07 Fischer10e SM Ch07 Final PDF

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CHAPTER 7
UNDERSTANDING THE ISSUES
1. Equity prior to sale of new shares ................................................................................. $200,000

Equity gained by sale .................................................................................................... 600,000
Total equity after sale.................................................................................................... $800,000
Parent interest ............................................................................................................... 60%
Parent equity ................................................................................................................. $480,000
Price paid ...................................................................................................................... 600,000
Excess of cost over book value .................................................................................... $120,000
Excess will likely be attributed to goodwill.
2.
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary $625,000 $500,000 $125,000
Less book value of interest acquired:
Total equity 450,000 $450,000 $450,000
Interest acquired 80% 20%
Book value $360,000 $ 90,000
Excess of fair value over book value $175,000 $140,000 $ 35,000
Adjustment of identifiable accounts:

Amortization Worksheet
Adjustment per Year Life Key
Equipment $175,000 $ 17,500 10 debit D
20X6:
Parent income ........................................................... $120,000
Subsidiary income ..................................................... 50,000
Equipment depreciation ............................................ (17,500)
Total income.............................................................. $152,500
Income purchased [1/2 year 0.10 ($50,000
$17,500 amortization)] ........................................ (1,625)
Consolidated net income .......................................... $150,875
NCI [10% ($50,000 $17,500 amortization)] ........ $ 3,250
Controlling:
Internally generated ............................................ $120,000
80% 1 ($50,000 $17,500).......................... $26,000
10% 1/2 ($50,000 $17,500)....................... 1,625 27,625
Total controlling interest ............................................ $147,625
369
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3.
Company Parent NCI
Implied Price Value
Fair value of subsidiary $1,000,000 $800,000 $200,000
Total equity 900,000 $900,000 $900,000
Book value $720,000 $180,000
Excess of fair value over book value $ 100,000 $ 80,000 $ 20,000

20X5:
Cost of investment .................................................... $ 800,000

Equity increase:
Equity at July 1, 20X5, with 1/2 year income ......... $1,300,000
Equity at January 1, 20X1...................................... 900,000
Increase .................................................................... $ 400,000
Interest ...................................................................... 80% 320,000
Equipment depreciation ($10,000 4.5 80%) ....... (36,000)
Adjusted cost............................................................. $1,084,000
Sale of 8,000 shares

a. Gain on sale of investment (could be discontinued operation):
Sale price ($150 8,000) ................................... $ 1,200,000
Adjusted cost ...................................................... (1,084,000)
Gain .................................................................... $ 116,000
b. There will be no consolidated statements.
c. The parent will report investment income
(perhaps gain on discontinued operations):
Income for 6 months ........................................... $ 100,000
Equipment depreciation (1/2 80% $10,000). (4,000)
Income ................................................................ $ 96,000
370

a. Increase in paid-in equity on sale of investment:
Sale price ($150 2,000) ...................................................... $ 300,000
Adjusted cost (1/4 $1,084,000) ........................................... (271,000)
Equity increase....................................................................... $ 29,000
b. Consolidated statements are prepared as follows:
Parent income ........................................................................ $150,000
Subsidiary income ($200,000 $10,000 depreciation) ......... 190,000
Consolidated net income ....................................................... $340,000
NCI:
(20% 1 $190,000) ...................................................... $ 38,000
(20% 1/2 $190,000) ................................................... 19,000
Total NCI interest ................................................................... $ 57,000
Controlling:
Internally generated ......................................................... $150,000
Subsidiary:
(60% 1 $190,000) ...................................................... 114,000
(20% 1/2 $190,000) ................................................... 19,000
Total controlling interest ......................................................... $283,000
c. Not applicable

a. Gain on sale of investment (would not be discontinued operation):
Sale price ($150 6,000) .............................. $ 900,000
Adjusted cost (3/4 $1,084,000) .................. (813,000)
Gain ............................................................... $ 87,000
b. There will be no consolidated statements.
c. The parent will report investment income under the equity method.
Amount Period Interest Income
$190,000 1/2 60% $57,000
190,000 1 20% 38,000
Total $95,000
371
4.
Company Parent NCI
Implied Price Value
Fair value of subsidiary $1,750,000 $1,400,000 $350,000
Common stock ($1 par) $ 100,000
Paid-in capital in excess of par 900,000
Retained earnings 500,000
Preferred dividends in arrears (12,000)
Total equity $1,488,000 $1,488,000 $1,488,000
Book value $1,190,400 $ 297,600

Worksheet
Adjustment Key
Goodwill $ 262,000 debit D
Parent income ........................................................... $ 120,000

Consolidated net income .......................................... $ 200,000
NCI (20% $68,000) ................................................ $13,600
NCI preferred (6% $200,000) ................................ 12,000 $ 25,600
Controlling {$120,000 + [0.80 ($80,000 $12,000)]} $ 174,400
Income would be as follows if Company P owns 1/2 of preferred stock:
Parent income ........................................................... $ 120,000

Consolidated net income .......................................... $ 200,000
NCI [20% ($80,000 $12,000)] ............................. $13,600
NCI preferred (6% $100,000) ................................ 6,000 $ 19,600
Controlling {$120,000 + [0.80 ($80,000 $12,000)]
+ (6% $100,000)}............................................. $ 180,400
372
Ch. 7Exercises
EXERCISES
EXERCISE 7-1

Company Parent NCI
Implied Price Value
Fair value of subsidiary $2,000,000 $1,200,000 $ 800,000
Common stock ($5 par) $ 100,000
New proceeds 1,200,000
Total equity $1,660,000 $1,660,000 $1,660,000
Book value $ 996,000 $ 664,000

Building $200,000 10,000 20 debit D1
Goodwill 140,000 debit D2
Total $340,000
People Corporation and Subsidiary Sample Corporation

Consolidated Balance Sheet
January 2, 20X4
Assets
Current assets ($600,000 + $100,000 + $1,200,000) ...................... $1,900,000

Goodwill ........................................................................................... 140,000
Long-lived assets:
Land ........................................................................................... $ 210,000
Property, plant, and equipment (add $200,000)......................... 1,300,000 1,510,0
Total assets...................................................................................... $3,550,000
Liabilities and Stockholders Equity

Current liabilities .............................................................................. $ 350,000
Bonds payable ................................................................................. 1,200,000
Stockholders equity:
NCI [(40% $1,660,000) + $136,000] ....................................... 800,000
Common stock ($5 par).............................................................. $ 400,000
Retained earnings ...................................................................... 800,000 1,200,0
Total liabilities and stockholders equity ........................................... $3,550,000
373
Ch. 7Exercises
EXERCISE 7-2

Company Parent NCI
Implied Price Value
Common stock ($10 par) $100,000
Total equity $120,000 $120,000 $120,000
Book value $ 72,000 $ 48,000
Excess of fair value over book value $130,000 $ 78,000 $ 52,000

Analysis of 20% Interest, January 1, 20X3

Price paid for additional investment in Hardwood ............................ $ 40,000
Less interest acquired:
Common stock ($10 par)............................................................ $100,000
Retained earnings ...................................................................... 50,000
Total stockholders equity ..................................................... $150,000
Interest acquired ........................................................................ 20% 30,000
Excess ............................................................................................. $ 10,000
Equipment adjustment (8 remaining years $13,000 20%) ......... (20,800)
Parent paid-in capital in excess of par from stock retirement .......... $ 10,800
374
Ch. 7Exercises
Exercise 7-2, Concluded
Barker Corporation and Subsidiary Hardwood Company

Consolidated Balance Sheet
December 31, 20X5
Assets
Current assets.................................................................................. $ 350,000
Long-lived assets:
Property, plant, and equipmenta ................................................. 1,045,000
Total assets...................................................................................... $1,395,000
a
$740,000 + $240,000 + $130,000 (5 $13,000 amortization)
Liabilities and Stockholders Equity
Current liabilities .............................................................................. $ 500,000
Stockholders equity:
NCIb ............................................................................................ 57,000
Common stock ($10 par)........................................................... $500,000
Paid-in capital in excess of par from stock retirement................ 10,800
Retained earningsc ..................................................................... 327,200 838,000
Total liabilities and stockholders equity ........................................... $1,395,000
b
20% $220,000 $ 44,000
+ 40% interest [40% ($50,000 $20,000)] 12,000
+ 20% interest [20% ($120,000 $50,000)] 14,000
(20% 5 years $13,000 amortization) (13,000)
Total NCI balance $ 57,000
c
Conversion:
60% interest [60% ($120,000 $20,000)] = $ 60,000
20% interest [20% ($120,000 $50,000)] = 14,000
Share of retained earnings $ 74,000
Amortizations:
2 years 60% $13,000 (15,600)
3 years 80% $13,000 (31,200)
Net adjustment $ 27,200
Parent retained earnings balance,
December 31, 20X5 300,000
Total $327,200
375
Ch. 7Exercises
EXERCISE 7-3

Company Parent NCI
Implied Price Value
Fair value of subsidiary $465,000 $418,500 $ 46,500
Total equity $350,000 $350,000 $350,000
Book value $315,000 $ 35,000
Excess of fair value over book value $115,000 $103,500 $ 11,500

Entries
Investment in Venus Company ........................................................ 195,300
Retained Earnings* .................................................................... 137,475
Investment Income** .................................................................. 57,825
To convert the investment to the equity method. This includes
10% interest that is to be adjusted to sophisticated equity balance.
Cash................................................................................................. 700,000
Investment in Venus Company [8/9 ($418,500 cost +
$195,300 adjustment)] ........................................................... 545,600
Gain on Sale of Investment ........................................................ 154,400
To record the sale of the 8,000 shares of Venus stock.
Adjustments to the investment account:

*Retained earnings account = 90% $170,000 change in retained earnings 3 years of
equipment depreciation (3 90% $5,750) = $137,475.
**Investment income = 90% ($70,000 $5,750 equipment depreciation) = $57,825.
376
Ch. 7Exercises
EXERCISE 7-4
Entries on Carpenters books, January 1, 20X6:

Investment in Hinckley Company ..................................................... 2,960
Retained EarningsCarpenter .................................................. 2,960
To adjust investment to equity for shares sold.
Remaining shares may remain at cost, because
they will be consolidated.
Cash................................................................................................. 40,000
Investment in Hinckley Company ............................................... 10,960
Paid-In Capital in Excess of ParCarpenter ............................. 29,040
To record sale of shares. Investment eliminated =
[(2,000 40,000) $160,000 original cost] plus
$2,960 equity adjustment.

