Christensen 13e CH10 SM

Chapter 10 – Additional Consolidation Reporting Issues
CHAPTER 10
ADDITIONAL CONSOLIDATION REPORTING ISSUES
ANSWERS TO QUESTIONS
Q10-1 The balance sheet, income statement, and statement of changes in retained earnings
are an integrated set and generally need to be completed as a unit. Once completed, these
statements can then be used in preparing a consolidated cash flow statement. Because both
the beginning and ending consolidated balance sheet totals (with all consolidation entries
posted) are needed in determining cash flows for the period, the cash flow statement cannot be
easily incorporated into the existing three-part worksheet format.
Q10-2 Consolidated retained earnings do not include the earnings assigned to noncontrolling
shareholders. As a result, dividends paid to noncontrolling shareholders are not included in the
consolidated retained earnings statement. On the other hand, all the cash generated by the
subsidiary is included in the consolidated cash flow statement and all uses of cash must also be
included, including cash distributed to noncontrolling shareholders in the form of dividends.
Q10-3 The indirect method focuses on reconciling between net income and cash flows from
operations and does not attempt to report payments to suppliers or other specific uses of cash.
It does report the change in inventory and accounts payable which are included in determining
payments to suppliers. While adjusting net income for changes in inventory and accounts
payable leads to a correct reporting of cash flows from operations, it does not permit explicit
reporting of payments to suppliers.
Q10-4 Changes in inventory balances are used in computing the amount reported as
payments to suppliers and do not need to be separately reported.
Q10-5 Sales must be included in the consolidated cash flows worksheet when the direct
method is used. They are excluded from the worksheet when the indirect method is used.
Q10-6 (a) When the indirect method is used, the changes in inventory are reported as a
reconciling item in the operating section of the statement of cash flows. (b) When the direct
method is used, changes in inventory are included in the computation of payments to suppliers
and not separately disclosed.
Q10-7 Only sales subsequent to the date of acquisition are included. The acquired company
was not part of the consolidated entity prior to the date of acquisition.
Q10-8 Dividends paid by the acquired company to the noncontrolling shareholders following
the date of acquisition are included as a cash outflow in the consolidated statement of cash
flows. Dividends paid by the acquired company prior to acquisition are excluded. The acquired
company was not part of the consolidated entity prior to the acquisition date. However, none of
the dividends paid by the subsidiary (before or after the acquisition date) will be reported in the
consolidated statement of changes in stockholders’ equity.
10-1
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Q10-9 The revenues and expenses of the subsidiary for the full year are included in the
consolidated income statement when the acquisition occurs at the beginning of the year. When
a mid-year acquisition occurs, the revenues and expenses of the acquired company prior to the
date of acquisition were not transactions of the consolidated entity. As a result, an additional
consolidation entry is made to close pre-acquisition account balances to retained earnings.
Q10-10 When there is a difference between the fair market value and the tax basis of an asset
acquired or liability assumed in an acquisition, a deferred tax asset or liability must be
recognized as part of the net identifiable assets in an acquisition. This usually occurs in a non-
taxable acquisition where the acquiree’s tax bases in the assets and liabilities carry over to the
consolidated entity after the acquisition.
Q10-11 The only book-tax difference that arises in acquisition that does not require the
inclusion of a related deferred tax asset or liability is goodwill. ASC805-740-25-9 states that
deferred taxes are not recognized when there is an excess of goodwill for financial reporting
over that for tax.
Q10-12 An accurate measure of the overall profit contribution from each segment of business
operations is often considered desirable in evaluating past operations and in planning future
strategy. In some cases the tax impact of operating a particular division is very different from
one or more other divisions, and that difference should be recognized in evaluating the
segment. Even when such differences do not exist, better knowledge of the approximate after
tax return from a particular subsidiary can be very helpful in assessing future investment and
operating strategies.
Q10-13 When a consolidated tax return is filed, all intercompany transfers are eliminated in
computing taxable income and there should be no need to adjust recorded tax expense in
preparing consolidated financial statements for the period. When the companies do not file a
consolidated return, tax payments and expense accruals recorded by the individual companies
presumably will include gains and losses on intercompany transfers. If an unrealized gain or
loss is eliminated in consolidation, the amount reported as tax expense also should be adjusted
to reflect only the tax expense on those items included in the consolidated income statement.
Q10-14 Assuming an unrealized profit has been reported, an additional consolidation entry is
needed to reduce tax expense and establish a deferred tax asset in the amount of the excess
payment. If a loss is eliminated, additional tax expense and taxes payable must be established
in the consolidation process.
Q10-15 When one of the companies in the consolidated entity has recorded tax expense on
unrealized profit in a preceding period, its retained earnings balance at the start of the period
will be overstated by the amount of unrealized profit less the tax expense recorded thereon. In
the period in which the item is sold and the profit is considered realized, the consolidation
entries must include a debit to the Investment in Subsidiary account for the amount of the net
overstatement and a debit to deferred tax expense for the proper amount of expense to be
recognized. If the original transfer was upstream, the entry would also include a debit to the
NCI in NA of the Subsidiary account.
Seems that this entry would also include a debit to NCI in NA if the original transfer was
upstream (see p. 10-16) and then reword as necessary.
Q10-16 When taxes are not considered, income assigned to noncontrolling shareholders is
reduced by a proportionate share of the unrealized profit. When taxes are considered, the
reduction is based on a proportionate share of the after tax balance of unrealized profits.
10-2
Q10-17 Perhaps the most important reason is that the earnings per share data reported by the
separate companies may include unrealized profits that must be eliminated in computing the
consolidated totals. Even without unrealized profits, simple addition could not be used when the
companies do not have an equal number of shares outstanding or when the parent does not
hold all the common or preferred shares of the subsidiary.
Q10-18 The full amount of dividends paid to unaffiliated preferred shareholders of the parent
are deducted from consolidated net income in arriving at consolidated earnings per share.
Preferred dividends paid by the subsidiary to noncontrolling shareholders and income assigned
to noncontrolling common shareholders are deducted from consolidated revenue and expenses
in computing consolidated net income and earnings per share. Subsidiary preferred dividends
paid to the parent or other affiliates must be eliminated and are not deducted in computing
consolidated earnings per share.
Q10-19 A subsidiary's contribution to consolidated earnings per share may be different from its
contribution to consolidated net income if the subsidiary has convertible bonds or preferred
stock outstanding that are treated as if they had been converted, or if the treasury stock method
is used to include the dilutive effects of subsidiary stock rights or stock options outstanding.
Q10-20 The net of tax interest savings from the assumed conversion of the bond into common
stock is included in the numerator and the additional shares are added to the denominator of the
earnings per share computation for the subsidiary. In doing so, earnings per share of the
subsidiary will be reduced. Moreover, the additional shares added to the denominator will
potentially alter the ownership ratio held by the parent; thus, the amount of subsidiary income
included in the consolidated earnings per share computation is likely to be reduced.
Q10-21 Those rights, warrants, and options treated as stock outstanding in the denominator of
the earnings per share computation of the subsidiary will reduce the amount of subsidiary
income included in the consolidated earnings per share computation to the extent that the
ownership ratio held by the parent is reduced. The actual shares will not be reported as such,
because they are assumed to be either eliminated or assigned to the noncontrolling interest.
Q10-22 In the earnings per share computation, the amount of income assigned to
noncontrolling interest may change as it is assumed that convertible securities are converted or
rights, warrants, and options are exercised. Both the amount of subsidiary income included in
the numerator and the proportion of parent company ownership may vary, thereby changing the
