Ch04 Beams10e TB

(1)

Chapter 4 Test Bank

CONSOLIDATION TECHNIQUES AND PROCEDURES

Multiple Choice Questions LO1

1. Which of the following will be debited to the Investment account when the equity method is used?

a.

b. Investee net losses.Investee net profits. c.

d. Investee declaration of dividends.Depreciation of excess purchase cost attributable to investee equipment.

LO1

2. A parent company uses the equity method to account for its wholly-owned subsidiary. The company correctly uses this method and has fully reflected all items of subsidiary gain, loss, income, deductions, and dividends. If the parent company is preparing the consolidation working papers, which of the following will be a correct working paper procedure for the Investment account?

a. A debit for a subsidiary loss and a credit for dividends received.

b. A credit for subsidiary income and a debit for dividends received.

c. A debit for subsidiary dividends received and a credit for a subsidiary loss.

d. A credit for a subsidiary loss and a credit for dividends received.

(2)

3. A parent corporation owns 55% of the outstanding voting common stock of one domestic subsidiary, but does not control the subsidiary because it is in bankruptcy. Which of the following statements is correct?

a. The parent corporation must still prepare consolidated financial statements for the economic entity.

b. The parent corporation must stop using the equity method of accounting for the subsidiary and start using the cost method.

c. The parent company may continue to use the equity method but the subsidiary cannot be consolidated.

d. The parent company would suspend the operation of the Investment account until notified by the bankruptcy court that the subsidiary has emerged from bankruptcy.

LO1

Use the following information to answer questions 4 through 9.

On January 1, 2005, Finch Corporation purchased 75% of the common stock of Grass Co. Separate balance sheet data for the companies at the combination date are given below:

Finch Grass Cash $ 24,000 $ 206,000 Accounts Receivable 144,000 26,000 Inventory 132,000 38,000 Land 68,000 32,000 Plant assets 700,000 300,000 Accum. Depreciation ( 240,000 ) ( 60,000 ) Investment in Lapp 392,000 Total assets $ 1,230,000 $ 542,000 Accounts payable $ 206,000 $ 142,000 Capital stock 800,000 300,000 Retained earnings 224,000 100,000

Total liabilities & equities $ 1,230,000 $ 542,000

At the date of combination, the book values of Grass’s net assets were equal to the fair value except for Grass’s inventory, which had a fair value of $60,000.

Determine below what the consolidated balance would be for each of the requested accounts.

(3)

4. What amount of Inventory will be reported? a. $170,000.

b. $169,000. c. $186,500. d. $192,000.

5. What amount of Goodwill will be reported? a. $10,500.

b. $20,000. c. $42,000. d. $75,500.

6. What amount of total liabilities will be reported? a. $206,000.

b. $261,000. c. $302,500. d. $348,000.

7. What is the reported amount for the minority interest? a. $ 69,333.

b. $100,000. c. $130,666. d. $150,000.

8. What is the amount of consolidated Retained Earnings? a. $224,000.

b. $299,000. c. $324,000. d. $346,666.

9. What is the amount of total assets? a. $1,244,500.

b. $1,380,000. c. $1,472,000. d. $1,762,000.

(4)

10. Bird Corporation has several subsidiaries that are included in its consolidated financial statements and several other investments in corporations that are not consolidated. In its year-end trial balance, the following intercompany balances appear. Ostrich Corporation is the unconsolidated company; the rest are consolidated.

Due from Pheasant Corporation $ 25,000

Due from Turkey Corporation 5,000

Cash advance to Skylark Company 8,000

Cash advance to Starling 15,000

Current receivable from Ostrich 10,000

What amount should Bird report as intercompany receivables on its consolidated balance sheet?

a. $0. b. $10,000. c. $30,000. d. $63,000.

LO3

11. The majority of errors in consolidated statements

a. result because the Investment in Subsidiary account on the parent’s books and the subsidiary equity accounts on the subsidiary’s books are reciprocal.

b. have conceptual problems from the minority interest representation of the equity investment in consolidated net assets by stockholders outside the affiliation structure. c. involve the amortization of book/market differences.

d. appear when the consolidated balance sheet does not balance.

