Fundamentals of Advanced Accounting 8th Edition Hoyle Solutions Manual 1

Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – 7e
Fundamentals of Advanced Accounting 8th Edition Hoyle

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Chapter 6
VARIABLE INTEREST ENTITIES, INTRA-ENTITY DEBT,
CONSOLIDATED CASH FLOWS, AND OTHER ISSUES
Chapter Outline
I. Variable interest entities (VIEs)
A. VIEs typically take the form of a trust, partnership, joint venture, or corporation. In most
cases a sponsoring firm creates these entities to engage in a limited and well-defined set
of business activities. For example, a business may create a VIE to finance the acquisition
of a large asset. The VIE purchases the asset using debt and equity financing, and then
leases the asset back to the sponsoring firm. If their activities are strictly limited and the
asset is pledged as collateral, VIEs are often viewed by lenders as less risky than their
sponsoring firms. As a result, such arrangements can allow financing at lower interest
rates than would otherwise be available to the sponsor.
B. Control of VIEs, by design, sometimes does not rest with its equity holders. Instead,
control is exercised through contractual arrangements with the sponsoring firm who
becomes the "primary beneficiary" of the entity. These contracts can take the form of
leases, participation rights, guarantees, or other residual interests. Through contracting,
the primary beneficiary bears a majority of the risks and receives a majority of the rewards
of the entity, often without owning any voting shares.
C. An entity whose control rests with a primary beneficiary is addressed by FASB ASC
subtopic 810-10 Variable Interest Entities. The following characteristics indicate a
controlling financial interest in a variable interest entity.
1. The power, through voting rights or similar rights, to direct the activities of an entity that
most significantly impact the entity’s economic performance.
2. The obligation to absorb the expected losses of the entity if they occur,or
3. The right to receive the expected residual returns of the entity if they occur
The primary beneficiary bears the risks and receives the rewards of a variable interest
entity and is considered to have a controlling financial interest.
D. If a reporting entity has a controlling financial interest in a variable interest entity, it should
include the assets, liabilities, and results of the activities of the variable interest entity its
consolidated financial statements.
E. In reporting periods subsequent to when a primary beneficiary gains control over a VIE,
consolidation procedures are similar to that for a voting interest entity. A notable exception
in consolidation procedures occurs in accounting for the allocation of consolidated net
income across the controlling and noncontrolling interests. Because variable, rather than
voting, interests determine profit allocation, the underlying agreements between the
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primary beneficiary, the VIE, and other related parties must be carefully reviewed to
determine net income distribution.
II. Intra-entity debt transactions

A. No special difficulty is created when one member of a business combination loans money
to another. The resulting receivable/payable accounts as well as the interest income
expense balances are identical and can be directly offset in the consolidation process.
B. The acquisition of an affiliate's debt instrument from an outside party does require special
handling so that consolidated financial statements can be produced.
1. Because the acquisition price will usually differ from the carrying amount of the liability,
a gain or loss has been created by an effective retirement which is not recorded within
the individual records of either company.
2. Because of the amortization of any associated discounts and/or premiums, the interest
income reported by the buyer will not equal the interest expense of the debtor.
C. In the year of acquisition, the consolidation process eliminates intra-entity accounts (the
liability, the receivable, interest income, and interest expense) while the gain or loss (which
produced all of the discrepancies because of the initial difference) is recognized.
1. Although several alternatives exist, this textbook assigns all income effects resulting
from the retirement to the parent company, the party ultimately responsible for the
decision to reacquire the debt.
2. Any noncontrolling interest is, therefore, not affected by the adjustments utilized to
consolidate intra-entity debt.
D. After the year of effective retirement, all intra-entity accounts must be eliminated again in
each subsequent consolidation. However, when the parent uses the equity method, the
parent’s Investment in Subsidiary account is adjusted in consolidation rather than a gain or
loss account. If the parent employs an accounting method other than the equity method,
then the parent’s Retained Earnings are adjusted for the prior years’ income net effects of
the effective gain/loss on retirement.
1. The change in retained earnings is needed because a gain or loss was created in a
prior year by the effective retirement of the debt, but only interest income and interest
expense were recognized by the two parties.
2. The adjustment to retained earnings at any point in time is the original gain or loss
adjusted for the subsequent amortization of discounts or premiums.
III. Subsidiary preferred stock

A. Subsidiary preferred shares not owned by the parent are a part of noncontrolling interest.
B. The fair value of any subsidiary preferred shares not acquired by the parent is added to
the consideration transferred along with the fair value of the noncontrolling interest in
common shares to compute the acquisition-date fair value of the subsidiary.
IV. Consolidated statement of cash flows

A. Statement is produced from consolidated balance sheet and income statement and not
from the separate cash flow statements of the component companies.
B. Consolidated net income is the starting point for the cash flow from operating section—
including both the parent and noncontrolling interest share.
C. Intra-entity cash transfers are omitted from this statement because they do not occur with
an outside unrelated party.
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D. Dividends paid by the subsidiary to the noncontrolling interest are reported as a financing
activity.
V. Consolidated earnings per share

A. This computation normally follows the pattern described in intermediate accounting
textbooks. For basic EPS, consolidated net income is divided by the weighted-average
number of parent shares outstanding. If convertibles (such as bonds or warrants) exist for
the parent shares, their weight must be included in computing diluted EPS but only if
earnings per share is reduced.
1. The subsidiary's diluted earnings per share are computed first to arrive at (1) an
earnings figure and (2) a shares figure.
2. The portion of the shares figure belonging to the parent is computed. That percentage
of the subsidiary's diluted earnings is then added to the parent's net income in order to
complete the earnings per share computation.
VI. Subsidiary stock transactions

A. If the subsidiary issues new shares of stock or reacquires its own shares as treasury
stock, a change is created in the book value underlying the parent's investment account.
The increase or decrease should be reflected by the parent as an adjustment to this
balance.
B. The book value of the subsidiary that corresponds to the parent's ownership is measured
before and after the transaction with any alteration recorded directly to the investment
account. The parent's additional paid-in capital (or retained earnings) account is normally
adjusted although the recognition of a gain or loss is an alternate accounting treatment.
C. Treasury stock acquired by the subsidiary may also necessitate a similar adjustment to the
parent's investment account. In addition, any subsidiary treasury stock is eliminated within
the consolidation process.
Answer to Discussion Question: Who Lost this $300,000?

This case is designed to give life to a theoretical accounting issue: If a subsidiary's debt is retired,
should the resulting gain or loss be assigned to the parent or to the subsidiary? The case
illustrates that there is no clear-cut solution. This lack of an absolute answer makes financial
accounting both intriguing and frustrating.
The assignment decision is only necessary in the presence of a noncontrolling interest.

Regardless of the ownership level all intra-entity balances are eliminated on the worksheet with a
gain or loss recognized. Not until the consolidated net income is allocated across the controlling
interest and the noncontrolling interest does the assignment decision have an impact.
We assume that financial and operating decisions are made in the best interest of the business
entity as a whole. This debt would not have been retired unless corporate officials believed that
Penston/Swansan would benefit from the decision. Thus, an argument can be made against any
assignment to either separate party.
Students should choose and justify one method. Discussion often centers on the following:
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 Parent company officials made the actual choice that created the book loss. Therefore,
assigning the $300,000 to the subsidiary directs the impact of their decision to the wrong
party. In effect, the subsidiary had nothing to do with this transaction (as indicated in the case)
so that its share of consolidated net income should not be affected by the $300,000 loss.
 The debt was that of the subsidiary. Because the subsidiary's debt is being retired, all of the
$300,000 should be attributed to that party. Financial records measure the results of
transactions and the retirement simply culminates an earlier transaction made by the
subsidiary. The parent is doing no more than acting as an agent for the subsidiary (as
indicated in the case). If the subsidiary had acquired its own debt, for example, no question as
to the assignment would have existed. Thus, changing that assignment simply because the
parent agreed to be the acquirer is not justified.
 Both parties were involved in the transaction so that some allocation of the loss is required. If,
at the time of repurchase, a discount existed within the subsidiary's accounts, this figure would
have been amortized to interest expense (if the debt had not been retired). Thus, the
$300,000 loss was accepted now in place of the later amortization. This reasoning then
assigns this portion of the loss to the subsidiary. Because the parent agreed to pay more than
face value, that remaining portion is assigned to the buyer.
Answers to Questions
1. A variable interest entity (VIE) is a business structure that is designed to accomplish a specific
purpose. A VIE can take the form of a trust, partnership, joint venture, or corporation although
typically it has neither independent management nor employees. The entity is frequently
sponsored by another firm to achieve favorable financing rates.
2. Variable interests are contractual, ownership, or other pecuniary interests in an entity that
change with changes in the entity's net asset value. Variable interests will absorb portions of a
variable interest entity's expected losses if they occur or receive portions of the entity's
expected residual returns if they occur. Variable interests typically are accompanied by
contractual arrangements that provide decision making power to the owner of the variable
interests. Examples of variable interests include debt guarantees, lease residual value
guarantees, participation rights, and other financial interests.
3. The following characteristics are indicative of an enterprise qualifying as a primary beneficiary

with a controlling financial interest in a VIE.
 The power, through voting rights or similar rights, to direct the activities of an entity that
most significantly impact the entity’s economic performance.
 The obligation to absorb the expected losses of the entity if they occur, or
 The right to receive the expected residual returns of the entity if they occur
4. Because the bonds were purchased from an outside party, the acquisition price is likely to
differ from the carrying amount of the debt in the subsidiary's records. This difference creates
accounting challenges in handling the intra-entity transaction. From a consolidated
perspective, the debt is retired; a gain or loss is reported with no further interest being
recorded. In reality, each company continues to maintain these bonds on their individual
financial records. Also, because discounts and/or premiums are likely to be present, these
account balances as well as the interest income/expense will change from period to period
because of amortization. For reporting purposes, all individual accounts must be eliminated
with the gain or loss being reported so that the events are shown from the vantage point of the
consolidated entity.
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5. If the bonds are acquired directly from the affiliate company, all reciprocal accounts will be
equal in amount. The debt and the receivable will be in agreement so that no gain or loss is
created. Interest income and interest expense should also reflect identical amounts.
Therefore, the consolidation process for this type of intra-entity debt requires no more than the
offsetting of the various reciprocal balances.
6. The gain or loss to be reported is the difference between the price paid and the carrying
amount of the debt on the date of acquisition. For consolidation purposes, this gain or loss
should be recognized immediately on the date of acquisition.
7. Because the bonds are still legally outstanding, they will continue to be found on both sets of
financial records. Thus, each account (Bonds Payable, Investment in Bonds, Interest
Expense, and Interest Income) must be eliminated within the consolidation process. Any gain
or loss on the effective retirement as well as later effects on interest caused by amortization
are also included to arrive at an adjustment to the beginning retained earnings (or the
Investment account if the equity method is used) of the parent company.
8. The original gain is never recognized within the financial records of either company. Thus,
within the consolidation process for the year of acquisition, the gain is directly recorded
whereas (for each subsequent year) it is entered as an adjustment to beginning retained
earnings (or the Investment account if the equity method is used). In addition, because the
carrying amount of the debt and the investment are not in agreement, the interest expense
and interest income balances being recorded by the two companies will differ each year
because of the amortization process. This amortization effectively reduces the difference
between the individual retained earnings balances and the total that is appropriate for the
consolidated entity. Consequently, a smaller change is needed each period to arrive at the
balance to be reported. For this reason, the annual adjustment to beginning retained earnings
(or the Investment account if the equity method is used) gradually decreases over the life of
the bond.
9. No set rule exists for assigning the income effects from intra-entity debt transactions although
several different theories exist and include: (1) assignment of the entire amount to the debtor,
(2) assignment of the entire amount to the buyer, and (3) allocation of the gain or loss
between the two parties in some manner. This textbook attributes the entire income effect (the
$45,000 gain in this case) to the parent company. Assignment to the parent is justified
because that party is ultimately responsible for the decision to retire the debt from the public
market. The answer to the discussion question included in this chapter analyzes this question
in more detail.
10. Subsidiary outstanding preferred shares are part of the noncontrolling interest and are
included in the consolidated financial statements at acquisition-date fair value and
subsequently adjusted for their share of subsidiary income and dividends.
11. The consolidated cash flow statement is developed from consolidated balance sheet and
income statement figures. Thus, the cash flows generated by operating, investing, and
financing activities are identified only after the consolidation of these other statements.
12. The noncontrolling interest share of the subsidiary’s net income is a component of
consolidated net income. Consolidated net income then is adjusted for noncash and other
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items to arrive at consolidated cash flows from operations. Any dividends paid by the
subsidiary to these outside owners are listed as a financing activity because an actual cash
outflow occurs.
13. An alternative to the normal diluted earnings per share calculation is required whenever the
subsidiary has dilutive convertible securities such as bonds or warrants. In this case, the
potential impact of the conversion of subsidiary shares must be factored into the overall
diluted earnings per share computation.
14. Basic Earnings per Share. The existence of subsidiary convertible securities does not affect
basic EPS. The parent’s basic earnings per share is computed by dividing the parent’s share
of consolidated net income by the weighted average number of parent shares outstanding.
Diluted Earnings per Share. The subsidiary's diluted earnings per share is computed by
including both convertible items. The portion of the parent's controlled shares to the total
shares used in this calculation is then determined. Only this percentage (of the income figure
used in the subsidiary's computation) is added to the parent's income in arriving at the parent
company’s diluted earnings per share.
15. Several reasons could exist for a subsidiary to issue new shares of stock to outside parties.
First, additional financing is brought into the company by any such sale. Also, stock issuance
may be used to entice new individuals to join the organization. Additional management
personnel, as an example, might be attracted to the company in this manner. The company
could also be forced to sell shares because of government regulation. Many countries require
some degree of local ownership as a prerequisite for operating within that country.
16. Because the new stock was issued at a price above the subsidiary’s assigned consolidation
value, the overall valuation for Metcalf's stock has been increased. Consequently, the
Washburn's investment is increased to reflect this change. To measure the effect, the value of
Washburn's investment is calculated both before and after the new issue. Because the
increment is the result of a stock transaction, an increase is made to additional paid-in capital.
Although the subsidiary's shares (both new and old) are eliminated in the consolidation
process, the increase in the parent's APIC (or gain or loss) carries into the consolidated
figures. Also, the noncontrolling interest percentage of the subsidiary increases.
17. A stock dividend does not alter the assigned consolidated subsidiary value and, thus, creates
no effect on Washburn's investment account or on the consolidated figures. Hence, no entry is
recorded by the parent company in connection with the subsidiary's stock dividend.
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Answers to Problems
1. C
2. B Vintage Company net income ...................................................... $100,000

