Solutions – Ch07

Problem 7-1
(a)
Cash (300,000 – 300,000 / 15 x 8 + 28,000) 168,000
Accumulated Depreciation (300,000 / 15 x 8) 160,000
Equipment 300,000
Gain on sale of Equipment 28,000

(b)
Equipment 168,000
Cash 168,000

Depreciation Expense (168,000 / 7) 24,000

Accumulated Depreciation 24,000

(c)
Equipment 300,000
Accumulated depreciation (300,000 / 15 x 9) 180,000
Depreciation expense (300,000 / 15) 20,000
Gain on sale of equipment 0

Problem 7-2
(a)
Equipment 546,000*
Accumulated depreciation (546,000 / [15 – 2] x 3) 126,000
Depreciation expense (546,000 / [15 – 2]) 42,000
Gain on sale of equipment 0
(b)
On January 1, Year 6: Upstream sale
Proceeds on sale of equipment 546,000
Cost of equipment on January 1, Year 4 600,000
Accumulated depreciation on December 31, Year 5
(600,000 / 15 x 2) (80,000)
Net book value 520,000
Gain on sale of equipment 26,000
Remaining useful life 13 years
Excess depreciation per year from consolidated perspective 2,000
Cumulative excess depreciation to December 31, Year 8 (3 years) 6,000

Consolidated net income for year 8:

Net income reported by Khan $50,000
Less: dividend income from Summerside (80% x 15,000) 12,000
38,000
Net income reported by Summerside $40,000
Amount of gain realized in Year 8 2,000
Realized net income of Summerside 42,000
Consolidated net income $80,000+

(c)
Consolidated net income for Year 8 would not change. However, the amounts attributable to the
parent and noncontrolling interest would change.

(d)
Equipment 600,000
Accumulated depreciation (600,000 / 15 x 5) 200,000
Depreciation expense (600,000 / 15) 40,000

Problem 7-3
Before tax 40% tax After tax

Asset profit – Y Company selling

January 1, Year 2 – sale 45,000 18,000 27,000
Depreciation Year 2 9,000 3,600 5,400
Balance December 31, Year 2 36,000 14,400 21,600 (a)
Depreciation Year 3 9,000 3,600 5,400 (b)
Balance December 31, Year 3 27,000 10,800 16,200
Asset profit – X Company selling
April 30, Year 3 – sale 60,000 24,000 36,000
Depreciation Year 3 (12,000  8/12) 8,000 3,200 4,800
Balance December 31, Year 3 52,000 20,800 31,200 (c)

Investment in Y Company

Balance January 1, Year 2 $ 86,900)

Year 2 transactions:
Increase in Y Company retained earnings
([125,000 – 70,000]  80%) 44,000)
X’s share of changes to acquisition differential * (1,150)
Holdback of Year 2 asset profit (net) ((a) 21,600  80%) (17,280)
Year 3 transactions:
Increase in Y Company retained earnings
([104,000 – 70,000])  80%) 27,200)
Changes to acquisition differential (*) (1,150)
Realization of Year 2 asset profit ((b) 5,400  80%) 4,320)
Holdback of Year 3 asset profit (net) (c) (31,200)
Balance December 31, Year 3 $111,640)

* (86,900 / 80% – 100,000) x 80% / 6 =1,150

Problem 7-4
Equipment gain
Before Tax 40% tax After tax
Year 2 sale – Sally selling 15,000
Depreciation Years 2 and 3 (3,000  2) 6,000
Balance December 31, Year 3 9,000 3,600 5,400
Depreciation Year 4 3,000 1,200 1,800 (a)
Balance December 31, Year 4 6,000 2,400 3,600 (b)
(a) Calculation of consolidated profit attributable to Peggy’s shareholders for Year 4

Profit of Peggy 185,000

Profit of Sally 53,000
Add: Equipment gain realized (a) 1,800
Adjusted profit 54,800 (c)
Consolidated profit 239,800
Attributable to:
Shareholders of Peggy 226,100
NCI (25% x 54,800) 13,700
239,800

(b) Peggy Company

Consolidated Income Statement
Year 4
Revenues (580,000 + 270,000) $850,000
Miscellaneous expense (110,000 + 85,000) 195,000
Depreciation expense (162,000 + 97,000 - (a) 3,000) 256,000
Income tax expense (123,000 + 35,000 + (a) 1,200) 159,200
Total expenses 610,200
Consolidated profit 239,800
Attributable to:
Shareholders of Peggy 226,100
NCI (25% x 54,800) 13,700
239,800

