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CHAPTER 9 CONSOLIDATION OWNERSHIP ISSUES

ANSWERS TO QUESTIONS Q9-1 Preferred stock of the subsidiary is eliminated in the consolidation process in a manner comparable to that used in eliminating the common stock of the subsidiary. For those preferred shares held by the parent company, a proportionate share of subsidiary income and net assets assigned to the preferred shares is eliminated against the balance in the parent's investment account. Subsidiary income and net assets assigned to preferred shares not held by the parent are included as a part of the noncontrolling interest along with the balances assigned to noncontrolling interest for common stock not held by the parent. The claim of the preferred shareholders normally is computed before the common stock is eliminated so that any priority claim associated with the preferred stock can be properly recognized and assigned to the correct shareholder group. Q9-2 All preferred shares held by the parent are eliminated against the balance in the investment account. Those held by unrelated parties are included in the total assigned to the noncontrolling interest. Q9-3 Preferred dividends normally are deducted in arriving at income available to common shareholders. When preferred dividends are paid by the subsidiary to shareholders other than the parent, the income accruing to the common shares held by the parent company is reduced. Therefore, they must be deducted to arrive at income available to the parent company shareholders. No preferred dividends are deducted if the parent company owns all the shares or if no dividends are declared and the preferred stock is noncumulative. Q9-4 In the event the preferred shares are redeemed, the subsidiary must pay the call premium and the net assets of the subsidiary will be reduced by the amount of the premium. Because it is more conservative to assume the call premium will be paid, the amount of the premium normally is added to the claim of the preferred shareholders and deducted from the equity assigned to the common shareholders whenever consolidated statements are prepared.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Q9-5 The fair value of the net assets of the subsidiary is computed by deducting the fair value of the subsidiary's liabilities from the fair value of its assets. When the subsidiary has preferred stock outstanding, the claims of the preferred shareholders, including dividends in arrears and participation rights held by preferred shareholders, must be taken into consideration in determining the fair value of net assets available to common shareholders. These items, when deducted from the fair value of the identifiable assets of the acquired company, will reduce the amount of net assets assigned to common stock. In those cases where the purchase price of the common stock is not reduced proportionately, the amount assigned to goodwill will increase when the common stock is eliminated. Q9-6 Under normal circumstances the parent will record a gain or loss on the difference between the carrying value of the shares sold and the sale price. For consolidation purposes the most appropriate treatment is to consider the point of sale to a nonaffiliate as the date of issue of the subsidiary shares. Any gain or loss recorded by the parent should be eliminated in the consolidation process and treated as a part of additional paid-in capital of the consolidated entity. Q9-7 All common shareholders should share equally in the net assets of a company. When a subsidiary sells additional shares to a nonaffiliate at a price in excess of existing book value, the effect will be to increase the net book value of all shareholders. Because it is a capital transaction, no gain or loss is recognized on the sale. Q9-8 Each purchase of additional shares should be examined to determine the difference between the price paid and underlying book value. When $10 over book value is paid for the shares, the parent will need to allocate that amount to either identifiable net assets or goodwill at the time the investment balance is eliminated and consolidated statements are prepared. Q9-9 All the shares of the subsidiary are eliminated in preparing the consolidated statements. Thus, treasury shares reported by the subsidiary are eliminated in the consolidation workpaper. The effect of the retirement on the consolidated statements depends on the price paid and whether the shares were purchased from the parent or from a nonaffiliate. Q9-10 Indirect ownership is a general term used whenever one company owns shares of another company and that company holds ownership in a third company. Indirect control occurs when a majority of the shares of a particular company are held by one or more companies that are, in turn, under the control of another company. By exercising its control over those companies the parent can exercise control of the company indirectly owned.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Q9-11 A reciprocal relationship exists if Subsidiary A and Subsidiary B hold ownership in each other. If Subsidiary A records investment income based on the reported net income of Subsidiary B and Subsidiary B records investment income based on the reported net income of Subsidiary A, the sum of the reported net income totals for the two companies may be substantially greater than the sum of the reported operating income totals for the two companies. Parent company net income will be overstated if the impact of the reciprocal relationship is ignored when the parent company records investment income on its ownership in the two subsidiaries. Q9-12 Under the treasury stock method the parent company shares that have been purchased by a subsidiary are reported as treasury stock in the consolidated balance sheet. The carrying value of the shares is the amount paid by the subsidiary when they were purchased. Q9-13 The entity method focuses on the reciprocal nature of the ownership between the two companies. Income attributed to each company is computed by solving a set of simultaneous equations. Consolidated net income is then computed by multiplying the income computed for the parent by the percentage of ownership held by nonaffiliates. The treasury stock method is more simply applied, computing consolidated net income by deducting income assigned to noncontrolling shareholders from the combined operating incomes of the two companies in the normal manner. However, in this case, income assigned to the noncontrolling shareholders is based on the operating income of the subsidiary plus dividends received from the parent. Q9-14 Consolidated net income will be reduced by $72,000 ($100,000 x .90 x .80) when the unrealized profit of Tiny Corporation is eliminated. A total of $10,000 is treated as a reduction to the income assigned to noncontrolling shareholders of Tiny Corporation ($100,000 x .10) and $18,000 is a reduction of the income assigned to noncontrolling shareholders of Subsidiary Company ($100,000 x .90 x .20). Q9-15 All three companies should be included in the consolidated financial statements. Slide Company should be consolidated with Bit Company because Bit holds majority ownership of Slide. Bit Company, in turn, should be consolidated with Snapper Corporation because Snapper holds majority ownership of Bit. Q9-16 A subsidiary's stock dividend results in the capitalization of some portion of its retained earnings. Such an action will have no effect on the consolidated financial statements since the entire stockholders' equity section of the subsidiary is eliminated in preparing the consolidation workpaper.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Q9-17 A 15 percent stock dividend is a small stock dividend and must be recorded by capitalizing retained earnings equal to the market price per share of the stock times the number of shares actually issued. As a result, retained earnings will decrease and the par value of stock outstanding and additional paid-in capital will increase on the subsidiary's books. There should be no change in the investment account balance reported by the parent. Thus, the only change in the eliminating entries is the relative amount debited to each of the three individual stockholders' equity accounts of the subsidiary. Q9-18 When the parent or other affiliates own all the shares of all companies included in the consolidation, the order in which the consolidation is completed may not be particularly critical. On the other hand, when less than 100 percent ownership is held there is a much greater chance of error in apportioning unrealized profits or other adjustments between noncontrolling ownership and consolidated net income when some other sequence is used. By starting the consolidation with the company furthest away from the parent, the computation of income assigned to noncontrolling interest at each level can be most easily accomplished.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

