Advanced Accounting 10th Edition By Fischer – Test Bank

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Chapter 5—Intercompany Transactions: Bonds and Leases

 

MULTIPLE CHOICE

  1. The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a consolidated group is due to the:
a. subsidiary’s ability to borrow larger amounts of capital at more favorable terms than would be available to the parent.
b. parent’s ability to borrow larger amounts of capital at more favorable terms than would be available to the subsidiary.
c. parent’s desire to decentralize asset management and credit control.
d. parent’s desire to eliminate long-term debt.

 

 

ANS:  B                    DIF:    E                    OBJ:   5-1

 

  1. The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:
a. replace the existing debt with new debt at a lower interest rate.
b. reduce the parent company’s acquisition price for the subsidiary.
c. increase the parent company’s ownership percentage in the subsidiary.
d. create interest revenue to offset interest expense in future income statements.

 

 

ANS:  A                    DIF:    E                    OBJ:   5-1

 

  1. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 8%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the current year’s consolidated statements?
a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c. Retirement of the bonds at a gain as of the purchase date.
d. Retirement of the bonds at a loss as of the purchase date.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-2

 

  1. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the current year’s consolidated statements?
a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c. Retirement of the bonds at a gain as of the purchase date.
d. Retirement of the bonds at a loss as of the purchase date.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-2

 

  1. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 6% effective interest rate. How should this event be reflected in the current year’s consolidated statements?
a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c. Retirement of the bonds at a gain as of the purchase date.
d. Retirement of the bonds at a loss as of the purchase date.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

  1. Intercompany debt that must be eliminated from consolidated financial statements may result from:
a. one member of a consolidated group selling its bonds directly to another member of the group.
b. one member of a consolidated group advancing funds to another member of the group so that the member may retire bonds it had issued to outside parties.
c. one member of a consolidated group purchasing bonds from outside parties as an investment that had been issued to outside parities by another member of the group.
d. all of the above.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

 

  1. Elimination procedures for intercompany bonds purchased from outside parties by another member of the consolidated group are:
a. not needed except in the period of acquisition if purchased at par.
b. not needed except in the period of acquisition if purchased at a premium or discount.
c. not needed except in the period of acquisition if only a portion of the outstanding bonds are purchased.
d. needed each period as long as there are intercompany bonds.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

 

  1. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X9, Company S has $200,000 of 8% face rate bonds outstanding, which were issued at face value. The bonds had 5 years to maturity on January 1, 20X9. Premiums or discounts would be amortized on a straight-line basis. On that date, Company P purchased the bonds for $198,000. The amount on the consolidated balance sheet relative to the debt is:
a. bonds payable $200,000.
b. bonds payable $200,000, discount $2,000.
c. bonds payable $200,000, discount $1,600.
d. The bonds do not appear on the balance sheet.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

 

  1. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X9, Company S has $100,000 of 8% face rate bonds outstanding. The bonds had 5 years to maturity on January 1, 20X9, and had an unamortized discount of $5,000. On that date, Company P purchased the bonds for $99,000. The net adjustment needed to consolidate retained earnings on December 31, 20X9 is ____.
a. $(4,000)
b. $(3,200)
c. $(800)
d. $0

 

 

ANS:  D                    DIF:    M                   OBJ:   5-2

 

  1. Sun Company is a 100%-owned subsidiary of Peter Company. On January 1, 20X1, Sun Company has $500,000 of 8% face rate bonds outstanding, with an unamortized discount of $5,000 that is being amortized over a 5 year remaining life to maturity. On that date, Peter Company purchased the bonds for $497,000. The adjustment to the consolidated income of the two companies needed in the consolidation process for 20X2 (the following year) is ____.
a. $2,800 increase
b. $400 decrease
c. $400 increase
d. $2,800 decrease

 

 

ANS:  C                    DIF:    M                   OBJ:   5-2

  1. Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S bonds that are outstanding and have a remaining discount. Consolidation theory takes the position that:
a. interest expense should be adjusted to reflect the market value of the bonds on the date of Company P’s purchase.
b. the debt has been retired at a loss.
c. the debt is outstanding but should be shown at face value.
d. the gain or loss on retirement should be allocated over the remaining life of the bonds.

 

 

ANS:  B                    DIF:    E                    OBJ:   5-2

 

  1. Company S is a 100%-owned subsidiary of Company P. Company P purchased all the outstanding bonds of Company S at a discount. The bonds had a remaining issuance premium at the time of Company P’s purchase. The bonds have 5 years to maturity. At the end of 5 years, consolidated retained earnings:
a. is greater as a result of the purchase.
b. is less as a result of the purchase.
c. is not affected by the purchase.
d. cannot be determined from the information provided.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-2

 

  1. Company P owns 80% of Company S. On January 1, 20X9 Company S has outstanding 6% bonds with a face value of $200,000 and an unamortized discount of $3,000, which is being amortized on a straight-line basis over a remaining term of 10 years. On January 1, 20X9, Company P purchased all the bonds for $205,000. The premium also is amortized on a straight-line basis. The net impact of the purchase on the noncontrolling interest as of December 31, 20X9, is ____.
a. $(8,000)
b. $(1,600)
c. $(1,440)
d. $(1,200)

 

 

ANS:  C                    DIF:    M                   OBJ:   5-2

 

  1. The purchase of outstanding subsidiary bonds by the parent company has the same impact on consolidated statements as:
a. the subsidiary retiring its own debt with the proceeds of new debt issued to outside parties.
b. the subsidiary retiring the debt with the proceeds of a loan from the parent.
c. the subsidiary retiring the debt with the proceeds of a new stock issue.
d. allowing the bonds to continue to be held by outside interests.

 

 

ANS:  B                    DIF:    E                    OBJ:   5-2

 

  1. A subsidiary has outstanding $100,000 of 8% bonds that were issued at face value. The parent purchased all the bonds for $96,000 with 5 years remaining to maturity. How will the parent’s use of the effective interest amortization rather than straight-line amortization of the discount affect the consolidated financial statements?
a. The consolidated financial statements report the same information whether the parent uses straight-line or effective interest amortization on its investment in sub’s bonds.
b. Will result in a different gain on retirement
c. Will result in more interest expense in the first year after the intercompany purchase.
d. Will result in less interest expense in the first year after the intercompany purchase.

 

 

ANS:  A                    DIF:    E                    OBJ:   5-2

Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $25,000. On December 31, 20X5, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000. Both firms use the straight-line method of amortization.

 

  1. Refer to Powell Company. What is the gain on retirement on the 20X5 consolidated income statement?
a. $12,500
b. $22,500
c. $10,000
d. $35,000

 

 

ANS:  B                    DIF:    D                   OBJ:   5-2

 

  1. Refer to Powell Company. Bond interest expense included as an adjustment in the 20X5 subsidiary income distribution schedule is ____.
a. $48,000
b. $45,500
c. $47,500
d. $0

 

 

ANS:  D                    DIF:    M                   OBJ:   5-2

 

Soap & Pumice: Soap Company issued $200,000 of 8%, 5-year bonds on January 1, 20X6. The discount on issuance was $12,000. Bond interest is paid annually on December 31. On December 31, 20X8, Pumice Company purchased one-half of the outstanding bonds for $96,000. Both companies use the straight-line method of amortization.

 

  1. Refer to Soap & Pumice.  How much bond interest expense will appear on the December 31, 20X8, consolidated income statement?
a. $18,400
b. $16,000
c. $9,200
d. $8,000

 

 

ANS:  A                    DIF:    D                   OBJ:   5-2

 

  1. Refer to Soap & Pumice. How much interest expense will appear on the December 31, 20X9, consolidated income statement?
a. $18,400
b. $16,000
c. $9,200
d. $8,000

 

 

ANS:  C                    DIF:    D                   OBJ:   5-2

 

  1. Refer to Soap & Pumice. What amount of gain or loss from retirement of debt will be reported on the 20X8 consolidated financial statements?
a. $1,600 gain
b. $1,600 loss
c. $1,200 gain
d. $1,200 loss

 

 

ANS:  A                    DIF:    D                   OBJ:   5-2

  1. Which of the following statements is true?
a. When one affiliate purchases another affiliate’s bonds prior to the business combination, the bonds become an intercompany debt as of the business combination date and thus are viewed, for consolidate purposes, as being retired on the purchase date.
b. When one affiliate purchases another affiliate’s bonds prior to the business combination, the bonds become an intercompany debt as of the purchase date and thus are viewed as being retired on the purchase date if the yield rate on date of purchase is greater than the original yield rate.
c. When one affiliate purchases another affiliate’s bonds prior to the business combination, the bonds become an intercompany debt as of the purchase date and thus are viewed as being retired on the purchase date if the yield rate on date of purchase is less than the original yield rate.
d. All of the above answers are false.

 

 

ANS:  A                    DIF:    E                    OBJ:   5-2

 

  1. In the year when one member of a consolidated group purchases from outside parties the bonds of another affiliate, the consolidated income statement  includes:
a. a gain if purchased above book value.
b. a gain if purchased below book value.
c. a loss if purchased below book value.
d. a deferred gain if purchased above book value.

 

 

ANS:  B                    DIF:    E                    OBJ:   5-2

 

  1. On an income distribution schedule, any gain or loss resulting from intercompany bonds is charged to
a. the issuer of the bonds.
b. the purchaser of the bonds.
c. allocation between the issuer and the purchaser.
d. none of the above

 

 

ANS:  A                    DIF:    E                    OBJ:   5-2

 

  1. In years subsequent to the year one member of a consolidated group purchases bonds from outside parties, Consolidated Income Statements:
a. recognize a prorated share of any gain or loss from intercompany bonds.
b. recognize a prorated share of any gain but would not show a share of a loss from intercompany bonds.
c. recognize a prorated share of any loss but would not show a share of a gain from intercompany bonds.
d. would not recognize any gain or loss from intercompany bonds.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

 

  1. When one member of a consolidated group purchases only part of the outstanding bonds of another member of the group (for example, 80% of the bonds),
a. all bonds, and all the interest expense and interest revenue applicable to the bonds should be eliminated.
b. 20% of the bonds, and 20% the interest expense and interest revenue applicable to the bonds should be eliminated.
c. 80% of the bonds, and 80% the interest expense and interest revenue applicable to the bonds should be eliminated.
d. none of the bonds, and none of the interest expense and interest revenue applicable to the bonds should be eliminated.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-2

  1. Leasing subsidiaries are formed to achieve centralized asset management through leasing to affiliated firms, and when they are consolidated with the parent, they are consolidated
a. only if the parent controls at least 20% of the leasing subsidiary.
b. only if the parent controls at least 50% of the leasing subsidiary.
c. only if the parent controls at least 90% of the leasing subsidiary.
d. regardless of the ownership percentage of the parent.

 

ANS:  D                    DIF:    E                    OBJ:   5-3

 

  1. The effect of an operating lease on the income distribution schedule:
a. is non-existent.
b. affects only the lessee’s income.
c. affects only the lessor’s income.
d. affects the amount of income or distribution of income between the noncontrolling and controlling interests.

 

ANS:  A                    DIF:    E                    OBJ:   5-4

 

  1. Lease terms can be considered to be “significantly affected”:
a. when the terms are the same for affiliated firms as for independent firms.
b. when the terms could not reasonably be expected to occur between independent firms.
c. only if the lease is an operating lease to the lessee and lessor.
d. only if the lease is a direct-financing lease to the lessee and lessor.

 

ANS:  B                    DIF:    E                    OBJ:   5-5

 

  1. Which of the following statements is true?
a. No adjustments are made in the income distribution schedule as a result of Operating, Direct-Financing, and Sales-Type leases.
b. No adjustments are made in the income distribution schedule as a result of Operating and Direct-Financing leases.
c. No adjustments are made in the income distribution schedule as a result of Operating and Sales-Type leases.
d. No adjustments are made in the income distribution schedule as a result of Direct-Financing and Sales-Type leases.

 

ANS:  B                    DIF:    E                    OBJ:   5-4 | 5-5 | 5-6

 

  1. Which of the following statements is true?
a. No elimination entries are required on a worksheet as a result of Operating, Direct-Financing, and Sales-Type leases.
b. No elimination entries are required on a worksheet as a result of Direct-Financing and Sales-Type leases.
c. No elimination entries are required on a worksheet as a result of Operating leases.
d. All the preceding are false.

 

ANS:  D                    DIF:    E                    OBJ:   5-4 | 5-5 | 5-6

 

  1. When there is an unguaranteed residual value for the lessor in a Direct-Financing Lease, this means:
a. the total payments to be received by the lessor will come from the lessee.
b. the total payments to be received by the lessee will come from the lessor.
c. a portion of the total payments to be received by the lessor will come from parties outside the consolidated group.
d. a portion of the total payments to be received by the lessee will come from parties outside the consolidated group.