Less: Prairie Company 15% ownership share ............................ (15,000)
Less: Prairie Company 40% participating rights ........................ (40,000)
Net income attributable to noncontrolling interest .................... $45,000
3. B
4. D
5. A
6. D
7. D Cash flow from operations:

Net income ................................................................. $45,000
Depreciation ............................................................... 10,000
Trademark amortization ............................................ 15,000
Increase in accounts receivable............................... (17,000)
Increase in inventory ................................................. (40,000)
Increase in accounts payable ................................... 12,000 (20,000)
Cash flow from operations ....................................... $25,000
8. C Cash flow from financing activities:

Dividends to parent’s interest .................................. ($12,000)
Dividends to noncontrolling interest (20%  $5,000) (1,000)
Reduction in long-term notes payable .................... (25,000)
Cash flow from financing activities ......................... ($38,000)
9. C
10. C Post-issue subsidiary valuation ($800,000 + $250,000) $1,050,000

Arcola’s new ownership percentage (40,000 ÷ 50,000) 80%
Arcola’s share of post-issue subsidiary valuation $ 840,000
Arcola’s pre-issue equity balance 800,000
Increase to Arcola’s investment account $ 40,000
11. C Dane’s income from own operations ....................... $185,000

Carlton’s income ...................................................... 105,000
Eliminate intra-entity interest income ...................... (19,000)
Eliminate intra-entity interest expense .................... 18,000
Recognize retirement gain on debt ($209,000 – $196,000) 13,000
Consolidated net income .................................... $302,000
6-6-7
12. B Mattoon’s share of consolidated net income .......... $465,000

Number of Mattoon common shares outstanding .. 100,000
Mattoon’s EPS = ($465,000 ÷ 100,000 shares) ......... $4.65
13. B Aaron net income ..................................................... $430,000

Less intra-entity dividends (initial value method) .. (8,050) $421,950
Zeese reported net income ...................................... 164,000
Gain on extinguishment of debt ($60,200 – $56,000) 4,200
Eliminate interest expense on "retired" debt
($60,200 × 10%) .................................................... 6,020
Eliminate interest income on "retired" debt
($56,000 × 12%) .................................................... (6,720)
Consolidated net income ......................................... $589,450
14. B 30% of $147,000 subsidiary net income; the intra-entity debt effects are
attributed solely to the parent company. 30% x $147,000 = $44,100
15. A For 2018, the adjustment to beginning retained earnings should recognize
the gain on the retirement of the debt, the elimination of the 2017 interest
expense, and the elimination of the 2017 interest income.
Gain on Retirement of Bond:

Original carrying amount .................................................... $10,600,000
2014–2016 amortization ($600,000 ÷ 20 yrs. × 3 yrs.) ....... (90,000)
Carrying amount, January 1, 2018 ..................................... $10,510,000
Percentage of bonds retired ............................................... 40%
Carrying amount of retired bonds ...................................... $ 4,204,000
Cash received ($4,000,000 × 96.6%) ................................... 3,864,000
Gain on retirement of bonds ............................................... $ 340,000
Interest Expense on Intra-Entity Debt—2017
Cash interest expense (9% × $4,000,000) .......................... $360,000
Premium amortization ($30,000 per year total × 40%
retired portion of bonds) ............................................... (12,000)
Interest expense on intra-entity debt ................................. $348,000
Interest Income on Intra-Entity Debt—2017
Cash interest income (9% × $4,000,000) ............................ $360,000
Discount amortization (.034 × $4,000,000 ÷ 17 years) ....... 8,000
Interest income on intra-entity debt ................................... $368,000
Adjustment to 1/1/18 Retained Earnings
Recognition of 2017 gain on extinguishment of debt (above) ..... $340,000
Elimination of 2017 intra-entity interest expense (above)............ 348,000
Elimination of 2017 intra-entity interest income (above) ............. (368,000)
Increase in retained earnings, 1/1/18 ....................................... $320,000
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16. D Consideration transferred for preferred stock ............................. $ 424,000

Consideration transferred for common stock .............................. 3,960,000
Noncontrolling interest fair value for preferred ........................... 1,696,000
Noncontrolling interest fair value for common ............................ 440,000
Acquisition-date fair value ............................................................. 6,520,000
Acquisition-date identified net asset fair value ........................... (6,000,000)
Goodwill .......................................................................................... $ 520,000
17. B Consideration transferred for preferred stock ............................. $214,000

Consideration transferred for common stock .............................. 1,253,280
Noncontrolling interest fair value for common ............................ 835,520
Acquisition-date fair value ............................................................. $2,302,800
Acquisition-date book value .......................................................... (2,174,000)
Excess fair over book value ........................................................... $ 128,800
to building .................................................................................. 63,600
to goodwill .................................................................................. $ 65,200
18. B Parent’s reported sales ............................................ $480,000

Subsidiary's reported sales ..................................... 264,000
Less: intra-entity transfers ...................................... (57,600)
Sales to outsiders ............................................... $686,400
Less: increase in receivables ................................... (37,300)
Cash generated by sales .................................... $649,100
19. B Subsidiary’s unamortized fair value of prior to new share issue

(12,000 × $49) ....................................................... $588,000
Parent's ownership ................................................... 100%
Unamortized subsidiary fair value ......................... $588,000
Subsidiary unamortized fair value after issuing new

shares (above value plus 3,000 shares at $50 each) $738,000
Parent's ownership 12,000 ÷ 15,000 shares) .......... 80%
Unamortized subsidiary fair value after stock issue $590,400
Investment in Veritable increases by $2,400 ($590,400 less $588,000).
20. A Because the parent acquired 80 percent of the new shares, its proportional
ownership remains the same. Because the amount the parent pays will
necessarily equal 80 percent of the increase in the subsidiary's book value,
no separate adjustment by the parent is required.
6-6-9
21. C Adjusted acquisition-date sub. fair value at 1/1/18

Consideration transferred ........................................................ $592,000
Noncontrolling interest acquisition-date fair value ................ 148,000
Increase in Stamford book value .............................................. 80,000
Stock issue proceeds ................................................................ 150,000
Subsidiary valuation basis 1/1/18 .................................................. 970,000
New parent ownership (32,000 shs. ÷ 50,000 shs.) ...................... 64%
Parent’s post-stock issue ownership balance .............................. $620,800
Parent's investment account ($592,000 + [80% × 80,000]) .......... 656,000
Required adjustment —decrease ............................................ $(35,200)
22. D Adjusted acquisition-date fair value ($820,000 – $192,000) ........ $628,000

New parent ownership (32,000 shs. ÷ 32,000 shs.) ...................... 100%
Fair value equivalency of parent's ownership ........................ $628,000
Parent's investment account ($592,000 + [80% × 80,000]) .......... 656,000
Required adjustment—decrease .............................................. $ (28,000)
23. (10 minutes) (Qualification of Primary Beneficiary of a VIE)

Consolidation of a variable interest entity is required if a firm has a variable
interest that gives the firm
 The power, through voting rights or similar rights, to direct the activities
of an entity that most significantly impact the entity’s economic
performance.
 The obligation to absorb a majority of the entity's expected losses if they
occur and/or the right to receive a majority of the entity's expected
residual returns if they occur
Because (1) HCO Media’s losses are limited by contract, and (2) Hillsborough
has the right to receive the residual benefits of the sales generated on the
HCO Media internet site above $500,000, Hillsborough should consolidate
HCO Media.
24. (30 minutes) (VIE Qualifications for Consolidation)
a. The purpose of consolidated financial statements is to present the financial

position and results of operations of a group of businesses as if they were a
single entity. They are designed to provide information useful for making
business and economic decisions—especially assessing amounts, timing,
and uncertainty of prospective cash flows. Consolidated statements also
provide more complete information about the resources, obligations, risks,
and opportunities of an enterprise than separate statements.
b. An entity qualifies as a VIE and is subject to consolidation if either of the

following conditions exist.
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24. (continued)
 The total equity at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties. In most cases, if equity at risk is less than 10% of total assets, the
risk is deemed insufficient.
 The equity investors in the VIE lack any one of the following three
characteristics of a controlling financial interest.
1. The power, through voting rights or similar rights, to direct the
activities of an entity that most significantly impact the entity’s
economic performance.
2. The obligation to absorb the expected losses of the entity if they occur
(e.g., another firm may guarantee a return to the equity investors)
3. The right to receive the expected residual returns of the entity (e.g.,
the investors' return may be capped by the entity's governing
documents or other arrangements with variable interest holders).
Consolidation of a variable interest entity is required if a firm has a variable

interest that gives the firm
 The power, through voting rights or similar rights, to direct the activities
of an entity that most significantly impact the entity’s economic
performance.
 The obligation to absorb a majority of the entity's expected losses if they
occur and/or the right to receive a majority of the entity's expected
residual returns if they occur
c. Risks of the construction project that has TecPC has effectively shifted to
the owners of the VIE:
At the end of the 1st five-year lease term, if the parent opts to sell the facility,
and the proceeds are insufficient to repay the VIE investors, TecPC may be
required to pay up to 85% of the project's cost. Thus, a potential 15% risk.
Risks that remain with TecPC

 Guarantees of return to VIE investors at market rate, if facility does not
perform as expected TecPC is still obligated to pay market rates.
 If lease is not renewed, TecPC must either purchase the facility or sell it
on behalf of the VIE with a guarantee of Investors' (debt and equity)
balances representing a risk of decline in market value of asset
 Debt guarantees
6-6-11
24. (continued)
d. TecPC possesses the following characteristics of a primary beneficiary:
 Direct decision-making ability (end of five-year lease term).
 Absorb a majority of the entity's expected losses if they occur (via debt
guarantees and guaranteed lease payments and residual value).
 Receive a majority of the entity's expected residual returns if they occur
(via use of the facility and potential increase in its market value).
25. (10 minutes) (Consolidation of variable interest entity.)