Company Parent NCI
Implied Price Value
Total equity 150,000 $150,000 $150,000
Book value $120,000 $ 30,000

Machine $ 20,000 $ 4,000 5 debit D1
Total $ 50,000
Equity adjustment:
Income ....................................................................................... $110,000
Amortization of excess (4 years $4,000) ................................. (16,000)
Dividends ................................................................................... (20,000)
$ 74,000
Interest sold (2,000 50,000) 4%
$ 2,960
377
Ch. 7Exercises
EXERCISE 7-5
(1) Retained Earnings (3 80% $5,000) ...................................... 12,000

Investment in Brown Corporation .......................................... 12,000
To adjust for building depreciation to December 31, 20X7.
Investment in Brown Corporation ............................................... 26,000
Investment Income ................................................................ 26,000
To adjust current years share of income and investment
account for one-half of the years building depreciation
[(80% $35,000) (1/2 80% $5,000)].
Cash ........................................................................................... 850,000
Investment in Brown Corporation* ......................................... 828,000
Gain on Sale of Subsidiary .................................................... 22,000
To record the sale and the gain on the 24,000 shares
of Brown stock.
*($814,000 $12,000 + $26,000).
(2) Retained Earnings (3 80% $5,000) ...................................... 12,000

To adjust one-half of current years share of income for
the first half of the year and one-half of the years building
depreciation, {1/2 [(80% $35,000) (1/2 80% $5,000)]}.
Note: A sophisticated equity adjustment for the other half of the investment will be
necessary at year-end.
Cash ........................................................................................... 425,000
Gain on Sale of Investment ................................................... 11,000
To record the sale and the gain on the 12,000 shares
of Brown stock.
*[1/2 ($814,000 $12,000)] + $13,000.
378
Ch. 7Exercises
(3) Only the 20% portion sold (25% of the investment) needs adjustment; the remaining 60% of
the investment) will be adjusted at year-end when consolidated statements are prepared.
Retained Earnings [(3 80% $5,000)* 1/4] ......................... 3,000
To adjust 25% of the current years share of income
for the first half of the year and 25% of the one-half
years building depreciation,
{1/4 [(80% $35,000) (1/2 80% $5,000)]}.
Cash ........................................................................................... 212,500
Paid-In Capital in Excess of Par ............................................ 5,500
To record the sale and the gain on the 6,000 shares of
Brown stock.
*[(1/4 $814,000) $3,000 + $6,500].
EXERCISE 7-6
(1)

Company Parent NCI
Implied Price Value
Total equity $284,000 $284,000 $284,000
Book value $227,200 $ 56,800

Worksheet
Adjustment Key
379
Ch. 7Exercises
(2)

Company Parent NCI
Implied Price Value
Preferred dividend share of retained
earnings (30,000)*
Total equity $260,000 $260,000 $260,000
Book value $208,000 $ 52,000

Worksheet
Adjustment Key
* $90,000 retained earnings 100/300 shares (preferred plus common stock)
(3)

Company Parent NCI
Implied Price Value
Preferred dividends share of RE (22,000)*
Total equity $268,000 $268,000 $268,000
Book value $214,400 $ 53,600

Worksheet
Adjustment Key
*(2 years $6,000) + (10% $100,000 par value)
380
Ch. 7Exercises
EXERCISE 7-7
(1)
Company Parent NCI
Implied Price Value
Total equity $860,000 $860,000 $860,000
Book value $688,000 $172,000

Worksheet
Adjustment Key
(2) Investment in Ace....................................................................... 32,000

Retained Earnings ................................................................. 32,000
To adjust for 80% of subsidiary income for 20X1 and 20X2
applicable to common stock, equal to 80%
($120,000 $80,000 current cumulative claim of
preferred stock).
Subsidiary Loss .......................................................................... 40,000
Investment in Ace .................................................................. 40,000
To adjust for 80% of subsidiary loss of $10,000 for
20X2 and 80% of the $40,000 current cumulative
claim of preferred stock.
381
Ch. 7Exercises
EXERCISE 7-8

Company Parent NCI
Implied Price Value
Common stock ($10 stated value) $300,000
Total equity $428,000 $428,000 $428,000
Book value $342,400 $ 85,600

Worksheet
Adjustment Key
(1) Equity claim on Kim Company retained earnings:

Retained earnings, January 1, 20X7 .......................................... $210,000
Preferred claim (4 years $16,000) .......................................... 64,000
Common shareholders claim ................................................ $146,000
(2) Cost-to-simple-equity conversion for preferred stock:

Preferred stockholders claim on retained earnings;
January 1, 20X5, through January 1, 20X7
(2 years $16,000) ............................................................... $32,000
Ownership interest ..................................................................... 50%
Cost-to-simple-equity conversion ............................................... $16,000
Investment in Kim Company Preferred Stock ............................ 16,000
Retained EarningsZigler..................................................... 16,000
To adjust investment to simple equity.
Preferred StockKim Company (50% $200,000) .................. 100,000
Retained EarningsKim Company (50% $64,000
applicable to preferred stock) .................................................. 32,000
Investment in Kim Company Preferred Stock
($90,000 cost + $16,000 adjusted).................................... 106,000
Paid-In Capital in Excess of ParRetirement
of Preferred Stock ............................................................. 26,000
To eliminate the investment in preferred stock.
382
Ch. 7Exercises

(3) Cost-to-simple-equity conversion for common stock:
Retained earnings, January 1, 20X7 .......................................... $210,000
Less preferred claim4 years 8% $200,000 ....................... 64,000 $146,000
Retained earnings, December 31, 20X4................................ $160,000
Less preferred claim2 years 8% $200,000 .................. 32,000 128,000
Increase in retained earnings, common stock ....................... $ 18,000
Ownership interest ............................................................ 80%
Cost-to-simple-equity conversion ...................................... $ 14,400
Entries:
Investment in Kim Company Common Stock............................. 14,400
Retained EarningsZigler..................................................... 14,400
To adjust investment to equity.
Common StockKim Company ($300,000 80%) ................... 240,000
Retained EarningsKim Company (80% $146,000
applicable to common stock) ................................................. 116,800
Goodwill ..................................................................................... 97,000
Investment in Kim Company Common Stock ........................ 434,400
NCI ........................................................................................ 19,400
To eliminate investment, adjust NCI, and record goodwill.
383
Ch. 7Problems
PROBLEMS
PROBLEM 7-1
(1)
Price paid ................................................................................... $70,000
Common stock ($10 par) ...................................................... $ 75,000
Retained earnings ................................................................ 85,000
Total stockholders equity ............................................... $160,000
Interest acquired .................................................................. 20% 32,000
Excess ....................................................................................... $38,000
Equipment adjustment {[$105,000 (2 years $10,500)]
20%} ................................................................................. 16,800
Debit parent retained earnings ................................................... $21,200
(2) See worksheet on page 389
Eliminations and Adjustments:

(CY1) Eliminate intercompany income.
(CY2) Eliminate intercompany dividends.
(EL) Eliminate the controlling interest in the subsidiary equity.
(D1)/(NCI) Distribute the excess on the original 60% investment to equipment.
(D2) Distribute the excess on the 20% investment to parent retained earnings.
(A) Depreciate the excess for 4 years as follows:
Sharper retained earnings, 2 years at 40% and 1 year at 20% of 10,500 $10,500
Parish retained earnings, 2 years at 60% and 1 year at 80% of 410,500 21,000
Depreciation expense 10,500
Subsidiary Sharp Company Income Distribution

Depreciation ............................. (A) $10,500 Internally generated net
income ............................... $35,000
Adjusted net income ................ $24,500

NCI share ................................ 20%
NCI .......................................... $ 4,900
Parent Parish Company Income Distribution

Internally generated net
income ............................... $100,000
80% Sharp adjusted
income of $24,500 ............. 19,600
Controlling interest................... $119,600
384
Ch. 7Problems
Problem 7-1, Concluded
(2) Parish Company and Subsidiary Sharp Company

Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X5
Eliminations Consolidated Controlling Consolidated

Trial Balance and Adjustments Income Retained Balance
Parish Sharp Dr. Cr. Statement NCI Earnings Sheet
Current Assets ............................................... 196,000 55,000 ............... ................. ................. ................. .................
..........................................................251,000
Investment in Sharp Company ....................... 265,000 ............. (CY2) 4,000 (CY1) 28,000 ...... ................. ................. .................
................. ................. ................. (EL) 140,000 ............... ................. ................. .................
................. ................. ................. (D1) 63,000 ............... ................. ................. .................
................. ................. ................. (D2) 38,000 ............... ................. ................. .................
Property, Plant, and Equipment (net) ............. 450,000 170,000 (D1) 105,000 (A) ............. 42,000 ............... .................
....................................................................... 683,000
Current Liabilities ........................................... (110,000) (20,000) ............. ................. ................. ................. .................
....................................................... (130,000)
Common Stock ($10 par)Parish ................. (500,000) ............ ................. ................. ................. ................. .................
....................................................... (500,000)
Retained EarningsParish ............................ (198,000) ............ (A) 21,000 ................. ................. ................. ................. .................
.......................................................................
................. ................. (D2) 21,200 ................. ................. ................. (155,800) ..
Common Stock ($10 par)Sharp .................. ................. (75,000) (EL) 60,000 ................. ................. ............(15,000) ..............
.......................................................................
Retained EarningsSharp ................. .......... (100,000) (EL) 80,000 ........ (NCI) ............. 42,000 ................. (34,700) ....
................. ................. (A) 10,500 ................. ................. ................. .................