 

ANS:  C                    DIF:    E                    OBJ:   5-7

  1. Consolidation procedures for Sale-Type Leases:
a. allow for the recognition of the profit or loss from the lease by the lessee at the inception of the lease.
b. allow for the recognition of the profit or loss from the lease by the lessor at the inception of the lease.
c. defer the profit or loss and then amortize it over the lessee’s period of usage.
d. defer the profit or loss and then amortize it over the lessor’s period of usage.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-6

 

  1. The parent company leased a machine to its subsidiary using a direct financing lease that included a bargain purchase option. As a result of the intercompany lease, the following items should be eliminated in the consolidation process:

 

Depreciation

Machine     Debt     Interest     Expense

a. Yes         Yes      Yes          Yes
b. Yes         Yes      Yes          No
c. Yes         No       No           No
d. No          Yes      Yes          No

 

 

ANS:  D                    DIF:    M                   OBJ:   5-5

 

Phil Company leased a machine to its 100%-owned subsidiary, Scout Company. The direct financing lease required annual lease payments in advance of $2,319 for 5 years. The present value of the minimum lease payments at 8% interest is $10,000.

 

  1. Refer to Phil Company. The adjustment needed to arrive at consolidated net income for the first year after the lease is ____.
a. $0
b. $800
c. $2,319
d. $10,000

 

 

ANS:  A                    DIF:    E                    OBJ:   5-5

 

  1. Refer to Phil Company. The adjustment of assets and liabilities needed to prepare a consolidated balance sheet is to eliminate the:
a. asset leased.
b. asset leased and the obligation under the capital lease.
c. obligation under the capital lease and the present value of the minimum lease payments.
d. obligation under the capital lease.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-5

 

  1. Park owns an 80% interest in the common stock of Stable Company. Park leased a machine to Stable under a 5-year, direct financing lease with a bargain purchase option. The lease term began January 1, 20X4. The impact of the lease on the Noncontrolling share of income for 20X4:
a. is an increase.
b. is a decrease.
c. is zero.
d. cannot be determined from the information given.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-5

 

  1. Lion Company leased equipment to its wholly owned subsidiary, Tiger, Inc., on July 1, 20X8. The lease is for a 10-year period, the useful life of the asset. The first of 10 equal annual payments of $600,000 was made on July 1, 20X8 and established a list selling price of $3,900,000 on the equipment. Assume that on July 1, 20X8, the present value of the rent payments over the lease term discounted at 12% was $3,797,000. The book value of the asset is $3,100,000.

 

What is the profit on the sale that Lion should recognize on the consolidated financial statements for the years ended December 31, 20X8 and 20X9?

a. $800,000 and $0
b. $697,000 and $80,000
c. $80,000 and $80,000
d. $34,850 and $69,700

 

 

ANS:  D                    DIF:    D                   OBJ:   5-6

PROBLEM

  1. Smart Corporation is a 90%-owned subsidiary of Phan Inc. On January 2, 20X6, Smart agreed to lease $400,000 of construction equipment from Phan for $3,000 a month on an operating lease. The equipment has a 10-year life and is being depreciated using the straight-line method.

 

Required:

 

Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-1 partial worksheet for December 31, 20X8. Key and explain all eliminations and adjustments.

 

Figure 5-1
Phan Inc. and Smart Corp.
Consolidated Partial Worksheet
For the Year Ended December 31, 20X8
 
      Eliminations and
  Trial Balance Adjustments
  Phan Smart Debit

Debit

Credit
Equipment 987,000 40,000        
Accumulated Depreciation – Equipment (212,500) (8,000)        
Equipment Under Operating Lease 400,000          
Accumulated Depreciation – Equipment Under Operating Lease (120,000)          
Rent Receivable 3,000          
Rent Payable   (3,000)        
Rental Income (50,000)          
Rent Expense   36,000        
Depreciation Expense 138,700 2,000        
             

 

 

ANS:

For the worksheet solution, please refer to Answer 5-1.

Answer 5-1
Phan Inc. and Smart Corp.
Consolidated Partial Worksheet
For the Year Ended December 31, 20X8
 
      Eliminations and
  Trial Balance Adjustments
  Phan Smart Debit

Debit

Credit
Equipment 987,000 40,000 (OL2) 400,000    
Accumulated Depreciation – Equipment (212,500) (8,000)     (OL2) 120,000
Equipment Under Operating Lease 400,000       (OL2) 400,000
Accumulated Depreciation – Equipment Under Operating Lease (120,000)   (OL2) 120,000    
Rent Receivable 3,000       (OL1b) 3,000
Rent Payable   (3,000) (OL1b) 3,000    
Rental Income (50,000)   (OL1a) 36,000    
Rent Expense   36,000     (OL1a) 36,000
Depreciation Expense 138,700 2,000        
        559,000   559,000

 

Eliminations and Adjustments:

 

(OL1a) Eliminate intercompany rent expense/revenue of $3,000 per month.
   
(OL1b) Eliminate one month’s accrued rent receivable and payable.
   
(OL2) Reclassify asset under the intercompany operating lease and related accumulated depreciation.

 

 

DIF:    E                    OBJ:   5-4

 

  1. Tempo Industries is an 80%-owned subsidiary of Dalie Inc. On January 1, 20X8, Dalie leased an asset to Tempo and the following journal entries were made:

 

Tempo    
     
Assets Under Capital Lease  21,561  
     Cash      5,000
     Obligations Under Capital Lease   16,561
     
Dalie    
     
Minimum Lease Payments Receivable  20,000  
Cash 5,000  
     Unearned Interest Income      3,439
     Asset (cost of asset leased)   18,000
     Sales Profit on Leases   3,561

 

The terms of the lease agreement require Tempo to make five payments of $5,000 each at the beginning of each year. The implicit interest rate used by both Dalie and Tempo is 8%.

 

Required:

Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-2 partial worksheet of December 31, 20X8. Key and explain all eliminations and adjustments.

Figure 5-2
Dalie and Tempo Industries
Consolidated Partial Worksheet
For the Year Ended December 31, 20X8
 
      Eliminations and
  Trial Balance Adjustments
Account Titles Dalie Tempo Debit Credit
Minimum Lease Payments Receivable 20,000          
Unearned Interest Income (2,114)          
Assets Under Capital Lease   21,561        
Accumulated Depreciation  –  Assets Under Capital Lease   (4,312)        
Rent Receivable 410,000 260,000        
Accumulated Depreciation  –  Plant Assets (167,000) (98,000)        
Obligations Under Capital lease   (16,561)        
Interest Payable   (1,325)        
Interest Income (1,325)          
Sales Profit on Leases (3,561)          
Interest Expense   1,325        
Depreciation Expense 17,500 10,470        
             

 

ANS:

For the worksheet solution, please refer to Answer 5-2.

Answer 5-2
Dalie and Tempo Industries
Consolidated Partial Worksheet
For the Year Ended December 31, 20X8
 
      Eliminations and
  Trial Balance Adjustments
Account Titles Dalie Tempo Debit Credit
Minimum Lease Payments Receivable 20,000       (CL2) 20,000
Unearned Interest Income (2,114)   (CL2) 2,114    
Assets Under Capital Lease   21,561     (CL2) 21,561
Accumulated Depreciation  –  Assets Under Capital Lease   (4,312) (CL3) 4,312    
Plant Assets 410,000 260,000 (CL2) 21,561 (CL4) 3,561
Accumulated Depreciation  –  Plant Assets (167,000) (98,000) (CL5) 712 (CL3) 4,312
Obligations Under Capital lease   (16,561) (CL2) 16,561    
Interest Payable   (1,325) (CL2) 1,325    
Interest Income (1,325)   (CL1) 1,325    
Sales Profit on Leases (3,561)   (CL4) 3,561    
Interest Expense   1,325     (CL1) 1,325
Depreciation Expense 17,500 10,470     (CL5) 712
        51,471   51,471

Eliminations and Adjustments:

(CL1) Eliminate intercompany interest expense/revenue.
   
(CL2) Eliminate intercompany debt and unearned income; eliminate the asset under capital lease and record the owned asset.
   
(CL3) Reclassify depreciation.
   
(CL4) Reduce cost of asset for gain on sales-type lease.
   
(CL5) Reduce depreciation 3,561 ÷ 5  712 per year, to recognize one year’s profit.

 

 

DIF:    E                    OBJ:   5-5

 

 

  1. On January 1, 20X8, Pope Company acquired 100% of the common stock of Siegel Company for $300,000. On this date Siegel had total owners’ equity of $250,000. Any excess of cost over book value is attributable to goodwill. Pope accounts for its investment in Siegel using the simple equity method.

 

On July 1, 20X8, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.

 

During early 20X9, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the market value of the bonds increased. On July 1, 20X9, Pope purchased $150,000 par value of Siegel’s bonds, paying $163,000. Pope still holds the bonds on December 31, 20X9 and has amortized the premium, using the straight-line method.

 

Required:

 

Complete the Figure 5-3 worksheet for consolidated financial statements for the year ended December 31, 20X9. Round all computations to the nearest dollar.

 

Figure 5-3
  Trial Balance Eliminations and
  Pope Siegel Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 7,500          
Other Current Assets 157,212 371,000        
Investment in Sub. Company 410,000          
             
             
Investment in Sub. Bonds 162,278          
             
Land 50,000 30,000        
Buildings and Equipment 350,000 380,000        
Rent Receivable (100,000) (50,000)        
Goodwill            
             
Interest Payable   (15,000)        
Other Current Liabilities (120,000) (56,000)        
Bonds Payable, 10%   (300,000)        
             
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (280,212)          
             
Common Stock – S Co.   (50,000)        
Other Paid-in Capital – S Co.   (70,000)        
Retained Earnings – S Co.   (180,000)        
             
Net Sales (500,000) (400,000)        
Cost of Goods Sold 300,000 240,000        
Operating Expenses 100,000 50,000        
Interest Expense   30,000        
Interest Income (6,778)          
Subsidiary Income (80,000)          
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   20,000        
Loss on Retirement of Bonds            
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable        
Other Current Assets        
Investment in Sub. Company        
         
         
Investment in Sub. Bonds        
         
Land        
Buildings and Equipment        
Rent Receivable        
Goodwill        
         
Interest Payable        
Other Current Liabilities        
Bonds Payable, 10%        
         
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
Operating Expenses        
Interest Expense        
Interest Income        
Subsidiary Income        
Dividends Declared – P Co.        
Dividends Declared – S Co.        
Loss on Retirement of Bonds        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-3.

 

Answer 5-3
  Trial Balance Eliminations and
  Pope Siegel Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 7,500       (B1) 7,500
Other Current Assets 157,212 371,000        
Investment in Sub. Company 410,000       (CY) 60,000
          (EL) 300,000
          (D) 50,000
Investment in Sub. Bonds 162,278       (B2) 162,278
             
Land 50,000 30,000        
Buildings and Equipment 350,000 380,000        
Accumulated depreciation (100,000) (50,000)        
Goodwill     (D) 50,000    
             
Interest Payable   (15,000) (B1) 7,500    
Other Current Liabilities (120,000) (56,000)        
Bonds Payable, 10%   (300,000) (B2) 150,000    
             
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (280,212)          
             
Common Stock – S Co.   (50,000) (EL) 50,000    
Other Paid-in Capital – S Co.   (70,000) (EL) 70,000    
Retained Earnings – S Co.   (180,000) (EL) 180,000    
             
Net Sales (500,000) (400,000)        
Cost of Goods Sold 300,000 240,000        
Operating Expenses 100,000 50,000        
Interest Expense   30,000     (B2) 7,500
Interest Income (6,778)   (B2) 6,778    
Subsidiary Income (80,000)   (CY) 80,000    
Dividends declared – P Co. 50,000          
Dividends declared – S Co.   20,000     (CY) 20,000
Loss on Retirement of Bonds     (B2) 13,000    
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   607,278   607,278
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable       0
Other Current Assets       528,212
Investment in Sub. Company       0
         
         
Investment in Sub. Bonds       0
         
Land       80,000
Buildings and Equipment       730,000
Accumulated depreciation       (150,000)
Goodwill       50,000
         
Interest Payable       (7,500)
Other Current Liabilities       (176,000)
Bonds Payable, 10%       (150,000)
         
Other Long-Term Liabilities       (200,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (280,212)  
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales (900,000)      
Cost of Goods Sold 540,000      
Operating Expenses 150,000      
Interest Expense 22,500      
Interest Income 0      
Subsidiary Income 0      
Dividends declared – P Co.     50,000  
Dividends declared – S Co.        
Loss on Retirement of Bonds 13,000      
         
Consolidated Net Income (174,500)      
     To NCI 0      
     To Controlling Interest 174,500   (174,500)  
Total NCI       0
Ret. Earn. Contr. Int. 12-31     (404,712) (404,712)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate the current-year entries made in the investment account and in the Siegel income account.
   
(EL) Eliminate the Siegel Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $50,000 excess of cost over book value to goodwill.
   
(B1) Eliminate $7,500 of intercompany interest receivable and payable.
   
(B2) Eliminate all of the intercompany interest income and one-half of the interest expense for the last one-half of the year. Eliminate the balance in investment in bonds against one-half of the bonds payable. The resulting loss of $13,000 is the same as the loss on July 1, 20X9 ($163,000 purchase price of bonds less $150,000 carrying value).

 

 

DIF:    M                   OBJ:   5-2

 

  1. On January 1, 20X8, Pope Company acquired 100% of the common stock of Siegel Company for $300,000. On this date Siegel had total owners’ equity of $250,000. Any excess of cost over book value is attributable to goodwill. Pope accounts for its investment in Siegel using the simple equity method.

