Solution manual advanced accounting 11th by beams chapter08

Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter CONSOLIDATIONS — CHANGES IN OWNERSHIP INTERESTS Answers to Questions Preacquisition earnings and dividends are the earnings and dividends applicable to an investment interest prior to its acquisition during an accounting period Assume that P purchases an 80 percent interest in S on July 1, 2011 and that S has earnings of $100,000 between January and July 1, 2011 and pays $50,000 dividends on May 1, 2011 In this case, preacquisition earnings and dividends are $100,000 and $40,000, respectively Historically, preacquisition earnings purchased were shown as a deduction on the income statement to arrive at consolidated net income Under current GAAP, this is no longer the case Instead, the consolidated income statement should only report revenues, expenses, gains and losses subsequent to the acquisition For example, in a March 31 acquisition, the consolidated income statement would only include income of the subsidiary from April through December 31 GAAP reasons that acquirers purchase assets and assume liabilities, based on their fair values Acquirers not “purchase” preacquisition earnings, although fair values of net assets should reflect earning power of the acquired firm Preacquisition earnings are not recorded by a parent under the equity method because the investor only recognizes income subsequent to acquisition on the interest acquired Historically, preacquisition earnings purchased were shown as a deduction on the income statement to arrive at consolidated net income Under current GAAP, this is no longer the case Instead, the consolidated income statement should only report revenues, expenses, gains and losses subsequent to the combination date For example, in a March 31 acquisition, the consolidated income statement would only include income of the subsidiary from April through December 31 Noncontrolling stockholders of Sub Company held a 20 percent interest during the first half year and a 10 percent interest during the last half year and at year-end But noncontrolling interest at year-end is computed for the 10 percent interest held by noncontrolling stockholders at the end of the year Noncontrolling interest share for the year has two parts: (1) annual income x 50% x 10% plus (2) annual income x 50% x 20% Preacquisition income is similar to noncontrolling interest share because it represents the income of a subsidiary attributable to stockholders outside the consolidated entity But preacquisition income is not income of the noncontrolling stockholders at the date of the financial statements In fact, preacquisition income relates to a previous controlling stockholder group when the interest acquired exceeds 50 percent In such a case, it seems improper to report this as a deduction in the consolidated income statement Rather, the fair value of net assets acquired should reflect the acquiree’s earnings history Under GAAP, a gain or loss is only recorded when the sold interest results in deconsolidation of the subsidiary, i.e., the parent no longer holds a controlling interest The gain or loss on the sale of an equity interest is the difference between the proceeds from the sale (the fair value) and the recorded book value of the interest sold, provided that the investment is accounted for as a one-line consolidation If another method of accounting has been used, the investment account must be converted to the equity method so that any gain or loss on sale is the same as if a one-line consolidation had been used previously When the parent maintains a controlling interest after the sale, the sale is treated as an equity transaction, with no gain or loss recognition The parent debits cash or other consideration received in the sale, credits the investment account based on percent of carrying value sold, and records the difference as an adjustment to other paid-in capital © 2011 Pearson Education, Inc publishing as Prentice Hall 8-1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-2 Conceptually, the income applicable to an equity interest sold during an accounting period should be included in investment income and consolidated net income In this case, the gain or loss on sale is computed on the basis of the book value of the interest at the time of sale, and income is assigned to the increased noncontrolling interest only after the date of sale As a practical expedient, a beginning-of-theperiod sale date can be used such that no income is recognized on the interest sold up to the time of sale, and the gain or loss is computed on the book value at the beginning of the period When this expedient is used, income must be assigned to the increased noncontrolling interest for