P6-2

Preliminary computations

NOTE: Since Pal paid a price $45,000 in excess of book value for its 90%
share, the implied total excess of fair value over book is $50,000 ($45,000 /
90%).

Computation of income from Sim:

Share of Sim’s reported income ($40,000 x .9)
Add: Realization of deferred profits in beginning inventory 5,000
Less: Unrealized profits in ending inventory (4,000)
Less: Unrealized profit on intercompany sale of equipment
($30,000 - $21,000) (9,000)
Add: Piecemeal recognition of deferred profit in equipment
($9,000/3 years) 3,000
Income from Sim $31,000

Consolidation workpaper entries

A. Cash 2,000
Accounts receivable 2,000
To record cash in transit from Sim on account.

B. Sales 20,000
Cost of sales 20,000
To eliminate intercompany cost of sales and sales.

C. Investment in Sim 5,000

Cost of sales 5,000
To recognize previously deferred profit from beginning inventory.

D. Cost of sales 4,000

Inventory 4,000
To defer unrealized profit from ending inventory.

E. Investment in Sim 3,000

Land 3,000
To reduce land to its cost basis and adjust the investment account to establish reciprocity with
Sim’s beginning of the period equity accounts.

F. Gain on sale of equipment 9,000

Equipment — net 9,000
To eliminate gain on intercompany sale of equipment and reduce equipment to a cost basis.

G. Equipment — net 3,000

Operating expenses 3,000
To eliminate current year’s depreciation of unrealized gain.
H. income from Sim 31,000
 Dividends — Sim 18,000
Investment in Sim 13,000
To eliminate income and dividends from Sim and return investment account to its beginning of
the period balance.

I. Retained earnings — Sim 70,000

Capital stock — Sim 50,000
Goodwill 50,000
Investment in Sim 153,000
Noncontrolling interest — January 1 17,000
To eliminate reciprocal investment and equity amounts, establish beginning noncontrolling
interest, and enter beginning-of-theperiod fair value — book value differential (goodwill).

J. Noncontrolling Interest Share 4,000

Dividends — Sim 2,000
Noncontrolling Interest 2,000
To record Noncontrolling interest share of subsidiary income and dividends.

K. Dividends payable 9,000

Dividends receivable 9,000
To eliminate reciprocal receivables and payables.

Pal Corporation and Subsidiary

Consolidation WorkPapers
for the year ended December 31, 2012
(in thousands)

Pal Sim 90% Adjustments and Consolidated

Eliminations Statements
Income Statement
Sales $ 300 $ 100 b 20 $ 380
Income from Sim 31 h 31
Gain on equipment 9 f 9
Cost of sales 140* 50* d 4 b 20
c 5 169*
Operating expenses 60* 10* g 3 67*
Consolidated NI 144
Noncontrolling share j 4 4*
Controlling share of NI $ 140√ $ 40√ $ 140

Retained Earnings Retained earnings — Pal $ 157 $ 157

Retained earnings — Sim $ 70 i 70
Controlling share of NI 140 40 140
Dividends 60* 20* h 18 60*
j 2
Retained earnings December 31 $ 237 $ 90 $ 237

Balance Sheet Cash $ 100 $ 17 a 2 $ 119

Accounts receivable 90 50 a 2 138
Dividends receivable 9 k 9
Inventories 20 8 d 4 24
Land 40 15 e 3 52
Buildings — net 135 50 185
Equipment — net 165 60 g 3 f 9 219
Investment in Sim 158 c 5 h 13
e 3 i 153
Goodwill i 50 50
$ 717 $ 200 $ 787

Accounts payable $ 98 30 $ 128

Dividends payable 15 10 k 9 16
Other liabilities 67 20 87
Capital stock 300 50 i 50 300
Retained earnings 237√ 90√ 237
$ 717 $ 200

Noncontrolling interest January 1 i 17

Noncontrolling interest December 31 j 2 19
$ 787
P6-3

Preliminary computations

Cost January 1, 2011 $270,000

Implied fair value of Sor ($270,000 / 90%) $300,000
Book value of Sor (240,000)
Excess of fair value over book value - Goodwill $ 60,000