(5)

LO3

12. At the beginning of 2005, Starling Inc. acquired an 80% interest in Orchard Corporation when the book values of identifiable net assets equaled their fair values. On December 26, 2005, Orchard declared dividends of $50,000, and the dividends were unpaid at year-end. Starling had not recorded the dividend receivable at December 31. A consolidated working paper entry is necessary to

a. enter $50,000 dividends receivable in the consolidated balance sheet.

b. enter $40,000 dividends receivable in the consolidated balance sheet.

c. reduce the dividends payable account by $40,000 in the consolidated balance sheet.

d. eliminate the dividend payable account from the consolidated balance sheet.

LO3

13. A parent company uses the equity method to account for its wholly-owned subsidiary, but has applied it incorrectly. In each of the past four full years, the company adjusted the Investment account when it received dividends from the subsidiary but did not adjust the account for any of the subsidiary’s profits. The subsidiary had four years of profits and paid yearly dividends in amounts that were less than reported net incomes. Which one of the following statements is correct if the parent company discovered its mistake at the end of the fourth year, and is now preparing consolidation working papers?

a. The parent company's Retained Earnings will be increased by the cumulative total of four years of subsidiary profits. b.

c.

d.

The parent company's Retained Earnings will be increased by the cumulative total of the first three years of subsidiary profit, and the Subsidiary Income account will be increased by the profit for the current year.

The parent company's Subsidiary Income account will be increased by the cumulative total of four years of subsidiary profits.

A prior period adjustment must be recorded for the cumulative effect of four years of accounting errors.

(6)

14. Pigeon Corporation acquired a 60% interest in Home Company on January 1, 2005, for $70,000 cash when Home had Capital Stock of $60,000 and Retained Earnings of $40,000. All excess purchase cost was attributable to equipment with a 10-year (straight-line) life. Home suffered a $10,000 net loss in 2005 and paid no dividends. At year-end 2005, Home owed Pigeon $12,000 on account. Pigeon’s separate income for 2005 was $150,000. Consolidated net income for 2005 was

a. $135,800. b. $136,800. c. $143,000. d. $144,000. LO4

15. On consolidated working papers, a subsidiary’s income has a. to be reduced from beginning retained earnings.

b. to be completely eliminated.

c. to have an allocation between the noncontrolling interest share and the parent’s share (which is eliminated).

d. only an entry in the parent company's general ledger.

LO4

16. Which one of the following will increase consolidated retained earnings?

a. An increase in the value of goodwill subsequent to the parent's date of acquisition.

b. The amortization of a $10,000 excess in the fair value of a note payable over its recorded book value.

c. The depreciation of a $10,000 excess in the fair value of equipment over its recorded book value.

d. The sale of inventory by a subsidiary that had a $10,000 excess in fair value over recorded book value on the parent's date of acquisition.

LO5

17. In contrast with single entity organizations, consolidated financial statements include which of the following in the calculation of cash flows from operating activities under the direct method?

a. The change in the balance sheet of the investee account. b. Noncontrolling interest dividends.

c. Noncontrolling interest income expense. d. Cash dividends from equity investees.

(7)

LO5

18. In contrast with single entity organizations, consolidated financial statements include which of the following in the calculation of cash flows from operating activities under the indirect method?

c. Noncontrolling interest income expense. d. Cash dividends from equity investees. LO5

19. In contrast with single entity organizations, in preparing consolidated financial statements which of the following is a subtraction in the calculation of cash flows from operating activities under the indirect method?

c. Noncontrolling interest income expense. d. Undistributed income of equity investees. LO6

20.

new Which of the following would be used if the trial balanceapproach is followed? a. Post-closing trial balances.

b. Adjusted trial balances. c. Unadjusted trial balances.

(8)

Exercise 1

Parrot Corporation acquired 80% of Hollow Co. on January 1, 2005 for $24,000 cash when Hollow’s stockholders’ equity consisted of $10,000 of Common Stock and $3,000 of Retained Earnings. The difference between the price paid by Parrot and the underlying equity acquired in Hollow was allocated solely to a patent amortized over 10 years. The separate company statements for Parrot and Hollow appear in the first two columns of the partially completed consolidation working papers.

Required:

Complete the consolidation working papers for Parrot and Hollow for the year 2005.