the entire year of sale The combined investment income and gain or loss on sale are the same under both approaches provided that the assumptions (beginning of the year and time of sale) are followed consistently As noted in question 5, gain or loss on the sale of the equity interest is only recognized when the subsidiary is deconsolidated Other wise, the gain or loss is an adjustment to other paid-in capital Assuming that no gain or loss is recognized, no adjustment of the parent’s investment account is necessary when the subsidiary sells additional shares to outside parties at book value because the parent’s share of underlying book value does not change If additional shares are sold above book values, the parent’s share of the underlying equity of the subsidiary increases This increase is recorded by the parent as follows: Investment in subsidiary Additional paid-in capital XX XX If the subsidiary sells additional shares below book value, the parent’s interest is decreased and the parent records decreases in its investment and additional paid-in capital accounts In all three cases (at book value, above book value, or below book value), the parent’s ownership percentage decreases from 80 percent (8,000 of 10,000 shares) to 66 23 percent (8,000 of 12,000 shares) No gain or loss is recognized, the change in underlying book value, adjusted for one-sixth [(80% – 66 23 %)  80%] of any unamortized cost book value differential is reported as adjustment to additional paid-in capital, since the parent maintains its controlling interest An alternative computation is to assume that the parent sold one-sixth of its interest for 66 23 percent of the proceeds, the difference being the amount of adjustment to additional paid-in capital The acquisition of the 2,000 shares directly from the subsidiary increases the parent’s percentage interest from 80 percent (8,000 of 10,000 shares) to 5/6 (10,000 of 12,000 shares, or 83 1/3%) The change in the interest held does not affect the way in which the parent records its additional investment The parent in all cases increases its investment account by the amount of cash paid or other consideration given for the additional investment It makes no difference if the purchase price is above or below book value But, if the purchase price is above the book value of equity acquired, then the excess is assigned to undervalued assets or goodwill If the purchase price is below the book value of equity acquired, then the excess should be assigned to reduce overvalued identifiable assets or goodwill Treasury stock transactions by a subsidiary change the parent’s proportionate interest in the subsidiary Any changes in the parent’s share of the underlying book value of the subsidiary require adjustments in the parent’s investment in subsidiary and additional paid-in capital accounts 10 Gains and losses to a parent (or equity investor) not result from the treasury stock transactions of its subsidiaries (or equity investees) Although the parent’s investment interest may increase or decrease from such transactions, the predominate view is that such changes are of a capital nature and should be accounted for by additional paid-in capital adjustments rather than by recorded gains and losses 11 Stock splits and stock dividends by a subsidiary not affect the amounts that appear in the consolidated financial statements But stock dividends by a subsidiary result in capitalization of subsidiary retained earnings and the amounts involved in eliminations for the subsidiary’s stockholders’ equity accounts are affected © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-3 SOLUTIONS TO EXERCISES Solution E8-1 Allocation of Set’s net income: Controlling share of income ($100,000  70%  1/2 year) + ($100,000  90%  1/2 year) $ 80,000 Noncontrolling interest share (30% x $100,000 x ½ year) + (10% x $100,000 x ½) Preacquisition income Note: This does not appear on the consolidated income statement $20,000 $ Allocation of Set’s dividends: Dividends to Pie ($30,000  70%) + ($30,000  90%) $ 48,000 Noncontrolling interest ($30,000 x 30%) + ($30,000 x 10%) $ 12,000 Preacquisition dividends $ Solution E8-2 Income from Sip for 2011: 40% interest x $240,000 x 8/12 year 60% interest  $240,000  1/3 year $64,000 $ 48,000 Total income from Sip $112,000 Preacquisition income: Under GAAP, no preacquisition income appears on the consolidated income statement The income statement only includes income of the subsidiary earned after the parent obtains its controlling interest Control was established on September 1, when Pin’s interest increased from 40% to 60%, so the consolidated income statement includes Sip income of $80,000 ($240,000 x 1/3 of year) Noncontrolling interest share for 2011: $80,000  40% $ 