Chapter 8-10 Test Bank

Chapter 8 Test Bank
CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS
Multiple Choice Questions
LO1
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
c. increases the parent’s interest and increases the
d. increases the parent’s interest and decreases the
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%
©2009 Pearson Education, Inc. publishing as Prentice Hall

8-1
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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

8-2
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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.

8-3
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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.

8-4
LO1
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.

8-5
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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.

8-6
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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.

8-7
LO3
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.
LO3
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.

8-8
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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.
LO1
Exercise 2
At the beginning of 2006, Starling Corporation held an 80% interest

in Twig Corporation. The investment account balance was $900,000,
consisting of 80% of 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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8-9
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.
LO1
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.

8-10
LO1
Exercise 5
On April 1, 2006, Gouldian Corporation paid $120,000 for a 25%

interest in Termite Mound Corporation. On July 1, 2006, Gouldian
acquired an additional 45% (based on the January 1, 2006 number of
Termite Mound shares outstanding) for $236,400. Termite 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.

8-11
Catbird Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Eliminations Non- Consol-
Catbird Bug cntl idated
Debit Credit
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

8-12
LO2
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.

8-13
Swallow Corporation and Subsidiary
Swallow Gully contl idated
Debit Credit
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
Dividends ( 10,000) ( 6,000)
Retained
Earnings 12/31 $ 75,000 $29,000
BALANCE SHEET
Receivables-net 19,000 16,000
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

8-14
LO2
Exercise 8
Swift Corporation paid $40,000 cash for an 80% interest in the voting
common stock of Weather Front Corporation on July 1, 2005, when
Weather 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.

8-15
Swift Corporation and Subsidiary
Weather Eliminations Non- Consol-
Swift Front cntl idated
Debit Credit
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
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
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

8-16
LO2
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.
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.
LO3
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.
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.

8-17
Solutions
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
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

($350,000 x 20%) 70,000
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

8-18
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

($350,000 x 1/9) 38,889
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

8-19
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

8-20
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

8-21
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

($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

8-22
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
($1,965,000 x 10%) 223,500
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
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

8-23
Exercise 4
Requirement Debit Credit

April 1
Investment in Openground 18,750
Income from Openground 18,750
Cash 65,000
Gain from sale of investment in 21,250
Openground
July 1
Cash 24,000
December 31
Income from Openground 33,750
Selling price $ 65,000

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

8-24
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

8-25
Exercise 6
Catbird Corporation and Subsidiary

Eliminations Min Consol-
Catbird Bug Int idated
Debit Credit
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
8-26
Exercise 7
Swallow Corporation and Subsidiary

Eliminations Min Consol-
Swallow Gully Int idated
Debit Credit
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

8-27
Exercise 8
Swift Corporation and Subsidiary
Swift Weather cntl. idated
Front Debit Credit
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
8-28
8-29
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

8-30
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
Chapter 9 Test Bank

8-31
INDIRECT AND MUTUAL HOLDINGS
LO1
1. Pallet Corporation owns 80% of Adelt Corporation and Adelt owns
60% of Bajo Inc. Which of the following is correct?
a. Bajo should not be consolidated because minority interests

hold 52%.
b. Bajo should be consolidated because the 60% of Bajo stock
is held in the affiliate structure.
c. Pallet has 8% indirect ownership of Bajo.
d. Pallet has 80% indirect ownership of Bajo.
LO1
2. Page Corporation acquired a 60% interest in Ace Corporation at
a price $40,000 in excess of book value and fair value on
January 1, 2005. On the same date, Ace acquired a 70% interest
in Bader Corporation at a price $30,000 in excess of book value
and fair value. The excess purchase cost paid by Page and Ace
was attributed to goodwill. Separate incomes (excluding
investment income) for the three affiliates for 2005 are as
follows: Page, $500,000, Ace, $300,000, and Bader, $400,000.
Page’s net income for 2005 is
a. $808,000.
b. $848,000.
c. $920,000.
d. $960,000.
Use the following information in answering questions 3, 4, and 5.
Paint Corporation owns 82% of Achille corporation and Achille

Corporation owns 80% of Badrack Corporation. For the current year,
the separate incomes of Paint, Achille, and Badrack are $120,000,
$100,000, and $50,000, respectively.
LO1
3. Noncontrolling interest expense from Badrack is
8-32
a. $9,000.
b. $10,000.
c. $20,000.
d. $40,000.
LO1
4. Noncontrolling interest from Achille is
a. $18,000.
b. $25,200.
c. $36,200.
d. $72,000.
LO1
5. Consolidated net income for Paint Corporation and Subsidiaries
can be determined by the equation:
a. $234,000.
b. $244,800.
c. $260,000.
d. $270,000.
LO1
6. Pabari Corporation owns an 80% interest in Alders Corporation
and Alders owns a 60% interest in Babao Corporation. Both
interests were acquired at book value equal to fair value.
During 2005, Alders sells land to Babao at a profit of $12,000.
Babao still holds the land at December 31, 2005. Profits and
(losses) of the three companies for 2005 are:
Pabari Corporation $180,000

Alders Corporation 72,000
Babao Corporation (30,000)
Consolidated net income and noncontrolling interest (loss),

respectively, for 2005 are
a. $211,200 and ($1,200).
b. $211,200 and ($3,600).
c. $213,600 and ($1,200).
d. $213,600 and ($3,600).

8-33
LO1
7. Pablo Corporation acquired 60% of Abagia Corporation on January
1, 2004, at a cost of $20,000 in excess of book value. Also, on
July 1, 2004, Pablo acquired 60% of Babin Corporation at book
value. On January 1, 2005, Abagia acquired a 20% interest in
Babin at a cost of $10,000 in excess of book value. The excess
purchase costs paid by Pablo and Abagia were attributed to
goodwill.
On July 1, 2005, Pablo sold land with a book value of $20,000

to Abagia for $40,000. The $20,000 unrealized gain is included
in Pablo’s separate income. Separate incomes for the affiliated
companies (excluding investment income) for 2005 are:
Pablo $250,000
Abagia 70,000
Babin 100,000
Consolidated net income for the three affiliates is
a. $304,000.
b. $324,000.
c. $344,000.
d. $364,000.
Use the following information for Questions 8, and 9.
Paisley Corporation owns 90% of Ackers Company. Akers Company owns

60% of Baglin. Paisley’s separate income for the current year is
$540,000. Akers’s separate income is $240,000. Baglin’s separate
income is $150,000.
LO1
8. The formula for the consolidated noncontrolling interest is
calculated as
a. 10% X $240,000.
b. (10% X $240,000) + (6% X $150,000).
c. (10% X $240,000) + (40% X $150,000).
d. (10% X $240,000) + (46% X $150,000).
LO1
9. The formula for consolidated net income is calculated as
a. $930,000 – ($240,000 X 10%)

b. $930,000 – ($240,000 X 10%) – ($150,000 X 40%)
c. $930,000 – ($240,000 X 10%) – ($150,000 X 46%)
d. $930,000 – ($240,000 X 10%) – ($150,000 X 40%)
– ($150,000 X 10% X 50%)

8-34
LO1
10. Paglia Corporation owns 80% of Aburn Corporation and has
separate income of $200,000 for 2005. Aburn Corporation has
separate income of $100,000 and owns 70% of the outstanding
stock of Badley Corporation. Badley Corporation has separate
income of $80,000. The correct amount of consolidated net
income is
a. $324,800.
b. $328,800.
c. $344,800.
d. $344,800.
Use the following information for Questions 11, 12, and 13.
Pace Corporation owns 70% of Abaza Corporation and 60% of Babon

Corporation. Abaza Corporation owns 20% of Babon Corporation. Pace’s
investment in Abaza was consummated in one transaction at a purchase
price $20,000 in excess of the book value. Pace’s purchase of Babon
was made in one transaction at a price $30,000 above book value.
Abaza’s investment in Babon was completed in one transaction at a
purchase price $10,000 in excess of the book value. The purchase
price differential for all three investments was attributable to
goodwill. Pace’s separate income for the current year is $100,000.
Abaza’s separate income is $190,000, which includes a $10,000
unrealized loss on the sale of land to Pace. Babon’s separate income
is $150,000.
LO1
11. The amount of consolidated net income for Pace Corporation and
Abaza for the current year is
a. $341,000.
b. $348,400.
c. $351,000.
d. $355,000.
LO1
12. The amount of noncontrolling interest expense for the current
year is
a. $69,000.
b. $85,000.
c. $95,000.
d. $99,000.
LO1
13. The amount of goodwill in Pace’s consolidated balance sheet is
a. $50,000.
b. $52,000.
c. $58,000.
d. $60,000.

8-35
Use the following information for Questions 14 through 18.
Pahm Corporation owns 80% of the outstanding voting common stock of

Abussi Corporation, which was purchased for $60,000 over Abussi’s
book value. The excess purchase price was attributable to goodwill.
Abussi Corporation owns 60% of the outstanding common stock of Badock
Corporation, which was purchased at book value. The separate incomes
of Pahm, Abussi, and Badock for the year are $200,000, $240,000, and
$260,000, respectively.
LO1
14. Consolidated net income for the current year is
a. $504,800.
b. $516,200.
c. $545,200.
d. $557,200.
LO1
15. The amount of income for the current year assigned to the
minority shareholders of Badock Corporation is
a. $100,000.
b. $104,000.
c. $120,000.
d. $140,000.
LO1
16. The amount of income for the current year assigned to the
minority shareholders of Abussi Corporation is
a. $48,000.
b. $53,200.
c. $74,000.
d. $79,200.
LO1
17. The amount of income assigned to the noncontrolling interest in
the current year’s consolidated income statement is
a. $142,800.
b. $154,800.
c. $183,200.
d. $195,200.
LO1
18. The net income recorded on the books of Pahm Corporation for
the current year is
a. $504,800.
b. $516,800.
c. $545,200.
d. $557,200.

8-36
Use the following information for Questions 19 and 20.
Paiva Corporation owns 80% of Ackroyd Corporation’s outstanding

common stock and Ackroyd owns 80% of the outstanding common stock of
Bailey Corporation. Bailey Corporation owns 10% of the outstanding
common stock of Ackroyd Corporation. The separate incomes for the
three affiliated companies for the year ended December 31, 2005
(excluding investment income) are as follows: Paiva Corporation,
$100,000, Ackroyd Corporation, $50,000, and Bailey Corporation,
$30,000.
Notations for question 19 are:

P = Income of Paiva on a consolidated basis
A = Income of Ackroyd on a consolidated basis
B = Income of Bailey on a consolidated basis
LO2
19. The equation, in a set of simultaneous equations, that computes
Paiva Corporation is
a. P = $50,000 + .8B.
b. P = $30,000 + .2A.
c. P = $100,000 + .2A.
d. P = $100,000 + .8A.
LO2
20. Ackroyd’s noncontrolling interest in the total consolidated
income for 2005 is
a. $ 7,609.
b. $ 8,044.
c. $15,652.
d. $23,696.

8-37
LO1
Exercise 1
Paice Corporation owns 80% of the voting common stock of Accardi

Corporation and 60% of the voting common stock of Badger Corporation.
Accardi owns 20% of the voting common stock of Badger. There are no
cost-book differentials to consider. The separate incomes of these
affiliated companies for 2005 are:
Paice $300,000
Accardi 160,000
Badger 120,000
Required:
Calculate consolidated net income for Paice Corporation and

Subsidiaries for 2005.

8-38
LO1
Exercise 2
Pacini Corporation owns an 80% interest in Abdoo Corporation,

acquired on January 1, 2004 for $700,000 when Abdoo’s stockholders’
equity consisted of $600,000 of Capital Stock and $200,000 of
Retained Earnings.
Abdoo Corporation acquired a 60% interest in Bach Corporation on July

1, 2004 for $180,000 when Bach had Capital Stock of $200,000 and
Retained Earnings of $50,000. On January 1, 2005, Abdoo acquired a
70% interest in Cabo Corporation for $270,000 when Cabo had Capital
Stock of $250,000 and Retained Earnings of $100,000.
No change in outstanding stock of any of the affiliated companies has

occurred since the investments were made. All cost-book differentials
are goodwill. The stockholders’ equity section of the separate
balance sheets of Abdoo, Bach, and Cabo at December 31, 2005 are as
follows:
Abdoo Bach Cabo

Capital Stock $ 600,000 $ 200,000 $ 250,000
Retained Earnings 280,000 140,000 130,000
Total stockholders’ equity $ 880,000 $ 340,000 $ 380,000
Required:
1. Compute the amount at which goodwill should be shown in the

consolidated balance sheet of Pacini Corporation and
Subsidiaries at December 31, 2005.
2. Pacini and Abdoo have applied the equity method correctly.

Determine the balances of the three investment accounts at
December 31, 2005.

8-39
LO1
Exercise 3
Paik Corporation owns 80% of Acdol Corporation and 60% of Ben

Corporation. Acdol Corporation owns 10% of Ben Corporation. All
subsidiary investments were acquired at book value equal to fair
value. Separate incomes (excluding investment income) of the
affiliated companies for 2005 are:
Paik: $600,000 which includes $60,000 unrealized losses on inventory

items sold to Ben
Acdol: $360,000
Ben: $340,000 which includes $100,000 unrealized profit on land

sold to Acdol
Required:
Determine consolidated net income and noncontrolling interest expense

for Paik Corporation and Subsidiaries for 2005.
LO1
Exercise 4
Packer Corporation owns 100% of Abel Corporation, Abel Corporation

owns 95% of Bacon Corporation and Bacon Corporation owns 80% of Cab
Corporation. The separate incomes of Packer, Abel, Bacon, and Cab are
$300,000, $100,000, $200,000, and $300,000, respectively. All of the
investments were made at times when the investee’s book values were
equal to their fair values.
Required:
Determine the consolidated net income and noncontrolling interest

expense for Packer Corporation and Subsidiaries for the current year.

8-40
LO1
Exercise 5
On January 1, 2005 Paki Inc. bought 75% interest in Adam Corporation.

At the time of purchase, Adam owned 80% of Baird Company and 10% of
Castle Corporation. In all acquisitions the book value equals the
fair value. Separate earnings for the three affiliates for 2005 are
as follows:
Separate Dividends
Earnings
Paki Company $ $400,000 $150,000
Adam Inc (50,000 ) 90,000
Baird Company 100,000 35,000
Castle Company 225,000 80,000
Required:
Compute consolidated net income and noncontrolling interest expense

for Paki for 2005.
LO2
Exercise 6
Paco Corporation owns 90% of Aber Corporation, Aber Corporation owns

85% of Back Corporation, and Back Corporation owns 5% of Aber
Corporation. The separate incomes (excluding investment income), of
Paco, Aber, and Back are $100,000, $40,000, and $55,000,
respectively.
Required:
Calculate revised net incomes for Paco, Aber, and Back by including
the correct amount of investment income for each company. Use the
conventional method for your solution.

8-41
LO2
Exercise 7
Paine Corporation owns 90% of Achan Corporation, Achan Corporation

owns 85% of Badge Corporation, and Badge Corporation owns 5% of Achan
Paine, Achan, and Badge are $400,000, $160,000, and $220,000,
respectively.
Required:
Calculate the consolidated net income for Paine Corporation and its
subsidiaries, Achan, and Badge. Use the treasury stock method for
your solution.
LO2
Exercise 8
Separate earnings and investment percentages for the three affiliates

for 2005 are as follows:
Separate Percentage Percentage

Earnings Interest in Interest
Acres in Bain
Palace Company $ 450,000 80%
Acres Inc 200,000 70%
Bain Corporation 160,000 10%
Required:
Compute consolidated net income for Palace for 2005.

8-42
LO2
Exercise 9
Padhy Corporation owns 80% of Abrams Corporation, Abrams Corporation

owns 60% of Bacud Corporation, and Bacud Corporation owns 10% of
Padhy Corporation. The separate incomes (excluding investment
income), of Padhy, Abrams, and Bacud are $300,000, $100,000, and
$80,000, respectively.
Required:
Calculate the consolidated net income for Padhy Corporation and its
subsidiaries, Abrams and Bacud. Use the conventional method for your
solution.
LO2
Exercise 10
Padua Corporation owns 80% of Able Corporation, Able Corporation owns

60% of Baden Corporation, and Baden Corporation owns 10% of Padua
Padua, Able, and Baden are $300,000, $100,000, and $80,000,
respectively.
Required:
Calculate the consolidated net income for Padua Corporation and its
subsidiaries, Able and Baden. Use the treasury stock method for your
solution.

8-43
SOLUTIONS
1 b
2 b
Page Ace Bader

Separate incomes $ 500,000 $ 300,000 $ 400,000
Allocate 70% of Bader to Ace
280,000 ( 280,000 )
Allocate 60% of Ace to Page 348,000 ( 348,000 )
Page’s net income $ 848,000
Noncontrolling interest $ 232,000 $ 120,000
expense
3 b
From Badrack: .20 x $50,000 = $ 10,000
4 b
From Achille: (.18)x[$100,000 + (.80)x($50,000)] $ 25,200
5 a

From Badrack: .20 x $50,000 = $ 10,000
From Achille: (.18)x[$100,000 + (.80)x($50,000)] $ 25,200
Total minority income $ 36,200
Combined separate incomes $ 270,000

Less: Noncontrolling interest expense ( 36,200 )
Consolidated net income $ 234,800

8-44
6 d Noncontrolling interest net loss: $8,400 + ($12,000) =
($3,600)
Pabari Alders Babao

Separate incomes $ 180,000 $ 72,000 $( 30,000 )
Less: Unrealized profit on
land ( 12,000 )
Subtotal $ 180,000 $ 60,000 $( 30,000 )
Allocate Babao’s net loss to
Alders ($30,000) x 60% ( 18,000 ) 18,000
Allocate 80% of Alders
income to Pabari 33,600 ( 33,600 )
Noncontrolling interest $ 8,400 $( (12,000 )
expense
7 c
Pablo Abagia Babin

Less: Unrealized profit on
land ( 20,000 )
Separate realized incomes $ 230,000 $ 70,000 $ 100,000
Allocate Babin’s income:
60% to Pablo 60,000 ( 60,000 )
20% to Abagia 20,000 ( 20,000 )
Allocate Abagia’s net income
$90,000 x 60% 54,000 ( 54,000 )

expense
8 d
9 c

8-45
10 a
Paglia Aburn Badley

Allocate Badley’s income:

70% to Aburn 56,000 ( 56,000 )
Subtotal $ 200,000 $ 156,000 $ 24,000
Allocate Aburn’s income:
80% to Paglia 124,800 ( 124,800 )
expense
11 c
Pace Abaza Babon
Plus: Unrealized loss on
land sale to Pace 10,000
Separate realized incomes $ 100,000 $ 200,000 $ 150,000
Allocate Babon’s income:
60% to Pace 90,000 ( 90,000 )
20% to Abaza 30,000 ( 30,000 )
Subtotal 190,000 230,000 30,000
Allocate Abaza’s net income
to Pace $230,000 x 70% 161,000 ( 161,000 )

expense
12 d From Question 11: $69,000 + 30,000 = $99,000
13 d
14 b $200,000 + (80%)x[$240,000 + (60%)x(260,000)] =

$516,200
15 b 40% x $260,000 = $104,000
16 d (20% x $240,000) + (20% x $156,000) = $79,200
17 c $79,200 + $104,000 = $183,200

8-46
Pahm Abussi Badock
Allocate Badock’s income:
60% to Abussi 156,000 ( 156,000 )
Subtotal $ 200,000 $ 396,000 $ 104,000
Allocate Abussi’s net income
to Pahm $396,000 x 80% 316,800 ( 316,800 )

Noncontrolling interest $ 79 ,200 $ 104,000
expense
18 b Pahm’s separate net income is the same as the

consolidated net income.
19 d
20 b
P = $100,000 + .8A
A = $50,000 + .8B
B = $30,000 + .1P
Computations:
A = $50,000 + .8 x ($30,000 + .1A)

A = $50,000 + $24,000 + .08S
A = $80,435 (rounded)
Noncontrolling interest expense

Ackroyd: $80,435 x 10% outside interest $ 8,044

8-47
LO1
Exercise 1
Paice Corporation and Subsidiaries

Income Allocation Schedule
For the year 2005
Paice Accardi Badger

Separate earnings $ 300,000 $ 160,000 $ 120,000
Allocate Badger’s income:
60% to Paice 72,000 ( 72,000 )
20% to Accardi 24,000 ( 24,000 )
Subtotal $ 372,000 $ 184,000 $ 24,000
Allocate Accardi’s income:
80% to Paice 147,200 ( 147,200 )
expense
LO1
Exercise 2
Requirement 1:
Pacini’s investment in Abdoo:
Goodwill at acquisition $700,000 cost –
($800,000 x 80%) book value $ 60,000
Abdoo’s investment in Bach:

Goodwill at acquisition: $180,000 cost –
($250,000 x 60%) book value acquired 30,000
Abdoo’s investment in Cabo:

Goodwill at acquisition: $270,000 cost –
($350,000 x 70%) book value acquired 25,000
Total goodwill on December 31, 2005 $ 115,000
Requirement 2:
Pacini Abdoo’s books
Equity Equity Equity
in in Bach in Cabo
Abdoo
Investment cost $ 700,000 $ 180,000 $ 270,000
Investors’ share of equity
since acquisition:
Abdoo: ($80,000 x 80%) 64,000
Bach: ($90,000 x 60%) 54,000
Cabo: ($30,000 x 70%) 21,000
Investment account balance $ 764,000 $ 234,000 $ 291,000

8-48
LO1
Exercise 3
Paik Acdol Ben

Plus: Unrealized loss on
inventory sales to Ben 60,000
Less: Unrealized profits
on land sold to Acdol ( 100,000 )
Separate realized incomes 660,000 360,000 240,000
Allocate Ben:
60% to Paik 144,000 ( 144,000 )
10% to Acdol 24,000 ( 24,000 )
Subtotal $ 804,000 $ 384,000 $ 72,000
Allocate Acdol to Paik 307,200 ( 307,200 )
Consolidated net income $ 1,111,200
expense
LO1
Exercise 4
Packer Abel Bacon Cab

Separate incomes $300,000 $100,000 $200,000 $300,000
Allocate Cab’s income: 240,000 (240,000)

80% to Bacon
Subtotal $440,000
Allocate Bacon’s income: 418,000 (418,000)
95% to Abel
Subtotal 518,000
Allocate Abel’s income: 518,000 (518,000)
100 to Packer
Consolidated net income $818,000
Noncontrolling interest $0 $22,000 $60,000

8-49
LO1
Exercise 5
Castle is not consolidated because the ownership percentage is less

than 20% and no evidence of control is given
Paki Adam Baird

Separate incomes $ 400,000 $ (50,000 ) $ 100,000
Allocate Baird 80% 80,000 (80,000 )
Subtotal $ 400,000 $ 30,000 $ 20,000
Allocate Adam 22,500 ( 22,500 )
Consolidated net
income $ 422,500
Minority income $ 7,500 $ 20,000
Noncontrolling interest in Baird $ 20,000

Noncontrolling interest in Adam 7,500
Noncontrolling interest expense $ 27,500

8-50
LO2
Exercise 6
Equations:
P = Income of Paco on a consolidated basis
A = Income of Aber on a consolidated basis
B = Income of Back on a consolidated basis
P = $100,000 + .90A
A = $ 40,000 + .85B
B = $ 55,000 + .05A
Computations:
A = $40,000 + (.85)x($55,000 + .05A)

A = $40,000 + $46,750 + .0425A
A = $90,601
B = $55,000 + (.05)x($90,601)
B = $59,530
P = $100,000 + (.9)x($90,601)
P = $100,000 + $81,541
P = $181,541
LO2
Exercise 7
Equations:
P = Income of Paine on a consolidated basis
A = Income of Achan on a consolidated basis
A = $160,000 + (.85) x ($220,000)

A = $160,000 + $187,000
A = $347,000
P = $400,000 + (90/95) x ($347,000)

P = $400,000 + $328,737
P = $728,737

8-51
LO2
Exercise 8
Equations:
P = Income of Palace on a consolidated basis
A = Income of Acres on a consolidated basis
B = Income of Bain on a consolidated basis
P = $450,000 + .8A
A = $200,000 + .7B
B = $160,000 + .1A
Computations:
A = $200,000 + (.7)x($160,000 + .1A)

A = $200,000 + $112,000 + .07A
A = $335,484
P = $450,000 + (.8)x($335,484)
P = $450,000 + $268,387
P = $718,387
LO2
Exercise 9
Equations:
P = Income of Padhy on a consolidated basis
A = Income of Abrams on a consolidated basis
B = Income of Bacud on a consolidated basis
P = $300,000 + .8A
A = $100,000 + .6B
B = $ 80,000 + .1P
Computations:
P = $300,000 + (.8)x($100,000 + .6B)

P = $300,000 + $80,000 + .48B
P = $300,000 + $80,000 + (.48)x($80,000 + .1P)
P = $380,000 + $38,400 + .048P
P = $439,496

8-52
LO2
Exercise 10
Equations:
P = Income of Padua on a consolidated basis
A = Income of Able on a consolidated basis
A = $100,000 + (.6) x ($80,000)

A = $100,000 + $48,000
A = $148,000
P = $300,000 + (.8) x ($148,000)]

P = $300,000 + $118,400
P = $418,400
Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)

8-53
Chapter 10 Subsidiary Preferred Stock, Consolidated Earnings Per Share, and
Consolidated Income Taxation
Use the following information to answer the question(s) below.
On December 31, 2010, Parminter Corporation owns an 80% interest in the common stock of Sanchez
Corporation and an 80% interest in Sanchez's preferred stock. On December 31, 2010, Sanchez's stockholders'
equity was as follows:
10% preferred stock, cumulative, $10 par value $50,000

Common stock 350,000
Retained earnings 100,000
Total stockholders' equity $500,000
On December 31, 2010, preferred dividends are not in arrears. Sanchez had 2011 net income of $30,000 and only
preferred dividends are declared and paid in 2011. There are no book value/fair value differentials associated
with Parminter's investments.
1) How much should the Parminter's Investment in Sanchez—Common Stock, change during 2011?
A) $5,000
B) $20,000
C) $25,000
D) $30,000
Answer: B
Explanation: B) ($30,000 - $5,000) × 80%
Objective: LO1
Difficulty: Moderate
2) What should be the noncontrolling interest share, common in the consolidated financial statements of
Parminter for the year ending December 31, 2011?
A) $ 5,000
B) $20,000
C) $25,000
D) $30,000
Answer: A
Explanation: A) ($25,000 × 20%)
Objective: LO1

8-54
3) What should be the noncontrolling interest share, preferred in the consolidated financial statements of
Parminter for the year ending December 31, 2011?
A) $1,000
B) $2,000
C) $4,000
D) $5,000
Answer: A
Explanation: A) ($5,000 × 20%)
Objective: LO1
4) A subsidiary has dilutive securities outstanding that include convertible bonds payable. The bonds are
convertible into the parent's common stock. When calculating consolidated diluted earnings per share, the
convertible bonds will affect
A) the numerator of consolidated diluted EPS only.
B) the denominator of consolidated diluted EPS only.
C) the numerator and denominator of consolidated diluted EPS.
D) None of the above will be affected.
Answer: C
Objective: LO2
On January 1, 2011, Pardy Corporation acquired a 70% interest in the common stock of Salter Corporation for
$7,000,000 when Salter's stockholders' equity was as follows:
10% cumulative, nonparticipating preferred stock,

$100 par, with a $105 liquidation preference,
callable at $110 $ 1,000,000
Common stock, $10 par value 6,000,000
Additional paid-in capital 1,500,000
Retained earnings 2,500,000
Total stockholders' equity $11,000,000
There were no preferred dividends in arrears on January 1, 2011. There are no book value/fair value
differentials.
5) What is the implied goodwill for Salter based on Pardy's purchase price for Salter on January 1, 2011?
A) $ 0
B) $ 35,000
C) $ 70,000
D) $100,000
Answer: D
Explanation: D)
Stockholders' equity $11,000,000
Less: Preferred stockholders' equity (10,000 × $110) 1,100,000

8-55
Common stockholders' equity 9,900,000
Cost of 70% interest acquired $7,000,000

Implied fair value of investment ($7,000,000/0.7) 10,000,000
Common stockholders' equity 9,900,000
Goodwill $100,000
Objective: LO1
6) Salter has a 2011 net loss of $200,000. No dividends are declared or paid in 2011. What is the change in
Pardy's Investment in Salter for the year ending December 31, 2011?
A) $ 50,000
B) $ 70,000
C) $140,000
D) $210,000
Answer: D
Explanation: D)
Salter's net loss $(200,000)
Preferred dividend 10% × $1,000,000 (100,000)
Total Loss to common stockholders (300,000)
Pardy's ownership percentage 70%
Pardy's share of the loss on investment $(210,000)
Objective: LO1
7) Assume Salter's net income for 2011 is $220,000. No dividends are declared or paid in 2011. What is the
change in Pardy's Investment in Salter for the year ending December 31, 2011?
A) $ 84,000
B) $119,000
C) $154,000
D) $189,000
Answer: A
Explanation: A) Salter's net income $220,000
Less: Income to the preferred stockholders (100,000)
Income to the common stockholders 120,000
Pardy's ownership percentage 70%
Pardy's share of the income $84,000
Objective: LO1
On January 1, 2011, Pamplin Corporation stockholders' equity consisted of $1,000,000 of $10 par value Common
Stock, $750,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. On January 1, 2011, Pamplin
purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000 with all excess purchase
cost assigned to goodwill. The stockholders' equity of Sage on this date consisted of $800,000 of $100 par value,
8% cumulative, preferred stock callable at $105, $900,000 of $10 par value common stock and $500,000 of

8-56
Retained Earnings. Sage's net income for 2011 was $100,000.
On January 1, 2011, no preferred dividends are in arrears. No dividends are declared or paid in 2011. In a
separate transaction on January 1, 2011, Pamplin purchased 70% of Sage's preferred stock for $600,000.
8) For the year ending December 31, 2011, the amount of Pamplin's income from Sage (associated with the
common stock investment in Sage) is
A) $32,400.
B) $36,000.
C) $60,000.
D) $90,000.
Answer: A
Explanation: A)
Preliminary computations:
Total stockholders' equity (Sage) $2,200,000
Less: Preferred stockholders' equity
($800,000 × 1.05) 840,000
Equals: Common stockholders' equity $1,360,000
Net income as given $100,000

Less: Preferred dividends ($800,000 × 8%) 64,000
Income available to the common stockholders $36,000
Ownership percentage 90%
Income from Sage $32,400
Objective: LO1
9) What is the goodwill on the consolidated balance sheet for Pamplin and Subsidiaries on December 31, 2011
based on Pamplin's purchase of Sage's common stock?
A) $140,000
B) $240,000
C) $290,000
D) $306,667
Answer: D
Explanation: D)
Implied fair value ($1,500,000/0.90) $1,666,667
Less: Common stockholders' equity 1,360,000
Goodwill $306,667
Objective: LO1
10) Pan Corporation has total stockholders' equity of $5,000,000 consisting of $1,000,000 of $10 par value
Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. Pan owns 80% of
Sailor Corporation's common stock purchased at book value, which equals fair value. Sailor has $900,000 of 10%
cumulative preferred stock outstanding, with no preferred dividends in arrears. The preferred stock has no call
price, redemption price or liquidation price. Pan acquired 60% of the preferred stock of Sailor for $500,000. After
this transaction the balances in Pan's Retained Earnings and Additional Paid-in Capital accounts, respectively,

8-57
are
A) $2,960,000 and $1,000,000.
B) $3,000,000 and $960,000.
C) $3,000,000 and $1,040,000.
D) $3,040,000 and $1,000,000.
Answer: C
Explanation: C) If the book value ($900,000 × 60%) of preferred stock is greater than the price paid ($500,000) for
the preferred stock, then the difference is added to the parent's additional paid-in capital.
Objective: LO1
11) Assume a company's preferred stock is cumulative with a call provision and has dividends in arrears. The
amount of stockholders' equity allocated to preferred stockholders is equal to the number of shares outstanding
times the
A) sum of the par value per share plus any liquidation premium per share, plus the sum of any preferred
dividends in arrears, plus the current year's dividend requirement, but only if dividends have been declared.
B) sum of the par value per share, plus any liquidation premium per share, plus the sum of any preferred
dividends in arrears, plus the current year's dividend requirement, regardless of whether dividends have been
declared.
C) call price plus the sum of any preferred dividends in arrears, plus the current year's dividend requirement,
but only if dividends have been declared.
D) call price plus the sum of any preferred dividends in arrears, plus the current year's dividend requirement,
regardless of whether dividends have been declared.
Answer: D
Objective: LO1
12) When a parent acquires the preferred stock of a subsidiary, there will be a constructive retirement and
A) any difference paid above the book value of the preferred stock reduces the parent's additional paid-in
capital.
B) any difference paid above the book value of the preferred stock reduces the subsidiary's retained earnings.
C) any difference paid above the book value of the preferred stock increases the parent's additional paid-in
capital.
D) any difference paid above the book value of the preferred stock increases the parent's retained earnings.
Answer: A
Objective: LO1
13) If a parent company has controlling interest in a subsidiary which has no potentially dilutive securities
outstanding, then in the calculation of consolidated diluted EPS, it will be necessary to
A) only make an adjustment of subsidiary's basic earnings.
B) replace the parent's equity in subsidiary earnings with the parent's equity in subsidiary's diluted EPS.
C) make a replacement calculation in the parent's basic earnings for the EPS.
D) only use the parent's common shares and shares represented by the parent's potentially dilutive securities.
Answer: D
Objective: LO2

8-58
14) Parnaby has 25,000 common stock shares outstanding and its 100%-owned subsidiary Sandal has 5,000
common stock shares outstanding. Parnaby and Sandal do not have any potentially dilutive securities
outstanding. The separate net incomes for Parnaby and Sandal is $150,000 and $75,000 respectively. Diluted EPS
for the consolidated company is
A) $5.00.
B) $6.00.
C) $7.50.
D) $9.00.
Answer: D
Explanation: D) ($150,000 + $75,000)/25,000
Objective: LO2
15) In computing consolidated diluted EPS, the replacement calculation replaces the parent's equity in
subsidiary earnings with the
A) parent's share of basic EPS of the subsidiary.
B) subsidiary's share of basic EPS of the parent.
C) parent's share of diluted EPS of the subsidiary.
D) subsidiary's share of diluted EPS of the parent.
Answer: C
Objective: LO2

8-59
16) When a subsidiary has preferred stock that is convertible into subsidiary common stock, the parent's equity
in the subsidiary's diluted earnings is calculated by the number of
A) subsidiary shares into which the subsidiary's dilutive securities can be converted times the subsidiary's basic
EPS figure.
B) parent shares into which the subsidiary's dilutive securities can be converted times the parent's basic EPS
figure.
C) subsidiary common shares held by the parent times the subsidiary's diluted EPS figure.
D) parent shares into which the subsidiary's dilutive securities can be converted times the subsidiary's basic EPS
figure.
Answer: C
Objective: LO2
17) Palm owns a 70% interest in Sable, a domestic subsidiary. Sable is not part of Palm's affiliated group. Palm
will pay taxes on
A) none of the dividends it receives from Sable.
B) 20% of the dividends it receives from Sable.
C) 66% of the dividends it receives from Sable.
D) 80% of the dividends it receives from Sable.
Answer: B
Objective: LO3
18) Palmer Company owns a 25% interest in Sad, Incorporated, a domestic company. Sad had net income of
$60,000 and paid dividends of $20,000. Palmer's tax rate is 35%. For simplicity, assume that Sad's undistributed
earnings are Palmer's only temporary timing difference. Assume Sad qualifies for the 80% dividend received
deduction. Which of the following statements is correct?
A) The current tax liability is $700.
B) The current tax liability is $1,050.
C) Under GAAP, Palmer provides for income taxes on Sad's undistributed earnings with a credit to deferred tax
liability of $700.
D) Under GAAP, Palmer provides for income taxes on Sad's undistributed earnings with a credit to deferred tax
liability of $1,050.
Answer: C
Objective: LO3
19) Palmquist Corporation and its 80%-owned subsidiary, Sadler Corporation, are members of an affiliated
group. They do not file consolidated tax returns. Sadler had $3,000,000 of income and paid $1,000,000 dividends
in 2010. Palmquist and Sadler had 35% income tax rates. What amount of Sadler's dividends is taxable to
Palmquist in 2010?
A) $0
B) $ 70,000
C) $160,000
D) $200,000
Answer: A
Objective: LO3
8-60
20) Palomba Corporation allocates consolidated income taxes to its 90%-owned subsidiary using the percentage
allocation method. Under this method, consolidated income tax expense will be allocated to a subsidiary
A) on the basis of the agreement between the parent and subsidiary.
B) on the basis of the subsidiary's pretax income as a percentage of consolidated pretax income.
C) on the basis of the income taxes remitted to the IRS.
D) 90% to the subsidiary.
Answer: B
Objective: LO3
Exercises
1) Saito Corporation's stockholders' equity on December 31, 2010 was as follows:
10% cumulative preferred stock, $100 par value,

callable at $105, with one year dividends in arrears $10,000
Common stock, $1 par value 50,000
Additional paid-in capital 150,000
On January 1, 2011, Panata Corporation paid $300,000 for a 70% interest in Saito's common stock. On January 1,
2011, the book values of Saito's assets and liabilities were equal to fair values.
Required:
1. Determine the book value of the common stockholders' equity for Saito Corporation on January 1, 2011.
2. What is the amount of goodwill reported on the consolidated balance sheet for Panata Corporation (and
Subsidiary) at January 2, 2011?
3. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panata Corporation
(and Subsidiary) on January 2, 2011?
Answer:
Requirement 1:
Total stockholders' equity at December 31, 2010 $370,000
Less: Preferred stockholders' equity 100 shares ×
($105 call price + $10 dividend per share in arrears) (11,500)
Common stockholders' equity $358,500
Requirement 2:
Implied fair value of investment ($300,000/0.7) $428,571
Book value of common stockholders' equity 358,500
Goodwill $70,071
Requirement 3
Noncontrolling interest at January 2, 2011:

8-61
Noncontrolling portion of Goodwill ($70,071 × 30%) $21,021
Noncontrolling interest: Preferred (100 shares × $115) 11,500
Noncontrolling interest: Common ($358,500 × 30%) 107,550
Total noncontrolling interest $140,071
Objective: LO1

8-62
2) Sally Corporation's stockholders' equity on December 31, 2010 was as follows:

On January 1, 2011, Panera Corporation paid $500,000 for a 70% interest in Sally's common stock. On January 1,
2011, the book values of Sally's assets and liabilities were equal to fair values.
Required:
1. Determine the book value of the common stockholders' equity for Sally Corporation on January 1, 2011.
2. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and
Subsidiary at January 2, 2011?
3. On January 2, 2011, Panera purchased 70% of Sally's preferred stock for $5,000. Prepare the journal entry(ies)
for Panera for this purchase on January 2, 2011.
4. Prepare the elimination entry on the consolidating work papers for the Investment in Sally, Preferred Stock
and Sally's Preferred Stock on January 2, 2011.
Answer:
Requirement 1
Total stockholders' equity at December 31, 2010 $370,000
($105 call price + $10 dividend per share in arrears) (11,500)
Common stockholders' equity $358,500
Requirement 2
Implied fair value of investment ($500,000/0.7) $714,286
Book value of common stockholders' equity 358,500
Goodwill $355,786
Requirement 3
Investment in Sally, Preferred Stock 5,000
Cash 5,000

($11,500 × 70%) = $8,050 - $5,000 = $3,050

8-63
Requirement 4
Preferred stock 10,000
Noncontrolling interest share
In Sally, Preferred Stock 3,450
Objective: LO1
3) Samford Corporation's stockholders' equity on December 31, 2010 was as follows:

callable at $109, with two years of dividends
in arrears $100,000
On January 1, 2011, Panera Corporation purchased a 70% interest in Samford's common stock for $1,400,000. On
this date the book values of Samford's assets and liabilities are equal to their fair values.
Required:
1. Determine the book value of the common stockholders' equity for Samford Corporation on January 1, 2011.
2. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and
3. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panera Corporation and
Subsidiary on January 2, 2011?
Answer:
Requirement 1
Total stockholders' equity at December 31, 2010 $1,450,000
[$109 call price + ($8 dividend per share in arrears × 2 years)] (125,000)
Common stockholders' equity $1,325,000
Requirement 2
Implied fair value of investment($1,400,000/0.70) $2,000,000
Less: Common stockholders' equity (1,325,000)
Goodwill $675,000
Requirement 3
Noncontrolling interest, January 2, 2011:
Preferred stockholders' equity $125,000
Common stockholders' equity (30% × $1,325,000) 397,500
Goodwill (30% × $675,000) 202,500
8-64
Total $725,000
Objective: LO1

8-65
4) Savy Corporation's stockholders' equity on December 31, 2010 was as follows:

callable at $109, with two years of dividends
in arrears $100,000
On January 1, 2011, Paul Corporation purchased a 70% interest in Savy's common stock for $2,100,000. On this
date the book values of Savy's assets and liabilities are equal to their fair values.
Required:
1. Determine the book value of the common stockholders' equity for Savy Corporation on January 1, 2011.
2. What is the amount of goodwill reported on the consolidated balance sheet for Paul Corporation and
3. On January 2, 2011, Paul purchased 70% of Savy's preferred stock for $50,000. Prepare the journal entry(ies)
for Paul for this purchase on January 2, 2011.
4. Prepare the elimination entry on the consolidating work papers for the Investment in Savy, Preferred Stock
and Savy's Preferred Stock on January 2, 2011.
Answer:
Requirement 1
Total stockholders' equity at December 31, 2010 $1,450,000
[$109 call price + ($8 dividend per share in arrears × 2 years)] (125,000)
Common stockholders' equity $1,325,000
Requirement 2
Implied fair value of investment ($2,100,000/0.70) $3,000,000
Less: Common stockholders' equity 1,325,000
Goodwill $1,675,000
Requirement 3
Investment in Savy, Preferred Stock 50,000
Cash 50,000

($125,000 × 70%) - $50,000 = $37,500

8-66
Requirement 4
Preferred Stock 100,000
Noncontrolling interest 37,500
Objective: LO1
5) Pancino Corporation owns a 90% interest in Sakal Corporation's common stock. Throughout 2010, Sakal had
20,000 shares of common stock outstanding and Pancino had 50,000 shares of common stock outstanding.
Sakal's only dilutive security consists of 2,500 stock options, with an exercise price of $20 per share. The average
price of Sakal's stock is $50 per share in 2010. The options are exercisable for one share of Sakal's common stock.
Pancino's and Sakal's separate net incomes for the year are $100,000 and $80,000, respectively.
Required:
Compute the amount of basic and diluted earnings per share for Pancino (Consolidated) and Sakal
Corporations.
Answer:
Basic Diluted
Sakal's Basic and Diluted EPS:
Sakal's income to common shareholders $80,000 $80,000
Common shares outstanding 20,000 20,000

Options:
Diluted EPS:
($50-$20)/$50 × 2,500 _______ 1,500
Common shares and common equivalents 20,000 21,500
Earnings per share $4.00 $3.72
Basic Diluted
Pancino's Basic and Diluted EPS:
Pancino's separate income $100,000 $100,000
Pancino's income from Sakal 72,000 72,000
Replacement computation: (72,000)
18,000 shares × $3.72 ________ 66,960

Income to common $172,000 $166,960
Earnings per share 3.44 3.34

Objective: LO2

8-67
6) Pandy Corporation owns a 90% interest in Sakaj Corporation's common stock. Throughout 2010, Sakaj had
20,000 shares of common stock outstanding and Pandy had 50,000 shares of common stock outstanding. Sakaj's
only dilutive security consists of 10,000 stock options, with an exercise price of $20 per share. The average price
of Sakaj's stock is $50 per share in 2010. The options are exercisable for one share of Sakaj's common stock.
Pandy's and Sakaj's separate net incomes for the year are $200,000 and $180,000, respectively.
Required:
Compute the amount of basic and diluted earnings per share for Pandy (Consolidated) and Sakaj Corporations.
Answer:
Basic Diluted
Sakaj's Basic and Diluted EPS:
Sakaj's income to common shareholders $180,000 $180,000

Options:
Diluted EPS:
($50-$20)/$50 × 10,000 _______ 6,000
Basic Diluted
Pandy's Basic and Diluted EPS:
Pandy's separate income $200,000 $200,000
Pandy's income from Sakaj ($180,000 × 90%) 162,000 162,000
Replacement computation:
(162,000)
18,000 shares × $6.92 ________ 124,560
Income to common $362,000 324,560

Objective: LO2

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7) Parker Corporation owns an 80% interest in Sample Corporation's common stock. Throughout 2010, Sample
had 10,000 shares of common stock outstanding and Parker had 100,000 shares of common stock outstanding.
Sample's only dilutive security consists of $50,000 face amount of 8% bonds payable. Each $1,000 bond is
convertible into 20 shares of Sample stock. Parker and Sample's separate incomes for the year are $100,000 and
$75,000, respectively. Assume a 34% flat income tax rate.
Required:
Compute the amount of basic and diluted earnings per share for Parker (Consolidated) and Sample
Corporations.
Answer:
Basic Diluted
Sample's Basic and Diluted EPS:
Sample's income to common shareholders $75,000 $75,000
Add: Net of tax interest expense
$50,000 × 8% × 66% 0 2,640
Adjusted subsidiary earnings $75,000 $77,640

Incremental shares:
Diluted EPS:
50 bonds × 20 shares ______ 1,000
Basic Diluted
Parker's Basic and Diluted EPS:
Parker's separate income $100,000 $100,000
Parker's income from Sample 60,000 60,000
Parker's income from Sample (60,000)
8,000 shares × $7.06 ________ 56,480

Objective: LO2

8-69
8) Peyton Corporation owns an 80% interest in Sampe Corporation's common stock. Throughout 2011, Sampe
had 10,000 shares of common stock outstanding and Peyton had 100,000 shares of common stock outstanding.
Sampe's only dilutive security consists of $100,000 face amount of 8% bonds payable. Each $1,000 bond is
convertible into 20 shares of Sampe stock. Peyton and Sampe's separate net incomes for the year are $200,000
and $150,000, respectively. Assume a 34% flat income tax rate.
Required:
Compute the amount of basic and diluted earnings per share for Peyton (consolidated) and Sampe
Corporations.
Answer: Basic Diluted
Sampe's Basic and Diluted EPS:
Sampe's income to common shareholders $150,000 $150,000
Add: Net of tax interest expense
$100,000 × 8% × 66% 0 5,280
Adjusted subsidiary earnings $150,000 $155,280

Incremental shares:
Diluted EPS:
100 bonds × 20 shares _______ 2,000
Basic Diluted
Peyton's Basic and Diluted EPS:
Peyton's separate income $200,000 $200,000
Peyton's income from Sampe
(80% × $150,000) 120,000 120,000
Peyton's income from Sampe (120,000)
8,000 shares × $12.94 ________ 103,520

Objective: LO2

8-70
9) Pane Corporation owns 100% of Alder Corporation, 85% of Ball Corporation, 70% of Cake Corporation, 40%
of Dash Corporation, and 10% of Eager Corporation. All of these corporations are domestic corporations. Pane,
Alder and Ball belong to an affiliated group. Pane's marginal income tax rate is 35%. All investees have paid out
all their net income in the form of dividends. During 2011, Pane Corporation received the following cash
dividends:
From Alder: $180,000

From Ball: $170,000
From Cake: $160,000
From Dash: $100,000
From Eager: $ 60,000
Required:
1. Compute the amount of the dividend income that would be excluded from taxation under the current
Internal Revenue Code.
2. Compute Pane's current income tax liability for the dividend income received in 2011.
Answer:
Requirement 1
Excluded dividend income:
From Alder: $180,000 × 100% $180,000
From Ball: $170,000 × 100% 170,000
From Cake: $160,000 × 80% 128,000
From Dash: $100,000 × 80% 80,000
From Eager: $60,000 × 70% 42,000
Total excluded dividend income $600,000
Requirement 2
Total dividend income received $670,000
Total excluded dividend income 600,000
Included dividend income $70,000
Current Income Tax Liability:
$70,000 × 35% = $24,500
Objective: LO3

8-71
10) Paradise Corporation owns 100% of Aldred Corporation, 90% of Balme Corporation, 80% of Calder
Corporation, 75% of Dale Corporation, 20% of East Corporation, and 8% of Faber Corporation. Paradise,
Aldred, Balme and Calder belong to an affiliated group. All of these corporations are domestic corporations.
During 2011, Paradise Corporation reports net income of $1,500,000. This net income includes the full amount of
dividends received from Aldred and Faber, but does not include the dividends received from Balme, Calder,
Dale, and East Corporations. All investees have paid out all of their net income in the form of dividends.
Paradise's share of the various dividend distributions is as follows:
From Aldred: $90,000

From Balme: $92,000
From Calder: $88,000
From Dale: $66,000
From East: $50,000
From Faber: $40,000
Required:
Calculate the correct amount of taxable income for Paradise Corporation if a consolidated tax return is filed.
Answer:
Net income as reported: $1,500,000
Excludable amount of dividends included in net income:
Exclude 100% of Aldred dividends (90,000)
Exclude 70% of Faber dividends (28,000)
Includable amount of dividends not yet added to net income:
Include 20% of Dale dividends 13,200
Include 20% of East dividends 10,000
Taxable income $1,405,200
The dividends from Balme and Calder are excluded in full. This problem also emphasizes the dividend
exclusion ratio applicable when the percentage of stock held is right on the dividing line between the different
exclusion percentages. The 70% exclusion ratio applies for stock holdings less than 20% and the 80% exclusion
ratio applies for holdings less than 80% but at least 20%.
Objective: LO3

8-72
11) Peter Corporation owns 90% of the common stock of Subsidiary Subway. The following data is available:
Peter Subway
Net income for 2011 $150,000 $50,000
Preferred dividends for 2011 $10,000
Common dividends for 2011 $15,000
Number of common shares outstanding 200,000 20,000
10% Preferred Stock, $100 par $100,000
The preferred stock is cumulative and convertible. The annual preferred dividends are $10,000.
Required:
1. Subway's preferred stock is convertible into 12,000 shares of Subway's common stock. Peter and Subway do
not have any other potentially dilutive securities outstanding.
a. What is Subway's basic EPS and diluted EPS?
b. What is consolidated basic EPS and diluted EPS?
2. Subway's preferred stock is convertible into 12,000 shares of Peter's common stock. Peter and Subway do not
have any other potentially dilutive securities outstanding. What is consolidated basic EPS and diluted EPS?
Answer:
Requirement 1
Subway Basic EPS:

$50,000 - $10,000
20,000 = $2.00
Subway Diluted EPS:

$50,000
20,000 + 12,000 = $1.56
Consolidated Basic EPS:

$150,000 + ( $40,000 × 90% )
200,000 = $0.93
Consolidated Diluted EPS:

$150,000 + ( $1. 56 × 20,000 × 90% )
200,000 = $0.89

8-73
Requirement 2

$150,000 + ( $40,000 × 90% )
200,000 = $0.93

$150,000 + ( $50,000 × 90% )
200,000 + 12,000 = $0.92
Objective: LO2
12) Jeff Corporation owns 90% of the common stock of Subsidiary Jordan. The following data is available:
Jeff Jordan
Net income for 2011 $250,000 $150,000
Preferred dividends for 2011 $20,000
Common dividends for 2011 $25,000
Number of common shares outstanding 200,000 20,000
10% Preferred Stock, $100 par $200,000
The preferred stock is cumulative and convertible. The annual preferred dividends are $20,000.
Required:
1. Jordan's preferred stock is convertible into 20,000 shares of Jordan's common stock. Jeff and Jordan do not
have any other potentially dilutive securities outstanding.
a. What is Jordan's basic EPS and diluted EPS?
b. What is consolidated basic EPS and diluted EPS?
2. Jordan's preferred stock is convertible into 20,000 shares of Jeff's common stock. Jeff and Jordan do not have
any other potentially dilutive securities outstanding. What is consolidated basic EPS and diluted EPS?
Answer:
Requirement 1
Jordan Basic EPS:

$150,000 - $20,000
20,000 = $6.50
Jordan Diluted EPS:

$150,000
20,000 + 20,000 = $3.75

$250,000 + ( $130,000 × 90% )
200,000 = $1.84

8-74
$250,000 + ( $3 .75 × 20,000 × 90% )
200,000 = $1.59
Requirement 2

$250,000 + ( $130,000 × 90% )
200,000 = $1.84

$250,000 + ( $150,000 × 90% )
200,000 + 20,000 = $1.75
Objective: LO2
13) Sandy Corporation's stockholders' equity on December 31, 2010 was as follows:

On January 1, 2011, Bombard Corporation paid $200,000 for a 90% interest in Sandy's common stock. On
January 1, 2011, the book values of Sandy's assets and liabilities were equal to fair values. On January 2, 2011,
Bombard Corporation paid $120,000 for a 90% interest in Sandy's preferred stock.
Required:
1. Determine the book value of the common stockholders' equity for Sandy Corporation on January 1, 2011.
2. Prepare the journal entry(ies) on January 1, 2011 for Bombard Corporation.
3. Prepare the journal entry(ies) on January 2, 2011 for Bombard Corporation.
4. For the year ending December 31, 2011, Sandy Corporation reported net income of $50,000. Sandy
Corporation declared and paid dividends of $20,000 to preferred stockholders and $10,000 to common
stockholders. Prepare the journal entries for Bombard Corporation relating to this information.
Answer:
Requirement 1
($105 call price + $10 dividend) × 1,000 (115,000)
Book value of common stockholders' equity $385,000
Requirement 2
Investment in Sandy Corp.—common stock 200,000
Cash 200,000
8-75
Requirement 3
Investment in Sandy Corp.—pref. stock 120,000
Cash 120,000

Investment in Sandy Corp.—pref. stock 16,500
($120,000 - $103,500)
($115,000 × 90%) = $103,500
Requirement 4
Cash ($20,000 × 90%) 18,000
Investment Income in Sandy Corp.—pref. stock 18,000
Cash ($10,000 × 90%) 9,000


Investment income in Sandy Corp.—
common stock 27,000
($50,000 - $20,000) × 90%
Objective: LO1

8-76
14) Stello Corporation's stockholders' equity on December 31, 2010 was as follows:

callable at $110, with no dividends in arrears $100,000
On January 1, 2011, Kaprelian Corporation paid $300,000 for a 90% interest in Stello's common stock. On
January 1, 2011, the book values of Stello's assets and liabilities were equal to fair values. On January 2, 2011,
Kaprelian Corporation paid $100,000 for a 90% interest in Stello's preferred stock.
Required:
1. Determine the book value of the common stockholders' equity for Stello Corporation on January 1, 2011.
2. Prepare the journal entry(ies) on January 1, 2011 for Kaprelian Corporation.
3. Prepare the journal entry(ies) on January 2, 2011 for Kaprelian Corporation.
4. For the year ending December 31, 2011, Stello Corporation reported net income of $50,000. Stello Corporation
declared and paid dividends of $10,000 to preferred stockholders and $10,000 to common stockholders. Prepare
the journal entries for Kaprelian Corporation relating to this information.
Answer:
Requirement 1
$110 call price × 1,000 (110,000)
Book value of common stockholders' equity $490,000
Requirement 2
Investment in Stello Corp.—common stock 300,000
Cash 300,000
Requirement 3
Investment in Stello Corp.—pref. stock 100,000
Cash 100,000

Investment in Stello Corp.—pref. stock 1,000
($100,000 - $99,000) = $1,000
($110,000 × 90%) = $99,000

8-77
Requirement 4
Cash ($10,000 × 90%) 9,000
Investment Income in Stello Corp.— 9,000
pref. stock
Cash ($10,000 × 90%) 9,000

Investment in Stello Corp.—common 9,000
stock
Investment in Stello Corp.—common stock 36,000

Investment income in Stello Corp.— 36,000
common stock
($50,000 - $10,000) × 90%
Objective: LO1

8-78
15) Pretax operating incomes of Pang Corporation and its 70%-owned subsidiary, Sala Corporation, for the year
2011, are shown below. Sala pays total dividends of $60,000 for the year. There are no unamortized book
value/fair value differentials relating to Pang's investment in Sala. During the year, Pang sold land to Sala for a
gain of $35,000 and Sala holds this land at the end of the year. The marginal corporate tax rate for both
corporations is 34%.
Pang Sala
Sales revenue $900,000 $600,000
Gain on sale of land 35,000
Cost of sales (480,000) (325,000)
Other expenses (192,000) (78,000)
Pretax operating income (does not include investment income) $263,000 $197,000
Required:
1. Determine the separate amounts of income tax expense for Pang and Sala as if they had filed separate tax
returns.
2. Determine Pang's net income from Sala.

Answer:
Requirement 1 Pang Sala
Income taxes currently payable:
Taxes on operating income
$263,000 × 34% $89,420
$197,000 × 34% $66,980
Taxes on dividends received:
$60,000 × 70% × 20% × 34% 2,856 ________
Income taxes currently payable 92,276 66,980
Add: Tax on undistributed income:

($197,000 - $66,980 - $60,000) ×
70% × 20% × 34% 3,333
Less: Deferred tax on gain on sale of land ($35,000 × 34%) (11,900) ________
Income tax expense $83,709 $66,980
Requirement 2
Pre-tax income from Sala $197,000
Less: income tax expense (66,980)
Net Income 130,020
Ownership Percentage × 70%
Subtotal $91,014
Less: Unrealized gain on sale of land
Income from Sala (35,000)
$56,014
Objective: LO3
16) Pretax operating incomes of Panitz Corporation and its 80%-owned subsidiary, Salazar Corporation, for the
year 2011, are shown below.
8-79
Panitz and Salazar belong to an affiliated group. Salazar pays total dividends of $35,000 for the year. There are
no unamortized book value/fair value differentials relating to Panitz's investment in Salazar. During the year,
Panitz sold land to Salazar at a total loss of $15,000 which is included in its pretax operating income. Salazar still
holds this land at the end of the year. The marginal corporate tax rate for both corporations is 34%.
Panitz Salazar
Sales revenue $890,000 $700,000
Loss on sale of land (15,000)
Cost of sales (400,000) (250,000)
Other expenses (350,000) (350,000)
Depreciation expense (50,000) (35,000)
Pretax operating income
(does not include Salazar investment income) $75,000 $65,000
Required:
1. Determine the separate amounts of income tax expense for Panitz and Salazar as if they had filed separate tax
returns.
2. Determine Panitz's net income from Salazar.

Answer:
Requirement 1 Panitz Salazar
Taxable Income Calculation:
Sales Revenue $890,000 $700,000
Loss on sale of land (15,000)
Cost of sales (400,000) (250,000)
Other expenses (350,000) (350,000)
Depreciation expense (50,000) (35,000)
Taxable income $75,000 $65,000
Tax rate 34% 34%
Income taxes currently payable $25,500 $22,100
Add: Deferred taxes on loss on sale of land ($15,000 × 34%) 5,100 _______
Income tax expense $30,600 $22,100
Requirement 2
Panitz's income from Salazar:
Assuming taxable income is the same as GAAP income $65,000
Less: Current income taxes expense 22,100
Net income 42,900
Panitz's ownership percentage 80%
Subtotal 34,320
Add: Unrealized loss on sale of land 15,000
Income from Salazar $49,320
Objective: LO3

8-80

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Chapter 8 Test Bank

CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS

Multiple Choice Questions

a. decreases the parent’s interest and decreases the

Use the following information in answering questions 2 and 3.

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

©2009 Pearson Education, Inc. publishing as Prentice Hall

Use the following information in answering questions 4 and 5.

Bristlebird Corporation purchased an 80% interest in Underbrush

Gain on Sale Income from Underbrush

Gain on Sale Income from Underbrush

©2009 Pearson Education, Inc. publishing as Prentice Hall

Use the following information for questions 8 and 9.

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

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

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

©2009 Pearson Education, Inc. publishing as Prentice Hall

Use the following information for questions 10, and 11.

Great Frigatebird Corporation acquired a 90% interest in Slipstream

©2009 Pearson Education, Inc. publishing as Prentice Hall

I. Exclude the subsidiary sales and expenses prior to

II. Include the subsidiary sales and expenses prior to

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

©2009 Pearson Education, Inc. publishing as Prentice Hall

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

The consolidated income statement of Heron Corporation and

Use the following information to answer questions 15 through 18.

Bowerbird Corporation purchased a 70% interest in Stage Corporation

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

©2009 Pearson Education, Inc. publishing as Prentice Hall

©2009 Pearson Education, Inc. publishing as Prentice Hall

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

a. the parent company investment account to decrease.

©2009 Pearson Education, Inc. publishing as Prentice Hall

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

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

Required: Compute the following:

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

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

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

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

Required: Compute the following using the actual sales date

1. Gain or loss on sale.

2. Income from Twig for 2006.

3. Noncontrolling interest for 2006.

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

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

Required: Compute the following using the actual sales date

1. Gain or loss on sale.

2. Income from Lichen for 2006.

3. Noncontrolling interest expense for 2006.

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

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

©2009 Pearson Education, Inc. publishing as Prentice Hall

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

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

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

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

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

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

Complete the working papers to consolidate the financial statements

©2009 Pearson Education, Inc. publishing as Prentice Hall