amount of subsidiary income included in the consolidated earnings per share computation.
10-3
SOLUTIONS TO CASES
C10-1 The Effect of Security Type on Earnings per Share
a. Until the securities are converted, the interest expense on bonds and the preferred dividends
must both be deducted in determining income available to common shareholders when basic
earnings per share is computed. Because interest expense is deductible for tax purposes and
preferred dividends are not, the increase in earnings available to common shareholders will be
less with conversion of the debentures. The decrease in earnings per share will be greater with
conversion of the convertible debentures since the two securities convert into an equal number
of common shares.
b. Interest expense is deducted in computing net income and preferred dividends are not. Thus,
conversion of the bonds will increase net income and conversion of the preferred stock will have
no effect on the reported net income of Stage Corporation. If Stage Corporation is a parent
company, consolidated net income will increase by the full amount of the interest saving (net of
tax) if the bonds are converted. In the event Stage Corporation is a subsidiary of another
company, consolidated net income again will increase if the bonds are converted, but the
amount of the increase depends on the percentage ownership of Stage by the parent.
Conversion of the preferred stock will increase consolidated net income because it increases
Stage’s income available to common shareholders, of which the parent is one. The increase will
be greater than the effect of the bond conversion because the preferred dividends have no tax
effect, but the amount of the increase will depend on the parent’s percentage ownership.
c. If the preferred shares are those of a parent company, they will be excluded entirely if (1) all
the shares are owned by its subsidiaries, or (2) the preferred shares are noncumulative and
have had no dividends declared during the period. If the shares are those of a subsidiary, the
preferred shares will have an effect on basic earnings per share unless (1) the parent or other
affiliates own all the common and preferred shares outstanding, or (2) the preferred shares are
noncumulative and have had no dividends declared during the period.
d. Interest expense will be deducted in computing Stage's net income. The preferred dividends
will then be deducted from net income in computing Stage's income available to common
shareholders. Assuming both securities are dilutive, interest expense (net of tax) will be added
back to Stage's net income, no preferred dividends will be deducted, and the increased number
of shares from the conversion of both securities will be added to the denominator in computing
Stage’s diluted earnings per share. These earnings per share amounts will then be used by
Prop Company in determining the income from the subsidiary to be included in its consolidated
earnings per share computations.
10-4
C10-2 Evaluating Consolidated Statements
MEMO
To: Treasurer
Cowl Corporation
From: , Accounting Staff
Re: Disclosure of Transfer of Cash from Subsidiary to Parent
The following comments are provided in response to your concern with respect to the transfer of
cash from Plum Corporation to the parent company. Intercompany borrowings often offer an
opportunity for one company to borrow money from an affiliate at rates favorable to both parties.
As a result, transfers of cash between affiliates are very common. These transactions are
eliminated in preparing the consolidated statements and the financial statement reader will be
unaware of them unless supplemental disclosures are made.
In general, the FASB does not require separate disclosure of transactions between consolidated
entities when they are eliminated in the preparation of consolidated or combined financial
statements. [ASC 850-10-50-4]
Nevertheless, the fact that Cowl Company is unable to generate sufficient cash from its
separate operations to pay its bills appears to be of sufficient importance that disclosure would
be appropriate in both the Management Discussion and Analysis (MD&A) section of Cowl’s
annual report and in the notes to the financial statements. The SEC establishes the disclosure
requirements for MD&A and requires discussion of currently known trends, demands,
commitments, events, or uncertainties that are reasonably expected to have material effects on
the registrant’s financial condition or results of operations, or that would cause reported financial
information not to be necessarily indicative of future operating results or financial condition.
[SEC Regulation S-K, Item 303]
The SEC also requires discussion of both short- and long-term liquidity and capital resources.
[SEC Financial Reporting Release 36]
ASC 230 does not specify those situations in which a discussion of operating cash flows must
be included in the notes to the financial statements. However, if the negative cash flow from
Cowl Company’s operations significantly affects the operating cash flows of the consolidated
entity, one or more notes to the financial statements should be used to provide information to
the financial statement readers. One possible form for doing so would be to include
supplemental cash flow information if the operations of the parent are identified as a separate
reportable segment [ASC 280-10-50-10].
Primary citations:
ASC 850-10-50-4
SEC Regulation S-K, Item 303
Secondary citations:
ASC 230
ASC 280-10-50-10
10-5
C10-3 Income Tax Expense
a. When prior-period intercompany profits are realized through resale to a nonaffiliate in the
current period, tax expense reported by the consolidated entity will be greater than actual tax
payments made by the separate companies.
b. Report the additional amount paid as a deferred tax asset or as prepaid income tax in the
consolidated balance sheet. (An alternate approach is to net the overpayment for unrealized
profits against deferred income taxes payable, but this was not discussed in the chapter.)
c. Whenever separate tax returns are filed and unrealized profits/gains are recorded on
intercompany transfers of land, buildings and equipment, or other assets, income tax expense
reported in the consolidated income statement in the period of the intercompany transfer will be
less than tax payments made. A similar effect occurs when one affiliate purchases the bonds of
another affiliate and a constructive loss on bond retirement is reported in the consolidated
income statement.
d. When unrealized profits from a prior period are realized in the current period, income tax
expense recognized in the current period will be greater than the actual tax payment made.
Also, when unrealized losses are recorded on intercompany transfers (like land, buildings,
equipment or other assets), tax expense reported in the consolidated income statement in the
period of the transfer will be greater than the actual tax payment. A constructive gain on bond
retirement on a purchase of an affiliate's bonds will also result in an excess of consolidated tax
expense over tax payments.
10-6
C10-4 Consolidated Cash Flows
a. The factors contributing to the increase in net income over the prior period are key in this
case. One possible explanation is that operating earnings of the combined companies actually
declined and the increase in net income resulted from a substantial one-time gain on sale of a
division or other assets in the current period. Another possibility would be a decrease in
noncash charges deducted in computing income. Cash generated by operations often is well
above operating earnings as a result of charges such as amortization of intangible assets or
depreciation. A decrease in these charges will increase net income but not change cash flows
Changes in the net amounts invested in receivables, inventories, and other current assets are
included in the computation of cash flows from operations. Increases in these balances can
substantially reduce the reported cash flows from operations without affecting net income.
b. Both sales and the balance in accounts receivable should increase when less stringent
criteria are used in extending credit. Similarly, both should decrease when credit terms are
tightened. If the companies have relaxed credit standards during the current period, net income
may be greater as a result of increased sales. However, cash flows are likely to increase to a
lesser degree as accounts receivable increase.
c. An inventory write-off under lower of cost or market and other noncash charges will not
reduce cash flows from operations. The amount expensed would be added back to consolidated
net income in arriving at cash generated by operating activities.
d. Assuming an allowance account is used, this particular write-off will not appear in either the
income statement or computation of cash flows from operations. There is no charge in the
income statement and no change in the net receivable balance as a result of a simple write-off
of an account receivable.
e. There are no significant differences between the preparation of a statement of cash flows for
a consolidated entity and a single corporate entity. However, for the consolidated entity,
dividend payments to the subsidiary’s noncontrolling interest must be included in the financing
section because they use cash even though they are not viewed as dividends of the
consolidated entity.
10-7
SOLUTIONS TO EXERCISES
E10-1 Analysis of Cash Flows
a. The consolidated cash balance at January 1, 20X2, was $83,000, computed as