a. Implied valuation and excess allocation for Softplus.
Noncontrolling interest fair value $ 60,000
Consideration transferred by Pantech 20,000
Total business fair value 80,000
Fair value of VIE net assets 100,000
Excess net asset value fair value $20,000
PanTech recognizes the $20,000 excess net asset fair value as a bargain purchase
and records all of SoftPlus’ assets and liabilities at their individual fair values.
Cash $20,000
Marketing software 160,000
Computer equipment 40,000
Long-term debt (120,000)
Noncontrolling interest (60,000)
Pantech equity interest (20,000)
Gain on bargain purchase (20,000)
-0-
b. Implied valuation and excess allocation for Softplus.
Noncontrolling interest fair value 60,000
Consideration transferred by Pantech 20,000
Total business fair value 80,000
Fair value of VIE net identifiable assets 60,000
Goodwill $20,000
When the fair value of a VIE (that is a business) is greater than assessed
asset values, all identifiable assets and liabilities are reported at fair values
(unless a previously held interest) and the difference is treated as goodwill.
Cash $20,000
Marketing software 120,000
Computer equipment 40,000
Goodwill (excess business fair value) 20,000
Long-term debt (120,000)
Noncontrolling interest (60,000)
Pantech equity interest (20,000)
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26. (40 minutes) (Acquisition-date consolidation worksheet for a parent and a

variable interest entity)
Access Net Consolidated

IT Connect Consolidation Entries NCI Balances
Cash 61,000 41,000 102,000
Investment in NetConnect 1,000,000 S 65,600
A 934,400
Capitalized software 981,000 156,000 1,137,000
Computer equipment 1,066,000 56,000 1,122,000
Communications
equipment 916,000 336,000 1,252,000
Research and
development asset A1,960,000 1,960,000
Patent 191,000 191,000
Goodwill A 376,000 376,000
Total assets 4,024,000 780,000 6,140,000
Long-term debt (941,000) (616,000) (1,557,000)

Common stock-Access IT (2,660,000) (2,660,000)
Common stock-
NetConnect (41,000) S 41,000
Retained earnings (423,000) (123,000) S 123,000 (423,000)
Noncontrolling interest S 98,400
A 1,401,600 (1,500,000) (1,500,000)
Total liabilities and equity (4,024,000) (780,000) 2,500,000 2,500,000 (6,140,000)
Consideration transferred $1,000,000

Noncontrolling interest fair value 1,500,000
Acquisition-date fair value $2,500,000
Book value (164,000)
Excess fair over book value $2,336,000
Research and development asset 1,960,000
Goodwill $ 376,000
6-6-13
27. (35 minutes) (Consolidation of a primary beneficiary and variable interest entity one
year after control is obtained)
Primair and Vista
Consolidation Worksheet
Year Ended December 31, 2018
Primair Vista Adj. & Elim. NCI Consolidated

Revenues (839,500) (188,000) (1,027,500)
Cost of good sold 612,000 75,000 687,000
Other operating expenses 78,000 25,000 103,000
Interest income (21,000) (IE) 21,000 -0-
Interest expense 21,000 (IE) 21,000 -0-
Net Income (170,500) (67,000)
Consolidated net income (237,500)
to noncontrolling interest (20,000) 20,000
to Primair (217,500)
Retained earnings 1/1 (1,555,000) (40,000) (S) 40,000 (1,555,000)

Net income (170,500) (67,000) (217,500)
Dividends declared 250,000 -0- 250,000
Retained earnings 12/31 (1,475,500) (107,000) (1,522,500)
Current assets 460,500 50,000 510,500

Loan receivable from Vista 300,000 (P) 300,000 -0-
Equipment (net) 794,000 525,000 1,319,000
Trademark 0 45,000 (A) 95,000 140,000
Total assets 1,554,500 620,000 1,969,500
Current liabilities (29,000) (18,000) (47,000)

Long-term debt (180,000) (180,000)
Loan payable to Primair (300,000) (P) 300,000 -0-
Common stock (50,000) (15,000) (S) 15,000 (50,000)
(S) 55,000
Noncontrolling interest (A) 95,000 (150,000) (170,000)
Retained earnings 12/31 (1,475,500) (107,000) (1,522,500)

Total liabilities and equity (1,554,500) (620,000) 471,000 471,000 (1,969,500)
Fair value of Vista on January 1, 2018 $150,000

Book value—date control is obtained 55,000
Excess fair over book value 95,000
To trademark (indefinite life) 95,000
-0-
Consolidated net income distribution:

Consolidated net income $237,500
To noncontrolling interest $67,000 – (25% x 188,000) 20,000
To controlling interest $217,500
6-14
28. (25 Minutes) (Consolidation entry for three consecutive years to report effects
of intra-entity bond acquisition. Straight-line method used. Parent uses equity
method)
a. Carrying Amount of Bonds Payable, January 1, 2016
Carrying amount, January 1, 2014 ........................................ $1,050,000

Amortization—2014–2015 ($5,000 per year
[$50,000 premium ÷ 10 years] for two years) .................. 10,000
Carrying amount of bonds payable, January 1, 2016 .......... $1,040,000
Carrying amount of 40% of bonds payable
(intra-entity portion), January 1, 2016 ............................. $416,000
Gain on Retirement of Bonds, January 1, 2016

Purchase price ($400,000 × 96%) .......................................... $384,000
Carrying amount of liability (computed above) ................... 416,000
Gain on retirement of bonds ................................................. $ 32,000
Carrying Amount of Bonds Payable, December 31, 2016

Carrying amount, January 1, 2016 (computed above) ........ $1,040,000
Amortization for 2016.............................................................. 5,000
Carrying amount of bonds payable, December 31, 2016 ..... $1,035,000
Carrying amount 40% bonds payable (intra-entity portion),
December 31, 2016 ............................................................ $414,000
Carrying Amount of Investment in Bonds, December 31, 2016

Investment carrying amount, Jan. 1, 2016 (purchase price) $384,000
Amortization for 2016 ($16,000 discount ÷ 8-yr. rem. life) .. 2,000
Carrying amount of investment, December 31, 2016 .......... $386,000
Intra-entity Interest Balances for 2016

Interest expense:
Cash payment ($400,000 × 9%) ........................................ $36,000
Amortization of premium for 2016 ($5,000 per year
× 40% intra-entity portion) .......................................... 2,000
Intra-entity interest expense ............................................ $34,000
Interest income:
Cash collection ($400,000 × 9%) ...................................... $36,000
Amortization of discount for 2016 (above) ..................... 2,000
Intra-entity interest income .............................................. $38,000
6-6-15
28. (continued)
CONSOLIDATION ENTRY B (2016)

Bonds Payable .......................................................... 400,000
Premium on Bonds Payable ..................................... 14,000
Interest Income .......................................................... 38,000
Investment in Bonds.............................................. 386,000
Interest Expense ................................................... 34,000
Gain on Retirement of Bonds .............................. 32,000
(To eliminate accounts stemming from intra-entity bonds [balances
computed above] and to recognize gain on the effective retirement of this
debt.)
b. In 2017, because straight-line amortization is used, the interest accounts

remain unchanged at $38,000 and $34,000. However, the premium
associated with the bond payable as well as the discount on the
investment are affected by the $2,000 per year amortization. In addition,
the gain now has to be removed from the Investment in Hamilton account.
Concurrently, the two interest balances recorded by the individual
companies in 2017 are removed from the Investment in Hamilton because
they occurred after the intra-entity retirement. Gain of $32,000 plus
$34,000 expense removal less $38,000 income elimination yields a
$28,000 credit to the investment account.
CONSOLIDATION ENTRY *B (2017)
Bonds Payable .............................................................. 400,000

Premium on Bonds Payable (net of $2,000 amortization) 12,000
Interest Income .............................................................. 38,000
Investment in Bonds (net of $2,000 amortization) ...... 388,000
Interest Expense ....................................................... 34,000
Investment in Hamilton ............................................. 28,000
(To remove intra-entity bond accounts that remain on the individual
records of both companies. Both debt and bond investment balances
have been adjusted for amortizations. Entry to Investment in Hamilton
brings the totals reported by the individual companies [interest income
and expense] to the balance of the original gain.)
c. As with part b, new premium and discount balances must be determined

and then removed. The adjustment made to the Investment in Hamilton
takes into account that another year of interest expense ($34,000) and
income ($38,000) have been incorporated into the investment account
through application of the equity method.
6-16
28. (continued)
CONSOLIDATION ENTRY *B (2018)
Bonds Payable .................................................... 400,000

Premium on Bonds Payable ............................... 10,000
Interest Income .................................................... 38,000
Investment in Bonds ...................................... 390,000
Interest Expense ............................................ 34,000
Investment in Hamilton .................................. 24,000
(To remove intra-entity bond accounts that remain on the individual
records of both companies. Both debt and bond investment balances
have been adjusted for amortizations. Credit to Investment in Hamilton
brings the totals reported by the individual companies to the balance of
the original gain.)
29. (12 Minutes) (Determine consolidated income statement accounts after

acquisition of intra-entity bonds.)
 Interest Expense To Be Eliminated = $84,000 × 11% = $9,240

 Interest Income To Be Eliminated = $108,000 × 8% = $8,640
 Loss To Be Recognized = $108,000 – $84,000 = $24,000
CONSOLIDATED TOTALS
 Revenues and Interest Income = $1,051,360 (add the two book values and
eliminate interest income on intra-entity bond)
 Operating and Interest Expense = $751,760 (add the two book values and
eliminate interest expense on intra-entity bond)
 Other Gains and Losses = $152,000 (add the two book values)
 Loss on Retirement of Debt = $24,000 (computed above)
 Net Income = $427,600 (consolidated revenues, interest income, and
gains less consolidated operating and interest expense and losses)
6-6-17
30. (30 Minutes) (Consolidation entry for two years to report effects of intra-
entity bond acquisition. Effective rate method applied.)
a. Loss on Repurchase of Bond

Cost of acquisition ......................................... $201,000
Carrying amount ($760,000 × 1/5) ................. 152,000
Loss on repurchase ....................................... $ 49,000
Interest Balances for 2016

Interest income:
$201,000 × 7% ............................................... $14,070
Interest expense:
$152,000 (carrying amount [above]) × 12%. $18,240
Investment in Bonds Balance, December 31, 2016

Original cost, 1/1/16 ........................................ $201,000
Amortization of premium:
Cash interest ($180,000 × 9%) ................. $16,200
Effective interest income (above) ........... 14,070 2,130
Investment in Bonds, 12/31/16 ....................... $198,870
Bonds Payable Balance, December 31, 2016

Carrying amount, 1/1/16 (above) .................. $152,000
Amortization of discount:
Cash interest ($180,000 × 9%) ................. $16,200
Effective interest expense (above) .......... 18,240 2,040
Bonds payable, 12/31/16 ................................ $154,040
Entry B—12/31/16
Bonds Payable ............................................... 154,040
Interest Income .............................................. 14,070
Loss on Retirement of Debt .......................... 49,000
Investment in Bonds ................................ 198,870
Interest Expense ....................................... 18,240
(To eliminate intra-entity debt holdings and recognize loss on
retirement.)
b. Interest Balances for 2017 followed by 2018

Interest income: $198,870 (Investment in Bonds
balance for the year) × 7% (rounded)....................... $13,921
Interest expense: $154,040 (liability balance

for the year) × 12% (rounded) ................................... $18,485
6-18
30. (continued)

Carrying amount, January 1, 2017 (part a) ............. $198,870
Cash interest ($180,000 × 9%) ............................ $16,200
Effective interest income (above) ...................... 13,921 2,279
Investment in Bonds balance, December 31, 2017 . $196,591

Carrying amount, January 1, 2017 (part a) ............. $154,040
Cash interest ($180,000 × 9%) ............................ $16,200
Effective interest expense (above) .................... 18,485 2,285
Bonds payable balance, December 31, 2017 .......... $156,325
Interest Balances for 2018

