Solution manual advanced accounting 10e by fischer taylor CH05

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER UNDERSTANDING THE ISSUES In the current year, consolidated net income will include a gain on retirement of bonds of $5,000 ($100,000 – $95,000) In the current and each of the next years, consolidated net income will be reduced by $1,000 ($5,000 ÷ years), which represents amortization of the discount paid by the parent In the current year, the NCI will receive $1,000 ($5,000 × 20%) of the gain on the retirement of bonds In the current and each of the next years, NCI share of income will be reduced by $200 ($1,000 × 20%) The first approach that could be used to reduce the overall consolidated interest cost but maintain the subsidiary as the debtor would have the parent advancing $1,000,000 to the subsidiary so that the subsidiary may retire the bonds The former debt is retired, and a new long-term intercompany debt originates The intercompany interest expense would be eliminated during the consolidation process Another approach would have the parent purchasing the subsidiary bonds from outside parties and holding them as an investment From a consolidated viewpoint, the debt is retired Therefore, interest expense would be eliminated during the consolidation process It is true that intercompany operating leases eliminated during the consolidation process will not have an effect on consolidated income However, the excessive rent expense amounts will still appear on the subsidiary’s separately stated income statement and will reduce the NCI share of consolidated income The high lease rates will shift income from the NCI to the controlling interest At the 10% annual interest rate, a loss on retirement of bonds will occur in the current year since the parent paid a premium to retire the subsidiary’s bonds In the current and future years, consolidated net income will be increased by the difference between interest expense and interest revenue This amount represents the amortization of the premium paid by the parent At the 13% annual interest rate, a gain on retirement of bonds will occur in the current year since the parent paid a discount to retire the subsidiary’s bonds In the current and future years, consolidated net income will be reduced by the difference between interest revenue and interest expense This amount represents the amortization of the discount paid by the parent to retire the bonds Either type of lease can shift income to the controlling interest by incorporating a higher than market interest rate to calculate the payments In a sales-type lease, the controlling interest can shift additional income by building a profit into the capitalized cost of the leased asset There is no difference in the consolidated company’s ability to recognize profit on selling equipment to its subsidiaries or leasing the equipment to its subsidiaries (only if the lease is sales-type) In both cases, the profit is deferred and amortized over the life of the asset or life of the lease The controlling interest has the opportunity to increase its profit by leasing the asset to the subsidiary The lessor can build in an interest rate in excess of its cost of funds Since Company S was the original issuer of the bonds, it will absorb the loss that results in the current year from the parent retiring the bonds at a premium The noncontrolling interest will receive its share of this loss In the current and future years, the subsidiary’s income will be increased by the difference between interest expense and interest revenue The noncontrolling interest will receive its share of this amount 247 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Exercises EXERCISES EXERCISE 5-1 It is desirable to refinance for two reasons First, interest rates are down, and it would be wise to lock in at the lower rate Second, the parent firm can borrow funds at a lower interest rate The simplest way to accomplish the refinancing is to have the parent incur the new debt and loan the proceeds to the subsidiary; the subsidiary would use the funds to retire its debt with a gain on retirement being recognized that would flow to the consolidated statements The parent would not only enjoy a lower interest rate, but it could also structure the loan terms, including the maturity date, to meet its needs The parent could decide what rate to charge Patel Industries The rate charged would affect the reported income of Patel Industries and thus impact the distribution of income between the noncontrolling and