Advanced Accounting 10th Edition By Fischer -Test Bank

Advanced Accounting 10th Edition By Fischer -Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5—Intercompany Transactions: Bonds and Leases

 

MULTIPLE CHOICE

1. The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a consolidated group is due to the:

a.	subsidiary’s ability to borrow larger amounts of capital at more favorable terms than would be available to the parent.
b.	parent’s ability to borrow larger amounts of capital at more favorable terms than would be available to the subsidiary.
c.	parent’s desire to decentralize asset management and credit control.
d.	parent’s desire to eliminate long-term debt.

 

 

ANS:  B                    DIF:    E                    OBJ:   5-1

 

2. The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:

a.	replace the existing debt with new debt at a lower interest rate.
b.	reduce the parent company’s acquisition price for the subsidiary.
c.	increase the parent company’s ownership percentage in the subsidiary.
d.	create interest revenue to offset interest expense in future income statements.

 

 

ANS:  A                    DIF:    E                    OBJ:   5-1

 

3. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 8%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the current year’s consolidated statements?

a.	The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
b.	The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c.	Retirement of the bonds at a gain as of the purchase date.
d.	Retirement of the bonds at a loss as of the purchase date.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-2

 

4. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the current year’s consolidated statements?

a.	The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
b.	The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c.	Retirement of the bonds at a gain as of the purchase date.
d.	Retirement of the bonds at a loss as of the purchase date.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-2

 

5. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 6% effective interest rate. How should this event be reflected in the current year’s consolidated statements?

a.	The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
b.	The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c.	Retirement of the bonds at a gain as of the purchase date.
d.	Retirement of the bonds at a loss as of the purchase date.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

6. Intercompany debt that must be eliminated from consolidated financial statements may result from:

a.	one member of a consolidated group selling its bonds directly to another member of the group.
b.	one member of a consolidated group advancing funds to another member of the group so that the member may retire bonds it had issued to outside parties.
c.	one member of a consolidated group purchasing bonds from outside parties as an investment that had been issued to outside parities by another member of the group.
d.	all of the above.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

 

7. Elimination procedures for intercompany bonds purchased from outside parties by another member of the consolidated group are:

a.	not needed except in the period of acquisition if purchased at par.
b.	not needed except in the period of acquisition if purchased at a premium or discount.
c.	not needed except in the period of acquisition if only a portion of the outstanding bonds are purchased.
d.	needed each period as long as there are intercompany bonds.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

 

8. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X9, Company S has $200,000 of 8% face rate bonds outstanding, which were issued at face value. The bonds had 5 years to maturity on January 1, 20X9. Premiums or discounts would be amortized on a straight-line basis. On that date, Company P purchased the bonds for $198,000. The amount on the consolidated balance sheet relative to the debt is:

a.	bonds payable $200,000.
b.	bonds payable $200,000, discount $2,000.
c.	bonds payable $200,000, discount $1,600.
d.	The bonds do not appear on the balance sheet.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

 

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

a.	$(4,000)
b.	$(3,200)
c.	$(800)
d.	$0

 

 

ANS:  D                    DIF:    M                   OBJ:   5-2

 

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

a.	$2,800 increase
b.	$400 decrease
c.	$400 increase
d.	$2,800 decrease

 

 

ANS:  C                    DIF:    M                   OBJ:   5-2

11. Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S bonds that are outstanding and have a remaining discount. Consolidation theory takes the position that:

a.	interest expense should be adjusted to reflect the market value of the bonds on the date of Company P’s purchase.
b.	the debt has been retired at a loss.
c.	the debt is outstanding but should be shown at face value.
d.	the gain or loss on retirement should be allocated over the remaining life of the bonds.

 

 

ANS:  B                    DIF:    E                    OBJ:   5-2

 

12. Company S is a 100%-owned subsidiary of Company P. Company P purchased all the outstanding bonds of Company S at a discount. The bonds had a remaining issuance premium at the time of Company P’s purchase. The bonds have 5 years to maturity. At the end of 5 years, consolidated retained earnings:

a.	is greater as a result of the purchase.
b.	is less as a result of the purchase.
c.	is not affected by the purchase.
d.	cannot be determined from the information provided.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-2

 

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

a.	$(8,000)
b.	$(1,600)
c.	$(1,440)
d.	$(1,200)

 

 

ANS:  C                    DIF:    M                   OBJ:   5-2

 

14. The purchase of outstanding subsidiary bonds by the parent company has the same impact on consolidated statements as:

a.	the subsidiary retiring its own debt with the proceeds of new debt issued to outside parties.
b.	the subsidiary retiring the debt with the proceeds of a loan from the parent.
c.	the subsidiary retiring the debt with the proceeds of a new stock issue.
d.	allowing the bonds to continue to be held by outside interests.

