Chapter 8 Test Bank

CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS

Multiple Choice Questions

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1. Which of the following is correct? The direct sale of
additional shares to the parent company from a subsidiary

a. decreases the parent’s interest and decreases the

noncontrolling shareholders’ interest.
b. decreases the parent’s interest and increases the
noncontrolling shareholders’ interest.
c. increases the parent’s interest and increases the
noncontrolling shareholders’ interest.
d. increases the parent’s interest and decreases the
noncontrolling shareholders’ interest.

Use the following information in answering questions 2 and 3.

On December 31, 2006, Giant-Petrel Corporation’s Investment in

Penguin Corporation account had a balance of $525,000. The balance
consisted of 80% of Penguin’s $600,000 stockholders’ equity on that
date and $45,000 of goodwill. On January 2, 2007, Penguin increased
its outstanding common stock from 15,000 to 18,000 shares.

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2. Assume that Penguin sold the additional 3,000 shares directly
to Giant-Petrel for $150,000 on January 2, 2007. Giant-Petrel’s
percentage ownership in Penguin immediately after the purchase
of the additional stock is

a. 66-2/3%.
b. 80%.
c. 83-1/3%.
d. 86-2/3%

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3. Assume that Penguin sold the additional 3,000 shares to outside
interests for $150,000 on January 2, 2007. Giant-Petrel’s
percentage ownership immediately after the sale of stock would
be

a. 66-2/3%.
b. 75%.
c. 80%.
d. 83-1/3%.

Use the following information in answering questions 4 and 5.

Bristlebird Corporation purchased an 80% interest in Underbrush

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

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4. If Bristlebird uses a “beginning-of-the-year” sale assumption,
its gain on sale and income from Underbrush for 2006 will be

Gain on Sale Income from Underbrush

a. $5,700 $59,400.
b. $5,700 $62,700.
c. $9,000 $59,400.
d. $9,000 $62,700.

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5. If Bristlebird uses the “actual-sale-date” sales assumption,
its gain on the sale and income from Underbrush for 2006 will
be:

Gain on Sale Income from Underbrush

a. $21,360 $59,400
b. $21,360 $62,700
c. $26,640 $59,400
d. $26,640 $62,700

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

a. $300,300.
b. $300,880.
c. $304,480.
d. $306,100.

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

a. $333,333.
b. $334,311.
c. $336,333.
d. $336,711.

Use the following information for questions 8 and 9.

Button-quail Corporation owned a 70% interest in Savannah Corporation

on December 31, 2006, and Button-quail’s Investment in Savannah
account had a balance of $3,900,000. Savannah’s stockholders’ equity
on this date was as follows:

Capital stock, $10 par value $ 3,000,000

Retained Earnings 2,400,000
Total Stockholders’ Equity $ 5,400,000

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

to Button-quail for $16 each.

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8. What is Button-quail’s percentage ownership in Savannah after
Savannah issues its stock to Button-quail?

a. 76.32%.
b. 80.43%.
c. 82.57%.
d. 83.43%.

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9. Assuming that Savannah has no fixed assets, what is the amount
of goodwill associated with the issuance of shares to Button-
quail?

a. $38,176.
b. $40,232.
c. $41,302.
d. $41,732.

Use the following information for questions 10, and 11.

Great Frigatebird Corporation acquired a 90% interest in Slipstream

Corporation at its $810,000 book value on December 31, 2005. A
summary of the stockholders’ equity for Slipstream at the end of 2005
and 2006 is as follows:
12/31/05 12/31/06
Capital stock, $10 par $ 600,000 $ 600,000
Additional paid-in capital 30,000 30,000
Retained Earnings 270,000 420,000
Total stockholders’ equity $ 900,000 $ 1,050,000

On January 1, 2007, Slipstream sold 10,000 new shares of its $10 par
value common stock for $45 per share.

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10. If Slipstream sold the additional shares to the general public,
Great Frigatebird’s Investment in Slipstream account after the
sale would be

a. $945,000.
b. $1,157,100.
c. $1,225,000.
d. $1,245,000.

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11. If Slipstream sold the additional shares directly to Great
Frigatebird, Great Frigatebird’s Investment in Slipstream
account after the sale would be

a. $1,350,000.
b. $1,395,000.
c. $1,425,000.
d. $1,500,000.