(9)

Parrot Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005

Parrot Hollow DebitEliminationsCredit Cntl.Non- Consol-idated INCOME STATEMENT Sales $ 20,000 $15,000 Income of Hollow 3,680 Cost of Sales ( 9,200) ( 4,700) Other Expenses ( 2,300) ( 4,000) Net income 12,180 6,300 Retained Earnings 1/1 11,000 3,000 Add: Net income 12,180 6,300 Less: Dividends ( 3,000) ( 2,000) Retained Earnings 12/31 $ 20,180 $ 7,300 BALANCE SHEET Cash 2,000 1,900 Accounts Receivable-net 12,000 5,500 Inventories 14,000 8,000 Patent Land 27,000 42,000 Equipment and Buildings-net 60,000 43,000 Investment in Hollow Co. 26,080 TOTAL ASSETS $ 141,080 $100,400 LIAB. & EQUITY

Accounts payable 90,900 83,100 Capital Stock 30,000 10,000 Retained Earnings 20,180 7,300 1/1 Noncontrol. Interest 12/31 Noncontrol. Interest Earnings

TOTAL LIAB. & EQUITY

$

(10)

Exercise 2

Cuckoo Company acquired all the voting stock of Perch Corporation on January 1, 2004 for $70,000 when Perch had Capital Stock of $50,000 and Retained Earnings of $8,000. The excess of cost over book value was allocated $3,000 to inventories that were sold in 2004, $4,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill.

Financial statements for Cuckoo and Perch at the end of the fiscal year ended December 31, 2005 (two years after acquisition), appear in the first two columns of the partially completed consolidation working papers. Cuckoo has accounted for its investment in Slim using an incomplete equity method of accounting.

Required:

Complete the consolidation working papers for Cuckoo Company and Subsidiary.

(11)

Cuckoo Company and Subsidiary

Consolidated Balance Sheet Working Papers at December 31, 2005

Cuckoo Perch DebitEliminationsCredit Non-Cntl Consol-idated INCOME STATEMENT Sales $ 206,000 $ 60,000 Income from Perch 12,000 Cost of Sales (150,000) ( 30,000) Other expenses ( 38,000) ( 18,000) Net income 30,000 12,000 Cuckoo Retained Earnings 1/1 24,000 Perch Retained Earnings 10,000 Add: Net income $ 30,000 $ 12,000 Less: Dividends ( 20,000) ( 4,000) Retained Earnings 12/31 $ 34,000 $ 18,000 BALANCE SHEET Other current assets 14,000 7,000 Inventories 21,000 15,000 Land 11,000 6,000 Equipment and Buildings-net 64,000 55,000 Investment in Perch Corp. 80,000 TOTAL ASSETS $ 190,000 $ 83,000 LIAB. & EQUITY

Liabilities 56,000 15,000 Capital Stock 100,000 50,000 Retained

Earnings 34,000 18,000 TOTAL LIAB. &

(12)

Exercise 3

Owl Corporation acquired 90% of the voting stock of Hunt Corporation on January 1, 2004 for $7,000 when Hunt had Capital Stock of $5,000 and Retained Earnings of $1,500. The excess of cost over book value was allocated $150 to inventories that were sold in 2004, $200 to undervalued land, $400 to undervalued equipment with a remaining useful life of 5 years under the straight-line method, and the remainder to goodwill.

Financial statements for Owl and Hunt Corporations at the end of the fiscal year ended December 31, 2005 appear in the first two columns of the partially completed consolidation working papers. Owl has accounted for its investment in Hunt using the equity method of accounting. Owl Corporation owed Hunt Corporation $100 on open account at the end of the year. Dividends receivable in the amount of $450 payable from Hunt to Owl is included in Owl’s net receivables.

Required:

Complete the consolidation working papers for Owl Corporation and Subsidiary.