Interest income: $196,591 (Investment in Bonds.... $13,761
balance for the year [above]) × 7% (rounded)
Interest expense: $156,325 (liability balance

for the year [above]) × 12% ................................ $18,759

Carrying amount, January 1, 2018 (above) ............. $196,591
Cash interest ($180,000 × 9%) ............................ $16,200
Effective interest income (above) ...................... 13,761 2,439
Investment in Bonds balance, December 31, 2018 . $194,152

Carrying amount, January 1, 2018 (above) ............. $156,325
Cash interest ($180,000 × 9%) ............................ $16,200
Effective interest expense (above) .................... 18,759 2,559
Bonds payable balance, December 31, 2018 .......... $158,884
6-6-19
30. (continued)
Adjustment Needed to Investment in Zack for Bond Retirement Loss:
Loss on retirement of debt (part a) ............................................ $49,000

Amounts recognized in previous years:
Interest income: 2017 $(14,070)
2017 (13,921) $(27,991)
Interest expense: 2017 $18,240

2017 18,485 36,725 8,734
Adjustment needed to Investment
in Zack to arrive at consolidated total .................................. $40,266
Entry *B—12/31/18
Bonds Payable .......................................................... 158,884

Interest Income ......................................................... 13,761
Investment in Zack ................................................... 40,266
Investment in Bonds ........................................... 194,152
Interest Expense ................................................. 18,759
(To eliminate intra-entity bond holdings and adjust the Investment in Zack
for the unrecognized loss on retirement. Amounts computed above.)
Many of the above amounts can also be determined using amortization tables as
shown below.
Investment in Bonds Amortization Table:
Interest Carrying
Cash Revenue Amortization Amount
201,000
2016 16,200 14,070 2,130 198,870
2017 16,200 13,921 2,279 196,591
2018 16,200 13,761 2,439 194,152
Intra-Entity Portion of Bonds Payable Amortization Table:
Interest Carrying
Cash Expense Amortization Amount
152,000
2016 16,200 18,240 (2,040) 154,040
2017 16,200 18,485 (2,285) 156,325
2018 16,200 18,759 (2,559) 158,884
6-20
31. (35 Minutes) (Consolidation procedures and balances related to intra-entity

bonds. Both straight-line and effective interest rate methods are used.)
a. Acquisition price of bonds ............................................................... $283,550

Carrying amount of bonds payable (see Schedule 1)
($443,497 × 50%) .......................................................................... (221,749)
Loss on retirement ............................................................................ $ 61,801
SCHEDULE 1—Carrying Amount of Bonds Payable
Effective
Carrying Interest Cash Year-End
Date Amount (12% Rate) Interest Amortization Carrying Amount
2015 $435,763 $52,292 $50,000 $2,292 $438,055
2016 $438,055 $52,567 $50,000 $2,567 $440,622
2017 $440,622 $52,875 $50,000 $2,875 $443,497
b. Investment in Bloom Bonds

Purchase price—12/31/17 ......................................... $283,550
Cash interest ($250,000 × 10%) ............................... $25,000
Effective interest income ($283,550 × 8%) .............. 22,684
Amortization ........................................................ 2,316
Investment in Bloom bonds, 12/31/18 ..................... $281,234
Bonds Payable
Carrying amount—12/31/17 (computed above) ...... $443,497
Cash interest ($500,000 × 10%) ............................... $50,000
Effective interest expense ($443,497 × 12%) .......... 53,220
Amortization ........................................................ 3,220
Bonds payable, 12/31/18 .......................................... $446,717
Although not required in the problem, the consolidation entry as of 12/31/18 is

as follows. The reduction in retained earnings represents the loss only; no intra-
entity interest was recognized in the previous year because the purchase was
made on December 31.
Entry *B (2018)
Bonds Payable ($446,717 × 50%) ............................ 223,359
Interest Income ......................................................... 22,684
Retained Earnings, 1/1/18 ........................................ 61,801
Interest Expense ($53,220 × 50%) ...................... 26,610
Investment in Bloom Bonds ............................... 281,234
6-6-21
31. (continued)
c. Loss on Retirement of Bond

Because Bloom uses the straight-line method of amortization, the loss on
retirement must be computed again.
Original issue price—1/1/15 ......................................................... $435,763
Discount amortization (2015–2017) ([$64,237 ÷ 11] × 3 years) .. 17,519
Carrying amount 12/31/17 ........................................................... $453,282
Intra-entity portion of bonds payable (50%) .............................. $226,641
Purchase price ............................................................................. 283,550
Loss on retirement ...................................................................... $ 56,909
Investment in Bloom Bonds

Purchase price—12/31/17 ........................................................... $283,550
Premium amortization (2018) ($33,550 ÷ 8) ............................... (4,194)
Carrying amount 12/31/18 ...................................................... $279,356
Interest Income
Cash interest ($250,000 × 10%) .................................................. $25,000
Premium amortization (above) ................................................... (4,194)
Intra-entity interest income—2018 ........................................ $20,806
Bonds Payable
Original issue price 1/1/15 ........................................................... $435,763
Discount amortization (2015–2018) [($64,237 ÷ 11) × 4 years] . 23,359
Carrying amount 12/31/18 ...................................................... $459,122
Opus ownership ..................................................................... 50%
Intra-entity portion—12/31/18 .......................................... $229,561
Interest Expense
Cash interest ($250,000 × 10%) .................................................. $25,000
Discount amortization ([$64,237 ÷ 11] × 1/2) ............................. 2,920
Intra-entity interest expense—2018 ...................................... $27,920
The reduction in retained earnings represents the loss only; no intra-entity

interest was recognized in the previous year because the purchase was made
on December 31.
Entry *B (2018)
Bonds Payable .......................................................... 229,561
Interest Income ......................................................... 20,806
Retained Earnings, 1/1/18 ....................................... 56,909
Interest Expense ................................................ 27,920
Investment in Bloom Bonds ............................... 279,356
6-22
32. (8 Minutes) (Determine goodwill for an acquisition in which subsidiary has both
common stock and preferred stock)
Consideration transferred for common stock $1,600,000
Consideration transferred for preferred stock 630,000
Noncontrolling interest in common stock 400,000
Noncontrolling interest in preferred stock 270,000
Hepner’s acquisition-date fair value $2,900,000
Book value of Hepner 2,500,000
Goodwill $ 400,000
33. (30 Minutes) (Consolidation entries with subsidiary cumulative preferred stock.)
a. The preferred shares are entitled to the specified cumulative dividend. Thus, the
noncontrolling interest's share of the subsidiary's income equals $160,000 or 8
percent of the preferred stock's par value.
b. Acquisition-Date Fair Value Allocation and Amortization

Consideration transferred ........................................................... $14,040,000
Noncontrolling interest fair value (preferred shares) ................ 2,000,000
Acquisition-date fair value of Smith ........................................... 16,040,000
Book value ................................................................................... (16,000,000)
Franchises .................................................................................... $ 40,000
Period of amortization ................................................................. 40 years
Annual amortization .................................................................... $1,000
Investment in Smith Account, December 31, 2018

Consideration transferred, January 1, 2018 .............................. $14,040,000
Equity accrual (income remaining for common stock
after preferred stock dividend) ............................................. 290,000
Dividends collected ($360,000 total less $160,000
paid to preferred shareholders) ............................................ (200,000)
Amortization for 2018 (above) .................................................... (1,000)
Investment in Smith account, December 31, 2018..................... $14,129,000
c. Consolidation Entries
Entry S and A combined
Preferred Stock (Smith) ........................................... 2,000,000
Common Stock (Smith) ............................................ 4,000,000
Retained Earnings, 1/1/18 (Smith) ........................... 10,000,000
Franchises ................................................................. 40,000
Investment in Smith ........................................ 14,040,000
Noncontrolling Interest in Smith, Inc ............ 2,000,000
(To eliminate subsidiary stockholders’ equity, record excess fair values, and
record outside ownership of subsidiary's preferred stock at fair value)
6-6-23
33. c. (continued)
Entry I Equity Income of Subsidiary .............................. 289,000

Investment in Smith ....................................... 289,000
(To eliminate equity accrual made in connection with common stock
[$290,000] along with excess amortization recorded by parent.)
Entry D Investment in Smith ............................................ 200,000

Dividends Declared ........................................ 200,000
(To remove intra-entity dividend declarations made on common stock [see
computation above].)
Entry E Amortization Expense ......................................... 1,000

Franchises ...................................................... 1,000
(To recognize amortization of franchises for current year [see computation
above].)
34. (30 Minutes) (Prepare consolidation entries for an acquisition where subsidiary
has outstanding preferred stock)
Consideration transferred for common stock $ 7,368,000

Consideration transferred for preferred stock 3,100,000
Noncontrolling interest in common stock 4,912,000
Acquisition-date fair value for Young $15,380,000
Young’s book value 15,000,000
Excess fair over book value 380,000
to building (5-year life) $200,000
to equipment (10-year life) (100,000) 100,000
to brand name (20-year life) $280,000
CONSOLIDATION ENTRIES
Entries S and A combined
Preferred Stock (Young) .......................................... 1,000,000
Common Stock (Young) ........................................... 4,000,000
Retained Earnings (Young) ...................................... 10,000,000
Brand Name ............................................................... 280,000
Building .................................................................... 200,000
Equipment ............................................................ 100,000
Investment in Young's preferred stock (100%) . 3,100,000
Investment in Young's common stock (60%) ... 7,368,000
Noncontrolling Interest ....................................... 4,912,000
(To eliminate subsidiary stockholders’ equity, record excess acquisition-date

fair values, and record outside ownership of subsidiary's preferred stock at
acquisition-date fair value)
6-24
34. (continued)
Entry I1
Dividend Income ....................................................... 80,000
Dividends Declared ............................................. 80,000
(To offset intra-entity preferred stock dividends recognized as income by
parent—$1,000,000 par value × 8% dividend rate.)
Entry I2
Dividend Income ....................................................... 192,000
(To eliminate intra-entity dividends [60% of $320,000] on common stock.
Because the $320,000 in dividends remaining after Entry I1 equals exactly 8
percent of the common stock par value, the participation factor does not
affect the distribution.)
Entry E
Amortization Expense .............................................. 44,000
Equipment ................................................................. 10,000
Building ................................................................ 40,000
Brand Name ......................................................... 14,000
(To record current year amortization of specific accounts
recognized within acquisition price of preferred stock.)
6-6-25
35. (15 Minutes) (The effect that various events have on a consolidated statement of
cash flows.)
 Sale of building. The $44,000 in cash received from the sale is listed as a
cash inflow within the company's investing activities. If the company is using
the direct method in presenting cash flows from operating activities, the
$12,000 gain is not presented. However, if the indirect method is used, the
gain (a positive) must be eliminated from net income by a subtraction.
 Intra-entity inventory transfers. Because these transactions do not occur
with any parties outside of the business combination, they are not reflected
in the consolidated statement of cash flows.
 Dividend paid by the subsidiary. The $27,000 payment to the parent is
eliminated in consolidated statements and is not a cash outflow from the
consolidated entity. The remaining $3,000 payment to the noncontrolling
interest is reported as a cash outflow from a financing activity.
 Amortization of intangible asset. This $16,000 noncash expense appears in
the consolidated income statement. If the combined companies are using the
direct method to present cash flows from operating activities, this expense
not presented. If the indirect method is used, the expense must be removed
by adding it back to consolidated net income.
 Decrease in accounts payable. Cash payments have reduced this liability
balance during the period. If the direct method is used to present cash flows
from operating activities, the change is added to cost of goods sold as one
step in deriving the cash paid during the period for inventory (an outflow). If
the indirect method is applied, the decrease is subtracted from net income in
arriving at the net cash generated from operating activities during the period.
6-26
36. (20 Minutes) (Determine cash flows from operations for a consolidated entity.)
DIRECT METHOD
Cash revenues (add book values, eliminate intra-entity transfers,
and add decrease in accounts receivable) ................................... $648,000
Cash inventory purchases (add book values, eliminate
intra-entity transfers, defer intra-entity gains, add increase in
inventory, and add decrease in accounts payable) ...................... (370,000)
Depreciation and amortization (omit as noncash expenses) ............ -0-
Other expenses (add book values) ..................................................... (40,000)
Gain on sale of equipment (omit because this is an investing activity) -0-
Equity in earnings of Knight (intra-entity so not included) .............. -0-
Net cash flow from operating activities ................................... $238,000
INDIRECT METHOD
Consolidated net income (computed below) ..................................... $216,000
Adjustments:
Depreciation and amortization ................................................. 61,000
Gain on sale of equipment ....................................................... (30,000)
Increase in inventory ................................................................ (11,000)
Decrease in accounts receivable ............................................. 8,000
Decrease in accounts payable ................................................. (6,000)
Net cash flow from operating activities ............................. $238,000
Consolidated Net Income = $206,200 + 9,800 = $216,000 or computation below:

Revenues (add book values and subtract intra-entity transfers) $640,000
Cost of goods sold (add book values, less intra-entity
transfers adjusted for deferral and subsequent
recognition of intra-entity gain) ............................................... (353,000)
Depreciation and amortization (add book values plus
amortization from excess fair value allocations) ................... (61,000)
Other expenses (add book value) ................................................. (40,000)
Gain on sale of equipment ............................................................. 30,000
Consolidated net income .......................................................... $216,000
6-6-27
37. (30 Minutes) (Compute basic and diluted earnings per share for a parent and its
100 percent owned subsidiary, both with convertible bonds.)
Basic EPS—Porter Company:

Porter's reported net income ................................... $150,000
Street's reported net income ................................... 130,000
Amortization expense .............................................. (10,000)
Consolidated net income (all to Porter) ............. $270,000
Porter shares outstanding .................................. 60,000
Basic earnings per share ($270,000 ÷ 60,000) ........ $4.50
Diluted EPS—Street Company

Street earnings after amortization ........................... $120,000
Shares outstanding .................................................. 30,000
Basic earnings per share (120,000 ÷ 30,000) .......... $4.00
Street's earnings assuming conversion of its bonds
($120,000 + $24,000 interest saved net of tax) .. $144,000
Street's shares assuming conversion of its bonds
(30,000 + 10,000) .................................................. 40,000
Diluted earnings per share (144,000 ÷ 40,000) ....... $3.60
Because diluted earnings per share is less than basic earnings per share, the
convertible bonds are dilutive and should be included.
Porter’s share of Street’s diluted earnings:
Total shares assuming Street bond conversion .... 40,000
Shares owned by Porter ........................................... 30,000
Porter's ownership percentage (30,000 ÷ 40,000) .. 75%
Street's earnings for diluted EPS (above) .............. $144,000
Porter's ownership percentage ................................ 75%
Earnings attributed to Porter company .................. $108,000
Porter’s earnings and shares for diluted EPS:

Porter's separate net income .................................. $150,000
Street’s income applicable to Porter (above) .......... 108,000
Interest saved (net of tax) on assumed
conversion of Porter's bonds ............................. 32,000
Diluted earnings to Porter......................................... $290,000
Porter shares outstanding ....................................... 60,000

Additional shares from assumed bond conversion 8,000
Diluted shares ........................................................... 68,000
Consolidated income statement EPS amounts for Porter Company:

Basic earnings per share (above) ............................ $4.50
Diluted earnings per share ($290,000 ÷ 68,000) ..... $4.26
6-28
38. (15 Minutes) (Compute diluted EPS. Subsidiary has stock warrants outstanding)
Figures For Sonston's Diluted EPS

Net Income .................................................................... $200,000
Shares outstanding ....................................................... 40,000
Assumed conversion of stock warrants ...................... 10,000
Repurchase of treasury stock with proceeds of stock
Warrants (10,000 × $10 = $100,000 ÷ $20) .................... (5,000) 5,000
Shares for diluted earnings per share computation .... 45,000
Shares controlled by Primus: 40,000 + (20% of 5,000) = 41,000

Percentage of total held by Primus: 41,000 ÷ 45,000 = 91% (rounded)
Income to be included in parent’s diluted EPS = $200,000 × 91% = $182,000
Parent’s Diluted Earnings Per Share:

Net income – Primus ..................................................... $600,000
Net income included from Sonston .............................. 182,000
Earnings for diluted EPS .......................................... $782,000
Outstanding shares of Primus ................................ 100,000
PARENT’S DILUTED EARNINGS PER SHARE = $782,000 ÷ 100,000 = $7.82
39. (15 Minutes) (Compute diluted EPS. Subsidiary has convertible bonds.)
Figures for Simon's diluted EPS:

Net income ....................................................................................... $290,000
Interest (net of tax) saved from assumed conversion ................... 56,000
Earnings for diluted earnings per share ......................................... $346,000
Shares outstanding .......................................................................... 80,000

Assumed conversion of bonds ........................................................ 30,000
Subsidiary shares for parent’s share of diluted earnings .............. 110,000
Shares controlled by Garfun = 80,000 ÷ 110,000 = 73% (rounded)

Income to be included in parent’s diluted EPS = $346,000 × 73% = $252,580
Earnings for parent’s diluted earnings per share:

Net income—Garfun ............................................................. $480,000
Dividends to Garfun's preferred stock ................................. (15,000)
Net Income included from Simon (above) ........................... 252,580
Earnings for diluted EPS.................................................. $717,580
PARENT’S DILUTED EARNINGS PER SHARE = $717,580 ÷ 80,000 = $8.97 (rounded)
6-6-29
40. (35 Minutes) (Compute basic and diluted earnings per share for parent
company. Subsidiary has stock warrants and convertible bonds.)
Basic EPS—Parent Company (Burks):

Reported net income (separate)—Burks ..................... $150,000
Foreman net income: 80% × ($120,000 – $40,000 amort.) 64,000
Preferred stock dividends (8,000 × $4) ......................... (32,000)
Burks’ earnings applicable to basic EPS ..................... $182,000
Burks' outstanding shares ...................................... 65,000
Basic earnings per share ($182,000 ÷ 65,000) ............. $ 2.80
Diluted EPS—Parent Company (Burks)*

Subsidiary income for Burks’ EPS:
Net income after amortization ($120,000 – 40,000) ...... $80,000

Assumed conversion of warrants ................................ 20,000
Assumed acquisition of treasury stock with
proceeds of conversion [(20,000 × $15) ÷ $20] ...... (15,000)
Shares applicable to diluted EPS ............................ 45,000
Shares controlled by parent:

(40,000 × 80%) ............................................................ 32,000
Income used in diluted EPS computation .............. $80,000
Portion owned by parent (32,000 ÷ 45,000) ............ 71.11%
Subsidiary income applicable to parent—diluted EPS $56,889
Earnings applicable to Burks’ diluted EPS:

Reported net income (separate)—Burks ...................... $150,000
Burks’ share of Foreman income (above) ................... 56,889
Because of assumed conversion, preferred stock
dividends would not be paid ................................... -0-
Earnings applicable to diluted EPS .............................. $206,889
Burks' outstanding shares ............................................ 65,000

Assumed conversion of preferred stock (8,000 × 4) ... 32,000
Shares applicable to diluted EPS ................................. 97,000
Diluted earnings per share ($206,889 ÷ 97,000)(rounded) = $ 2.13
*Foreman’s convertible bonds are antidilutive and thus excluded from the diluted
EPS calculations.
6-30
40. (continued)
Alternative derivation of Burks’ diluted EPS:
Consolidated net income

[$150,000 + ($120,000 - $40,000)] .................................................. $(230,000)
Subsidiary net income ............................................ $(120,000)
Excess fair value amortization ................................... 40,000
Income applicable to diluted EPS .......................... $ (80,000)
Noncontrolling interest share (13,000 ÷ 45,000) .... 28.89% (23,111)
Parent's net income applicable to diluted EPS ........................... $(206,889)
Shares for diluted EPS .................................................................. 97,000
Diluted EPS ($206,889 ÷ 97,000 shares) ....................................... $ 2.13
41. (8 Minutes) (Effect of subsidiary stock issuance to public at a price above

reported value per share)
Equity method investment prior to Ricardo share issue $490,000

Parent's ownership percentage ..................................... 100%
Fair value ownership equivalency ................................. $490,000
Adjusted subsidiary fair value after new share issue
(above value plus 10,000 shares at $15.75 each) ... $647,500
Parent's ownership (40,000 ÷ 50,000 shares) .............. 80%
New ownership adjusted fair value ............................... $518,000
Investment in Ricardo should be increased by $28,000 ($518,000 less $490,000)
42. (20 Minutes) (Effects of two different stock issuances by subsidiary.)
a. Prior to the issuance of the new shares, Albuquerque owns an 80% interest in
Marmon (16,000 shares out of 20,000 shares). The adjusted acquisition-date fair
value is $840,000 ($600,000 + $150,000 + $90,000). After the stock issue, the
adjusted acquisition-date fair value of the subsidiary will increase by $235,000
(the price of the stock) to $1,075,000. Albuquerque' ownership, however, will
only be 64% (16,000 ÷ 25,000). The investment’s equity method balance before
stock issue is $672,000 (600,000 + [$90,000 × 80%]). The book value underlying
Albuquerque' investment is now $688,000 (64% of $1,075,000) so that a $16,000
increase is recorded by the parent.
Investment in Marmon ............................................. 16,000
Additional Paid-In Capital ................................... 16,000
6-6-31
42. (continued)
b. Albuquerque's adjusted acquisition-date fair value is $840,000 (see above) prior

to the issuance of the new shares. The 4,000 additional shares increase
subsidiary's total value by $132,000 (the price of the stock) to $972,000.
Albuquerque' ownership decreases to 2/3 (16,000 shares out of a total of 24,000)
for a fair value equivalency of $648,000. Reducing the $672,000 (see a.) to
$648,000 requires a $24,000 decrease to the parent’s APIC.
Additional Paid-In Capital ........................................ 24,000
Investment in Marmon ........................................ 24,000
43. (55 Minutes) (Prepare consolidation entries following a subsidiary stock issue to
outside parties.)
Initially, Aronsen owns 18,000 shares (or 90%) of Siedel's outstanding shares
(the total number of shares can be determined by dividing the subsidiary's
common stock account by the $10 per share par value). After issuing 4,000
additional shares, the parent must prepare an adjustment to reflect the
change in its share of the subsidiary’s unamortized acquisition-date fair
value. Because that entry has not been recorded, it is included on the
consolidation worksheet as Entry C1 (labeled in this manner as a correction).
Other consolidation procedures follow as described in previous chapters.
Excess Acquisition-Date Fair Value Allocation and Amortization

Fair value (consideration transferred plus NCI fair value) .......... $649,000
Acquisition-date book value ........................................................... (480,000)
Fair value in excess of book value ................................................ $169,000
Allocated to land based on fair value ............................................ 89,000
Allocated to copyrights based on fair value ................................. $ 80,000
Life of copyrights ........................................................................... 16 yrs
Annual amortization ....................................................................... $ 5,000
Adjustment for Stock Transaction