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12. Which of the following is correct about the treatment of
preacquisition earnings on consolidated financial statements?

I. Exclude the subsidiary sales and expenses prior to

acquisition from consolidated sales and expenses.

II. Include the subsidiary sales and expenses prior to

acquisition and deduct preacquisition income as a separate
item.

a. I only.
b. II only.
c. I or II.
d. Neither I nor II.
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13. If a parent company and outside investors purchase shares of a
subsidiary in relation to existing stock ownership (ratably)

a. there will be no adjustment to additional paid-in capital

regardless whether the stock is sold above or below book
value.
b. the transaction will requirement an investment account
adjustment.
c. the transaction will require the elimination of a gain if
it was conducted at economic arm's length.
d. the transaction will require the elimination of a loss if
it was conducted at economic arm's length.

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14. Heron Corporation acquired 40% of WatersEdge Inc.’s common
stock for $400,000 book value on January 1, 2006 when
WatersEdge equity consisted of $500,000 capital stock and
$500,000 retained earnings. On September 1, 2006 Heron bought
an additional 30% interest in WatersEdge for $210,000. In both
cases, Watersedge book value equaled the fair value.

WatersEdge had income of $120,000 earned evenly through 2006

and paid dividends quarterly of $25,000.

The consolidated income statement of Heron Corporation and

Subsidiary for the year 2006 should show pre-acquisition income
of:

a. $ 5,333.
b. $ 8,000.
c. $32,000.
d. $56,000.

Use the following information to answer questions 15 through 18.

Bowerbird Corporation purchased a 70% interest in Stage Corporation

on June 1, 2006 at a purchase price of $390,400. On this date,
Stage’s book values were equal to its fair values except for an
unrecorded copyright, and its stockholders’ equity consisted of
$290,000 of Common Stock and $210,000 of Retained Earnings. All cost-
book differentials were attributed to the copyright, which had an
estimated economic life of ten years.

During 2006, Stage earned $120,000 of net income earned uniformly

throughout the year and paid $6,000 of dividends on March 1 and
another $6,000 on September 1.

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15. Minority interest income for 2006 is

a. $36,000.
b. $32,400.
c. $61,200.
d. $50,000.

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16. Preacquisition income for 2006 is

a. $50,000.
b. $35,000.
c. $44,000.
d. $36,000.

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17. The value of the copyright that is included in Bowerbird’
Investment in Stage account on June 1, 2006 is

a. $ 2,600.
b. $ 5,400.
c. $ 9,600.
d. $10,400.

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18. The amortization expense recorded for the copyright in 2006 is:

a. $315.
b. $560.
c. $815.
d. $960.

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19. The acquisition of treasury stock by a subsidiary above book
value

a. decreases the parent’s share of subsidiary book value and

decreases the parent’s ownership percentage.
b. decreases the parent’s share of subsidiary book value and
increases the parent’s ownership percentage.
c. increases the parent’s share of subsidiary book value and
decreases the parent’s ownership percentage.
d. increases the parent’s share of subsidiary book value and
increases the parent’s ownership percentage.

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20. A stock dividend by a subsidiary causes

a. the parent company investment account to decrease.

b. the parent company investment account to remain the same.
c. the parent company investment account to decrease.
d. any noncontrolling interest equity to increase.

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Exercise 1

At December 31, 2004, the stockholders’ equity of Goshawk Corporation

and its 80%-owned subsidiary, Treetop Corporation, are as follows:

Goshawk Treetop
Common stock, $10 par value $ 20,000 $ 12,000
Retained earnings 8,000 6,000
Totals $ 28,000 $ 18,000

Goshawk’s investment in Treetop’s account balance is equal to the

Treetop book value. Treetop Corporation issued 225 additional shares
of common stock directly to Goshawk on January 1, 2005 at $18 per
share.

Required: Compute the following:

1. Compute the balance in Goshawk’s Investment in Treetop account

on January 1, 2005 after the new investment is recorded.

2. Determine the goodwill (if any) from Goshawk’s new investment in

the 225 Treetop shares.

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Exercise 2

At the beginning of 2006, Starling Corporation held an 80% interest

in Twig Corporation. The investment account balance was $900,000,
consisting of 80% of Twig’s $1,095,000 of net assets and $24,000 of
goodwill.