(13)

Owl Corporation and Subsidiary

Owl Hunt DebitEliminationsCredit Non-Cntl Consol-idated INCOME STATEMENT

Sales $ 10,000 $ 6,500

Income from Hunt 1,270

Cost of Sales ( 4,000) ( 3,300) Depreciation expense ( 1,000) ( 1,000) Other expenses ( 1,800) ( 700) Net income 4,470 1,500 Retained Earnings 1/1 2,510 2,000 Add: Net income 4,470 1,500 Less: Dividends ( 2,000) ( 1,000) Retained Earnings 12/31 $ 4,980 $ 2,500 BALANCE SHEET Cash 1,440 1,900 Receivables-net _{1,550 600} Inventories _{1,500 1,200} Land 1,000 600 Equipment and Buildings-net 7,500 5,700 Investment in Hunt Corporation 7,590 TOTAL ASSETS $ 20,580 $10,000 LIAB. & EQUITY

Accounts payable 3,000 2,000 Dividends payable 1,000 500 Capital Stock 11,600 5,000 Retained Earnings 4,980 2,500 LIAB. & EQUITY $ 20,580 $10,000

(14)

LO3

Exercise 4

Koel Corporation acquired all the voting stock of Rain Company for $500,000 on January 1, 2005 when Rain had Capital Stock of $300,000 and Retained Earnings of $150,000. Rain’s assets and liabilities were fairly valued except for the plant assets. The entire cost-book differential is allocated to plant assets and is fully depreciated on a straight-line basis over a 10-year period.

During 2005, Koel borrowed $25,000 on a short-term non-interest-bearing note from Rain, and on December 31, 2005, Koel mailed a check to Rain to settle the note. Rain deposited the check on January 5, 2006, but receipt of payment of the note was not reflected in Rain’s December 31, 2005 balance sheet.

Required:

Complete the consolidation working papers.

(15)

Koel Corporation and Subsidiary Consolidated Balance Sheet Working Papers

Koel Rain DebitEliminationsCredit Non-Cntl BalanceSheet INCOME STATEMENT Sales $ 500,000 $400,000 Income from Rain 135,000 Cost of Sales (350,000) (200,000) Other expenses (100,000) (60,000) Net income 185,000 140,000 Koel Retained Earnings 1/1 300,000 Rain Retained Earnings 150,000 Add: Net income $ 185,000 $140,000 Less: Dividends (70,000) Retained Earnings 12/31 $ 485,000 $220,000 BALANCE SHEET Note Receivable from Koel 25,000 Other current assets 210,000 300,000 Plant assets-net 200,000 425,000 Investment in Rain Company 565,000 TOTAL ASSETS $ 975,000 $750,000 EQUITIES Liabilities 290,000 230,000 Capital Stock 200,000 300,000 Retained Earnings 485,000 220,000 TOTAL EQUITIES $ 975,000 $750,000

(16)

Exercise 5

Owl Corporation acquired 90% of Barn Corporation on January 1, 2005 for $72,000 cash when Barn’s stockholders’ equity consisted of $30,000 of Common Stock and $30,000 of Retained Earnings. The difference between the price paid by Owl and the underlying equity acquired in Barn was allocated to a plant asset with a remaining 10-year straight-line life that was overvalued by $5,000. The remainder was attributable to goodwill. The separate company statements for Owl and Barn appear in the first two columns of the partially completed consolidation working papers.

Required:

Complete the consolidation working papers for Owl and Barn for the year 2005.

(17)

Owl Barn DebitEliminationsCredit MinInt Consol-idated INCOME STATEMENT Sales $ 60,000 $22,000 Income of Barn 3,510 Cost of Sales ( 13,000) ( 9,500) Depreciation Expense ( 2,000) ( 3,000) Other Expenses ( 23,000) ( 6,100) Net income 25,510 3,400 Retained Earnings 1/1 25,000 30,000 Add: Net income 25,510 3,400 Less: Dividends ( 15,000) ( 3,000) Retained Earnings 12/31 $ 35,510 $30,400 BALANCE SHEET Cash 26,520 7,000 Accounts Receivable-net 22,000 10,000 Inventories 20,000 14,000 Land 27,000 42,000 Equipment and Buildings-net 70,000 38,000 Investment in Barn Corporation 72,810 TOTAL ASSETS $ 238,330 $111,000 LIAB. & EQUITY

Accounts payable 32,820 50,600 Capital Stock 170,000 30,000 Retained Earnings 35,510 30,400 Noncontrolling Interest

TOTAL LIAB. & EQUITY

$

(18)

Exercise 6

Lorikeet Company has the following information collected in order to do make a cash flow statement and uses the direct format for Cash Flow from Operations. The annual report year end is December 31, 2005.