SOLUTIONS TO CASES C9-1 Effect of Subsidiary Preferred Stock

When a parent company owns all the outstanding preferred and common shares of its subsidiary, the contribution of the subsidiary to consolidated net income can be calculated on the basis of the reported net income of the subsidiary. In most cases the parent does not own all the shares of the subsidiary and income assigned to the noncontrolling interest includes (1) a portion of subsidiary preferred dividends and (2) a portion of earnings available to common shareholders. To determine the amount of income to assign to preferred and common shareholders of the subsidiary, the controller needs to have the following information about the preferred stock: 1. The number of preferred shares outstanding and the number owned by the parent and other affiliates. 2. The annual preferred dividend rate per share and whether the dividends are cumulative or noncumulative. 3. If the dividends are noncumulative, declared during the period, if any. the amount of preferred dividends

In this particular case the parent does not appear to own any of the subsidiary's preferred shares. Once the controller determines the portion of subsidiary income assignable to common shareholders, consolidated net income is computed by adding the parent's pro rata share of this amount to the parent's income from its own operations.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

C9-2

Sale of Subsidiary Shares

A gain of $60 per share will be recorded by Hardcore Mining on the sale to Basic Manufacturing regardless of whether the purchaser is an affiliate or a nonaffiliate. In both cases the gain must be eliminated in preparing the consolidated statements. (a) On a sale of shares to a nonaffiliate, net resources have been brought into the consolidated entity and there is an additional claim by the noncontrolling shareholders. It is considered appropriate to treat the gain recorded by the parent as an addition to consolidated additional paid-in capital in such cases. A sale of subsidiary shares to a nonaffiliate will also change the amount of income assigned to the noncontrolling interest in the consolidated income statement and the amount of net assets assigned to noncontrolling interest in the consolidated balance sheet.

(b) When a parent sells shares of one subsidiary to another subsidiary there is no increase in net resources to the consolidated entity, and the gain recorded by the parent must be eliminated when the investment balance reported by the subsidiary is eliminated. A change in the claim of the noncontrolling interest is likely to occur if the subsidiary that purchases the shares is not whollyowned. As a result, there may be some change in consolidated income and the balance sheet totals assigned to noncontrolling interest.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

C9-3

Reciprocal Ownership

A great many factors beyond the immediate impact on reported earnings may be important in deciding on the use of the funds. Items such as the following should be considered: 1. Are the excess funds held by Thorson available only temporarily or not likely to be needed in the foreseeable future? 2. Will there be any regulatory or taxation problems associated with one or more of the alternatives? 3. Can shares of the companies be purchased in the desired quantities and at existing market prices or are there potential difficulties associated with one or more alternatives? 4. Is it desirable to acquire more shares of either subsidiary controlling ownership already is in the hands of Strong Manufacturing? since

5. Have the noncontrolling shareholders of either subsidiary been troublesome or caused the parent to refrain from actions that it might otherwise have taken? With the information given, it is difficult to determine which action will have the most favorable impact on consolidated net income. The earnings of each company, the number of shares outstanding, and the relative market prices of the shares each will have an effect. In general, reported income is maximized by purchasing the shares with the lowest price-earnings ratio.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

SOLUTIONS TO EXERCISES E9-1 1. 2. 3. 4. d c b Multiple-Choice Questions on Preferred Stock Ownership .20($40,000 + $60,000) + 1.00($30,000) = $50,000 .20($40,000 + $60,000) + .30($30,000) = $29,000 Only the retained earnings of the acquiring company is included.

a The portion held by the parent is eliminated when the preferred investment is eliminated, and the portion held by nonaffiliates is eliminated and included with the balance reported as noncontrolling interest in the consolidated balance sheet.

E9-2 1. 2. 3. 4. 5. b b c c c

Multiple-Choice Questions on Multilevel Ownership $100,000 + .80[$80,000 + .60($50,000)] = $188,000 .40($50,000) = $20,000 .20[$80,000 + .60($50,000)] = $22,000 .40($50,000) + .20[$80,000 + .60($50,000)] = $42,000 .80[($160,000 - $120,000) / 10 years] = $3,200

E9-3

Acquisition of Preferred Shares

Eliminating entries: E(1) Common Stock__Separate Company Retained Earnings Investment in Separate Company Common Stock Noncontrolling Interest Eliminate investment in common stock. Preferred Stock__Separate Company Investment in Separate Company Preferred Stock Noncontrolling Interest Eliminate subsidiary preferred stock. 50,000 150,000 140,000 60,000

E(2)

100,000 60,000 40,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-4 a.

Reciprocal Ownership [AICPA Adapted] None of Simba's dividends are reported in the consolidated statements. of Simba's dividends are eliminated in the consolidation process. All

b.

Only 90 percent of Pride's dividends are included in the consolidated retained earnings statement. The dividend payment on the 10 percent owned by Simba is an intercorporate payment to an affiliate and must be eliminated in the consolidation process.

E9-5

Subsidiary with Preferred Stock Outstanding Eliminating entries:

E(1)

Common Stock__Topple Company Retained Earnings Investment in Topple Common Stock Noncontrolling Interest Eliminate investment in common stock. Preferred Stock__Topple Company Investment in Topple Preferred Stock Noncontrolling Interest Eliminate subsidiary preferred stock.

150,000 210,000 270,000 90,000

E(2)

200,000 80,000 120,000

E9-6 a.

Subsidiary with Preferred Stock Outstanding Entries recorded by Clayton Corporation: (1) Investment in Topple Common Stock Investment in Topple Preferred Stock Cash Record purchase of Topple stock. Investment in Topple Common Stock Income from Subsidiary Record equity-method income: $40,500 = ($70,000 - $16,000) x .75 Cash Investment in Topple Common Stock Record dividends from Topple: $25,500 = ($50,000 - $16,000) x .75 (4) Cash Dividend Income Record dividends on preferred stock from Topple: $16,000 x .40 6,400 6,400 270,000 80,000 350,000

(2)

40,500 40,500

(3)

25,500 25,500

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-6

(continued)

b.

