solusi manual advanced acc zy Chap010

Chapter 10 - Additional Consolidation Reporting Issues

CHAPTER 10
ADDITIONAL CONSOLIDATION REPORTING ISSUES
ANSWERS TO QUESTIONS
Q10-1 The balance sheet, income statement, and statement of changes in retained
earnings are an integrated set and generally need to be completed as a unit. Once
completed, these statements can then be used in preparing a consolidated cash flow
statement. Because both the beginning and ending consolidated balance sheet totals are
needed in determining cash flows for the period, the cash flow statement cannot be easily
incorporated into the existing three-part workpaper format.
Q10-2 Consolidated retained earnings do not include the earnings assigned to
noncontrolling shareholders. As a result, dividends paid to noncontrolling shareholders are
not included in the consolidated retained earnings statement. On the other hand, all the cash
generated by the subsidiary is included in the consolidated cash flow statement and all uses
of cash must also be included, including that distributed to noncontrolling shareholders in the
form of dividends.
Q10-3 The indirect method focuses on reconciling between net income and cash flows from
operations and does not attempt to report payments to suppliers or other specific uses of
cash. It does report the change in inventory and accounts payable which are included in
determining payments to suppliers. While adjusting net income for changes in inventory and
accounts payable leads to a correct reporting of cash flows from operations, it does not
permit explicit reporting of payments to suppliers.
Q10-4 Changes in inventory balances are used in computing the amount reported as
payments to suppliers and do not need to be separately reported.
Q10-5 Sales must be included in the consolidated cash flows workpaper when the direct
method is used. They are excluded from the workpaper when the indirect method is used.
Q10-6 (a) When the indirect method is used the changes in inventory are reported as a
reconciling item in the statement of cash flows. (b) When the direct method is used, changes
in inventory are included in the computation of payments to suppliers and not separately
disclosed.
Q10-7 Only sales subsequent to the date of acquisition are included. The acquired
company was not part of the consolidated entity prior to the date of acquisition.
Q10-8 Dividends paid by the acquired company to the noncontrolling shareholders following
the date of acquisition are included as a cash outflow in the consolidated statement of cash
flows. Dividends paid by the acquired company prior to acquisition are excluded. The
acquired company was not part of the consolidated entity.

10-1


Q10-9 The revenues and expenses of the subsidiary for the full year are included in the
consolidated income statement when the acquisition occurs at the beginning of the year.
When a mid-year acquisition occurs, the revenues and expenses of the acquired company
prior to the date of acquisition were not transactions of the consolidated entity. The
eliminating entries at the end of the year must be expanded to eliminate those amounts. In
addition, the eliminating entry used to assign income to the noncontrolling interest and
eliminate dividends paid to the noncontrolling shareholders will be modified to include only
the income earned and dividends declared for that portion of the year in which ownership
was held by the parent.
Q10-10 An accurate measure of the overall profit contribution from each segment of
business operations is often considered desirable in evaluating past operations and in
planning future strategy. In some cases the tax impact of operating a particular division is
very different from one or more other divisions, and that difference should be recognized in
evaluating the segment. Even when such differences do not exist, better knowledge of the
approximate after tax return from a particular subsidiary can be very helpful in assessing
future investment and operating strategies.
Q10-11 When a consolidated tax return is filed, all intercorporate transfers are eliminated in
computing taxable income and there should be no need to adjust recorded tax expense in
preparing consolidated financial statements for the period. When the companies do not file a
consolidated return, tax payments and expense accruals recorded by the individual
companies presumably will include gains and losses on intercompany transfers. If an
unrealized gain or loss is eliminated in consolidation, the amount reported as tax expense
also should be adjusted to reflect only the tax expense on those items included in the
consolidated income statement.
Q10-12 Assuming an unrealized profit has been reported, an additional elimination entry is
needed to reduce tax expense and establish a deferred tax asset in the amount of the
excess payment. If a loss is eliminated, additional tax expense and taxes payable must be
established in the elimination process.
Q10-13 When one of the companies in the consolidated entity has recorded tax expense on
unrealized profit in a preceding period, its retained earnings balance at the start of the period
will be overstated by the amount of unrealized profit less the tax expense recorded thereon.
In the period in which the item is sold and the profit is considered realized, the eliminating
entries must include a debit to beginning retained earnings for the amount of the net
overstatement and a debit to tax expense for the proper amount of expense to be
recognized.
Q10-14 When taxes are not considered, income assigned to noncontrolling shareholders is
reduced by a proportionate share of the unrealized profit. When taxes are considered, the
reduction is based on a proportionate share of the after tax balance of unrealized profits.
Q10-15 Perhaps the most important reason is that the earnings per share data reported by
the separate companies may include unrealized profits that must be eliminated in computing
the consolidated totals. Even without unrealized profits, simple addition could not be used
when the companies do not have an equal number of shares outstanding or when the parent
does not hold all the common or preferred shares of the subsidiary.
Q10-16 The full amount of dividends paid to unaffiliated preferred shareholders of the parent
are deducted from consolidated net income in arriving at consolidated earnings per share.
Preferred dividends paid by the subsidiary to noncontrolling shareholders and income

10-2


assigned to noncontrolling common shareholders are deducted from consolidated revenue
and expenses in computing consolidated net income and earnings per share. Subsidiary
preferred dividends paid to the parent or other affiliates must be eliminated and are not
deducted in computing consolidated earnings per share.
Q10-17 A subsidiary's contribution to consolidated earnings per share may be different from
its contribution to consolidated net income if the subsidiary has convertible bonds or
preferred stock outstanding that are treated as if they had been converted, or if the treasury
stock method is used to include the dilutive effects of subsidiary stock rights or stock options
outstanding.
Q10-18 The net of tax interest savings from the assumed conversion of the bond into
common stock is included in the numerator and the additional shares are added to the
denominator of the earnings per share computation for the subsidiary. In doing so, earnings
per share of the subsidiary will be reduced. Moreover, the additional shares added to the
denominator will potentially alter the ownership ratio held by the parent; thus, the amount of
subsidiary income included in the consolidated earnings per share computation is likely to be
reduced.
Q10-19 Those rights, warrants, and options treated as stock outstanding in the denominator
of the earnings per share computation of the subsidiary will reduce the amount of subsidiary
income included in the consolidated earnings per share computation to the extent that the
ownership ratio held by the parent is reduced. The actual shares will not be reported as such,
because they are assumed to be either eliminated or assigned to the noncontrolling interest.
Q10-20 In the earnings per share computation, the amount of income assigned to
noncontrolling interest may change as it is assumed that convertible securities are converted
or rights, warrants, and options are exercised. Both the amount of subsidiary income
included in the numerator and the proportion of parent company ownership may vary,
thereby changing the amount of subsidiary income included in the consolidated earnings per
share computation.