During 2006, Twig uniformly earned $234,000 and paid dividends of

$37,500 on April 1 and again on October 1. On August 1, 2006,
Starling sold 30% of its investment in Twig for $262,500, thereby
reducing its interest in Twig to 56%.

Required: Compute the following using the actual sales date

assumption:

1. Gain or loss on sale.

2. Income from Twig for 2006.

3. Noncontrolling interest for 2006.

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Exercise 3

At the beginning of 2006, Flycatcher Corporation held a 60% interest

in Lichen Corporation. The investment account balance was $2,100,000,
consisting of 60% of Lichen’s $3,226,666 of net assets and $164,000
of goodwill.

During 2006, Lichen earned $300,000 and paid dividends of $110,000 on

November 1. On October 1, 2006, Flycatcher sold 10% of its investment
in Lichen for $364,000, thereby reducing its interest in Lichen to
54%.

Required: Compute the following using the actual sales date

assumption:

1. Gain or loss on sale.

2. Income from Lichen for 2006.

3. Noncontrolling interest expense for 2006.

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Exercise 4

At December 31, 2005 year-end, Lapwing Corporation’s investment in

Openground Inc. was 200,000 consisting of 80% of Openground’s
$250,000 stockholders’ equity on that date. On April 1, 2006,
Lapwing sold 20% interest (one-fourth of its holdings) in Openground
for $65,000. During 2006, Openground had net income of $75,000 and
on July 1, 2006, Openground paid dividends of $40,000.

Required:

1. Record the journal entries before year-end 2006 assuming the

equity method.

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Exercise 5

On April 1, 2006, Gouldian Corporation paid $120,000 for a 25%

interest in Termite Mound Corporation. On July 1, 2006, Gouldian
acquired an additional 45% (based on the January 1, 2006 number of
Termite Mound shares outstanding) for $236,400. Termite Mound’s
stockholders’ equity on January 1, 2006 consisted of $300,000 of $10
par value Common Stock and $100,000 of Retained Earnings. Termite
Mound’s net income for 2006 was $144,000 earned uniformly throughout
the year.

Required: Calculate each of the following amounts:

1. Gouldian’s income from Termite Mound for 2006.

2. The amount of minority interest income that will appear on the

consolidated income statement of Gouldian and Subsidiary for
2006.

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Exercise 6

Catbird Corporation paid $240,000 on April 1, 2006 for all of the

common stock of Bug Corporation in a business acquisition. Bug’s
stockholders’ equity at April 1 consisted of the $195,000 January 1,
2006 stockholders’ equity of Bug plus first quarter income less
dividends. Dividends are paid quarterly. Any excess cost over book
value acquired is goodwill with a 10-year amortization period.

Additional information:

1. Catbird sold equipment with a 5-year remaining useful life to

Bug on July 1, 2006 for a gain of $10,000.

2. Bug’s accounts payable balance at December 31 includes $5,000

due to Catbird from the sale of equipment.

3. Catbird accounts for its investment in Bug using the equity

method as a one-line consolidation.

Required:

Complete the working papers to consolidate the financial statements

of Catbird and Bug Corporations for the year 2006.

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 Catbird Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Eliminations Non- Consol-
Catbird Bug Debit Credit cntl idated
INCOME STATEMENT
Net Sales $ 500,000 $170,000
Income from
Bug 21,000
Gain on sale of
Equipment 10,000
Cost of sales (230,000) ( 90,000)
Depreciation (113,000) ( 30,000)
Other expenses ( 30,000) ( 10,000)
Preacquisition
Income
Net income 158,000 40,000
Retained
Earnings 1/1 75,000 50,000
Add: Net income 158,000 40,000
Dividends ( 30,000) ( 20,000)
Retained
Earnings 12/31 $ 203,000 $70,000
BALANCE SHEET
Cash 47,000 30,000
Receivables 80,000 50,000
Inventories 120,000 90,000
Equipment-net 80,000 80,000
Investment in
Bug 246,000
Goodwill
TOTAL ASSETS $ 573,000 $250,000
LIAB. & EQUITY
Accounts and
notes payable 140,000 35,000
Capital stock 200,000 100,000
Paid-in capital 30,000 45,000
Retained
Earnings 203,000 70,000
Noncontrolling
Interest
TOTAL LIAB. & $
EQUITY 573,000 $250,000

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Exercise 7

Swallow Corporation paid $62,000 to acquire 100% of Gully

Corporation’s outstanding voting common stock at book value on May 1,
2006. The stockholders’ equity of Gully on January 1, 2006 consisted
of $40,000 Capital Stock and $20,000 Retained Earnings. Gully’s total
dividends for 2006 were $6,000, paid equally on April 1 and October
1. Gully’s net income was earned uniformly throughout 2006.