Eliminating entries: E(1) Income from Subsidiary Dividends Declared__Common Stock Investment in Topple Common Stock Eliminate income from subsidiary. Dividend Income__Preferred Dividends Declared__Preferred Eliminate dividend income from subsidiary preferred. Income to Noncontrolling Interest Dividends Declared__Preferred Stock Dividends Declared__Common Stock Noncontrolling Interest Assign income to noncontrolling interest: $23,100 = [($70,000 - $16,000) x .25] + ($16,000 x .60) $9,600 = $16,000 x .60 $8,500 = ($50,000 - $16,000) x .25 $5,000 = $13,500 - $8,500 Common Stock__Topple Company Retained Earnings, January 1 Investment in Topple Common Stock Noncontrolling Interest Eliminate beginning investment balance. Preferred Stock__Topple Company Investment in Topple Preferred Stock Noncontrolling Interest Eliminate subsidiary preferred stock. 40,500 25,500 15,000

E(2)

6,400 6,400

E(3)

23,100 9,600 8,500 5,000

E(4)

150,000 210,000 270,000 90,000

E(5)

200,000 80,000 120,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-7 a.

Preferred Dividends and Call Premium Culbertson Company's contribution to 20X2 consolidated net income: Reported net income for 20X2 Income assigned to noncontrolling interest: Preferred shares [.40($100,000 x .12)] Common shares {.10[$70,000 - ($100,000 x .12)]} Contribution to consolidated net income $70,000 $4,800 5,800

(10,600) $59,400

b.

Income assigned to the noncontrolling interest in 20X2, as computed in part (a), is $10,600.

c.

Retained earnings assignable to preferred shareholders: Dividends in arrears [5 years x ($100,000 x .12)] Call feature ($2 x 10,000 shares) Total retained earnings assigned to preferred stock $60,000 20,000 $80,000

d.

Book value of common shares: Par value of common shares outstanding Retained earnings balance Less: Balance assigned to preferred shares Book value of common shares $300,000 $380,000 (80,000) 300,000 $600,000

e.

Total noncontrolling interest: Preferred stock [.40($100,000 + $80,000)] Common stock (.10 x $600,000) Total noncontrolling interest $ 72,000 60,000 $132,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-8 a.

Multilevel Ownership Consolidated net income for 20X6 is $153,200: Operating income of Grasper Equity-method income from: Dally ($40,000 x .25) Latent [($60,000 + $16,000) x .70] Consolidated net income $ 90,000 10,000 53,200 $153,200

b.

Income of $36,800 is assigned to noncontrolling interest: Income from Dally ($40,000 x .35) Income from Latent [($60,000 + $16,000) x .30] Total income assigned $14,000 22,800 $36,800

c.

Only the $45,000 of dividends paid by Grasper Corporation to its shareholders will be reported as dividends declared in Grasper's 20X6 consolidated retained earnings statement.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-9 a.

Eliminating entries for Multilevel Ownership Journal entries recorded by Brown Corporation on its investment in Tann Company: (1) Investment in Tann Company Stock Cash Record purchase of Tann Company stock. Investment in Tann Company Stock Income from Tann Company Record equity-method income: $40,000 x .60 Cash Investment in Tann Company Stock Record dividends from Tann Company: $15,000 x .60 120,000 120,000

(2)

24,000 24,000

(3)

9,000 9,000

b.

Journal entries recorded by Promise Enterprises on its investment in Brown Corporation: (1) Investment in Brown Corporation Stock Cash Record purchase of Brown Corporation stock. Investment in Brown Corporation Stock Income from Brown Corporation Record equity-method income: ($120,000 + $24,000) x .90 Cash Investment in Brown Corporation Stock Record dividends from Brown Corporation: $50,000 x .90 315,000 315,000

(2)

129,600 129,600

(3)

45,000 45,000

c.

Eliminating entries: E(1) Income from Tann Company Dividends Declared Investment in Tann Company Stock Eliminate income from Tann Company. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $16,000 = $40,000 x .40 $6,000 = $15,000 x .40 24,000 9,000 15,000

E(2)

16,000 6,000 10,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-9

(continued) Common Stock__Tann Company Additional Paid-In Capital Retained Earnings, January 1 Investment in Tann Company Stock Noncontrolling Interest Eliminate investment in Tann Company stock: $120,000 = $200,000 x .60 $80,000 = $200,000 x .40 Income from Brown Corporation Dividends Declared Investment in Brown Corporation Stock Eliminate income from Brown Corporation. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling shareholders of Brown Corporation: $14,400 = ($120,000 + $24,000) x .10 $5,000 = $50,000 x .10 $9,400 = $14,400 - $5,000 Common Stock__Brown Corporation Additional Paid-In Capital Retained Earnings, January 1 Investment in Brown Corporation Stock Noncontrolling Interest Eliminate investment in Brown Corporation stock: $315,000 = $350,000 x .90 $35,000 = $350,000 x .10 100,000 60,000 40,000 120,000 80,000

E(3)

E(4)

129,600 45,000 84,600

E(5)

14,400 5,000 9,400

E(6)

150,000 60,000 140,000 315,000 35,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-10 a.

Reciprocal Ownership

Treasury stock method: Operating income of Grower Supply Corporation Operating income of Schultz Company Less: Income assigned to noncontrolling interest .15[$50,000 + .30($70,000)] Consolidated net income $112,000 50,000 $162,000 (10,650) $151,350

b.

Entity approach: [GS = Grower Supply net income and SC = Schultz net income] Basic equations GS = $112,000 + .85 SC SC = $50,000 + .30 GS

Solution by substitution

GS GS GS .745 GS GS

= = = = =

$112,000 + .85($50,000 + .30 GS) $112,000 + $42,500 + .255 GS $154,500 + .255 GS $154,500 $207,383

and

SC = $50,000 + .30($207,383) SC = $50,000 + $62,215 SC = $112,215

Consolidated net income

= $207,383 x .70 = $145,168

Income to noncontrolling interest

= $112,215 x .15 = $16,832

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-11

Consolidated Balance Sheet with Reciprocal Ownership Talbott Company and Short Company Consolidated Balance Sheet Workpaper December 31, 20X9 Talbott Company 78,000 120,000 150,000 400,000 352,000 61,000 (3) 61,000 1,100,000 600,000 60,000 100,000 200,000 240,000 600,000 Short Company 39,000 80,000 120,000 300,000 (1)352,000 (2) 61,000 61,000 1,348,000 150,000 500,000 300,000 310,000 88,000 1,348,000 Eliminations Debit Credit Consolidated 117,000 200,000 270,000 700,000

Item Cash Accounts Receivable Inventory Buildings and Equipment (net) Investment in Short Co. Common Stock Investment in Talbott Co. Common Stock Treasury Stock Debits

Accounts Payable 90,000 Bonds Payable 400,000 Common Stock 300,000 Retained Earnings 310,000 Noncontrolling Interest Credits 1,100,000

(1)200,000 (1)240,000 501,000 (1) 88,000 501,000

Eliminating entries: E(1) Common Stock__Short Company Retained Earnings Investment in Short Company Common Stock Noncontrolling Interest E(2) Treasury Stock Investment in Talbott Company Common Stock

200,000 240,000 352,000 88,000 61,000 61,000

Talbott Company and Subsidiary Consolidated Balance Sheet December 31, 20X9 Cash $ Accounts Receivable Inventory Buildings and Equipment (net) 117,000 200,000 270,000 700,000 Accounts Payable $ Bonds Payable Noncontrolling Interest Common Stock $300,000 Retained Earnings 310,000 $610,000 Treasury Shares (61,000) 150,000 500,000 88,000

$1,287,000

549,000 $1,287,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-12 a.