10-3


SOLUTIONS TO CASES
C10-1 The Effect of Security Type on Earnings per Share
a. Until the securities are converted, the interest expense on bonds and the preferred
dividends must both be deducted in determining income available to common shareholders
when basic earnings per share is computed. Because interest expense is deductible for tax
purposes and preferred dividends are not, the increase in earnings available to common
shareholders will be less with conversion of the debentures. The decrease in earnings per
share will be greater with conversion of the convertible debentures since the two securities
convert into an equal number of common shares.
b. Interest expense is deducted in computing net income and preferred dividends are not.
Thus, conversion of the bonds will increase net income and conversion of the preferred stock
will have no effect on the reported net income of Stage Corporation. If Stage Corporation is a
parent company, consolidated net income will increase by the full amount of the interest
saving (net of tax) if the bonds are converted. In the event Stage Corporation is a subsidiary
of another company, consolidated net income again will increase if the bonds are converted,
but the amount of the increase depends on the percentage ownership of Stage by the parent.
Conversion of the preferred stock will increase consolidated net income because it increases
Stage’s income available to common shareholders, of which the parent is one. The increase
will be greater than the effect of the bond conversion because the preferred dividends have
no tax effect, but the amount of the increase will depend on the parent’s percentage
ownership.
c. If the preferred shares are those of a parent company, they will be excluded entirely if (1)
all the shares are owned by its subsidiaries, or (2) the preferred shares are noncumulative
and have had no dividends declared during the period. If the shares are those of a
subsidiary, the preferred shares will have an effect on basic earnings per share unless (1)
the parent or other affiliates own all the common and preferred shares outstanding, or (2) the
preferred shares are noncumulative and have had no dividends declared during the period.
d. Interest expense will be deducted in computing Stage's net income. The preferred
dividends will then be deducted from net income in computing Stage's income available to
common shareholders. Assuming both securities are dilutive, interest expense (net of tax)
will be added back to Stage's net income, no preferred dividends will be deducted, and the
increased number of shares from the conversion of both securities will be added to the
denominator in computing Stage’s diluted earnings per share. These earnings per share
amounts will then be used by Prop Company in determining the income from the subsidiary
to be included in its consolidated earnings per share computations.

10-4


C10-2 Evaluating Consolidated Statements
MEMO
To:
From:
Re:

Treasurer
Cowl Corporation
, Accounting Staff
Disclosure of Transfer of Cash from Subsidiary to Parent

The following comments are provided in response to your concern with respect to the
transfer of cash from Plum Corporation to the parent company. Intercompany borrowings
often offer an opportunity for one company to borrow money from an affiliate at rates
favorable to both parties. As a result, transfers of cash between affiliates are very common.
These transactions are eliminated in preparing the consolidated statements and the financial
statement reader will be unaware of them unless supplemental disclosures are made.
In general, the FASB does not require separate disclosure of transactions between
consolidated entities when they are eliminated in the preparation of consolidated or
combined financial statements. [FASB 57, Par. 2]
Nevertheless, the fact that Cowl Company is unable to generate sufficient cash from its
separate operations to pay its bills appears to be of sufficient importance that disclosure
would be appropriate in both the Management Discussion and Analysis (MD&A) section of
Cowl’s annual report and in the notes to the financial statements. The SEC establishes the
disclosure requirements for MD&A and requires discussion of currently known trends,
demands, commitments, events, or uncertainties that are reasonably expected to have
material effects on the registrant’s financial condition or results of operations, or that would
cause reported financial information not to be necessarily indicative of future operating
results or financial condition. [SEC Regulation S-K, Item 303]
The SEC also requires discussion of both short- and long-term liquidity and capital
resources. [SEC Financial Reporting Release 36]

10-5


C10-2 (continued)
FASB Statement No. 95, “Statement of Cash Flows,” does not specify those situations in
which a discussion of operating cash flows must be included in the notes to the financial
statements. However, if the negative cash flow from Cowl Company’s operations significantly
affects the operating cash flows of the consolidated entity, one or more notes to the financial
statements should be used to provide information to the financial statement readers. One
possible form for doing so would be to include supplemental cash flow information if the
operations of the parent are identified as a separate reportable segment [FASB 131, Par.
16].
Primary citations:
FASB 57, Par. 2
SEC Regulation S-K, Item 303
Secondary citations:
FASB 95
FASB 131, Par. 131

10-6


C10-3 Income Tax Expense
a. When prior-period intercompany profits are realized through resale to a nonaffiliate in the
current period, tax expense reported by the consolidated entity will be greater than actual tax
payments made by the separate companies.
b. Two reporting procedures are usually discussed in dealing with income tax allocation for
consolidated entities. One procedure is to report the additional amount paid as a deferred tax
asset or as prepaid income tax in the consolidated balance sheet. An alternate approach is
to net the overpayment for unrealized profits against deferred income taxes payable.
c. Whenever separate tax returns are filed and unrealized profits are recorded on
intercompany transfers of land, buildings and equipment, or other assets, income tax
expense reported in the consolidated income statement in the period of the intercompany
transfer will be less than tax payments made. A similar effect occurs when one affiliate
purchases the bonds of another affiliate and a constructive loss on bond retirement is
reported in the consolidated income statement.
d. When unrealized profits from a prior period are realized in the current period, income tax
expense recognized in the current period will be greater than the actual tax payment made.
Also, when unrealized losses are recorded on intercompany transfers, tax expense reported
in the consolidated income statement in the period of the transfer will be greater than the
actual tax payment. A constructive gain on bond retirement on a purchase of an affiliate's
bonds will also result in an excess of consolidated tax expense over tax payments.

10-7


C10-4 Consolidated Cash Flows
a. The factors contributing to the increase in net income over the prior period are key in this
case. One possible explanation is that operating earnings of the combined companies
actually declined and the increase in net income resulted from a substantial gain on sale of a
division or other assets in the current period. Another possibility would be a decrease in
noncash charges deducted in computing income. Cash generated by operations often is well
above operating earnings as a result of charges such as amortization of intangible assets or
depreciation. A decrease in these charges will increase net income but not change cash
flows
Changes in the net amounts invested in receivables, inventories, and other current assets
are included in the computation of cash flows from operations. Increases in these balances
can substantially reduce the reported cash flows from operations without affecting net
income.
b. Both sales and the balance in accounts receivable should increase when less stringent
criteria are used in extending credit. Similarly, both should decrease when credit terms are
tightened. If the companies have relaxed credit standards during the current period, net
income may be greater as a result of increased sales; however, cash flows are likely to
increase to a lesser degree as accounts receivable increase.
c. An inventory write-down under lower of cost or market and other noncash charges will not
reduce cash flows from operations. The amount expensed would be added back to
consolidated net income in arriving at cash generated by operating activities.
d. Assuming an allowance account is used, this particular write-off will not appear in either
the income statement or computation of cash flows from operations. There is no charge in
the income statement and no change in the net receivable balance as a result of a simple
write-off of an account receivable.
e. There are no significant differences between the preparation of a statement of cash flows
for a consolidated entity and a single corporate entity. However, for the consolidated entity,
dividend payments to the subsidiary’s noncontrolling interest must be included in the
financing section because they use cash even though they are not viewed as dividends of
the consolidated entity.

10-8


SOLUTIONS TO EXERCISES
E10-1 Analysis of Cash Flows
a.

The consolidated cash balance at January 1, 20X2, was $83,000, computed as
follows:
Balance at December 31, 20X2
Decrease in cash balance during 20X2:
Cash flows from operations
Cash outflow for investment activities
Cash outflow for financing activities
Net cash outflow
Cash balance at January 1, 20X2

b.

$ 57,000
$284,000
(80,000)
(230,000)

Dividends of $48,000 were reported:
Dividends paid to Lamb shareholders
Dividends paid to noncontrolling interest of
Mint Company ($10,000 x .30)
Total cash payments

c.

26,000
$83,000

$45,000
3,000
$48,000

Consolidated net income was $207,000, computed as follows:
Cash flow from operations
Adjustments to reconcile consolidated net income
and cash provided by operations
Consolidated net income

10-9

$284,000
(77,000)
$207,000


E10-2 Statement of Cash Flows
a.

