Chapter 03

The Reporting Entity and

Consolidation of
Less-than-Wholly-Owned
Subsidiaries with No
Differential

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 1

Understand and explain the

usefulness and limitations of
consolidated
financial statements.

3-2
 Consolidation: The Concept

 Parent creates or gains control of the subsidiary.

 The result: a single legal entity.

P
S
3-3
Review

How do we report the results of subsidiaries?

Parent
Company

80% 51% 21%

Sub A Sub B Sub C

Consolidation Equity Method

(plus the Equity Method)
3-4
 Consolidated Financial Statements

Consolidated financial statements present the

financial position and results of operations for:
 a parent (controlling entity) and
 one or more subsidiaries (controlled entities)
 as if the individual entities actually were a single
company or entity.

3-5
 Benefits of Consolidated Financial Statements

 Presented primarily for those parties having a

long-run interest in the parent company:
 shareholders,
 long-term creditors, or
 other resource providers.
 Provide a means of obtaining a clear picture of the
total resources of the combined entity that are
under the parent's control.

3-6
 Limitations of Consolidated Financial Statements

 Results of individual companies not

disclosed (hides poor performance).
 Financial ratios are not necessarily
representative of any single company in the
consolidation.
 Similar accounts of different companies may
not be entirely comparable.
 Information is lost any time data sets are
aggregated.

3-7
 Subsidiary Financial Statements

 Creditors, preferred stockholders, and

noncontrolling common stockholders of subsidiaries
are most interested in the separate financial
statements of the subsidiaries in which they have an
interest.
 Because subsidiaries are legally separate from their
parents,
 the creditors and stockholders of a subsidiary generally
have no claim on the parent, and
 the stockholders of the subsidiary do not share in the
profits of the parent.

3-8
Practice Quiz Question #1

A primary benefit of consolidated

financial statements is that they:
a. provide information directly applicable
to the needs of regulators.
b. obscure data of individual companies.
c. present data of two or more entities that
clearly reports their individual performance.
d. give a picture of the use of resources
under the parent’s control.
e. none of the above.

3-9
Learning Objective 2

Understand and explain how

direct and indirect control
influence the
consolidation of a
subsidiary.

3-10
 Concepts and Standards

 Traditional view of control includes:

 Direct control that occurs when one company
owns a majority of another company’s common
stock.
 Indirect control or pyramiding that occurs when
a company’s common stock is owned by one or
more other companies that are all under common
control.

3-11
 Concepts and Standards

 Ability to Exercise Control

 Sometimes, majority stockholders may not
be able to exercise control even though
they hold more than 50 percent of
outstanding voting stock.
 Subsidiary is in legal reorganization or bankruptcy
 Foreign country restricts remittance of subsidiary
profits to domestic parent company
 The unconsolidated subsidiary is reported
as an intercorporate investment.
3-12
 Concepts and Standards

 Differences in Fiscal Periods

 Difference in the fiscal periods of a parent and
subsidiary should not preclude consolidation.
 Often the fiscal period of the subsidiary is
changed to coincide with that of the parent.
 Another alternative is to adjust the financial
statement data of the subsidiary each period to
place the data on a basis consistent with the
fiscal period of the parent.

3-13
 Concepts and Standards
 Changing Concept of the Reporting Entity
 FASB 94, requiring consolidation of all majority-
owned subsidiaries, was issued to eliminate the
inconsistencies found in practice until a more
comprehensive standard could be issued.
 Completion of the FASB’s consolidation project has
been hampered by, among other things, issues
related to:
 Control
 Reporting entity

3-14
 Concepts and Standards

 The FASB has been attempting to move

toward a consolidation requirement for
entities under effective control.
 Ability to direct the policies of another entity
even though majority ownership is lacking.
 Even though FASB 141R indicates that
control can be achieved without majority
ownership, a comprehensive consolidation
policy has yet to be achieved.

3-15
 Concepts and Standards

 Defining the accounting entity would help

resolve the issue of when to prepare
consolidated financial statements and what
entities should be included.
 FASB 160 deals only with selected issues
related to consolidated financial statements,
leaving a comprehensive consolidation policy
until a later time.

3-16
Practice Quiz Question #2

P owns 60% of X and 75% of Y. If X

and Y jointly own 100% of Z, under
what circumstance would P not be
deemed to control Z?
a. Z is a bank.
b. Z’s products are largely sold overseas.
c. Z is currently in Chapter 11 bankruptcy.
d. Z has a CEO known to have a bad temper
and a serious gambling habit.
e. none of the above.