 

Also on July 1, 20X8, Siegel Company sold to outside investors $200,000 par value of 10-year, 10% bonds. The price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.

 

During early 20X9, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the market value of the bonds increased. On July 1, 20X9, Pope purchased $100,000 par value of Siegel’s bonds, paying $112,695. Pope still holds the bonds on December 31, 20X9 and has amortized the premium, using the effective-interest method.

 

Required:

 

Complete the Figure 5-4 worksheet for consolidated financial statements for the year ended December 31, 20X9. Round all computations to the nearest dollar.

 

Figure 5-4
  Trial Balance Eliminations and
  Pope Siegel Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 5,000          
Other Current Assets 210,000 366,000        
Investment in Sub. Company 410,000          
             
             
Investment in Sub. Bonds 112,203          
             
Land 50,000 30,000        
Buildings and Equipment 350,000 280,000        
Rent Receivable (100,000) (50,000)        
Goodwill            
             
Interest Payable   (10,000)        
Other Current Liabilities (120,000) (56,000)        
Bonds Payable, 10%   (200,000)        
             
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (282,695)          
             
Common Stock – S Co.   (50,000)        
Other Paid-in Capital – S Co.   (70,000)        
Retained Earnings – S Co.   (180,000)        
             
Net Sales (500,000) (400,000)        
Cost of Goods Sold 300,000 240,000        
Operating Expenses 100,000 60,000        
Interest Expense   20,000        
Interest Income (4,508)          
Subsidiary Income (80,000)          
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   20,000        
Loss on Retirement of Bonds            
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable        
Other Current Assets        
Investment in Sub. Company        
         
         
Investment in Sub. Bonds        
         
Land        
Buildings and Equipment        
Rent Receivable        
Goodwill        
         
Interest Payable        
Other Current Liabilities        
Bonds Payable, 10%        
         
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
Operating Expenses        
Interest Expense        
Interest Income        
Subsidiary Income        
Dividends Declared – P Co.        
Dividends Declared – S Co.        
Loss on Retirement of Bonds        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-4.

 

Answer 5-4
  Trial Balance Eliminations and
  Pope Siegel Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 5,000       (B1) 5,000
Other Current Assets 210,000 366,000        
Investment in Sub. Company 410,000       (CY) 60,000
          (EL) 300,000
          (D) 50,000
Investment in Sub. Bonds 112,203       (B2) 112,203
             
Land 50,000 30,000        
Buildings and Equipment 350,000 280,000        
Accumulated Depreciation (100,000) (50,000)        
Goodwill     (D) 50,000    
             
Interest Payable   (10,000) (B1) 5,000    
Other Current Liabilities (120,000) (56,000)        
Bonds Payable, 10%   (200,000) (B2) 100,000    
             
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (282,695)          
             
Common Stock – S Co.   (50,000) (EL) 50,000    
Other Paid-in Capital – S Co.   (70,000) (EL) 70,000    
Retained Earnings – S Co.   (180,000) (EL) 180,000    
             
Net Sales (500,000) (400,000)        
Cost of Goods Sold 300,000 240,000        
Operating Expenses 100,000 60,000        
Interest Expense   20,000     (B2) 5,000
Interest Income (4,508)   (B2) 4,508    
Subsidiary Income (80,000)   (CY) 80,000    
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   20,000     (CY) 20,000
Loss on Retirement of Bonds     (B2) 12,695    
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   552,203   552,203
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable       0
Other Current Assets       576,000
Investment in Sub. Company       0
         
         
Investment in Sub. Bonds       0
         
Land       80,000
Buildings and Equipment       630,000
Accumulated Depreciation       (150,000)
Goodwill       50,000
         
Interest Payable       (5,000)
Other Current Liabilities       (176,000)
Bonds Payable, 10%       (100,000)
         
Other Long-Term Liabilities       (200,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (282,695)  
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales (900,000)      
Cost of Goods Sold 540,000      
Operating Expenses 160,000      
Interest Expense 15,000      
Interest Income 0      
Subsidiary Income 0      
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.        
Loss on Retirement of Bonds 12,695      
         
Consolidated Net Income (172,305)      
     To NCI 0      
     To Controlling Interest 172,305   (172,305)  
Total NCI       0
Ret. Earn. Contr. Int. 12-31     (405,000) (405,000)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account.
   
(EL) Eliminate the Siegel Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $50,000 excess of cost over book value to goodwill.
   
(B1) Eliminate $5,000 of intercompany interest receivable and payable.
   
(B2) Eliminate all of the intercompany interest income and one-half of the interest expense for the last one-half of the year. Eliminate the balance in investment in bonds against one-half of the bonds payable. The resulting loss of $12,695 is the same as the loss on July 1, 20X9 ($112,695 purchase price of bonds less $100,000 carrying value).

 

 

DIF:    M                   OBJ:   5-2                 MSC:  effective-interest amortization

 

  1. On January 1, 20X8, Pope Company acquired 100% of the common stock of Siegel Company for $300,000. On this date Siegel had total owners’ equity of $250,000. Any excess of cost over book value is attributable to goodwill. Pope accounts for its Investment in Siegel using the simple equity method.

 

On January 1, 20X8, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.

 

During 20X8, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the market value of the bonds increased. On December 31, 20X8, Pope purchased $150,000 par value of Siegel’s bonds, paying $163,000. Pope still holds the bonds on December 31, 20X9 and has amortized the premium, using the straight-line method.

 

Required:

 

Complete the Figure 5-5 worksheet for consolidated financial statements for the year ended December 31, 20X9. Round all computations to the nearest dollar.

 

Figure 5-5
  Trial Balance Eliminations and
  Pope Siegel Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 7,500          
Other Current Assets 167,569 371,000        
Investment in Sub. Company 410,000          
             
             
Investment in Sub. Bonds 161,556          
             
Land 50,000 30,000        
Buildings and Equipment 350,000 380,000        
Rent Receivable (100,000) (50,000)        
Goodwill            
             
Interest Payable   (15,000)        
Other Current Liabilities (120,000) (56,000)        
Bonds Payable, 10%   (300,000)        
             
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (283,069)          
             
Common Stock – S Co.   (50,000)        
Other Paid-in Capital – S Co.   (70,000)        
Retained Earnings – S Co.   (180,000)        
             
Net Sales (500,000) (400,000)        
Cost of Goods Sold 300,000 240,000        
Operating Expenses 100,000 50,000        
Interest Expense   30,000        
Interest Income (13,556)          
Subsidiary Income (80,000)          
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   20,000        
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable        
Other Current Assets        
Investment in Sub. Company        
         
         
Investment in Sub. Bonds        
         
Land        
Buildings and Equipment        
Rent Receivable        
Goodwill        
         
Interest Payable        
Other Current Liabilities        
Bonds Payable, 10%        
         
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
Operating Expenses        
Interest Expense        
Interest Income        
Subsidiary Income        
Dividends Declared – P Co.        
Dividends Declared – S Co.        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-5.

 

Answer 5-5
  Trial Balance Eliminations and
  Pope Siegel Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 7,500       (B1) 7,500
Other Current Assets 167,569 371,000        
Investment in Sub. Company 410,000       (CY) 60,000
          (EL) 300,000
          (D) 50,000
Investment in Sub. Bonds 161,556       (B2) 161,556
             
Land 50,000 30,000        
Buildings and Equipment 350,000 380,000        
Accumulated Depreciation (100,000) (50,000)        
Goodwill     (D) 50,000    
             
Interest Payable   (15,000) (B1) 7,500    
Other Current Liabilities (120,000) (56,000)        
Bonds Payable, 10%   (300,000) (B2) 150,000    
             
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (283,069)          
      (B2) 13,000    
Common Stock – S Co.   (50,000) (EL) 50,000    
Other Paid-in Capital – S Co.   (70,000) (EL) 70,000    
Retained Earnings – S Co.   (180,000) (EL) 180,000    
             
Net Sales (500,000) (400,000)        
Cost of Goods Sold 300,000 240,000        
Operating Expenses 100,000 50,000        
Interest Expense   30,000     (B2) 15,000
Interest Income (13,556)   (B2) 13,556    
Subsidiary Income (80,000)   (CY) 80,000    
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   20,000     (CY) 20,000
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   614,056   614,056
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable       0
Other Current Assets       538,569
Investment in Sub. Company       0
         
         
Investment in Sub. Bonds       0
         
Land       80,000
Buildings and Equipment       730,000
Accumulated Depreciation       (150,000)
Goodwill       50,000
         
Interest Payable       (7,500)
Other Current Liabilities       (176,000)
Bonds Payable, 10%       (150,000)
         
Other Long-Term Liabilities       (200,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (270,069)  
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales (900,000)      
Cost of Goods Sold 540,000      
Operating Expenses 150,000      
Interest Expense 15,000      
Interest Income 0      
Subsidiary Income 0      
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.        
         
Consolidated Net Income (195,000)      
     To NCI 0      
     To Controlling Interest 195,000   (195,000)  
Total NCI       0
Ret. Earn. Contr. Int. 12-31     415,069 (415,069)
  0   0 0

 

Eliminations and Adjustments:

 

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account.
   
(EL) Eliminate the Siegel Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $50,000 excess of cost over book value to goodwill.
   
(B1) Eliminate $5,000 of intercompany interest receivable and payable.
   
(B2) Eliminate all of the intercompany interest income and one-half of the interest expense. Eliminate the balance in investment in bonds against one-half of the bonds payable.
   
  The resulting loss of $13,000 is the same as the loss on December 31, 20X8 ($113,000 purchase price of bonds less $100,000 carrying value). Since the loss occurred in 20X8, it is debited to retained earnings.

 

 

DIF:    M                   OBJ:   5-2                 MSC:  straight-line amortization

 

  1. On January 1, 20X8, Parent Company purchased 90% of the common stock of Subsidiary Company for $450,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000, $130,000, and $200,000, respectively. Any excess of cost over book value is due to goodwill. Parent accounts for the Investment in Subsidiary using the cost method.

 

On January 1, 20X8, Subsidiary sold $100,000 par value of 6%, ten-year bonds for $97,000. The bonds pay interest semi-annually on January 1 and July 1 of each year.

 

On January 1, 20X9, Parent repurchased all of Subsidiary’s bonds for $96,400. The bonds are still held on December 31, 20X9.

 

Both companies have correctly recorded all entries relative to bonds and interest, using straight-line amortization for premium or discount.

 

Required:

 

Complete the Figure 5-6 worksheet for consolidated financial statements for the year ended of December 31, 20X9. Round all computations to the nearest dollar.

 

Figure 5-6
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 3,000          
Other Current Assets 214,400 340,500        
Investment in Sub. Company 450,000          
             
             
Investment in Sub. Bonds 96,800          
             
Land 100,000 50,000        
Buildings and Equipment 400,000 290,000        
Rent Receivable (150,000) (70,000)        
Goodwill            
             
Interest Payable   (3,000)        
Other Current Liabilities (114,000) (70,000)        
Bonds Payable, 8%   (100,000)        
Discount on Bonds Payable   2,400        
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (50,000)          
Other Paid-in Capital – P Co. (250,000)          
Retained Earnings – P Co. (400,000)          
             
Common Stock – S Co.   (20,000)        
Other Paid-in Capital – S Co.   (130,000)        
Retained Earnings – S Co.   (250,000)        
             
Net Sales (630,000) (360,000)        
Cost of Goods Sold 350,000 210,000        
Operating Expenses 163,200 73,800        
Interest Expense   6,300        
Interest Income (6,400)          
Dividend Income (27,000)          
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   30,000        
Gain on Retirement of Bonds            
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable        
Other Current Assets        
Investment in Sub. Company        
         
         
Investment in Sub. Bonds        
         
Land        
Buildings and Equipment        
Rent Receivable        
Goodwill        
         
Interest Payable        
Other Current Liabilities        
Bonds Payable, 8%        
Discount on Bonds Payable        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
Operating Expenses        
Interest Expense        
Interest Income        
Dividend Income        
Dividends Declared – P Co.        
Dividends Declared – S Co.        
Gain on Retirement of Bonds        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-6.

