swap:


Total above ...................................................
$ 550,000

.................
.......

Less value of shares issued ...................................


(100,000)

......................

Total .................................................
$ 450,000

Ownership interest (4,000/5,000) ..............................

80%
360,000

....

Increase in equity ....................................................


...............
$ 98,333
Value of share exchanged ...............................................
100,000

......
........
1,667)

Increase (decrease) in equity .........................................


$
(

Subsidiary Salida Company Income Distri


bution

Internally generated net


income .....................................

$ 60,000

NCI share ......................................


NCI ................................................

1/6

$ 10,000

Parent Pepe Company Income Distribu


tion

Ending inventory profit ..................


Internally generated net
income .....................................

$4,000

$120,000

5/6 of Salida income ......................

Controlling interest .........................

50,000

$166,000

47
2
----------------------- Page 57-----------------------

Ch. 8Problems

PROBLEM 8-10

Determination and Distribution of Excess Schedule


Company
Parent

NCI

Price

Value

Implied
Fair Value
(75%)

(25%)

Fair value of subsidiary


$111,000*
$ 37,000

$148,000

Less book value of interest acquired:


Common stock ($5 par)

$ 20,000

Paid-in capital in excess of par

10,000

Retained earnings

112,000

Total equity
142,000

$142,000

Interest acquired
75%
Book value
106,500

$142,000
25%
$
$ 35,500

Excess of fair value over book value


4,500
$
1,500

6,000

Adjustment of identifiable accounts:

Worksheet
Adjustment
Key
Goodwill

6,000

debit D

*Last purchase at $51,800/1,400 shares = $37 per share. Fair value = 3,000 share
s $37 =
$111,000

Adjustment to fair value:


Fair value of prior purchase (1,600 shares $37) .......
$59,200
Cost ...........................................................................
...
48,000
Gain ...........................................................................
..
$11,200

473
----------------------- Page 58-----------------------

Ch. 8Problems

Problem 8-10, Continued

Heckert Company and Subsidiary Aker Company


Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X3

Eliminations
Controlling

Consolidated
Consolidated
Trial Balance

and Adjustments
Income

Retained

Balance
H
eckert
Cr.

Aker
Statement

Dr.
NCI

Earnings

Sheet

Cash ...............................................................
38,100
29,050 ...............
.
................
.................
.................
...........
......
............................................................ 67,150
Marketable Securities .....................................
33,000
18,000 ...............

(TS)

............. 18,000 ...............

...........

......
.......................................................................

33,00

0
Trade Accounts Receivable ...........................
210,000
88,000 ...............
(IA)
............... 8,000 ...............
......

...........

.......................................................................
00
Allowance for Doubtful Accounts ....................
(6,800)
(2,300) ...............
................
.................
.................
......

290,0

.
...........

........................................................... (9,100)
Intercompany Receivables .............................
24,000 .............
.................
IA)
24,000 ......
.................
......
.................

(
...........

Inventories .....................................................
275,000
135,000 .............
(EI)
............... 5,400 ...............
......

...........

.......................................................................
00
Machinery and Equipment .............................
514,000
279,000 .............
(F1)
........... 800
.................
......

404,6

...........

.......................................................... 792,200
Accumulated Depreciation .............................
(298,200)
(196,700) ...........
................
.................
.................
......

.
...........

....................................................... (494,900)
Investment in Aker Company (at cost) ...........
99,800 .............
(Adj)
(EL)
........... 106,500 ...............
......
.................

11,200
...........

.......................................................................
.............
......

.................
4,500 ...............
.................

.................
.................

....
(D)
...........

Patents ...........................................................
35,000 .............
.................
.
................
.................
.................
...........
......
............................................................ 35,000
Goodwill .........................................................
....
.............
.................
(D)
6,000
.
................
.................
.................
...........
......
.............................................................. 6,000
Dividends Payable .........................................
(7,500) ............
(CY2) 750
................
.................
.................
......
(6,750)

.
...........

Trade Accounts Payable ................................


(195,500)
(174,050)
(IA)
4,000 ......
.................
.................
......

2
...........

....................................................... (345,550)
Intercompany Payables ..................................
(8,000) ............
(IA)
.............
.................
.................
......
.................

8,000 ....
...........

Common Stock ($10 par)Heckert ...............


(150,000) ............
.................
..............
.................
.................
....

...
.............

....................................................... ( 150,000)
Common Stock ($5 par)Aker ......................
...........
(22,000)
(EL)
...........
.................
. (5,500) ..............

......
16,500 ......
............

.......................................................................
Paid-In Capital in Excess of ParHeckert .....
(36,000) ............
.................
..............
.................
.................
....