32,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-4 Solution E8-3 (amounts in thousands) Entry to record sale of 15% interest: Cash Investment in Sap Other paid-in capital To record sale of 15% interest in Sap No gain or loss on sale is recognized since Pet maintains an 85% controlling interest Entry to record investment income for 2011: Investment in Sap($600  85%) Income from Sap To record income from Sap 750 660 90 510 510 Check: Investment balance January 1, 2011 Less: Book value of interest sold Add: Income from Sap Investment balance December 31, 2011 Underlying equity ($4,600  85%) Add: 85% of Goodwill * Investment balance December 31, 2011 * Note that implied total goodwill is $400 ($340 / 85%) $4,400 (660) 510 $4,250 $3,910 340 $4,250 Solution E8-4 (amounts in thousands) Gain on sale of 20% interest: No gain or loss is recognized since Pal maintains a 60% controlling interest Beginning of the period sale assumption Selling price $130 Book value of interest ($436 investment 109 account balance  20%/80%) Adjustment to other paid-in capital $ 21 Actual sale date assumption Selling price Book value of interest sold: Beginning of the period balance Add: Income ($150  1/3 year  80%) Interest sold Adjustment to increase additional paid-in capital Income from Sag Beginning of the period sale assumption Income from Sag($150  60%) Actual sale date assumption January to May 1: Share of Sag’s income ($150  80%  1/3 year) May to December 31: Share of Sag’s income ($150  60%  2/3 year) Income from Sag $130 $436 40 476 25% 119 $ 11 $ 90 $ 40 60 $100 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-5 Solution E8-4 (continued) Investment in Sag December 31, 2011 Investment balance January Book value of interest sold Income from Sag Dividends Investment balance December 31, 2011 Beginning of Period Sale Assumption $436 (109) 90 (48) $369 Actual Sale Date Assumption $436 (119) 100 (48) $369 Solution E8-5 (amounts in thousands) 1a Fair value — book value differential Cost Implied fair value of Set ($1,274 / 70%) Book value ($1,480 January balance + $100 income for months - $60 dividends in January and April) Goodwill 1b $1,274 $1,820 (1,520) $ 300 Income from Set (Note: Only include earnings subsequent to the acquisition date) Income from Set ($240,000  7/12 year  70%) 1c $ Investment in Set at December 31 Investment cost Add: Income from Set Deduct: Dividends ($60,000  70%) Investment in Set December 31, 2011 98 $1,274 98 (42) $1,330 Consolidation working paper entries: a Income from Set 98 Investment in Set 56 Dividends 42 To eliminate income and dividends from Set and adjust investment account to its cost on June b 1,000 Common stock, $10 par — Set 580 Retained earnings — Set Goodwill 300 Investment in Set 1,274 Noncontrolling interest 564 Dividends 42 To eliminate reciprocal investment and equity balances, record preacquisition income and beginning noncontrolling interest, and eliminate preacquisition dividends c Noncontrolling interest share 240,000 x 7/12 x 30% Dividends 120,000 x 30% 42,000 36,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-6 Noncontrolling interest 6,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-7 Solution E8-6 Investment in Sow (in thousands) Investment balance December 31, 2011 ($9,000  80%) Cost of new shares ($25  60,000 shares) Investment in Sow after new investment $ 7,200 1,500 $ 8,700 Goodwill from new investment * Sow’s stockholders’ equity after issuance ($9,000 + $1,500) Pal’s ownership percentage (480,000 + 60,000 shares)/660,000 shares Pal’s book value after issuance Less: Pal’s book value before issuance Increase in book value from purchase (book value acquired) $ 1,391.1 Cost of 60,000 shares Book value acquired Goodwill from acquisition of new shares* $ 1,500 (1,391.1) $ 108.9 $10,500 8182 8,591.1 (7,200) This implies total goodwill is equal to $136,125 Solution E8-7 Sod issues 30,000 shares to Pod at $20 per share Pod’s ownership interest before issuance: 176,000/220,000 shares = 80% Pod’s ownership interest after issuance: 206,000/250,000 shares = 82.4% Sod sells 30,000 shares to the public at $20 per share Pod’s ownership interest after issuance: 176,000/250,000 shares = 70.4% Sod sells 30,000 shares to the public; no gain or loss recognized: Investment in Sod 115,200 Additional paid-in capital 115,200 To record increase in investment in Sod computed as follows: Book value before issuance ($3,200,000  80%) Book value after issuance ($3,800,000  70.4%) Additional paid-in capital $2,560,000 2,675,200 $ 115,200 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-8 Solution E8-8 Pam buys shares 1a Percentage ownership after additional investment: 700,000/1,000,000 = 70% 1b Goodwill from additional investment (in thousands): Book value of interest