Noncontrolling Interest Dividends $20,000

Dividends Received from Equity Investees 17,000

Cash Paid to Employees 37,000

Cash Paid for Other Operating Activities 34,000

Cash Paid for Interest Expense 22,300

Cash Proceeds from the Sale of Equipment 70,000

Cash Paid to Suppliers 192,700

Cash Received from Customers 412,600

Required:

1. Prepare the Cash Flow for Operations part of the cash flow statement for Lorikeet.

LO4

Exercise 7

Bronzewing Company has the following information collected in order to do make a cash flow statement and uses the indirect format for Cash Flow from Operations. The annual report year end is December 31, 2005.

Noncontrolling Interest Dividends $17,000

Undistributed Income of Equity Investees 7,500

Depreciation Expense 65,000

Consolidated Net Income 175,000

Increase in Accounts Payable 15,000

Amortization of Patent 13,000

Decrease in Accounts Receivable 48,000

Increase in Inventories 27,500

Gain on sale of equipment 45,000

Noncontrolling Interest Expense 17,000

Required:

1. Prepare the Cash Flow for Operations part of the cash flow statement for Bronzewing.

(19)

LO6

Exercise 8

Swift Corporation paid $88,500 for a 70% interest in Cave Corporation on January 1, 2005, when Cave’s Capital Stock was $70,000 and its Retained Earnings $30,000. The fair values of Cave's identifiable assets and liabilities were the same as the recorded book values on the acquisition date. Trial balances at the end of the year on December 31, 2005 are given below:

Swift

Inc. CaveInc.

Cash $ 4,500 $ 20,000

Accounts Receivable 25,000 30,000

Inventory 100,000 80,000

Investment in Cave 88,500

Cost of Goods Sold 60,000 40,000

Operating Expenses 22,000 37,000

Dividends 15,000 10,000

$ 315,000 $ 217,000

Liabilities $ 47,000 $ 27,000

Capital stock, $10 par value 100,000 70,000 Additional Paid-in Capital 10,000

Retained Earnings 31,000 30,000

Sales Revenue 120,000 90,000

Dividend Income 7,000

$ 315,000 $ 217,000

During 2005, Swift made only two journal entries with respect to its investment in Cave. On January 1, 2005, it debited the Investment in Cave account for $88,500 and on November 1, 2005, it credited Dividend Income for $7,000.

Required:

1. Prepare a consolidated income statement and a statement of retained earnings for Swift and Subsidiary for the year ended December 31, 2005.

2. Prepare a consolidated balance sheet for Swift and Subsidiary as of December 31, 2005.

(20)

Exercise 9

Emu Corporation paid $77,000 for a 60% interest in Chick Inc. on January 1, 2005, when Chick’s Capital Stock was $80,000 and its Retained Earnings $20,000. The fair values of Chick's identifiable assets and liabilities were the same as the recorded book values on the acquisition date. Trial balances at the end of the year on December 31, 2005 are given below:

Emu

Inc. ChickInc.

Cash $ 4,500 $ 20,000

Accounts Receivable 25,000 30,000

Inventory 100,000 70,000

Investment in Cave 77,000

Cost of Goods Sold 71,500 50,000

Operating Expenses 22,000 37,000

Dividends 15,000 10,000

$ 315,000 $ 217,000

Liabilities $ 47,000 $ 27,000

Capital stock, $10 par value 100,000 80,000 Additional Paid-in Capital 11,000

Retained Earnings 31,000 20,000

Sales Revenue 120,000 90,000

Dividend Income 6,000

$ 315,000 $ 217,000

During 2005, Emu made only two journal entries with respect to its investment in Chick. On January 1, 2005, it debited the Investment in Chick account for $77,000 and on November 1, 2005, it credited Dividend Income for $6,000.

Required:

1. Prepare a consolidated income statement and a statement of retained earnings for Emu and Subsidiary for the year ended December 31, 2005.