3-17
Learning Objective 3

Understand and explain the

rules related to the
consolidation of variable
interest entities.

3-18
The Rise and FALL of Enron
Press Release Tuesday, October 16, 2001

ENRON REPORTS NON-RECURRING CHARGES OF $1.01

BILLION AFTER-TAX.

3-19
 Special Purpose Entities

 Corporations, trusts, or partnerships created

for a single specified purpose.
 Usually have no substantive operations and
are used only for financing purposes.
 Used for several decades for asset
securitization, risk sharing, and taking
advantage of tax statutes.

3-20
 Variable Interest Entities

 A legal structure used for business purposes,

usually a corporation, trust, or partnership,
that either:
 does not have equity investors that have voting
rights and share in all profits and losses of the
entity.
 has equity investors that do not provide sufficient
financial resources to support the entity’s
activities.

3-21
 Enron’s Accounting “Sleight of Hand”

Special Purpose Entities (SPEs)

 What is normally the business purpose?
 Bundle peripheral activities and have them
done by an independent, but close, friend.
 Examples:
 Acquire financing for a project

 Package receivables and sell them to third parties

 What was Enron’s purpose?

 Move liabilities off the balance sheet
 Provide favorable terms for some transactions

3-22
 “Raptors”

 Established by Enron CFO to provide a quick

buyer for Enron assets.
 Option 1: Find a bona fide third party.
 Can’t find anyone?
 Option 2: Establish a SPE to take the other side
of the transaction.
 Where does the financing come from?
 97% sponsoring institution
 3% third party

3-23
 Example: The Chewco Raptor
A diagram of the Chewco transaction is set forth below:

3-24
Raptor’s Impact on Earnings

3-25
 Variable Interest Entities (VIEs)
 As a result of the Enron collapse and other notable
scandals related to SPEs, the FASB issued Interpretation
No. 46 (FIN46) [the revised version is FIN46R].
 What is a VIE?
 An entity that either
 does not have equity investors with voting rights and a
percentage of profits and losses, OR
 has equity investors that do not provide sufficient
financial resources to support the entity’s activities.
 What is a variable interest?
 an interest that changes with changes in the VIE’s net assets.

3-26
 Variable Interest Entities

 FIN 46 (an interpretation of ARB 51) uses the

term variable interest entities to encompass SPEs
and other entities falling within its conditions.
 Does not apply to entities that are considered SPEs
under FASB 140.
 FIN 46R defines a variable interest in a VIE as a
contractual, ownership (with or without voting
rights), or other money-related interest in an
entity that changes with changes in the fair value
of the entity’s net assets exclusive of variable
interests.

3-27
Purpose of FIN46R

The main effect of Fin46R is to

capture those investment
relationships in which a
controlling financial interest is
not indicated by voting rights,
but is indicated by residual
interests in risks and benefits,
which is the conceptual
definition of ownership in CON6.
3-28
 Example: Variable Interest Entities

Senior Debt Junior Debt

($85k) ($12k)

Lease Pmts. $100k

ABC Corp. Leasing Corp. Building Owner
Use of Building Building

Investor ($3k)

How would ABC Corp. typically determine whether to consolidate Leasing Corp.?
 A controlling financial interest through voting rights.
What if ABC Corp. were a related party to Investor?
What if ABC Corp. guaranteed the value of the building at the end of the lease?
What if ABC Corp. received any residual value above $100k when building sold?

3-29
 Variable Interest Entities (VIEs)

Variable Interest Relationships

 Situations in which an entity receives benefits
and/or is exposed to risks similar to those
received from having a majority ownership
interest.
 Results from contractual arrangements.

3-30
 VIEs: “Contractual Arrangements”

 Contractual Arrangement Types:

 Options
 Leases
 Guarantees of asset recovery values
 Guarantees of debt repayment
 Contractual arrangements may exist
simultaneously with a less than majority
ownership in a VIE.

3-31
 VIEs: Most are “SPEs”

 Special Purpose Entities

 Legally structured entities to serve a specific,
predetermined, limited purpose.
 May be a corporation, partnership, trust, or some
other legal entity.
 Creator is called the “sponsor.”
 Usually thinly capitalized.
 Most commonly used for securitizations (of
receivables).