 

Answer 5-6
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 3,000       (B1) 3,000
Other Current Assets 214,400 340,500        
Investment in Sub. Company 450,000   (CV) 45,000 (EL) 360,000
          (D) 135,000
             
Investment in Sub. Bonds 96,800       (B2) 96,800
             
Land 100,000 50,000        
Buildings and Equipment 400,000 290,000        
Accumulated Depreciation (150,000) (70,000)        
Goodwill     (D) 150,000    
             
Interest Payable   (3,000) (B1) 3,000    
Other Current Liabilities (114,000) (70,000)        
Bonds Payable, 8%   (100,000) (B2) 100,000    
Discount on Bonds Payable   2,400     (B2) 2,400
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (50,000)          
Other Paid-in Capital – P Co. (250,000)          
Retained Earnings – P Co. (400,000)       (CV) 45,000
             
Common Stock – S Co.   (20,000) (EL) 18,000    
Other Paid-in Capital – S Co.   (130,000) (EL) 117,000    
Retained Earnings – S Co.   (250,000) (EL) 225,000 (D) 15,000
             
Net Sales (630,000) (360,000)        
Cost of Goods Sold 350,000 210,000        
Operating Expenses 163,200 73,800        
Interest Expense   6,300     (B2) 6,300
Interest Income (6,400)   (B2) 6,400    
Dividend Income (27,000)   (CY) 27,000    
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   30,000     (CY) 27,000
Gain on Retirement of Bonds         (B2) 900
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   691,400   691,400
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable       0
Other Current Assets       554,900
Investment in Sub. Company       0
         
         
Investment in Sub. Bonds       0
         
Land       150,000
Buildings and Equipment       690,000
Accumulated Depreciation       (220,000)
Goodwill       150,000
         
Interest Payable       0
Other Current Liabilities       (184,000)
Bonds Payable, 8%       0
Discount on Bonds Payable       0
Other Long-Term Liabilities       (200,000)
Common Stock – P Co.       (50,000)
Other Paid-in Capital – P Co.       (250,000)
Retained Earnings – P Co.     (445,000)  
         
Common Stock – S Co.   (2,000)    
Other Paid-in Capital – S Co.   (13,000)    
Retained Earnings – S Co.   (40,000)    
         
Net Sales (990,000)      
Cost of Goods Sold 560,000      
Operating Expenses 237,000      
Interest Expense 0      
Interest Income 0      
Dividend Income 0      
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.   3,000    
Gain on Retirement of Bonds (900)      
         
Consolidated Net Income (193,900)      
     To NCI 7,070 (7,070)    
     To Controlling Interest 186,830   (186,830)  
Total NCI   (59,070)   (59,070)
Ret. Earn. Contr. Int. 12-31     581,830 (581,830)
        0

 

Eliminations and Adjustments:

 

(CV) Convert to simple equity method as of January 1, 20X9 (90% of $50,000 increase in Sub’s retained earnings from January 1, 20X8 to January 1, 20X9).
   
(CY) Eliminate Parent’s dividend income against dividends declared by Subsidiary.
   
(EL) Eliminate 90% of the Subsidiary Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $150,000 excess of cost over book value to goodwill; allocate to Parent and NCI.
   
(B1) Eliminate $3,000 of intercompany interest receivable and payable.
   
(B2) Eliminate all of the intercompany interest income and expense. Eliminate the balances in investment in bonds, bonds payable, and discount on bonds payable. The resulting gain of $900 is the gain as of beginning of year: on January 1, 20X8 $97,300 carrying value of bonds less $96,400 purchase price.

 

 

Subsidiary Company Income Distribution Schedule
Interest adjustment 100 Internally generated net income 69,900
    Gain on retirement 900
    Adjusted income 70,700
    NCI Share 10%
    NCI 7,070
       
Parent Company Income Distribution Schedule
    Internally generated net income 123,200
    90% × Sub’s adjusted income 63,630
    Controlling interest 186,830

 

 

DIF:    M                   OBJ:   5-2                 MSC:  cost method

 

  1. On January 1, 20X8, Parent Company purchased 90% of the common stock of Subsidiary Company for $360,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000, $130,000, and $200,000, respectively. Any excess of cost over book value is due to goodwill. Parent accounts for the Investment in Subsidiary using the simple equity method.

 

On January 1, 20X8, Subsidiary sold $100,000 par value of 6%, ten-year bonds for $97,000. The bonds pay interest semi-annually on January 1 and July 1 of each year.

 

On January 1, 20X9, Parent repurchased all of Subsidiary’s bonds for $96,400. The bonds are still held on December 31, 20X9.

 

Both companies have correctly recorded all entries relative to bonds and interest, using straight-line amortization for premium or discount.

 

Required:

 

Complete the Figure 5-7 worksheet for consolidated financial statements for the year ended of December 31, 20X9. Round all computations to the nearest dollar.

 

Figure 5-7
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 3,000          
Other Current Assets 214,400 340,500        
Investment in Sub. Company 440,910          
             
             
Investment in Sub. Bonds 96,800          
             
Land 100,000 50,000        
Buildings and Equipment 500,000 290,000        
Rent Receivable (150,000) (70,000)        
Goodwill            
             
Interest Payable   (3,000)        
Other Current Liabilities (124,000) (70,000)        
Bonds Payable, 8%   (100,000)        
Discount on Bonds Payable   2,400        
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (50,000)          
Other Paid-in Capital – P Co. (250,000)          
Retained Earnings – P Co. (445,000)          
             
Common Stock – S Co.   (20,000)        
Other Paid-in Capital – S Co.   (130,000)        
Retained Earnings – S Co.   (250,000)        
             
Net Sales (630,000) (360,000)        
Cost of Goods Sold 350,000 210,000        
Operating Expenses 163,200 73,800        
Interest Expense   6,300        
Interest Income (6,400)          
Subsidiary Income (62,910)          
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   30,000        
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable        
Other Current Assets        
Investment in Sub. Company        
         
         
Investment in Sub. Bonds        
         
Land        
Buildings and Equipment        
Rent Receivable        
Goodwill        
         
Interest Payable        
Other Current Liabilities        
Bonds Payable, 8%        
Discount on Bonds Payable        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
Operating Expenses        
Interest Expense        
Interest Income        
Subsidiary Income        
Dividends Declared – P Co.        
Dividends Declared – S Co.        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-7.

 

Answer 5-7
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 3,000       (B1) 3,000
Other Current Assets 214,400 340,500        
Investment in Sub. Company 440,910       (CY) 35,910
          (EL) 360,000
          (D) 45,000
Investment in Sub. Bonds 96,800       (B2) 96,800
             
Land 100,000 50,000        
Buildings and Equipment 500,000 290,000        
Accumulated Depreciation (150,000) (70,000)        
Goodwill     (D) 50,000    
             
Interest Payable   (3,000) (B1) 3,000    
Other Current Liabilities (124,000) (70,000)        
Bonds Payable, 8%   (100,000) (B2) 100,000    
Discount on Bonds Payable   2,400     (B2) 2,400
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (50,000)          
Other Paid-in Capital – P Co. (250,000)          
Retained Earnings – P Co. (445,000)          
             
Common Stock – S Co.   (20,000) (EL) 18,000    
Other Paid-in Capital – S Co.   (130,000) (EL) 117,000    
Retained Earnings – S Co.   (250,000) (EL) 225,000 (D) 5,000
             
Net Sales (630,000) (360,000)        
Cost of Goods Sold 350,000 210,000        
Operating Expenses 163,200 73,800        
Interest Expense   6,300     (B2) 6,300
Interest Income (6,400)   (B2) 6,400    
Subsidiary Income (62,910)   (CY) 62,910    
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   30,000     (CY) 27,000
Gain on Retirement of Bonds         (B2) 900
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   582,310   582,310
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable       0
Other Current Assets       554,900
Investment in Sub. Company       0
         
         
Investment in Sub. Bonds       0
         
Land       150,000
Buildings and Equipment       790,000
Accumulated Depreciation       (220,000)
Goodwill       50,000
         
Interest Payable       0
Other Current Liabilities       (194,000)
Bonds Payable, 8%       0
Discount on Bonds Payable       0
Other Long-Term Liabilities       (200,000)
Common Stock – P Co.       (50,000)
Other Paid-in Capital – P Co.       (250,000)
Retained Earnings – P Co.     (445,000)  
         
Common Stock – S Co.   (2,000)    
Other Paid-in Capital – S Co.   (13,000)    
Retained Earnings – S Co.   (30,000)    
         
Net Sales (990,000)      
Cost of Goods Sold 560,000      
Operating Expenses 237,000      
Interest Expense 0      
Interest Income 0      
Subsidiary Income 0      
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.   3,000    
Gain on Retirement of Bonds (900)      
         
Consolidated Net Income (193,900)      
     To NCI 7,070 (7,070)    
     To Controlling Interest 186,830   (186,830)  
Total NCI   (49,070)   (49,070)
Ret. Earn. Contr. Int. 12-31     (581,830) (581,830)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account.
   
(EL) Eliminate 90% of the Subsidiary Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $50,000 excess of cost over book value to goodwill and allocate to Parent and Noncontrolling Interest
   
(B1) Eliminate $3,000 of intercompany interest receivable and payable.
   
(B2) Eliminate all of the intercompany interest income and expense for the year. Eliminate the balances in investment in bonds, bonds payable, and discount on bonds payable. The resulting gain of $900 is the same as the gain as of beginning of year: on January 1, 20X8,  $97,300 carrying value of bonds less $96,400 purchase price.

 

Subsidiary Company Income Distribution Schedule
Interest adjustment 100 Internally generated net income 69,900
    Gain on retirement 900
    Adjusted income 70,700
    NCI Share 10%
    NCI 7,070
       
Parent Company Income Distribution Schedule
    Internally generated net income 123,200
    90% × Sub’s adjusted income 63,630
    Controlling interest 186,830

 

 

DIF:    M                   OBJ:   5-2                 MSC:  simple equity method

 

  1. On January 1, 20X8, Parent Company purchased 90% of the common stock of Subsidiary Company for $360,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000, $130,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent account for the Investment in Subsidiary using the simple equity method.

 

On July 1, 20X8, Subsidiary sold $100,000 par value of 9%, ten-year bonds for $106,755, which resulted in an effective interest rate of 8%. The bonds pay interest semi-annually on January 1 and July 1 of each year. Subsidiary uses the effective-interest method of amortizing the premium.

 

An amortization table for 20X8 and 20X9 is presented below:

 

Date Cash Int Interest Exp Premium Amort Premium Bal Carrying Value
7/1/X8       6,755 106,755
12/31/X8 4,500 4,270 230 6,525 106,525
7/1/X9 4,500 4,261 239 6,286 106,286
12/31/X9 4,500 4,251 249 6,037 106,037

 

On July 1, 20X9, Parent repurchased all of Par’s bonds for $94,153, which resulted in an effective interest rate of 10%. The bonds are still held at year end.

 

Both companies have correctly recorded all entries relative to bonds and interest.

 

Required:

 

Complete the Figure 5-8 worksheet for consolidated financial statements for the year ended of December 31, 20X9. Round all computations to the nearest dollar.

 

Figure 5-8
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 4,500          
Other Current Assets 246,139 326,537        
Investment in Sub. Company 441,000          
             
             
Investment in Sub. Bonds 94,361          
             
Land 80,000 60,000        
Buildings and Equipment 400,000 280,000        
Rent Receivable (120,000) (60,000)        
Goodwill            
             
Interest Payable   (4,500)        
Other Current Liabilities (103,000) (56,000)        
Bonds Payable, 8%   (100,000)        
Premium on Bonds Payable   (6,037)        
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (100,000)          
Other Paid-in Capital – P Co. (200,000)          
Retained Earnings – P Co. (410,000)          
             
Common Stock – S Co.   (20,000)        
Other Paid-in Capital – S Co.   (130,000)        
Retained Earnings – S Co.   (250,000)        
             
Net Sales (640,000) (350,000)        
Cost of Goods Sold 360,000 200,000        
Operating Expenses 164,708 71,488        
Interest Expense   8,512        
Interest Income (4,708)          
Subsidiary Income (63,000)          
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   30,000        
Gain on Retirement of Bonds            
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable        
Other Current Assets        
Investment in Sub. Company        
         
         
Investment in Sub. Bonds        
         
Land        
Buildings and Equipment        
Rent Receivable        
Goodwill        
         
Interest Payable        
Other Current Liabilities        
Bonds Payable, 8%        
Premium on Bonds Payable        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
Operating Expenses        
Interest Expense        
Interest Income        
Subsidiary Income        
Dividends Declared – P Co.        
Dividends Declared – S Co.        
Gain on Retirement of Bonds        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-8.