2. Prepare a consolidated balance sheet for Emu and Subsidiary as of December 31, 2005.

(21)

SOLUTIONS

Multiple Choice Questions

1 b

2 d

3 c

4 c Parent’s inventory of $132,000 plus subsidiary’s book value of inventory of $38,000 plus 75% of the excess of the fair value over the book value = $132,000+$38,000+(75%)x($22,000) = $186,500 5 d Purchase price minus 75% of Grass’s underlying

book value - $16,500 of excess cost over book value allocated to inventory (see 9) =

$392,000 – (75%)x(400,000) - $16,500 = $75,500 6 d Just add the liability amounts together

7 b (25%)x($400,000) = $100,000

8 a The parent’s Retained Earnings is the amount of consolidated Retained Earnings

9 c Cash $230,000 Accounts Receivable 170,000 Inventory $132,000+$38,000+ $16,500= 186,500 Land 100,000 Plant assets-net 700,000 Goodwill 75,500 Total assets $1,472,000

10 b Intercompany receivables and payables from unconsolidated subsidiaries would not be eliminated.

11 d

12 c

(22)

Less: 60% of Home’s $10,000 loss

= ( 6,000 )

Less: Equipment depreciation

$10,000/ 10 years = ( 1,000 )

Consolidated net income $ 143,000

15 c 16 b 17 d 18 c 19 d 20 b

(23)

Exercise 1

Parrot Corporation and Subsidiary Consolidated Balance Sheet Working Papers

Parrot Hollow DebitEliminationsCredit _Cntl.Non- Consoli-dated INCOME STATEMENT Sales $ 20,000 $ 15,000 $ 35,000 Income of Hollow 3,680 a $ 3,680 Cost of Sales ( 9,200) ( 4,700) ( 13,900) Other Expenses ( 2,300) ( 4,000) c 1,360 ( 7,660) Minority Income $1,260 ( 1,260) Net income 12,180 6,300 $ 12,180 Retained Earnings 1/1 11,000 3,000 b 3,000 11,000 Add: Net income 12,180 6,300 12,180 Less: Dividends ( 3,000) ( 2,000) a $ 1,600 ( 400) 3,000 Retained Earnings 12/31 $ 20,180 $ 7,300 $ 20,180 BALANCE SHEET Cash 2,000 1,900 $ 3,900 Accounts Receivable-net 12,000 5,500 17,500 Inventories 14,000 8,000 22,000 Patent b 13,600 c 1,360 12,240 Land 27,000 42,000 69,000 Equipment and Buildings-net 60,000 43,000 103,000 Investment in Hollow Co. 26,080 ab 2,080 24,000 TOTAL ASSETS $ 141,080 $100,400 $227,640

LIB. & EQUITY

Accounts payable 90,900 83,100 $174,000 Capital Stock 30,000 10,000 b 10,000 30,000 Retained Earnings 20,180 7,300 20,180 1/1 Noncontrol. Interest b 2,600 2,600 12/31 Noncontrol. Interest 3,460 3,460

TOTAL LIAB. &

(24)

Cuckoo Company and Subsidiary

Consolidated Balance Sheet Working Papers at December 31, 2005 Cuckoo Perch Eliminations Balance Sheet Debit Credit INCOME STATEMENT Sales $ 206,000 $60,000 $266,000 Income from Perch 12,000 ab $ 1,000 11,000 Cost of Sales (150,000) ( 30,000) ( 180,000) Other expenses ( 38,000) ( 18,000) d 1,000 ( 57,000) Net income 30,000 12,000 29,000 Cuckoo Retained Earnings 1/1 24,000 a 4,000 20,000 Perch Retained Earnings 10,000 c 10,000 Add: Net income $ 30,000 $12,000 29,000 Less: Dividends ( 20,000) ( 4,000) b $( 4,000) ( 20,000) Retained Earnings 12/31 $ 34,000 $18,000 $ 29,000 BALANCE SHEET Cash 14,000 7,000 21,000 Inventories 21,000 15,000 36,000 Land 11,000 6,000 17,000 Equipment and Buildings-net 64,000 55,000 c 3,000 d 1,000 121,000 Investment in Perch Corporation 80,000 ab c 5,000 7,000 68,000 Goodwill c 5,000 5,000 TOTAL ASSETS $ 190,000 $83,000 $200,000

LIAB. & EQUITY

Liabilities 56,000 15,000 71,000

Capital Stock 100,000 50,000 c 50,000 100,000 Retained

Earnings 34,000 18,000 29,000

TOTAL LIAB. &

EQUITY $ 190,000 $83,000 $200,000

(25)