follows:
Balance at December 31, 20X2 $ 57,000

Decrease in cash balance during 20X2:
Cash flows from operations $284,000
Cash outflow for investment activities (80,000)
Cash outflow for financing activities (230,000)
Net cash outflow 26,000
Cash balance at January 1, 20X2 $83,000
b. Dividends of $48,000 were reported:
Dividends paid to Plant shareholders $45,000

Dividends paid to noncontrolling interest of
Stem Company ($10,000 x 0.30) 3,000
Total cash payments $48,000
c. Consolidated net income was $207,000, computed as follows:
Cash flow from operations $284,000

Adjustments to reconcile consolidated net income
and cash provided by operations (77,000)
Consolidated net income $207,000
10-8
E10-2 Statement of Cash Flows
a. The noncontrolling interest received dividends of $6,000 ($15,000 x .40).
b. A total of $320,000 will be reported as cash provided by operations, computed as follows:

Depreciation expense 21,000
Amortization of patents 13,000
Gain on bond retirement (4,000)
Loss on sale of land 8,000
Decrease in accounts receivable 32,000
Increase in inventory (16,000)
Decrease in accounts payable (12,000)
Increase in wages payable 7,000
Net cash provided by operating activities $320,000
c. Cash used in investing activities will be reported at $161,000, computed as follows:
Purchases of equipment $(295,000)

Sale of land 134,000
Net cash used in investing activities $(161,000)
d. Cash used in financing activities will be reported at $81,000, computed as follows:
Sale of stock $150,000

Bond retirement (200,000)
Dividends paid to Pecan Corporation shareholders (25,000)
Dividends paid to noncontrolling interests (6,000)
Net cash used in financing activities $ (81,000)
e. The cash balance increased by $78,000 ($320,000 - $161,000 - $81,000) in 20X4.
E10-3 Computation of Operating Cash Flows
Cash received from customers was $293,000 ($310,000 - $17,000). Cash payments to
suppliers was $193,000 ($180,000 - $8,000 + $21,000), resulting in cash flows from operating
activities of $100,000 ($293,000 - $193,000).
10-9
E10-4 Consolidated Operating Cash Flows
a. Cash received from customers was $482,000 ($300,000 + $200,000 - $28,000 + $10,000).
b. Cash payments to suppliers was $288,000 ($160,000 + $95,000 + $35,000 - $15,000 +