 

 

ANS:  B                    DIF:    E                    OBJ:   5-2

 

15. A subsidiary has outstanding $100,000 of 8% bonds that were issued at face value. The parent purchased all the bonds for $96,000 with 5 years remaining to maturity. How will the parent’s use of the effective interest amortization rather than straight-line amortization of the discount affect the consolidated financial statements?

a.	The consolidated financial statements report the same information whether the parent uses straight-line or effective interest amortization on its investment in sub’s bonds.
b.	Will result in a different gain on retirement
c.	Will result in more interest expense in the first year after the intercompany purchase.
d.	Will result in less interest expense in the first year after the intercompany purchase.

 

 

ANS:  A                    DIF:    E                    OBJ:   5-2

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

 

16. Refer to Powell Company. What is the gain on retirement on the 20X5 consolidated income statement?

a.	$12,500
b.	$22,500
c.	$10,000
d.	$35,000

 

 

ANS:  B                    DIF:    D                   OBJ:   5-2

 

17. Refer to Powell Company. Bond interest expense included as an adjustment in the 20X5 subsidiary income distribution schedule is ____.

a.	$48,000
b.	$45,500
c.	$47,500
d.	$0

 

 

ANS:  D                    DIF:    M                   OBJ:   5-2

 

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

 

18. Refer to Soap & Pumice.  How much bond interest expense will appear on the December 31, 20X8, consolidated income statement?

a.	$18,400
b.	$16,000
c.	$9,200
d.	$8,000

 

 

ANS:  A                    DIF:    D                   OBJ:   5-2

 

19. Refer to Soap & Pumice. How much interest expense will appear on the December 31, 20X9, consolidated income statement?

a.	$18,400
b.	$16,000
c.	$9,200
d.	$8,000

 

 

ANS:  C                    DIF:    D                   OBJ:   5-2

 

20. Refer to Soap & Pumice. What amount of gain or loss from retirement of debt will be reported on the 20X8 consolidated financial statements?

a.	$1,600 gain
b.	$1,600 loss
c.	$1,200 gain
d.	$1,200 loss

 

 

ANS:  A                    DIF:    D                   OBJ:   5-2

21. Which of the following statements is true?

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

 

 

ANS:  A                    DIF:    E                    OBJ:   5-2

 

22. In the year when one member of a consolidated group purchases from outside parties the bonds of another affiliate, the consolidated income statement  includes:

a.	a gain if purchased above book value.
b.	a gain if purchased below book value.
c.	a loss if purchased below book value.
d.	a deferred gain if purchased above book value.

 

 

ANS:  B                    DIF:    E                    OBJ:   5-2

 

23. On an income distribution schedule, any gain or loss resulting from intercompany bonds is charged to

a.	the issuer of the bonds.
b.	the purchaser of the bonds.
c.	allocation between the issuer and the purchaser.
d.	none of the above

 

 

ANS:  A                    DIF:    E                    OBJ:   5-2

 

24. In years subsequent to the year one member of a consolidated group purchases bonds from outside parties, Consolidated Income Statements:

a.	recognize a prorated share of any gain or loss from intercompany bonds.
b.	recognize a prorated share of any gain but would not show a share of a loss from intercompany bonds.
c.	recognize a prorated share of any loss but would not show a share of a gain from intercompany bonds.
d.	would not recognize any gain or loss from intercompany bonds.

 

 

ANS:  D                    DIF:    E                    OBJ:   5-2

 

25. When one member of a consolidated group purchases only part of the outstanding bonds of another member of the group (for example, 80% of the bonds),

a.	all bonds, and all the interest expense and interest revenue applicable to the bonds should be eliminated.
b.	20% of the bonds, and 20% the interest expense and interest revenue applicable to the bonds should be eliminated.
c.	80% of the bonds, and 80% the interest expense and interest revenue applicable to the bonds should be eliminated.
d.	none of the bonds, and none of the interest expense and interest revenue applicable to the bonds should be eliminated.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-2

26. Leasing subsidiaries are formed to achieve centralized asset management through leasing to affiliated firms, and when they are consolidated with the parent, they are consolidated

a.	only if the parent controls at least 20% of the leasing subsidiary.
b.	only if the parent controls at least 50% of the leasing subsidiary.
c.	only if the parent controls at least 90% of the leasing subsidiary.
d.	regardless of the ownership percentage of the parent.

 

ANS:  D                    DIF:    E                    OBJ:   5-3

 

27. The effect of an operating lease on the income distribution schedule:

a.	is non-existent.
b.	affects only the lessee’s income.
c.	affects only the lessor’s income.
d.	affects the amount of income or distribution of income between the noncontrolling and controlling interests.

 

ANS:  A                    DIF:    E                    OBJ:   5-4

 

28. Lease terms can be considered to be “significantly affected”:

a.	when the terms are the same for affiliated firms as for independent firms.
b.	when the terms could not reasonably be expected to occur between independent firms.
c.	only if the lease is an operating lease to the lessee and lessor.
d.	only if the lease is a direct-financing lease to the lessee and lessor.