Subsidiary Stock Dividend

Lake Company: Stock Dividends Declared Common Stock Lindale Company: No entry required.

40,000 40,000

b.

Eliminating entries, December 31, 20X3: E(1) Income from Subsidiary Dividends Declared Investment in Lake Company Stock Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Common Stock__Lake Company Retained Earnings, January 1 Investment in Lake Company Stock Noncontrolling Interest Stock Dividends Declared 17,500 7,000 10,500 7,500 3,000 4,500 140,000 200,000 210,000 90,000 40,000

E(2)

E(3)

c.

Eliminating entry, January 1, 20X4: E(1) Common Stock__Lake Company Retained Earnings Investment in Lake Company Stock Noncontrolling Interest 140,000 175,000 220,500 94,500

Lake Company retained earnings, December 31, 20X3: Balance, December 31, 20X2 Add: Net income for 20X3 Less: Stock dividend in 20X3 Cash dividend paid in 20X3 Balance, December 31, 20X3 $200,000 25,000 (40,000) (10,000) $175,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-13 a.

Sale of Subsidiary Shares by Parent

Investment in Acme Concrete, January 1, 20X5: Purchase price Acme net income in 20X3 and 20X4 Dividends paid by Acme in 20X3 and 20X4 Proportion of stock held by Stable Balance prior to sale of shares

$360,000 $100,000 (40,000) $ 60,000 x .80

48,000 $408,000

b.

Journal entry recorded by Stable Home Builders for sale of shares: Cash Investment in Acme Stock Gain on Sale of Acme Stock 120,000 102,000 18,000

c.

Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Acme Stock Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Common Stock__Acme Concrete Retained Earnings, January 1 Investment in Acme Stock Noncontrolling interest Gain on sale of Acme Stock Additional Paid-In Capital 30,000 12,000 18,000 20,000 8,000 12,000 200,000 310,000 306,000 204,000 18,000 18,000

E(2)

E(3)

E(4)

E9-14 a.

Purchase of Additional Shares from Nonaffiliate $240,000 $50,000 x .60 $30,000 (3,000) 27,000 (12,000) $255,000

Purchase price, December 31, 20X7 Modern Products Company net income for 20X8 ($230,000 + $20,000 - $200,000) Proportion of stock held by Weal Amortization of differential ($30,000 / 10 years) Income from subsidiary Dividends received from Modern Products Company ($20,000 x .60) Balance in investment account, December 31, 20X8

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-14 b.

(continued) $255,000 96,000 $70,000 x .80 $56,000

Balance in investment account, December 31, 20X8 Purchase of additional shares on January l, 20X9 Modern Products Company net income for 20X9 ($280,000 + $20,000 - $230,000) Proportion of stock held by Weal Less: Amortization of differential on stock purchased: December 31, 20X7 ($30,000 / 10 years) January 1, 20X9 ($20,000 / 10 years) Income from subsidiary Dividends received from Modern Products Company($20,000 x .80) Balance in investment account, December 31, 20X9

(3,000) (2,000) 51,000 (16,000) $386,000

c.

Eliminating entries: E(1) Income from Modern Products Company Dividends Declared Investment in Modern Products Company Stock Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest $14,000 = $70,000 x .20 Common Stock__Modern Products Company Retained Earnings, January 1 Differential Investment in Modern Products Company Stock Noncontrolling Interest $30,000 Differential on shares purchased, December 31, 20X7 (3,000) Amortized in 20X8 $27,000 Unamortized balance Differential on shares purchased, 20,000 January 1, 20X9 Unamortized purchase differential, $47,000 January 1, 20X9 E(4) Patents Amortization Expense Differential $42,000 = ($47,000 - $3,000 - $2,000) 42,000 5,000 47,000 51,000 16,000 35,000 14,000 4,000 10,000

E(2)

E(3)

150,000 230,000 47,000 351,000 76,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-15 a.

Purchase of Shares by Subsidiary from Nonaffiliate $500,000 (84,000) $416,000 x .75 $312,000 (300,000) $ 12,000

Book value of Quinn stock outstanding Cost of treasury shares repurchased Book value of remaining shares outstanding Proportion of remaining shares held by Blatant (6,000 / 8,000) Adjusted book value of shares held by Blatant Book value of shares held by Blatant before treasury stock repurchase by Quinn ($500,000 x .60) Increase in carrying value of shares held by Blatant

b.

Investment in Quinn Manufacturing Stock Additional Paid-In Capital

12,000 12,000

c.

Common Stock__Quinn Manufacturing Additional Paid-In Capital Retained Earnings, January 1 Investment in Quinn Stock Noncontrolling Interest Treasury Shares $312,000 = .75($500,000 - $84,000) $104,000 = .25($500,000 - $84,000)

100,000 150,000 250,000 312,000 104,000 84,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

E9-16

Sale of Shares by Subsidiary to Nonaffiliate

a. Computation of change in book value of Schroeder Corporation shares held by Browne Corporation: Before After Sale Sale Common stock, $10 par value Additional paid-in capital Retained earnings Total stockholders' equity of Schroeder Proportion of stock held by Browne Corporation: 11,000 / 15,000 11,000 / (15,000 + 5,000) Book value of shares Increase in book value of shares held by Browne Corporation $150,000 50,000 400,000 $600,000 $ 200,000 400,000 400,000 $l,000,000

.733 x $ .550 550,000

$440,000

110,000

b.

Investment in Schroeder Stock Additional Paid-In Capital

110,000 110,000

c.