During 2006, Swallow made sales of $10,000 to Gully at a gross profit

of $3,000. One-half of this merchandise was inventoried by Gully at
year-end, and one-half of the 2006 intercompany sales were unpaid at
year-end 2006.

Swallow sold equipment with a ten-year remaining useful life to Gully

at a $2,000 gain on December 31, 2006. The straight-line depreciation
method is used.

Financial statements of Swallow and Gully Corporations for 2006

appear in the first two columns of the partially completed
consolidation working papers.

Required:

Complete the working papers for Swallow Corporation and Subsidiary

for the year 2006.

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 Swallow Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Eliminations Non- Consol-
Swallow Gully Debit Credit contl idated
INCOME STATEMENT
Net Sales $ 80,000 $40,000
Income from Gully 6,500
Gain on sale of
Equipment 2,000
Cost of sales ( 40,000) ( 15,000)
Depreciation ( 11,000) ( 4,000)
Other expenses ( 12,500) ( 6,000)
Preacquisition
Income
Net income 25,000 15,000
Retained
Earnings 60,000 20,000
Add: Net income 25,000 15,000
Dividends ( 10,000) ( 6,000)
Retained
Earnings 12/31 $ 75,000 $29,000
BALANCE SHEET
Receivables-net 19,000 16,000
Inventories 10,000 8,000
Other assets 10,500 14,000
Land 5,000 5,000
Buildings-net 20,000 15,000
Investment in
Gully 65,500

Equipment-net 40,000 22,000

TOTAL ASSETS $ 170,000 $80,000
LIAB & EQUITY
Accounts payable 16,000 10,000
Other debt 19,000 1,000
Common stock 60,000 40,000
Retained
Earnings 75,000 29,000
Noncontrolling
Interest
TOTAL LIAB. & $
EQUITY 170,000 $80,000

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Exercise 8

Swift Corporation paid $40,000 cash for an 80% interest in the voting
common stock of Weather Front Corporation on July 1, 2005, when
Weather Front’s stockholders’ equity consisted of $30,000 of $10 par
common stock and $15,000 retained earnings. The excess cost over the
book value of the investment was assigned $2,000 to undervalued
inventory items that were sold in 2005, with the remaining excess
being assigned to goodwill. During the last half of 2005, Weather
Front reported $4,000 net income and declared dividends of $2,000,
and Swift reported income from Weather Front of $1,100.

There were no intercompany sales during the last half of 2005, but
during 2006 Swift sold inventory items that cost $8,000 to Weather
Front for $12,000. Half of these inventory items were included in
Weather Front Corporation’s Inventory at December 31, 2006, with
$1,000 unpaid by Weather Front at December 31, 2006.

On January 5, 2006, Swift sold a plant asset with a book value of

$2,500 and a remaining useful life of 5 years to Weather Front for
$4,000. Weather Front Corporation owned the plant asset at year-end.

Swift Corporation uses the equity method to account for its

investment in Weather Front, and the changes in Swift’s Investment in
Weather Front account from
Acquisition until year-end 2006 are as follows:

Investment in Weather Front, July 1, 2005 $ 40,000

Income from Weather Front July 1 – December 31, 2005 1,200
Less: Share of dividends received ( 1,600 )
Investment in Weather Front at December 31, 2005 39,600
Add: Income from Weather Front for 2006 4,800
Less: Dividends received ( 3,200 )
Investment in Weather Front at December 31, 2006 $ 41,200