3-32
 VIEs: Potential Variable Interests

 Potential Variable Interests

 Subordinated loans to a VIE.
 Equity interests in a VIE (50% or less).
 Guarantees to a VIE’s lenders or equity
holders (that reduce the true risk of these
parties).
 Written put options on a VIE’s assets held
by a VIE or its lenders or equity holders.
 Forward contracts on purchases and sales.
3-33
 VIEs: The Primary Beneficiary

 The primary beneficiary of a VIE must consolidate

the VIE.
 The primary beneficiary is the entity that:
 Will absorb a majority (more than 50%) of the VIE’s
expected losses and/or
 Will receive a majority (more than 50%) of the VIE’s
expected residual returns.
 Expected losses are given more weight than expected
residual returns in certain situations.
 Only one primary beneficiary can exist for a VIE
(by definition).
3-34
 Group Exercise 1: To Consolidate (or not)?
Parch Inc. and Rees Urch, Parch’s former head of R&D, formed
Sede Inc., which will perform research and development.
Sede issued 10,000 shares of common stock to Urch, who is
now Sede’s president. Parch lent $800,000 to Sede for initial
working capital in return for a note receivable that can be
converted at will into 100,000 shares of Sede’s common
stock. Parch also granted Sede a line of credit of $1,000,000.

REQUIRED

1. Is consolidation appropriate?
2. What would Parch accomplish with this arrangement?
3. If consolidation were not appropriate, what serious
reporting issue exists regarding Parch’s separate financial
statements?
3-35
 Group Exercise 1: To Consolidate (or not)?
Parch Inc. and Rees Urch, Parch’s former head of R&D, formed
Sede Inc., which will perform research and development.
Sede issued 10,000 shares of common stock to Urch, who is
now Sede’s president. Parch lent $800,000 to Sede for initial
working capital in return for a note receivable that can be
converted at will into 100,000 shares of Sede’s common
stock. Parch also granted Sede a line of credit of $1,000,000.

s e a rch Rees Urch

d of Re
rH ea
rme
Fo 10,000 shares
$1,000,000
Line of credit
Parch Sede
$800,000 loan
Option
100,000 shares 3-36
 Practice Quiz Question #3

On 1/1/X2, Pocahontas, Inc. invested $480,000 in

Smith (80% owned). For 20X2, Smith:
(1) earned $70,000,
(2) declared dividends of $60,000, and
(3) paid dividends of $50,000.
What amounts does Pocahontas report?
Cost Equity
Investment income for 20X2
Investment in Smith at year-end
Retained earnings increase

3-37
 Practice Quiz Question #4

On 1/1/X2, Pocahontas, Inc. invested $480,000 in

Smith (80% owned) and NCI shareholders invested
$120,000. For 20X2, Smith:
(1) earned $70,000,
(2) declared dividends of $60,000, and
(3) paid dividends of $50,000.
What amounts does Pocahontas report for the
following items?
NCI in net income for 20X2
NCI in net assets at 12/31/X2
Parent’s retained earnings increase

3-38
Learning Objective 4

Understand and explain

differences in consolidation
rules under U.S. GAAP
and IFRS.

3-39
 IFRS Differences Related to VIEs and SPEs

 U.S. GAAP and International Financial Reporting

Standards (IFRS) are rapidly converging.
 The FASB and the IASB are working together to
remove differences in existing standards.
 They are also working jointly on all new standards
so that agreed-upon standards can be adopted.
 Despite convergence efforts, there are still some
differences related to VIEs and SPEs.
 See Fig. 3-1 on p. 117