Exercise 3

Owl Corporation and Subsidiary Consolidated Balance Sheet Working Papers

Owl Hunt DebitEliminationsCredit BalanceSheet INCOME STATEMENT

Sales $ 10,000 $6,500 $16,500

Income from Hunt 1,270 a $1,270

Cost of Sales ( 4,000) ( 3,300) ( 7,300) Depreciation expense ( 1,000) ( 1,000) c 80 ( 2,080) Other expenses ( 1,800) ( 700) ( 2,500) Minority income $(150) ( 150) Net income 4,470 1,500 4,470 Retained Earnings 2,510 2,000 b 2,000 2,510 Add: Net income 4,470 2,500 4,470 Less: Dividends ( 2,000) ( 1,000) a $ 900 (100) ( 2,000) Retained Earnings 12/31 $ 4,980 $ 2,500 $4,980 BALANCE SHEET Cash 1,440 1,900 $3,340 Receivables-net 1,550 600 de 100 450 1,600 Inventories 1,500 1,200 2,700 Goodwill b 400 400 Land 1,000 600 b 200 1,800 Equipment and Buildings-net 7,500 5,700 b 320 c 80 13,440 Investment in Hunt Corporation 8,490 ab 1,270 7,220 TOTAL ASSETS $ 21,480 $10,000 $ 23,280

LIAB. & EQUITY

Accounts payable 3,000 2,000 d 100 $ 4,900 Dividends payable 1,000 500 e 450 1,050 Capital Stock 11,600 5,000 b 5,000 11,600 Retained earnings 5,880 3,500 4,980 Noncntl. interest 1/1 b 700 700 Noncntl. interest 12/31 850 750

(26)

Koel Corporation and Subsidiary Consolidated Balance Sheet Working Papers

Koel Rain DebitEliminationsCredit BalanceSheet INCOME STATEMENT Sales $ 500,000 $400,000 $900,000 Income from Rain 135,000 b $135,000 Cost of Sales (350,000) (200,000) (550,000) Other expenses (100,000) ( 60,000) d 5,000 (165,000) Net income 185,000 140,000 185,000 Koel Retained Earnings 1/1 300,000 300,000 Rain Retained Earnings 150,000 c 150,000 Add: Net income $ 185,000 $140,000 185,000 Less: Dividends ( 70,000) b $70,000 Retained Earnings 12/31 $ 485,000 $220,000 $485,000 BALANCE SHEET Note Receivable from Koel 25,000 a 25,000 Other current assets 210,000 300,000 a 25,000 $535,000 Plant assets-net 200,000 425,000 c 50,000 d 5,000 670,000 Investment in Rain Company 565,000 b c 65,000 500,000 TOTAL ASSETS $ 975,000 $750,000 $1,205,000 LIAB & EQUITY

Liabilities 290,000 230,000 520,000

Capital Stock 200,000 300,000 c 300,000 200,000 Retained

Earnings 485,000 220,000 485,000

TOTAL LIAB & EQUITY $ 975,000 $750,000 $1,205,000

(27)

Exercise 5

Consolidated Balance Sheet Working Papers at December 31, 2005 Owl Barn Eliminations Min Int Consoli-dated Debit Credit INCOME STATEMENT Sales $ 60,000 $ 22,000 $ 82,000

Income from Barn 3,510 a $ 3,510

Cost of Sales ( 13,000) ( 9,500) ( 22,500) Depreciation Expense ( 2,000) ( 3,000) d $ 450 ( 4,550) Other Expenses ( 23,000) ( 6,100) ( 29,100) Minority Income $ 340 ( 340) Net income 25,510 3,400 25,510 Retained Earnings 1/1 25,000 30,000 b 30,000 25,000 Add: Net income 25,510 3,400 25,510 Less: Dividends ( 15,000) ( 3,000) a 2,700 $( 300) ( 15,000) Retained Earnings 12/31 $ 35,510 $30,400 $ 35,510 BALANCE SHEET Cash 26,520 7,000 33,520 Accounts Receivable-net 22,000 10,000 32,000 Inventories 20,000 14,000 34,000 Goodwill b 22,500 22,500 Land 27,000 42,000 69,000 Equipment and Buildings-net 70,000 38,000 c 450 b 4,500 103,950 Investment in Barn Corporation 72,810 b a 72,000 810 TOTAL ASSETS $ 238,330 $111,000 294,970 EQUITIES Accounts payable 32,820 50,600 83,420 Capital Stock 170,000 30,000 170,000 Retained Earnings 35,510 30,400 35,510 1/1 Minority Interest b 6,000 6,000 12/31 Minority Interest Earnings 6,040 6,040 TOTAL EQUITIES _{$ 238,330} $111,000 _$294,970