controlling interests The intercompany debt would be eliminated in the preparation of consolidated statements Marcus could incur new debt and use the proceeds to purchase Patel Industries’ outstanding bonds The bonds would remain as debt on the separate statements of Patel Industries The bonds would also appear as an investment on the books of Marcus The intercompany bonds, however, would be eliminated in the consolidated statements The consolidated income statement would show a gain on retirement in the year of the intercompany purchase The NCI would share in the gain, but this would be offset by interest adjustments in future periods EXERCISE 5-2 (a) (1) The consolidated income statement for 20X3 will include a gain on retirement of the bonds of $32,000 ($968,000 paid for $1,000,000 debt) The interest expense of $80,000 will be eliminated as will the interest revenue of $84,000 ($80,000 nominal + $4,000 discount amortization) recorded by the parent (2) The subsidiary income distribution schedule will get the benefit of the retirement gain of $32,000 in the year the bonds are purchased, but subsidiary income will be reduced each year for the amortization of the purchase discount recorded by the parent ($4,000) The net effect for 20X3 is $28,000 The NCI would receive 20% of this increase The balance flows to the controlling interest (b) (1) The consolidated income statement includes nothing relative to the bonds From a consolidated viewpoint, the bonds were retired in the prior period The interest expense recorded by the subsidiary and the interest revenue recorded by the parent are eliminated (2) The income distribution of the subsidiary is reduced by $4,000 for the amortization of the purchase discount recorded by the parent In the end, this adjustment is shared 20% by the NCI and 80% by the controlling interest 248 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Exercises EXERCISE 5-3 (1) Eliminations and Adjustments at December 31, 20X5: Interest Revenue Bonds Payable Loss on Retirement Interest Expense Investment in Bonds Discount on Bonds Payable 8,700 100,000 4,800c 9,500 101,500a 2,500b Interest Payable Interest Receivable Loss remaining at year-end: Carrying value of bonds at December 31, 20X5 Investment in bonds at December 31, 20X5 Loss amortized during the year: Interest revenue eliminated (($100,000 × 9%) – $300) Interest expense eliminated (($100,000 × 9%) + $500) Loss at January 1, 20X5 9,000 9,000 $ $ 97,500b 101,500a 8,700 9,500 $(4,000) (800) $(4,800) a $101,800 – $100,000 = $1,800 premium at 1/1/X5; $1,800 ÷ years left = $300/yr amortization; $101,800 – $300 = $101,500 investment balance at 12/31/X5 b $100,000 – $95,000 = $5,000 discount at 1/1/X1; $5,000 ữ 10 years = $500/yr amortization; $500 ì years = $2,500 $95,000 + $2,500 = $97,500 book value at 12/31/X5 c $95,000 + ($500 × years) = $97,000 book value at 1/1/X5; $97,000 – $101,800 investment at 1/1/X5 = $4,800 loss (to be amortized at $4,800/6 = $800/yr.) (2) Eliminations and Adjustments at December 31, 20X6: Interest Revenue Bonds Payable Retained Earnings—Dien (80% × $4,000*) Retained Earnings—Casper (20% × $4,000*) Interest Expense Investment in Bonds [$101,800 – ($300 × yrs.)] Discount on Bonds Payable ($2,500 balance, 1/1/X6 – $500) 8,700 100,000 3,200 800 9,500 101,200 2,000 *$4,800 original loss on 1/1/X5 – $800 amortization in 20X5 = $4,000 unamortized loss on 1/1/X6 Interest Payable Interest Receivable Loss remaining at year-end: Carrying value of bonds at December 31, 20X6 Investment in bonds at December 31, 20X6 Loss amortized during the year: Interest revenue eliminated Interest expense eliminated Loss at January 1, 20X6 249 9,000 9,000 $ $ 98,000 101,200 8,700 9,500 $(3,200) (800) $(4,000) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Exercises EXERCISE 5-4 Gain on retirement (January 2, 20X6): Balance on issuer’s books Less purchase price (cost to retire bonds) Gain on retirement $48,734 47,513 1,221 $ Schedule of interest adjustments: Year Ending 12/31/X6 12/31/X7 12/31/X8 Intercompany Interest, Effective Interest on Purchase (10%) Recorded Interest, Effective Interest on Issuance (9%) $4,751 4,826 4,909 Interest Expense Adjustment to Issuer Income Distribution Schedule $4,386 4,421 4,459 $ 365 405 450 $1,220* *Does not add to gain on retirement due to rounding EXERCISE 5-5 (1) Eliminations and Adjustments at December 31, 20X3: Interest Revenue [(7% ì $60,000) + ($6,400 ữ 8)] Bonds Payable (60% × $100,000) Premium on Bonds Payable (60% × $700) Interest Expense [($4,200 – (60% × $100)] Investment in Bonds (balance at year-end $53,600 + $800) Gain on Retirement* 5,000 60,000 420 4,140 54,400 6,880 *Book value of bonds on 1/2/X3 [$101,000 – ($1,000/10 × 2) = $100,800] Purchased ($100,800 × 60%) $60,480 Price paid 53,600 Gain on retirement of bonds $ 6,880 Interest Payable ($60,000 × 7%) Interest Receivable 4,200 4,200 An alternative way to calculate the gain: Gain remaining at year-end: Carrying value of bonds at December 31, 20X3 (60% × $100,700) Investment in bonds at December 31, 20X3 Gain amortized during the year: Interest revenue eliminated Interest expense eliminated Gain at January 1, 20X3 250 $60,420 54,400 $ 5,000 4,140 $6,020 860 $6,880 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Exercises Exercise 5-5, Concluded (2) Eliminations and Adjustments at December 31, 20X4: Interest Revenue Bonds Payable Premium on Bonds Payable (60% × $600) Interest Expense Investment in Bonds (balance at year-end) ($54,400 + $800) Retained Earnings—Mirage ($6,020* x 80%) Retained Earnings—Carlton ($6,020* x 20%) 5,000 60,000 360 4,140 55,200 4,816 1,204 *Unamortized gain on retirement = $6,880 – ($860 amortization for yr.) = $6,020 Interest Payable Interest Receivable 4,200 4,200 An alternative way to calculate the unamortized gain: Gain remaining at year-end: Carrying value of bonds at December 31, 20X4 (60% × $100,600) Investment in bonds at December 31, 20X4 Gain amortized during the year: Interest revenue eliminated Interest expense eliminated Remaining gain at January 1, 20X4 $60,360 55,200 $ 5,000 4,140 EXERCISE 5-6 Partial Schedule of Bond Premium Amortization 12-Year, 8% Bonds Sold to Yield 7% (Lift) Date January 1, 20X5 January 1, 20X6 January 1, 20X7 January 1, 20X8 January 1, 20X9 Cash Paid Interest Expense $8,000 8,000 8,000 8,000 $7,556 7,525 7,492 7,456 Premium Amortized $444 475 508 544 Carrying Amount of Bonds $107,943 107,499 107,024 106,516 105,972 Partial Schedule of Bond Discount Amortization 12-Year, 8% Bonds Sold to Yield 9% (Shark) Date January 2, 20X8 January 1, 20X9 Cash Received Interest Revenue $8,000 $8,460 251 Discount Amortized $460 Carrying Value of Bonds $94,005 94,465 $5,160 860 $6,020 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Exercises Exercise 5-6, Concluded (1) Eliminations and Adjustments at December 31, 20X8: Interest Revenue Bonds Payable Premium on Bonds Payable Gain on Retirement Interest Expense Investment in Bonds 8,460 100,000 5,972 Interest Payable Interest Receivable 8,000 12,511 7,456 94,465 8,000 Gain remaining at year-end: Carrying value of bonds at December 31, 20X8 Investment in bonds at December 31, 20X8 Gain amortized during the year: Interest expense eliminated Interest revenue eliminated Gain at January 1, 20X8 $105,972 94,465 $ 8,460 7,456 $11,507 1,004 $12,511 (2) Subsidiary Life Industries Income Distribution Interest adjustment ($8,460 – $7,456) $1,004 Internally generated net income $500,000 Retirement gain on bonds 12,511 Adjusted income $511,507 NCI share × 10% NCI $ 51,151 252 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Exercises EXERCISE 5-7 (1) Asset Under Operating Lease Cash 60,000 Depreciation Expense Accumulated Depreciation—Asset Under Operating Lease ($60,000 ÷ years) 12,000 Cash Rental Revenue 15,000 (2) Rent Expense Cash 15,000 (3) Fixed Asset Accumulated Depreciation—Asset Under Operating Lease Asset Under Operating Lease Accumulated Depreciation 60,000 12,000 Rent Revenue Rent Expense To eliminate the intercompany lease transactions 15,000 60,000 12,000 15,000 15,000 60,000 12,000 15,000 EXERCISE 5-8 (1) Lease Payment Amortization Schedule Date Payment January 1, 20X1 January 1, 20X1 January 1, 20X2 January 1, 20X3 January 1, 20X4 Total $12,000 12,000 12,000 12,000 $48,000 Interest at 12% on Previous Balance $ *Adjusted for rounding 253 $3,459 2,434 1,285* 7,178 Reduction of Principal $12,000 8,541 9,566 10,715 $40,822 Principal Balance $40,822 28,822 20,281 10,715 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Exercises Exercise 5-8, Concluded (2) Eliminations and Adjustments at December 31, 20X1: Interest Revenue (see amortization schedule) Interest Expense To eliminate intercompany interest revenue and expense 3,459 3,459 Obligations Under Capital Lease ($40,822 – $12,000 first payment) Interest Payable Unearned Interest Income Minimum Lease Payments Receivable To eliminate intercompany debt recorded by lessee against net intercompany receivable of lessor 28,822 3,459 3,719 Property, Plant, and Equipment Accumulated Depreciation—Assets Under Capital Lease ($40,822 ÷ years) Assets Under Capital Lease Accumulated Depreciation—Property, Plant, and Equipment To reclassify asset under capital lease and related accumulated depreciation as a productive asset owned by the consolidated entity 40,822 36,000 8,164 40,822 8,164 (3) Eliminations and Adjustments at December 31, 20X2: Interest Revenue (see amortization schedule) Interest Expense To eliminate intercompany interest revenue and expense 2,434 Obligations Under Capital Lease Interest Payable Unearned Interest Income Minimum Lease Payments Receivable To eliminate intercompany debt recorded by lessees against net receivable of lessor 20,281 2,434 1,285 Property, Plant, and Equipment Accumulated Depreciation—Assets Under Capital Lease (2 × $8,164) Assets Under Capital Lease Accumulated Depreciation—Property, Plant, and Equipment To reclassify asset under capital lease and related accumulated depreciation as a productive asset owned by the consolidated entity 40,822 254 2,434 24,000 16,328 40,822 16,328 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Exercises EXERCISE 5-9 Eliminations and Adjustments at December 31, 20X1: Interest Income (see amortization schedule) Interest Revenue To eliminate intercompany interest revenue and expense 2,690 Obligations Under Capital Lease Interest Payable Unearned Interest Income (see amortization) Minimum Lease Payments Receivable To eliminate intercompany debt recorded by lessee against net intercompany receivable of lessor 26,904 2,690 4,790 Property, Plant, and Equipment Accumulated Depreciation—Assets Under Capital Lease ($35,000/8 yrs.) Assets Under Capital Lease Accumulated Depreciation—Property, Plant, and Equipment To reclassify asset under capital lease and related accumulated depreciation as a productive asset owned by the consolidated entity Asset is depreciated over 8-year life 35,000 Sales Profit on Leases Property, Plant, and Equipment To eliminate unrealized profit on intercompany “sale” and to reduce asset to its cost to the consolidated entity 10,000 Accumulated Depreciation—Property, Plant, and Equipment ($10,000/8 yrs.) Depreciation Expense To reduce depreciation on leased asset to depreciation based on cost to consolidated entity Rental Income Rent Expense To eliminate intercompany rent revenue and expense due to executory costs on lease 255 2,690 34,384 4,375 35,000 4,375 10,000 1,250 1,250 1,000 1,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems PROBLEMS PROBLEM 5-1 (1) Bonds Payable Interest Income ($4,500 + $200 amortization) Investment in Bonds ($48,400 + $200 amortization) Interest Expense Gain on Extinguishment of Debt (2) Justin Corporation and Subsidiary Drew Corporation Consolidated Income Statement For Year Ended December 31, 20X6 Sales Cost of goods sold Gross profit Other expenses ($720,000 + $105,000) Gain on debt retirement Consolidated net income 256 50,000 4,700 48,600 4,500 1,600 $3,040,000 1,405,000 $1,635,000 (825,000) 1,600 $ 811,600 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems PROBLEM 5-16 Determination and Distribution of Excess Schedule Company Implied Fair Value Fair value of subsidiary Less book value of interest acquired: Total equity Interest acquired Book value Excess of fair value over book value Parent Price (80%) NCI Value (20%) $600,000 $480,000 $120,000 500,000 $500,000 80% $400,000 $500,000 20% $100,000 $100,000 $ 80,000 $ 20,000 Adjustment $100,000 Worksheet Key debit D Adjustment of identifiable accounts: Goodwill Life Amortization per Year Subsidiary Swing Company Income Distribution Internally generated net income Realized gain on machine $17,440 509 Adjusted income NCI share NCI $17,949 × 20% $ 3,590 Parent Patter, Inc Income Distribution Internally generated loss $16,440 80% × Swing adjusted income of $17,949 Controlling interest $ 2,081 308 $14,359 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems Problem 5-16, Continued Cash Inventory Property, Plant, and Equipment Accumulated Depreciation—Property, Plant, and Equipment Assets Under Capital Lease Accumulated Depreciation—Assets Under Capital Lease Assets Under Operating Lease Accumulated Depreciation— Assets Under Operating Lease Minimum Lease Payments Receivable Unearned Interest Income on Leases Goodwill Investment in Swing Company Accounts Payable Obligations Under Capital Lease Interest Payable Common Stock ($10 par)—Patter Paid-In Capital in Excess of Par—Patter Retained Earnings—Patter Patter, Inc and Subsidiary Swing Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X5 Eliminations Consolidated