The noncontrolling interest received dividends of $6,000 ($15,000 x .40).

b.

A total of $320,000 will be reported as cash provided by operations, computed as
follows:
Depreciation expense
Amortization of patents
Gain on bond retirement
Loss on sale of land
Decrease in accounts receivable
Increase in inventory
Decrease in accounts payable
Increase in wages payable
Total

c.

$271,000
21,000
13,000
(4,000)
8,000
32,000
(16,000)
(12,000)
7,000
$320,000

Cash used in investing activities will be reported at $161,000, computed as follows:
Purchases of equipment
Sale of land
Total

d.

$(295,000)
134,000
$(161,000)

Cash used in financing activities will be reported at $81,000, computed as follows:
Sale of stock
Bond retirement
Dividends paid to Becon Corporation shareholders
Dividends paid to noncontrolling interests
Total

e.

$150,000
(200,000)
(25,000)
(6,000)
$ (81,000)

The cash balance increased by $78,000 ($320,000 - $161,000 - $81,000) in 20X4.

E10-3 Computation of Operating Cash Flows
Cash received from customers was $293,000 ($310,000 - $17,000). Cash payments to
suppliers was $193,000 ($180,000 - $8,000 + $21,000), resulting in cash flows from
operations of $100,000 ($293,000 - $193,000).

10-10


E10-4 Consolidated Operating Cash Flows
a. Cash received from customers was $482,000 ($300,000 + $200,000 - $28,000 +
$10,000).
b. Cash payments to suppliers was $288,000 ($160,000 + $95,000 + $35,000 - $15,000
+ 17,000 - $4,000).
c. Cash flows from operating activities was $194,000 ($482,000 - $288,000).

E10-5 Preparation of Statement of Cash Flows
Consolidated Enterprises Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X3
Cash Flows from Operating Activities:
Consolidated Net Income
Noncash Expenses, Revenue, and Gains
Included in Income:
Depreciation Expense
Goodwill Impairment Loss
Gain on Sale of Equipment
Decrease in Accounts Receivable
Increase in Accounts Payable
Increase in Inventory
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Equipment Purchased
Sale of Equipment
Net Cash Used in Investing Activities

$ 464,000
73,000
3,000
(8,000)
23,000
5,000
(15,000)

$(380,000)
45,000

Cash Flows from Financing Activities:
Sale of Bonds
Repurchase of Common Stock
Dividends Paid:
To Parent Company Shareholders
To Noncontrolling Shareholders
Net Cash Provided by Financing Activities
Net Increase in Cash

$545,000

(335,000)

$ 120,000
(35,000)
(60,000)
(6,000)

19,000
$229,000

10-11


E10-6 Direct Method Cash Flow Statement
Consolidated Enterprises Inc. and Subsidiary
Cash Received from Customers
Cash Payments to Suppliers
Equipment Purchased
Sale of Equipment

$ 923,000 (a)
(378,000) (b)
$ 545,000
$(380,000)
45,000

Sale of Bonds
Repurchase of Common Stock
Dividends Paid:

(335,000)

$120,000
(35,000)
(60,000)
(6,000)


19,000
$ 229,000

(a) $923,000 = $900,000 + $23,000
(b) $378,000 = $368,000 - $5,000 + $15,000
The FASB also requires the following reconciliation when the statement of cash flows is
prepared using the direct method:

Reconciliation of consolidated net income to net cash provided by operating
activities
Adjustments to reconcile net income to net cash
provided by operating activities:
Total Adjustments

10-12

$464,000
$73,000
3,000
(8,000)
23,000
(15,000)
5,000

81,000
$545,000


E10-7 Analysis of Consolidated Cash Flow Statement
a.

Dividends paid to noncontrolling interest
Proportion of stock held by noncontrolling interest
Total dividends paid by Jones Delivery

b.

When bonds are sold at a premium the annual cash payment is greater than
reported interest expense. The amount of premium amortized must therefore be
deducted from net income in determining the cash flow from operations.

c.

An increase in accounts receivable means that cash collections have been less
than sales for the period. The amount of the increase must be deducted from
operating income to determine the amount of cash actually made available from
current period operations.

d.

Dividends paid to noncontrolling shareholders are reported as a cash outflow in
the cash flow statement because they represent funds that have been distributed
during the period and are no longer available to the consolidated entity. On the
other hand, these same dividends are omitted from the retained earnings
statement. Only the income to the parent company shareholders is included in the
consolidated retained earnings statement and only dividends to the parent
company shareholders are deducted in deriving the ending consolidated retained
earnings balance.

e.

The loss occurred on a sale to a nonaffiliate. All profits and losses on sales to
affiliates are eliminated in the period of intercorporate sale and are considered
realized as the equipment is depreciated by the purchasing affiliate.

10-13

$ 6,000
÷
.40
$15,000


E10-8 Midyear Acquisition
a.

The retained earnings balance reported for the consolidated entity as of January 1,
20X1, would be $400,000.

b.

Separate earnings of Yarn Manufacturing
Net income reported by Spencer Corporation
Portion of year ownership was held by Yarn
Income earned following acquisition
Income to noncontrolling interest ($20,000 x .05)
Income to controlling interest

$60,000
x 4/12

$140,000
20,000
$160,000
(1,000)
$159,000

c.

Consolidated retained earnings, January 1, 20X1
Dividends paid by Yarn Manufacturing
Consolidated retained earnings, December 31, 20X1

$400,000
159,000
(80,000)
$479,000

d.

Purchase price on August 30, 20X1
Equity method income
Dividends received from Spencer ($25,000 x .95)
Balance in investment account December 31, 20X1

$503,500
19,000
(23,750)
$498,750

10-14


E10-9 Purchase of Shares at Midyear
a.

Journal entries recorded by Highbeam in 20X2:
(1)

(2)

Cash
Investment in Copper Company Stock
Record dividends from Copper Company.

13,500

(3)

b.

Cash
Record purchase of Copper Company Stock.

319,500

Income from Subsidiary
Record equity-method income.

27,000

319,500

13,500

27,000

Eliminating Entries:
E(1)

Dividends Declared
Eliminate income from subsidiary.

27,000

E(2)

Income to Noncontrolling Interest
Dividends Declared
Noncontrolling Interest
Assign income to noncontrolling interest:
$3,000 = $30,000 x .10
$1,500 = $15,000 x .10

3,000

E(3)

Common Stock — Copper Company
Additional Paid-In Capital
Retained Earnings, January 1
Sales
Total Expenses
Dividends Declared
Eliminate beginning investment balance.

160,000
40,000
150,000
90,000

10-15

13,500
13,500

1,500
1,500

80,000
5,000
319,500
35,500


E10-10 Tax Deferral on Gains and Losses
Eliminating entries, December 31, 20X7:
E(1)

Sales
Cost of Goods Sold
Inventory
Eliminate downstream inventory sale:
$20,000 = ($90,000 - $60,000) x 2/3

E(2)

Deferred Tax Asset
Income Tax Expense
Eliminate tax expense on unrealized
intercompany profit on inventory transfer.

E(3)

Gain on Sale of Land
Land
Eliminate upstream gain on sale of land.

E(4)

Deferred Tax Asset
Income Tax Expense
intercompany profit on land transfer.

90,000

8,000

100,000

40,000

70,000
20,000

8,000

100,000

40,000

E10-11 Unrealized Profits in Prior Year
E(1)

E(2)

Income Tax Expense
Cost of Goods Sold
Eliminate beginning inventory profit.