...
.............

......................................................... (36,000)
Paid-In Capital in Excess of ParAker ..........
...........
(14,000)
(EL)
..........
.................
. (3,500) ..............

......
10,500 .......
............

.......................................................................
Retained EarningsHeckert ..........................

(378,000) ............
..............
.................
....
.................

.................
.................

...
.............

474
----------------------- Page 59-----------------------

Ch. 8Problems

....
.............
.................
.................
.................
(378,000) ..............

.................
.................

Retained EarningsAker ...............................


............
(106,000)
(EL)
(NCI)
............... 1,500
.....
(28,000) ....

.....
79,500
............

.......................................................................
Dividends DeclaredHeckert ........................
7,500 .............
.................
Y2)
750 ...........
.................
6,750 ........
Dividends DeclaredAker .............................
...........
4,000
.................
Y1)
3,000 ........
..
.................

(C

......
(C
1,000 ......

Sales and Services ........................................


(850,000)
(530,000)
(IS)
182,000 ....
.............. (1,198,000) ......
..
.................
.......................................................................
Dividend Income ............................................
(3,000) ............
(CY1)
3,000
.................
.................
.................
..........
.......
.................
Other Income .................................................
(9,000)
(3,700)
(F1)
800 ...........
............ (11,900) ...........

....

.................

.......................................................................
Cost of Goods Sold ........................................
510,000
374,000
(EI)
5,400
(IS)
182,000 ...............
..
.................

707,400 ..

.......................................................................
Depreciation Expense ....................................
65,600
11,200 ...............
.................
............. 76,800 ...........
.....
.................
.......................................................................
Administrative and Selling Expenses .............
130,000
110,500 .............
.................
........... 240,500 ............
....
.................
.......................................................................

475
----------------------- Page 60-----------------------

Ch. 8Problems

Problem 8-10, Continued

Hecker
t Company and Subsidiary Aker Company
Worksh
eet for Consolidated Financial Statements
For Year Ended December 31, 20X3
(Concluded)

Eliminations
Controlling
Consolidated
ce

Consolidated
Trial Balan
Income

and Adjustments
Retained
Balance
Aker
NCI

Dr.
Earnings

Cr.
Sheet

Heckert
Statement

Gain on investment ........................................ .................


.................
................. (Adj)
11,200
(11,200)
Treasury Stock (cost) .....................................

.............. (TS)
......
.................

.................
...
...........

18,000
.................
.................

............................................................ 18,000
0
.................

365,650
.................

0
365,650 ....
.................

Consolidated Net Income ........................................................


................................................................................
(196,400) ..............
.................
.................
To NCI (see distribution schedule) ..........................................
............................................................................
10,750
(10,750) ....
.................
To Controlling Interest (see distribution schedule) .........................
......................................................................
185,
650 ...............
(185,650) ..
Total NCI ......................................................................
................................................................................
..................................
(46,750) ...............
(46,750)
Retained EarningsControlling Interest, December 31, 20X3 ........................
................................................................................
.....................
(556,900)
(556,900)
Totals ......................................................................
................................................................................
................................................................................
...
0

Eliminations and Adjustments:


(Adj)

Adjust investment account for gain on prior investment, $

(CY1)

Eliminate intercompany cash dividends.

11,200.

(CY2)
ed by Aker,

Eliminate intercompany dividends on shares of Heckert own


1,500 $0.50 = $750 against the dividends payable account.

(EL)
account.

Eliminate 75% of subsidiary equity against the investment

(D)/(NCI) Distribute excess and NCI adjustment to Goodwill, according to


the determination and distribution of excess schedule.
(TS)

Reclassify Akers investment in Heckert as treasury stock a

(F1)

Eliminate gain on machinery sale by Aker.

(IA)

Eliminate intercompany receivables and payables.

(IS)

Eliminate intercompany merchandise sales of $182,000.

t cost.

(EI)
Eliminate ending inventory profit on Aker sales to Hecker
t, 30% $18,000 = $5,400.

476
----------------------- Page 61-----------------------

C
h. 8Problems

Problem 8-1
0, Concluded

Subsidiary Aker Company Income D


istribution

Gain on sale of equipment ............


800
Internally generated net

Unrealized profit in
income .....................................
$ 8,000
5,400

ending inventory ......................


Gain on investment in Heckert ......
11,200

Adjusted net income ......................


$ 43,000

NCI share ......................................


25%

NCI ................................................
$ 10,750

Parent Heckert Company Income D


istribution

Internally generated net

income .....................................

$153,400

75% Aker adjusted


income of $43,000 ...................
32,250

Controlling interest .........................

477
----------------------- Page 62-----------------------

$185,650