................. ................. (D2) 16,800 ................. ................. ................. .................
Sales .............................................................. (400,000) (110,000) ........... ................. .......... (510,000) ............... .................
.......................................................................
Subsidiary Income.......................................... (28,000) ............ (CY1) 28,000 ................. ................. ................. ................. .................
Cost of Goods Sold ........................................ 200,000 60,000 ............... ................. ........... 260,000 ................ .................
.......................................................................
Other Expenses ............................................. 100,000 15,000 (A) 10,500 ...... ................. ................. ................. .................
.......................................................................
................. ................. ................. ................. 125,500 ............... ................. .................
Dividends Declared ........................................ 25,000 5,000 ................. (CY2) ............... 4,000 1,000 ........
............................................................25,000
0 0 357,000 357,000 .... ................. ................. .................
Consolidated Net Income ........................................................................................................................................ (124,500) ................. ................. .................
To NCI ................................................................................................................................................................. 4,900 (4,900)............... .................
385
Ch. 7Problems
To Controlling Interest ......................................................................................................................................... 119,600 ................. (119,600) ..............

Total NCI ........................................................................................................................................................................................ (53,600)...............
(53,600)
Retained EarningsControlling Interest, December 31, 20X5 ............................................................................................................................. (250,400)
(250,400)
Totals ......................................................................................................................................................................................................................................... 0
386
Ch. 7Problems
PROBLEM 7-2
(1)
Company Parent NCI
Implied Price Value
Common stock $ 50,000
Other paid-in capital in excess of
par 100,000
Total equity $300,000 $300,000 $300,000
Book value $210,000 $ 90,000

Equipment $ 20,000 $ 5,000 4 debit D1
Total $ 50,000
Analysis of 20% Interest:

Price paid ......................................................................................... $92,000
Common stock ..................................................................... $ 50,000
Other paid-in capital in excess of par ................................... 100,000
Retained earnings ................................................................ 190,000
Income for 4 months ............................................................ 30,000
Interest acquired .................................................................. 20% 74,000
Excess........................................................................................ $ 18,000
Equipment adjustment {[$20,000 (1 1/3 years $5,000)]
20%} ................................................................................. (2,667)
Debit parent retained earnings ....................................... $15,333
387
Ch. 7Problems
Problem 7-2, Continued
(2) Entries under the simple equity method: 20X1 20X2

Debit Credit Debit Credit
Investment in Craft Company................ 42,000 (1) 75,000 (2)
Subsidiary Income ......................... 42,000 75,000
Cash ...................................................... 14,000 (3) 27,000 (4)
Investment in Craft Company ........ 14,000 27,000
(1) 70% of $60,000 net income
(2) 70% of $30,000 (first 4 months) net income plus 90% of $60,000 (second 8 months)
net income
(3) 70% of $20,000 dividends
(4) 90% of $30,000 dividends
(3) Balance in Investment in Craft Company:

$245,000 + $42,000 $14,000 + $92,000 + $75,000 $27,000 = $413,000
Balance in Subsidiary Income (20X2 only): 70% of $30,000 (January 1 thru April 30) +
90% of $60,000 (May 1 thru December 31, 20X2) = $75,000.
388
Ch. 7Problems
(4) James Company and Subsidiary Craft Company

Eliminations Consolidated Controlling Consol.
James Craft Dr. Cr. Statement NCI Earnings Sheet
Inventory, December 31................................. 100,000 50,000 ............... (EI) ............... 3,000 ................ .................
....................................................................... 147,000
Other Current Assets ..................................... 126,000 180,000 ............. ................. ................. ................. .................
.......................................................... 306,000
Investment in Craft Company ........................ 413,000 .............. (CY2) 27,000 (CY1) 75,000...... ................. ................. .................
................. ................. ................. (EL) 312,000 ............... ................. ................. .................
................. ................. ................. (D1) 35,000 ............... ................. ................. .................
................. ................. ................. (D2) 18,000 ............... ................. ................. .................
Land ............................................................... 50,000 50,000 ............... ................. ................. ................. .................
.......................................................... 100,000
Buildings and Equipment ............................... 350,000 320,000 (D1) 20,000 ...... ................. ................. .................
.......................................................... 690,000
Accumulated Depreciation ............................. (100,000) (60,000) ............ (A) ............. 10,000 ................ .................
....................................................................... (170,000)
Goodwill ......................................................... ................. ................. (D1 ) 30,000 ................. ................. ................. ................. 30,000
Other Intangibles ........................................... 20,000 .............. ................. ................. ................. ................. ................. 20,000
Current Liabilities ........................................... (120,000) (40,000) ............ ................. ................. ................. .................
........................................................(160,000)
Bonds Payable ............................................... ................. (100,000) ................. ................. ................. ................. .................
........................................................(100,000)
Other Long-Term Liabilities............................ (200,000) ............. ................. ................. ................. ................. .................
........................................................(200,000)
Common StockJames ................................ (200,000) ............. ................. ................. ................. ................. .................
........................................................(200,000)
Other Paid-In Capital in Excess of Par
James ..................................................... (100,000) ............. ................. ................. ................. ................. .................
(100,000)
Retained EarningsJames ........................... (214,000) ............. (A) 3,500 ................. ................. ................. (195,167)..
................. ................. (D2) 15,333 ................. ................. ................. ................. .................
Common StockCraft ................................... ................. (50,000) (EL) 45,000................. ................. .............. (5,000) ..............
.......................................................................
Other Paid-In Capital in Excess of Par
Craft ........................................................ ................. (100,000) (EL) 90,000................. ................. ............ (10,000) ..............
...................................................................
Retained EarningsCraft .............................. ................. (190,000) (EL) 171,000 (NCI) ............. 15,000 ................. (29,833)....
.......................................................................
................. ................. (A) 1,500 ................. ................. ................. ................. .................
................. ................. (D2) 2,667 ................. ................. ................. ................. .................
389
Ch. 7Problems
Net Sales ....................................................... (520,000) (450,000) (IS) 50,000 ...... ......... (920,000) .............. .................
.......................................................................
Cost of Goods Sold ........................................ 300,000 260,000 (EI) 3,000 (IS) 50,000 ................ 513,000 .... .................
.......................................................................
Operating Expenses ...................................... 120,000 100,000 (A) 5,000 ........ ...........225,000................ .................
.......................................................................
Subsidiary Income ......................................... (75,000) ............. (CY1) 75,000 ................. ................. ................. ................. .................
Dividends Declared ........................................ 50,000 30,000 ............... (CY2) ............. 27,000 3,000 ........ 50,000
.......................................................................
Purchased Income ......................................... ................. ................. (EL) 6,000 ................. 6,000 ........ ................. .................
Total ............................................................... 0 0 545,000 545,000 .... ................. ................. .................
Consolidated Net Income........................................................................................................................................ (176,000) .............. ................. .................
To NCI (see distribution schedule) ...................................................................................................................... 8,200 (8,200) ...... .................
To Controlling Interest (see distribution schedule) .............................................................................................. 167,800 ................ (167,800)..
Total NCI........................................................................................................................................................................................ (50,033) ..............
(50,033)
Retained EarningsControlling Interest, December 31, 20X2 .............................................................................................................................. (312,967)
(312,967)
Totals ........................................................................................................................................................................................................................................ 0
390
Ch. 7Problems

(CY1) Eliminate the current-year entries for subsidiary income.
(CY2) Eliminate current-year entries for subsidiary dividends.
(EL) Eliminate 90% of Craft Company equity balances at the beginning of the year
against the investment account. Also eliminate 20% of the January through April
20X2 income ($30,000) with a debit of $6,000 to Purchased Income.
(D1)/(NCI) Distribute the $35,000 excess cost and $15,000 NCI adjustment as required by
the determination and distribution of excess schedules to Equipment and
Goodwill.
(A) Depreciate the write-up to equipment over 2 years. Charge the 20X1
depreciation against January 1, 20X2, Retained Earnings of James Company
and Craft Company and the 20X2 adjustment against Operating Expenses.
(D2) Distribute excess on 20% investment. Eliminate NCI of $2,667 and debit James
Retained Earnings for $15,333.
(IS) Eliminate the intercompany sale and purchase.
(EI) Eliminate the $3,000 of gross profit in the ending inventory.
Subsidiary Craft Company Income Distribution

Ending inventory profit ............. (EI) $3,000 Internally generated net
Equipment depreciation ........... (A) 5,000 income ............................... $90,000
Adjusted net income ................ $82,000

NCI share ................................ 10%
NCI .......................................... $ 8,200
Parent James Company Income Distribution

income ............................... $100,000
90% of Craft income ................ 73,800
Less purchased income........... (EL) (6,000)
Controlling interest................... $167,800
391
Ch. 7Problems
PROBLEM 7-3

Company Parent NCI
Implied Price Value
Price paid for investment $475,500 $325,500 $150,000*
Common stock $100,000
Total equity $500,000 $500,000 $500,000
Book value $350,000 $150,000
Excess of fair value over book value $ (24,500) $ (24,500)

Worksheet
Adjustment Key
Gain on acquisition $ (24,500) credit D
* NCI value cannot be less than fair (equal to book) value of interest in net assets.
Analysis of September 30, 20X7, purchase:
Price paid ....................................................................................... $105,000
Common stock ....................................................................... $100,000
Retained earnings, January 1 ................................................ 400,000
Income, JanuarySeptember ................................................. 25,000
Interest acquired .................................................................... 20% 105,000
Excess ........................................................................................... $ 0
(CY1) Eliminate the subsidiary income.
(CY2) Eliminate the intercompany dividends.
(EL) Eliminate 90% of Stallwards equity against the investment.
(D) Distribute excess to gain on acquisition.
(PI) Eliminate purchased income from the investment, $25,000 20% = $5,000.
(LN) Eliminate the intercompany accounts resulting from the 12% note:
(1) Payment of installment and interest on December 31 was made by Stallward but
not received by Away.
(2) Balance on note.
(3) Interest income and expense.
(S) (1) Eliminate intercompany services.
(2) Eliminate profit in deferred charges, $16,500 1/3 = $5,500.
(IS) Eliminate intercompany sales of $60,000.
(EI) Eliminate the intercompany profit in ending inventory:
Sales Cost of Goods Sold $450,000
Aways Percent Profit: = = = 25%
Sales $1,800,000
25% $10,000 = $2,500
392
Ch. 7Problems
(F1) Eliminate the gain on the sale of tools.