12,000
8,000

Deferred Tax Asset
Land
Eliminate unrealized gain on sale of land.

40,000
45,000
15,000

10-16

20,000

100,000


E10-12 Allocation of Income Tax Expense
a.

Allocation of tax expense incurred in 20X5:
Item

Winter
Corporation

Ray Guard
Corporation

Block
Company

$100,000
40,000

$50,000

$30,000
20,000

(10,000)
$130,000

(20,000)
$30,000

(10,000)
$40,000

Reported operating income
20X4 profits realized in 20X5
Unrealized profits in 20X5
sales
Realized income before tax
Income tax assigned:
($130,000 / $200,000) x $80,000
($30,000 / $200,000) x $80,000
($40,000 / $200,000) x $80,000
b.

$ 52,000

$12,000

$16,000

Computation of consolidated net income and income to controlling interest:
Realized income before tax:
Winter Corporation
Ray Guard Corporation
Block Company
Consolidated income before tax
Income tax expense
Income to noncontrolling interests:
Ray Guard Corporation ($30,000 - $12,000) x .20
Block Company ($40,000 - $16,000) x .10

10-17

$130,000
30,000
40,000
$200,000
(80,000)
$120,000
$ 3,600
2,400

(6,000)
$114,000


E10-13 Effect of Preferred Stock on Earnings per Share
Because both companies paid preferred dividends in 20X1 and neither issue is convertible,
only one basic consolidated earnings per share number will be reported for 20X1:
Operating income of Amber Corporation
Net income of Newtop Company
Less: Preferred dividends
Earnings available to Newtop common shareholders
Less: Income to noncontrolling interest ($40,000 x .30)
Income to common shareholders of Amber Corporation
Less: Preferred dividends of Amber Corporation
Earnings available to common shareholders
Consolidated earnings per share for 20X1
($78,000 / 12,000 shares)

$45,000
(5,000)

$ 59,000
40,000
$99,000
(12,000)
$87,000
(9,000)
$78,000
$6.50

E10-14 Effect of Convertible Bonds on Earnings per Share
Basic earnings per share:
Operating income of Crystal Corporation
Contribution to consolidated EPS from Evans Company
($30,000 / 10,000) x 6,000 shares
($63,000 / 30,000 shares)

$45,000
18,000
$63,000
$2.10

Diluted earnings per share:
Operating income of Crystal Corporation
Contribution to consolidated EPS from Evans Company:
$30,000 + $12,000 (a)
x 6,000 shares
10,000 shares + 10,000 shares
($57,600 / 30,000 shares)
(a) $12,000 = ($200,000 x .10) x (1 - .40)

10-18

$45,000

12,600
$57,600
$1.92


E10-15 Effect of Convertible Preferred Stock on Earnings per Share
Basic earnings per share:
Operating income of Eagle Corporation
Contribution to consolidated EPS from Standard Company:
$45,000 - $12,000
10,000 shares

$60,000

x 8,000 shares
26,400

Earnings available to shareholders
Preferred dividends of Eagle Corporation
($70,400 / 10,000 shares)

$86,400
(16,000)
$70,400
$7.04

Diluted earnings per share:
Operating income of Eagle Corporation
Contribution to consolidated EPS from Standard Company:
$45,000
x 8,000 shares
10,000 shares + 15,000 shares
Earnings available to shareholders
Preferred dividends of Eagle Corporation
($58,400 / 10,000 shares)

10-19

$60,000

14,400
$74,400
(16,000)
$58,400
$5.84


SOLUTIONS TO PROBLEMS
P10-16 Direct Method Computation of Cash Flows
Car Corporation and Subsidiary
Operating Cash Flows

$533,000
(268,000)
$265,000

Computation of payments received from customers
Sales of Car Corporation
Sales to outside parties by Bus Company ($240,000 - $100,000)
Increase in Car Corporation accounts receivable
Decrease in Bus Company’s accounts receivable
Payments received from customers

$400,000
140,000
(9,000)
2,000
$533,000

Computation of payments to suppliers
Cost of goods sold by Car Corporation excluding sale of
inventory purchased from Bus Company ($235,000 - $40,000)
Cost of goods sold on sales by Bus Company
to outside parties ($105,000 - $70,000)
Cost of goods sold on intercompany sales
resold in period ($70,000 x .40)
Decrease in Car Corporation inventory
Increase in Bus Company inventory
Decrease in accounts payable of Car Corporation
Increase in accounts payable of Bus Company
Payment made to suppliers

10-20

$195,000
35,000
28,000
(22,000)
16,000
31,000
(15,000)
$268,000


P10-17 Preparing a Statement of Cash Flows
a.

Metal Corporation and Ocean Company
Consolidated Cash Flow Workpaper
Year Ended December 31, 20X3
Item

Balance
1/1/X3

Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Patents

68,500
82,000
115,000
45,000
515,000
5,000
830,500

Accumulated Depreciation
Accounts Payable
Wages Payable
Notes Payable
Common Stock
Retained Earnings

186,500
61,000
26,000
250,000
150,000
130,000
27,000
830,500

Amortization of Patent
Increase in Accounts Receivable
Decrease in Wages Payable

Debit
(a)
(b)
(c)
(d)
(e)

(i)

32,000
15,000
8,000
10,000
35,000

6,000

(k) 30,000
(m) 5,000
141,000
(l) 83,500
(g) 36,500
(f) 1,000
(h)

5,000

Purchase of Land
Purchase of Buildings and Equipment

Credit

(f)

1,000

(g) 36,500
(h) 5,000
(j) 15,000
(l) 74,500
(l) 9,000
141,000

(b) 15,000
(c) 8,000
(i) 6,000
(d) 10,000
(e) 35,000

Increase in Notes Payable
Dividends Paid:
To Metal Corporation Shareholders
To Ocean Company Shareholders
Increase in Cash

(j) 15,000

141,000

10-21

(k) 30,000
(m) 5,000
(a) 32,000
141,000

Balance
12/31/X3
100,500
97,000
123,000
55,000
550,000
4,000
929,500
223,000
66,000
20,000
265,000
150,000
174,500
31,000
929,500


P10-17 (continued)
b.

Consolidated statement of cash flows for 20X3
Metal Corporation and Subsidiary
Cash Flows from Operating Activities
Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Amortization Expense

$ 83,500
36,500
1,000
(15,000)
(8,000)
5,000
(6,000)

Purchase of Land

$(10,000)
(35,000)

Dividends Paid to Parent Company Shareholders
Dividends Paid to Noncontrolling Shareholders
Net Cash Used in Financing Activities

$ 15,000
(30,000)
( 5,000)

Cash at Beginning of Year
Cash at End of Year

$97,000

(45,000)

(20,000)
$ 32,000
68,500
$100,500

10-22


P10-18 Preparing a Statement of Cash Flows – Direct Method
a.