17,000 - $4,000).
c. Cash flows from operating activities was $194,000 ($482,000 - $288,000).
E10-5 Preparation of Statement of Cash Flows
Consolidated Enterprises Inc. and Subsidiary

Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X3
Cash Flows from Operating Activities:

Consolidated Net Income $ 464,000
Adjustments for noncash items:
Noncash Expenses, Revenue, and Gains
Included in Income:
Depreciation Expense 73,000
Goodwill Impairment Loss 3,000
Gain on Sale of Equipment (8,000)
Changes in operating assets and liabilities
Decrease in Accounts Receivable 23,000
Increase in Accounts Payable 5,000
Increase in Inventory (15,000)
Net Cash Provided by Operating Activities $545,000
Cash Flows from Investing Activities:

Equipment Purchased $(380,000)
Sale of Equipment 45,000
Net Cash Used in Investing Activities (335,000)
Cash Flows from Financing Activities:

Sale of Bonds $ 120,000
Repurchase of Common Stock (35,000)
Dividends Paid:
To Parent Company Shareholders (60,000)
To Noncontrolling Shareholders (6,000)
Net Cash Provided by Financing Activities 19,000
Net Increase in Cash $229,000
10-10
E10-6 Direct Method Cash Flow Statement
Consolidated Enterprises Inc. and Subsidiary


Cash Received from Customers $ 923,000 (a)
Cash Payments to Suppliers (378,000) (b)
Net Cash Provided by Operating Activities $ 545,000

Equipment Purchased $(380,000)

Sale of Bonds $120,000
Repurchase of Common Stock (35,000)
Dividends Paid:
Net Increase in Cash $ 229,000
(a) $923,000 = $900,000 + $23,000

(b) $378,000 = $368,000 - $5,000 + $15,000
The FASB also requires the following reconciliation when the statement of cash flows is
prepared using the direct method:
Reconciliation of consolidated net income to net cash provided by operating

activities
Consolidated Net Income $464,000

Depreciation Expense $73,000
Changes in operating assets and liabilities:
Total Adjustments 81,000
10-11
E10-7 Analysis of Consolidated Cash Flow Statement
a. Dividends paid to noncontrolling interest $ 6,000

Proportion of stock held by noncontrolling interest ÷ .40
Total dividends paid by Sons Delivery $15,000
b. When bonds are sold at a premium the annual cash payment is greater than
reported interest expense. The amount of premium amortized must therefore be
deducted from net income in determining the cash flow from operations.
c. An increase in accounts receivable means that cash collections have been less
than sales for the period. The amount of the increase must be deducted from
operating income to determine the amount of cash actually made available from
current period operations.
d. Dividends paid to noncontrolling shareholders are reported as a cash outflow in

the cash flow statement because they represent funds that have been distributed
during the period and are no longer available to the consolidated entity. On the
other hand, these same dividends are omitted from the retained earnings
statement. Only the income to the parent company shareholders is included in the
consolidated retained earnings statement and only dividends to the parent
company shareholders are deducted in deriving the ending consolidated retained
earnings balance.
e. The loss occurred on a sale to a nonaffiliate. All profits and losses on sales to
affiliates are eliminated in the period of intercompany sale and are considered
realized as the equipment is depreciated by the purchasing affiliate.
E10-8 Midyear Acquisition
a. The retained earnings balance reported for the consolidated entity as of January 1,
20X1, would be $400,000.
b. Separate earnings of Pole Manufacturing $140,000

Net income reported by Spencer Corporation $60,000
Portion of year ownership was held by Pole x 4/12
Income earned following acquisition 20,000
Income to noncontrolling interest ($20,000 x .05) (1,000)
Income to controlling interest $159,000
c. Consolidated retained earnings, January 1, 20X1 $400,000

Income to controlling interest 159,000
Dividends paid by Pole Manufacturing (80,000)
Consolidated retained earnings, December 31, 20X1 $479,000
d. Purchase price on August 30, 20X1 $503,500

Equity method income 19,000
Dividends received from Spencer ($25,000 x .95) (23,750)
Balance in investment account December 31, 20X1 $498,750
10-12
E10-9 Purchase of Shares at Midyear
a. Journal entries recorded by Pie in 20X2:
Investment in Slice Co. 319,500

Cash 319,500
Record purchase of Slice Company Stock.

Income from Slice Co. 27,000
Record equity-method income.
Cash 13,500
Record dividends from Slice Company.
b. Consolidation Entries:
Sales 90,000
Total Expenses 80,000
Dividends Declared 5,000
Retained Earnings 5,000
Book Value Calculations:

Retained
Commo Add.
+ = + +
NCI Pie Corp. n Paid-In Earning
10% 90% Stock Cap. s
Book Value At
Acquisition Date 35,500 319,500 160,000 40,000 155,000
+ Net Income 3,000 27,000 30,000
- Dividends (1,500) (13,500) (15,000)
Ending Book Value 37,000 333,000 160,000 40,000 170,000
Basic Consolidation Entry

Common Stock 160,000
Additional Paid-in Capital 40,000
Income from Slice Co. 27,000
NCI in NI of Slice Co. 3,000
NCI in NA of Slice Co. 37,000
10-13
E10-10 Deferred Tax Assets and Liabilities Arising in Acquisition
Accounts Receivable:
Fair Value $28,000

Tax Basis 30,000
Book-Tax Difference (future deductible difference) 2,000
x 0.40
Deferred Tax Asset 800
Land:
Fair Value $40,000

Tax Basis 10,000
Book-Tax Difference (future taxable difference) 30,000
x 0.40
Deferred Tax Liability 12,000
Equipment:
Fair Value $15,000