 

ANS:  B                    DIF:    E                    OBJ:   5-5

 

29. Which of the following statements is true?

a.	No adjustments are made in the income distribution schedule as a result of Operating, Direct-Financing, and Sales-Type leases.
b.	No adjustments are made in the income distribution schedule as a result of Operating and Direct-Financing leases.
c.	No adjustments are made in the income distribution schedule as a result of Operating and Sales-Type leases.
d.	No adjustments are made in the income distribution schedule as a result of Direct-Financing and Sales-Type leases.

 

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

 

30. Which of the following statements is true?

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

 

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

 

31. When there is an unguaranteed residual value for the lessor in a Direct-Financing Lease, this means:

a.	the total payments to be received by the lessor will come from the lessee.
b.	the total payments to be received by the lessee will come from the lessor.
c.	a portion of the total payments to be received by the lessor will come from parties outside the consolidated group.
d.	a portion of the total payments to be received by the lessee will come from parties outside the consolidated group.

 

ANS:  C                    DIF:    E                    OBJ:   5-7

32. Consolidation procedures for Sale-Type Leases:

a.	allow for the recognition of the profit or loss from the lease by the lessee at the inception of the lease.
b.	allow for the recognition of the profit or loss from the lease by the lessor at the inception of the lease.
c.	defer the profit or loss and then amortize it over the lessee’s period of usage.
d.	defer the profit or loss and then amortize it over the lessor’s period of usage.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-6

 

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

 

Depreciation

Machine     Debt     Interest     Expense

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

 

 

ANS:  D                    DIF:    M                   OBJ:   5-5

 

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

 

34. Refer to Phil Company. The adjustment needed to arrive at consolidated net income for the first year after the lease is ____.

a.	$0
b.	$800
c.	$2,319
d.	$10,000

 

 

ANS:  A                    DIF:    E                    OBJ:   5-5

 

35. Refer to Phil Company. The adjustment of assets and liabilities needed to prepare a consolidated balance sheet is to eliminate the:

a.	asset leased.
b.	asset leased and the obligation under the capital lease.
c.	obligation under the capital lease and the present value of the minimum lease payments.
d.	obligation under the capital lease.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-5

 

36. Park owns an 80% interest in the common stock of Stable Company. Park leased a machine to Stable under a 5-year, direct financing lease with a bargain purchase option. The lease term began January 1, 20X4. The impact of the lease on the Noncontrolling share of income for 20X4:

a.	is an increase.
b.	is a decrease.
c.	is zero.
d.	cannot be determined from the information given.

 

 

ANS:  C                    DIF:    E                    OBJ:   5-5

 

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

 

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

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

 

 

ANS:  D                    DIF:    D                   OBJ:   5-6

PROBLEM

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

 

Required:

 

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

 

Figure 5-1
Phan Inc. and Smart Corp.
Consolidated Partial Worksheet
For the Year Ended December 31, 20X8
			Eliminations and
	Trial Balance		Adjustments
	Phan	Smart	Debit Debit		Credit
Equipment	987,000	40,000
Accumulated Depreciation – Equipment	(212,500)	(8,000)
Equipment Under Operating Lease	400,000
Accumulated Depreciation – Equipment Under Operating Lease	(120,000)
Rent Receivable	3,000
Rent Payable		(3,000)
Rental Income	(50,000)
Rent Expense		36,000
Depreciation Expense	138,700	2,000

 

 

ANS:

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

Answer 5-1
Phan Inc. and Smart Corp.
Consolidated Partial Worksheet
For the Year Ended December 31, 20X8
			Eliminations and
	Trial Balance		Adjustments
	Phan	Smart	Debit Debit		Credit
Equipment	987,000	40,000	(OL2)	400,000
Accumulated Depreciation – Equipment	(212,500)	(8,000)			(OL2)	120,000
Equipment Under Operating Lease	400,000				(OL2)	400,000
Accumulated Depreciation – Equipment Under Operating Lease	(120,000)		(OL2)	120,000
Rent Receivable	3,000				(OL1b)	3,000
Rent Payable		(3,000)	(OL1b)	3,000
Rental Income	(50,000)		(OL1a)	36,000
Rent Expense		36,000			(OL1a)	36,000
Depreciation Expense	138,700	2,000
				559,000		559,000

 

Eliminations and Adjustments:

 

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

 

 

DIF:    E                    OBJ:   5-4

 

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

 

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

 

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

 

Required:

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

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

 

ANS:

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

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

Eliminations and Adjustments:

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

 

 

DIF:    E                    OBJ:   5-5

 

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

DIF:    M                   OBJ:   5-2

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

 

 

DIF:    M                   OBJ:   5-2

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

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

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

DIF:    D                    OBJ:   5-5

 

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

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Required:

 

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

 

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

 

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

 

 

ANS:

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

 

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

 

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

 

Eliminations and Adjustments:

 

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

 

 

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

 

 

DIF:    D                    OBJ:   5-2

 

ESSAY

 

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

 

Required:

 

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

 

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

 

 

ANS:

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

 

 

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

 

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

 

Required:

 

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

 

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

 

 

ANS:

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

 

 

DIF:    E                    OBJ:   5-2