Metal Corporation and Ocean Company
Consolidated Cash Flow Workpaper
Item

Balance
1/1/X3

Cash
Accounts Receivable
Inventory
Land
Patents

68,500
82,000
115,000
45,000
515,000
5,000
830,500

Accounts Payable
Wages Payable
Notes Payable
Common Stock
Retained Earnings

186,500
61,000
26,000
250,000
150,000
130,000
27,000
830,500

Sales
Cost of Goods Sold
Wage Expense
Interest Expense
Other Expenses

490,000
259,000
55,000
36,500
16,000
1,000
39,000
406,500
83,500


10-23

Debit
(a)
(b)
(c)
(d)
(e)

32,000
15,000
8,000
10,000
35,000

(h) 6,000
(k) 30,000
(m) 5,000
141,000
(c)259,000
(h) 55,000
(g) 36,500
(i) 16,000
(f) 1,000
(c) 39,000
(l) 83,500
490,000

Credit

(f)

1,000

(g) 36,500
(c) 5,000
(j) 15,000
(l) 74,500
(l) 9,000
141,000
(b)490,000

490,000

Balance
12/31/X3
100,500
97,000
123,000
55,000
550,000
4,000
929,500
223,000
66,000
20,000
265,000
150,000
174,500
31,000
929,000


P10-18 (continued)
Cash Paid to Suppliers
Cash Paid to Employees
Cash Paid for Interest on Notes Payable

(b) 475,000

Purchase of Land

(d) 10,000
(e) 35,000

Dividends Paid:
To Metal Corporation Shareholders
To Ocean Company Shareholders
Increase in Cash

b.

(c)301,000
(h) 61,000
(i) 16,000

(j) 15,000

490,000

(k) 30,000
(m) 5,000
(a) 32,000
490,000

Consolidated statement of cash flows for 20X3
Metal Corporation and Subsidiary
Cash Paid to Employees
Cash Paid for Interest on Notes Payable
Purchase of Land
Dividends Paid to Parent Company Shareholders
Dividends Paid to Noncontrolling Shareholders
Cash at End of Year

$301,000
61,000
16,000

$(10,000)
(35,000)

$15,000
(30,000)
( 5,000)

$475,000
(378,000)
$ 97,000

(45,000)

(20,000)
$ 32,000
68,500
$100,500

10-24


P10-18 (continued)
activities
Adjustments to reconcile net income to net cash
provided by operating activities:
Total Adjustments

10-25

$83,500
$36,500
1,000
(15,000)
(8,000)
5,000
(6,000)

13,500
$97,000


P10-19 Consolidated Statement of Cash Flows
a.

Traper Company and Arrow Company
Consolidation Cash Flow Workpaper
Balance
1/1/X4

Item
Cash
Accounts Receivable
Inventory
Land
Goodwill

83,000
210,000
320,000
190,000
850,000
40,000
1,693,000

Accum. Depreciation
Accounts Payable
Interest Payable
Bonds Payable
Bond Premium
Common Stock
Retained Earnings

280,000
52,000
45,000
400,000
18,000
300,000
70,000
488,000
40,000
1,693,000

Amortization of Bond Premium
Loss on Sale of Land
Decrease in Interest Payable

Debit
(a) 98,000
(c) 50,000
(e)130,000

(i) 15,000
(k) 2,000
(l) 25,000
(n) 3,000
323,000
(m) 79,000
(g) 45,000
(f) 12,000
(d) 20,000
(b) 35,000
(h) 22,000

Sale of Land

(d) 10,000

Sale of Bonds
Dividends Paid:
To Traper Shareholders
Increase in Cash

Credit
(b) 35,000
(d) 30,000
(f) 12,000
(g) 45,000
(h) 22,000
(j) 100,000

(m) 72,000
(m) 7,000
323,000

(k)

2,000

(c) 50,000
(i) 15,000

(e)130,000

(j)100,000

323,000

10-26

(l) 25,000
(n) 3,000
(a) 98,000
323,000

Balance
12/31/X4
181,000
175,000
370,000
160,000
980,000
28,000
1,894,000
325,000
74,000
30,000
500,000
16,000
300,000
70,000
535,000
44,000
1,894,000


P10-19 (continued)
Explanation of Workpaper Entries:
(a)

Increase in cash balance

(b)

Decrease in accounts receivable

(c)

Increase in inventory

(d)

Sale of land

(e)

Purchase of buildings and equipment

(f)

Goodwill impairment loss recognized in 20X4

(g)

Depreciation charges for 20X4

(h)

Increase in accounts payable

(i)

Decrease in interest payable

(j)

Sale of bonds

(k)

Amortize bond premium

(l)

Traper Company dividend $25,000

(m
)

Consolidated net income $79,000

(n)

Arrow Company dividend $15,000 x .20

10-27


P10-19 (continued)
b.

Consolidated statement of cash flows for 20X4:
Traper Company and Subsidiary
For Year Ended December 31, 20X4

Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Sale of Land

$79,000
45,000
12,000
(2,000)
20,000
35,000
(50,000)
22,000
(15,000)

$ 10,000
(130,000)

Sale of Bonds
Dividends Paid:
Cash Balance at Beginning of Year
Cash Balance at End of Year

$146,000

(120,000)

$100,000
(25,000)
(3,000)

72,000
$ 98,000
83,000
$181,000

10-28


P10-20 Consolidated Statement of Cash Flows — Direct Method
a.

Traper Company and Arrow Company
Item

Cash
Accounts Receivable
Inventory
Land
Goodwill
Accum. Depreciation
Accounts Payable
Interest Payable
Bonds Payable
Bond Premium
Common Stock
Additional Paid-In
Capital
Retained Earnings
Sales
Cost of Goods Sold
Interest Expense

Balance
1/1/X4
83,000
210,000
320,000
190,000
850,000
40,000
1,693,000
280,000
52,000
45,000
400,000
18,000
300,000
70,000
488,000
40,000
1,693,000
600,000
375,000
45,000
69,000
20,000
12,000
521,000
79,000

10-29

Debit
(a) 98,000
(c) 50,000
(e)130,000

(h) 15,000
(h)

2,000

(j) 25,000
(l) 3,000
323,000
(c)375,000
(g) 45,000
(h) 69,000
(d) 20,000
(f) 12,000
(k) 79,000
600,000

Credit
(b) 35,000
(d) 30,000
(f) 12,000
(g) 45,000
(c) 22,000

Balance
12/31/X4
181,000
175,000
370,000
160,000
980,000
28,000
1,894,000

(i) 100,000

325,000
74,000
30,000
500,000
16,000
300,000
70,000

(k) 72,000
(k) 7,000
323,000

535,000
44,000
1,894,000

(b) 600,000

600,000


P10-20 (continued)
Cash Paid for Interest on
Bonds Payable

(b)635,000

(h) 86,000

Sale of Land

(d) 10,000

Sale of Bonds
Dividends Paid:
To Traper Shareholders
Increase in Cash

745,000

(a) Increase in cash balance
(b) Payments received from customers
(c) Payments to suppliers
(d) Sale of land
(e) Purchase of buildings and equipment
Goodwill impairment loss recognized in 20X4

(g) Depreciation charges for 20X4
(h) Payment of interest
(i)

Sale of bonds

(j)

Traper Company dividend $25,000

(k) Consolidated net income $79,000
(l)

(e)130,000

(i) 100,000

Explanation of Workpaper Entries:

(f)

(c)403,000

Arrow Company dividend $15,000 x .20

10-30

(j) 25,000
(l) 3,000
(a) 98,000
745,000


P10-20 (continued)
b.