Tax Basis 5,000
x 0.40
Bond Payable:
Fair Value $115,000

Tax Basis 120,000
x 0.40
Total Deferred Tax Assets acquired = 800
Total Deferred Tax Liabilities acquired = 18,000 (12,000 + 4,000 + 2,000)
Deferred Tax Liability, Net on the balance sheet = 17,200
10-14
E10-11 Tax Deferral on Gains and Losses
Consolidation entries, December 31, 20X7:

Ending
Inventor
Total = Re-sold + y
Sales 90,000 30,000 60,000
COGS 60,000 20,000 40,000
Gross Profit 30,000 10,000 20,000
Gross Profit % 33.33%
Eliminate Inventory Purchases:

Sales 90,000
Cost of Goods Sold 70,000
Inventory 20,000
Eliminate Tax Expense on Unrealized Profit on Inventory transfer:

Deferred Tax Asset 8,000
Deferred Tax Expense 8,000
Eliminate Gain on Sale of Land:

Gain on Sale of Land 100,000
Land 100,000
Eliminate Tax Expense on Unrealized Profit on Land Transfer:

E10-12 Unrealized Profits in Prior Year
Consolidation entries, December 31, 20X8:
Eliminate Beginning Inventory Profit:

12,00
Investment in Spring Services 0
Income Tax Expense 8,000
Eliminate Unrealized Gain on Sale of Land:

40,00
Deferred Tax Asset 0
45,00
Investment in Spring Services 0
15,00
NCI in NA of Spring Services 0
Land 100,000
10-15
E10-13 Allocation of Income Tax Expense
a. Allocation of tax expense incurred in 20X5:
Polly Sonny Daughter

Item Corporation Corporation Company
Reported operating income $100,000 $50,000 $30,000

20X4 profits realized in 20X5 40,000 20,000
Unrealized profits in 20X5
sales (10,000) (20,000) (10,000)
Realized income before tax $130,000 $30,000 $40,000
Income tax assigned:

($130,000 / $200,000) x $80,000 $ 52,000
($30,000 / $200,000) x $80,000 $12,000
($40,000 / $200,000) x $80,000 $16,000
b. Computation of consolidated net income and income to controlling interest:
Realized income before tax:

Polly Corporation $130,000
Sonny Corporation 30,000
Daughter Company 40,000
Consolidated income before tax $200,000
Income tax expense (80,000)
Income to noncontrolling interests:
Sonny Corporation ($30,000 - $12,000) x 0.20 $ 3,600
Daughter Co ($40,000 - $16,000) x 0.10 2,400 (6,000)
10-16
E10-14 Effect of Preferred Stock on Earnings per Share
Because both companies paid preferred dividends in 20X1 and neither issue is convertible, only
one basic consolidated earnings per share number will be reported for 20X1:
Operating income of Poison Corporation $ 59,000

Net income of Snake Company $45,000
Less: Preferred dividends (5,000)
Earnings available to Snake common shareholders 40,000
Less: Income to noncontrolling interest ($40,000 x .30) (12,000)
Income to common shareholders of Poison Corporation $87,000
Less: Preferred dividends of Poison Corporation (9,000)
Earnings available to common shareholders $78,000
Consolidated earnings per share for 20X1

($78,000 / 12,000 shares) $6.50
E10-15 Effect of Convertible Bonds on Earnings per Share
Basic earnings per share:
Operating income of Poppy Corporation $45,000

Contribution to consolidated EPS from Seed Company
($30,000 / 10,000) x 6,000 shares 18,000

($63,000 / 30,000 shares) $2.10
Diluted earnings per share:
Operating income of Poppy Corporation $45,000

Contribution to consolidated EPS from Seed Company:
$30,000 + $12,000 (a) x 6,000 shares

10,000 shares + 10,000 shares 12,600

($57,600 / 30,000 shares) $1.92
(a) $12,000 = ($200,000 x 0.10) x (1 - 0.40)
10-17
E10-16 Effect of Convertible Preferred Stock on Earnings per Share
Basic earnings per share:
Operating income of Pagle Corporation $60,000

Contribution to consolidated EPS from Standard Company:
$45,000 - $12,000 x 8,000 shares

10,000 shares 26,400
Earnings available to shareholders $86,400
Preferred dividends of Pagle Corporation (16,000)

($70,400 / 10,000 shares) $7.04
Diluted earnings per share:
Operating income of Pagle Corporation $60,000

Contribution to consolidated EPS from Standard Company:
$45,000 x 8,000 shares

10,000 shares + 15,000 shares 14,400
Earnings available to shareholders $74,400
Preferred dividends of Pagle Corporation (16,000)

($58,400 / 10,000 shares) $5.84
10-18
SOLUTIONS TO PROBLEMS
P10-17 Direct Method Computation of Cash Flows
Putter Corporation and Subsidiary

Operating Cash Flows

Cash Received from Customers $533,000
Cash Payments to Suppliers (268,000)
Computation of payments received from customers
Sales of Putter Corporation $400,000

Sales to outside parties by Sand Company ($240,000 - $100,000) 140,000
Increase in Putter Corporation accounts receivable (9,000)
Decrease in Sand Company’s accounts receivable 2,000
Payments received from customers $533,000
Computation of payments to suppliers
Cost of goods sold by Putter Corporation excluding sale of

inventory purchased from Sand Company ($235,000 - $40,000) $195,000
Cost of goods sold on sales by Sand Company
to outside parties ($105,000 - $70,000) 35,000
Cost of goods sold on intercompany sales
resold in period ($70,000 x 0.40) 28,000
Decrease in Putter Corporation inventory (22,000)
Increase in Sand Company inventory 16,000
Decrease in accounts payable of Putter Corporation 31,000
Increase in accounts payable of Sand Company (15,000)
Payment made to suppliers $268,000
10-19
P10-18 Preparing a Statement of Cash Flows
a. Pear Corporation and Sugar Company

Consolidated Cash Flow Worksheet
Year Ended December 31, 20X3
Balance Balance
Item 1/1/X3 Debit Credit 12/31/X3
Cash 68,500 (a) 32,000 100,500

Accounts Receivable 82,000 (b) 15,000 97,000
Inventory 115,000 (c) 8,000 123,000
Land 45,000 (d) 10,000 55,000
Buildings and Equipment 515,000 (e) 35,000 550,000
Patents 5,000 (f) 1,000 4,000
830,500 929,500
Accumulated Depreciation 186,500 (g) 36,500 223,000

Accounts Payable 61,000 (h) 5,000 66,000
Wages Payable 26,000 (i) 6,000 20,000
Notes Payable 250,000 (j) 15,000 265,000
Common Stock 150,000 150,000
Retained Earnings 130,000 (k) 30,000 (l) 74,500 174,500
Noncontrolling Interest 27,000 (m) 5,000 (l) 9,000 31,000
830,500 141,000 141,000 929,500

Consolidated Net Income (l) 83,500
Depreciation Expense (g) 36,500
Amortization of Patent (f) 1,000
Changes in Operating Assets and Liabilities:
Increase in Accounts Receivable (b) 15,000
Increase in Inventory (c) 8,000
Increase in Accounts Payable (h) 5,000
Decrease in Wages Payable (i) 6,000

Purchase of Land (d) 10,000
Purchase of Buildings and Equipment (e) 35,000

Increase in Notes Payable (j) 15,000
Dividends Paid:
To Pear Corporation Shareholders (k) 30,000
To Sugar Company Shareholders (m) 5,000
Increase in Cash (a) 32,000
141,000 141,000
10-20
P10-18 (continued)
b. Consolidated statement of cash flows for 20X3
Pear Corporation and Subsidiary

Cash Flows from Operating Activities

Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Amortization Expense 1,000
Changes in operating assets and liabilities
Increase in Accounts Receivable (15,000)
Decrease in Wages Payable (6,000)

Purchase of Land $(10,000)
Purchase of Buildings and Equipment (35,000)

Increase in Notes Payable $ 15,000
Dividends Paid to Parent Company Shareholders (30,000)
Dividends Paid to Noncontrolling Shareholders ( 5,000)
Net Cash Used in Financing Activities (20,000)

Cash at Beginning of Year 68,500
Cash at End of Year $100,500
10-21
P10-19 Preparing a Statement of Cash Flows – Direct Method
a. Pear Corporation and Sugar Company

Consolidated Cash Flow Worksheet
Balance Balance
Cash 68,500 (a) 32,000 100,500

Inventory 115,000 (c) 8,000 123,000
Land 45,000 (d) 10,000 55,000
Patents 5,000 (f) 1,000 4,000
830,500 929,500
Accumulated Depreciation 186,500 (g) 36,500 223,000

Accounts Payable 61,000 (c) 5,000 66,000
Wages Payable 26,000 (h) 6,000 20,000
Notes Payable 250,000 (j) 15,000 265,000
Common Stock 150,000 150,000
830,500 141,000 141,000 929,500
Sales 490,000 (b)490,000

Cost of Goods Sold 259,000 (c)259,000
Wage Expense 55,000 (h) 55,000
Depreciation Expense 36,500 (g) 36,500
Interest Expense 16,000 (i) 16,000
Amortization Expense 1,000 (f) 1,000
Other Expenses 39,000 (c) 39,000
406,500
Consolidated Net Income 83,500 (l) 83,500
490,000 490,000
10-22
P10-19 (continued)

Cash Received from Customers (b) 475,000
Cash Paid to Suppliers (c)301,000
Cash Paid to Employees (h) 61,000
Cash Paid for Interest on Notes Payable (i) 16,000

Purchase of Buildings and Equipment (e) 35,000

Increase in Notes Payable (j) 15,000
Dividends Paid:
To Pear Corporation Shareholders (k) 30,000
To Sugar Company Shareholders (m) 5,000
490,000 490,000
b. Consolidated statement of cash flows for 20X3
Pear Corporation and Subsidiary


Cash Paid to Suppliers $301,000
Cash Paid to Employees 61,000
Cash Paid for Interest on Notes Payable 16,000 (378,000)

Purchase of Land $(10,000)

Increase in Notes Payable $15,000
Dividends Paid to Parent Company Shareholders (30,000)
Dividends Paid to Noncontrolling Shareholders ( 5,000)

10-23
P10-19 (continued)

activities

Increase in Accounts Receivable (15,000)
Decrease in Wages Payable (6,000)
10-24
P10-20 Consolidated Statement of Cash Flows
a. Point Company and Shoot Company

Consolidation Cash Flow Worksheet
Balance Balance
Cash 83,000 (a) 98,000 181,000

Inventory 320,000 (c) 50,000 370,000
Land 190,000 (d) 30,000 160,000
Buildings and Equipment 850,000 (e)130,000 980,000
Goodwill 40,000 (f) 12,000 28,000
1,693,000 1,894,000
Accum. Depreciation 280,000 (g) 45,000 325,000

Accounts Payable 52,000 (h) 22,000 74,000
Interest Payable 45,000 (i) 15,000 30,000
Bonds Payable 400,000 (j) 100,000 500,000
Bond Premium 18,000 (k) 2,000 16,000
Common Stock 300,000 300,000
Additional Paid-In Capital 70,000 70,000
Retained Earnings 488,000 (l) 25,000 (m) 72,000 535,000
Noncontrolling Interest 40,000 (n) 3,000 (m) 7,000 44,000
1,693,000 323,000 323,000 1,894,000

Consolidated Net Income (m) 79,000
Depreciation Expense (g) 45,000
Goodwill Impairment Loss (f) 12,000
Amortization of Bond Premium (k) 2,000
Loss on Sale of Land (d) 20,000
Decrease in Accounts Receivable (b) 35,000
Increase in Accounts Payable (h) 22,000
Decrease in Interest Payable (i) 15,000

Sale of Land (d) 10,000
Purchase of Buildings and Equipment (e)130,000

Sale of Bonds (j)100,000
Dividends Paid:
To Point Shareholders (l) 25,000
To Noncontrolling Shareholders (n) 3,000
323,000 323,000
10-25
P10-20 (continued)
Explanation of Worksheet Entries:
(a) Increase in cash balance
(b) Decrease in accounts receivable
(c) Increase in inventory
(d) Sale of land
(e) Purchase of buildings and equipment
(f) Goodwill impairment loss recognized in 20X4
(g) Depreciation charges for 20X4
(h) Increase in accounts payable
(i) Decrease in interest payable
(j) Sale of bonds
(k) Amortize bond premium
(l) Point Company dividend $25,000
(m) Consolidated net income $79,000
(n) Shoot Company dividend $15,000 x 0.20
10-26
P10-20 (continued)
b. Consolidated statement of cash flows for 20X4:
Point Company and Subsidiary

For Year Ended December 31, 20X4

Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Amortization of Bond Premium (2,000)
Loss on Sale of Land 20,000
Decrease in Interest Payable (15,000)

Sale of Land $ 10,000

Dividends Paid:
Cash Balance at Beginning of Year 83,000
Cash Balance at End of Year $181,000
10-27
P10-21 Consolidated Statement of Cash Flows — Direct Method
a. Point Company and Shoot Company

Balance Balance
Cash 83,000 (a) 98,000 181,000

Inventory 320,000 (c) 50,000 370,000
Land 190,000 (d) 30,000 160,000
Goodwill 40,000 (f) 12,000 28,000
1,693,000 1,894,000
Accum. Depreciation 280,000 (g) 45,000 325,000

Interest Payable 45,000 (h) 15,000 30,000
Bonds Payable 400,000 (i) 100,000 500,000
Bond Premium 18,000 (h) 2,000 16,000
Common Stock 300,000 300,000
Additional Paid-In 70,000 70,000
Capital
Retained Earnings 488,000 (j) 25,000 (k) 72,000 535,000
Noncontrolling Interest 40,000 (l) 3,000 (k) 7,000 44,000
1,693,000 323,000 323,000 1,894,000
Sales 600,000 (b) 600,000

Cost of Goods Sold 375,000 (c)375,000
Depreciation Expense 45,000 (g) 45,000
Interest Expense 69,000 (h) 69,000
Loss on Sale of Land 20,000 (d) 20,000
Goodwill Impairment Loss 12,000 (f) 12,000
521,000
Consolidated Net Income 79,000 (k) 79,000
600,000 600,000
10-28
P10-21 (continued)

Cash Received from Customers (b)635,000
Cash Paid to Suppliers (c)403,000
Cash Paid for Interest on
Bonds Payable (h) 86,000

Sale of Land (d) 10,000
Purchase of Buildings and Equipment (e)130,000

Sale of Bonds (i) 100,000
Dividends Paid:
To Traper Shareholders (j) 25,000
To Noncontrolling Shareholders (l) 3,000
745,000 745,000
Explanation of Worksheet Entries:
(a) Increase in cash balance
(b) Payments received from customers
(c) Payments to suppliers
(d) Sale of land
(e) Purchase of buildings and equipment
(f) Goodwill impairment loss recognized in 20X4
(g) Depreciation charges for 20X4
(h) Payment of interest
(i) Sale of bonds
(j) Point Company dividend $25,000
(k) Consolidated net income $79,000
(l) Shoot Company dividend $15,000 x 0.20
10-29
P10-21 (continued)
b. Consolidated statement of cash flows for 20X4:
Point Company and Subsidiary

For Year Ended December 31, 20X4

Cash Payments to Suppliers $403,000
Cash Payments of Interest 86,000 (489,000)

Sale of Land $ 10,000

Dividends Paid:
Cash Balance at End of Year $181,000

activities

Amortization of Bond Premium (2,000)
Loss on Sale of Land 20,000
Decrease in Interest Payable (15,000)
10-30
P10-22 Consolidated Statement of Cash Flows
Planet Company and Sun Corporation

Balance Balance
Cash 54,000 (a) 21,000 75,000

Inventory 230,000 (c)130,000 360,000
Land 95,000 (d) 5,000 100,000
1,300,000 1,296,000
Accumulated Depreciation 290,000 (e)100,000 (f) 40,000 230,000

Accounts Payable 90,000 (g) 15,000 105,000
Bonds Payable 300,000 (h) 50,000 250,000
Common Stock 300,000 300,000
Retained Earnings 290,000 (i) 65,000 (j) 148,000 373,000
Noncontrolling Interest 30,000 (k) 4,000 (j) 12,000 38,000
1,300,000 375,000 375,000 1,296,000

Consolidated Net Income (j) 160,000
Depreciation Expense (f) 40,000
Gain on Sale of Equipment (e) 30,000
Increase in Inventory (c)130,000
Increase in Accounts Payable (g) 15,000

Sale of Buildings and Equipment (e) 80,000

Bond Retirement (h) 50,000
Dividends Paid:
To Planet Company Shareholders (i) 65,000
To Noncontrolling Shareholders (k) 4,000
305,000 305,000
10-31
P10-23 Consolidated Statement of Cash Flows — Direct Method
Planet Company and Sun Corporation