Common Stock__Schroeder Corporation Additional Paid-In Capital Retained Earnings Investment in Schroeder Stock Noncontrolling Interest $450,000 = $1,000,000 x .45

200,000 400,000 400,000 550,000 450,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

SOLUTIONS TO PROBLEMS P9-17 1. d Multiple-Choice Questions on Preferred Stock Ownership Book value of shares held by noncontrolling interest: Preferred stock ($100,000 x .30) Common stock [($200,000 + $50,000) x .20] Total book value

$30,000 50,000 $80,000

2.

Income to noncontrolling preferred shareholders [($100,000 x .10) x .30] Income to noncontrolling common shareholders: Reported net income of Upland Company $30,000 Income to preferred shareholders (10,000) Income to common shareholders $20,000 Proportion of common stock owned by noncontrolling interest x .20 Total income to noncontrolling interest

$3,000

4,000 $7,000

3.

Reported net income of Upland Company Operating income of Stacey Company Less: Income to noncontrolling interest Consolidated net income

$ 30,000 100,000 $130,000 (7,000) $123,000

4.

Parent company balance at date of acquisition.

5.

All preferred shares of the subsidiary are eliminated in preparing the consolidated financial statements.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-18

Multilevel Ownership with Purchase Differential

a. Journal entries recorded by Corn Corporation on its investment in Bark Company: (1) Investment in Bark Company Stock Cash Record purchase of Bark Company stock. Investment in Bark Company Stock Income from Bark Company Record equity-method income: $30,000 x .70 Cash Investment in Bark Company Stock Record dividends from Bark Company: $20,000 x .70 (4) Income from Bark Company Investment in Bark Company Stock Amortize differential related to buildings and equipment: $20,000 / 10 years 2,000 2,000 405,000 405,000

(2)

21,000 21,000

(3)

14,000 14,000

b. Journal entries recorded by Purple Corporation on its investment in Corn Corporation: (1) Investment in Corn Corporation Stock Income from Corn Corporation Record equity-method income: ($60,000 + $19,000) x .80 Cash Investment in Corn Corporation Stock Record dividends from Corn Corporation: $25,000 x .80 (3) Income from Corn Corporation Investment in Corn Corporation Stock Amortize differential related to trademark: $40,000 / 5 years 8,000 8,000 63,200 63,200

(2)

20,000 20,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-18

(continued)

c. Eliminating entries: E(1) Income from Bark Company Dividends Declared Investment in Bark Company Stock Eliminate income from Bark Company. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling shareholders of Bark Company: $9,000 = $30,000 x .30 $6,000 = $20,000 x .30 $3,000 = $9,000 - $6,000 Common Stock__Bark Company Retained Earnings, January 1 Differential Investment in Bark Company Stock Noncontrolling Interest Eliminate investment in Bark Company stock: $20,000 = $405,000 - ($550,000 x .70) $405,000 = Purchase price $165,000 = $550,000 x .30 Buildings and Equipment Differential Assign beginning differential. Depreciation Expense Accumulated Depreciation Amortize differential related to buildings and equipment: $20,000 / 10 years Income from Corn Corporation Dividends Declared Investment in Corn Corporation Stock Eliminate income from Corn Corporation. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling shareholders of Corn Corporation: $15,800 = ($60,000 + $19,000) x .20 $5,000 = $25,000 x .20 $10,800 = $15,800 - $5,000 19,000 14,000 5,000

E(2)

9,000 6,000 3,000

E(3)

250,000 300,000 20,000 405,000 165,000

E(4)

20,000 20,000

E(5)

2,000 2,000

E(6)

55,200 20,000 35,200

E(7)

15,800 5,000 10,800

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-18 E(8)

(continued) Common Stock__Corn Corporation 400,000 Retained Earnings, January 1 270,000 Differential 24,000 Investment in Corn Corporation Stock Noncontrolling Interest Eliminate investment in Corn Corporation stock: $270,000 = $200,000 + $35,000 + $35,000 $24,000 = $40,000 - $8,000 - $8,000 $560,000 = $520,000 + [($60,000 - $25,000) x .80 - $8,000] x 2 years $134,000 = ($400,000 + $270,000) x .20 Trademark Differential Assign beginning differential: $40,000 - ($8,000 x 2 years) Amortization Expense Trademark Amortize differential related to trademark: $40,000 / 5 years 24,000 24,000

560,000 134,000

E(9)

E(10)

8,000 8,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-19 1. b

Multiple-Choice Questions on Reciprocal Ownership The A = B = C = basic equations are as follows: $190,000 + .80B + .70C $170,000 + .15C $230,000 + .25A

[AICPA Adapted]

2.

3.

The noncontrolling interest of Cashin is = .15($230,000 + .25A)

4.

d Income to noncontrolling interest requires that the income of Benson be computed: A = $190,000 + .80[$170,000 + .15($230,000 + .25A)] + .70($230,000 + .25A) A = $190,000 + .80($170,000 + $34,500 + .0375A) + $161,000 + .175A A = $190,000 + $136,000 + $27,600 + .03A + $161,000 + .175A .795A = $514,600 A = $647,296 C = $230,000 + .25($647,296) C = $230,000 + $161,824 C = $391,824 B = $170,000 + .15($391,824) B = $170,000 + $58,774 B = $228,774 Noncontrolling interest of B = .20($228,774) = $45,755

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-20

Subsidiary Stock Dividend

Investment elimination entry, January 1, 20X8: Alternative 1: Pound Manufacturing stock is split 2:1. E(1) Common Stock__Pound Manufacturing Additional Paid-In Capital Retained Earnings Investment in Pound Mfg. Stock Noncontrolling Interest 100,000 70,000 280,000 306,000 144,000

Alternative 2: A stock dividend of 4,000 shares is issued. E(1) Common Stock__Pound Manufacturing Additional Paid-In Capital Retained Earnings Investment in Pound Mfg. Stock Noncontrolling Interest 140,000 70,000 240,000 306,000 144,000

Alternative 3: A stock dividend of 1,500 shares is issued. E(1) Common Stock__Pound Manufacturing Additional Paid-In Capital Retained Earnings Investment in Pound Mfg. Stock Noncontrolling Interest 115,000 130,000 205,000 306,000 144,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-21 a.

Subsidiary Preferred Stock Outstanding

Eliminating entries, January 1, 20X5: Preferred Stock__Pert Company Retained Earnings Investment in Pert Preferred Stock Noncontrolling Interest Eliminate preferred stock: $32,000 = ($200,000 x .08) x 2 years Common Stock__Pert Company Retained Earnings Investment in Pert Common Stock Noncontrolling Interest Eliminate common stock: $168,000 = $200,000 - $32,000 200,000 32,000 92,800 139,200

150,000 168,000 222,600 95,400

b.