(F2) Adjust the depreciation on tools:
Depreciation taken [($25,000 5) ] ...................................................... $2,500
Less correct depreciation [($15,000 5) ] ............................................ 1,500
Depreciation adjustment............................................................................. $1,000
Subsidiary Stallward, Inc. Income Distribution

Unrealized profit on Internally generated net
engineering services .......... (S2) $5,500 income ............................... $ 48,000
Adjusted income ...................... $ 42,500

NCI share ................................ 10%
NCI .......................................... $ 4,250
Parent Away Company Income Distribution

Unrealized gain on sale Internally generated net
of tools ................................ (F1) $10,000 income ............................... $202,000
Unrealized profit in ending 70% interest in income of
inventory ............................. (EI) 2,500 Stallward for full year
(70% $42,500) ................ 29,750
20% interest in income for
one-quarter year [($42,500
$25,000) 20%] ................ 3,500
Gain on acquisition .................. 24,500
Depreciation adjustment
on tools .............................. (F2) 1,000
Controlling interest ................... $248,250
393
Ch. 7Problems
Away Company and Subsidiary Stallward, Inc.


Away Stallward Dr. Cr. Statement NCI Earnings Sheet
Cash .............................................................. 99,500 78,000 ............... ................. ................. ................. .................
.......................................................... 177,500
Notes Receivable ........................................... 100,000 .............. ................. (LN1) 25,000...... ................. ................. .................
................. ................. ................. (LN2) 75,000 ............... ................. ................. .................
Accounts Receivable ..................................... 200,000 100,000 ............. ................. ................. ................. .................
.......................................................... 300,000
Interest Receivable ........................................ 3,000 .............. ................. (LN1) 3,000........ ................. ................. .................
Dividends Receivable .................................... 4,500 .............. ................. (CY1) 4,500........ ................. ................. .................
Inventories ..................................................... 924,000 125,000 ............. (EI) ............... 2,500 ................ .................
....................................................................... 1,046,500
Investment in Stallward, Inc. ......................... 469,200 .............. (D) 24,500 (CY1) ............. 43,200 ................ ................. .................
.......................................................................
................. ................. (CY2) 4,500 (EL) 450,000.... ................. ................. .................
................. ................. ................. (PI) 5,000 ............... ................. ................. .................
Property, Plant, and Equipment ..................... 1,250,000 500,000 ............. (F1) ............. 10,000 ................ .................
....................................................................... 1,740,000
Accumulated Depreciation ............................. (500,000) (150,000) (F2) 1,000 ........ ................. ................. .................
........................................................(649,000)
Deferred Charges .......................................... 25,000 .............. ................. (S2) 5,500........ ................. .................
............................................................ 19,500
Patents and Licenses..................................... ................. 50,000 ................. ................. ................. ................. .................
............................................................ 50,000
Cash in Transit............................................... ................. ................. (LN1) 28,000 ................. ................. ................. .................
............................................................ 28,000
Accounts Payable .......................................... (425,000) (80,000) ............ ................. ................. ................. .................
........................................................(505,000)
Notes Payable ............................................... ................. (75,000) (LN2) 75,000 ................. ................. ................. ................. .................
Dividends Payable ......................................... ................. (5,000) (CY1) 4,500 ................. ................. ................. .................
.............................................................. (500)
Capital StockAway ..................................... (300,000) ............. ................. ................. ................. ................. .................
........................................................(300,000)
Retained EarningsAway ............................. (1,605,000) ...... ................. ................. ................. ................. (1,605,000)
.......................................................................
394
Ch. 7Problems
Capital StockStallward ............................... ................. (100,000) (EL) 90,000................. ................. ............ (10,000) ..............
.......................................................................
Retained EarningsStallward ....................... ................. (400,000) (EL) 360,000............... ................. ............ (40,000) ..............
.......................................................................
Sales and Services ........................................ (1,800,000) (750,000) (S1) 40,000 ...... ................. ................. ................. .................
.......................................................................
................. ................. (IS) 60,000 ................. ................. ................. ................. .................
................. ................. (F1) 10,000 ................. (2,440,000) ................. .................
Subsidiary Income ......................................... (43,200) ............. (CY1) 43,200 ................. ................. ................. ................. .................
Interest Income .............................................. (3,000) ............. (LN3) 3,000 ................. ................. ................. ................. .................
Cost of Goods Sold ........................................ 1,350,000 525,000 ............. ................. ................. ................. ................. .................
.......................................................................
................. ................. (EI) 2,500 (IS) 60,000 1,817,500 . ................. .................
Administrative and Selling Expenses ............. 251,000 174,000 (S2) 5,500 (S1) ............. 40,000 ................ ................. .................
.......................................................................
................. ................. ................. (F2) 1,000 389,500 .... ................. .................
Interest Expense ............................................ ................. 3,000 ................. (LN3) 3,000........ ................. ................. .................
395
Ch. 7Problems
Away Company and Subsidiary Stallward Inc.

(Concluded)

Away Stallward Dr. Cr. Statement NCI Earnings Sheet
Gain on Acquisition ........................................ ................. ................. ................. (D) 24,500 (24,500) .... ................. .................
Dividends Declared ........................................ ................. 5,000 ................. (CY2) 4,500........ 500 ........... .................
Purchased Income ......................................... ................. ................. (PI) 5,000 ................. 5,000 ........ ................. .................
0 0 756,700 756,700 .... ................. ................. .................
To NCI (see distribution schedule) ...................................................................................................................... 4,250 (4,250) ...... .................
Total NCI........................................................................................................................................................................................ (53,750) ..............
(53,750)
Retained EarningsControlling Interest, December 31, 20X7 .............................................................................................................................. (1,853,250)
(1,853,250)
Totals ........................................................................................................................................................................................................................................ 0
396
Ch. 7Problems
PROBLEM 7-4

Company Parent NCI
Implied Price Value
Total equity $500,000 $500,000 $500,000
Book value $450,000 $ 50,000

Buildings $ 50,000 $ 2,500 20 debit D
Entries of July 1, 20X7:

Investment in Doer [10% ($25,000 income $10,000 dividends)
(10% $2,500 amortization 1/2 year)] ................................. 1,375
To record the increase in the investment account for the
portion sold of income not received in dividends.
Investment in Doer [(10% $100,000 change)] (10% 4 years
$2,500 amortization) ............................................................... 9,000
To convert the portion of the investment sold to equity by
recording undistributed income less amortization for
previous years.
Cash................................................................................................. 80,000
Investment in Doer [(1/9 $495,000) + $1,375 + $9,000] ......... 65,375
Paid-In Capital in Excess of ParCipher .................................. 14,625
To record sale of 10% interest.
Entries on December 31, 20X7:
Investment in Doer [80% ($60,000 income $20,000
dividends) (80% $2,500 amortization)] ................................ 30,000
To record the increase in the investment account for the
portion sold for income not received in dividends.
397
Ch. 7Problems
Investment in Doer (80% $100,000 change)

(80% 4 years $2,500 amortization) ...................................... 72,000
To convert the portion of the investment sold to equity by
recording undistributed income less amortizations for
previous years.
Cash................................................................................................. 500,000
Loss on Sale of Investment* ............................................................ 42,000
Investment in Doer [(8/9 $495,000) + $30,000 + $72,000] ..... 542,000
To record sale of 8/9 interest.
*The loss could be a result of a discontinued segment.
PROBLEM 7-5
Adjustments for investment in preferred stock:

Investment in Channel Preferred Stock ........................................... 1,800
Subsidiary Income, Preferred Stock........................................... 1,800
To record dividend preference for 20X5.
Adjustments for investment in common stock:
From cost to fair value on January 1, 20X3
Fair value, 1,000 shares ($140,000 purchase cost/5,000 shares) $28,000
Cost ............................................................................................ 25,000
Adjustment to fair value on control date ..................................... $ 3,000
Investment in Channel Company ..................................................... 3,000

Unrealized Gain on Investments ................................................ 3,000
Adjustment for 20X320X4:

Retained Earnings ........................................................................... 3,600
Investment in Channel Common Stock ...................................... 3,600
Net correction for equity adjustments on common:
20X320X4:
Failure to deduct preferred dividend claims from
net income to arrive at income available to
common. Decrease investment and retained
earnings (2 $3,000 60% interest) = $(3,600).
Adjustment for 20X5:

Retained Earnings ........................................................................... 2,400
Investment in Channel Common Stock ...................................... 2,400
Deduct dividends accumulated on preferred
from income available to common and from
investment (80% $3,000) = $(2,400).
398
Ch. 7Problems
Adjustment for sale of 10% interest:

Adjusted cost of shares, January 1, 20X3, 1,000 shares $28. $28,000
Share of income, 10% $75,000............................................... 7,500
Common dividends, 10% $5,000 ............................................ (500)
Deduction for preferred dividends paid or accrued, 10% $9,000 (900)
Equity-adjusted cost................................................................... $34,100
Entry to correct sale:

Investment in Channel Common Stock ...................................... 900
Paid-In Capital in Excess of ParBillings............................ 900
Calculation of balance:
Original cost ...................................................................................................... $25,000
Income, 10% $130,000 (20X1 thru 20X5) ...................................................... 13,000
Common dividends paid, 10% $11,000 (20X2 and 20X3) ............................. (1,100)
Preferred dividends paid or accrued, 10% $15,000 (20X1 thru 20X5)....... (1,500)
Balance in investment account, December 31, 20X5 ................................... $35,400
Entry to correct sale:

Gain on Sale of Investment................................................................. 400
Investment in Channel Company ($35,400 balance $35,000
removed) ............................................................................. 400
PROBLEM 7-6
Determination and Distribution of Excess Schedule, December 31, 20X3