after sale $2,600  70% Book value of interest before sale $2,100  2/3 Book value of interest acquired Cost of interest Goodwill from additional investment * * $1,820 1,400 420 500 $ 80 This implies total goodwill is now equal to $114,286 Outsiders buy shares 2a Percentage ownership after sale: 600,000/1,000,000 = 60% 2b Change in underlying book value of investment in Sat: Sat’s underlying equity after sale Pam’s interest Book value of Pam’s investment in Sat after the sale Less: Book value before the sale Increase in book value of investment 2c $2,600,000 60% 1,560,000 1,400,000 $ 160,000 Entry to adjust investment account: Investment in Sat Additional paid-in capital 160,000 160,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-9 Solution E8-9 Preliminary computations of fair value — book value differentials: April 1, 2011 acquisition Cost of 4,000 shares (20% interest) $ 64,000 Implied total fair value of Sum ($64,000 / 20%) $320,000 Book value of Sum on april acquisition date: Beginning stockholders’ equity $280,000 20,000 Add: Income for months ($80,000  ¼ year) Stockholders’ equity April 300,000 Goodwill $ 20,000 July 1, 2012 acquisition Cost of 8,000 shares (40% interest) Implied total fair value of Sum ($164,000 / 40%) Book value on July acquisition date: Beginning stockholders’ equity Add: Income for months ($80,000  1/2 year) Less: Dividends May Stockholders’ equity July Goodwill (amount is unchanged by this transaction) $164,000 $410,000 $360,000 40,000 (10,000) 390,000 $ 20,000 Income from Sum 2011 Income from Sum for 2011 ($80,000  20%  3/4 year) $ 12,000 2012 Income from Sum 20% share of reported income ($80,000  20%) 40% share of reported income ($80,000  40%  1/2 year) Income from Sum $ 16,000 16,000 $ 32,000 Noncontrolling interest December 31, 2012 (($420,000 book value + $20,000 goodwill) 40%) $176,000 Preacquisition income does not appear in income statement Investment balance at December 31, 2012 Cost of 20% investment Income from Sum for 2011 Cost of 40% investment Income from Sum for 2012 Gain on revaluation of investment Less: Dividends ($2,000 + $6,000) Investment in Sum $ 64,000 12,000 164,000 32,000 18,000 (8,000) $282,000 Implied fair value of Sum ($164,000/0.4) $410,000 Fair value of original investment($410,000 x 20%) Less: Cost of original investment Gain on revaluation of investment 82,000 (64,000) $ 18,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-10 Solution E8-10 Preliminary computations Investment cost July 1, 2012 $675,000 Implied total fair value of Sad ($675,000 / 90%) Less: Book value of Sad at acquisition: Equity of Sad December 31, 2011 Add: Income for 1/2 year Equity of Sad July 1, 2012 Excess (book value = underlying equity) $750,000 $700,000 50,000 750,000 Investment income from Sad Income from Sad — 2012 ($100,000  1/2 year  90%) Income from Sad — 2013: January to July ($80,000  1/2 year  90%) July to December 31 ($80,000  1/2 year  80%) $ 45,000 $ 36,000 32,000 $ 68,000 Investment in Sad Cost July 1, 2012 Add: Income from Sad — 2012 Less: Dividends paid in December ($50,000  90%) $675,000 45,000 (45,000) Investment balance December 31, 2012 675,000 Less: Book value of 1/9 interest sold on July 1, 2013a Add: Income from Sad — 2013 Less: Dividends paid in December ($30,000  80%) Investment balance December 31, 2013 a (79,000) 68,000 (24,000) $640,000 Sale of 10% interest July 1, 2013: Equity of Sad December 31, 2011 Add: Income less dividends — 2012 Add: Income for 1/2 year — 2013 Equity of Sad July 1, 2013 Interest sold $700,000 50,000 40,000 790,000 10% Underlying equity of interest sold $ 79,000 Gain on sale of 1/9 interest ($85,000 proceeds - $79,000) Since Pit maintains a controlling interest, the gain is not recorded, but shown as an adjustment to additional paid-in capital $ © 2011 Pearson Education, Inc publishing as Prentice Hall 6,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-18 Solution P8-6 Investment in Sod December 31, 2012 Investment in Sod January 2, 2011 $ 98,000 Increase for 2011 ($30,000 retained earnings increase  70%) 21,000 Purchase of additional 20% interest June 30, 2012 37,000 Increase for income for 2012: 24,000 ($30,000  1/2 year  70%) + ($30,000  1/2 year  90%) (9,000) Dividends 2012: ($10,000  90%) Investment in Sod December 31, 2012 $171,000 Goodwill December 31, 2012 January 2, 2011 purchase: Cost of 70% interest Implied fair value of Sod ($98,000 / 70%) Less: Book value of Sod Goodwill June 30, 2012 purchase: Cost of 20% interest Implied fair value of Sod ($37,000 / 20%) Less: Book value of Sod Goodwill - December 31, 2012 * $ 98,000 $140,000 120,000 $ 20,000 $ 37,000 $185,000 165,000 $ 20,000 Consolidated net income Sales Cost of sales Expenses Consolidated net income Noncontrolling interest