Consolidated net income: Operating income of Emerald Corporation Income from preferred stock of Pert Company ($16,000 x .40) Income from common stock of Pert Company [($34,000 - $16,000) x .70] Consolidated net income Income to noncontrolling interest: Income from preferred stock of Pert Company ($16,000 x .60) Income from common stock of Pert Company [($34,000 - $16,000) x .30] Income to noncontrolling shareholders

$80,000 6,400 12,600 $99,000

$ 9,600 5,400 $15,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-22 a.

Ownership of Subsidiary Preferred Stock

Preferred stockholders' claim on net assets of Jacobs: Liquidation value of preferred stock ($101 per share) 20X6 dividends in arrears ($200,000 x .10) Total preferred stockholder claim, December 31, 20X6 $202,000 20,000 $222,000

b.

Book value of Jacobs common shares purchased by Presley: Total Jacobs stockholders' equity, December 31, 20X6 Claim of preferred stockholders Book value of Jacobs common stock Portion acquired by Presley Book value of common shares purchased by Presley $3,155,000 (222,000) $2,933,000 x .60 $1,759,800

c.

Goodwill associated with purchase of common shares: Purchase price of common shares Book value of common shares purchased Goodwill $1,800,000 (1,759,800) $ 40,200

d.

Income to noncontrolling interest, 20X7: Jacobs net income Less 20X7 preferred dividends ($200,000 x .10) Income accruing to common shareholders Noncontrolling common shareholders' interest Income to noncontrolling common shareholders Preferred dividends to noncontrolling shareholders ($20,000 x .80) Total income to noncontrolling shareholders $280,000 (20,000) $260,000 x .40 $104,000 16,000 $120,000

e.

Presley's income from investment in subsidiary common stock: Jacobs net income Less 20X7 preferred dividends ($200,000 x .10) Income accruing to common shareholders Presley's proportionate share Presley's share of income to common shareholders $280,000 (20,000) $260,000 x .60 $156,000

f.

Noncontrolling interest, December 31, 20X7: From Jacobs stockholders' equity, January 1, 20X7 20X7 net income Less preferred dividends Less common dividends Total Jacobs stockholders' equity, December 31, 20X7 Claim of preferred stockholders Book value of Jacobs' common stock Noncontrolling stockholders' interest Noncontrolling interest__common $3,155,000 280,000 (40,000) (10,000) $3,385,000 (202,000) $3,183,000 x .40 $1,273,200

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-22

(continued)

Total Jacobs preferred stockholders' equity, January 1, 20X7 Less dividends in arrears paid during 20X7 Jacobs preferred stockholders' equity, December 31, 20X7 Noncontrolling stockholders' interest Noncontrolling interest__preferred Noncontrolling interest__common Noncontrolling interest__preferred Total noncontrolling interest g. Elimination entries: E(1) Income from Subsidiary Dividends Declared__Common Investment in Jacobs Common Stock Eliminate income from subsidiary. Dividend Income__Preferred Dividends Declared__Preferred Eliminate dividend income from subsidiary preferred stock: $40,000 x .20 Income to Noncontrolling Interest Dividends Declared__Common Dividends Declared__Preferred Noncontrolling Interest Assign income to noncontrolling interest: $4,000 = $10,000 x .40 $32,000 = $40,000 x .80

$222,000 (20,000) $202,000 x .80 $161,600 $1,273,200 161,600 $1,434,800

156,000 6,000 150,000

E(2)

8,000 8,000

E(3)

120,000 4,000 32,000 84,000

E(4)

Common Stock__Jacobs Jacuzzi 500,000 Additional Paid-In Capital__Common 800,000 Premium on Preferred Stock 3,000* Retained Earnings, January 1 1,630,000** Goodwill 40,200 Investment in Jacobs Common Stock 1,800,000 Noncontrolling Interest 1,173,200 Eliminate beginning investment in common stock: $3,000 = $5,000 - $2,000 $1,630,000 = $1,650,000 - $20,000 $1,173,200 = ($500,000 + $800,000 + $3,000 + $1,630,000) x .40 *Portion accruing to common shareholders **Portion accruing to common shareholders after deducting preferred dividends in arrears

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-22

(continued) 26,000 26,000

E(5) Goodwill Impairment Loss Goodwill Recognize goodwill impairment loss. E(6) Preferred Stock__Jacobs Jacuzzi Premium on Preferred Stock Retained Earnings, January 1 Investment in Jacobs Preferred Stock Additional Paid-In Capital__ Retirement of Preferred Stock Noncontrolling Interest Eliminate subsidiary preferred stock: $2,000 = $5,000 - $3,000 $20,000 = $200,000 x .10 $2,400 = ($222,000 x .20) - $42,000 $177,600 = $222,000 x .8 *Portion representing call premium

200,000 2,000* 20,000** 42,000 2,400 177,600

**Portion relating to preferred dividends in arrears

P9-23 a.

Consolidation Workpaper with Subsidiary Preferred Stock

Eliminating entries: E(1) Income from Subsidiary Dividends Declared__Common Stock Investment in White Common Stock Dividend Income Dividends Declared__Preferred Stock Income to Noncontrolling Interest Dividends Declared__Preferred Stock Dividends Declared__Common Stock Noncontrolling Interest Common Stock__White Corporation Retained Earnings, January 1 Investment in White Common Stock Noncontrolling Interest Preferred Stock__White Corporation Investment in White Preferred Stock Noncontrolling Interest Dividends Payable Dividends Receivable 58,500 9,000 49,500 9,000 9,000 12,500 6,000 1,000 5,500 100,000 250,000 315,000 35,000 200,000 120,000 80,000 9,000 9,000

E(2)

E(3)

E(4)

E(5)

E(6)

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-23 b.