Trial Balance and Adjustments Income Patter Swing Dr Cr Statement 91,013 26,050 70,000 20,000 320,000 50,000(OL2) 140,000 (F1) 3,560 (CL3a) 17,560 (CL2b) 23,116 (70,000) 40,676 (20,000)(F1) (F2) 480,000 (130,000) (24,560) (4,440) (200,000) (300,000) (278,333) Consolidated Balance Sheet 117,063 90,000 547,116 (OL2) (CL3a) (CL3b) (CL3a) (CL2b) 18,000 5,017 5,779 17,560 23,116 (117,778) 5,017 5,779 (OL2) 140,000 280,000 18,000 (CL2a) (CL2b) (4,000)(CL2a) 1,139 (CL2b) 2,861 (D) 100,000 (CV) 101,288 (EL) (D) (180,000) (CL2a) 9,444 (CL2b) 15,116 (CL2a) 1,417 (CL2b) 3,023 (CV) (F1) 2,441 12,000 21,000 501,288 80,000 101,288 (377,180) (62,000) 379,000 100,000 (310,000) (200,000) (300,000) (10,796) (CL3a) (CL3b) 420,000 509 509 NCI Controlling Retained Earnings (80,000)(OL2) 412,000 309 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems Problem 5-16, Continued Common Stock ($10 par)—Swing Paid-In Capital in Excess of Par—Swing Patter, Inc and Subsidiary Swing Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X5 Concluded Eliminations and Adjustments Trial Balance Patter Swing Dr Cr (100,000)(EL) 80,000 (300,000)(EL) 240,000 Retained Earnings—Swing Consolidated Income Statement Controlling Retained NCI Earnings (20,000) (60,000) Consolidated Balance Sheet (226,610)(EL) 181,288(NCI) 20,000 (F1) 610 (64,712) Sales (300,000) (130,000) (430,000) Rent Income (34,000)(OL1) 11,000 (23,000) Interest Income—Capital Lease (4,440)(CL1a) 1,417 (CL1b) 3,023 Depreciation Expense 41,000 23,000 (CL5a) 509 63,491 Interest Expense 4,440 (F2) 1,417 (CL1b) 3,023 Selling and General Expense 70,000 38,000 108,000 Cost of Goods Sold 190,000 90,000 280,000 Rent Expense 11,000 (OL1) 11,000 964,557 964,557 Consolidated Net Income (1,509) To NCI (see distribution schedule) 3,590 (3,590) To Controlling Interest (see distribution schedule) (2,081) 2,081 Total NCI (148,302) Retained Earnings—Controlling Interest, December 31, 20X5 (375,099) Totals 310 (148,302) (375,099) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems Problem 5-16, Continued Eliminations and Adjustments: (CV) (EL) Conversion to equity at the beginning of the year [80% × ($226,610 – $100,000)] Eliminate the 80% ownership portion of the subsidiary equity accounts against the investment (D)/(NCI) Distribute the excess cost to goodwill (OL1) Eliminate the intercompany rent revenue and expense on operating lease (OL2) Reclassify the asset under the operating lease and the related accumulated depreciation to productive asset owned by the consolidated entity (3 years at $6,000) (CL1a) Eliminate the intercompany interest expense/revenue on machine: Original balance First lease payment First-year interest (15% × $12,560) Second lease payment Balance Interest for second year (15% × $9,444) (CL2a) Eliminate the obligation under capital lease plus accrued interest payable against minimum lease payments receivable and unearned interest income: Obligations balance, January 1, 20X5: Original balance Principal, January 1, 20X4 Principal, January 1, 20X5 ($5,000 – $1,884) Balance $17,560 (5,000) (3,116) $ 9,444 Minimum lease payments, January 1, 20X5: (2 × $5,000) + $2,000 option $12,000 Unearned interest income, January 1, 20X5: Original balance ($22,000* – $17,560) Earned in 20X5 Earned in 20X4 Balance *($5,000 x 4) + $2,000 (CL3a) (F1) (F2) $ $ $17,560 (5,000) 1,884 (5,000) 9,444 1,417 $ $ 4,440 (1,884) (1,417) 1,139 Reclassify the machine under the capital lease and related depreciation Cost, $17,560; accumulated depreciation, [($17,560 ữ 7) ì 2] = $5,017 Defer remaining gain on asset at the beginning of the year, $3,560* less year’s amortization of $509** = $3,051 Because profit was recorded by the subsidiary, the retained earnings adjustment is allocated to NCI ($3,051 × 20% = $610) and controlling interest ($3,051 × 80% = $2,441) *$17,560 – $14,000 = $3,560 ** $3,560/7 = $509 Adjust the current year’s depreciation for 1/7 of the gain, $509 311 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems Problem 5-16, Concluded (CL1b) Eliminate intercompany interest expense/revenue on truck lease: Original balance Initial payment Balance First-year interest at 20% (CL1b) Payment at start of second year Balance Remaining minimum payments ($8,000 + $5,000) Future unearned interest (CL2b) (CL2b) (CL3b) $23,116 8,000 $15,116 3,023 $ Entry (8,000) $10,139 13,000 2,861 Entry Eliminate present value of obligation under capital lease, $15,116; current interest payable, $3,023; and future unearned interest of $2,861 against minimum lease payments of $21,000 [($8,000 × 2) + $5,000] Reclassify the asset as an owned productive asset Reclassify and adjust the depreciation as applicable to the owned asset, $23,116 ÷ = $5,779 312 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems APPENDIX PROBLEMS PROBLEM 5A-1 Cash Accounts Receivable (net) Inventory Minimum Lease Payments Receivable Unguaranteed Residual Value Unearned Interest Income Assets Under Capital Lease Accumulated Depreciation—Assets Under Capital Lease Property, Plant, and Equipment Accumulated Depreciation—Property, Plant, and Equipment Investment in Steven Truck Company Accounts Payable Interest Payable Obligations Under Capital Lease Common Stock ($5 par)—Paulz Retained Earnings—Paulz Common Stock ($5 par)—Steven Retained Earnings—Steven Sales Gain on Sale of Assets Interest Income Paulz Heavy Equipment and Subsidiary Steven Truck Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X6 Eliminations Consolidated and Adjustments Income Trial Balance Paulz Steven Dr Cr Statement 90,485 123,307 228,000 120,000 200,000 140,000 97,000 10,000 (CL2s) 10,000 (CL2p) 97,000 6,000 (CL2s) 6,000 (9,673) (444) (CL2s) 1,237(CL1s) 412 (CL2p) 9,673(CL1s) 381 27,833 109,388 (CL2s) 27,833 (CL3p) 109,388 NCI (18,556) (13,674)(CL3s) (CL3p) 2,075,000 1,145,000 (CL3p) 18,556 13,674 (CL2s) 32,596 109,388 (713,000) (160,000)(F2) 1,045,800 (100,000) (85,000) (740) (7,939)(CL2s) (CL2p) (9,260) (79,388)(CL2s) (CL2p) (1,800,000) (864,834) (CL1s) (800,000)(EL) (387,250)(EL) (CL1s) (3,200,000) (1,400,000) (60,000)(F1) (7,939) (1,152)(CL1s) (CL1p) 750 (CL3s) (CL3p) (CY2) 28,000 (EL) 740 7,939 9,260 79,388 305 (CL3s) 640,000 309,800(CL3s) 76 60,000 1,152 7,939 (160,000) (77,457) (4,600,000) (864,859) 313 (F1) 60,000 17,730 13,674 (CY1) 124,000 949,800 330 83 Controlling Retained Earnings Consolidated Balance Sheet 213,792 348,000 340,000 3,301,984 (903,654) (185,000) (1,800,00 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems Problem 5A-1 Continued Paulz Heavy Equipment and Subsidiary Steven Truck Company Worksheet for Consolidated Financial Statements For Year Ended December 31, 20X6 Concluded Eliminations Consolidated Controlling Consolidated and Adjustments Income Retained Balance Trial Balance Paulz Steven Dr Cr Statement NCI Earnings Sheet Rent Income (2,182) (CL4p) 2,182 Cost of Goods Sold 1,882,000 770,000 2,652,000 Interest Expense 740 7,939 (CL1s) 740 (CL1p) 7,939 Depreciation Expense 135,000 45,000 (F2) 750 (CL3s) 413 178,837 Other Expenses 924,326 483,213 (CL4p) 2,182 1,405,357 Subsidiary Income (124,000) (CY1) 124,000 Dividends Declared 144,000 35,000 (CY2) 28,000 7,000 144,000 0 1,456,655 1,456,655 Consolidated Net Income (363,806) To NCI (see distribution schedule) 19,150 (19,150) To Controlling Interest (see distribution schedule) 344,656 (344,656) Total NCI (249,607) Retained Earnings—Controlling Interest, December 31, 20X6 (1,065,515) (1,065,515) Totals Eliminations and Adjustments: (CY1) (CY2) (EL) (CL1s) (CL2s) Eliminate the current-year subsidiary income to the investment account Eliminate the current-year dividends to the investment account Eliminate 80% of the subsidiary equity balances Eliminate intercompany interest expense/revenue recorded on truck, $740, and interest on residual value [See table in entry (CL2s).] Eliminate the interest on the unguaranteed residual value recorded in 20X5 Eliminate the intercompany debt, the unguaranteed residual value, and reclassify the asset at cost: Lessee Lessor Date Payment Interest (8%) January 1, 20X5 January 1, 20X6 January 1, 20X7 January 1, 20X8 $10,000 10,000 10,000 $1,427 740 Balance Payment Interest (8%) Balance $17,833 9,260 $10,000 10,000 10,000 6,000 $1,808 1,152 444 $22,596 14,404 5,556 314 Interest Difference $ 381 412 444 $1,237 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems Problem 5A-1, Continued (CL3s) (CL1p) (CL2p) Reclassify and adjust the depreciation on the truck, ($27,833 ÷ 3) versus 1/3 × ($32,596 – $6,000 residual) Adjust past and current year by $413 ($9,278 – $8,865) Eliminate interest revenue and expense on equipment lease, 10% × ($109,388 original balance – $30,000 payment, January 1, 20X6), or $7,939 Eliminate obligation under capital lease ($109,388 – $30,000) plus accrued interest payable ($7,939) against minimum lease payments receivable, [(3 × $30,000) + $7,000 purchase option, or $97,000], and unearned interest income, computed as follows: Original balance of payments receivable Original principal balance Interest earned in 20X6 Unearned interest income, December 31, 20X6 (CL3p) (CL4p) $127,000 109,388 Reclassify the equipment under capital lease and related accumulated depreciation for one year Annual depreciation is $109,388 ÷ 8, or $13,674 Eliminate the intercompany rent revenue and expense, $2,182, which is $1,500 executory costs plus $682 contingent payment, computed as follows: Previous growth rate of net income (20X5 net income, $81,650 ÷ 20X4 net income of $75,600, or 1.08; 20X4 net income, $75,600 ÷ 20X3 net income of $70,000, or 1.08) 20X6 net income, excluding gain on asset sale Less 1.08 × $81,650, 20X5 net income Increase in income due to cost saving Contingent payment, 10% of increase (F1) (F2) $ $17,612 (7,939) 9,673 8% $ $ $95,000 88,182 6,818 682 Eliminate the gain on the intercompany sale of warehouse and reduce the asset to its cost to the consolidated entity Adjust current year’s depreciation for one-quarter year, or $750 ($60,000 gain ÷ 20year life = $3,000 annual depreciation adjustment) 315 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems Problem 5A-1, Concluded Subsidiary Steven Truck Company Income Distribution Unrealized gain on sale of warehouse Unearned interest on residual $60,000 412 Internally generated net income Gain realized through use of warehouse Adjustment of depreciation on lease Adjusted income NCI share NCI $155,000 750 413 $ 95,751 × 20% $ 19,150 Parent Paulz Heavy Equipment Income Distribution Internally generated net income 80% × Steven adjusted income of $95,751 Controlling interest $268,055 76,601 $344,656 PROBLEM 5A-2 (1) Eliminations and Adjustments at December 31, 20X1: Interest Income Interest Expense Unearned Interest Income To eliminate intercompany interest revenue and expense 5,136 Property, Plant, and Equipment (original cost to lessor) Obligations Under Capital Lease Interest Payable Unearned Interest Income (includes above $513 adjustment) Minimum Lease Payments Receivable Unguaranteed Residual Value Assets Under Capital Lease To eliminate intercompany debt, the unguaranteed residual value, and the asset under the capital lease 50,098 28,894 4,623 4,279 Accumulated Depreciation—Assets Under Capital Lease (1/3 × $46,894) Accumulated Depreciation—Property, Plant, and Equipment [1/3 × ($50,098 – $5,000 residual)] Depreciation Expense To reclassify accumulated depreciation 316 4,623 513 36,000 5,000 46,894 15,631 15,033 598 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Problems Problem 5A-2, Concluded (2) Eliminations and Adjustments at December 31, 20X2: Interest Income Interest Expense Unearned Interest Income To eliminate intercompany interest revenue and expense Retained Earnings—Penn Unearned Interest Income To adjust for interest income recorded on residual value in 20X1 Property, Plant, and Equipment Obligations Under Capital Lease Interest Payable Unearned Interest Income (includes $513 and $595 adjustments) Minimum Lease Payments Receivable Unguaranteed Residual Value Assets Under Capital Lease To eliminate intercompany debt, the unguaranteed residual value, and the asset under the capital lease Accumulated Depreciation—Assets Under Capital Lease (2 × $15,631) Accumulated Depreciation—Property, Plant, and Equipment (2 × $15,033) Depreciation Expense Retained Earnings—Penn To reclassify accumulated depreciation 317 3,078 2,483 595 513 513 50,098 15,517 2,483 1,796 18,000 5,000 46,894 31,262 30,066 598 598 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Cases CASES CASE 5-1 First, let’s consider the existing outstanding bonds There is a major difference in interest rates between those available to Power Pro and Swift-Craft To the extent possible, the debt should be directly or indirectly retired Direct retirement would be accomplished by Power Pro lending funds to Swift-Craft, which Swift-Craft would in turn use to retire the bonds The other alternative is for Power Pro to purchase the existing bonds that it could then hold as an investment Assuming the current borrowing rate is 11% for Swift-Craft, the bonds would trade near face value The direct borrowing route would allow the parent to choose the interest rate it wanted to charge Any rate under 11% would benefit the NCI share of income because it would increase the subsidiary’s reported income The intercompany debt and interest revenue/expense would be eliminated in consolidation The indirect route (purchasing the Swift-Craft bonds) would probably leave the NCI shareholders in the same position they are in now The parent receives the 11% interest and can borrow at 7.5% The bonds are retired for consolidation purposes in