3-40
 Key Differences between U.S. GAAP and IFRS
Topic U.S. GAAP
Determination  Normally, control is
of Control determined by majority
ownership of voting shares.
 However, majority
ownership may not indicate
control of a VIE.
 Thus, VIE rules must be
evaluated first in all
situations.
 The primary beneficiary
must consolidate a VIE.
 The majority shareholder
consolidates most non-VIEs.
 Control is based on direct or
indirect voting interests.
 An entity with less than 50
percent ownership may
have “effective control”
through other contractual
arrangements.
IFRS
 Normally, control is determined
by majority ownership of voting
shares.
 In addition to voting shares,
convertible instruments and
other contractual rights that
could affect control are
considered.
 A parent with less than 50
percent of the voting shares
could have control through
contractual arrangements
allowing control of votes of the
board of directors.
 Control over SPEs is determined
based on judgment and relevant
facts.
 Substance over form considered
in determining whether an SPE
should be consolidated.
3-41
 Key Differences between U.S. GAAP and IFRS
Topic U.S. GAAP
Related Parties  Interests held by related
parties and “de facto” agents
may be considered in
determining control of a VIE.
Definitions of  SPEs can be VIEs.
VIEs versus  Consolidation rules focus on
SPEs whether an entity is a VIE
(regardless of whether or
not it is an SPE).
 This guidance applies only
to legal entities.
IFRS
 There is no specific provision for
related parties or de facto agents.
 Considers specific indicators of
whether an entity has control of
an SPE: (1) whether the SPE
conducts activities for the entity,
(2) whether the entity has
decision-making power to obtain
majority of benefits from the SPE,
(3) whether the entity has the
right to majority of benefits from
the SPE, and (4) whether the
entity has majority of the SPE’s
residual or risks.
 This guidance applies whether or
not conducted by a legal entity.
3-42
 Key Differences between U.S. GAAP and IFRS
Topic U.S. GAAP
Disclosure  Disclosures required for
determining control of a VIE.
 Entities must disclose
whether or not they are the
primary beneficiary of
related VIEs.
Accounting for  Owners typically share
Joint Ventures control (often with 50-50
ownership).
 If the joint venture is a VIE,
contracts must be
considered to determine
whether consolidation is
required.
 If the joint venture is not a
VIE, venturers use the equity
method.
 Proportional consolidation
generally not permitted.
IFRS
 No SPE-specific disclosure
requirements.
 There are specific disclosure
requirements related to
consolidation in general.
 Joint ventures can be accounted
for using either proportionate
consolidation or the equity
method.
 Proportionate consolidation
reports the venturer’s share of
the assets, liabilities, income, and
expenses on a line-by-line basis
based on the venturer’s financial
statement line items.
3-43
Practice Quiz Question #5

Which of the following differs

between U.S. GAAP and IFRS in the
determination of control?
a. In U.S. GAAP, control is solely based on
ownership but IFRS considers other factors.
b. U.S. GAAP ignores direct stock
ownership, while IFRS considers it.
c. In U.S. GAAP, rules related to VIEs must
be followed, but IFRS has not specifically
addressed VIEs (only SPEs).
e. The determination of control is identical
under U.S. GAAP and IFRS..

3-44
Learning Objective 5

Understand and explain

differences in the
consolidation process when
the subsidiary is not wholly
owned.

3-45
 Noncontrolling Interest
 Only a controlling interest is needed for the parent
to consolidate the subsidiary—not 100% interest.
 Shareholders of the subsidiary other than the parent
are referred to as “noncontrolling” shareholders.
 Noncontrolling interest or refers to the claim of
these shareholders on the income and net assets of
the subsidiary.
NCI Parent

<50% >50%

Sub
3-46
 Noncontrolling Interest (NCI)
 What is a noncontrolling interest (NCI)?
 Voting shares not owned by the parent company
 NCI was formerly called the “Minority Interest”

Two Issues:
NCI Parent (1)Should 100% of
the financial
<50% >50% statements be
consolidated?
Sub (2) Where to report
NCI in the financial
statements?
3-47
 Issue 1: Should 100% be Consolidated?

Proportional Full
Consolidation Consolidation
Percent
< 100% 100%
Consolidated?
Reports NCI
No Yes
Amounts?
Complies with
No Yes
US GAAP?
Relative
Easy Hard
Complexity?

3-48
 Issue 1: Should 100% be Consolidated?

 Full consolidation required by US GAAP

(100%)
 This means two special accounts appear in
consolidated statements:
 NCI in Net Income of Sub
 Like an “expense” in the consolidated income
statement
 “Reported income that doesn’t belong to us.”
 NCI in Net Assets of Sub
 Equity of unrelated owners
 “Net assets on our balance sheet not belonging to us.”
3-49
 Issue 2: Where to report NCI in Net Assets?

 Old rules: Could report in in equity,

liabilities, or “no man’s land” between
liabilities and equity.
 New rules: Must report in equity
 FASB 160 makes clear that the noncontrolling
interest’s claim on net assets is an element of
equity, not a liability.

3-50
 Noncontrolling Interest

 Computation of income to the

noncontrolling interest
 In uncomplicated situations, it is a simple
proportionate share of the subsidiary’s net
income
 Presentation
 FASB 160 requires that
 the term “consolidated net income” be applied to the
income available to all stockholders,
 with the allocation of that income between the
controlling and noncontrolling stockholders shown.

3-51
Practice Quiz Question #6

The noncontrolling interest in a

corporation can best be describe as:
a. a group of disinterested shareholders
who rarely vote on company issues.
b. all employees below the manager level.
c. all shareholders other than the parent
company.
d. a group of investors who plan to sell
their stock within the next twelve months .
e. none of the above.