Consolidated statement of cash flows for 20X4:
Traper Company and Subsidiary
For Year Ended December 31, 20X4

Cash Payments of Interest
Sale of Land

$403,000
86,000

$ 10,000
(130,000)

Sale of Bonds
Dividends Paid:

$635,000
(489,000)
$146,000

(120,000)

$100,000
(25,000)
(3,000)


72,000
$ 98,000
83,000
$181,000

activities
Adjustments to reconcile net income to net cash provided by
operating activities:
Total Adjustments

10-31

$ 79,000
$45,000
12,000
(2,000)
20,000
35,000
(50,000)
22,000
(15,000)

67,000
$146,000


P10-21 Consolidated Statement of Cash Flows
Weatherbee Company and Sun Corporation
Balance
1/1/X6

Item

Debit

Cash
Accounts Receivable
Inventory
Land

54,000
121,000
230,000
95,000
800,000
1,300,000

(a) 21,000

Accounts Payable
Bonds Payable
Common Stock
Retained Earnings

290,000
90,000
300,000
300,000
290,000
30,000
1,300,000

(e)100,000


(c)130,000
(d) 5,000

(h) 50,000
(i) 65,000
(k) 4,000
375,000

(j) 160,000
(f) 40,000
(b) 10,000
(g) 15,000

Sale of Buildings and Equipment
Purchase of Land

(e) 80,000

Bond Retirement
Dividends Paid:
To Weatherbee Company Shareholders
Increase in Cash

Credit
(b) 10,000
(e)150,000
(f) 40,000
(g) 15,000
(j) 148,000
(j) 12,000
375,000

(e) 30,000
(c)130,000

(d)

5,000

(h) 50,000

305,000

10-32

(i) 65,000
(k) 4,000
(a) 21,000
305,000

Balance
12/31/X6
75,000
111,000
360,000
100,000
650,000
1,296,000
230,000
105,000
250,000
300,000
373,000
38,000
1,296,000


P10-22 Consolidated Statement of Cash Flows — Direct Method
Weatherbee Company and Sun Corporation
Balance
1/1/X6

Item

Debit

Credit

Cash
Accounts Receivable
Inventory
Land

54,000 (a) 21,000
121,000
230,000 (c) 130,000
95,000 (d)
5,000
800,000
1,300,000

Accounts Payable
Bonds Payable
Common Stock
Retained Earnings

290,000 (e) 100,000
90,000
300,000 (g) 50,000
300,000
290,000 (h) 65,000
30,000 (j)
4,000
1,300,000
375,000

(f)
(c)

Sales
Gain on Sale
of Equipment

1,070,000

(b)1,070,000

30,000
1,100,000
750,000
40,000
150,000
940,000
160,000

(e)

Cost of Goods Sold
Other Expenses

10,000

(e) 150,000
40,000
15,000

(i) 148,000
(i) 12,000
375,000

30,000

(c) 750,000
(f)
40,000
(c) 150,000
(i)

160,000
1,100,000


(b)1,080,000

Sale of Buildings and Equipment
Purchase of Land

(e)

Bond Retirement
Dividends Paid
To Weatherbee Company Shareholders
Increase in Cash

(b)

80,000

1,100,000

(c)1,015,000

10-33

5,000

(g)

1,160,000

(d)

50,000

(h) 65,000
(j)
4,000
(a) 21,000
1,160,000

Balance
12/31/X6
75,000
111,000
360,000
100,000
650,000
1,296,000
230,000
105,000
250,000
300,000
373,000
38,000
1,296,000


P10-23 Consolidated Statement of Cash Flows [AICPA Adapted]
Brimer, Inc., and Subsidiary
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation
Decrease in Allowance to Reduce
Marketable Securities to Market
Increase in Inventories
and Accrued Liabilities
Increase in Deferred Income Taxes
Total Adjustments
Purchase of Equipment
Sale of Equipment

$231,000
82,000 [1]
3,000
(6,000)
(11,000)
22,000
(70,000)
121,000
12,000

$(127,000)
40,000

Payment on Note Payable
Sale of Treasury Stock
Cash Dividend Paid by Parent Company
Cash Dividend Paid to Minority Stockholders
of Subsidiary

153,000
$384,000

(87,000)

$(150,000)
44,000
(58,000)
(15,000) [2]

Cash at End of Year

(179,000)
$118,000
195,000
$313,000

Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of Common Stock to Purchase Land

10-34

$215,000


P10-23 (continued)
Explanations of Amounts:
[1]

Depreciation:
Accumulated depreciation, Dec. 31, 20X6
Accumulated depreciation on equipment sold
($62,000 - $34,000)
Deduct accumulated depreciation, Dec. 31, 20X5
Depreciation for 20X6

[2]

Cash dividends paid to minority stockholders of subsidiary:
Cash dividend paid by Dore Corporation
Minority ownership
Cash dividend paid to minority stockholders in 20X6

10-35

$199,000
28,000
227,000
(145,000)
$ 82,000
$ 50,000
x
.30
$ 15,000


P10-24 Statement of Cash Flows Prepared from Consolidation Workpaper
a.

Workpaper for consolidated statement of cash flows:
Detecto Corporation and Strand Company
Item

Balance
1/1/X3

Cash
Accounts Receivable
Inventory
Land

92,000
135,000
140,000
75,000
400,000

Patents

30,000
872,000

Accounts Payable
Bonds Payable
Common Stock
Retained Earnings

210,000
114,200
90,000
100,000
273,000
84,800
872,000

Decrease in Accounts Payable

Debit

(c) 59,000
(d) 5,000
(e)100,000
(f) 40,000

(i) 19,200
(k) 50,000
(m) 8,000
281,200
(l) 91,000
(g) 5,000
(h) 40,000
(b) 15,000

Purchase of Land
Acquisition of Buildings and
Equipment from Bond Issue
Dividends Paid:
To Detecto Corp. Shareholders
Issuance of Bonds for Buildings
and Equipment
Decrease in Cash

Credit
(a) 30,200
(b) 15,000

(g)

5,000

(h) 40,000
(j) 100,000
(l) 79,400
(l) 11,600
281,200

(c) 59,000
(i) 19,200
(d)

5,000

(e)100,000
(f) 40,000

(k) 50,000
(m) 8,000
(j) 100,000
(a) 30,200
281,200

10-36

281,200

Balance
12/31/X3
61,800
120,000
199,000
80,000
540,000
25,000
1,025,800
250,000
95,000
190,000
100,000
302,400
88,400
1,025,800


P10-24 (continued)
b.

Consolidated cash flow statement for 20X3:
Detecto Corporation and Subsidiary

Noncash Expenses, Revenue, Losses and Gains
Included in Income:
Decrease in Accounts Payable

$ 91,000
5,000
40,000
15,000
(59,000)
(19,200
)

Purchase of Land

$ (5,000)
(40,000)

Dividends Paid:
Net Cash Received from
Financing Activities

$ 72,800

$(50,000)
(8,000)

(45,000)

(58,000)

Net Decrease in Cash

$(30,200)
92,000
$ 61,800

Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of Bonds to Purchase Equipment

$100,000

10-37


P10-25 Midyear Purchase of Controlling Interest
a.

Equity-method entries recorded by Mega Theaters during 20X1:
(1)

Investment in Blase Company Common Stock
Cash
Record purchase of Blase Company stock.

(2)

Cash
Investment in Blase Company
Common Stock
Record dividends from Blase Company:
$30,000 x .85

25,500

Investment in Blase Company Common Stock
Income from Blase Company
Record equity-method income:
($175,000 - $60,000) x .85

97,750

(3)

10-38

765,000

765,000

25,500

97,750


P10-25 (continued)
b.

E(1)

E(2)

E(3)

Income from Blase Company
Dividends Declared
Common Stock
Eliminate income from subsidiary:
$25,500 = ($40,000 - $10,000) x .85

97,750

Dividends Declared
$17,250 = ($175,000 - $60,000) x .15
$4,500 = ($40,000 - $10,000) x .15

17,250

25,500
72,250

4,500
12,750

Common Stock
Sales
Differential
Operating Expense
Dividends Declared
Common Stock
Eliminate beginning investment balance,
subsidiary stockholders’ equity, and subsidiary
preacquisition income and dividends.