Cost January 1, 2011 $270,000

Add: Income from Sor for 2011
Equity in income ($40,000 x 90% ) $ 36,000
Less: Unrealized inventory profit (10,000) Less: Unrealized profit on machinery
(selling price $35,000 - book value $28,000) (7,000)
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years x .5 Year)1,000
Income from Sor for 2011 20,000
Less: Dividends $10,000 x 90% (9,000)

Investment balance January 1, 2012 281,000

Add: Income from Sor for 2012
Equity in income ($50,000 x 90%) $ 45,000
Add: Unrealized profit in beginning inventory 10,000
Less: Unrealized profit in ending inventory (12,000)
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years) 2,000
Less: Gain on sale of land (5,000)
Income from Sor for 2012 40,000
Less: Dividends ($20,000 x 90%) (18,000)
Investment balance December 31, 2012 $303,000

Pal Corporation and Subsidiary

Consolidation WorkPapers
for the Year Ended December 31, 2012
(in thousands)

Pal Sor 90% Adjustments and Consolidated

Eliminations Statements
Income Statement
Sales $ 450 $ 190 a 72 $ 568
Income from Sor 40 f 40
Gain on land 5 e5
Cost of sales (200) (100) c 12 a 72
b 10 (230)
Operating expense (113) (40) (151)
Consolidated NI 187
Noncontrolling share h 5 (5)
Controlling share of NI $ $ 182 $ 50 $ 182

Retained Earnings $ 202 $ 202

Retained earnings — Pal
Retained earnings — Sor $ 120 g 120
Controlling share of NI 182 50 182
Dividends (150) (20) f 18 ( 150)
h 2
Retained earnings December 31 $ 234 $ 150 $ 234

Balance Sheet
Cash $ 133 $ 14 $ 147
Accounts receivable 180 100 270
Dividends receivable 18 i 10
Inventories 60 36 j 18 84
Land 100 30 c 12 125
Buildings — net 280 80 e 5 360
Machinery — net 330 140 466
Investment in Sor 303 d 4
Goodwill b 10 f 22 60
d 6 g 297
Total assets $ 1,404 $ 400 g 60 $ 1,512

Accounts payable $ 200 $ 50 i 10 $ 240

Dividends payable 30 20 j 18 32
Other liabilities 140 30 170
Capital stock 800 150 g 150 800
Retained earnings 234 150 234
Total equities $ 1,404 $ 400
Noncontrolling interest January 1 g 33
Noncontrolling interest December 31 h3 36
$ 1,512

P6-4
Par Corporation and Subsidiary
Consolidation WorkPapers
for the year ended December 31, 2011
(in thousands)

Par Sag 90% Adjustments and Consolidated

 Eliminations Balance
Sheet
Income Statement
Sales $ 700 $ 500 a 50 $ 1,150
Income from Sag 70 e 70
Gain on land 10 c 10
Gain on equipment 20 d 20
Cost of sales 300* 300* b 5 a 50 555*
Depreciation expense 90* 35* d 5 120*
Other expenses 200* 65* 265*
Consolidated NI 210
Noncontrolling share h 10 10*
Controlling share of NI $ 200 $ 110 $ 200

Retained Earnings $ 600 $ 600

Retained earnings — Par
Retained earnings — Sag $ 200 f 200
Controlling share of NI 200√ 110√ 200
Dividends 100* 50* e 45 100*
h 5
Retained earnings December 31 $ 700 $ 260 $ 700
$ 65
Balance Sheet $ 35 $ 30 g 10 190
Cash
Accounts receivable 90 110 b5 175
Inventories 100 80 110
Other current items 70 40 c 10 110
Land 50 70 350
Buildings — net 200 150
Equipment — net 500 400 d 15 885
Investment in Sag 655
$ 1,700 $ 880 $ 1,885

Accounts payable $ 160 $ 50 g 10 $ 200

Other liabilities 340 70 410
Capital stock 500 500 f 500 500
Retained earnings 700√ 260√ 700
$ 1,700 $ 880

Noncontrolling interest January 1 f 70

Noncontrolling interest December 31 h 5 75
$ 1,885

NOTE: Purchase price implies book values are equal to fair values.