3-52
Learning Objective 6

Understand and explain the

differences in theories of
consolidation.

3-53
 Different Approaches to Consolidation

 Theories that might serve as a basis for

preparing consolidated financial statements:
 Proprietary theory
 Parent company theory
 Entity theory
 With the issuance of FASB 141R, the FASB’s
approach to consolidation now focuses on the
entity theory.

3-54
 Proprietary Theory

 Views the firm as an extension of its

owners.
 Assets and liabilities of the firm are
considered to be those of the owners.
 Results in a pro rata consolidation where
the parent consolidates only its
proportionate share of a less-than-wholly
owned subsidiary’s assets, liabilities,
revenues and expenses.

3-55
 Parent Company Theory

 Recognizes that though the parent does not

have direct ownership or responsibility, it
has the ability to exercise effective control
over all of the subsidiary’s assets and
liabilities, not simply a proportionate share.
 Separate recognition is given, in the
consolidated financial statements, to the
noncontrolling interest’s claim on the net
assets and earnings of the subsidiary.

3-56
 Entity Theory

 Focuses on the firm as a separate economic

entity, rather than on the ownership rights
of the shareholders.
 Emphasis is on the consolidated entity itself,
with the controlling and noncontrolling
shareholders viewed as two separate
groups, each having an equity in the
consolidated entity.

3-57
Recognition of Subsidiary Income

3-58
 Entity Theory

 All of the assets, liabilities, revenues, and

expenses of a less-than-wholly owned
subsidiary are included in the consolidated
financial statements, with no special
treatment accorded either the controlling or
noncontrolling interest.

3-59
Reporting Net Assets of the Subsidiary

3-60
 Current Practice

 FASB 141R has significantly changed the

preparation of consolidated financial
statements subsequent to the acquisition of
less-than-wholly owned subsidiaries.
 Under FASB 141R, consolidation follows largely
an entity-theory approach.
 Accordingly, the full entity fair value increment
and the full amount of goodwill are recognized.

3-61
 Current Practice

 Current approach clearly follows the entity

theory with minor modifications aimed at the
practical reality that consolidated financial
statements are used primarily by those
having a long-run interest in the parent
company.

3-62
Practice Quiz Question #7

Current consolidation practice in the

U.S. adopts the:
a. Proprietary theory.
b. Parent company theory.
c. Equity theory.
d. Entity theory.
e. none of the above.

3-63
Learning Objective 7

Make calculations and

prepare basic elimination
entries for the consolidation
of a less-than-wholly-owned
subsidiary.

3-64
 Summary of differences in consolidation

Wholly Owned Partially Owned

Subsidiary Subsidiary

Investment = No
Book Value Chapter 2 Chapter 3 Differential

Investment >
Book Value Chapter 4 Chapter 5 Differential

No NCI NCI
Shareholders Shareholders

3-65
 Consolidation of Less-than-wholly-owned Subs

 The entity theory requires that the entity’s

entire income and value be reported.
 The subsidiary’s income is divided between the parent
(controlling interest) and the NCI shareholders.
 The subsidiary’s net assets are divided between the
parent (controlling interest) and the NCI shareholders.
 Basic elimination entry is modified to split both:
Sub Equity Accounts 100%
Income from Sub XXX
NCI in Net Income of Sub XXX
Dividends Declared by Sub
100%
Investment in Sub
XXX
3-66
Practice Quiz Question #8

The primary difference in

consolidating a less than wholly
owned subsidiary relative to a wholly
owned subsidiary is:
a. Income and net assets of the subsidiary
must be divided between the parent and the
NCI shareholders.
b. The title of the worksheet must specify
“Less than wholly owned.”
c. You only consolidate the parent’s %
ownership.
d. There is no difference.

3-67
 Group Exercise 2: Basic Elimination Entry
Given the following information:
1) Photo owns 70% of Snap Photo
2) Snap’s net income for 20X4 is $160,000
3) Photo’s net income for 20X4 from its own separate operations is 70%
$500,000.
4) Snap’s declares dividends of $12,000 during 20X4.
5) Snap has 10,000 shares of $4 par stock outstanding that were Snap
originally issued at $14 per share.
6) Snap’s beginning balance in Retained Earnings for 20X4 is $120,000.
Book Value Calculations
Investment Additional
AccountCommon Paid-in
= Retained
NCI (30%) (70%) Stock Capital Earnings
Beginning Balance
+ Net Income
Dividends
Ending Balance
3-68
Learning Objective 8

Prepare a consolidation
worksheet for a less-than-
wholly-owned
consolidation.