100,000
500,000
150,000
240,000
100,000
180,000
10,000
765,000
135,000

Computation of differential
Compensation given by Mega Theaters
Fair value of noncontrolling interest
Total fair value
Book value of Blase stock:
Common stock
Additional paid-in capital
Retained earnings, January 1
First quarter undistributed
earnings ($60,000 - $10,000)
Book value, April 1
Differential
E(4)

Goodwill
Differential
Assign differential to goodwill.

10-39

$765,000
135,000
$900,000
$100,000
500,000
150,000
50,000
(800,000)
$100,000
100,000
100,000


P10-26 Consolidation Involving a Midyear Purchase
a.

Journal entries recorded by Famous Products:
(1)

(2)

Cash
Investment in Sanford Company Stock
Record dividend received from Sanford:
$9,000 = $10,000 x .90

(3)

b.

Common Stock
Record purchase of Sanford Company stock:
$80,000 = $10 x 8,000 shares
$167,500 = $247,500 - $80,000

Record equity-method income:
$13,500 = $15,000 x .90

247,500

9,000

13,500

80,000
167,500

9,000

13,500

E(1)

Dividends Declared
Eliminate income from subsidiary.

13,500

E(2)

Dividends Declared
$1,500 = $15,000 x .10
$1,000 = $10,000 x .10

1,500

E(3)

Common Stock — Sanford Company
Sales
Cost of Goods Sold
Other Expenses
Dividends Declared
Eliminate beginning investment balance,
subsidiary stockholders’ equity, and subsidiary
preacquisition income and dividends.

10-40

150,000
100,000
205,000

9,000
4,500

1,000
500

126,000
16,000
18,000
20,000
247,500
27,500


P10-26 (continued)
Famous Products Corporation and Sanford Company
Consolidation Workpaper
December 31, 20X2

c.

Item

Sales
Credits
Cost of Goods Sold
Other Expenses
Debits
Income, carry forward
Retained Earnings, Jan. 1
Income, from above
Dividends Declared
Ret. Earnings, Dec. 31,
carry forward

Famous
Products Sanford
Corp.
Co.
390,000
250,000
13,500
403,500
250,000
305,000
145,000
25,000
20,000
14,000
25,000
(344,000) (190,000)

59,500

60,000

135,000
59,500
194,500
(40,000)

100,000
60,000
160,000
(30,000)

Eliminations
Debit
Credit
(3) 205,000
(1) 13,500
(3) 126,000
(3) 16,000
(3) 18,000

(2)

1,500
220,000

160,000

(3)100,000
220,000

160,000
(1) 9,000
(2) 1,000
(3) 20,000

154,500

130,000

320,000

Cash
Accounts Receivable
Inventory
Investment in
Sanford Stock

85,000
100,000
150,000
400,000

50,000
60,000
100,000
340,000

Debits

987,000

550,000

Accum. Depreciation
Accounts Payable
Taxes Payable
Bonds Payable
Common Stock
Additional Paid-In
Capital
Retained Earnings,
from above

105,000
40,000
70,000
250,000
200,000

65,000
50,000
55,000
100,000
150,000

154,500

130,000

320,000

Credits

987,000

550,000

470,000

190,000

Consolidated
435,000
435,000
324,000
29,000
21,000
(374,000)
61,000
(1,500)
59,500
135,000
59,500
194,500
(40,000)
154,500
135,000
160,000
250,000
740,000

252,000

(1) 4,500
(3)247,500

1,285,000
170,000
90,000
125,000
350,000
200,000

(3)150,000

167,500

167,500

10-41

190,000
(2)
500
(3) 27,500
470,000

154,500
28,000
1,285,000


P10-27 Tax Allocation in Consolidated Balance Sheet
a.

Acme Powder Corporation and Brown Company
Consolidated Balance Sheet Workpaper
December 31, 20X9

Item

Acme
Powder
Corp.

Brown
Co.

Cash
Accounts Receivable
Inventory

44,400
120,000
170,000

20,000
60,000
120,000

Land
Investment in Brown
Company Stock
Deferred Tax Asset

90,000
500,000

30,000
300,000

Eliminations
Debit
Credit

Debits

280,000

1,204,400

Accum. Depreciation
Accounts Payable
Wages Payable
Bonds Payable
Common Stock
Retained Earnings,

530,000

180,000
70,000
80,000
200,000
100,000
574,400

Credits

1,204,400

530,000

64,400
180,000

(2) 20,000
(3) 25,000

245,000
120,000
830,000

(4) 30,000
(2) 8,000
(3) 10,000
(4) 20,000

80,000
20,000
30,000
150,000
250,000

Consolidated

(1)280,000
38,000
1,477,400
(4) 80,000

(1)150,000
(1)250,000
(2) 8,400
(3) 15,000
(4) 21,000
(2) 3,600
(4) 9,000
525,000

(1)120,000
525,000

340,000
90,000
110,000
200,000
100,000

530,000
107,400
1,477,400

Eliminating entries, December 31, 20X9 (not required)
E(1)

Common Stock — Brown Company
Retained Earnings
Investment in Brown Company Stock
Eliminate investment balance.

10-42

150,000
250,000

280,000
120,000


P10-27 (continued)
E(2)

E(3)

E(4)

Deferred Tax Asset
Retained Earnings
Inventory
Eliminate inventory profit of
Brown Company:
$8,000 = $20,000 x .40
$8,400 = ($20,000 - $8,000) x .70
$3,600 = ($20,000 - $8,000) x .30

8,000
8,400
3,600

Deferred Tax Asset
Retained Earnings
Inventory
Eliminate inventory profit of Acme
Powder Corporation:
$10,000 = $25,000 x .40
$15,000 = $25,000 - $10,000

10,000
15,000

Deferred Tax Asset
Retained Earnings
Eliminate unrealized profit on equipment:
$30,000 = $120,000 - $90,000
$20,000 = ($90,000 - $40,000) x .40
$21,000 = [($90,000 - $40,000) x .60] x .70
$9,000 = [($90,000 - $40,000) x .60] x .30

30,000
20,000
21,000
9,000

10-43

20,000

25,000

80,000


P10-27 (continued)
b.

Acme Powder Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 20X9

Cash
Accounts Receivable
Inventory
Land
Less: Accumulated Depreciation
Deferred Tax Asset
Total Assets

$

$830,000
(340,000)

Accounts Payable
Wages Payable
Bonds Payable
Stockholders' Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Total Stockholders’ Equity
Total Liabilities and Stockholders' Equity

64,400
180,000
245,000
120,000

490,000
38,000
$1,137,400
$ 90,000
110,000
200,000

$100,000
530,000
$630,000
107,400

10-44

737,400
$1,137,400


P10-28 Computations Involving Tax Allocation
a.

Basic equity-method journal entries recorded by Broom Manufacturing:
(1)

(2)

b.

Cash
Investment in Satellite
Industries Stock
Record dividends for 20X5:
$150,000 x .75

112,500

Investment in Satellite Industries Stock
Record equity-method income for 20X5:
$190,000 x .75

142,500

112,500

Income assigned to noncontrolling interest:
Net income of Satellite Industries
Unrealized inventory profit ($30,000 x .60)
Unrealized profit on sale of land ($120,000 x .60)
Satellite's realized net income
Income to noncontrolling interest

c.