the period in which they are purchased by Power Pro The intercompany interest revenue/expense on the bonds is eliminated It would appear that Power Pro will build and equip the new plant It can add a reasonable profit The higher the price, the greater the shift of income from the subsidiary to the parent When consolidating, the profit is removed from the gain account and the asset accounts It is deferred over the period of use as a decrease in Depreciation Expense Power Pro could sell the assets to Swift-Craft in return for a long-term mortgage Again, any rate under 11% is a bonus to the NCI shareholders Again, the intercompany debt and interest revenue/expense are eliminated in the consolidation process The best situation might be for Power Pro to lease the assets to Swift-Craft under a financingtype lease It would be a sales-type lease; thus, the profit would be deferred in the same manner as if the asset were sold to Swift-Craft This would allow Power Pro to determine the interest rate and would provide it with control over the accounting for the assets Any rate below 11% is beneficial to the NCI, and any profit below that charged by outside parties is a plus to the NCI shareholders The intercompany debt and the interest revenue/expense resulting from the lease are eliminated in the consolidation process The assets under the lease are reclassified to appear as normal, owned assets 318 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Cases CASE 5-2 (1) Option 1: Consolidated Income Statement Sales Cost of goods sold Gross profit Expenses Interest expense Gain on bond retirement Net income $ $ $ 320,000 (220,000) 100,000 (40,000) (20,000) 15,000 55,000 Consolidated Balance Sheet Assets Cash 45,000 Other current assets 82,000* Plant and equipment 300,000 Accumulated depreciation 796,000** Total $1,223,000 Liabilities and Equity $ 173,000 Current liabilities $ 250,000 NCI 1,300,000 Common stock (par) (500,000) Retained earnings $1,223,000 Total *NCI = 20% × ($100,000 + $285,000 + $10,000 income + $15,000 gain on bond retirement) **Retained earnings = $746,000 + $30,000 Magna income + [80% × ($10,000 Metros income + $15,000 gain on bond retirement)] (2) Option 2: There would be no difference The bonds would still be retired from a consolidated viewpoint with the parent paying $185,000 to retire the bonds The gain would still be credited to the subsidiary income distribution schedule and thus would be allocated 20% to the NCI and 80% to the parent The bonds would still be eliminated from the consolidated balance sheet 319 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Cases CASE 5-3 (1) Entries: Pannier: Note Receivable Sales Cost of Goods Sold Inventory 125,000 125,000 100,000 100,000 Jodestar: Equipment Note Payable 125,000 125,000 (2) Consolidated statements: Consolidated Income Statement Sales Cost of goods sold Gross profit Expenses Interest expense Net income $ $ $ 320,000 (220,000) 100,000 (40,000) (20,000) 40,000 Consolidated Balance Sheet Assets Cash 45,000 Inventory 200,000 Other current assets 79,000* Plant and equipment 300,000 Accumulated depreciation 784,000 Total $1,408,000 Liabilities and Equity $ 358,000 Current liabilities $ 90,000 Long-term debt 210,000 NCI 1,250,000 Common stock (par) (500,000) Retained earnings $1,408,000 Total *NCI = 20% × ($100,000 + $285,000 + $10,000 Jodestar income) Inventory is reduced by $100,000 and equipment is increased by $100,000 for the cost of the equipment sold to the subsidiary 320 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 5—Cases Case 5-3, Concluded (3) Entries: Pannier: Minimum Lease Payments Receivable (4 × $29,977) Cash Inventory Unearned Interest Income Sales-Type Profit on Lease 119,908 29,977 100,000 24,885 25,000 Jodestar: Asset Under Capital Lease Cash Obligation Under Capital Lease (4) There would be no difference in the consolidated statements 321 125,000 29,977 95,023 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ... purchase discount recorded by the parent In the end, this adjustment is shared 20% by the NCI and 80% by the controlling interest 248 To download more slides, ebook, solutions and test bank, visit... interest expense recorded by the subsidiary and the interest revenue recorded by the parent are eliminated (2) The income distribution of the subsidiary is reduced by $4,000 for the amortization... accumulated depreciation as a productive asset owned by the consolidated entity 40,822 254 2,434 24,000 16,328 40,822 16,328 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com