 

Answer 5-8
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Interest Receivable 4,500       (B1) 4,500
Other Current Assets 246,139 326,537        
Investment in Sub. Company 441,000       (CY) 36,000
          (EL) 360,000
          (D) 45,000
Investment in Sub. Bonds 94,361       (B2) 94,361
             
Land 80,000 60,000        
Buildings and Equipment 400,000 280,000        
Accumulated Depreciation (120,000) (60,000)        
Goodwill     (D) 50,000    
             
Interest Payable   (4,500) (B1) 4,500    
Other Current Liabilities (103,000) (56,000)        
Bonds Payable, 8%   (100,000) (B2) 100,000    
Premium on Bonds Payable   (6,037) (B2) 6,037    
Other Long-Term Liabilities (200,000)          
Common Stock – P Co. (100,000)          
Other Paid-in Capital – P Co. (200,000)          
Retained Earnings – P Co. (410,000)          
             
Common Stock – S Co.   (20,000) (EL) 18,000    
Other Paid-in Capital – S Co.   (130,000) (EL) 117,000    
Retained Earnings – S Co.   (250,000) (EL) 225,000 (D) 5,000
             
Net Sales (640,000) (350,000)        
Cost of Goods Sold 360,000 200,000        
Operating Expenses 164,708 71,488        
Interest Expense   8,512     (B2) 4,251
Interest Income (4,708)   (B2) 4,708    
Subsidiary Income (63,000)   (CY) 63,000    
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   30,000     (CY) 27,000
Gain on Retirement of Bonds         (B2) 12,133
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   588,245   588,245
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Interest Receivable       0
Other Current Assets       572,676
Investment in Sub. Company       0
         
         
Investment in Sub. Bonds       0
         
Land       140,000
Buildings and Equipment       680,000
Accumulated Depreciation       (180,000)
Goodwill       50,000
         
Interest Payable       0
Other Current Liabilities       (159,000)
Bonds Payable, 8%       0
Premium on Bonds Payable        
Other Long-Term Liabilities       (200,000)
Common Stock – P Co.       (100,000)
Other Paid-in Capital – P Co.       (200,000)
Retained Earnings – P Co.     (410,000)  
         
Common Stock – S Co.   (2,000)    
Other Paid-in Capital – S Co.   (13,000)    
Retained Earnings – S Co.   (30,000)    
         
Net Sales (990,000)      
Cost of Goods Sold 560,000      
Operating Expenses 236,196      
Interest Expense 4,261      
Interest Income 0      
Subsidiary Income 0      
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.   3,000    
Gain on Retirement of Bonds (12,133)      
         
Consolidated Net Income (201,676)      
     To NCI 8,168 (8,168)    
     To Controlling Interest 193,508   (193,508)  
Total NCI   (50,168)   (50,168)
Ret. Earn. Contr. Int. 12-31     (553,508) (553,508)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account.
   
(EL) Eliminate 90% of the Subsidiary Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $50,000 excess of cost over book value to goodwill; allocate to Parent and Noncontrolling Interest
   
(B1) Eliminate $4,500 of intercompany interest receivable and payable.
   
(B2) Eliminate all of the intercompany interest income and the interest expense for the last one-half of the year. Eliminate the balances in investment in bonds, bonds payable, and premium on bonds payable. The resulting gain of $12,133 is the same as the gain on July 1, 20X9 ($106,286 carrying value of bonds less $94,153 purchase price).

 

 

Subsidiary Company Income Distribution Schedule
    Internally generated net income 70,000
Interest adjustment 457 Gain on retirement 12,133
    Adjusted income 81,676
    NCI Share 10%
    NCI 8,168
       
Parent Company Income Distribution Schedule
    Internally generated net income 120,000
    90% × Sub’s adjusted income 73,508
    Controlling interest 193,508

 

 

DIF:    M                   OBJ:   5-2

 

  1. On January 1, 20X1 Parent Company acquired 90% of the common stock of Subsidiary Company for $360,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent accounts for the Investment in Subsidiary using the simple equity method.

 

On January 1, 20X2, Parent purchased equipment for $204,110 and immediately leased the equipment to Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies. The lease amortization schedule is presented below:

 

Date Pmt Interest Gross Rec Unearn Int Carrying Value
1/1/X2          240,000     (35,890)  204,110
1/1/X2     60,000        180,000     (35,890)  144,110
1/1/X3     60,000  17,293      120,000     (18,597)  101,403
1/1/X4     60,000  12,168        60,000       (6,429)    53,571
1/1/X5     60,000    6,429               0              0             0

 

Required:

 

Complete the Figure 5-9 worksheet for consolidated financial statements for the year ended December 31, 20X2. Round all computations to the nearest dollar.

 

Figure 5-9
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Current Assets 160,377 211,311        
             
Min. Lease Payments Rec. 180,000          
Unearned Interest Income (18,597)          
Investment in Sub. Company 459,000          
             
             
Land 100,000 60,000        
Buildings and Equipment 350,000 300,000        
Accumulated Depreciation (100,000) (50,000)        
Equipment under Cap. Lease   204,110        
Acc. Depr. – Eq. Cap. Lease   (34,018)        
Goodwill            
             
Current Liabilities (120,000) (60,000)        
Obligation under Cap. Lease   (144,110)        
Interest Payable on Lease   (17,293)        
Other Long-Term Liabilities (200,000) (10,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (426,780)          
             
Common Stock – S Co.   (50,000)        
Other Paid-in Capital – S Co.   (100,000)        
Retained Earnings – S Co.   (250,000)        
             
Net Sales (500,000) (300,000)        
Cost of Goods Sold 317,293 180,000        
Operating & Other Expenses 120,000 42,707        
Interest Income on Lease (17,293)          
Interest Expense on Lease   17,293        
Subsidiary Income (54,000)          
Dividends Declared – P Co. 50,000          
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Current Assets        
         
Min. Lease Payments Rec.        
Unearned Interest Income        
Investment in Sub. Company        
         
         
Land        
Buildings and Equipment        
Acc. Depr. – Bldg & Equip        
Equipment under Cap. Lease        
Acc. Depr. – Eq. Cap. Lease        
Goodwill        
         
Current Liabilities        
Obligation under Cap. Lease        
Interest Payable on Lease        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
Operating & Other Expenses        
Interest Income on Lease        
Interest Expense on Lease        
Subsidiary Income        
Dividends Declared – P Co.        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-9.

 

Answer 5-9
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Current Assets 160,377 211,311        
             
Min. Lease Payments Rec. 180,000       (CL2) 180,000
Unearned Interest Income (18,597)   (CL2) 18,597    
Investment in Sub. Company 459,000       (CY) 54,000
          (EL) 360,000
          (D) 45,000
Land 100,000 60,000        
Buildings and Equipment 350,000 300,000 (CL3) 204,110    
Accumulated Depreciation (100,000) (50,000)     (CL4) 34,018
Equipment under Cap. Lease   204,110     (CL3) 204,110
Acc. Depr. – Eq. Cap. Lease   (34,018) (CL4) 34,018    
Goodwill     (D) 50,000    
             
Current Liabilities (120,000) (60,000)        
Obligation under Cap. Lease   (144,110) (CL2) 144,110    
Interest Payable on Lease   (17,293) (CL2) 17,293    
Other Long-Term Liabilities (200,000) (10,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (426,780)          
             
Common Stock – S Co.   (50,000) (EL) 45,000    
Other Paid-in Capital – S Co.   (100,000) (EL) 90,000    
Retained Earnings – S Co.   (250,000) (EL) 225,000 (D) 5,000
             
Net Sales (500,000) (300,000)        
Cost of Goods Sold 317,293 180,000        
Operating & Other Expenses 120,000 42,707        
Interest Income on Lease (17,293)   (CL1) 17,293    
Interest Expense on Lease   17,293     (CL1) 17,293
Subsidiary Income (54,000)   (CY) 54,000    
Dividends Declared – P Co. 50,000          
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   899,421   899,421
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Current Assets       371,688
         
Min. Lease Payments Rec.       0
Unearned Interest Income       0
Investment in Sub. Company       0
         
         
Land       160,000
Buildings and Equipment       854,110
Accumulated Depreciation       (184,018)
Equipment under Cap. Lease       0
Acc. Depr. – Eq. Cap. Lease       0
Goodwill       50,000
         
Current Liabilities       (180,000)
Obligation under Cap. Lease       0
Interest Payable on Lease       0
Other Long-Term Liabilities       (210,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (426,780)  
         
Common Stock – S Co.   (5,000)    
Other Paid-in Capital – S Co.   (10,000)    
Retained Earnings – S Co.   (30,000)    
         
Net Sales (800,000)      
Cost of Goods Sold 497,293      
Operating & Other Expenses 162,707      
Interest Income on Lease 0      
Interest Expense on Lease 0      
Subsidiary Income 0      
Dividends Declared – P Co.     50,000  
         
Consolidated Net Income (140,000)      
     To NCI 6,000 (6,000)    
     To Controlling Interest 134,000   (134,000)  
Total NCI   (51,000)   (51,000)
Ret. Earn. Contr. Int. 12-31     (510,780) (510,780)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate the current-year entry made in the investment account and in the subsidiary income account.
   
(EL) Eliminate the Subsidiary Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $50,000 excess to goodwill and allocate to Parent and Noncontrolling Interest.
   
(CL1) Eliminate the intercompany interest income and expense on the lease obligation.
   
(CL2) Eliminate the intercompany receivable and payable on the leased asset. The receivable balance is $161,403 ($180,000 minimum lease payment receivable less unearned interest of $18,597). The payable is also $161,403 ($144,110 lease obligation payable plus $17,293 interest payable).
   
(CL3) Reclassify the leased equipment as Building and Equipment.
   
(CL4) Reclassify the accumulated depreciation on the leased equipment.

 

 

Subsidiary Company Income Distribution Schedule
    Internally generated net income 60,000
    NCI Share 10%
    NCI 6,000
       
Parent Company Income Distribution Schedule
    Internally generated net income 80,000
    90% × Sub’s adjusted income 54,000
    Controlling interest 134,000

Consolidated net income is not impacted because equal amounts of interest expense and revenue were eliminated.

 

DIF:    D                    OBJ:   5-5                 MSC:  capital lease, end of first year

 

  1. On January 1, 20X1, Parent Company acquired 90% of the common stock of Subsidiary Company for $360,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent uses the simple equity method to account for its investment in subsidiary.

 

On January 1, 20X2, Parent purchased equipment for $204,110 and immediately leased the equipment to Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies. A lease amortization schedule, applicable to either company, is presented below:

 

Date Pmt Interest Gross Rec Unearn Int Carrying Value
1/1/X2          240,000     (35,890)  204,110
1/1/X2     60,000        180,000     (35,890)  144,110
1/1/X3     60,000  17,293      120,000     (18,597)  101,403
1/1/X4     60,000  12,168        60,000       (6,429)    53,571
1/1/X5     60,000    6,429               0              0            0

 

Required:

 

Complete the Figure 5-10 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the nearest dollar.

 

Figure 5-10
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Current Assets 243,209 280,498        
             
Min. Lease Payments Rec. 120,000          
Unearned Interest Income (6,429)          
Investment in Sub. Company 513,000          
             
             
Land 100,000 60,000        
Buildings and Equipment 350,000 300,000        
Accumulated Depreciation (120,000) (80,000)        
Equipment under Cap. Lease   204,110        
Acc. Depr. – Eq. Cap. Lease   (68,037)        
Goodwill            
             
Current Liabilities (135,000) (48,000)        
Obligation under Cap. Lease   (101,403)        
Interest Payable on Lease   (12,168)        
Other Long-Term Liabilities (200,000) (15,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (451,780)          
             
Common Stock – S Co.   (50,000)        
Other Paid-in Capital – S Co.   (100,000)        
Retained Earnings – S Co.   (310,000)        
             
Net Sales (600,000) (350,000)        
Cost of Goods Sold 372,168 200,000        
             
Operating & Other Expenses 140,000 67,832        
Interest Income on Lease (12,168)          
Interest Expense on Lease   12,168        
Subsidiary Income (63,000)          
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   10,000        
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Current Assets        
         
Min. Lease Payments Rec.        
Unearned Interest Income        
Investment in Sub. Company        
         
         
Land        
Buildings and Equipment        
Accumulated Depreciation        
Equipment under Cap. Lease        
Acc. Depr. – Eq. Cap. Lease        
Goodwill        
         
Current Liabilities        
Obligation under Cap. Lease        
Interest Payable on Lease        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
         
Operating & Other Expenses        
Interest Income on Lease        
Interest Expense on Lease        
Subsidiary Income        
Dividends Declared – P Co.        
Dividends Declared – S Co.        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-10.

 

Answer 5-10
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Current Assets 243,209 280,498        
             
Min. Lease Payments Rec. 120,000       (CL2) 120,000
Unearned Interest Income (6,429)   (CL2) 6,429    
Investment in Sub. Company 513,000       (CY) 54,000
          (EL) 414,000
          (D) 45,000
Land 100,000 60,000        
Buildings and Equipment 350,000 300,000 (CL3) 204,110    
Accumulated Depreciation (120,000) (80,000)     (CL4) 68,037
Equipment under Cap. Lease   204,110     (CL3) 204,110
Acc. Depr. – Eq. Cap. Lease   (68,037) (CL4) 68,037    
Goodwill     (D) 50,000    
             
Current Liabilities (135,000) (48,000)        
Obligation under Cap. Lease   (101,403) (CL2) 101,403    
Interest Payable on Lease   (12,168) (CL2) 12,168    
Other Long-Term Liabilities (200,000) (15,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (451,780)          
             
Common Stock – S Co.   (50,000) (EL) 45,000    
Other Paid-in Capital – S Co.   (100,000) (EL) 90,000    
Retained Earnings – S Co.   (310,000) (EL) 279,000 (D) 5,000
             
Net Sales (600,000) (350,000)        
Cost of Goods Sold 372,168 200,000        
             
Operating & Other Expenses 140,000 67,832        
Interest Income on Lease (12,168)   (CL1) 12,168    
Interest Expense on Lease   12,168     (CL1) 12,168
Subsidiary Income (63,000)   (CY) 63,000    
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   10,000     (CY) 9,000
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   931,315   931,315
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Current Assets       523,707
         
Min. Lease Payments Rec.       0
Unearned Interest Income       0
Investment in Sub. Company       0
         
         
Land       160,000
Buildings and Equipment       854,110
Accumulated Depreciation       (268,037)
Equipment under Cap. Lease       0
Acc. Depr. – Eq. Cap. Lease       0
Goodwill       50,000
         
Current Liabilities       (183,000)
Obligation under Cap. Lease       0
Interest Payable on Lease       0
Other Long-Term Liabilities       (215,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (451,780)  
         
Common Stock – S Co.   (5,000)    
Other Paid-in Capital – S Co.   (10,000)    
Retained Earnings – S Co.   (36,000)    
         
Net Sales (950,000)      
Cost of Goods Sold 572,168      
         
Operating & Other Expenses 207,832      
Interest Income on Lease 0      
Interest Expense on Lease 0      
Subsidiary Income 0      
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.   1,000    
         
Consolidated Net Income (170,000)      
     To NCI 7,000 (7,000)    
     To Controlling Interest 163,000   (163,000)  
Total NCI   (57,000)   (57,000)
Ret. Earn. Contr. Int. 12-31     (564,780) (564,780)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate the Parent’s current-year equity method entries to record subsidiary income and receipt of dividends.
   