$190,000
(18,000)
(72,000)
$100,000
x
.25
$ 25,000

Consolidated net income and income to controlling
Interest:
Operating income of Broom Manufacturing
Inventory profits realized in 20X5
Realized operating income of Broom Manufacturing
Realized income of Satellite Industries
Consolidated income before provision for taxes
Provision for income taxes on:
Operating income ($720,000 x .40)
Income from Satellite Industries
($112,500 x .20 x .40)

$700,000
20,000
$720,000
100,000
$820,000
$288,000

Income to noncontrolling interest
d.

142,500

9,000

(297,000)
$523,000
(25,000)
$498,000

Net assets assigned to noncontrolling interest in consolidated
balance sheet at December 31, 20X5:
Net assets reported by Satellite Industries
Less: Unrealized inventory profits ($30,000 x .60)
Unrealized profit on land ($120,000 x .60)
Realized net assets of Satellite Industries
Net assets assigned to noncontrolling interest

10-45

$900,000
(18,000)
(72,000)
$810,000
x
.25
$202,500


P10-29 Workpaper Involving Tax Allocation
a.

Eliminating entries:
E(1)

Dividends Declared
Investment in Custom Pizza Common
Stock
Eliminate income from subsidiary:
$25,200 = $36,000 x .70

25,200

7,000
18,200

E(2)

Dividends Declared
$8,100 = ($36,000 + $6,000 - $15,000) x .30
$3,000 = $10,000 x .30
$5,100 = $8,100 - $3,000

E(3)

Common Stock ─ Custom Pizza
Investment in Custom Pizza Common
Stock
Eliminate beginning investment balance.

50,000
150,000

Tax Expense
Cost of Goods Sold
Eliminate unrealized profits in beginning
inventory on upstream sale.

4,000
4,200
1,800

E(4)

8,100

140,000
60,000

E(5)

Sales
Cost of Goods Sold
Inventory
Eliminate unrealized profits in ending
inventory on upstream sale.

120,000

E(6)

Deferred Tax Asset
Tax Expense
intercompany profit: $25,000 x .40

10,000

E(7)

Eliminate unrealized profit on downstream
sale of equipment.

85,000
15,000

E(8)

Deferred Tax Asset
Tax Expense
Eliminate income tax expense on unrealized
gain on equipment: $15,000 x .40

10-46

3,000
5,100

6,000

10,000

95,000
25,000

10,000

100,000

6,000


P10-29 (continued)
b.

Hardtack Bread Company and Custom Pizza Corporation
Consolidation Workpaper
December 31, 20X7

Item
Sales
Gain on Sale
of Equipment
Credits
Cost of Goods Sold
Depreciation and
Amortization
Tax Expense
Other Expenses
Debits
Income, carry forward

Hardtack
Bread Co.

Custom
Pizza
Corp.

580,000

300,000

15,000
25,200
620,200
435,000

300,000
210,000

40,000
44,000

20,000
24,000

Eliminations
Debit
Credit
(5)120,000

89,800

36,000

Ret. Earnings, Jan. 1

374,200

150,000

Income, from above
Dividends Declared

89,800
464,000
(20,000)

36,000
186,000
(10,000)

Ret. Earnings, Dec. 31,
carry forward

444,000

176,000

10-47

760,000

(7) 15,000
(1) 25,200
(4) 10,000
(5) 95,000
(4)

4,000

(2)

8,100
172,300

121,000

(3)150,000
(4) 4,200
172,300

121,000

11,400
10,000
(530,400) (264,000)

(6) 10,000
(8) 6,000

(1) 7,000
(2) 3,000
326,500

Consolidated

131,000

760,000
540,000
60,000
56,000
21,400
(677,400)
82,600
(8,100)
74,500
370,000
74,500
444,500
(20,000)
424,500


P10-29 (continued)

Item
Cash
Accounts Receivable
Inventory
Land
Patents
Investment in Custom
Pizza Stock

Hardtack
Bread Co.
35,800
130,000
220,000
60,000
450,000
70,000

Custom
Pizza
Corp.
56,000
40,000
60,000
20,000
400,000

Accounts Payable
Wages Payable
Bonds Payable
Deferred Income Tax
Common Stock
Retained Earnings,
from above
Credits

(5) 25,000
(7) 85,000

158,200

Deferred Tax Asset
Debits

Eliminations
Debit
Credit

(6) 10,000
(8) 6,000

1,124,000

576,000

150,000
40,000
70,000
200,000
120,000
100,000

160,000
30,000
20,000
100,000
40,000
50,000

444,000

176,000

326,500
(4) 1,800

1,124,000

576,000

479,300

10-48

Consolidated
91,800
170,000
255,000
80,000
935,000
70,000

(1) 18,200
(3)140,000
16,000
1,617,800
(7)100,000

410,000
70,000
90,000
300,000
160,000
100,000

131,000
(2) 5,100
(3) 60,000
479,300

424,500

(3) 50,000

63,300
1,617,800


P10-30 Earnings per Share with Convertible Securities
Basic earnings per share
Branch Manufacturing income from operations
Short Retail Stores net income
Preferred dividends ($100,000 x .08)
Earnings available
Short shares outstanding
Computed EPS for Short
Shares held by Branch Manufacturing
Contribution to Branch Manufacturing earnings
Total earnings of Branch Manufacturing
Preferred dividends of Branch Manufacturing
Earnings to Branch common shareholders
Branch Manufacturing shares outstanding

$49,200
(8,000)
$41,200
÷20,000
$ 2.06
x16,000

$100,000

32,960
$132,960
(22,000)
$110,960
÷ 15,000
$
7.40

Diluted earnings per share
Branch Manufacturing income from operations
Short Retail Stores net income
Assumed conversion of bonds:
$20,000 x .60
Earnings available
Short shares outstanding
20,000
Assumed conversion of bonds
8,000
Assumed conversion of preferred
12,000
Total shares
Computed EPS for Short
Shares held by Branch Manufacturing
Contribution to Branch Manufacturing earnings
Total earnings of Branch Manufacturing
Preferred dividends of Branch Manufacturing
Earnings to Branch common shareholders
Branch Manufacturing shares outstanding

10-49

$49,200

$100,000

12,000
$61,200

÷40,000
$ 1.53
x16,000

24,480
$124,480
(22,000)
$102,480
÷ 15,000
$
6.83


P10-31 Comprehensive Earnings per Share
Mighty Corporation operating income
Longfellow net income
Preferred dividends ($200,000 x .11)

$115,000
(22,000)
$
93,000
÷ 40,000
$
2.325
x 32,000

Longfellow shares outstanding
Computed EPS for Longfellow
Shares held by Mighty Corporation
Contribution to Mighty Corporation earnings
Total earnings of Mighty Corporation
Mighty Corporation shares outstanding

$300,000

74,400
$374,400
÷100,000
$ 3.74

Mighty Corporation operating income
Longfellow net income
($500,000 x .08) x .60
Earnings available to common
Longfellow shares outstanding
Assumed conversion of preferred
Exercise of warrants:
10,000 - [($8 x 10,000) / $40]
Total shares
Computed EPS for Longfellow
Shares held by Mighty Corporation
Contribution to Mighty Corporation Earnings
Total earnings of Mighty Corporation
Interest savings on assumed conversion
of bonds ($800,000 x .10) x .60
Mighty Corporation shares

10-50

$115,000

40,000
30,000
20,000
8,000

$300,000

24,000
$139,000

÷ 98,000
$ 1.418
x 32,000

45,376
$345,376
48,000
$393,376
÷125,000
$
3.15

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