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

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 Swift Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Weather Eliminations Non- Consol-
Swift Front Debit Credit cntl idated
INCOME STATEMENT
Net Sales $ 60,000 $34,000
Income from 4,800
Weather Front
Gain on sale of
Equipment 1,500
Cost of sales ( 27,000) ( 16,000)
Depreciation ( 5,000) ( 3,000)
Other expenses ( 12,100) ( 5,000)
Noncntl. expense
Net income 22,200 10,000
Retained
Earnings 10,100 17,000
Add: Net income 22,200 10,000
Dividends ( 12,000) ( 4,000)
Retained
Earnings 12/31 $ 20,300 $23,000
BALANCE SHEET
Cash 2,300 7,000
Net Receivables 7,000 5,000
Dividends Rec 800
Inventories 7,000 5,000
Plant assets-net 22,000 43,000
Investment in
Weather Front 41,200

TOTAL ASSETS $ 80,300 $60,000

LIAB. & EQUITY
Accounts payable 17,000 6,000
Dividends
Payable 3,000 1,000
Common stock 40,000 30,000
Retained
Earnings 20,300 23,000
Noncontrolling
Interest
TOTAL LIAB. & $
EQUITIES 80,300 $60,000

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Exercise 9

On September 1, 2006, Warbler Corporation acquired an 80% interest in

Reed Corporation for $700,000. Reed’s stockholders’ equity at January
1, 2006 consisted of $200,000 of Common Stock and $600,000 of
Retained Earnings. The book values of its assets and liabilities were
equal to their respective fair values on this date. All excess
purchase cost was attributed to goodwill.

During 2006, Reed uniformly earned $78,000 and paid dividends of

$9,000 on each of four dates: February 1, June 1, August 1, and
December 1.

Required: Compute the following:

1. Warbler’s income from Reed for 2006.

2. Preacquisition income that will appear on the consolidated

income statement of Warbler Corporation and Subsidiary for 2006.

3. Minority interest income for 2006.

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Exercise 10

At January 1, 2005, the stockholders’ equity of Raven Corporation and

its 60%-owned subsidiary, Trunk Corporation, are as follows:

Raven Trunk
Common stock, $10 par value $ 700,000 $ 400,000
Retained earnings 800,000 50,000
Totals $ 1,500,000 $ 450,000

Trunk’s net income for 2005 was $40,000. Raven’s Investment in Trunk
account balance on December 31, 2005 was equal to its underlying
equity on December 31, 2005. Trunk Corporation issued 10,000
additional shares of common stock directly to Raven on January 1,
2006 at $12 per share.

Required: Compute the following:

1. Compute the balance in Raven’s Investment in Trunk account on

January 1, 2006 after its purchase of the additional Trunk
shares.

2. Calculate any positive or negative goodwill stemming from

Raven’s investment in the 10,000 Trunk shares.

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Solutions

Multiple Choice Questions

1 d

2 c (15,000 shares/18,000 shares) = 83.33%

3 a (12,000 shares/18,000 shares) = 66.67%

4 c Selling price $ 84,000

Book value of interest sold
$300,000 x (20%/80%) = 75,000
Gain on sale $ 9,000

Income from Underbrush

$99,000 x (80% - 20%) = $ 59,400

5 b Selling price $ 84,000

Book value of interest sold:
Beginning balance $ 300,000
Income for 2 months
$99,000 x 1/6 x 80% = 13,200
Adjusted book value 313,200
Percentage of interest sold 20%
Book value applied 62,640 62,640
Gain on sale $ 21,360

Income from Underbrush:

Jan 1 – Mar 1 $16,500 x 80% = $ 13,200
Mar 1 – Dec 31 $82,500 x 60% = 49,500
Income from Underbrush $ 62,700

6 b Selling price $ 92,000

Book value of interest sold:
($350,000 x 20%) 70,000
Gain on sale $ 22,000

Finch’s share of Nest’s

Income: $35,000 x (90%-18%) = $ 25,200

Finch’s Investment account

balance at December 31, 2006:
Jan 1, 2006 balance $ 350,000
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 Less: Book value of interest
sold ( 70,000 )
Plus: Income from Nest 25,200
Less: Dividends $6,000 x 72% ( 4,320 )
Investment account balance at
12/31/2006 $ 300,880

7 b Selling price $ 47,000

Book value of interest sold:
($350,000 x 1/9) 38,889
Gain on sale $ 8,111

Finch’s share of Nest’s

Income: $35,000 x (90%-10%) = $ 28,000

Finch’s Investment account

balance at December 31, 2006:
Jan 1, 2006 balance $ 350,000
Less: Book value of interest
sold ( 38,889 )
Plus: Income from Nest 28,000
Less: Dividends $6,000 x 80% ( 4,800 )
Investment account balance at
12/31/2006 $ 334,311