Adjusted acquisition-date fair value of subsidiary
on new issue date ($649,000 + $90,000 + $152,000) ............... $891,000
Adjusted parent ownership (18,000 shares ÷ 24,000 shares) ..... 75%
Parent’s post-issue equity method value at 1/1/18 ................ $668,250
Equity method balance before new subsidiary stock issue
Consideration transferred .......................................... 584,100
Increase in book value (90% × $100,000) .................. 90,000
Copyright amortization ($5,000 × 2 years × 90%) ..... (9,000) 665,100
Required increase (Entry C1) ........................................................ $ 3,150
6-32
43. (continued)
Consolidation worksheet entries:
Entry *C
Investment in Siedel ................................................. 81,000
Retained Earnings, 1/1/18 (Aronsen) ................. 81,000
(To convert 1/1/18 balance to full accrual [$100,000 less
two year’s amortization expense $5,000 × 2] × 90%)
Entry C1
Investment in Siedel ................................................. 3,150
Additional Paid-In Capital (Aronsen) ................. 3,150
(To record adjustment for subsidiary stock
transaction; computation shown above.)
Entry S
Common Stock (Siedel) ........................................... 240,000
Additional Paid-In Capital (Siedel) .......................... 112,000
Retained Earnings, 1/1/18 (Siedel) .......................... 380,000
Investment in Siedel (75%) ................................. 549,000
Noncontrolling Interest in Siedel, 1/1/18 (25%) .. 183,000
(To eliminate subsidiary stockholders' equity accounts
against Investment account and to recognize noncontrolling
interest. Stockholders’equity balances have been adjusted
for increase in book value during 2016–2018 and the issuance
by the subsidiary of 4,000 shares of stock on 1/1/18.)
Entry A
Land .......................................................................... 89,000
Copyrights ................................................................. 70,000
Investment in Siedel (75%) .................................. 119,250
Noncontrolling Interest (25%) ............................ 39,750
(To recognize acquisition price allocated to land and
copyrights. Copyrights balance has been reduced for
2016–2018 amortization to arrive at 1/1/18 balance.
NCI now reflects 25% of the unamortized 1/1/18 balance.)
Entry I
Dividend Income ....................................................... 15,000
(To eliminate intra-entity dividends recorded by
parent as income [75% × $20,000].)
Entry E
Copyrights ............................................................ 5,000
(To recognize current year amortization.)
6-6-33
44. (50 Minutes) (Prepare consolidation worksheet for business combination. Intra-
entity bond acquisition is made during the current year.)
Acquisition-date fair-value allocation and amortization:
Equipment $30,000 10-year life $3,000 annual amortization

Trademarks $40,000 20-year life $2,000 annual amortization
As indicated in the problem, the parent is applying the partial equity method.
Hence an Entry *C must be recorded on the worksheet to convert the recorded
figures (amortization is needed for the three years prior to 2018) to equity
balances:
Amortization expense ($5,000 × 3 years) = ............ $15,000 (Entry *C)
Deferred gross profit in ending inventory (downstream):

Ending balance ......................................................... $10,000
Markup ($20,000 ÷ $100,000) .................................... 20%
Intra-entity gross profit to be eliminated ................ $ 2,000 (Entry G)
Loss on extinguishment of bonds:

Carrying amount at date of repurchase ....................... $282,000
Percentage repurchased ............................................... 50%
Equivalent carrying amount .......................................... $141,000
Amount paid ................................................................... 145,500
Loss on extinguishment of bonds ................................ $ 4,500 (Entry B)
Amortization during 2018 changed the carrying amount of the bond payable
from $282,000 to $288,000 (found in the balance sheet) and the investment from
$145,500 to $147,000. This amortization also affects interest income and
expense accounts.
Entry A reflects remaining values after three years of amortizations.
6-34
44.(continued) Pavin and Stabler

Year Ending December 31, 2018
Consolidation Entries Consolidated
Accounts Pavin Stabler Debit Credit Totals
Revenues ............................................... (740,000) (505,000) (TI)100,000 (1,145,000)
Cost of goods sold ................................ 455,000 240,000 (G) 2,000 (TI) 100,000 597,000
Expenses................................................ 125,000 158,500 (E) 5,000 288,500
Interest expense—bonds .................... 36,000 -0- (B) 18,000 18,000
Interest income—bond investment ..... -0- (16,500) (B) 16,500 -0-
Loss on extinguishment of bonds ...... -0- -0- (B) 4,500 4,500
Equity in income of Stabler .................. (123,000) -0- (I) 123,000 -0-
Net income .......................................... (247,000) (123,000) (237,000)
Retained earnings, 1/1/18 ..................... (345,000) (*C) 15,000 (330,000)

Retained earnings, 1/1/18 ..................... (361,000) (S) 361,000 -0-
Net income (above) ............................... (247,000) (123,000) (237,000)
Dividends declared ............................... 155,000 61,000 (D) 61,000 155,000
Retained earnings, 12/31/18 ................. (437,000) (423,000) (412,000)
Cash and receivables ........................... 217,000 35,000 (P) 33,000 219,000

Inventory ................................................ 175,000 87,000 (G) 2,000 260,000
Investment in Stabler ............................ 613,000 -0- (D) 61,000 (*C) 15,000
(S) 481,000
(A) 55,000 -0-
(I) 123,000
Investment in Pavin ............................. -0- 147,000 (B) 147,000 -0-
Land, buildings, and equipment (net) . 245,000 541,000 (A) 21,000 (E) 3,000 804,000
Trademarks ............................................ -0- -0- (A) 34,000 (E) 2,000 32,000
Total assets ........................................ 1,250,000 810,000 1,315,000
Accounts payable ................................. (225,000) (167,000) (P) 33,000 (359,000)

Bonds payable ....................................... (300,000) (100,000) (B) 150,000 (250,000)
Discount on bonds ................................ 12,000 -0- (B) 6,000 6,000
Common stock ...................................... (300,000) (120,000) (S) 120,000 (300,000)
Retained earnings (above) ................... (437,000) (423,000) (412,000)
Total liabilities and stockholders’ equity (1,250,000) (810,000) 1,046,000 1,046,000 (1,315,000)
6-6-35
45. (45 Minutes) (Prepare consolidation entries after intra-entity bond acquisition.)
a. Allocation of Acquisition-date Excess Fair Value

Consideration transferred $312,000
Noncontrolling interest fair value 208,000
Acquisition-date fair value $520,000
Book value acquired 300,000
Fair value in excess of book value $220,000 Annual Excess
Excess allocated to patents based Life Amortizations
on fair value 90,000 12 years $7,500
Customer list $130,000 10 years 13,000
Total $20,500
CONSOLIDATION ENTRIES
Entry *TL
Investment in Herman .............................................. 7,000
Land .................................................................... 7,000
(To eliminate intra-entity gain created by previous intra-entity transfer.
Investment is adjusted here because transfer was downstream and equity
method has been applied by parent. Thus, retained earnings have already
been corrected.)
Entry *G
Retained Earnings 1/1/18 (Herman) ........................ 8,000
Cost of Goods Sold ............................................. 8,000
(To remove intra-entity inventory gross profit from prior year recognize the
profit in the current year. Amount is computed as shown below.)
Intra-entity profit—2017 ........................................... $25,000

Transfer price—2017 ................................................ $125,000
Markup ($25,000 ÷ $125,000) .................................... 20%
Recognized gain from 1/1/18 inventory
($40,000 × 20%) .................................................... $8,000
Entry S
Common Stock (Herman) ......................................... 100,000
Retained Earnings, 1/1/18 (Herman)
(adjusted for Entry *G) ........................................ 292,000
Investment in Herman (60%) ......................... 235,200
Noncontrolling Interest in Herman (40%) .... 156,800
(To eliminate Herman's stockholders' equity accounts and to record
beginning of year balance for noncontrolling interest.)
6-36
45. a. (continued)
Entry A
Patents .................................................................... 75,000
Customer List ............................................................ 104,000
Investment in Herman ......................................... 107,400
Noncontrolling Interest ....................................... 71,600
(To recognize unamortized balances as of 1/1/18 of amounts allocated within
original acquisition price. Allocations have been reduced by two years of
amortizations.)
Entry I
Equity income of Herman ......................................... 3,000
Investment in Herman .................................... 3,000
(To eliminate intra-entity equity income accrual)
Herman’s income ............................................................ $25,000
Excess amortizations ..................................................... (20,500)
2017 intra-entity inventory gross profit ......................... 8,000
2018 intra-entity inventory gross profit ......................... (7,500)
Accrual-based income .................................................... $5,000
Fred’s ownership percentage ........................................ 60%
Equity in earnings of Herman ........................................ $3,000
Entry D
Investment in Herman .............................................. 2,400
(To eliminate intra-entity dividend declaration.)
Entry E
Patents .................................................................. 7,500
Customer List ....................................................... 13,000
(To recognize current year amortization expense.)
Entry P
Accounts Payable ..................................................... 60,000
Accounts Receivable .......................................... 60,000
(To remove intra-entity debt created by inventory transfers.)
6-6-37
45. a. (continued)
Entry B
Bonds Payable .......................................................... 20,000
Premium on Bonds Payable .................................... 1,069
Interest Income ......................................................... 1,873
Investment in Parent Bonds ............................... 19,005
Gain on Retirement of Bonds .............................. 2,654
(To eliminate effect created by bond acquisition and recognize the related
retirement gain [$21,386 – $18,732]. Amounts are calculated below.)
Carrying Cash Year-End

Amount Effective Interest Excess Carrying
(given) Interest (8%) Amortizations Amount
Investment $18,732 $1,873 (10%) $1,600 $273 $19,005
Liability 21,386 1,283 (6%) 1,600 317 21,069
Entry Tl
Sales .......................................................................... 120,000
Cost of Goods Sold (or purchases) ................... 120,000
(To eliminate intra-entity transfers made during current year.)
Entry G
Cost of Goods Sold .................................................. 7,500
Inventory ............................................................... 7,500
(To defer intra-entity profits in ending inventory as calculated below):
Intra-entity profit ....................................................................... $ 30,000
Transfer price 2018 ................................................................... $120,000
Markup ($30,000 ÷ $120,000) .................................................... 25%
Intra-entity gross profit in ending inventory ($30,000 × 25%) $7,500
b. Herman's reported net income for 2018 .................................. $25,000

Excess fair value amortization ................................................. (20,500)
2017 intra-entity gross profit recognized in 2018 (Entry *G) . 8,000
2018 deferred intra-entity gross profit (Entry G) .................... (7,500)
Herman's realized net income for 2018 .................................... $5,000
Noncontrolling interest ownership .......................................... 40%
Net income attributable to noncontrolling interest ................. $2,000
Noncontrolling interest, 1/1/18 (Entries S and A) ................... $228,400

NCI’s share of Herman's net income (above) ......................... 2,000
NCI’s share of Herman's dividends ($4,000 × 40%) ................ (1,600)
Noncontrolling interest, 12/31/18 .............................................. $228,800
6-38
45. (continued)
c. The balances in the individual records as of December 31, 2019 pertaining to
the Intra-entity bonds are as follows:
Beginning
Carrying Cash Year-End
Amount Effective Interest Excess Carrying
(see part a.) Interest (8%) Amortizations Amount
Investment $19,005 $1,901 (10%) $1,600 $301 $19,306
Liability 21,069 1,264 (6%) 1,600 336 20,733
The adjustment to recognize the original gain by the parent can be computed as
follows:
Original gain on retirement (see part a) ....................... $2,654

Interest income recorded on investment in 2018
(see part a) ................................................................ $1,873
Interest expense recorded on liability in 2018
(see part a) ............................................................... 1,283 590
Required increase as of January 1, 2019 ..................... $2,064
Entry *B (as of December 31, 2019)

Bonds Payable ........................................................... 20,000
Premium on Bonds Payable .................................... 733
Interest Income ......................................................... 1,901
Investment in Herman ......................................... 2,064
Investment in Fred’s bonds ................................ 19,306
(To remove accounts pertaining to intra-entity bonds. "Investment in
Herman" is adjusted here rather than retained earnings because equity
method is used and the gain is attributed to the parent.)
6-6-39
46. (50 Minutes) (Prepare consolidation entries for intra-entity preferred stock and
bonds. Determine specified account balances. Preferred stock is a debt
instrument.)
a. Consideration transferred for common stock .................. $552,800

Consideration transferred for preferred stock ................. 65,000
Noncontrolling interest in common stock ........................ 138,200
Noncontrolling interest in preferred stock ....................... 34,000
Lisa’s acquisition-date fair value....................................... $790,000
Book value of Lisa .............................................................. 750,000
Excess assigned to franchises .......................................... $ 40,000
CONSOLIDATION ENTRIES 1/1/17
Entry S and A combined:
Preferred Stock (Lisa) .............................................. 100,000
Common Stock (Lisa) ............................................... 200,000
Retained Earnings, 1/1/17 (Lisa) .............................. 450,000
Franchises ................................................................. 40,000
Investment in Lisa-Common Stock ............... 552,800
Investment in Lisa-Preferred Stock ............... 65,000
Noncontrolling Interest in Lisa, Inc ............... 172,200
(To eliminate subsidiary stockholders’ equity, record excess acquisition-date

fair values, and record outside ownership of subsidiary's preferred and
common stock at acquisition-date fair values.)
b. Acquisition price of bonds, 1/2/17 .......................... $53,310