3-69
 Consolidation of < Wholly Owned Subs
 The worksheet is modified when the parent
owns less than 100% of the subsidiary.
 The total “Net Income” is divided between:
 the noncontrolling interest (NCI shareholders) and
 the controlling interest (the parent company)
Elimination Entries
Pinkett, Inc. Smith, Inc. DR CR Consolidated
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation Expense (12,000) (10,000)
Less: Other Expenses (192,000) (98,000)
Income from Smith, Inc. 32,400 32,400
Net Income $ 152,400 $ 36,000 32,400
NCI in Net Income 3,600
CI In Net Income $ 152,400 $ 36,000 36,000
3-70
Practice Quiz Question #9

The primary difference in the

worksheet when consolidating a less
than wholly owned subsidiary is:
a. only the parent’s % is consolidated.
b. extra columns are added to split the
subsidiary into two or more pieces.
c. extra rows are added to divide the net
income and net assets of the sub between the
parent and NCI shareholders
d. there is no difference.

3-71
 Group Exercise 3: Consolidation < 100%
Elimination Entries
Pinkett, Inc. Smith, Inc. DR CR Consolidated
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation expense (12,000) (10,000)
Less: Other Expenses (192,000) (98,000)
Income from Smith, Inc. 32,400
Net Income $ 152,400 $ 36,000
NCI in Net Income
CI in Net Income $ 152,400 $ 36,000 Assume Pinkett only purchases
Statement of Retained Earnings 90% of Smith.
Balances, 1/1/X8 $ 124,800 $ 72,000
Add: Net Income 152,400 36,000
Less: Dividends (108,000) (12,000) REQUIRED
Balances, 12/31/X8 $ 169,200 $ 96,000

Balance Sheet •Prepare an analysis of the

Cash $ 58,800 $ 48,000
Accounts Receivable 114,000 66,000 investment for 20X8.
Inventory 204,000 90,000
Investment in Sub 140,400 •Prepare all consolidation
Property & Equipment
Accumulated Depreciation
336,000
(144,000)
210,000
(30,000)
entries as of 12/31/X8.
Total Assets $ 709,200 $ 384,000
•Prepare a consolidation
Payables & Accruals $ 168,000 84,000 worksheet at 12/31/X8.
Long-term Debt 360,000 144,000
Common Stock 12,000 60,000
Retained Earnings 169,200 96,000
NCI in Net Assets
Total Liabilities & Equity $ 709,200 384,000

3-72
 Group Exercise 3: Solution
Book Value Calculations
Parent’s Subsidiary’s Equity Accounts
NCI Investment Common Retained
(10%) Account (90%) Stock =
Earnings
NCI (10%) (90%) Stock Earnings

Balances, 1/1/X8
+ Net Income
 Dividends
Balances, 12/31/X8

3-73
 Group Exercise 1: Solution
Don’t forget the accumulated depreciation elimination entry:

Accumulated Depreciation 20,000

Buildings and Equipment 20,000

Property, Plant & Equipment Accumulated Depreciation

20,000
210,000

3-74
 Group Exercise 3: Solution
Elimination Entries
Pinkett, Inc. Smith, Inc. DR CR Consolidated
Income Statement
Sales $ 840,000 $ 300,000
Less: COGS (516,000) (156,000)
Less: Depreciation expense (12,000) (10,000)
Less: Other Expenses (192,000) (98,000)
Income from Smith, Inc. 32,400
Net Income $ 152,400 $ 36,000
NCI in Net Income
CI in Net Income $ 152,400 $ 36,000

Statement of Retained Earnings

Balances, 1/1/X8 $ 124,800 $ 72,000
Add: Net Income 152,400 36,000
Less: Dividends (108,000) (12,000)
Balances, 12/31/X8 $ 169,200 $ 96,000

Balance Sheet
Cash $ 58,800 $ 48,000
Accounts Receivable 114,000 66,000
Inventory 204,000 90,000
Investment in Sub 140,400
Property & Equipment 336,000 210,000
Accumulated Depreciation (144,000) (30,000)
Total Assets $ 709,200 $ 384,000

Payables & Accruals $ 168,000 84,000

Long-term Debt 360,000 144,000
Common Stock 12,000 60,000
Retained Earnings 169,200 96,000
NCI in Net Assets
Total Liabilities & Equity $ 709,200 384,000

3-75
Conclusion

The End