share * Controlling share of net income $600,000 (400,000) (70,000) 130,000 6,000 $124,000 Noncontrolling share is 10% for full year plus 20% for ½ year Alternative: Pot’s reported income = Controlling share of net income $124,000 Consolidated retained earnings December 31, 2012 Beginning retained earnings Add: Controlling share of Consolidated net income — 2012 Less: Dividends Consolidated retained earnings — ending Alternative solution: Pot’s reported ending retained earnings = Consolidated retained earnings — ending Noncontrolling interest December 31, 2012 Equity of Sod December 31, 2012 Goodwill Fair value of Sod Noncontrolling interest percentage Noncontrolling interest December 31, 2012 $200,000 124,000 (64,000) $260,000 $260,000 $170,000 20,000 $190,000 10% $ 19,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-19 Solution P8-7 Pod Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2012 (in thousands) Sales Cost of sales Gross profit Depreciation expense Other expenses Consolidated net income Noncontrolling interest share ($150,000  20%) + ($150,000  1/4 year  10%) Controlling share of Consolidated net income $3,200 (1,900) 1,300 (700) (150) 450 (33.75) $ 416.25 Note: Should also add Gain on revaluation of investment of $66,750 to Consolidated income statement Calculation: Implied fair value of Subsidiary $95,000/0.1 = $950,000 Fair value of original investment $950,000 x 70% = $665,000 Less: Carrying value of original investment 598,250 Gain on revaluation of investment $66,750 Carrying value of original investment= $600,000 + ($150,000 x 3/12 x 70%) – ($40,000 x 70%) = $598,250 Schedule to allocate Saw’s income and dividends Saw’s income: Controlling share: ($150,000 x 70% x 3/12) + ($150,000 x 80% x 9/12) = 116,250 Noncontrolling share: ($150,000 x 30% x 3/12) + ($150,000 x 20% x 9/12) = 33,750 Saw’s dividends: Controlling share: ($40,000 x 70%) + ($40,000 x 80%) = $60,000 Noncontrolling share: ($40,000 x 30%) + ($40,000 x 20%) = $20,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-20 Solution P8-8 Preliminary computations Cost October 1, 2011 Implied fair value of Sat ($82,400 / 80%) Book value on October acquisition date: Book value on January 1, 2011 Add: Income January to October ($24,000  3/4 year) Deduct: Dividends March 15 Book value October Goodwill $ 82,400 $103,000 $70,000 18,000 (5,000) 83,000 $ 20,000 Income from Sat for 2011 Share of Sat’s net income ($24,000  1/4 year  80%) Less: Unrealized profit in Sat’s ending inventory Income from Sat $ 4,800 (1,000) $ 3,800 * Preacquisition income ($24,000  3/4 year  100%) $18,000 * Preacquisition dividends ($5,000  80%) $ 4,000 * Noncontrolling interest share ($6,000  20%) $ 1,200 * Under GAAP, preacquisition earnings are not shown as a reduction of consolidated net income Rather, we only include earnings and dividends subsequent to the acquisition date Preacquistion amounts are disclosed in required proforma disclosures for acquisitions The worksheet on the following page reflects these adjustments © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-21 Solution P8-8 (continued) Pop Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2011 Pop Income Statement Sales $ 112,000 Income from Sat Cost of sales 3,800 60,000* Operating expenses Consolidated net income Noncontrolling int share 25,100* Controlling share of NI $ 30,700 Retained Earnings Retained earnings — Pop 30,000 Balance Sheet Cash Accounts receivable Note receivable Inventories $ 50,000 a 12,000 c 37,500 b 3,800 20,000* d 1,000 6,000* f $ $ $ Retained earnings — Sat Net income Dividends Retained earnings December 31 Adjustments and Eliminations Sat 80% 30,700 20,000* 40,700 $ 34,000 $ 5,100 10,400 5,000 30,000 88,000 $ 7,000 17,000 10,000 16,000 60,000 82,200 112,500 a 12,000 c 15,000 c 4,500 54,000* $ 26,600* 31,900 1,200* 30,700 $ 30,000 1,200 e 20,000 30,700 24,000 10,000* $ Plant assets — net Investment in Sat $ 24,000 20,000 Consolidated Statements b c f b 4,000 5,000 1,000 g 6,000 d 1,000 20,000* $ 40,700 $ 12,100 21,400 15,000 45,000 148,000 200 e 82,400 Goodwill e 20,000 Accounts payable Notes payable Capital stock Retained earnings $ 220,700 $ 15,000 $ 25,000 140,000 40,700 220,700 $ $ Noncontrolling interest — beginning Noncontrolling interest December 31 $ 110,000 $ 16,000 g 6,000 10,000 50,000 e 50,000 34,000 110,000 $ c 13,000 e 7,600 f 200 $ * 20,000 261,500 25,000 35,000 140,000 40,700 20,800 261,500 Deduct © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-22 Solution P8-9 Supporting computations: Fair value — book value differential Investment cost $175,000 Implied total fair value of Sid ($175,000 / 70%) Less: Book value of Sid ($250,000 equity on January plus $10,000 net income (1/4 year) less $10,000 dividends) Fair value — book