(EL) Eliminate the Subsidiary Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $50,000 excess to goodwill and allocate to Parent and Noncontrolling Interest.
   
(CL1) Eliminate the intercompany interest income and expense on the lease obligation.
   
(CL2) Eliminate the intercompany receivable and payable on the leased asset. The receivable balance is $113,571 ($120,000 minimum lease payment receivable less unearned interest of $6,429).
   
  The payable is also $113,571 ($101,403 lease obligation payable plus $12,168 interest payable).
   
(CL3) Reclassify the leased equipment as ordinary Building and Equipment.
   
(CL4) Reclassify the accumulated depreciation on the leased equipment.

 

 

Subsidiary Company Income Distribution Schedule
    Internally generated net income 70,000
    NCI Share 10%
    NCI 7,000
       
Parent Company Income Distribution Schedule
    Internally generated net income 100,000
    90% × Sub’s adjusted income 63,000
    Controlling interest 163,000

Consolidated net income is not impacted because equal amounts of interest expense and revenue were eliminated.

 

DIF:    M                   OBJ:   5-5                 MSC:  capital lease, end of second year

 

  1. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for $365,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent uses the simple equity method to account for its investment in subsidiary.

 

On January 1, 20X2, Parent purchased equipment for $174,120 and immediately leased the equipment to Subsidiary on a 4-year lease. The transaction was legally structured as a sales-type lease with a present value for the minimum lease payments of $204,120. Parent recorded the following entry:

 

Minimum Lease Payments Receivable 240,000  
     Unearned Interest Income     35,880
     Equipment   174,120
     Sales Profit on Lease   30,000

 

The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies.

 

A lease amortization schedule, applicable to either company, is presented below:

 

Carrying Carrying Interest     Principal
Value on       Value     Rate Interest Payment Reduction
1-1-X2 $204,120        
   –  60,000        
1-1-X2 144,120 12% $17,294 $60,000 $42,706
   –  42,706        
1-1-X3 101,414 12% 12,170 60,000 47,830
   –  47,830        
1-1-X4 53,584 12% 6,416* 60,000 53,584
   –  53,584        
1-1-X5 $           0             *Adjusted for rounding error.

 

Required:

 

Complete the Figure 5-11 worksheet for consolidated financial statements for the year ended December 31, 20X2. Round all computations to the nearest dollar.

 

Figure 5-11
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Current Assets 190,366 211,314        
             
Min. Lease Payments Rec. 180,000          
Unearned Interest Income (18,586)          
Investment in Sub. Company 475,000          
             
             
Land 100,000 60,000        
Buildings and Equipment 350,000 300,000        
Accumulated Depreciation (100,000) (50,000)        
Equipment under Cap. Lease   204,120        
Acc. Depr. – Eq. Cap. Lease   (34,020)        
Goodwill            
             
Current Liabilities (120,000) (60,000)        
Obligation under Cap. Lease   (144,120)        
Interest Payable on Lease   (17,294)        
Other Long-Term Liabilities (200,000) (10,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (466,780)          
             
Common Stock – S Co.   (50,000)        
Other Paid-in Capital – S Co.   (100,000)        
Retained Earnings – S Co.   (250,000)        
             
Net Sales (470,000) (300,000)        
Cost of Goods Sold 317,294 180,000        
Operating & Other Expenses 120,000 42,706        
Interest Income on Lease (17,294)          
Interest Expense on Lease   17,294        
Sales Profit on Lease (30,000)          
Subsidiary Income (60,000)          
Dividends Declared – P Co. 50,000          
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Current Assets        
         
Min. Lease Payments Rec.        
Unearned Interest Income        
Investment in Sub. Company        
         
         
Land        
Buildings and Equipment        
Rent Receivable        
Equipment under Cap. Lease        
Acc. Depr. – Eq. Cap. Lease        
Goodwill        
         
Current Liabilities        
Obligation under Cap. Lease        
Interest Payable on Lease        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
Operating & Other Expenses        
Interest Income on Lease        
Interest Expense on Lease        
Sales Profit on Lease        
Subsidiary Income        
Dividends Declared – P Co.        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-11.

 

Answer 5-11
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Current Assets 190,366 211,314        
             
Min. Lease Payments Rec. 180,000       (CL2) 180,000
Unearned Interest Income (18,586)   (CL2) 18,586    
Investment in Sub. Company 475,000       (CY) 60,000
          (EL) 400,000
          (D) 15,000
Land 100,000 60,000        
Buildings and Equipment 350,000 300,000 (CL3) 204,120 (CL5) 30,000
Accumulated Depreciation (100,000) (50,000) (CL6) 5,000 (CL4) 34,020
Equipment under Cap. Lease   204,120     (CL3) 204,120
Acc. Depr. – Eq. Cap. Lease   (34,020) (CL4) 34,020    
Goodwill     (D) 15,000    
             
Current Liabilities (120,000) (60,000)        
Obligation under Cap. Lease   (144,120) (CL2) 144,120    
Interest Payable on Lease   (17,294) (CL2) 17,294    
Other Long-Term Liabilities (200,000) (10,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (466,780)          
             
Common Stock – S Co.   (50,000) (EL) 50,000    
Other Paid-in Capital – S Co.   (100,000) (EL) 100,000    
Retained Earnings – S Co.   (250,000) (EL) 250,000    
             
Net Sales (470,000) (300,000)        
Cost of Goods Sold 317,294 180,000        
Operating & Other Expenses 120,000 42,706     (CL6) 5,000
Interest Income on Lease (17,294)   (CL1) 17,294    
Interest Expense on Lease   17,294     (CL1) 17,294
Sales Profit on Lease (30,000)   (CL5) 30,000    
Subsidiary Income (60,000)   (CY) 60,000    
Dividends Declared – P Co. 50,000          
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   945,434   945,434
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Current Assets       401,680
         
Min. Lease Payments Rec.       0
Unearned Interest Income       0
Investment in Sub. Company       0
         
         
Land       160,000
Buildings and Equipment       824,120
Accumulated Depreciation       (179,020)
Equipment under Cap. Lease       0
Acc. Depr. – Eq. Cap. Lease       0
Goodwill       15,000
         
Current Liabilities       (180,000)
Obligation under Cap. Lease       0
Interest Payable on Lease       0
Other Long-Term Liabilities       (210,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (466,780)  
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales (770,000)      
Cost of Goods Sold 497,294      
Operating & Other Expenses 157,706      
Interest Income on Lease 0      
Interest Expense on Lease 0      
Sales Profit on Lease 0      
Subsidiary Income 0      
Dividends Declared – P Co.     50,000  
         
Consolidated Net Income (115,000)      
     To NCI 0      
     To Controlling Interest 115,000   (115,000)  
Total NCI       0
Ret. Earn. Contr. Int. 12-31     (531,780) (531,780)
      0 0

 

Eliminations and Adjustments:

 

(CY) Eliminate the current-year entry made in the investment account and in the subsidiary income account.
   
(EL) Eliminate the Subsidiary Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $15,000 excess to Goodwill.
   
(CL1) Eliminate the intercompany interest income and expense on the lease obligation.
   
(CL2) Eliminate the intercompany receivable and payable on the leased asset. The receivable balance is $161,414 ($180,000 minimum lease payment receivable less unearned interest of $18,586).
   
  The payable is also $161,414 ($144,120 lease obligation payable plus $17,294 interest payable).
   
(CL3) Reclassify the leased equipment as ordinary Building and Equipment.
   
(CL4) Reclassify the accumulated depreciation on the leased equipment.
   
(CL5) Eliminate the Sales Profit on Lease and adjust the leased asset back to cost.
   
(CL6) Adjust depreciation on the leased asset. The credit to depreciation expense treats part of the sales-type lease profit as realized to the Parent through use by Subsidiary.

 

 

DIF:    D                    OBJ:   5-5 | 5-6

 

  1. On January 1, 20X1, Parent Company purchased 100% of the common stock of Subsidiary Company for $390,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill.  Parent accounts for the Investment in Subsidiary using the simple equity method.

 

On January 1, 20X2, Parent purchased equipment for $204,120 and immediately leased the equipment to Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies.

 

A lease amortization schedule, applicable to either company, is presented below:

 

Carrying Carrying Interest Principal    
Value on     Value      Rate   Interest Payment Reduction
1-1-X2 $204,120        
   –  60,000        
1-1-X2 144,120 12% $17,294 $60,000 $42,706
   –  42,706        
1-1-X3 101,414 12% 12,170 60,000 47,830
   –  47,830        
1-1-X4 53,584 12% 6,416* 60,000 53,584
   –  53,584        
1-1-X5 $          0            *Adjusted for rounding error.

 

On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $10,000. During 20X3, subsidiary sold merchandise to Parent for $50,000, of which $15,000 is held by Parent on December 31, 20X3. Subsidiary’s usual gross profit on affiliated sales is 40%.

 

Required:

 

Complete the Figure 5-12 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the nearest dollar.

 

Figure 5-12
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Current Assets 234,196 280,504        
             
Min. Lease Payments Rec. 120,000          
Unearned Interest Income (6,416)          
Investment in Sub. Company 560,000          
             
             
             
Land 100,000 60,000        
Buildings and Equipment 350,000 300,000        
Accumulated Depreciation (120,000) (80,000)        
Equipment under Cap. Lease   204,120        
Acc. Depr. – Eq. Cap. Lease   (68,040)        
Goodwill            
             
Current Liabilities (135,000) (48,000)        
Obligation under Cap. Lease   (101,414)        
Interest Payable on Lease   (12,170)        
Other Long-Term Liabilities (200,000) (15,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (482,780)          
             
Common Stock – S Co.   (50,000)        
Other Paid-in Capital – S Co.   (100,000)        
Retained Earnings – S Co.   (310,000)        
             
Net Sales (600,000) (350,000)        
Cost of Goods Sold 372,170 200,000        
             
Operating & Other Expenses 140,000 67,830        
Interest Income on Lease (12,170)          
Interest Expense on Lease   12,170        
Subsidiary Income (70,000)          
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   10,000        
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Current Assets        
         
Min. Lease Payments Rec.        
Unearned Interest Income        
Investment in Sub. Company        
         
         
         
Land        
Buildings and Equipment        
Accumulated Depreciation        
Equipment under Cap. Lease        
Acc. Depr. – Eq. Cap. Lease        
Goodwill        
         
Current Liabilities        
Obligation under Cap. Lease        
Interest Payable on Lease        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales        
Cost of Goods Sold        
         
Operating & Other Expenses        
Interest Income on Lease        
Interest Expense on Lease        
Subsidiary Income        
Dividends Declared – P Co.        
Dividends Declared – S Co.        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-12.

 

Answer 5-12
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Current Assets 234,196 280,504     (EI) 6,000
             
Min. Lease Payments Rec. 120,000       (CL2) 120,000
Unearned Interest Income (6,416)   (CL2) 6,416    
Investment in Sub. Company 560,000       (CY) 60,000
          (EL) 460,000
          (D) 40,000
             
Land 100,000 60,000        
Buildings and Equipment 350,000 300,000 (CL3) 204,120    
Accumulated Depreciation (120,000) (80,000)     (CL4) 68,040
Equipment under Cap. Lease   204,120     (CL3) 204,120
Acc. Depr. – Eq. Cap. Lease   (68,040) (CL4) 68,040    
Goodwill     (D) 40,000    
             
Current Liabilities (135,000) (48,000)        
Obligation under Cap. Lease   (101,414) (CL2) 101,414    
Interest Payable on Lease   (12,170) (CL2) 12,170    
Other Long-Term Liabilities (200,000) (15,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (482,780)          
      (BI) 4,000    
Common Stock – S Co.   (50,000) (EL) 50,000    
Other Paid-in Capital – S Co.   (100,000) (EL) 100,000    
Retained Earnings – S Co.   (310,000) (EL) 310,000    
             
Net Sales (600,000) (350,000) (IS) 50,000    
Cost of Goods Sold 372,170 200,000 (EI) 6,000 (BI) 4,000
          (IS) 50,000
Operating & Other Expenses 140,000 67,830        
Interest Income on Lease (12,170)   (CL1) 12,170    
Interest Expense on Lease   12,170     (CL1) 12,170
Subsidiary Income (70,000)   (CY) 70,000    
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   10,000     (CY) 10,000
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   1,034,330   1,034,330
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Current Assets       508,700
         
Min. Lease Payments Rec.       0
Unearned Interest Income       0
Investment in Sub. Company       0
         
         
         
Land       160,000
Buildings and Equipment       854,120
Accumulated Depreciation       (268,040)
Equipment under Cap. Lease       0
Acc. Depr. – Eq. Cap. Lease       0
Goodwill       40,000
         
Current Liabilities       (183,000)
Obligation under Cap. Lease       0
Interest Payable on Lease       0
Other Long-Term Liabilities       (215,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (478,780)  
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
Net Sales (900,000)      
Cost of Goods Sold 524,170      
         
Operating & Other Expenses 207,830      
Interest Income on Lease 0      
Interest Expense on Lease 0      
Subsidiary Income 0      
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.        
         