Carrying amount of ½ bonds payable acquired) .... (44,175)
Loss on extinguishment of debt ........................ $9,135
Interest income—Mona ($53,310 × 8%) ................... (rounded) $4,265
Interest expense—Lisa ($44,175 × 14%) ................. (rounded) $6,185
Investment in bonds of Lisa (carrying amount):
Carrying amount—date of acquisition, 1/2/17 .. $53,310
Cash interest ($50,000 × 10%) ............................ $5,000
Effective interest (above) .................................... 4,265 735
Investment in Bonds of Lisa
(carrying amount as of 12/31/17) .................. $52,575
6-40
46. b. (continued)
Bonds payable (carrying amount)
Carrying amount—date of acquisition, 1/2/17 .. $44,175
Cash interest ($50,000 × 10%) ............................ $5,000
Effective interest (above) .................................... 6,185 1,185
Bonds payable (carrying amount as of 12/31/17)
$45,360
CONSOLIDATION ENTRY B—December 31, 2017

(all figures computed above)
Bonds Payable .......................................................... 50,000
Interest Income (or other revenues) ....................... 4,265
Loss on Retirement of Bonds .................................. 9,135
Discount on Bonds Payable ($50,000 – $45,360) 4,640
Interest Expense .................................................. 6,185
Investment in Bonds of Lisa .............................. 52,575
c. December 31, 2017 book values based on historical cost figures:

Cost of fixed assets .................................................. $100,000
Depreciation expense ($40,000 book value over
a 10-year life) ....................................................... 4,000
Accumulated depreciation (including current
expense) ............................................................... 64,000
December 31, 2017 book values based on transfer price:

Cost of fixed assets .................................................. $120,000
Depreciation expense (10-year life) ........................ 12,000
Accumulated depreciation ....................................... 12,000
Gain on transfer of fixed assets
($120,000 – $40,000) book value ........................ 80,000
CONSOLIDATION ENTRY TA—December 31, 2017
Gain on Transfer of Fixed Assets (to remove) ....... 80,000

Accumulated Depreciation ($64,000 – $12,000) . 52,000
Depreciation Expense ($12,000 – $4,000) ......... 8,000
Fixed Assets ($120,000 – $100,000) ................... 20,000
6-6-41
46. (continued)
d. Original allocation to franchises (given) ...................... $40,000

Amortization at $1,000/year (2017–2018) ................ (2,000)
Consolidated franchises—12/31/18 ........................ $38,000
Fixed assets (book values):

Mona, Inc. .................................................................. $1,100,000
Lisa Co. .................................................................... 800,000
Reduction necessitated by intra-entity sale
($120,000 transfer price reduced to $100,000
original cost) (see part c) .................................... (20,000)
Consolidated fixed assets—12/31/18 ...................... $1,880,000
Accumulated depreciation (book values):

Mona, Inc .................................................................... $300,000
Lisa Co. .................................................................... 200,000
Increase needed to eliminate intra-entity
sale ($60,000 accumulated depreciation at time
of transfer less excess depreciation expense
[$12,000 - $4,000] for 2017 and 2018) ...................... 44,000
Consolidated Acc. Depr.—12/31/18.......................... $544,000
Expenses (book values):

Mona, Inc............................................................... $220,000
Lisa Co. ................................................................ 120,000
Recognition of amortization on franchises ............ 1,000
Elimination of interest expense on intercom-
pany debt ($45,360 [see part b] × 14%) (rounded) (6,350)
Elimination of excess depreciation from
intra-entity transfer of fixed assets
($12,000– $4,000) ................................................. (8,000)
Consolidated expenses ........................................... $326,650
6-42
47. (35 Minutes) (Prepare statement of cash flows for a business combination.)
(Note: before working this problem, students may wish to review the statement
of cash flows in an intermediate accounting textbook.)
BOLERO COMPANY AND CONSOLIDATED SUBSIDIARY RIVERA

Consolidated Statement of Cash Flows
Year Ending December 31, 2018
CASH FROM OPERATING ACTIVTIES

Consolidated net income .......................................... $250,000
Adjustment from accrual to cash:
Depreciation and amortization ........................... 120,000
Gain on sale of building ...................................... (30,000)
Decrease in accounts receivable ....................... 20,000
Increase in inventory .......................................... (150,000)
Decrease in accounts payable ........................... (50,000)
Net cash flow from operating activities .................. $160,000
CASH FLOWS FROM INVESTING ACTIVITIES

Sale of building ......................................................... $70,000
Purchase of equipment (given) ................................ (205,000)
Net cash flow from investing activities .............. (135,000)
CASH FLOWS FROM FINANCING ACTIVITIES

Dividends paid .......................................................... $(112,000)
Issuance of bonds .................................................... 110,000
Issuance of common stock ...................................... 67,000
Net cash flow from financing activities ............. 65,000
Net increase in cash during 2018 ................................. 90,000
Cash, January 1, 2018 ................................................... 90,000
Cash, December 31, 2018 .............................................. $180,000
The above statement uses the indirect method for computing cash flows from
operations.
6-6-43
47. (continued)
Development of Cash Flow Balances via Direct Method
OPERATING ACTIVITIES
Cash collected from customers (consolidated revenues
plus the decrease in accounts receivable) ................................... $1,050,000
Cash Purchases (consolidated COGS plus
increase in inventory plus
decrease in accounts payable) ...................................................... (850,000)
Interest expense (the consolidated balance) ..................................... (40,000)
Cash flows from operating activities .................................................. $ 160,000
INVESTING ACTIVITIES
Sale of building ($40,000 book value sold at a $30,000 gain)............ $ 70,000
Purchase of equipment (given in problem) ........................................ (205,000)
Cash flows from investing activities ................................................... $(135,000)
FINANCING ACTIVITIES
Dividends paid by parent (the consolidated balance) ...................... $(110,000)
Dividends paid by subsidiary (amount paid to
noncontrolling interest—20%) ....................................................... (2,000)
Issuance of bonds ............................................................................... 110,000
Issuance of common stock by the parent (increase in
common stock and additional paid-in capital) ............................. 67,000
Cash flows from financing activities ................................................... $ 65,000
6-44
48. (40 Minutes) (Compute basic and diluted earnings per share. Subsidiary has
stock warrants outstanding and convertible debt.)
Basic EPS—Austin, Inc.

Consolidated net income to parent ............................... $284,000
Austin’s preferred dividends ........................................ (40,000)
Earnings applicable to Austin’s basic EPS ............ $244,000
Austin's outstanding common shares ......................... 50,000

Basic earnings per share ($244,000 ÷ 50,000) .................. $4.88
Diluted EPS—Austin, Inc.

Subsidiary earnings and shares for Austin’s diluted EPS calculation:
Rio Grande net income after amortization .................... $105,000
Interest saved assuming conversion of bonds
(net of tax) ................................................................. 22,000
Net income applicable to diluted EPS .......................... $127,000

Assumed conversion of warrants ................................ 5,000
Assumed treasury stock acquisition using proceeds
from warrant conversion ([5,000 × $10] ÷ $20) ....... (2,500)
Assumed conversion of bonds ..................................... 10,000
Subsidiary shares applicable to diluted EPS .............. 42,500
Shares controlled by parent (24,000 plus 50% of incre-

ment created by warrants [or 1,250]) ...................... 25,250
Portion owned by parent (25,250 ÷ 42,500) .................. 59.4% (rounded)
Net income applicable to parent—diluted EPS

(59.4% × $127,000) .................................................... $75,438
Austin’s income and shares for diluted EPS calculation:

Austin’s separate net income ........................................ $200,000
Net income of Rio Grande to parent (computed above) 75,438
Preferred dividends (assumed converted) .................. -0-
Earnings applicable to diluted EPS .............................. $275,438
Austin's outstanding common shares ......................... 50,000

Assumed conversion of preferred stock
(10,000 × 2 shares) .................................................... 20,000
Shares applicable to diluted EPS ................................. 70,000
Diluted earnings per share ($275,438 ÷ 70,000) ................ $3.93 (rounded)
6-6-45
49. (50 Minutes) (Determine consolidated totals. Subsidiary has preferred shares
outstanding that are equity instruments.)
Consideration transferred for common and preferred stock $560,000

Skyler’s book value 450,000
Excess fair value assigned to intangible asset (10-year life) $110,000
Annual amortization $11,000

Ending Intra-entity Gross Profit
Ending inventory (at transfer price) ............................. $18,000
Markup ($30,000 ÷ $90,000) ...................................... 33⅓%
Deferred gross profit in ending inventory (increase
made to cost of goods sold to defer gain) ............. $6,000
Effect of Intra-Entity Equipment Transfer:

Transfer price:
Recorded value ................................................................................ $20,000
Depreciation expense ($20,000 ÷ 4) ............................................... $5,000
Accumulated depreciation .............................................................. $5,000
Gain on sale ($20,000 – $12,000) .................................................... $8,000
Historical cost:
Recorded value ................................................................................ $30,000
Depreciation expense ($12,000 ÷ 4) ............................................... $3,000
Accumulated depreciation ($18,000 + $3,000) .............................. $21,000
6-46
49. (continued)
Paisley, Inc. and Skyler Corp.
Year Ending December 31
Consolidation Entries Consolidated
Accounts Paisley, Inc. Skyler Corp. Debit Credit Totals
Sales ............................................... (800,000) (400,000) (TI) 90,000 (1,110,000)
Cost of goods sold......................... 528,000 260,000 (G) 6,000 (TI) 90,000 704,000
Expenses ........................................ 180,000 130,000 (E) 11,000 (ED) 2,000 319,000
Gain on sale of equipment ............ (8,000) -0- (TA) 8,000 -0-
Net income................................... (100,000) (10,000) (87,000)
Retained earnings, 1/1 ................... (400,000) (150,000) (S) 150,000 (400,000)
Net income ..................................... (100,000) (10,000) (87,000)
Dividends declared ........................ 60,000 -0- 60,000
Retained earnings, 12/31 ............ (440,000) (160,000) (427,000)
Cash ................................................ 30,000 40,000 70,000
Accounts receivable ...................... 300,000 100,000 (P) 28,000 372,000
Inventory......................................... 260,000 180,000 (G) 6,000 434,000
Investment in Skyler Corp. ............ 560,000 -0- (S) 450,000 -0-
(A) 110,000
Land, buildings, and equipment ... 680,000 500,000 (TA) 10,000 1,190,000
Accumulated depreciation ............ (180,000) (90,000) (ED) 2,000 (TA) 18,000 (286,000)
Intangible Asset ............................. -0- -0- (A) 110,000 (E) 11,000 99,000
Total assets ................................. 1,650,000 730,000 1,879,000
Accounts payable .......................... (140,000) (90,000) (P) 28,000 (202,000)
Long-term liabilities ....................... (240,000) (180,000) (420,000)
Preferred stock............................... -0- (100,000) (S) 100,000 -0-
Common stock ............................... (620,000) (200,000) (S) 200,000 (620,000)
Additional paid-in capital............... (210,000) -0- (210,000)
Retained earnings, 12/31 ............... (440,000) (160,000) (427,000)
Total liab. and stockholders’ equity (1,650,000) (730,000) 715,000 715,000 (1,879,000)
6-6-47
49. (continued)
CONSOLIDATED TOTALS
 Sales = $1,110,000 (add book values and eliminate intra-entity transfers)