value differential $250,000 250,000 Allocation of Sid’s reported net income Pal company ($40,000  3/4 year  70%) Preacquisition income ($40,000  1/4 year  100%) Noncontrolling interest share ($40,000  year  30%x 3/4) Sid’s net income $ 21,000 10,000 9,000 $ 40,000 Pal’s income from Sid Equity in Sid’s income $ 21,000 Constructive gain on Pal’s bonds Note that bonds payable has a book value of $105,400 on December 31, 2011 A half-year of premium amortization ($300) yields a book value of $105,700 at July 1, 2011 ( $105,700 book value on July less $102,850 on December 31) 2,850 Recognition of constructive gain on separate books ($2,850  6/114 months) Gain on intercompany sale of equipment — downstream [$30,000 - ($36,000/2)] (150) (12,000) Piecemeal recognition of gain on equipment — downstream ($12,000/3 years  1/2 year) Gain on intercompany sale of land — upstream ($10,000 - $8,000 cost)  70% Income from Sid 2,000 (1,400) $ 12,300 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-23 Solution P8-9 (continued) Worksheet entries in journal form a b c d e Income from Sid 12,300 Dividends - Sid Investment in Sid common Eliminate intercompany post-acquisition earnings and dividends and return Investment to beginning balance Sales * 37,500 Cost of sales * Dividends – Sid* Retained earnings - Sid 50,000 Common stock - Sid 200,000 Investment in Sid - common Noncontrolling interest Eliminate preacquisition earnings and dividends Eliminate Sid’s equity accounts, the investment account and establish beginning noncontrolling interest Gain on plant assets 12,000 Plant assets Eliminate intercompany gain on sale of equipment Gain on plant assets 2,000 Plant assets Eliminate intercompany gain on sale of land Interest income 5,850 Interest expense Gain on bond retirement Investment in Pal bonds f g h i Bonds payable 100,000 Premium on bonds 5,400 Record constructive retirement of bonds payable Interest payable 6,000 Interest receivable Eliminate reciprocal interest accounts Other current liabilities 7,000 Other current assets Eliminate reciprocal for unpaid intercompany dividends Noncontrolling interest share 8,400 Dividends - Sid Noncontrolling interest Record noncontrolling interest share of earnings and post-acquisition dividends Plant assets 2,000 Expenses Eliminate excess depreciation on equipment 7,000 5,300 27,500 10,000 175,000 75,000 12,000 2,000 5,700 2,850 102,700 6,000 7,000 3,000 5,400 2,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-24 Solution P8-9 (continued) Pal Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2011 Pal Income Statement Sales Income from Sid Gain on bonds Gain on plant assets $ 287,100 12,300 200,000* 100,000 Retained Earnings Retained earnings — Pal $ 250,000 2,000 c d e 12,000 2,000 5,850 117,850* $ 40,000 $ 50,000 100,000 50,000* Dividends 300,000 $ 70,000 $ 17,000 $ 4,000 6,000 60,000 20,000 107,300 Plant assets — net Investment — Sid common 180,300 b Investment — Pal bonds 950,000 $ 6,000 38,600 100,000 5,400 500,000 $ $ $ 950,000 Noncontrolling interest ($250,000  30%) Noncontrolling interest December 31 30,000 2,850 2,850 e b i 5,700 27,500 2,000 5,700* 288,350* 108,400 8,400* $ 100,000 $ 250,000 100,000 a b h f i 2,000 7,000 10,000 3,000 50,000* $ 300,000 $ 21,000 6,000 200,000 123,000 g 7,000 c 12,000 d 2,000 a 5,300 b 175,000 e 102,700 f 6,000 g 7,000 e 100,000 e 5,400 b 200,000 598,000 $ 942,000 $ 61,600 500,000 300,000 70,000 $ 399,600 e 300,000 200,000 300,000 $ 50,000 102,700 $ Consolidated Statements 8,400 40,000 20,000* $ 140,000 110,000 502,700 ($268,000  30%) 37,500 12,300 h Retained earnings — Sid Net income Interest payable Other current liabilities 12% bonds payable Premium on bonds Common stock Retained earnings b a 5,850 $ Balance Sheet Cash Interest receivable Inventories Other current assets 150,000 11,400* Consolidated NI Noncontrolling int share Controlling share of NI Retained earnings December 31 $ 12,000 Interest income Interest expense Expenses — includes cost of goods sold Adjustments and Eliminations Sid 70% 300,000 b 75,000 h 5,400 80,400 $ 942,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-25 Solution P8-10 Supporting computations: Investment cost of 70% interest $420,000 Implied total fair value of Sam ($420,000 / 70%) Book value of Sam Goodwill $600,000 500,000 $100,000 Investment cost of 10% interest $ 67,500 Implied total fair value of Sam ($67,500 / 10%) Book value of Sam: Beginning equity January 1, 2012 Add: Income for 1/2 year Less: June dividends Book value at July 1, 2012 Goodwill (unchanged) $675,000 Investment in Sam account: Investment cost January 1, 2011 Add: 2011 share of retained earnings increase ($50,000  70%) Less: Unrealized profit in ending inventory Less: Unrealized gain on land Investment balance