Consolidated Net Income (168,000)      
     To NCI 0      
     To Controlling Interest 168,000   (168,000)  
Total NCI       0
Ret. Earn. Contr. Int. 12-31     (596,780) (596,780)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate Parent’s current-year simple equity method entries.
   
(EL) Eliminate the Subsidiary Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $40,000 excess of cost over book value to goodwill.
   
(CL1) Eliminate the intercompany interest income and expense on the lease obligation.
   
(CL2) Eliminate the intercompany receivable and payable on the leased asset. The receivable balance is $113,584 ($120,000 minimum lease payment receivable less unearned interest of $6,416).
   
  The payable is also $113,584 ($101,414 lease obligation payable plus $12,170 interest payable).
   
(CL3) Reclassify the leased equipment as ordinary Building and Equipment.
   
(CL4) Reclassify the accumulated depreciation on the leased equipment.
   
(BI) Eliminate the $4,000 of gross profit in the beginning inventory.
   
(IS) Eliminate the entire intercompany sales of $50,000.
   
(EI) Eliminate the $6,000 of gross profit in the ending inventory.

 

 

DIF:    D                    OBJ:   5-5

 

  1. On January 1, 20X1, Porter Company purchased 80% of the common stock of Singer Company for $372,000. On this date Singer had total owners’ equity of $440,000. Any excess of cost over book value is due to goodwill. Porter accounts for its investment in Singer using the simple equity method.

 

On January 1, 20X2, Porter held merchandise acquired from Singer for $30,000. During 20X2, Singer sold merchandise to Porter for $90,000, of which $20,000 is held by Porter on December 31, 20X2. Singer’s usual gross profit on affiliated sales is 40%.

 

On December 31, 20X2, Porter still owes Singer $10,000 for merchandise acquired in December.

 

On December 31, 20X1, Porter sold $100,000 par value of 10%, 10-year bonds for $102,000. Porter uses the straight-line method of amortization for the premium. The bonds pay interest semiannually on June 30 and December 31.

 

On December 31, 20X2, Singer repurchased $50,000 par value of the bonds, paying $49,100. Straight-line amortization is used.

 

Required:

 

Complete the Figure 5-13 worksheet for consolidated financial statements for the year ended December 31, 20X2. Round all computations to the nearest dollar.

 

Figure 5-13
  Trial Balance Eliminations and
  Porter Singer Adjustments
Account Titles Company Company Debit Credit
Inventory, December 3l 100,000 80,000        
Other Current Assets 276,000 380,900        
Investment in Sub. Company 460,000          
             
             
Investment in Parent Bonds   49,100        
Land 140,000 100,000        
Buildings and Equipment 375,000 300,000        
Accumulated Depreciation (120,000) (110,000)        
Rent Receivable            
Goodwill            
             
Current Liabilities (150,000) (100,000)        
Bonds Payable, 10% (100,000)          
Premium on Bonds Payable (1,800)          
Other Long-Term Liabilities (200,000) (150,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (379,000)          
             
Common Stock – S Co.   (100,000)        
Other Paid-in Capital – S Co.   (200,000)        
Retained Earnings – S Co.   (200,000)        
             
             
Net Sales (580,000) (500,000)        
Cost of Goods Sold 350,000 300,000        
             
Operating Expenses 130,000 125,000        
Interest Income            
Interest Expense 9,800          
Subsidiary Income (60,000)          
             
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   25,000        
             
Gain on Retirement of Bonds            
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 3l        
Other Current Assets        
Investment in Sub. Company        
         
         
Investment in Parent Bonds        
Land        
Buildings and Equipment        
Accumulated Depreciation        
Rent Receivable        
Goodwill        
         
Current Liabilities        
Bonds Payable, 10%        
Premium on Bonds Payable        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
         
Net Sales        
Cost of Goods Sold        
         
Operating Expenses        
Interest Income        
Interest Expense        
Subsidiary Income        
         
Dividends Declared – P Co.        
Dividends Declared – S Co.        
         
Gain on Retirement of Bonds        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-13.

 

Answer 5-13
  Trial Balance Eliminations and
  Porter Singer Adjustments
Account Titles Company Company Debit Credit
Inventory, December 3l 100,000 80,000     (EI) 8,000
Other Current Assets 276,000 380,900     (IA) 10,000
Investment in Sub. Company 460,000       (CY) 40,000
          (EL) 400,000
          (D) 20,000
Investment in Parent Bonds   49,100     (B) 49,100
Land 140,000 100,000        
Buildings and Equipment 375,000 300,000        
Accumulated Depreciation (120,000) (110,000)        
             
Goodwill     (D) 25,000    
             
Current Liabilities (150,000) (100,000) (IA) 10,000    
Bonds Payable, 10% (100,000)   (B) 50,000    
Premium on Bonds Payable (1,800)   (B) 900    
Other Long-Term Liabilities (200,000) (150,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (379,000)   (BI) 9,600    
             
Common Stock – S Co.   (100,000) (EL) 80,000    
Other Paid-in Capital – S Co.   (200,000) (EL) 160,000    
Retained Earnings – S Co.   (200,000) (EL) 160,000 (D) 5,000
      (BI) 2,400    
             
Net Sales (580,000) (500,000) (IS) 90,000    
Cost of Goods Sold 350,000 300,000 (EI) 8,000 (BI) 12,000
          (IS) 90,000
Operating Expenses 130,000 125,000        
Interest Income            
Interest Expense 9,800          
Subsidiary Income (60,000)   (CY) 60,000    
             
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   25,000     (CY) 20,000
             
Gain on Retirement of Bonds         (B) 1,800
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   655,900   655,900
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 3l       172,000
Other Current Assets       646,900
Investment in Sub. Company       0
         
         
Investment in Parent Bonds       0
Land       240,000
Buildings and Equipment       675,000
Accumulated Depreciation       (230,000)
         
Goodwill       25,000
         
Current Liabilities       (240,000)
Bonds Payable, 10%       (50,000)
Premium on Bonds Payable       (900)
Other Long-Term Liabilities       (350,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (369,400)  
         
Common Stock – S Co.   (20,000)    
Other Paid-in Capital – S Co.   (40,000)    
Retained Earnings – S Co.   (42,600)    
         
         
Net Sales (990,000)      
Cost of Goods Sold 556,000      
         
Operating Expenses 255,000      
Interest Income        
Interest Expense 9,800      
Subsidiary Income 0      
         
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.   5,000    
         
Gain on Retirement of Bonds (1,800)      
         
Consolidated Net Income (171,000)      
     To NCI 15,800 (15,800)    
     To Controlling Interest 155,200   (155,200)  
Total NCI   (113,400)   (113,400)
Ret. Earn. Contr. Int. 12-31     (474,600) (474,600)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate the subsidiary income and intercompany dividends; return Investment in Sub account to beginning-of-year balance.
   
(EL) Eliminate 80% of the Singer Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $25,000 excess of cost over book value to goodwill; allocate to Parent and Noncontrolling Interest.
   
(BI) Eliminate the $12,000 of gross profit in the beginning inventory.
   
(IS) Eliminate the entire intercompany sales of $90,000.
   
(EI) Eliminate the $8,000 of gross profit in the ending inventory.
   
(IA) Eliminate the $10,000 intercompany accounts receivable and payable.
   
(B) Eliminate one-half of Porter’s bonds payable and premium against the investment in bonds account. The gain to Porter is $1,800.

 

 

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory 8,000 Internally generated net income 75,000
    Realized profit in beginning inventory 12,000
    Adjusted income 79,000
    NCI Share 20%
    NCI 15,800
       
Parent Company Income Distribution Schedule
    Internally generated net income 90,200
    Gain on bond retirement 1,800
    80% × Sub’s adjusted income 63,200
    Controlling interest 155,200

 

 

DIF:    D                    OBJ:   5-2                 MSC:  second year of consolidation

 

  1. On January 1, 20X1, Porter Company purchased 80% of the common stock of Singer Company for $372,000. On this date Singer had total owners’ equity of $440,000. Any excess of cost over book value is due to goodwill. Porter accounts for its investment in Singer using the simple equity method.

 

On January 1, 20X3, Porter held merchandise acquired from Singer for $40,000. During 20X3, Singer sold merchandise to Porter for $120,000, of which $10,000 is held by Porter on December 31, 20X3. Singer’s usual gross profit on affiliated sales is 40%.

 

On December 31, 20X3, Porter still owes Singer $5,000 for merchandise acquired in December.

 

On December 31, 20X1, Porter sold $100,000 par value of 10%, 10-year bonds for $102,000. Porter uses the straight-line method of amortization for the premium. The bonds pay interest semi-annually on June 30 and December 31.

 

On December 31, 20X2, Singer repurchased $50,000 par value of the bonds, paying $49,100. Singer uses the straight-line method of amortization for the discount. The bonds are still held on December 31, 20X3.

 

Required:

 

Complete the Figure 5-14 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the nearest dollar.

 

Figure 5-14
  Trial Balance Eliminations and
  Porter Singer Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 120,000 60,000        
Other Current Assets 375,800 365,800        
Investment in Sub. Company 520,000          
             
             
Investment in Parent Bonds   49,200        
Land 140,000 100,000        
Buildings and Equipment 375,000 400,000        
Accumulated Depreciation (150,000) (130,000)        
             
Goodwill            
             
Current Liabilities (160,000) (80,000)        
Bonds Payable, 10% (100,000)          
Premium on Bonds Payable (1,600)          
Other Long-Term Liabilities (200,000) (140,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (479,200)          
             
Common Stock – S Co.   (100,000)        
Other Paid-in Capital – S Co.   (200,000)        
Retained Earnings – S Co.   (250,000)        
             
             
Net Sales (590,000) (520,000)        
Cost of Goods Sold 355,000 310,000        
             
Operating Expenses 115,200 115,100        
Interest Income   (5,100)        
Interest Expense 9,800          
Subsidiary Income (80,000)          
             
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   25,000        
             
Gain on Retirement of Bonds            
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31        
Other Current Assets        
Investment in Sub. Company        
         
         
Investment in Parent Bonds        
Land        
Buildings and Equipment        
Accumulated Depreciation        
         
Goodwill        
         
Current Liabilities        
Bonds Payable, 10%        
Premium on Bonds Payable        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
         
Net Sales        
Cost of Goods Sold        
         
Operating Expenses        
Interest Income        
Interest Expense        
Subsidiary Income        
         
Dividends Declared – P Co.        
Dividends Declared – S Co.        
         
Gain on Retirement of Bonds        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-14.

 

Answer 5-14
  Trial Balance Eliminations and
  Porter Singer Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 120,000 60,000     (EI) 4,000
Other Current Assets 375,800 365,800     (IA) 5,000
Investment in Sub. Company 520,000       (CY) 60,000
          (EL) 440,000
          (D) 20,000
Investment in Parent Bonds   49,200     (B) 49,200
Land 140,000 100,000        
Buildings and Equipment 375,000 400,000        
Accumulated Depreciation (150,000) (130,000)        
             
Goodwill     (D) 25,000    
             
Current Liabilities (160,000) (80,000) (IA) 5,000    
Bonds Payable, 10% (100,000)   (B) 50,000    
Premium on Bonds Payable (1,600)   (B) 800    
Other Long-Term Liabilities (200,000) (140,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (479,200)       (B) 1,800
      (BI) 12,800    
Common Stock – S Co.   (100,000) (EL) 80,000    
Other Paid-in Capital – S Co.   (200,000) (EL) 160,000    
Retained Earnings – S Co.   (250,000) (EL) 200,000 (D) 5,000
      (BI) 3,200    
             
Net Sales (590,000) (520,000) (IS) 120,000    
Cost of Goods Sold 355,000 310,000 (EI) 4,000 (BI) 16,000
          (IS) 120,000
Operating Expenses 115,200 115,100        
Interest Income   (5,100) (B) 5,100    
Interest Expense 9,800       (B) 4,900
Subsidiary Income (80,000)   (CY) 80,000    
             
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   25,000     (CY) 20,000
             
Gain on Retirement of Bonds            
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   745,900   745,900
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31       176,000
Other Current Assets       736,600
Investment in Sub. Company       0
         
         
Investment in Parent Bonds       0
Land       240,000
Buildings and Equipment       775,000
Accumulated Depreciation       (280,000)
         
Goodwill       25,000
         
Current Liabilities       (235,000)
Bonds Payable, 10%       (50,000)
Premium on Bonds Payable       (800)
Other Long-Term Liabilities       (340,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (468,200)  
         
Common Stock – S Co.   (20,000)    
Other Paid-in Capital – S Co.   (40,000)    
Retained Earnings – S Co.   (51,800)    
         
         
Net Sales (990,000)      
Cost of Goods Sold 533,000      
         
Operating Expenses 230,300      
Interest Income 0      
Interest Expense 4,900      
Subsidiary Income 0      
         
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.   5,000    
         
Gain on Retirement of Bonds        
         
Consolidated Net Income (221,800)      
     To NCI 22,400 (22,400)    
     To Controlling Interest 199,400   (199,400)  
Total NCI   (129,200)   (129,200)
Ret. Earn. Contr. Int. 12-31     (617,600) (617,600)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account; eliminate intercompany dividends.
   