8 a (210,000 shares + 80,000

shares)/380,000 shares = 76.32%

9 a Savannah’s equity after the

issuance of the new shares
($5,400,000 + $1,280,000) $ 6,680,000
Button-quail’s ownership 76.32%
percentage
Button-quail’s share of
Savannah’s equity now $ 5,098,176
Button-quail’s previous share of
Savannah’s equity ($5,400,000 x
70%) 3,780,000
Savannah’s equity acquired in the
purchase $ 1,318,176
Amount spent to acquire stock 1,280,000
Goodwill purchased $ 38,176

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10 b Slipstream’s stockholders’ equity
prior to the stock issuance $ 1,050,000
Plus: Capital received from new
stock issued 450,000
New stockholders’ equity $ 1,500,000
Great Frigatebird’s ownership 77.14%
percentage
Great Frigatebird’s adjusted
investment in Slipstream $ 1,157,100

11 b Investment balance at 12/31/2006

($1,050,000 x 90%) $ 945,000
Additional investment (10,000
Shares x $45) 450,000
Investment account balance $ 1,395,000

12 b

13 a

14 c $120,000 net income x 2/3 year x $ 32,000

40%

15 a $120,000 x 30% = $ 36,000

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

x 70% $ 35,000

17 c Cost of 70% interest $ 390,400

Book value of interest
Acquired:
January 1 balance $ 500,000
Add: 5 months of income 50,000
Less: Dividends paid
before June 1
( 6,000 )
Total book value at 6/1 544,000
Majority percentage 70%
Book value of interest
Acquired 380,800
Copyright value $ 9,600

18 b From Question 17:

($9,600/120 months) x
7 months 560

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 19 b

20 b

Exercise 1

Requirement 1
Cost of investment ($18,000 x 80%)
$ 14,400
Plus: Purchase of 225 Treetop
shares at $18 on January 1, 2005 4,050
Investment account balance` $ 17,450

Requirement 2
Treetop’s stockholders’ equity at
January 1, 2005 $ 18,000
Plus: Additional capital from the
shares issued 4,050
Total stockholders’ equity after
issuance of the new shares $ 22,050
Goshawk’s percentage
(960 + 225)/1425 = 83%
Goshawk’s share of Treetop’s
equity after issuance $ 18,302
Goshawk’s share of Treetop’s
equity before stock issuance 14,400
Equity acquired in the purchase 4,702
Cost of interest acquired 4,050
Positive goodwill $ 652

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Exercise 2

Preliminary computations
Investment balance, January 1 $ 900,000
Income from Twig ($234,000 x 7/12
x 80%) 109,200
Less: April 1 dividends ($37,500 x
80%) ( 30,000 )

Book value at July 31, 2006 $ 979,200

Requirement 1

Proceeds from sale $ 262,500

Book value of interest sold
($979,200 x 30%) 293,760
Loss on sale $ ( 31,260 )

Requirement 2
Income from Twig from Jan 1
through July 31 (from above)
$109,200 $ 109,200
Income from August 1 – December 31
($234,000 x 5/12 x 56%) 54,600

Income from Twig for 2006 $ 163,800

Requirement 3
Noncontrolling interest expense:
Jan 1 to Jul 31 ($234,000 x 7/12 x
20%) $ 27,300
Aug 1 to Dec 31 ($234,000 x 5/12 x
44%) 42,900
Noncontrolling interest expense $ 70,200

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Exercise 3

Preliminary computations
Investment balance, January 1 $ 2,100,000
Income from Lichen ($300,000 x
9/12 x 60%) 135,000

Book value at September 30, 2006 $ 2,235,000

Requirement 1
Proceeds from sale $ 364,000
Book value of interest sold
($1,965,000 x 10%) 223,500
Gain on sale $ 140,500

Requirement 2
Income from Lichen from Jan 1
through September 30 (from above)
$ 135,000
Income from October 1–December 31
($300,000 x 3/12 x 54%) 40,500

Income from Lichen for 2006 $ 175,500

Requirement 3
Noncontrolling interest expense:
Jan 1 to Sep 30 ($300,000 x 9/12 x
40%) $ 90,000
Oct 1 to Dec 31 ($300,000 x 3/12 x
46%) 34,500
Noncontrolling interest $ 124,500