December 31, 2011 Add: Investment cost of 10% interest Add: Income from Sam for 2012 $100,000  70% interest  year $100,000  10% interest  1/2 year Add: Beginning inventory profits Less: Ending inventory profits Less: Gain: intercompany sale machinery Add: Piecemeal recognition of gain ($40,000/5  1/2 year) Less: Dividends from Sam ($25,000  70%) + ($25,000  80%) Investment balance December 31, 2012 $550,000 50,000 (25,000) 575,000 $100,000 $420,000 $ 35,000 (5,000) (8,000) 22,000 $442,000 67,500 $ 70,000 5,000 5,000 (6,000) (40,000) 38,000 4,000 (37,500) $510,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-26 Solution P8-10 (continued) Pam Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2012 (in thousands) 80% Sam Pam Income Statement Sales Income from Sam Gain on machinery Cost of sales $ 900 38 40 400* Depreciation expense Other expenses Consolidated net income Noncontrolling int share Controlling share of NI $ 328 Retained Earnings Retained earnings — Pam $ 155 500 300* 90* 160* $ $ 250 $ 300 $ $ 80 30 Buildings — net 20 130 20 90 20 50 60 Machinery — net Investment in Sam 510 b e g 100 1,000 $ 725 177 100 140 300 $ 40 25 60 300 283 $1,000 Noncontrolling interest, January Noncontrolling interest, December 31 * $ 328 $ 155 37.5 10 2.5 i j c 25 20 e d 36 200* $ 283 $ 100 135 154 100 82 165 384 g 522.5 f 100 $1,220 i j 25 20 $ g 300 300 $ 653* 146* 200* 353 25* 328 f h g 320 Goodwill $ 48 g 250 70 80 40 105 100 a b d 25 100 50* 283 Consolidated Statements $1,352 100 $ Accounts payable Dividends payable Other liabilities Capital stock, $10 par Retained earnings 48 38 40 60* 40* 328 200* Dividends Balance Sheet Cash Accounts receivable Dividends receivable Inventories Other current items Land a f d c h Retained earnings — Sam Controlling share of NI Retained earnings December 31 $ Adjustments and Eliminations 192 105 200 300 283 725 g 125 h 15 140 $1,220 Deduct © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-27 Solution P8-11 Preliminary computations: Investment cost of 85% of Sly August 1, 2011 $522,750 Implied fair value of Sly ($522,750 / 85%) Book value August 1, 2011: Capital stock Retained earnings Add: Income for months Less: Dividends for 1/2 year Stockholders’ equity August 1, 2011 Fair value – book value differential $615,000 $500,000 100,000 35,000 (20,000) 615,000 $ Investment cost August 1, 2011 Equity in income $60,000  5/12 year  85% Less: Deferred inventory profit from upstream sale $5,000  85% Less: Deferred profit from sale of equipment $10,000 profit - ($2,000  1/4 year) Income from Sly 2011 Less: Dividends from Sly $20,000  85% Investment in Sly December 31, 2011 $522,750 $ 21,250 (4,250) (9,500) 7,500 (17,000) $513,250 Noncontrolling interest share of post-acquisition income, adjusted for the inventory profit: ($25,000 - $5,000)  15% = $3,000 Preacquisition earnings ($35,000  100%) = $35,000 Working paper entries: a Sales 60,000 Cost of sales To eliminate intercompany sales b Cost of sales Inventories To defer unrealized inventory profits 60,000 5,000 5,000 c Sales 50,000 Cost of sales 40,000 10,000 Plant assets — net To eliminate intercompany sale of inventory item to be used as equipment d 500 Plant assets — net Operating expense 500 To record depreciation for 1/4 year on intercompany gain on plant asset © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-28 P8-11 (continued) E Income from Sly 7,500 Investment in Sly 9,500 Dividends 17,000 To eliminate income and dividends and return investment account to its beginning-of-the-period balance F Capital stock 500,000 Retained earnings 100,000 Investment in Sly 522,750 Noncontrolling interest 92,250 Sales * 233,333 Cost of sales * 145,833 Operating expenses * 52,500 Dividends * 20,000 To eliminate reciprocal equity and investment balances, and enter beginning noncontrolling interest (* adjusted for preacquisition earnings and dividends) G Dividends payable 17,000 Dividends receivable 17,000 To eliminate reciprocal dividends receivable and payable amounts H Noncontrolling Interest Share 3,000 Dividends 3,000 To enter Noncontrolling Interest share of subsidiary postacquisition income and dividends Alternative to entry c: Sales Cost of sales Cost of sales Plant assets — net 50,000 50,000 10,000 © 2011 Pearson Education, Inc publishing as Prentice Hall 10,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-29 Solution P8-11 (continued) Pan Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2011 Pan Income Statement Sales $ 910,000 Income from Sly Cost of sales 7,500 500,000* Operating expense 200,000* Consolidated net income Noncontrolling int share Controlling share of NI $ 217,500 Retained Earnings Retained earnings — Pan $ 192,500 Balance Sheet Cash Dividends receivable Accounts receivable Inventories Plant