 Cost of Goods Sold = $704,000 (add book values, eliminate intra-entity
transfers, and eliminate ending intra-entity gain [computed above])
 Expenses = $319,000 (add book values and include amortization of
intangibles and eliminate $2,000 excess equipment depreciation)
 Gain on Sale of Equipment = $0 (intra-entity balance is eliminated)
 Net Income = $87,000 (consolidated revenues less consolidated expenses)
 Retained Earnings, 1/1 = $400,000 (parent company figure only because
subsidiary was not acquired until current year)
 Dividends Declared = $60,000 (parent balance only)
 Retained Earnings, 12/31 = $427,000 (consolidated beginning retained
earnings plus net income less dividends declared)
 Cash = $70,000 (add book values)
 Accounts Receivable = $372,000 (add book values after eliminating intra-
entity balance)
 Inventory = $434,000 (add book values after eliminating intra-entity gross
profit)
 Investment in Skyler Corporation = 0 (intra-entity account is eliminated
because individual asset and liability accounts of subsidiary are included)
 Land, Buildings, and Equipment = $1,190,000 (add book values and increase
transferred asset from transfer price to historical cost [see above])
 Accumulated Depreciation = $286,000 (add book values and adjust balance
for transferred asset from transfer price figure to historical cost (see above])
 Intangible Asset = $99,000 (original allocations less one year amortization)
 Total Assets = $1,879,000 (summation of consolidated accounts)
 Accounts Payable = $202,000 (add book values and remove intra-entity
balance)
 Long-Term Liabilities = $420,000 (add book values)
 Preferred Stock = $0 (subsidiary outstanding shares are eliminated)
 Common Stock = $620,000 (parent balance only)
 Additional Paid-in Capital = $210,000 (parent balance only)
 Retained Earnings, 12/31 = $427,000 (computed above)
 Total Liabilities and Equities = $1,879,000 (summation of consolidated
accounts)
6-58
49. (continued): Consolidation entries and explanations:
Entry S
Preferred Stock (Skyler) ................................................... 100,000
Common Stock (Skyler) ................................................... 200,000
Retained Earnings, 1/1 ..................................................... 150,000
Investment in Skyler Corp. ......................................... 450,000
(To eliminate subsidiary stockholder’s equity accounts.)
Entry A
Intangible Asset ............................................................... 110,000
Investment in Skyler Corp. ......................................... 110,000
(To recognize excess fair value attributed to intangible asset.)
Entry E
Amortization Expense ...................................................... 11,000
Intangible Asset .......................................................... 11,000
(To record current year’s amortization of intangible asset.)
Entry P
Accounts Payable............................................................. 28,000
Accounts Receivable .................................................. 28,000
(To eliminate intra-entity receivable and payable.)
Entry TA
Equipment ......................................................................... 10,000
Gain on Sale of Equipment .............................................. 8,000
Accumulated Depreciation......................................... 18,000
(To eliminate effects as of 1/1 created by intra-entity transfer of equipment.)
Entry TI
Sales ............................................................................... 90,000
Cost of Goods Sold .................................................... 90,000
(To eliminate intra-entity inventory transfers for the current year.)
Entry G
Cost of Goods Sold .......................................................... 6,000
Inventory ..................................................................... 6,000
(To defer intra-entity gain in inventory remaining at the end of the current year.
Markup is 33⅓% [30,000 gross profit ÷ 90,000 transfer price] indicating that the
ending inventory of 18,000 contains an intra-entity profit of 6,000 [18,000 × 33⅓%].)
Entry ED
Accumulated Depreciation .............................................. 2,000
Depreciation Expense ................................................ 2,000
(To eliminate excess depreciation resulting from intra-entity gain of 8,000 on
transfer of equipment [see Entry TA]. Equipment is being depreciated over a
remaining life of four years.)
6-59
50. (30 minutes) (Consolidated Cash Flow Statement with current year business
combination)
Plaster Inc. and Subsidiary Stucco Company

Consolidated Statement of Cash Flows
For the year ended 12/31/18
CASH FLOW FROM OPERATING ACTIVITIES

Consolidated net income $274,000
Depreciation expense 187,500
Amortization expense 8,750
Decrease in accounts receivable (net of acquisition) 3,600
Increase in inventory (net of acquisition) (102,000)
Decrease in accounts payable (net of acquisition) (8,000) 89,850
Net cash flow provided by operating activities $363,850
CASH FLOW FROM INVESTING ACTIVITIES

Purchase of Stucco Company assets (net of cash acquired)
Net cash flow used in investing activities (856,000)
CASH FLOW FROM FINANCING ACTIVITIES

Issue long-term debt 800,000
Dividends (108,000)
Net cash flow provided by financing activities $692,000
Increase in cash 1/1/18 to 12/31/18 $199,850
Beginning cash, 1/1/18 43,000

Ending cash, 12/31/18 $242,850
6-60
Excel Case–Intra-entity Bonds
Bonds with a stated rate of 11% sold to yield 12%
Eff. Yield
12% 1,000,000.00 0.32197 321,973.24
110,000.00 5.65022 621,524.53
943,497.77 56,502.23
2016 943,497.77 113,219.73 110,000.00 3,219.73

2017 946,717.50 113,606.10 110,000.00 3,606.10
2018 950,323.60 114,038.83 110,000.00 4,038.83
2019 954,362.43 114,523.49 110,000.00 4,523.49
2020 958,885.93 115,066.31 110,000.00 5,066.31
2021 963,952.24 115,674.27 110,000.00 5,674.27
2022 969,626.51 116,355.18 110,000.00 6,355.18
2023 975,981.69 117,117.80 110,000.00 7,117.80
2024 983,099.49 117,971.94 110,000.00 7,971.94
2025 991,071.43 118,928.57 110,000.00 8,928.57
1,000,000.00 56,502.23
Consolidated Worksheet Entry 12/31/18

Bonds Payable 954,362.43
Interest Income 117,523.20
Loss on Retirement 0.00
Gain on Retirement 46,299.01
Investment in Bonds 911,547.79
Interest Expense 114,038.83
Bonds retired by affiliate on 1/1/18 at 904,024.59

Eff. Yield
13% 1,000,000.00 0.37616 376,159.86
110,000.00 4.79877 527,864.73
904,024.59 95,975.41
2018 904,024.59 117,523.20 110,000.00 7,523.20

2019 911,547.79 118,501.21 110,000.00 8,501.21
2020 920,049.00 119,606.37 110,000.00 9,606.37
2021 929,655.37 120,855.20 110,000.00 10,855.20
2022 940,510.57 122,266.37 110,000.00 12,266.37
2023 952,776.95 123,861.00 110,000.00 13,861.00
2024 966,637.95 125,662.93 110,000.00 15,662.93
2025 982,300.88 127,699.12 110,000.00 17,699.12
1,000,000.00 95,975.41
6-61
RESEARCH CASE: STATEMENT OF CASH FLOWS
Pfizer, Inc. shows the following in its 2015 Consolidated Statement of Cash
Flows:
 Pfizer employs the indirect method of accounting for operating cash flows
starting with net income and then reconciling through adjustments to “Net
cash flows provided by operating activities.”
 Pfizer includes in its determination of net cash provided by operating

activites other changes in assets and liabilities, net of acquisitions and
divestitures. These other changes are included “net” so as not to distort
the effects of accounts receivable and other accounts balance obtained
from current year acquisitions. For example, including accounts receivable
from a business combination would cause an increase in accounts
receivable that did not result from sales. Such a change in accounts
receivable would thus not affect cash provided by operating activities.
 Cash paid for business acquisitions (net of cash acquired) is shown as an

investing activity.
 The net income used in the operating cash flow section of the statement of
cash flows is the net income before allocation to noncontrolling interests.
Because the statement of cash flows accounts for the year-to-year
difference in cash on the consolidated balance sheet, all income to the
consolidated entity (both controlling and noncontrolling interests) must be
included.
 Included in Pfizer’s 2015 Statement of Cash Flows is its September 3, 2015,

$15.7 billion (net of cash received) acquisition of Hospira, “a leading
provider of sterile injectible drugs and infusion technologies.” As a result
of the acquisition, Hospira is a subsidiary of Pfizer.
6-62
Financial Reporting Research and Analysis Case
The number of potential solutions is large. Searches in Lexis-Nexis, Edgar, etc. will
produce numerous examples of consolidations of VIEs. For example, Walt Disney
Company prepares a before and after disclosure of its consolidated VIEs Euro
Disney, Hong Kong Disneyland, and Shanghai Disney Resort as follows (10-3-15):
Before International International

Theme Parks Theme Parks
Consolidation and Adjustments Total
Cash and cash equivalents $3,488 $781 $ 4,269
Other current assets 12,237 252 12,489
Total current assets 15,725 1033 16,758
Investments/Advances 7,505 (4,862) 2,643

Parks, resorts and other property 17,431 7,748 25,179
Other assets 43,540 62 43,602
Total assets $84,201 $3,981 $88,182
Current portion of borrowings 4,562 1 4,563

Other current liabilities 11,331 440 11,771
Total current liabilities 15,893 441 16,334
Borrowings 12,454 319 12,773

Deferred income tax and other liabilities 10,225 195 10,420
Equity 45,629 3,026 48,655
Total liabilities and equity $84,201 $3,981 $88,182
6-63

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Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – 7e

Fundamentals of Advanced Accounting 8th Edition Hoyle

II. Intra-entity debt transactions

III. Subsidiary preferred stock

IV. Consolidated statement of cash flows

V. Consolidated earnings per share

VI. Subsidiary stock transactions

Answer to Discussion Question: Who Lost this $300,000?

The assignment decision is only necessary in the presence of a noncontrolling interest.

3. The following characteristics are indicative of an enterprise qualifying as a primary beneficiary

2. B Vintage Company net income ...................................................... $100,000

7. D Cash flow from operations:

8. C Cash flow from financing activities:

10. C Post-issue subsidiary valuation ($800,000 + $250,000) $1,050,000

11. C Dane’s income from own operations ....................... $185,000

12. B Mattoon’s share of consolidated net income .......... $465,000

13. B Aaron net income ..................................................... $430,000

Gain on Retirement of Bond:

16. D Consideration transferred for preferred stock ............................. $ 424,000

17. B Consideration transferred for preferred stock ............................. $214,000

18. B Parent’s reported sales ............................................ $480,000

19. B Subsidiary’s unamortized fair value of prior to new share issue

Subsidiary unamortized fair value after issuing new

Investment in Veritable increases by $2,400 ($590,400 less $588,000).

21. C Adjusted acquisition-date sub. fair value at 1/1/18

22. D Adjusted acquisition-date fair value ($820,000 – $192,000) ........ $628,000

23. (10 minutes) (Qualification of Primary Beneficiary of a VIE)

24. (30 minutes) (VIE Qualifications for Consolidation)

a. The purpose of consolidated financial statements is to present the financial

b. An entity qualifies as a VIE and is subject to consolidation if either of the

Consolidation of a variable interest entity is required if a firm has a variable

Risks that remain with TecPC

25. (10 minutes) (Consolidation of variable interest entity.)

26. (40 minutes) (Acquisition-date consolidation worksheet for a parent and a

Access Net Consolidated

Long-term debt (941,000) (616,000) (1,557,000)

Consideration transferred $1,000,000

Primair Vista Adj. & Elim. NCI Consolidated

Retained earnings 1/1 (1,555,000) (40,000) (S) 40,000 (1,555,000)

Current assets 460,500 50,000 510,500

Current liabilities (29,000) (18,000) (47,000)

Retained earnings 12/31 (1,475,500) (107,000) (1,522,500)

Fair value of Vista on January 1, 2018 $150,000

Consolidated net income distribution:

a. Carrying Amount of Bonds Payable, January 1, 2016

Carrying amount, January 1, 2014 ........................................ $1,050,000

Gain on Retirement of Bonds, January 1, 2016

Carrying Amount of Bonds Payable, December 31, 2016

Carrying Amount of Investment in Bonds, December 31, 2016

Intra-entity Interest Balances for 2016

CONSOLIDATION ENTRY B (2016)

b. In 2017, because straight-line amortization is used, the interest accounts

CONSOLIDATION ENTRY *B (2017)

Bonds Payable .............................................................. 400,000

c. As with part b, new premium and discount balances must be determined

CONSOLIDATION ENTRY *B (2018)

Bonds Payable .................................................... 400,000

29. (12 Minutes) (Determine consolidated income statement accounts after

 Interest Expense To Be Eliminated = $84,000 × 11% = $9,240

a. Loss on Repurchase of Bond

Interest Balances for 2016

Investment in Bonds Balance, December 31, 2016

Bonds Payable Balance, December 31, 2016

b. Interest Balances for 2017 followed by 2018