(c) Deferred income taxes - December 31, Year 4 (b) 2,400

Problem 7-5
(a) Before tax 40% tax After tax
Equipment (Parent selling)
Gain on sale, Dec. 31, Year 2 $500,000 $200,000 $300,000 (a)
Depreciation Year 3
(500,000 / 5) 100,000 40,000 60,000 (b)
Balance, Dec. 31, Year 3 400,000 160,000 240,000 (c)
Depreciation Year 4 100,000 40,000 60,000 (d)
Balance, Dec. 31, Year 4 $300,000 $120,000 $180,000 (e)
Dividends received by Hanna from Fellow (200,000 x 80%) 160,000 (f)

Equipment (7,000,000 + 4,000,000 – (a) 500,000) $10,500,000

Accumulated depreciation (2,700,000 + 1,450,000 – (b + d) 200,000) 3,950,000

Retained earnings, beginning of year, for Hanna $5,000,000

Unrealized gain, beginning of year (c) 240,000
4,760,000
Retained earnings, beginning of year, for Fellow 3,000,000
Retained earnings, date of acquisition 2,100,000
Change since acquisition 900,000
Hanna’s share x 80%
720,000
Consolidated retained earnings, beginning of year $5,480,000
Depreciation expense (800,000 + 610,000 – (d) 100,000) 1,310,000

Net income for Hanna 1,500,000

Dividends from Fellow (f) (160,000)
Realized gain on sale of equipment (d) 60,000
1,400,000
Net income for Fellow 550,000
Consolidated net income 1,950,000
- attributable to Hanna’s shareholders (1,400,000 + 80% x 550,000) 1,840,000
- attributable to noncontrolling interest (20% x 550,000) 110,000
Dividends declared (only Hanna’s dividends declared) 500,000
(b)
Equipment (same as above) $10,500,000
Accumulated depreciation (same as above) 3,950,000

Retained earnings, beginning of year, for Hanna $5,000,000

Retained earnings, beginning of year, for Fellow 3,000,000
Retained earnings, date of acquisition 2,100,000
Change since acquisition 900,000
Unrealized gain, beginning of year (c) 240,000
660,000
Hanna’s share x 80%
528,000
Consolidated retained earnings, beginning of year 5,528,000

Depreciation expense (same as above) 1,310,000

Net income for Hanna 1,500,000

Dividends from Fellow (f) (160,000)
1,340,000
Net income for Fellow 550,000
Realized gain during Year 4 (d) 60,000
610,000
Hanna’s share x 80%
488,000
Consolidated net income 1,828,000
Dividends declared (same as above) 500,000

Problem 7- 7
(a) Journal entries recorded by Moncton Corporation:

January 1, Year 2
Investment in Chase Corporation Bonds 312,000
Cash 312,000
 December 31, Year 2

Interest Receivable (300,000 x 6%) 18,000

Interest Income 16,800
Investment in Chase Corporation Bonds ([312,000 – 300,000] \ 10) 1,200

(b) Journal entries recorded by Chase Corporation:

January 1, Year 2

Cash 312,000
Bonds Payable 300,000
Bond Premium 12,000

December 31, Year 2

Interest Expense 16,800
Bond Premium 1,200
Cash 18,000

(c) Nothing would appear on the consolidated financial statements for these bonds because
neither the bonds payable nor the investment in bonds were transactions with outsiders.

Problem 7-8
(a) Since the investment in bonds was amortized by $1,000 at the end of Year 5 and the
bond has a 10-year life, the total premium on the bond was $10,000 for Fredericton
and $7,500 for the noncontrolling shareholders. Therefore, the purchase price for the
investment in bonds was $210,000 for Fredericton and $157,500 for the noncontrolling
shareholders.
(b) Fredericton = 200,000 + 10,000 x 7/10 = $207,000
Noncontrolling shareholders = 150,000 + 7,500 x 7/10 = $155,250
(c) The consolidated statements would show a bond payable of $155,250, which is owed
to the NCI and interest expense of 150,000 * 12% + 7,500 / 10 = $18,750

Problem 7-9
(a) Before tax 40% tax After tax
Equipment (Subsidiary selling)
Gain on sale, Jan. 1, Year 5 $240,000 $96,000 $144,000 (a)
Depreciation for January, Year 5
 ($240,000 / 4 / 12) 5,000 2,000 3,000 (b)
Balance, Jan. 31, Year 5 $235,000 $94,000 $141,000 (c)
Dividends received by Goodkey from Jingya (600,000 x 100%) 600,000 (d)

Goodkey Co.
Consolidated Income Statement
For month ended January 31, Year 5
Sales (10,000,000 + 6,000,000) $16,000,000
Gain on sale of equipment (0 + 240,000 – (a) 240,000) 0
Other income (800,000 + 50,000 – (d) 600,000) 250,000
16,250,000
Depreciation expense (450,000 + 180,000 – (b) 5,000) 625,000
Other expenses (6,600,000 + 4,300,000) 10,900,000
Income tax expense (1,220,000 + 719,000 – (a) 96,000 + (b) 2,000) 1,845,000
13,370,000
Net income $2,880,000
Attributable to:
Shareholders of parent $2,880,000
Noncontrolling interest 0

(b)
Everything would be the same except for other income on Goodkey’s separate entity income
statement. Under the equity method, it should exclude the dividends received from Jingya and
should include Goodkey’s share of Jingya’s net income from a consolidated viewpoint, which is
$190,000 calculated as follows:
Jingya’ net income $1,091,000
Unrealized gain from sale of equipment (c) 141,000
950,000
Goodkey's share x 100%
Equity method income $950,000 (e)
Goodkey’s other income should be
(800,000 - (d) 600,000 + (e) 950,000) 1,150,000
Goodkey’s net income will now be $2,880,000 ($2,530,000 – $800,000 + $1,150,000), which is
equal to consolidated net income attributable to Goodkey’s shareholders.

(c)
Everything would remain the same as in part (a) except for the following:
Goodkey’s other income (800,000 – (d) 600,000 + 80% x (d) 600,000) 680,000
Consolidated net income would remain the same at $2,880,000 but it would be attributable
as follows:
Attributable to:
Shareholders of parent (2,880,000 – 190,000) $2,690,000
Noncontrolling interest ([1,091,000 – (c) 141,000] x 20%) 190,000
Problem 7-12
Intercompany bond purchase – Oct. 1, Year 5

Par value of 20% (80,000 / 400,000) of Palmer's bonds 80,000

Cost of 20% purchased 72,000
Realized gain to Scott Corporation (before tax) 8,000 (a)

Par value of 20% of Palmer's bonds 80,000

Carrying amount ([400,000 – 16,000]  20%) 76,800
Realized loss to Palmer Corporation (before tax) 3,200 (b)

Realized gain to entity ((a) 8,000 – (b) 3,200) (before tax) 4,800 (c)
Yearly interest elimination loss (4,800 / 4) 1,200 (d)

Interest elimination loss Year 5 ((d) 1,200  3/12) 300

60% 60%
Before tax After tax Before tax After tax
Entity Palmer
Realized gain (loss) Oct. 1,
Year 5 (c) 4,800 2,880 (b) (3,200) (1,920)
Interest elimination
loss (gain)* 300 180 (200) (120)
Balance gain (loss)
Dec. 31, Year 5 4,500 2,700 (3,000) (1,800) (e)

Scott
Realized gain (loss) Oct. 1,
Year 5 (a) 8,000 4,800
Interest elimination
loss (gain)* 500 300
Balance gain (loss)
Dec. 31, Year 5 7,500 4,500 (f)
* ¼ x 3/12

a) December 31, Year 5

Investment in Scott Corporation 42,000
Equity method income 42,000
70%  $60,000 Share of Scott's profit

Cash 9,100
Investment in Scott Corporation 9,100
70%  $13,000 Share of Scott's dividends

Equity method income (e) 1,800

Investment in Scott Corporation 1,800
Net bond loss allocated to Palmer

Investment in Scott Corporation (f) 3,150

Equity method income 3,150
Net bond gain allocated to Scott ($4,500  70%)

b) Carrying amount of bonds Oct. 1, Year 5 (400,000 – 16,000) 384,000

Discount amortization Oct. to Dec. Year 5 (16,000 / 4 x 3/12) 1,000
Carrying amount of bonds, Dec. 31, Year 5 385,000
Intercompany portion (20%  385,000) 77,000
Consolidated bonds payable Dec. 31, Year 5 308,000
Problem 7-13
Cost of bonds 150,064
Par value of bonds 800,000 (a)
Less: unamortized discount 73,065 (b)
Carrying amount of bonds 726,935
Intercompany portion (160,000 / 800,000) 20% 145,387
Loss to the entity 4,677 (c)
Tax at 40% 1,871 (d)
Realized loss after tax 2,806 (e)

Cost 150,064 Par 160,000

Par 160,000 Carrying amount 145,387
Gain to Alpha 9,936 (f) Loss to Beta 14,613 (i)
Tax at 40% 3,974 (g) Tax at 40% 5,845 (j)
Realized gain after tax 5,962 (h) Realized loss after tax 8,768 (k)
Bond Amortization Table for Alpha
Date Effective Interest (6%) Interest Paid (5%) Amortization Balance
Jan 1, Yr 4 150,064
June 30, Yr 4 9,004 8,000 1,004 151,068
Dec 31, Yr 4 9,064 8,000 1,064 152,132
Total 18,068 16,000 2,068 (l)

Bond Amortization Table for Beta

Date Effective Interest (6.5%) Interest Paid (5%) Amortization Balance
Jan 1, Yr 4 726,935
June 30, Yr 4 47,251 40,000 7,251 734,186
Dec 31, Yr 4 47,722 40,000 7,722 741,908
Total 94,973 80,000 14,973
Intercompany (20%) 18,995 16,000 2,995

(m)

Before tax 40% tax After tax

Alpha
Realized gain on bonds (f) 9,936 (g) 3,974 (h) 5,962
Interest elimination loss* (l) 2,068 827 1,241
Balance December 31, Year 4 gain 7,868 3,147 4,721 (n)

Beta
Realized gain (loss) on bonds (i) (14,613) (j) (5,845) (k) (8,768)
Interest elimination loss (gain) (m) (2,995) (1,198) (1,797)
Balance December 31, Year 4 gain (loss) (11,618) (4,647) (6,971) (o)
* from bond amortization

(a) Realized loss on bonds, Year 4 (c) 4,677

(b) December 31, Year 4

Investment in Beta Corporation 102,600
Equity method income 102,600
90%  114,000 share of Beta's profit

Cash 27,000
Investment in Beta Corporation 27,000
90%  30,000 dividends from Beta

Equity method income 6,274

Investment in Beta Corporation 6,274
Net bond loss allocated to Beta (90%  (o) 6,971)

Investment in Beta Corporation (n) 4,721

 Equity method income 4,721
Net bond gain allocated to Alpha

(c) Carrying amount of bonds 741,908

Intercompany portion (20%) 148,382
Consolidated bonds payable December 31, Year 4 593,526

Problem 7-14

Cost of bonds July 1, Year 7 381,250

Par value of bonds 400,000
Less: unamortized discount 20,000
Carrying amount 380,000
Realized loss to entity July 1, Year 7 (before tax) 1,250 (a)

Par value 400,000

Cost of bonds 381,250
Realized gain to Parent Co. (before tax) 18,750 (b)
Par value 400,000
Carrying amount (400,000 – 20,000) 380,000
Realized loss to Sub. Co. (before tax) 20,000 (c)

Before tax 40% tax After tax

Entity
Realized loss (gain) July 1, Year 7 (a) 1,250 500 750 (d)
Interest elimination gain (loss) Year 7* 125 50 75 (e)
Balance loss (gain) Dec. 31, Year 7 1,125 450 675

Parent Co.
Realized loss (gain) July 1, Year 7 (b) 18,750 (7,500) (11,250)
Interest elimination gain (loss)
Year 7* (1,875 (750) (1,125)
Balance loss (gain) Dec. 31, Year 7 (16,875) (6,750) (10,125) (f)
Sub. Co.
Realized loss (gain) July 1, Year 7 (c) 20,000 8,000 12,000
Interest elimination gain (loss)
Year 7* 2,000 800 1,200
Balance loss (gain) Dec. 31, Year 7 18,000 7,200 10,800 (g)

* 10 interest periods to maturity

Intercompany interest revenue

(400,000  10%  ½ + [(b) 18,750 / 5  ½]) = 21,875 (h)
Intercompany interest expense
Interest expense (400,000  10%) 40,000
Discount amortization ([20,000 / 10 periods]  2) 4,000
Total interest expense for the year 44,000

Interest expense July 1 to Dec. 31, Year 7 22,000 (i)

Gain on elimination of intercompany revenues and expenses 125

Calculation of consolidated net income, Year 7

Income of Parent Co. 197,875
Add: Realized net bond gain (f) 10,125
Adjusted net income 208,000
Income of Sub. Co. 64,000
Less: Realized net bond loss (g) 10,800
Adjusted net income 53,200 (j)
Consolidated net income, Year 7 261,200
Attributable to:
Shareholders of Parent 247,900
NCI (25% x (j) 53,200) 13,300
261,200

Parent Co.
Consolidated Income Statement
 Year 7

Interest revenue (21,875 + 0 – (h) 21,875) 0

Miscellaneous revenue (900,000 + 500,000) 1,400,000
Loss on retirement of intercompany bonds (a) 1,250
Interest expense (44,000 – (i) 22,000) 22,000
Other expense (600,000 + 350,000) 950,000
Income tax expense (124,000 + 42,000 – (d) 500 + (e) 50) 165,550
Total expenses 1,138,800
Net income 261,200
Attributable to:
Shareholders of Parent 247,900
NCI (25% x 53,200) 13,300
261,200