assets — net Investment in Sly Accounts payable Dividends payable Capital stock Retained earnings $ a 60,000 c 50,000 f 233,333 e 7,500 250,000* b 5,000 a 60,000 c 40,000 f 145,833 90,000* d 500 f 52,500 $ $ 217,500 100,000* Consolidated Statements 400,000 h Retained earnings — Sly Net income Dividends Retained earnings December 31 Adjustments and Eliminations Sly 85% 310,000 $ 120,000 $ 33,750 17,000 120,000 300,000 880,000 $ 10,000 70,000 150,000 500,000 $ 220,500* 3,000* 217,500 $ 192,500 f 100,000 217,500 60,000 40,000* $ 966,667 509,167* 237,000* 3,000 60,000 100,000 $ e f h d g 17,000 b 500 c 5,000 10,000 100,000* $ 310,000 $ 43,750 190,000 445,000 1,370,500 513,250 $1,864,000 $ 730,000 $2,049,250 $ $ 90,000 20,000 g 17,000 500,000 f 500,000 120,000 730,000 $ 154,000 e 17,000 20,000 3,000 1,400,000 310,000 $1,864,000 $ Noncontrolling interest January Noncontrolling interest December 31 9,500 f 522,750 244,000 3,000 1,400,000 310,000 f 92,250 92,250 $2,049,250 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-30 Solution P8-12 Indirect Method Pop Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2012 Cash Flows from Operating Activities Consolidated net income – controlling share Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Decrease in accounts receivable Decrease in prepaid expenses Decrease in accounts payable Increase in inventories Gain on sale of 10% interest * $300,000 $ 22,000 528,000 2,500 20,000 (203,500) (130,000) (5,700) Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Sale of 10% interest in subsidiary 533,300 $(100,000) 72,700 Net cash flows from investing activities Cash Flows from Financing Activities Cash paid on long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities 233,300 (27,300) $(300,000) (200,000) (10,000) (510,000) Decrease in cash for 2012 Cash on hand January 1, 2012 Cash on hand December 31, 2012 (4,000) 50,500 $ 46,500 * Note: Since Pop maintains a controlling interest in Sat, no gain or loss should have been recognized on sale of the 10% interest Rather, this amount should appear as an increase in other paid-in capital The net effect on the statement of cash flows is the same © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-31 Solution P8-12 (continued) Pop Corporation and Subsidiary Working Paper for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2012 Reconciling Items Year’s Change Asset Changes Cash Accounts receivable — net Inventories Prepaid expenses Equipment Accumulated depreciation Land and buildings Accumulated depreciation Total asset changes Changes in Equities Accounts payable Dividends payable Long-term note payable Common stock Retained earnings Noncontrol int 20% Debit Credit Cash Flows Cash Flows from Investing Operations Activities Cash Flows Financing Activities (4,000) (2,500) 130,000 (20,000) 90,000 (498,000) e 2,500 k 130,000 l 20,000 h 10,000 g 100,000 f 500,000 h 2,000 (28,000) f 28,000 (332,500) (203,500) (300,000) 100,000 71,000 i 203,500 j 300,000 a 300,000 c 200,000 b 22,000 d 10,000 h 59,000 Changes in equities (332,500) Controlling int.share a 300,000 b 22,000 Noncontrolling int share Purchase of equipment g 100,000 Depreciation — equipment and buildings Gain - sale of 10% subsidiary Interest Decrease in accounts receivable Increase in inventories Decrease in prepaid expenses Decrease in accounts payable Cash paid on long-term note Paid dividends — controlling Paid dividends —noncontrol Sale of 10% interest in Subsidiary f 528,000 h 5,700 e k 130,000 l i 203,500 j 300,000 c 200,000 d 300,000 22,000 (100,000) 528,000 (5,700) 2,500 (130,000) 20,000 20,000 (203,500) 2,500 (300,000) (200,000) 10,000 (10,000) h 72,700 1,890,700 1,890,700 72,700 533,300 (27,300) (510,000) Cash decrease for 2012 = $533,300 - $27,300 - $510,000 = $(4,000) * Note: Since Pop maintains a controlling interest in Sat, no gain or loss should have been recognized on sale of the 10% interest Rather, this amount © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 8-32 Consolidations — Changes in Ownership Interests should appear as an increase in other paid-in capital The net effect on the statement of cash flows is the same © 2011 Pearson Education, Inc publishing as Prentice Hall ... publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 8-3 SOLUTIONS TO EXERCISES Solution E8-1 Allocation of Set’s net income: Controlling... capital nature and should be accounted for by additional paid-in capital adjustments rather than by recorded gains and losses 11 Stock splits and stock dividends by a subsidiary not affect the amounts... ebooks, solution manual and testbank on www.downloadslide.com Consolidations — Changes in Ownership Interests 8-2 Conceptually, the income applicable to an equity interest sold during an accounting