Company Parent NCI
Implied Price Value
Preferred arrearage (2 years
$8,000) (16,000)
Total equity $784,000 $784,000 $784,000
Book value $627,200 $156,800
Excess of fair value over book value $116,000 $ 92,800 $ 23,200

Building $ 28,000 $ 1,400 20 debit D1
Total $116,000
399
Ch. 7Problems
Marsha Corporation and Subsidiary Transam Corporation


Marsha Transam Dr. Cr. Statement NCI Earnings Sheet
Current Assets ............................................... 806,400 463,250 ............. ................. ................. ................. .................
....................................................... 1,269,650
Investment in Transam Corporation ............... 720,000 .............. (CV) 59,200 (EL) ........... 686,400 ................ ................. .................
.......................................................................
................. ................. ................. (D) 92,800 ............... ................. ................. .................
Land ............................................................... 400,000 210,000 ............. ................. ................. ................. .................
.......................................................... 610,000
Building .......................................................... 950,000 500,000 (D1) 28,000 ...... ................. ................. .................
....................................................... 1,478,000
Accumulated DepreciationBuilding ............. (200,000) (160,000)........... (A1) ............... 4,200 ................ .................
....................................................................... (364,200)
Equipment ...................................................... 1,500,000 740,000 ............. (F1) ............. 25,000 ................ .................
....................................................................... 2,215,000
Accumulated DepreciationEquipment ........ (400,000) (200,000) (F1) 5,000 ........ ................. ................. .................
........................................................(590,000)
................. ................. (F2) 5,000 ................. ................. ................. ................. .................
Goodwill ......................................................... ................. ................. (D2) 88,000 ................. ................. ................. .................
............................................................ 88,000
Liabilities ........................................................ (800,000) (550,000)........... ................. ................. ................. .................
.....................................................(1,350,000)
Common Stock ($20 par)Marsha ............... (2,000,000) ...... ................. ................. ................. ................. .................
.....................................................(2,000,000)
Retained EarningsMarsha .......................... (860,000) ............. (A1) 2,240 (CV) 59,200...... ................. ................. .................
................. ................. (F1) 20,000 ................. ................. ................. (896,960)..
Preferred Stock ($100 par)Transam ........... ................. (100,000) ................. ................. ................. (100,000) .. .................
Common Stock ($20 par)Transam ............. ................. (750,000) (EL) 600,000 (NCI) ............. 23,200 ................. (150,000)..
.......................................................................
Retained Earnings (common)Transam....... ................. (124,000) (PS) 16,000................. ................. ................. ................. .................
.......................................................................
................. ................. (EL) 86,400 ................. ................. (44,240) .... .................
................. ................. (A1) 560 ................. ................. ................. ................. .................
Retained Earnings (preferred)Transam ...... ................. ................. ................. (PS) 16,000 ............... (16,000) .... .................
400
Ch. 7Problems
Sales .............................................................. (2,100,000) (1,000,000)........ ................. ............. (3,100,000) ....... .................

.......................................................................
Subsidiary Dividend Income .......................... (21,400) ............. (CY) 21,400................. ................. ................. ................. .................
.......................................................................
Cost of Goods Sold ........................................ 1,155,000 600,000 ............. ................. ...............1,755,000 ......... .................
.......................................................................
Other Expenses ............................................. 650,000 320,000 (A1) 1,400 (F2) 5,000 ................ 966,400 .... .................
.......................................................................
Dividends Declared ........................................ 200,000 50,750 ............... (CY) ............. 21,400 29,350 ......
.......................................................... 200,000
0 0 933,200 933,200 .... ................. ................. .................
To NCI (see distribution schedule) ...................................................................................................................... 22,120 (22,120) .... .................
Total NCI........................................................................................................................................................................................ (303,010) ..............
........................................................................................................................................................................................ (303,010)
Retained EarningsControlling Interest, December 31, 20X6 .............................................................................................................................. (1,053,440)
............................................................................................................................................................................................................ (1,053,440)
Totals ........................................................................................................................................................................................................................................ 0
401
Ch. 7Problems

(CV) Convert the investment to the equity method as of January 1:
Retained earnings applicable to common stock
on January 1, 20X6 ($124,000 $16,000 arrearage
for 20X4 and 20X5) .............................................................. $108,000
Less retained earnings applicable to common stock
on December 31, 20X3 ($50,000 $16,000) ....................... 34,000
Change in retained earnings ...................................................... $ 74,000
Parents interest ......................................................................... 80%
Equity conversion ....................................................................... $ 59,200
(CY) Eliminate the intercompany common stock dividends for 20X6 (80% $26,750).
(PS) Remove the retained earnings applicable to preferred stock on January 1, 20X6,
from the retained earnings of Transam Corporation, 2 years $8,000.
(EL) Eliminate the parents 80% share of subsidiary common stock equity.
(D)/(NCI) Distribute the excess and NCI adjustment according to the determination and
distribution of excess schedule.
(D1) Building.
(D2) Goodwill.
Amortize the excess:
(A1) Adjust the depreciation on the buildingtwo past years and one current year.
(F1) Adjust equipment for $25,000 gain. Reduce prior year depreciation $5,000.
Eliminate $20,000 gain on January 1 from Marsha retained earnings.
(F2) Reduce current depreciation by $5,000 for 1/5 of current gain on sale.
402
Ch. 7Problems
Subsidiary Transam Corporation Income Distribution

Building depreciation ................ (A1) $1,400 Internally generated net
income ............................... $80,000
Less preferred claim to
NCI (20X6 dividends)......... 8,000
Adjusted income ...................... $70,600

NCI share ................................ 20%
NCI .......................................... $14,120
Add preferred claim ................. 8,000
Total NCI ................................. $22,120
Parent Marsha Corporation Income Distribution

Internally generated
income ............................... $295,000
Share of Transam adjusted income
(80% $70,600) ................ 56,480
Realized gain on equipment
through use ........................ 5,000
Controlling interest ................... $356,480
403
Ch. 7Problems
PROBLEM 7-7
(1)
Adjustment of investment account:
July 1, 20X8
Implied fair value of 5,000 shares [($226,200/15,000 shares) 5,000] ................ $ 75,400
Book value ($71,400 + $12,000 $9,000) ............................................................ 74,400
Unrealized gain ..................................................................................................... $ 1,000
Correcting entry:
Investment in Boat Corporation .......................................................... 1,000
Unrealized Gain on Investment ................................................... 1,000
(2) Supporting schedules for worksheet:
Determination and Distribution of Excess Schedule, July 1, 20X8

Company Parent NCI
Implied Price Value
Fair value of subsidiary $377,000 $301,600* $ 75,400
January 1June 20 income 20,000
Total equity $377,000 $377,000 $377,000
Book value $301,600 $ 75,400
Excess of fair value over book value $ 0 $ 0 $ 0
*$74,400 + $1,000 gain + $226,200
January 2, 20X8, Engine Corporation preferred, 250 shares:

Price paid ................................................................................... $7,000
Preferred stock ................................................................... $ 50,000
Retained earnings, preferred stock,
[$50,000/($200,000 + $50,000)] $100,000
retained earnings on January 1, 20X8 .......................... 20,000
Total stockholders equity ....................................... $ 70,000
Interest acquired (250 2,500)........................................... 10% 7,000
Excess........................................................................................ $ 0
404
Ch. 7Problems
January 2, 20X8, Engine Corporation common, 14,000 shares (14,000 shares/20,000 shares =
70%):

Company Parent NCI
Implied Price Value
Retained earnings (for common
shares) 80,000*
Total equity $280,000 $280,000 $280,000
Book value $196,000 $ 84,000
Excess of fair value over book value $ 0 $ 0 $ 0
*($200,000/250,000) $100,000
405
Ch. 7Problems
Titan Corporation and Subsidiaries Boat Corporation and Engine Corporation


Trial Balance and Adjustments Income NCI NCI Retained Balance
Titan Boat Engine Dr. Cr. Statement Boat Engine Earnings Sheet
Cash ........................................... 100,000 87,000 95,000 ............. ............. ................. ............... ............... ................
282,000
Accounts Receivable .................. 158,200 210,000 105,000 ........... (IA) ............. 22,400 ........... ............... ................
................................. 450,800
Inventories .................................. 290,000 90,000 115,000 ........... (EI) ............... 6,400 ........... ............... ................
................................. 488,600
Advance to Boat Corporation ...... 17,000 ........... ............... .............. (LN) 17,000 ...... ............... ............... ................ .................
Dividends Receivable ................. 24,000 ........... ............... .............. (DP) 24,000 ...... ............... ............... ................ .................
Property, Plant, and Equipment .. 777,600 325,000 470,000 ........... ............. ................. ............... ............... ................
1,572,600
Accumulated Depreciation .......... (180,000) (55,000) (160,000) ......... ............. ................. ............... ............... ................
(395,000)
Investment in Boat Corporation:
6% Bonds .............................. 23,800 ............ ............... .............. (B) 23,800 ...... ............... ............... ................ .................
Common Stock ...................... 293,600 ............ ............... .............. ................. ............... ............... ................
................. ................ ............... (CY2) 24,000 (CY1a)16,000 ............. ............... ............... ................ .................
................. ................ ............... .............. (PI) 16,000 .............. ............... ............... ................ .................
................. ................ ............... .............. (EL1) 285,600 .............. ............... ............... ................ .................
Investment in Engine Corporation:
Preferred Stock ..................... 7,400 ............ ............... .............. (PS2) 7,000 ........ ............... ............... ................ .................
................. ................ ............... .............. (PS) 400 ................. ............... ............... ................ .................
Common Stock ...................... 207,200 ............ ............... .............. (CY1b)11,200 ............. ............... ............... ................ .................
................. ................ ............... .............. (EL2) 196,000 .............. ............... ............... ................ .................
Notes Payable ............................ (45,000) (14,000) (44,000) ........... ............. ................. ............... ............... ................
(103,000)
Accounts Payable ....................... (170,000) (96,000) (86,000) (IA) 22,400 .. ................. ............... ............... ................ .................
................. ............... ............... (LN) 17,000 ............. ................. ............... ............... ................
(312,600)
Bonds Payable ............................ (285,000) (150,000) (125,000) (B) 25,000 .. ................. ............... ............... ................
(535,000)
Discount on Bonds Payable ........ 8,000 ........... ............... .............. ............. ................. ............... ............... ................
8,000
Dividends Payable ...................... (22,000) (30,000) .. (DP) 24,000 ............. ................. ............... ............... ................
(28,000)
Preferred Stock ($20 par)Titan (400,000) .......... ............... .............. ............. ................. ............... ............... ................
(400,000)
406
Ch. 7Problems
Common Stock ($10 par)Titan (600,000) .......... ............... .............. ............. ................. ............... ............... ................
(600,000)
Retained EarningsTitan ........... (154,600) .......... ............... ............. ................. ............... ............... (154,600)..
Common Stock ($10 par)Boat . ................. (250,000) .......... (EL1) 200,000 ........... ................. .......... (50,000) ........... .................
..............................................
Retained EarningsBoat ........... ................. (107,000) .......... (EL1) 85,600 ............. ................. .......... (21,400) ........... .................
..............................................
Preferred Stock ($20 par)
Engine ................................ ................. ................ (50,000) (PS2) 5,000 ............. ................. ............... (45,000) .. .................
Common Stock ($10 par)
Engine ................................ ................. ................ (200,000) (EL2) 140,000 ........... ................. ............... ...........(60,000) ............
..............................................
Retained Earnings (common)
Engine ................................... ................. ................ (100,000) (PS1) 20,000 ............. ................. ............... ............... ................ .................
................. ................ ............... (EL2) 56,000 ............. ................. ............... (24,000) .. .................
407
Ch. 7Problems
Titan Corporation and Subsidiaries Boat Corporation and Engine Corporation