(28)

Investment cost on January 1, 19X4 $ 72,000 Less: Book value acquired = (90%)x($60,000) = 54,000 Excess cost over book value acquired = $ 18,000

Excess allocated to:

Overvalued equipment ($5,000) x (90%)= $ ( 4,500)

Remainder to goodwill 22,500

Excess cost over book value $ 18,000

Income from Barn Corporation:

Equity in Barn’s net income (90%)x(3,400)= $ 3,060 Depreciation “savings” on equipment $4,500/10 yrs = 450

Income from Barn $ 1,260

Investment in Barn account:

Initial investment cost $ 72,000

Plus: Income from Barn 3,510

Less: Dividends (3,000)x(90%)= ( 2,700)

Investment in Barn at December 31 $ 72,810

Exercise 6

Lorikeet Company and Subsidiary Consolidated Statement of Cash Flows for the Year Ended December 31,2005

Cash Flows from Operating Activities

Cash Received from Customers $412,600

Dividends Received from Equity Investees 17,000

Less

Cash Paid to Suppliers $192,700

Cash Paid to Employees 37,000

Cash Paid for Other Operating Activities 34,000

Cash Paid for Interest Expense 22,300 (286,000)

Net cash flows from operating activities $143,600

(29)

Exercise 7

Bronzewing Company and Subsidiary Consolidated Statement of Cash Flows for the Year Ended December 31,2005

Cash Flows from Operating Activities

Consolidated Net Income $175,000

Adjustments to reconcile net income to cash

Noncontrolling Interest Expense $17,000

Undistributed Income of Equity Investees ( 7,500 )

Depreciation Expense 65,000

Increase in Accounts Payable 15,000

Amortization of Patent 13,000

Decrease in Accounts Receivable 48,000

Increase in Inventories ( 27,500 )

Gain on sale of equipment ( 45,000 ) 78,000

Net cash flows from operating activities 253,000

Exercise 8 Requirement 1

Swift and Subsidiary Corporation Consolidated Income Statement for the year ended December 31, 2005

Sales Revenue $ 210,000

Cost of Goods Sold 100,000

Gross Profit 110,000

Operating Expenses $ 59,000

Minority Interest Income 3,900

Total Expenses and Minority Income 62,900

Retained Earnings, January 1, 2005 31,000

Dividends ( 15,000)

(30)

Swift and Subsidiary Corporation Consolidated Balance Sheet

December 31, 2005 Assets Cash $ 24,500 Accounts Receivable 55,000 Inventory 180,000 Goodwill 18,500 Total Assets $ 278,000 Equities Liabilities $ 74,000 Capital Stock 100,000

Additional Paid-in Capital 10,000

Retained Earnings 63,100

Minority Interest 30,900

Total Liabilities and Equities $ 278,000 Minority Interest Calculation:

$30,000 Beginning equity + $3,900 Net income - $3,000 Dividends = $30,900 Exercise 9

Requirement 1

Emu and Subsidiary Corporation Consolidated Income Statement for the year ended December 31, 2005

Sales Revenue $ 210,000

Cost of Goods Sold 121,500

Gross Profit 88,500

Operating Expenses $ 59,000

Minority Interest Income 1,200

Total Expenses and Minority Income 60,200

Retained Earnings, January 1, 2005 31,000

Dividends ( 15,000)

Retained Earnings, December 31, 2005 $ 44,300

(31)

Requirement 2

Emu and Subsidiary Corporation Consolidated Balance Sheet

December 31, 2005 Assets Cash $ 24,500 Accounts Receivable 55,000 Inventory 170,000 Goodwill 17,000 Total Assets $ 266,500 Equities Liabilities $ 74,000 Capital Stock 100,000

Additional Paid-in Capital 11,000

Retained Earnings 44,300

Minority Interest 37,200

Total Liabilities and Equities $ 266,500

Minority Interest Calculation: