Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter CONSOLIDATION TECHNIQUES AND PROCEDURES Answers to Questions Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its subsidiary investment and income accounts Since patents and patent amortization accounts are not recorded on the parent’s books, they are created for consolidated statement purposes through workpaper entries Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper adjusting entry in which noncontrolling interest share is debited, noncontrolling interest’s share of dividends is credited and noncontrolling interest is credited The noncontrolling interest share (debit) is carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest for noncontrolling interest share is added to the beginning noncontrolling interest The noncontrolling interest share is calculated based on the subsidiary’s reported net income adjusted to reflect fair value through the amortization of the excess of fair value over book value This is the approach illustrated throughout this text Workpaper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity accounts are alike in regard to the objectives of consolidation Regardless of the configuration of the workpaper entries, the final result of adjustments for these items is to eliminate them through workpaper entries In other words, the investment in subsidiary, income from subsidiary, and the capital stock, additional paid-in capital, retained earnings, and other stockholders’ equity accounts of the subsidiary never appear in consolidated financial statements When the parent does not amortize fair value/book value differentials on its separate books, the parent’s income from subsidiary and investment in subsidiary accounts are overstated in the year of acquisition In subsequent years, the income from the subsidiary, investment in subsidiary, and parent’s beginning retained earnings will be overstated (This assumes that the asset is undervalued).The error may be corrected in the workpapers with the following entries: Year of acquisition Income from subsidiary Investment in subsidiary Subsequent year Income from subsidiary Retained earnings — parent Investment in subsidiary XXX XXX XXX XXX XXX ©2011 Pearson Education, Inc publishing as Prentice Hall 4-1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-2 By entering a correcting entry, all other workpaper entries are the same as if the parent provided for amortization on its separate books If the errors are not corrected through the workpaper entries suggested above, the entry to eliminate the income from subsidiary in the year of acquisition is prepared in the usual manner without further complications because neither the beginning investment nor retained earnings accounts are affected by the omission In subsequent years the entry to eliminate income from subsidiary and dividends from subsidiary will have to be changed to correct the beginning-of-the-period retained earnings as follows: Income from subsidiary Retained earnings — parent Dividends (subsidiary) Investment in subsidiary XXX XXX XXX XXX No Workpaper adjustments are not entered in the general ledger of the parent or any other entity They are used in the preparation of consolidated financial statements for a conceptual entity for which there are no formal accounting records Workpapers are tools of the accountant that facilitate the consolidation of parent and subsidiary financial statements Given the tools available, the accountant should select those that are most convenient in the circumstances If financial statements are to be consolidated, the financial statement approach is the appropriate tool The trial balance approach is most convenient when the data are presented in the form of a trial balance The accountant needs to be familiar with both approaches to perform the work as efficiently as possible Workpaper adjustment and elimination entries as illustrated in this text are exactly the same when the trial balance approach is used as when the financial statement approach is used This is possible through a check-off system that nullifies the closing process when the financial statement approach is used The retained earnings of the parent will equal consolidated retained earnings if the equity method of accounting has been correctly applied In consolidating the financial statements of affiliated companies, the beginning retained earnings of the parent are used as beginning consolidated retained earnings If the equity method has not been correctly applied, parent beginning retained earnings will not equal beginning consolidated retained earnings In this case, retained earnings of the parent are adjusted to a correct equity basis in order to establish the correct amount of beginning consolidated retained earnings Thus, workpaper adjustments to beginning retained earnings of the parent are needed whenever the beginning retained earnings of the parent not correctly reflect the equity method The noncontroling interest that appears in the consolidated balance sheet can be checked by first adjusting the equity of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for any unamortized excess of fair value over book value) and then multiplying by the noncontrolling interest percentage Consolidated retained earnings at a balance sheet date can be checked by comparing the amount with the parent’s retained earnings on the same date If consolidated retained earnings and parent retained earnings are not equal, either consolidated retained earnings have been computed incorrectly, or parent retained earnings not reflect a correct equity method of accounting 10 Consolidated assets and liabilities are reported for all equity holders—noncontrolling as well as controlling Therefore, the change in net assets from operations for a period results from noncontrolling interest share and controlling interest share 11 A change in cash relates to all interests in the consolidated entity This difference is one of many inconsistencies in the concepts underlying consolidated financial statements Consider, for example, the error that could result from dividing cash provided by operations by outstanding parent shares to compute cash flow per share ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-3 SOLUTIONS TO EXERCISES Solution E4-1 d c a d b 10 d b b a b Solution E4-2 Preliminary computations (in thousands) Investment cost January Implied total fair value of Sal ($600 / 80%) Less: Book value Excess fair value over book value Excess allocated to: Inventory Remainder to goodwill Excess fair value over book value Income from Sal Sal’s reported net income Less: Excess allocated to inventory (sold in 2011) Sal adjusted income Pan’s 80% share $600 $750 (500) $250 $ 25 225 $250 $140 (25) $115 $ 92 Noncontrolling interest share Sal’s adjusted income $115  20% noncontrolling interest $ 23 Noncontrolling interest December 31 Sal’s equity book value Add: Unamortized excess (Goodwill) Sal’s equity fair value 20% noncontrolling interest Investment in Sal December 31 Investment cost January Add: Income from Sal (given)* Less: Dividends ($120  80%) Investment in Sal December 31 * Assumes this is based on Sal’s adjusted income Consolidated net income Noncontrolling interest share Controlling interest share equals Parent NI under equity method $520 225 $745 $149 $600 100 (96) $604 $383.4 $ 23 $360.4 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-4 Solution E4-3 $700,000 ($300,000 + $440,000 - $40,000 intercompany) Preliminary computations for and Investment cost on January 1, 2011 Implied total fair value of Sar ($28,000 / 70%) Book value of Sar Excess allocated entirely to Goodwill $28,000 $40,000 30,000 $10,000 $24,000 (700) $23,300 + (300) $23,000 $28,000 Pim’s separate income for 2013 Loss from investment in Sar ($1,000  70%) Controlling share of consolidated net income Noncontrolling share Consolidated net income Investment cost January 1, 2011 Add: Share of income less dividends 2011 — 2013 ($1,400 income - $1,000 dividends)  70% Investment balance December 31, 2013 280 $28,280 Solution E4-4 Preliminary computations Investment cost Implied total fair value of Sin ($580,000 / 80%) Book value Total excess fair value over book value $580,000 $725,000 600,000 $125,000 Excess allocated to: Equipment (5-year life) Patents (10-year amortization period) Total excess fair value over book value $ 50,000 75,000 $125,000 Income from Sin Sin’s reported net income Less: Depreciation of excess allocated to equipment Less: Amortization of patents Sin’s adjusted income Income from Sin (80%) 1a 1b 1c 1d 2011 $120,000 (10,000) (7,500) $102,500 $ 82,000 2012 $150,000 (10,000) (7,500) $132,500 $106,000 Consolidated net income for 2011 Pen’s net income = controlling share of consolidated net income under equity method Add: Noncontrolling interest share Consolidated net income Investment in Sin December 31, 2011 Cost January Add: Income from Sin — 2011 Less: Dividends from Sin — 2011 ($80,000  80%) Investment in Sin December 31 $580,000 82,000 (64,000) $598,000 Noncontrolling interest share — 2011 ($102,500 adjusted income  20%) $ 20,500 Noncontrolling interest December 31, 2012 Sin’s equity book value at acquisition date Add: Income less dividends for 2011 and 2012 (see note) Sin’s equity book value at December 31, 2012 Unamortized excess at December 31, 2012 $600,000 100,000 700,000 90,000 $340,000 20,500 $360,500 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-5 Sin’s equity fair value at December 31, 2012 Noncontrolling interest percentage Noncontrolling interest December 31, 2012 Solution E4-4 (continued) $790,000 20% $158,000 Note: Sin’s income less dividends: 2011 Net Income 2011 Dividends 2012 Net Income 2012 Dividends Total $ 120,000 (80,000) 150,000 (90,000) $ 100,000 Solution E4-5 c a b c d Solution E4-6 Pat Corporation and Subsidiary Partial Consolidated Cash Flows Statement for the year ended December 31, Cash Flows from Operating Activities Controlling interest share of consolidated net income Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share $ 50,000 Undistributed income of equity investees (5,000) Loss on sale of land 100,000 Depreciation expense 120,000 Patents amortization 16,000 Increase in accounts receivable (105,000) Increase in inventories (45,000) Decrease in accounts payable (20,000) Net cash flows from operating activities $100,000 111,000 $211,000 Solution E4-7 Pro Corporation and Subsidiary Partial Consolidated Cash Flows Statement for the year ended December 31, Cash Flows from Operating Activities Cash received from customers Dividends received from equity investees Less: Cash paid to suppliers Cash paid to employees Cash paid for other operating items Cash paid for interest expense Net cash flows from operating activities $322,500 7,000 $182,500 27,000 23,500 12,000 245,000 $ 84,500 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-6 SOLUTIONS TO PROBLEMS Solution P4-1 (in thousands of $) Preliminary computations Investment in Sen (75%) January 1, 2011 Implied fair value of Sen ($2,400 / 75%) Book value of Sen Total excess of fair value over book value Excess allocated: 10% to inventories (sold in 2011) 40% to plant assets (useful life years) 50% to goodwill Total excess of fair value over book value Goodwill at December 31, 2015 (not amortized) Noncontrolling interest share for 2015 Net income ($1,000 sales - $600 expenses) Less: Amortization of excess Plant assets ($320 / yrs.) Adjusted Sen income 25% Share $2,400 $3,200 (2,400) $ 800 $ $ 80 320 400 800 $ 400 $ 400 $ $ (40) 360 90 Consolidated retained earnings December 31, 2014 Equal to Pea’s December 31, 2014 retained earnings Since this a trial balance, reported retained earnings equals beginning of 2015 retained earnings $1,670 Consolidated retained earnings December 31, 2015 Pea’s retained earnings December 31, 2014 Add: Pea’s net income for 2015 Less: Pea’s dividends for 2015 Consolidated retained earnings December 31 $1,670 1,085 (500) $2,255 Consolidated net income for 2015 Consolidated sales Less: Consolidated expenses ($3,785 + $40 depreciation) Total consolidated income Less: Noncontrolling interest share Controlling share of consolidated net income for 2015 $5,000 (3,825) 1,175 (90) $1,085 Noncontrolling interest December 31, 2014 Sen’s stockholders’ equity at book value Unamortized excess after four years: Inventory Plant assets ($320 - $160) Goodwill Sen’s stockholders’ equity at fair value 25% Sen’s stockholders’ equity at fair value Noncontrolling interest December 31, 2015 Sen’s stockholders’ equity at book value Unamortized excess after five years: Inventory Plant assets ($320 - $200) Goodwill Sen’s stockholders’ equity at fair value $2,400 160 400 $2,960 $ 740 $2,600 120 400 $3,120 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-7 25% Sen’s stockholders’ equity at fair value $ ©2011 Pearson Education, Inc publishing as Prentice Hall 780 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-8 Solution P4-2 Pal Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) 80% Sal Pal Income Statement $ 620 Sales Income from Sal 21 Cost of goods sold 400* Operating expenses 154* Consolidated NI Noncontrol.interest share ($1530,000  30%) Controlling share $ Retained Earnings Retained earnings — Pal $ 130 Balance Sheet Cash Receivables — net Inventories PP&E — net Investment in Sal Accounts payable Other liabilities Capital stock Other paid-in capital Retained earnings $ 200 87 $ 820 130* 40* 530* 194* $ 96 $ 30 $ 22 9* $ 87 $ 130 87 60* b 22 87 30 20* a 14 c 60* $ 157 $ 32 $ 157 $ $ 30 60 40 70 $ 121 180 88 310 91 120 48 240 98 a b 91 $ 597 $ 200 $ 699 $ $ $ 60 40 300 40 157 $ 597 36 24 100 32 $ 200 b100 b Noncontrolling interest January Noncontrolling interest December 31 160 * Consolidated Statements a 21 c Retained earnings — Sal Net income Dividends Retained earnings December 31 Adjustments and Eliminations b 39 c 160 96 64 300 40 157 42 $ 699 Deduct Workpaper entries a To eliminate income from Sal and dividends received from Sal and adjust the investment in Sal account to its beginning of the period balance b To eliminate reciprocal investment in Sal and equity amounts of Sal and to enter beginning noncontrolling interest c To enter noncontrolling interest share of subsidiary income and dividends ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-9 Solution P4-2 (continued) Pal Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 (in thousands) Sales Less: Cost of goods sold Gross profit Operating expenses Consolidated net income Less: Noncontrolling interest share Controlling share of consolidated net income $820 530 290 194 96 $ 87 Pal Corporation and Subsidiary Consolidated Retained Earnings Statement for the year ended December 31, 2011 Consolidated retained earnings January Add: Controlling share of onsolidated net income Less: Dividends of Pal Consolidated retained earnings December 31 $130 87 (60) $157 Pal Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 Assets Current assets: Cash Receivables — net Inventories Plant assets — net Total assets Liabilities and Stockholders’ Equity Liabilities: Accounts payable Other liabilities Stockholders’ equity: Capital stock, $10 par Other paid-in capital Consolidated retained earnings Add: Noncontrolling interest Total liabilities and stockholders’ equity $121 180 88 $ 96 64 $300 40 157 497 42 $389 310 $699 $160 539 $699 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-10 Solution P4-3 Pan Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 (in thousands) Pan Income Statement Sales Income from Saf Cost of sales Other expenses Consolidated Net Income Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pan Retained earnings — Saf Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable Dividends receivable from Saf Inventories Note receivable from Pan Land Buildings — net Equipment — net Investment in Saf $800 27.6 500* 194* $200 100* 52* Consolidated Statements $1,000 a 27.6 c 11.2 f 9.2 $ 600* 257.2* 142.8 9.2* 133.6 $ 360 $ $133.6 $ 48 $360 $ 68 133.6 100* b 68 133.6 48 32* a f 24 100* $393.6 $ 84 $ 393.6 $ $ 30 40 $ 136 212 106 172 12 190 130 340 260 363.6 20 10 60 160 100 Patents Accounts payable Note payable to Saf Dividends payable Capital stock, $10 par Retained earnings Adjustments and Eliminations Saf 75% $1,573.6 $420 $ $ 20 170 10 1,000 393.6 $1,573.6 Noncontrolling interest January Noncontrolling interest December 31 16 300 84 $420 e 12 d 10 210 190 500 360 b 112 d e b 10 12 300 a 3.6 b 360 c 11.2 100.8 $1,708.8 $ 550 190 1,000 393.6 b 120 f 1.2 550 121.2 $1,708.8 *Deduct ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-31 Solution P4-13 (continued) Ply Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 Ply Income Statement Sales Income from Ski Cost of sales Operating expenses Consolidated NI Noncontrolling share Controlling share of NI $ 170,000 16,000 110,000* 30,000* Adjustments and Eliminations Ski 80% $ 90,000 Consolidated Statements $ 260,000 a 16,000 35,000* 35,000* c d 1,000 125 f 3,775 145,000* 66,125* $ $ 46,000 $ 90,300 $ 20,000 $ 40,000 $ 48,875 3,775* 45,100 $ 90,300 Retained Earnings Retained earnings — Ply Retained earnings — Ski Controlling share of NI Dividends 46,000 15,000* $ 50,000 Balance Sheet Cash $ 20,000 30,000 Trade receivables — net Dividends receivable Inventories 26,700 45,000 4,000 40,000 95,000 Plant & equipment — net Investment in Ski 30,000 60,000 a f b b $ 305,000 $ 140,000 $ $ 17,700 6,000 100,000 60,000 121,300 $ 305,000 25,000 5,000 40,000 20,000 50,000 $ 140,000 e 4,000 3,000 c 1,000 4,875 a 8,000 b 86,300 d 125 15,000* $ 120,400 46,700 75,000 70,000 157,000 4,750 $ 353,450 $ e 4,000 b 40,000 b 20,000 Noncontrolling interest January Noncontrolling interest December 31 42,700 7,000 100,000 60,000 120,400 b 21,575 f 1,775 132,775 * 8,000 2,000 $ 94,300 Intangible assets Accounts payable Dividends payable Capital stock Other paid-in capital Retained earnings 45,100 20,000 10,000* Retained earnings – Dec 31 $ 121,300 $ b 40,000 132,775 23,350 $ 353,450 Deduct ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-32 Solution P4-14 Preliminary computations Investment cost Implied fair value of Sim ($99,000 / 90%) Book value of Sim Excess fair value over book value $ 99,000 $110,000 80,000 $ 30,000 Excess allocated to: Inventories (sold in 2011) Patents (10-year remaining useful life) Excess fair value over book value $ 10,000 20,000 $ 30,000 Analysis of investment in Sim account Fair value of Sim January 5, 2011 Add: Change in retained earnings from January 5, 2011 to December 31, 2013 Less: Amortization of excess Allocated to inventories and amortized in 2011 Allocated to patents and amortized over 10 years ($20,000/10 years)  years Fair value at December 31, 2013 Add: Income from Sim for 2014 Less: Dividends in 2014 Fair value at December 31, 2014 $110,000 Investment in Sim on December 31, 2013 (90% fair value) Investment in Sim on December 31, 2014 (90% fair value) Noncontrolling interest on Dec 31, 2013 (10% fair value) Noncontrolling interest on Dec 31, 2014 (10% fair value) $129,600 $136,800 $ 14,400 $ 15,200 50,000 (10,000) (6,000) 144,000 18,000 (10,000) $152,000 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-33 Solution P4-14 (continued) Pep Company and Subsidiary Consolidation Workpapers for the year ended December 31, 2014 Pep Adjustments and Eliminations Sim Debits $ 11,000 $ 15,000 Cash Accounts receivable 15,000 25,000 Plant assets 220,000 180,000 Investment in Sim 136,800 Patents b 14,000 Cost of goods sold 50,000 30,000 Operating expenses 25,000 40,000 c 2,000 Dividends 20,000 10,000 Income Retained Statement Earnings $ 26,000 40,000 400,000 a 7,200 b 129,600 c 2,000 12,000 $ 80,000* 67,000* a d 9,000 1,000 $ 20,000* $477,800 $300,000 Credits Accumulated depreciation Liabilities Capital stock Paid-in-excess Retained earnings Sales Income from Sim $478,000 $ 90,000 $ 50,000 80,000 30,000 100,000 60,000 b 60,000 20,000 71,600 70,000 b 70,000 100,000 90,000 16,200 a 16,200 $477,800 $300,000 Noncontrolling interest Dec 31, 2013 Noncontrolling interest share ($18,000 adj inc x 10%) Controlling share of NI Balance Sheet 140,000 110,000 100,000 20,000 71,600 190,000 b d 14,400 1,800 1,800* $ 41,200 Consolidated retained earnings 41,200 $ 92,800 Noncontrolling interest Dec 31, 2014 164,000 d 800 164,000 92,800 15,200 $478,000 * Deduct a To eliminate income from subsidiary and dividends received and reduce the investment account to its beginning-of-the-period balance To eliminate reciprocal investment and subsidiary equity amounts, establish beginning noncontrolling interest, and adjust patents for the unamortized excess as of the beginning of the period To amortize excess allocated to patents for 2014 To enter noncontrolling interest share of subsidiary income and dividends b c d ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-34 Solution P4-15 Journal entries on Peg’s books January 1, 2011 Investment in Sup (90%) 18,000 Cash 18,000 To record purchase of 90% of Sup’s stock for cash July 1, 2011 Investment in Ell (25%) 7,000 Cash 7,000 To record purchase of 25% of Ell’s stock for cash November 2011 Cash 2,700 Investment in Sup (90%) 2,700 To record receipt of 90% of Sup’s $3,000 dividends November 2011 Cash 1,250 Investment in Ell (25%) 1,250 To record receipt of 25% of Ell’s $5,000 dividends December 31, 2011 Investment in Sup (90%) 4,500 Income from Sup To record Share of Sup’s reported income ($28,000 - $23,000)  90% December 31, 2011 Investment in Ell (25%) 700 Income from Ell To record investment income from Ell for 20119 computed as: Share of Ell’s reported income $ 750 ($30,000-$24,000)1/2 year  25% Less: Amortization of excess [$7,000 – ($24,000  25%)] (50)  10 years  1/2 year $ 700 ©2011 Pearson Education, Inc publishing as Prentice Hall 4,500 700 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-35 Solution P4-15 (continued) Peg’s separate company financial statements Peg Corporation Income Statement for the year ended December 31, 2011 Revenues Sales Income from Sup Income from Ell Total revenue Costs and expenses Cost of sales Other expenses Total costs and expenses Net income $100,000 4,500 700 $105,200 $ 60,000 25,000 85,000 $ 20,200 Peg Corporation Retained Earnings Statement for the year ended December 31, 2011 Retained earnings January Add: Net income Deduct: Dividends Retained earnings December 31 $ 20,000 20,200 (10,000) $ 30,200 Peg Corporation Balance Sheet at December 31, 2011 Assets Current assets: Cash Other current assets Plant assets — net Investments: Investment in Sup (90%) Investment in Ell (25%) $ 18,950 40,000 $ 19,800 6,450 Total assets Liabilities and stockholders’ equity Current liabilities Stockholders’ equity: Capital stock Retained earnings December 31 Total liabilities and stockholders’ equity $ 58,950 120,000 26,250 $205,200 $ 25,000 $150,000 30,200 180,200 $205,200 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-36 Solution P4-15 (continued) Consolidation workpapers — trial balance format Peg Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2011 Peg 90% Sup Adjustments and Eliminations Income Retained Statement Earnings Debits $ 18,950 $ 4,000 Cash Other current assets 40,000 11,000 120,000 14,000 Plant assets — net Investment in Sup Investment in Ell Cost of sales Other expenses Dividends 19,800 6,450 60,000 25,000 10,000 Balance Sheet $ 22,950 51,000 134,000 a 1,800 b 18,000 6,450 16,000 7,000 3,000 $ 76,000* 32,000* a d 2,700 300* $ 10,000* Total debits $300,200 $55,000 $214,400 Credits Current liabilities Capital stock Retained earnings Sales Income from Sup Income from Ell Total credits $ 25,000 $ 7,000 150,000 18,000 b 18,000 20,000 2,000 b 2,000 100,000 28,000 4,500 a 4,500 700 $300,200 $55,000 $ 32,000 150,000 Noncontrolling interest - January 20,000 128,000 700 b 2,000 Noncontrolling interest share $5,000  10% Controlling share of NI d 500 500* $ 20,200 Consolidated retained earnings Noncontrolling interest December 31 20,200 $ 30,200 d 200 ©2011 Pearson Education, Inc publishing as Prentice Hall 30,200 2,200 $214,400 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-37 Solution P4-15 (continued) Consolidated financial statements Peg Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 Revenues Sales $128,000 Income from Ell (equity method) 700 Total revenues Costs and expenses Cost of sales $ 76,000 Other expenses 32,000 Total costs and expenses Total consolidated income Less: Noncontrolling interest share Controlling share of NI Peg Corporation and Subsidiary Consolidated Retained Earnings Statement for the year ended December 31, 2011 Consolidated retained earnings January Add: Controlling share of NI Deduct: Dividends Consolidated retained earnings December 31 $128,700 108,000 20,700 500 $ 20,200 $ 20,000 20,200 (10,000) $ 30,200 Peg Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2011 Assets Current assets: Cash $ 22,950 Other current assets 51,000 Plant assets — net Investments and other assets: Investment in Ell Total assets Liabilities and stockholders’ equity Current liabilities Stockholders’ equity: Capital stock $150,000 Consolidated retained earnings 30,200 Noncontrolling interest 2,200 Total liabilities and stockholders’ equity $ 73,950 134,000 6,450 $214,400 $ 32,000 182,400 $214,400 Solution P4-16 Partial consolidated statement of cash flows using the direct method Pil Corporation and Subsidiaries Partial Consolidated Statement of Cash Flows for the current year Cash Flows from Operating Activities Cash received from customers $1,600,000 Dividends from equity investees 40,000 Interest received from short-term loan 5,000 Cash paid for other expenses (450,000) Cash paid to suppliers (630,000) Net cash flow from operating activities $ 565,000 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-38 Solution P4-17 Direct Method Pes Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 Cash Flows from Operating Activities Cash received from customers Cash paid to suppliers Cash paid for operating expenses Net cash flows from operating activities Cash Flows from Investing Activities Purchase of plant and equipment Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment of long-term liabilities Net cash flows from financing activities Decrease in cash for the year Cash on January Cash on December 31 $670,000 ($348,000) (157,500) (505,500) 164,500 (125,000) (125,000) (36,000) (2,000) (11,000) (49,000) (9,500) 65,000 $ 55,500 Reconciliation of net income to cash provided by operating activities Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Increase in accounts payable Increase in accounts receivable Increase in inventories Increase in other current assets Net cash flows from operating activities $130,000 $ 5,000 51,000 500 22,000 (5,000) (20,000) (19,000) 34,500 $164,500 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-39 Solution P4-17 (continued) Indirect Method Pes Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 Cash Flows from Operating Activities Controlling share of NI $130,000 Adjustments to reconcile net income to net cash from operating activities: Noncontrolling share of NI $5000 Depreciation Patents amortization Increase in accounts receivable Increase in inventories Increase in other current assets Increase in accounts payable Net cash flows from operating activities Cash Flows from Investing Activities Purchase of plant and equipment Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment of long-term liabilities Net cash flows from financing activities Decrease in cash for the year Cash on January Cash on December 31 $ 51,000 500 (5,000) (20,000) (19,000) 22,000 34,500 164,500 (125,000) (125,000) (36,000) (2,000) (11,000) (49,000) (9,500) 65,000 $ 55,500 Note: The cash flows from investing activities and cash flows from financing activities sections of the statement of cash flows are the same under the direct and indirect method ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-40 Solution P4-18 [AICPA] Indirect Method Puh, Inc and Subsidiary Statement of Cash Flows (Indirect Method) for the year ended December 31, 2011 Cash Flows from Operating Activities Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Decrease in accounts receivable Increase in accounts payable Increase in deferred income taxes Increase in inventories Gain on marketable equity securities Gain on sale of equipment Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Proceeds from sale of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from sale of treasury stock Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment on long-term note Net cash flows from financing activities Increase in cash for the year Cash on January Cash on December 31 $ 198,000 $ 33,000 82,000 3,000 22,000 121,000 12,000 (70,000) (11,000) (6,000) 186,000 384,000 $(127,000) 40,000 (87,000) 44,000 (58,000) (15,000) (150,000) (179,000) 118,000 195,000 $ 313,000 Listing of non-cash investing and financing activities: Issued common stock in exchange for land with a fair value of $215,000 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-41 Solution P4-18 (continued) Indirect Method Puh, Inc and Subsidiary Workpapers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2011 Year’s Change Asset Changes Cash Allowance to reduce MES Accounts receivable — net Inventories Land* Plant and equipment Accumulated depreciation Patents — net Total asset changes Changes in Equities Accounts & accrued payable Note payable long-term Deferred income taxes Noncontrolling interest in Sto Common stock, $10 par* Additional paid-in capital Retained earnings Treasury stock at cost Total changes in equities 118,000 11,000 (22,000) 70,000 215,000 65,000 (54,000) (3,000) e f k l m Cash Flow From Operations Cash Flow Investing Activities Cash Flow Financing Activities 11,000 22,000 62,000 82,000 3,000 g 70,000 h 215,000 j 127,000 k 28,000 400,000 121,000 (150,000) 12,000 18,000 100,000 123,000 140,000 36,000 n 121,000 o 150,000 p b 12,000 33,000 h 100,000 h 115,000 i 8,000 a 198,000 i 36,000 d 15,000 c 58,000 400,000 Controlling share of NI Noncontrolling interest share Gain on MES Purchase of equipment Sale of equipment Gain on equipment Depreciation expense Payment on long-term note Amortization of patents Decrease in receivables Increase in inventories Increase in accounts payable Increase in deferred income taxes Proceeds from treasury stock Payment of dividends Payment of dividends Reconciling Items Debit Credit — controlling — noncontrolling a 198,000 b 33,000 e 11,000 j 127,000 k k 40,000 l 82,000 m f 3,000 22,000 6,000 198,000 33,000 (11,000) (127,000) 40,000 (6,000) 82,000 o 150,000 g (150,000) 70,000 n 121,000 p 12,000 i 44,000 c 58,000 d 15,000 1,229,000 3,000 22,000 (70,000) 121,000 12,000 44,000 (58,000) (15,000) 1,229,000 384,000 (87,000) Cash increase for the year = $384,000 – $87,000 – $179,000 = $118,000 * Non-cash item: Purchased $215,000 land through common stock issuance ©2011 Pearson Education, Inc publishing as Prentice Hall (179,000) Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-42 Solution P4-19 Indirect Method Pil Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 Cash Flows from Operating Activities Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Increase in accounts payable Income less dividends — equity investee Increase in accounts receivable Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January Cash on December 31 $ 500,000 $ 40,000 200,000 10,000 17,000 (30,000) (210,000) 27,000 527,000 $(500,000) (500,000) $ 200,000 (137,000) (20,000) 43,000 70,000 360,000 $ 430,000 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-43 Solution P4-19 (continued) Indirect Method Pil Corporation and Subsidiary Workpapers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2011 Year’s Change Asset Changes Cash $ Accounts receivable — net Inventories Plant & equipment — net Equity investments Patents Total asset changes 70,000 210,000 300,000 30,000 (10,000) Reconciling Items Debit Credit Cash Flows From Operations Cash Flows Investing Activities Cash Flows Financing Activities e 210,000 f 200,000 l 30,000 h 10,000 g 500,000 m 60,000 $ 600,000 Changes in Equities Accounts payable $ 17,000 Dividends payable 13,000 Long-term note payable 200,000 Common stock Other paid-in capital Retained earnings 350,000 Noncontrol interest 20% 20,000 Changes in equities $ 600,000 Controlling share of NI Noncontrolling interest share Purchase of plant & equipment Depreciation — plant & equipment Amortization of patents Increase in accounts receivable Income less dividends from investees Increase in accounts payable Received cash from long-term note i 17,000 k 13,000 j 200,000 a 500,000 b 40,000 c 150,000 d 20,000 a 500,000 b 40,000 $ 500,000 40,000 g 500,000 $(500,000) f 200,000 h 10,000 200,000 10,000 (210,000) l 30,000 i 17,000 j 200,000 k 13,000 (30,000) 17,000 e 210,000 m 60,000 c 150,000 Payment of dividends — controlling Payment of dividends — noncontrolling d 20,000 1,950,000 1,950,000 $ 527,000 $(500,000) Cash increase for the year = $527,000 – $500,000 + $43,000 = $70,000 ©2011 Pearson Education, Inc publishing as Prentice Hall $ 200,000 (137,000) (20,000) $ 43,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-44 Solution P4-19 (continued) Direct Method Pil Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 Cash Flows from Operating Activities Cash received from customers Cash received from equity investees Cash paid to suppliers Cash paid for operating expenses Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January Cash on December 31 Reconciliation of net income to cash provided by operating activities Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Income less dividends — equity investee Depreciation expense Patents amortization Increase in accounts payable Increase in accounts receivable Net cash flows from operating activities $2,390,000 30,000 ($1,433,000) (460,000)(1,893,000) 527,000 $ (500,000) (500,000) $ $ 200,000 (137,000) (20,000) $ 43,000 70,000 360,000 430,000 $ 500,000 $ 27,000 527,000 40,000 (30,000) 200,000 10,000 17,000 (210,000) ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 4-45 Solution P4-19 (continued) Direct Method Pil Corporation and Subsidiary Workpapers for the Statement of Cash Flows (Direct Method) for the year ended December 31, 2011 Year’s Change Asset Changes Cash Accounts receivable — net Inventories Plant & equipment — net Equity investments Patents Total asset changes Changes in Equities Accounts payable Dividends payable Long-term note payable Retained earnings* Noncontrol.interest 20% Changes in equities Ret earnings change* Sales Income from equity investees Cost of goods sold Depreciation expense Other operating expenses Noncontrolling interest share Dividends declared — Pil $ $ $ 70,000 210,000 300,000 30,000 (10,000) 600,000 b 200,000 e Cash Flow Investing Activities Cash Flow Financing Activities $2,600,000 a 210,000 60,000 (1,450,000) (200,000) (470,000) d i c 500,000 d 30,000 10,000 f 17,000 g 13,000 h 200,000 $ Cash Flow From Operations a 210,000 17,000 13,000 200,000 350,000 20,000 600,000 40,000 j 20,000 $2,390,000 30,000 f 17,000 b 200,000 e 10,000 (40,000) i (150,000) Retained earnings change $ 350,000 Received cash from long-term note Payment of dividends — controlling Payment of dividends — noncontrolling Purchase of equipment * Reconciling Items Debit Credit 30,000 (1,433,000) (460,000) 40,000 g 13,000 k 137,000 h 200,000 k 137,000 j 20,000 c 500,000 1,377,000 1,377,000 $ 200,000 (137,000) (20,000) $ 527,000 $(500,000) $(500,000) Retained earnings changes replace the retained earnings account for reconciling purposes Cash increase for the year = $527,000 - $500,000 + $43,000 = $70,000 ©2011 Pearson Education, Inc publishing as Prentice Hall $ 43,000 ... cash provided by operations by outstanding parent shares to compute cash flow per share ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank... Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Consolidation Techniques and Procedures 4-6 SOLUTIONS TO PROBLEMS Solution P4-1 (in thousands of $) Preliminary... solution manual and testbank on www.downloadslide.com Chapter 4-3 SOLUTIONS TO EXERCISES Solution E4-1 d c a d b 10 d b b a b Solution E4-2 Preliminary computations (in thousands) Investment cost