(continued) Brown Company and White Company Consolidation Workpaper December 31, 20X6 Brown Company White Company Eliminations Debit Credit Consolidated 800,000 9,000 58,500 800,000 450,000 70,000 151,000 (671,000) 129,000 (12,500) 116,500 435,000 116,500 551,500 (2) (3) (1) (3) 330,000 9,000 6,000 9,000 1,000 25,000

Item Sales Dividend Income Income from Subsidiary Credits Cost of Goods Sold Deprec. and Amort. Other Expenses Debits Income to Noncontrolling Interest Net Income carry forward Ret. Earnings, Jan. 1 Net Income, from above Dividends Declared: Preferred Stock Common Stock Ret. Earnings, Dec. 31, carry forward Cash Accounts Receivable Dividends Receivable Inventory Bldgs. and Equip. (net) Investment in White Co.: Preferred Stock Common Stock Debits

500,000 300,000 9,000 (2) 58,500 (1) 567,500 300,000 280,000 170,000 40,000 30,000 131,000 20,000 (451,000)(220,000) (3) 116,500 435,000 116,500 551,500 80,000 250,000 80,000 330,000 (15,000) (60,000) (10,000)

12,500 80,000

(4) 250,000 80,000

(60,000) 491,500 158,000 200,000

491,500 58,000 80,000 9,000 100,000 360,000 120,000 364,500 1,091,500 100,000 300,000 200,000 491,500

305,000 100,000 120,000

(6) 200,000 270,000

9,000 300,000 630,000

(5) 120,000 (1) 49,500 (4) 315,000 690,000 70,000 15,000 200,000 100,000 305,000 1,288,000 170,000 6,000 300,000 200,000 25,000 491,500 5,500 35,000 80,000 120,500 639,000 1,288,000

Accounts Payable Dividends Payable Bonds Payable Preferred Stock Common Stock Ret. Earnings, from above Noncontrolling Interest

(6)

9,000

(5) 200,000 (4) 100,000 330,000 (3) (4) (5) 639,000

Credits

1,091,500

690,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-24 a. (1)

Subsidiary Stock Transactions Book value of Beta Company stock outstanding Cost of treasury shares repurchased Book value of remaining shares outstanding Proportion of remaining shares held by Apex (7,500 / 9,000) Adjusted book value of shares held by Apex Book value of shares held by Apex before treasury stock repurchase by Beta Company ($500,000 x .75) Decrease in carrying value of shares held by Apex Journal entry recorded by Apex Corporation: Retained Earnings Investment in Beta Company Stock 15,000 15,000 $500,000 (68,000) $432,000 x .833 $360,000 375,000 $(15,000)

(2)

(3) E(1)

Eliminating entries: Income from Subsidiary Investment in Beta Company Stock $45,000 x .833 Income to Noncontrolling Interest Noncontrolling Interest $45,000 x .167 Common Stock__Beta Company Additional Paid-In Capital Retained Earnings Treasury Stock Investment in Beta Company Stock Noncontrolling Interest 37,500 37,500

E(2)

7,500 7,500

E(3)

100,000 80,000 320,000 68,000 360,000 72,000

b.

(1)

Book value of Beta Company stock outstanding Cost of treasury shares repurchased Book value of remaining shares outstanding Proportion of remaining shares held by Apex (6,500 / 9,000) Adjusted book value of shares held by Apex Book value of shares held by Apex before treasury stock repurchase by Beta Company ($500,000 x .75) Decrease in carrying value of shares held by Apex Journal entry recorded by Apex Corporation: Cash Investment in Beta Company Stock Gain on Sale of Investment 68,000

$500,000 (68,000) $432,000 x .722 $312,000 375,000 $ 63,000

(2)

63,000 5,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-24 (3) E(1)

(continued) Eliminating entries: Gain on Sale of Investment Additional Paid-In Capital Income from Subsidiary Investment in Beta Company Stock $45,000 x .722 Income to Noncontrolling Interest Noncontrolling Interest $45,000 x .278 Common Stock__Beta Company Additional Paid-In Capital Retained Earnings Treasury Stock Investment in Beta Company Stock Noncontrolling Interest 5,000 5,000 32,500 32,500

E(2)

E(3)

12,500 12,500

E(4)

100,000 80,000 320,000 68,000 312,000 120,000

P9-25

Sale of Subsidiary Shares

a. Eliminating entries: E(1) Gain on Sale of ENC Company Stock Additional Paid-In Capital Eliminate gain on sale of ENC shares: $60,000 - ($250,000 x .20) Income from Subsidiary Dividends Declared Investment in ENC Company Stock Eliminate income from subsidiary: $18,000 = .60($170,000 - $140,000) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $12,000 = .40($170,000 - $140,000) Common Stock__ENC Company Additional Paid-In Capital Retained Earnings, January 1 Investment in ENC Company Stock Noncontrolling Interest Eliminate investment in common stock. 10,000 10,000

E(2)

18,000 6,000 12,000

E(3)

12,000 4,000 8,000

E(4)

100,000 20,000 130,000 150,000 100,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-25 b.

(continued) Penn Corporation and ENC Company Consolidation Workpaper December 31, 20X4 Penn Corp. 280,000 ENC Company 170,000 Eliminations Debit Credit Consolidated 450,000

Item Sales Gain on Sale of ENC Company Stock Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Other Expenses Debits Income to Noncontrolling Interest Net Income, carry forward Retained Earnings, January 1 Net Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash Accounts Receivable Inventory Buildings and Equipment Investment in ENC Company Stock Debits Accum. Depreciation Accounts Payable Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits

10,000 (1) 10,000 18,000 (2) 18,000 308,000 170,000 210,000 100,000 20,000 15,000 21,000 25,000 (251,000)(140,000)

450,000 310,000 35,000 46,000 (391,000) 59,000 (12,000) 47,000

(3) 12,000 57,000 30,000 40,000

320,000 130,000 (4)130,000 57,000 30,000 40,000 377,000 160,000 (15,000) (10,000) (2) (3) 362,000 30,000 70,000 120,000 650,000 162,000 1,032,000 170,000 50,000 200,000 200,000 50,000 362,000 415,000 95,000 20,000 30,000 100,000 20,000 150,000 150,000 35,000 50,000 100,000 230,000 170,000

320,000 47,000 367,000 6,000 4,000 10,000 (15,000) 352,000 65,000 120,000 220,000 880,000

(2) 12,000 (4)150,000 1,285,000 265,000 70,000 230,000 200,000 60,000 352,000 108,000 1,285,000

(4)100,000 (4) 20,000 (1) 10,000 170,000 10,000 (3) 8,000 (4)100,000 290,000 290,000

1,032,000

415,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-26 a. E(1)

Sale of Shares by Subsidiary to Nonaffiliate Common Stock__Delta Corporation 240,000 Additional Paid-In Capital 190,000 Retained Earnings 350,000 Investment in Delta Corporation Stock 520,000 Noncontrolling Interest 260,000 Eliminate investment in common stock: $240,000 = $200,000 + ($10 x 4,000 shares) $190,000 = $50,000 + [($45 - $10) x 4,000 shares] $520,000 = $780,000 x (16,000 shares / 24,000 shares) $260,000 = $780,000 x (8,000 shares / 24,000 shares)

Journal entry recorded by Craft Corporation: Investment in Delta Corporation Stock Additional Paid-In Capital Book value of shares held by Craft: After sale $780,000 x (16,000 / 24,000) Before sale $600,000 x (16,000 / 20,000) Increase in book value 40,000 40,000 $520,000 (480,000) $ 40,000

b.