P6-5

Preliminary computations

Cost January 1, 2011 $270,000

 Add: Income from Sto for 2011
Equity in income ($40,000 x 90% ) $ 36,000
Less: Patent amortize. ($60,000/10 years)x 90% (5,400)
Less: Unrealized inventory profit (10,000)
Less: Unrealized profit on machinery
(selling price $35,000 - book value $28,000) (7,000)
Add: Piecemeal recognition of profit on .
machinery ($7,000/3.5 years x .5 Years ) 1,000
Income from Sto for 2011 14,600 90% (9,000)
Less: Dividends $10,000 x 90% (9,000)

Investment balance January 1, 2012 275,600

Add: Income from Sto for 2012
Equity in income ($50,000 x 90%) % 45,000
Less: Patent amortization (90%) (5,400)
Add: Unrealized profit in beginning inventory 10,000
Less: Unrealized profit in ending inventory (12,000)
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years) 2,000
Less: Gain on sale of land (5,000)
Income from Sto for 2012 34,600
Less: Dividends ($20,000 x 90% ) (18,000)

Investment balance December 31, 2012 $292,200

Noncontrolling interest share of
Sto’s income (10%) 2011 2012 Sto’s reported net income $40,000 $50,000
Less: Patent amortization (6,000) (6,000)
Sto’s adjusted income $34,000 $44,000
10% Noncontrollling interest share $ 3,400 $ 4,400

Pal Corporation and Subsidiary Consolidation WorkPapers for the Year Ended December 31, 2012

Pal Sto 90% Adjustments and Consolidate

Eliminations d
Statements
Income Statement $ 568,000
Sales $ 450,000 $ 190,000 a 72,000
Income from Sto 34,600 f 34,600
Gain on land 5,000 e 5,000
Cost of sales (200,000) (100,000) c 12,000 a 72,000
b 10,000 (230,000)
Operating expense (113,000) (40,000) h 6,000 d 2,000 (157,000)
Consolidated NI 181,000
Noncontrolling share k 4,400 (4,400)
Controlling share of NI $ 176,600 $ 50,000 $ 176,600

Retained Earnings
Retained earnings — Pal $ 200,000 $ 200,000
Retained earnings — Sto $ 120,000 g
 120,000
Controlling share of NI 176,600 50,000 176,000
Dividends (150,000) (20,000) f 18,000
k 2,000 (150,000)
Retained earnings December 31 $ 226,600 $ 150,000 $ 226,600

Balance Sheet $ 150,400

Cash $ 136,400 $ 14,000
Accounts receivable 180,000 100,000 i 10,000 270,000
Dividends receivable 18,000 j 18,000
Inventories 60,000 36,000 c 12,000 84,000
Land 100,000 30,000 e 5,000 125,000
Buildings — net 280,000 80,000 360,000
Machinery — net 330,000 140,000 d 4,000 466,000
Investment in Sto 292,200 b 10,000 f 16,000
d 6,000 g
291,600
Patents g 54,000 h 6,000 48,000
Total assets $ $ 400,000 $ 1,503,400
1,396,600

Accounts payable $ 200,000 $ 50,000 i 10,000 $ 240,000

Dividends payable 30,000 20,000 j 18,000 32,000
Other liabilities 140,000 30,000 170,000
Capital stock 800,000 150,000 g 800,000
150,000
Retained earnings 226,600 150,000 226,600
Total equities $ $ 400,000
1,396,600
Noncontrolling interest January 1 g 32,400
Noncontrolling interest December 31 k 2,400 34,800
$ 1,503,400