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Exercise 4

Requirement Debit Credit

April 1
Investment in Openground 18,750
Income from Openground 18,750

Cash 65,000
Investment in Openground 43,750
Gain from sale of investment in 21,250
Openground

July 1
Cash 24,000
Investment in Openground 24,000

December 31
Investment in Openground 33,750
Income from Openground 33,750

Selling price $ 65,000

Book value of interest sold:
Beginning balance $ 200,000
Income for 3 months
$75,000 x 1/4 x 80% = 18,750
Adjusted book value 218,750
Percentage of interest sold 20%
Book value applied 43,750 43,750
Gain on sale $ 21,250

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Exercise 5

Preliminary computations:
Purchase 1:
Purchase price $ 120,000
Book value at April 1st:
Stockholders’ equity at January 1 $ 400,000
Plus: Income through March 36,000
Total book value 436,000
Interest acquired 25%
Book value of interest acquired $ 109,000 109,000
Goodwill $ $ 11,000

Purchase 2:
Purchase price $ $ 236,400
Stockholders’ equity at January 1 $ 400,000
Income through June 30 72,000
Total book value 472,000
Interest acquired 45%
Book value of interest acquired $ 212,400 212,400
Goodwill $ 24,000

Requirement 1
Gouldian’s income from Termite
Mound:
$144,000 x 9/12 x 25% $ 27,000
$144,000 x 6/12 x 45% 32,400

Income from Termite Mound $ 59,400

Requirement 2
Minority interest income:
$144,000 x 30% = $ 43,200

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Exercise 6

Catbird Corporation and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2006
Eliminations Min Consol-
Catbird Bug Debit Credit Int idated
INCOME STATEMENT
Net Sales $ 500,000 $170,000 $670,000
Income from
Bug 21,000 c $ 21,000
Gain on sale of
equipment 10,000 a 10,000
Cost of sales (230,000) ( 90,000) (320,000)
Depreciation (113,000) ( 30,000) b $ 1,000 (142,000)
Other expenses ( 30,000) ( 10,000) ( 40,000)
Preacquisition
income d 10,000 ( 10,000)
Net income 158,000 40,000 158,000
Retained
Earnings 75,000 50,000 d 50,000 75,000
Add: Net income 158,000 40,000 158,000
Dividends ( 30,000) ( 20,000) c 15,000 ( 30,000)
Preacquisition
dividends d 5,000
Retained
Earnings 12/31 $ 203,000 $70,000 $203,000
BALANCE SHEET
Cash 47,000 30,000 77,000
Receivables 80,000 50,000 e 5,000 125,000
Inventories 120,000 90,000 210,000
Equipment-net 80,000 80,000 b 1,000 a 10,000 151,000
Investment in c 6,000
Bug 246,000 d 240,000
Goodwill d 40,000 40,000
TOTAL ASSETS $ 573,000 $250,000 $603,000
LIAB. & EQUITY
Accounts and
notes payable 140,000 35,000 e 5,000 170,000
Capital stock 200,000 100,000 d 100,000 200,000
Paid-in capital 30,000 45,000 d 45,000 30,000
Retained
Earnings 203,000 70,000 203,000
Noncontrolling
interest
TOTAL LIAB. & $ $603,000
EQUITY 573,000 $250,000

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Exercise 7

Swallow Corporation and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2006
Eliminations Min Consol-
Swallow Gully Debit Credit Int idated
INCOME STATEMENT
Net Sales $ 80,000 $40,000 a $ 10,000 $110,000
Income from 6,500 d 6,500
Gully
Gain on sale of
equipment 2,000 c 2,000
Cost of sales ( 40,000) ( 15,000) b 1,500 a $ 10,000 ( 46,500)
Depreciation ( 11,000) ( 4,000) ( 15,000)
Other expenses ( 12,500) ( 6,000) ( 18,500)
Preacquisition
income e 5,000 ( 5,000)
Net income 25,000 15,000 25,000
Retained
Earnings 60,000 20,000 e 20,000 60,000
Add: Net income 25,000 15,000 25,000
Dividends ( 10,000) ( 6,000) d 3,000
e 3,000 ( 10,000)
Retained
Earnings 12/31 $ 75,000 $29,000 $75,000
BALANCE SHEET
Receivables-net 19,000 16,000 f 5,000 30,000
Inventories 10,000 8,000 b 1,500 16,500
Other assets 10,500 14,000 24,500
Land 5,000 5,000 10,000
Buildings-net 20,000 15,000 35,000
Investment in d 3,500
Gully 65,500 e 62,000
Equipment-net 40,000 22,000 c 2,000 60,000
TOTAL ASSETS $ 170,000 $80,000 $176,000
EQUITIES
Accounts payable 16,000 10,000 f 5,000 21,000
Other debt 19,000 1,000 20,000
Common stock 60,000 40,000 e 40,000 60,000
Retained
Earnings 75,000 29,000 75,000
Minority
interest
TOTAL EQUITIES $ 170,000 $80,000 $176,000