Craft Corporation and Delta Corporation Consolidated Balance Sheet Workpaper January 1, 20X3 Craft Corp. Delta Corp. 230,000 120,000 200,000 600,000 (1)520,000 1,150,000 2,170,000 Eliminations Debit Credit Consolidated 280,000 210,000 380,000 1,300,000

Item

Cash 50,000 Accounts Receivable 90,000 Inventory 180,000 Buildings & Equipment 700,000 Investment in Delta Corporation 520,000 Total Debits 1,540,000 Accumulated Depreciation Accounts Payable Taxes Payable Mortgages Payable Common Stock Additional Paid-In Capital Retained Earnings Noncontrolling Interest Total Credits

200,000 70,000 250,000 300,000 220,000 500,000

220,000 70,000 80,000 240,000 190,000 350,000 (1)240,000 (1)190,000 (1)350,000 (1)260,000 780,000

420,000 140,000 80,000 250,000 300,000 220,000 500,000 260,000 2,170,000

1,540,000

1,150,000

780,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-26 c.

(continued) Craft Corporation and Subsidiary Consolidated Balance Sheet January 1, 20X3

Current Assets: Cash Accounts Receivable Inventory Noncurrent Assets: Buildings and Equipment Less: Accumulated Depreciation Total Assets

$280,000 210,000 380,000 $1,300,000 (420,000)

870,000

880,000 $1,750,000

Current Liabilities: Accounts Payable Taxes Payable Mortgages Payable Noncontrolling Interest Stockholders' Equity: Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities and Stockholders' Equity

$140,000 80,000

220,000 250,000 260,000

$300,000 220,000 500,000

1,020,000 $1,750,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-27 a.

Sale of Additional Shares to Parent

Eliminating entry: E(1) Common Stock__Tin Products Corporation Additional Paid-In Capital Retained Earnings Buildings and Equipment Investment in Tin Products Corporation Noncontrolling Interest 125,000 175,000 200,000 12,500 412,500 100,000

Journal entry recorded by Tin Products: Cash Common Stock Additional Paid-In Capital Journal entry recorded by Shady Lane: Investment in Tin Products Stock Cash 150,000 150,000 150,000 25,000 125,000

b.

Shady Lane Manufacturing Company and Tin Products Corporation Consolidation Workpaper January 2, 20X1 Shady Lane 77,500 60,000 100,000 600,000 412,500 1,250,000 150,000 50,000 400,000 200,000 50,000 400,000 Tin Products 210,000 100,000 180,000 600,000 (1) 12,500 (1)412,500 1,090,000 240,000 50,000 300,000 125,000 175,000 200,000 1,940,000 390,000 100,000 700,000 200,000 50,000 400,000 (1)100,000 512,500 100,000 1,940,000 Eliminations Debit Credit Consolidated 287,500 160,000 280,000 1,212,500

Item Cash Accounts Receivable Inventory Buildings and Equipment Investment in Tin Products Stock Debits Accum. Depreciation Accounts Payable Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings Noncontrolling Interest Credits

(1)125,000 (1)175,000 (1)200,000

1,250,000

1,090,000

512,500

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-28

Complex Ownership Structure

The overall ownership structure can be diagrammed as follows:

First Boston .80 .10

Gulfside .60

Paddock

a.

Entity approach: Basic equations assume FB = net income of First Boston GS = net income of Gulfside PD = net income of Paddock

Simple equations: FB = $44,000 + .80GS GS = $34,000 + .60PD PD = $50,000 + .10FB Using substitution: FB = $44,000 + .80[$34,000 + .60($50,000 + .10FB)] FB = $44,000 + .80($34,000 + $30,000 + .06FB) FB = $44,000 + $27,200 + $24,000 + .048FB .952FB = $95,200 FB = $100,000 PD = $50,000 + .10($100,000) PD = $50,000 + $10,000 PD = $60,000 GS = $34,000 + .60($60,000) GS = $34,000 + $36,000 GS = $70,000 Consolidated net income = $100,000 x .90 = $90,000 Noncontrolling interest: Gulfside $70,000 Paddock $60,000 Total noncontrolling interest x .20 = $14,000 x .40 = 24,000 $38,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-28 b.

(continued)

Treasury stock method: Operating income of First Boston Operating income of Gulfside Operating income of Paddock Total earnings available Income to noncontrolling interests Paddock .40[$50,000 + .10($30,000)] Gulfside .20[$34,000 + .60($10,000)] Consolidated net income $ 44,000 34,000 50,000 $128,000 $21,200 8,000

(29,200) $ 98,800

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-29

Reciprocal Ownership

The overall ownership structure can be diagrammed as follows:

Black .80 Red .50 Green .30 .20

a.

Entity approach: Basic equations assume B = net income of Black Corporation R = net income of Red Corporation G = net income of Green Company

Simple equations: B = $66,000 + .80R + .30G R = $35,000 + .50G G = $50,000 + .20B

Using substitution: B = $66,000 + .80[$35,000 + .50($50,000 + .20B)] + .30($50,000 + .20B) B = $66,000 + .80($35,000 + $25,000 + .10B) + $15,000 + .06B B = $66,000 + $28,000 + $20,000 + .08B + $15,000 + .06B .86B = $129,000 B = $150,000 G = $50,000 + .20($150,000) G = $50,000 + $30,000 G = $80,000 R = $35,000 + .50($80,000) R = $35,000 + $40,000 R = $75,000 Consolidated net income: Noncontrolling interest: $150,000 x .80 = $120,000 R = $75,000 x .20 = $15,000 G = $80,000 x .20 = 16,000 $31,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

P9-29 b.

(continued)

Treasury stock method: $ 66,000 35,000 50,000 $151,000 $11,600 9,000

Operating income of Black Corporation Operating income of Red Corporation Operating income of Green Company Total earnings available Income to noncontrolling interest: Green Company {.20[$50,000 + .20($40,000)]} Red Corporation {.20[$35,000 + .50($20,000)]} Consolidated net income

(20,600) $130,400

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

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