(EL) Eliminate 80% of the Singer Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $25,000 excess of cost over book value to goodwill; allocate to Parent and noncontrolling interest.
   
(BI) Eliminate the $16,000 of gross profit in the beginning inventory.
   
(IS) Eliminate the entire intercompany sales of $120,000.
   
(EI) Eliminate the $4,000 of gross profit in the ending inventory.
   
(IA) Eliminate the $5,000 intercompany accounts receivable and payable.
   
(B) Eliminate the interest income and the investment in bonds. Eliminate one-half of the bonds payable, premium on bonds, and interest expense. The gain to Porter of $1,800 is debited to retained earnings since it occurred in 20X8.

 

 

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory 4,000 Internally generated net income 100,000
    Realized profit in beginning inventory 16,000
    Adjusted income 112,000
    NCI Share 20%
    NCI 22,400
       
Parent Company Income Distribution Schedule
Amortize gain on retirement 200 Internally generated net income 110,000
    80% × Sub’s adjusted income 89,600
    Controlling interest 199,400

 

 

DIF:    D                    OBJ:   5-2                 MSC:  third year of consolidation

 

  1. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $402,000. On this date Subsidiary had total owners’ equity of $440,000. Any excess of cost over book value is due to goodwill. Parent accounts for its investment in Subsidiary using the simple equity method.

 

On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $50,000. During 20X3, Subsidiary sold merchandise to Parent for $120,000, of which Parent holds $30,000 on December 31, 20X3. Subsidiary’s gross profit on sales is 40%. On December 31, 20X3, Parent still owes Subsidiary $5,000 for merchandise.

 

On December 31, 20X1, Parent sold $100,000 par value of 11%, 10-year bonds for $106,232, which resulted in an effective interest rate of 10%. The bonds pay interest semi-annually on June 30 and December 31. Parent uses the effective-interest method of amortization for the premium.

 

An amortization table for 20X2 and 20X3 is presented below:

 

  Cash Int Int Exp Prem Amort Prem Bal Debt CV
12/31/X1              6,232     106,232
6/30/X2          5,500      5,312            (188)        6,044     106,044
12/31/X2          5,500      5,302            (198)        5,846     105,846
6/30/X3          5,500      5,292            (208)        5,638     105,638
12/31/X3          5,500      5,282            (218)        5,420     105,420

 

On December 31, 20X2, Subsidiary repurchased $50,000 par value of the bonds, paying a price equal to par. The bonds are still held on December 31, 20X3.

 

On December 31, 20X3, Parent sold equipment with a cost of $50,000 and accumulated depreciation of $30,000 to Subsidiary for $40,000. Subsidiary will use the equipment beginning in 20X4.

 

Required:

 

Complete the Figure 5-17 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the nearest dollar.

 

Figure 5-17
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 120,000 60,000        
Other Current Assets 399,620 325,000        
Investment in Sub. Company 550,000          
             
             
Investment in Parent Bonds   50,000        
Land 140,000 100,000        
Buildings and Equipment 325,000 440,000        
Accumulated Depreciation (120,000) (130,000)        
             
Goodwill            
             
Current Liabilities (160,000) (80,000)        
Bonds Payable, 10% (100,000)          
Premium on Bonds Payable (5,420)          
Other Long-Term Liabilities (200,000) (140,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (489,200)          
             
             
Common Stock – S Co.   (100,000)        
Other Paid-in Capital – S Co.   (200,000)        
Retained Earnings – S Co.   (250,000)        
             
             
Net Sales (590,000) (520,000)        
Cost of Goods Sold 355,000 310,000        
             
Operating Expenses 114,426 115,500        
Interest Income   (5,500)        
Interest Expense 10,574          
Subsidiary Income (80,000)          
Gain on Sale of Equipment (20,000)          
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   25,000        
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0        
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31        
Other Current Assets        
Investment in Sub. Company        
         
         
Investment in Parent Bonds        
Land        
Buildings and Equipment        
Accumulated Depreciation        
         
Goodwill        
         
Current Liabilities        
Bonds Payable, 10%        
Premium on Bonds Payable        
Other Long-Term Liabilities        
Common Stock – P Co.        
Other Paid-in Capital – P Co.        
Retained Earnings – P Co.        
         
         
Common Stock – S Co.        
Other Paid-in Capital – S Co.        
Retained Earnings – S Co.        
         
         
Net Sales        
Cost of Goods Sold        
         
Operating Expenses        
Interest Income        
Interest Expense        
Subsidiary Income        
Gain on Sale of Equipment        
Dividends Declared – P Co.        
Dividends Declared – S Co.        
         
Consolidated Net Income        
     To NCI        
     To Controlling Interest        
Total NCI        
Ret. Earn. Contr. Int. 12-31        
         

 

 

ANS:

For the worksheet solution, please refer to Answer 5-17.

 

Answer 5-17
  Trial Balance Eliminations and
  Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 120,000 60,000     (EI) 12,000
Other Current Assets 399,620 325,000     (IA) 5,000
Investment in Sub. Company 550,000       (CY) 60,000
          (EL) 440,000
          (D) 50,000
Investment in Parent Bonds   50,000     (B) 50,000
Land 140,000 100,000        
Buildings and Equipment 325,000 440,000        
Accumulated Depreciation (120,000) (130,000)     (F) 20,000
             
Goodwill     (D) 62,500    
             
Current Liabilities (160,000) (80,000) (IA) 5,000    
Bonds Payable, 10% (100,000)   (B) 50,000    
Premium on Bonds Payable (5,420)   (B) 2,710    
Other Long-Term Liabilities (200,000) (140,000)        
Common Stock – P Co. (200,000)          
Other Paid-in Capital – P Co. (100,000)          
Retained Earnings – P Co. (489,200)   (BI) 16,000 (B) 2,923
             
             
Common Stock – S Co.   (100,000) (EL) 80,000    
Other Paid-in Capital – S Co.   (200,000) (EL) 160,000    
Retained Earnings – S Co.   (250,000) (EL) 200,000 (D) 12,500
      (BI) 4,000    
             
Net Sales (590,000) (520,000) (IS) 120,000    
Cost of Goods Sold 355,000 310,000 (EI) 12,000 (BI) 20,000
          (IS) 120,000
Operating Expenses 114,426 115,500        
Interest Income   (5,500) (B) 5,500    
Interest Expense 10,574       (B) 5,287
Subsidiary Income (80,000)   (CY) 80,000    
Gain on Sale of Equipment (20,000)   (F) 20,000    
Dividends Declared – P Co. 50,000          
Dividends Declared – S Co.   25,000     (CY) 20,000
             
Consolidated Net Income            
     To NCI            
     To Controlling Interest            
Total NCI            
Ret. Earn. Contr. Int. 12-31            
  0 0   817,710   817,710
(continued)

 

  Consol.   Control. Consol.
  Income   Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31       168,000
Other Current Assets       719,620
Investment in Sub. Company       0
         
         
Investment in Parent Bonds       0
Land       240,000
Buildings and Equipment       765,000
Accumulated Depreciation       (270,000)
         
Goodwill       62,500
         
Current Liabilities       (235,000)
Bonds Payable, 10%       (50,000)
Premium on Bonds Payable       (2,710)
Other Long-Term Liabilities       (340,000)
Common Stock – P Co.       (200,000)
Other Paid-in Capital – P Co.       (100,000)
Retained Earnings – P Co.     (476,123)  
         
         
Common Stock – S Co.   (20,000)    
Other Paid-in Capital – S Co.   (40,000)    
Retained Earnings – S Co.   (58,500)    
         
         
Net Sales (990,000)      
Cost of Goods Sold 537,000      
         
Operating Expenses 229,926      
Interest Income 0      
Interest Expense 5,287      
Subsidiary Income 0      
Gain on Sale of Equipment 0      
Dividends Declared – P Co.     50,000  
Dividends Declared – S Co.   5,000    
         
Consolidated Net Income (217,787)      
     To NCI 21,600 (21,600)    
     To Controlling Interest 196,187   (196,187)  
Total NCI   (135,100)   (135,100)
Ret. Earn. Contr. Int. 12-31     (622,310) (622,310)
        0

 

Eliminations and Adjustments:

 

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account; eliminate intercompany dividends.
   
(EL) Eliminate 80% of the Subsidiary Company equity balances at the beginning of the year against the investment account.
   
(D) Distribute the $62,500 excess of cost over book value to goodwill; allocate to Parent and Noncontrolling Interest.
   
(BI) Eliminate the $20,000 of gross profit in the beginning inventory.
   
(IS) Eliminate the entire intercompany sales of $120,000.
   
(EI) Eliminate the $12,000 of gross profit in the ending inventory.
   
(IA) Eliminate the $5,000 intercompany accounts receivable and payable.
   
(B) Eliminate the interest income and the investment in bonds. Eliminate one-half of the bonds payable, premium on bonds, and interest expense. The gain to Parent of $2,923 is credited to retained earnings since it occurred in 20X2.
   
(F) Eliminate the gain on sale of equipment, restore the old accumulated depreciation of $30,000, and increase the equipment by $10,000 to restore its original historical cost of $50,000.

 

 

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory 12,000 Internally generated net income 100,000
    Realized profit in beginning inventory 20,000
    Adjusted income 108,000
    NCI Share 20%
    NCI 21,600
       
Parent Company Income Distribution Schedule
Defer gain on sale 20,000 Internally generated net income 130,000
Amortize gain on debt retirement 213    
    80% × Sub’s adjusted income 86,400
    Controlling interest 196,187

 

 

DIF:    D                    OBJ:   5-2

 

ESSAY

 

  1. The Park Company owns 80% of the outstanding common stock of the Sea Company. Park is about to lease a machine with a 5-year life to the Sea Company. The lease would begin January 1, 20X8.

 

Required:

 

Explain the adjustments that will be required in the consolidation process if each of the following occurs.

 

a. The lease is an operating lease.
   
b. The lease is a direct financing lease with a bargain purchase option.
   
c. The lease is a sales-type lease with a bargain purchase option.

 

 

ANS:

a. The intercompany rent expense and rent revenue are eliminated. The asset and related accumulation should be reclassified as normal productive assets.
   
b. The intercompany interest expense and revenue recorded on the lease obligation are eliminated. The liability obligation under capital lease is eliminated against the asset, present value of minimum lease payments. The asset–machine under capital lease should be reclassified as a normal productive asset.
   
c. In addition to the procedures outlined in part b, the sales profit is eliminated and the asset is reduced to its cost to the consolidated group. Depreciation expense is reduced to that applicable to the cost of the asset to the consolidated group.

 

 

DIF:    E                    OBJ:   5-4 | 5-5 | 5-6

 

  1. The Planes Company owns 100% of the outstanding common stock of the Sands Company. Sands issued $100,000 of face value, 9%, 10-year bonds on January 1, 20X3, for $96,000. The discount is being amortized on a straight-line basis. On January 1, 20X8, Planes purchased all the bonds as an investment for $95,000.

 

Required:

 

Be specific in answering the following questions and include numerical explanations.

 

a. How will this bond issue be recorded and accounted for in 20X8 on the separate books of Planes and Sands?
   
b. How will this bond issue be accounted for on the 20X8 consolidated statements?
   
c. How will this bond issue be recorded and accounted for in 20X9 on the separate books of Planes and Sands?
   
d. How will this bond issue be accounted for on the 20X9 consolidated statements?

 

 

ANS:

a. Planes will show the bonds as an investment and will amortize the purchase discount at the rate of $1,000 per year. Planes will record interest income of $10,000 ($9,000 cash  $1,000 discount amortization). Sands will continue to treat the bonds as outstanding and will record interest expense of $9,400 ($9,000 cash  $400 discount amortization).
   
b. The bonds are considered as retired on January 1, 20X8, at a gain of $3,000 ($98,000 book value less $95,000 price). No interest expense or revenue should appear in the consolidated statements.
   
c. In 20X9, Planes will continue to show the bonds as an investment and will record $10,000 interest revenue. Sands will continue to treat the bonds as outstanding and will record $9,400 interest expense.
   
d. The consolidated statements will not include the bonds as an investment or as a liability. No interest expense or revenue will be applicable to these bonds.

 

 

DIF:    E                    OBJ:   5-2

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