P6-6

Preliminary computations
Investment cost $290,000
Implied fair value of San ($290,000 / 80%) $362,500
Book value of San (300,000)
Excess fair value over book value $ 62,500
- allocated 50% to Patents with a ten-year life ($31,250)
- allocated 50% to Inventory sold in 2009 ($31,250)

Reconciliation of income from San:

Pil’s share of San’s net income ($50,000 x 80%) $ 40,000
Less: 80% of Patent amortization ($31,250/10 years) (2,500)
Add: Depreciation on deferred gain on equipment 80% 2,400
($15,000/5 years) x 80% ((8,000)
Less: Unrealized profit on upstream sale of land ($10,000 x 80%) (8,000)
Income from San $ 31,900

Reconciliation of investment account:

Share of San’s underlying equity ($400,000 x 80%) $320,000
Add: 80% of Unamort. patent ($31,250 - ($3,125 x 3 years ) x 80%
Less: Unrealized gain on equipment
(%15,000 – ($3,000 x 2 years)) x 80% (7,200)
Less: Share of unrealized gain on land (8,000)
Investment in San December 31, 2011 $322,300

Noncontrolling interest share:

San’s reported income $ 50,000
Add: Piecemeal recognition of gain on sale of machinery 3,000
Less: Patent amortization ( 3,125)
Less: Unrealized gain on upstream sale of land (10,000)
Realized income 39,875
Noncontrolling percentage 20%
Noncontrolling interest share $ 7,975

P6-6

Pil Corporation and Subsidiary

Consolidation WorkPapers
for the year ended December 31, 2011

Pil San 80% Adjustments and Consolidated

Eliminations Statements
Income Statement $ 340,000
Sales $ 210,000
Income from San 31,900 c 31,900
Gain on land b 10,000
Depreciation expense 40,000* a 3,000
67,000*
Other expenses 110,000* e 3,125 173,125*
Consolidated NI 89,875
Noncontrolling share f 7,975 7,975*
Controlling share of NI $ $ 91,900 $ 91,900

Retained Earnings $ 140,400 $ 140,400

Retained earnings — Pil
Retained earnings — San $ 50,000 d 50,000
Controlling share of NI 91,900√ 50,000√ 91,900
Dividends 30,000* 30,000
Retained earnings December 31 $ 202,300 $ 100,000 $ 202,300

Balance Sheet Current $ 170,000 $ 370,000

assets $ 200,000
Plant assets 550,000 350,000 a 15,000 875,000
b 10,000
Accumulated depreciation 120,000 70,000 a 6,000 1884,000*
Investment in San 322,300 a 9,600 c 31,900
 d
300,000
Patent d 25,000 e 3,125 21,875
$ 952,300 $ 450,000 $ 1,082,875

Current liabilities $ 150,000 $ 50,000 $ 200,000

Capital stock 600,000 300,000 d 300,000 600,000
Retained earnings 202,300√ 100,000√ 202,300
$ 952,300 $ 450,000

Noncontrolling interest January 1 a 2,400 d 75,000

Noncontrolling interest December 31 f 7,975 80,575
$ 1,082,875

Consolidation workpaper entries

a. Accumulated depreciation 6,000

Investment in San 9,600
Noncontrolling interest 2,400
Depreciation expense 3,000 Plant assets 15,000
To eliminate unrealized profit on 2010 sale of plant assets and reduce plant assets to cost.

b. Gain on land 10,000

Plant assets 10,000
To eliminate unrealized gain on 2011 upstream sale of land and reduce plant assets to cost.

c. Income from San 31,900

Investment in San 31,900
To eliminate income from San and adjust investment to beginning of period.

d. Capital stock—San 300,000

Retained earnings—San January 1 50,000
Patent 25,000 Investment in San 300,000
Noncontrolling interest January 1 75,000
To eliminate investment in San and stockholders’ equity of San and enter beginning of the period
patent.

e. Other expenses 3,125

Patent 3,125 To provide
for patent amortization.

f. Noncontrolling Interest Share 7,975

Noncontrolling Interest 7,975
To enter noncontrolling interest share of subsidiary income.