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Exercise 8
Swift Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Eliminations Non- Consol-
Swift Weather Debit Credit cntl. idated
Front
INCOME STATEMENT
Net Sales $ 60,000 $34,000 a $ 12,000 $82,000
Income from 4,800 e 4,800
Weather Front
Gain on sale of
Equipment 1,500 c 1,500
Cost of sales ( 27,000) ( 16,000) b 2,000 a $ 12,000 ( 33,000)
Depreciation ( 5,000) ( 3,000) d 300 ( 7,700)
Other expenses ( 12,100) ( 5,000) ( 17,100)
Noncntl. expense $ 2,000 ( 2,000)
Net income 22,200 10,000 22,200
Retained
Earnings 10,100 17,000 f 17,000 10,100
Add: Net income 22,200 10,000 22,200
Dividends ( 12,000) ( 4,000) e 3,200( 800) ( 12,000)
Retained
Earnings 12/31 $ 20,300 $23,000 $20,300
BALANCE SHEET
Cash 2,300 7,000 9,300
Net Receivables 7,000 5,000 h 1,000 11,000
Dividends Rec 800 g 800
Inventories 7,000 5,000 b 2,000 10,000
Plant assets-net 22,000 43,000 d 300 c 1,500 63,800
Investment in e 1,600
Weather Front 41,200 f 39,600
Goodwill f 2,000 2,000
TOTAL ASSETS $ 80,300 $60,000 $96,100
LIAB & EQUITY
Accounts payable 17,000 6,000 h 1,000 22,000
Dividends
Payable 3,000 1,000 g 800 3,200
Common stock 40,000 30,000 f 30,000 40,000
Retained
Earnings 20,300 23,000 20,300
Noncntl Interest
January 1 f 9,400 9,400
Noncntl Interest
December 31 10,600 10,600
TOTAL LIAB. & $ $96,100
EQUITY 80,300 $60,000

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Exercise 9

Cost of investment $ 700,000

Book value acquired:
Stockholders’ equity, Jan 1 $ 800,000
Income Jan 1 – Aug 31
($78,000/12 months x 8 months) 52,000
Preacquisition dividends ( 27,000 )
Book value at September 1 825,000
Interest acquired 80% 660,000
Goodwill $ 40,000

Requirement 1
Income from Reed
Share of Reeds’s net income
($78,000 x 1/3 x 80%) $ 20,800

Requirement 2
Preacquisition income
($78,000 x 80% x 2/3) or
($6,500 x 8 months x 80%) $ 41,600

Requirement 3
Minority interest income
($78,000 x 20%) $ 15,600

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Exercise 10

Requirement 1
Cost of investment ($450,000 x
60%) $ 270,000
Share of Trunk’s income for 2005
($40,000 x 60%) 24,000
Investment in Trunk balance at
December 31, 2005 294,000
Plus: Purchase of 10,000 Trunk
shares at $12 on January 1, 2006 120,000
Investment account balance` $ 414,000

Requirement 2
Trunk’s stockholders’ equity at
January 1, 2006 ($450,000 +
$40,000 of 2005 net income) $ 490,000
Plus: Additional capital from the
shares issued 120,000
Total stockholders’ equity after
issuance of the new shares $ 610,000
Raven’s percentage
(24,000 + 10,000)/50,000 = 68%
Raven’s share of Trunk’s equity
after issuance $ 414,800
Raven’s share of Trunk’s equity
before stock issuance 294,000
Equity acquired in the purchase 120,800
Cost of interest acquired 120,000
Goodwill $ 800

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