(Concluded)

Trial Balance and Adjustments Income NCI NCI Retained Balance
Titan Boat Engine Dr. Cr. Statement Boat Engine Earnings Sheet
Retained Earnings (preferred)
Engine ................................... ................. ................ ............... (PS2) 2,000 (PS1) 20,000 ...... ............... (18,000) .. .................
Sales ........................................... (1,050,000) (500,000) (650,000) (IS) 22,400 .. ............ (2,177,600) .... ................ .................
..............................................
Other Revenue ........................... (2,100) .......... ............... (B) 1,050 ............. (1,050) ... ............... ................ .................
Gain on Bond Retirement ........... ................. ............... ............... .............. (B) 1,500 (1,500) ... ............... ................ .................
Unrealized Gain on Investment ... (1,000) .......... ............... (1,000)
Subsidiary Income:
Common StockBoat ........... (16,000) .......... ............... (CY1a)16,000 ............. ................. ............... ............... ................ .................
Preferred StockEngine ....... (400) ............... ............... (PS) 400 ............. ................. ............... ............... ................ .................
Common StockEngine ....... (11,200) .......... ............... (CY1b)11,200 ............. ................. ............... ............... ................ .................
Cost of Goods Sold ..................... 650,000 300,000 400,000 (EI) 6,400(IS) 22,400 ........... 1,334,000 ................ .................
..............................................
Other Expenses .......................... 358,500 160,000 230,000 ........... (B) 750 ......... 747,750 ............ ................ .................
..............................................
Dividends Declared ..................... 22,000 30,000 .... .............. (CY2) 24,000 ...... 6,000 ...... 22,000 ......
Purchased Income ...................... ................. ............... ............... (PI) 16,000 ............. 16,000 .... ............... ................ .................
0 0 0 694,450 694,450 .... ............... ............... ................ .................
Consolidated Net Income............................................................................................................................... (83,400) .......... ............... ................ .................
To NCIBoat (see distribution schedule) ................................................................................................ 6,960 (6,960) .... ................ .................
To NCIEngine (see distribution schedule) ............................................................................................. 8,400 ........... (8,400) .... .................
To Controlling Interest (see distribution schedule) ................................................................................... 68,040 ........... ............... (68,040)....
NCIBoat ............................................................................................................................................................................ (72,360)........... ................
(72,360)
NCIEngine ........................................................................................................................................................................................... (155,400) ...........
(155,400)
Retained EarningsControlling Interest, December 31, 20X8 ................................................................................................................................... (200,640)
(200,640)
Totals......................................................................................................................................................................................................................................... 0
408
Ch. 7Problems

(CY1a) Eliminate the current years income from the investment in Boat Corporation.
(CY1b) Eliminate the current years income from investment in Engine Corporation
Common Stock.
(CY2) Eliminate intercompany dividends.
(PI) Eliminate the income purchased on July 1, 20X8, from the investment in Boat
Corporation (80% $20,000).
(EL1) Eliminate the parents interest in the equity of Boat Corporation.
(PS1) Segregate Engine Corporation Retained Earnings to common and preferred.
Preferred pro rata interest in Retained Earnings:
$50,000
$100,000 = $20,000
$250,000
(PS2) Eliminate the parents 10% interest in preferred stock and Retained Earnings
(preferred)Engine, against Investment in Engine CorporationPreferred Stock.
Eliminate the income from Preferred StockEngine against investment.
(EL2) Eliminate the parents interest in Engine Corporation common stock. Retained
earnings applicable to common stock:
$200,000
$100,000 = $80,000. Parents share 70% $80,000 = $56,000.
$250,000
(IS) Eliminate the intercompany sale of merchandise from Boat Corporation to Engine
Corporation.
(IA) Eliminate the intercompany receivable and payable from sale of merchandise from
Boat Corporation to Engine Corporation.
(EI) Eliminate the profit from Engine ending inventory:
$22,400 ($22,400 1.4) = $6,400.
(B) Eliminate the intercompany interest revenue and expense. Eliminate the balance of
the investment in bonds account against the bonds payable account. The gain on
retirement as of the date that consolidation is required is calculated as follows:
Gain remaining at year-end:
Carrying value of bonds at December 31, 20X8............. $25,000
Investment in bonds at December 31, 20X8 .................. 23,800 $1,200
Gain amortized during the year:
Interest revenue eliminated ($750 stated interest for half
year + 1/2 year amortization of discount of $300*) ....... $ 1,050
Interest expense eliminated
(1/2 year 6% $25,000) ......................................... 750 300
Gain at July 1, 20X8 ............................................................. $1,500
*$1,200/2 years left = $600; $600 year = $300

(DP) Eliminate the intercompany dividends receivable and payable.
(LN) Eliminate advance to Boat Corporation.
409
Ch. 7Problems
Subsidiary Boat Corporation Income Distribution

Interest adjustment Internally generated net
($1,050 $750) .................. (B) $ 300 income ............................... $40,000
Unrealized profit in ending Gain on retirement of
inventory ............................. (EI) 6,400 bonds ................................. (B) 1,500
Adjusted income ...................... $34,800

NCI share ................................ 20%
NCI .......................................... $ 6,960
Subsidiary Engine Corporation Income Distribution

income ............................... $20,000
Adjusted income ...................... $20,000

Less preferred interest:
NCI [90% ($50,000/$250,000)
$20,000]............................. 3,600
Controlling (10% 1/5
$20,000)............................. 400
Common stock interest ............ $16,000
NCI share (30%) ...................... 4,800
Total NCI ($3,600 + $4,800) .... $ 8,400
Parent Titan Corporation Income Distribution

income ............................... $44,600
80% Boat Corporation
income for one-half year
[($34,800 $20,000) 80%] 11,840
Controlling share of Engines
preferred stock income ...... 400
70% common stock interest
in income of Engine
(70% $16,000) ................ 11,200
Total controlling interest .......... $68,040
410
Ch. 7Problems
PROBLEM 7-8
(1)
Company Parent NCI
Implied Price Value

Preferred arrearage (2 years
$4,000) (8,000)
Total equity $142,000 $142,000 $142,000
Book value $ 85,200 $ 56,800

Equipment $ 43,000 $ 5,375 8 debit D
411
Ch. 7Problems
Black Jack Corporation and Subsidiary Zeppo Company


Black Jack Zeppo Dr. Cr. Statement NCI Earnings Sheet
Cash .............................................................. 30,400 10,000 ............... ................. ................. ................. .................
............................................................ 40,400
Accounts Receivable (net) ............................. 80,000 76,000 ............... (IA) ............... 8,000 ................ .................
....................................................................... 148,000
Inventories ..................................................... 230,000 44,000 ............... (EI) ............... 2,600 ................ .................
....................................................................... 271,400
Other Current Assets ..................................... 20,000 8,000 ................. ................. ................. ................. .................
............................................................ 28,000
Property, Plant, and Equipment ..................... 1,450,000 122,000 (D) 43,000 ...... ................. ................. .................
....................................................... 1,610,000
................. ................. ................. (F1) 5,000 ............... ................. ................. .................
Accumulated Depreciation ............................. (420,000) (25,000) (F1) 1,000 (A) ............. 10,750 ................ ................. .................
.......................................................................
................. ................. (F2) 1,000 ................. ................. ................. .................
(453,750)
Investment in Zeppo Preferred Stock ............ 56,000 .............. ................. (ELP) 56,000...... ................. ................. .................
Investment in Zeppo Common Stock ............. 121,200 .............. ................. (CY1b) 3,600 ............... ................. ................. .................
................. ................. ................. (ELC) 91,800 ............... ................. ................. .................
................. ................. ................. (D) 25,800 ............... ................. ................. .................
Liabilities ........................................................ (350,000) (18,000) (IA) 8,000 ........ ................. ................. .................
........................................................(360,000)
Common StockBlack Jack .......................... (1,000,000) ...... ................. ................. ................. ................. .................
.....................................................(1,000,000)
Paid-In Capital in Excess of ParBlack Jack ................. ................. ................. (ELP) 2,000 ............... ................. .................
........................................................... (2,000)
Retained EarningsBlack Jack ..................... (195,000) ............. (A) 3,225 ................. ................. ................. ................. .................
................. ................. (F1) 2,400 ................. ................. ................. ................. .................
................. ................. (BI) 1,070 ................. ................. ................. (188,305)..
Preferred Stock ($100 par)Zeppo ............... ................. (50,000) (ELP) 50,000 ................. ................. ................. ................. .................
Common Stock ($10 par)Zeppo ................. ................. (100,000) (ELC) 60,000 ................. ................. (40,000) .... .................
Paid-In Capital in Excess of ParZeppo ....... ................. (20,000) (ELC) 12,000 ................. ................. (8,000) ...... .................
Retained Earnings (preferred)Zeppo .......... ................. ................. (ELP) 8,000 (PS) 8,000........ ................. ................. .................
Retained EarningsZeppo............................ ................. (41,000) (PS) 8,000 (NCI) 17,200...... (26,470) .... .................
412
Ch. 7Problems
................. ................. (ELC) 19,800 ................. ................. ................. ................. .................

................. ................. (F1) 1,600 ................. ................. ................. ................. .................
................. ................. (BI) 180 ................. ................. ................. ................. .................
................. ................. (A) 2,150 ................. ................. ................. ................. .................
Sales .............................................................. (420,000) (96,000) (IS) 28,000 ...... ......... (488,000) .............. .................
.......................................................................
Cost of Goods Sold ........................................ 300,000 60,000 (EI) 2,600 (IS) ............. 28,000 ................ ................. .................
.......................................................................
................. ................. ................. (BI) 1,250 333,350 .... ................. .................
Other Expenses ............................................. 80,000 26,000 (A) 5,375 (F2) 1,000 ................ 110,375 .... .................
.......................................................................
Dividends Declared ........................................ 25,000 4,000 ................. (CY1a) 4,000........ ................. 25,000 ......
413
Ch. 7Problems
Black Jack Corporation and Subsidiary Zeppo Company

(Concluded)

Black Jack Zeppo Dr. Cr. Statement NCI Earnings Sheet
Subsidiary IncomePreferred ....................... (4,000) ............. (CY1a) 4,000 ............... ................. ................. ................. .................
Subsidiary IncomeCommon ....................... (3,600) ............. (CY1b) 3,600 ............... ................. ................. ................. .................
0 0 265,000 265,000 .... ................. ................. .................
To NCI (see distribution schedule) ...................................................................................................................... 590 (590) ................. .................
To Controlling Interest (see distribution schedule) .............................................................................................. 43,685 ................ (43,685)....
Total NCI........................................................................................................................................................................................ (75,060) ..............
(75,060)
Retained EarningsControlling Interest, December 31, 20X8 .............................................................................................................................. (206,990)
(206,990)
Totals ........................................................................................................................................................................................................................................ 0
414
Ch. 7Problems

(CY1a) Eliminate the entries made concerning the investment in preferred stock during
20X8.
(CY1b) Eliminate the entries made concerning the investment in common stock during
20X8.
(PS) Distribute retained earnings at the beginning of the year; preferred share is
$4,000 2 years of arrearage.
(ELP) Eliminate the investment in preferred stock:
Adjustment to paid-in capital in excess of par resulting from retirement
of preferred stock on January 1, 20X7:
Price paid ........................................................... $ 56,000
Book value:
Par ..................................................................... $ 50,000
Dividend arrearage ............................................ 8,000 58,000
Gain to paid-in capital in excess of par .............. $ 2,000
(ELC) Eliminate 60% of subsidiary equity against the investment in common stock.
This equity includes 60% of the January 1, 20X8, retained earnings applicable to
common stock ($41,000 less $8,000 preferred claim).
(D)/(NCI) Distribute the excess of book value to plant asset (see schedule).
(A) Amortize the decrease in depreciation for one past year and for the current year.
(F1) Eliminate the gain on equipment sale ($5,000), less one years depreciation of
$1,000 at the beginning of the year.
(F2) Decrease depreciation for the current year.
(IS) Eliminate intercompany sales.
(IA) Eliminate intercompany trade debt.
(BI) Eliminate the beginning inventory profit:
Black Jack Corporation, $800, deduct from controlling retained earnings.
Zeppo Company, $450, allocate 40% to NCI and 60% to controlling retained
earnings.
(BI) (Parent seller) $2,800 ($2,800/1.4) = $800 profit
(BI) (Subsidiary seller) $1,200 ($1,200/1.6) = $450 profit
(EI) Eliminate profit in ending inventory: Black Jack, $2,000; Zeppo, $600.
(EI) (Parent seller) $7,000 ($7,000/1.4) = $2,000 profit.
(EI) (Subsidiary seller) $1,600 ($1,600/1.6) = $600 profit
415
Ch. 7Problems
Subsidiary Zeppo Company Income Distribution

Unrealized gross profit Internally generated
in ending inventory ............ (EI) $ 600 income ..................................... $10,000
Depreciation adjustment ......... (A) 5,375 Realized gross profit in
beginning inventory............ (BI) 450
Realized profit on
equipment sale ................. (F1) 1,000
Adjusted income ............................ $5,475

Less preferred share ..................... 4,000
$1,475
NCI share ...................................... 40%
NCI ................................................ $ 590
Parent Black Jack Corporation Income Distribution

Unrealized gross profit Internally generated
in ending inventory ............ (EI) $2,000 income ..................................... $40,000
Share of Zeppo common income
(60% $1,475)) ....................... 885
Realized gross profit in
beginning inventory............ (BI) 800
Subsidiary preferred
income ..................................... 4,000
Controlling interest......................... $43,685
(2) Entries to record sale:

(a) Adjust investment for amortization of excess cost:
Retained Earnings ($5,375 2 years 60% ownership) ......... 6,450
Investment in Zeppo Common Stock ................................... 6,450
(b) Adjust the investment account for unrealized profit
on inventory sales, 60% $600:
Retained Earnings .................................................................... 360
Investment in Zeppo Common Stock ................................... 360
(c) To record the sale:
Cash ......................................................................................... 130,000
Investment in Zeppo Common Stock* .................................. 114,390
Gain on Sale of Subsidiary Interest ...................................... 15,610
*Equity balance on December 31, 20X8 [$121,200 ($6,450 + $360)].
Note: The gain on the sale and subsidiary income on the common stock would be shown in
the discontinued segment section of the income statement for 20X8.
416
Ch. 7Problems
APPENIDIX PROBLEMS
PROBLEM 7A-1
Analysis of 30% purchase

September 1, 20X9:
Price paid ....................................................................... $92,000
Equity, December 31, 20X9.................................... $252,000
Add dividends declared December 31 ................... 40,000
Deduct income for last 4 months ............................ (32,000)
Total stockholders equity, Sept. 1, 20X9 ......... $260,000
Interest acquired ..................................................... 30% 78,000
Debit Moot retained earnings. ........................................ $14,000
Moot Corporation and Subsidiary Ferrel Corporation

Worksheet for Consolidated Balance Sheet
December 31, 20X9
Eliminations Consolidated
Balance Sheet and Adjustments Balance
Moot Ferrel Dr. Cr. NCI Sheet
Cash ........................................ 167,250 101,000 (IA) 8,000..... ................
............................... 276,250
Accounts Receivable............... 178,450 72,000 ............ (IA) ..............8,000
............................................. 242,450
Notes Receivable .................... 87,500 28,000 ............ .............. ................
............................... 115,500
Dividends Receivable.............. 36,000............ ............. (CY) 36,000..... ...............
Inventories ............................... 122,000 68,000 ............ (EI) ..............6,000

............................................. 184,000
Property, Plant, and
Equipment ............................ 487,000 252,000 .......... (F) ............14,000
............................................. 725,000
Accumulated Depreciation ...... (117,000) (64,000) (F) 350........ ................
............................. (180,650)
Investment in Ferrel
Corporation .......................... 240,800............ ............. (EL) 226,800... ...............
............... ............... ............. (D) 14,000 ............ ...............
Accounts Payable ................... (222,000) (76,000).......... .............. ................

............................. (298,000)
Notes Payable ......................... (79,000) (89,000).......... .............. ................
............................. (168,000)
Dividends Payable .................. ............... (40,000) (CY) 36,000 ............ ................
................................. (4,000)
Moot ..................................... (400,000) .......... ............. .............. ................
(400,000)
Ferrel .................................... ............... (100,000) (EL) 90,000 ............ ... (10,000)
.............................................
417
Ch. 7Problems
Retained EarningsMoot ....... (501,000) .......... (D) 14,000 ............ ................ ...............
.............................................
............... ............... (EI) 6,000 .............. ................ ...............
............... ............... (F) 13,650 .............. ................

(467,350)
Retained EarningsFerrel...... ............... (152,000) (EL) 136,800 .......... ... (15,200)
.............................................
0 0 304,800 304,800... ...............
NCI ........................................................................................................................................ (25,200)

(25,200)
Totals ..................................................................................................................................................... 0
418
Ch. 7Problems
Problem 7A-1, Concluded

(CY) Eliminate intercompany dividends.
(EL) Eliminate the pro rata equity at year-end.
(D) Adjust parent retained earnings for excess cost on 30% investment.
(EI) Eliminate the ending inventory profit by Moot, 20% $30,000 = $6,000.
(F) Equipment profit, $14,000 10 years = $1,400 per year.
Amortize to date, $1,400 1/4 = $350.
(IA) $8,000 payment in transit.
PROBLEM 7A-2
(1)
Company Parent NCI
Implied Price Value
Fair value of subsidiary $2,600,000 $2,600,000 N/A
Common stock ($25 par) $1,000,000
Total equity $2,170,000 $2,170,000
Interest acquired 100%
Book value $2,170,000
Excess of fair value over book value $ 430,000 $ 430,000

Adjustment Worksheet Key
419
Ch. 7Problems
Problem 7A-2, Continued
Book, Inc. and Subsidiary Cray, Inc.

December 31, 20X4
Trial Balance and Adjustments Balance
Book Cray Dr. Cr. Sheet
Cash ......................................... 825,000 330,000 ............ .................
............................. 1,155,000
Accounts and Other Current
Receivables .......................... 2,140,000 835,000 ............ (IA) ....... 720,000
..............................................
.................. ................... ................. (B2) 8,000
2,247,000
Inventories ................................ 2,310,000 1,045,000 ......... (EI) 90,000
............................. 3,265,000
Land ......................................... 650,000 300,000 ............ .................
.................................950,000
Depreciable Assets (net) .......... 4,575,000 1,980,000 ......... .................
............................. 6,555,000
Goodwill.................................... .................. ................... (D) 430,000 .................
430,000
Investment in Cray, Inc. ........... 2,860,000.......... ................. (EL) 2,430,000 ..
.................. ................... ................. (D) 430,000 ................
Long-Term Investments and

Other Assets ......................... 865,000 385,000 ............ (B1) 320,000
.................................930,000
Accounts Payable and Other
Current Liabilities .................. (2,465,000) (1,145,000) (IA) 720,000 .... ..................
..............................................
.................. ................... (B2) 8,000 .................
(2,882,000)
Long-Term Debt ....................... (1,900,000) (1,300,000) (B1) 320,000 ....
........................... (2,880,000)
Common Stock ($25 par) ......... (3,200,000) (1,000,000) (EL) 1,000,000 .
........................... (3,200,000)
Additional Paid-In Capital
in Excess of Par ................... (3,260,000) (190,000) (EL) 190,000 ....
........................... (3,260,000)
Retained Earnings.................... (3,400,000) (1,240,000) (EL) 1,240,000 .
........................... (3,310,000)
.................. ................... (EI) 90,000 ................. ..................
.................. ................... ................. ................. ..................

Totals .................................... 0 0 3,998,000 3,998,000
............................................ 0
420
Ch. 7Problems
(EL) Eliminate the parents investment in the subsidiary and the subsidiary equity
accounts.
(D) Distribute excess to goodwill.
(B1) Eliminate the intercompany long-term debt. There is no adjustment to retained
earnings because issue and repurchase of the bonds were at face value.
(B2) Eliminate the intercompany receivable and payable for interest bonds (1/2 year
10% 1/2 interest period $320,000).
(EI) Eliminate the unearned gross profit in Crays ending inventory, $180,000 1/2 =
$90,000.
(IA) Eliminate the intercompany receivable and payable for the full price of $720,000.
421
Ch. 7Problems
(2) Book, Inc. and Subsidiary Cray, Inc.

Consolidated Statement of Retained Earnings
December 31, 20X4:

Balance, January 1, 20X4 ...................................................... $2,506,000
Consolidated net income ($890,000 + $260,000 $90,000
inventory profit) .............................................................. 1,060,000
Dividends declared:
Book ............................................................................... (256,000)
Balance, December 31, 20X4 ................................................ $3,310,000
PROBLEM 7A-3

Company Parent NCI
Implied Price Value
Total equity 270,000 $270,000 $270,000
Book value $243,000 $ 27,000

Land $ 20,000 debit D1
Building 40,000 $ 2,000 20 debit D2
Total $ 90,000
422
Ch. 7Problems
Problem 7A-3, Continued
Press Company and Subsidiary Soap Company

Trial Balance and Adjustments Balance Sheet
Press Soap Dr. Cr. NCI Dr. Cr.
Assets:
Accounts Receivable ........................................................... 65,000 50,000 ............. (IA) ........... 8,000 ...... 107,000
............................................................................................
Bond Interest Receivable .................................................... 1,500 .............. ............. (BI) 1,500 .... ................. .................
Minimum Lease Payments Receivable ............................... 80,000.............. ............. (L1) 80,000 .. ................. .................
Unearned Interest Income ................................................... (2,961) ............ (L1) 2,961 ............. ............. ................. .................
Inventory ............................................................................. 86,000 80,000 ............. (EI) ........... 6,000 ...... 160,000
............................................................................................
Other Current Assets........................................................... 60,236 183,668 ........... ............. ............. ...... 243,904
............................................................................................
Investment in Soap Company ............................................. 351,000.............. ............. (EL) 270,000 ................. .................
............... ............... ............. (D) 81,000 ............ ................. .................
Investment in Soap Bonds .................................................. 59,225.............. ............. (B2) 59,225 .. ................. .................
Land .................................................................................... 60,000 30,000 (D1) 20,000 .. ............. ...... 110,000
............................................................................................
Buildings and Equipment ..................................................... 300,000 230,000 (L2) 111,332 ............. ................. .................
............... ............... (D2) 40,000 ............. ............. 681,332 .................

Accumulated DepreciationBuildings and Equipment ....... (100,000) (50,000) .......... (A) ........... 4,000 ................. .................
............... ............... ............. (L3) 35,000 ............ .................

189,000
Equipment Under Capital Lease ......................................... ............... 111,332 ............. (L2) 111,332 ................. .................
Accumulated DepreciationEquipment Under Lease ........ ............... (35,000) (L3) 35,000 ............. ............. ................. .................
Goodwill .............................................................................. ............... ............... (D3) 30,000 ............. ............. 30,000 .................
Totals ...................................................................................... 960,000 600,000
Liabilities and Equity:
Accounts Payable ............................................................... 78,000 70,000 (IA) 8,000 .... ............. .................
140,000
Bond Interest Payable ......................................................... ............... 2,500 (BI) 1,500 ............. ............. .................
1,000
Lease Interest Payable........................................................ ............... 5,707 (L1) 5,707 ............. ............. ................. .................
Other Current Liabilities....................................................... 57,000 48,911 ............. ............. ............. .................
105,911
Lease Obligation Payable ................................................... ............... 71,332 (L1) 71,332 ............. ............. ................. .................
423
Ch. 7Problems
Bonds Payable .................................................................... 150,000 100,000 (B2) 60,000 .. ............. .................

190,000
Premium on Bonds .............................................................. ............... 1,550 (B2) 930 ............. ............. .................
620
Common StockPress ....................................................... 200,000.............. ............. ............. ............. .................
200,000
Other Paid-In Capital in Excess of ParPress ................... 150,000.............. ............. ............. ............. .................
150,000
Retained EarningsPress .................................................. 325,000.............. (A) 3,600 (B2) 1,535 .... .................
317,535
............... ............... (EI) 5,400 ............. ............. ................. .................
Common StockSoap ........................................................ ............... 100,000 (EL) 90,000 ............. ............. 10,000 .................
Other Paid-In Capital in Excess of ParSoap .................... ............... 70,000 (EL) 63,000 ............. ............... 7,000 .................
Retained EarningsSoap ................................................... ............... 130,000 (EL) 117,000 (NCI) 9,000 ............. 21,170 .................
............... ............... (EI) 600 (B2) 170 ............. ................. .................

............... ............... (A) 400 ............. ............. ................. .................
NCI.......................................................................................... ............... ............... ............. ............. 38,170 ................. 38,170
Totals ...................................................................................... 960,000 600,000 666,762 666,762 1,332,236
............................................................................ 1,332,236
424
Ch. 7Problems

(EL) Eliminate 90% of the subsidiary equity accounts against the investment in subsidiary account.
(D)/(NCI) Distribute the excess of cost over book value and NCI adjustment to net assets as required
by the determination and distribution of excess schedule.
(A) Depreciate the write-up to building for two years.
(EI) Eliminate the intercompany gross profit in the ending inventory.
(IA) Eliminate the intercompany receivable and payable.
(BI) Eliminate the bond interest receivable against 60% of bond interest payable.
(B2) Eliminate the bond investment against 60% of bonds payable and premium on bonds. The
resulting gain of $1,705 is allocated 90% and 10% to retained earnings of parent and
subsidiary, respectively.
(L1) Eliminate the lease payable (lease obligation payable plus lease interest payable) against the
lease receivable (minimum lease payments receivable less unearned interest income).
(L2) Reclassify the leased equipment.
(L3) Reclassify the accumulated depreciation on the leased equipment.
425

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UNDERSTANDING THE ISSUES

1. Equity prior to sale of new shares ................................................................................. $200,000

Adjustment of identifiable accounts:

Adjustment of identifiable accounts:

Equipment $100,000 $ 10,000 10 debit D

Cost of investment .................................................... $ 800,000

Sale of 8,000 shares

Sale of 2,000 shares

Sale of 6,000 shares

Adjustment of identifiable accounts:

Parent income ........................................................... $ 120,000

Income would be as follows if Company P owns 1/2 of preferred stock:

Parent income ........................................................... $ 120,000

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

People Corporation and Subsidiary Sample Corporation

Current assets ($600,000 + $100,000 + $1,200,000) ...................... $1,900,000

Liabilities and Stockholders Equity

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

Analysis of 20% Interest, January 1, 20X3

Exercise 7-2, Concluded

Barker Corporation and Subsidiary Hardwood Company

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

Adjustments to the investment account:

Entries on Carpenters books, January 1, 20X6:

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

(1) Retained Earnings (3 80% $5,000) ...................................... 12,000

*($814,000 $12,000 + $26,000).

(2) Retained Earnings (3 80% $5,000) ...................................... 12,000

Exercise 7-5, Concluded

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

Exercise 7-6, Concluded

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

Adjustment of identifiable accounts:

(2) Investment in Ace....................................................................... 32,000

Determination and Distribution of Excess Schedule

Adjustment of identifiable accounts:

(1) Equity claim on Kim Company retained earnings:

(2) Cost-to-simple-equity conversion for preferred stock:

Exercise 7-8, Concluded

(2) See worksheet on page 389

Eliminations and Adjustments:

Subsidiary Sharp Company Income Distribution

Adjusted net income ................ $24,500

Parent Parish Company Income Distribution

Controlling interest................... $119,600

Problem 7-1, Concluded

(2) Parish Company and Subsidiary Sharp Company

Eliminations Consolidated Controlling Consolidated

................. ................. (A) 10,500 ................. ................. ................. .................

To Controlling Interest ......................................................................................................................................... 119,600 ................. (119,600) ..............

Adjustment of identifiable accounts:

Analysis of 20% Interest:

Problem 7-2, Continued

(2) Entries under the simple equity method: 20X1 20X2