Balance Balance
Cash 54,000 (a) 21,000 75,000

Inventory 230,000 (c) 130,000 360,000
Land 95,000 (d) 5,000 100,000
1,300,000 1,296,000
Accumulated Depreciation 290,000 (e) 100,00 (f) 40,000 230,000

0
Bonds Payable 300,000 (g) 50,000 250,000
Common Stock 300,000 300,000
Retained Earnings 290,000 (h) 65,000 (i) 148,000 373,000
Noncontrolling Interest 30,000 (j) 4,000 (i) 12,000 38,000
1,300,000 375,000 375,000 1,296,000
Sales 1,070,000 (b)1,070,000

Gain on Sale of Equipment 30,000 (e) 30,000
1,100,000
Cost of Goods Sold 750,000 (c) 750,000
Depreciation Expense 40,000 (f) 40,000
Other Expenses 150,000 (c) 150,000
940,000
Consolidated Net Income 160,000 (i) 160,000
1,100,000 1,100,000

Cash Received from Customers (b)1,080,00
0
Cash Paid to Suppliers (c)1,015,000

Sale of Buildings and Equipment (e)
80,000

Bond Retirement (g) 50,000
Dividends Paid
To Planet Company Shareholders (h) 65,000
To Noncontrolling Shareholders (j) 4,000
1,160,000 1,160,000
10-32
P10-24 Consolidated Statement of Cash Flows [AICPA Adapted]
Primer, Inc., and Subsidiary


Depreciation 82,000 [1]
Decrease in Allowance to Reduce
Marketable Securities to Market (11,000)
Increase in Inventories (70,000)
Increase in Accounts Payable
and Accrued Liabilities 121,000
Increase in Deferred Tax Liability 12,000

Purchase of Equipment $(127,000)

Payment on Note Payable $(150,000)
Sale of Treasury Stock 44,000
Cash Dividend Paid by Parent Company (58,000)
Cash Dividend Paid to Noncontrolling Interest
in Subsidiary (15,000) [2]
Net Increase in Cash $118,000
Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of Common Stock to Purchase Land $215,000
10-33
P10-24 (continued)
Explanations of Amounts:
[1] Depreciation:
Accumulated depreciation, Dec. 31, 20X6 $199,000
Accumulated depreciation on equipment sold
($62,000 - $34,000) 28,000
227,000
Deduct accumulated depreciation, Dec. 31, 20X5 (145,000)
Depreciation for 20X6 $ 82,000
[2] Cash dividends paid to minority stockholders of subsidiary:

Cash dividend paid by Sore Corporation $ 50,000
noncontroling ownership x 0.30
Cash dividend paid to minority stockholders in 20X6 $ 15,000
10-34
P10-25 Statement of Cash Flows Prepared from Consolidation Worksheet
a. Worksheet for consolidated statement of cash flows:
Protecto Corporation and Strand Company

Balance Balance
Cash 92,000 (a) 30,200 61,800

Inventory 140,000 (c) 59,000 199,000
Land 75,000 (d) 5,000 80,000
Buildings and Equipment 400,000 (e)100,000
(f) 20,000 520,000
Patents 30,000 (g) 5,000 25,000
872,000 1,005,800
Accumulated Depreciation 210,000 (h) 20,000 230,000

Accounts Payable 114,200 (i) 19,200 95,000
Bonds Payable 90,000 (j) 100,000 190,000
Common Stock 100,000 100,000
872,000 261,200 261,200 1,005,800

Consolidated Net Income (l) 91,000
Amortization Expense (g) 5,000
Depreciation Expense (h) 20,000
Decrease in Accounts Payable (i) 19,200

Acquisition of Buildings and
Equipment from Bond Issue (e)100,000
Purchase of Buildings and Equipment (f) 20,000

Dividends Paid:
To Protecto Corp. Shareholders (k) 50,000
To Noncontrolling Shareholders (m) 8,000
Issuance of Bonds for Buildings
and Equipment (j) 100,000
Decrease in Cash (a) 30,200
261,200 261,200
10-35
P10-25 (continued)
b. Consolidated cash flow statement for 20X3:
Protecto Corporation and Subsidiary


Included in Income:
Decrease in Accounts Payable (19,200
)

Purchase of Land $
(5,000)

Dividends Paid:
To Parent Company Shareholders $(50,000
)
Net Cash Received from
Financing Activities (58,000)
Net Decrease in Cash $(30,200)
Cash Balance at End of Year $ 61,800
Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of Bonds to Purchase Equipment $100,000
10-36
P10-26 Midyear Purchase of Controlling Interest
a. Equity-method entries recorded by Parachute Theaters during 20X1:
Investment in Stage Co. 765,000

Cash 765,000
Record purchase of Stage Company stock.

Income from Stage Co. 97,750
Record equity-method income: ($175,000 - $60,000) x 0.85
Cash 25,500
Record dividends from Stage Company: $30,000 x 0.85
10-37
P10-26 (continued)
b. Consolidation entries, December 31, 20X1:

Sales 240,000
Operating Expenses 180,000

Parachut Retaine
e Commo Add. d
+ = + +
NCI Theaters n Paid-In Earning
15% 85% Stock Cap. s
Book Value At Acquisition
Date 120,000 680,000 100,000 500,000 200,000
+ Net Income 17,250 97,750 115,000
- Dividends (4,500) (25,500) (30,000)
Ending Book Value 132,750 752,250 100,000 500,000 285,000

Additional Paid-in Capital 500,000
Income from Stage Co. 97,750
NCI in NI of Stage Co. 17,250
NCI in NA of Stage Co. 132,750
Excess Value (Differential) Calculations:

Parachute
NCI 15% + Theaters 85% = Goodwill
Beginning balance 15,000 85,000 100,000
Changes 0 0 0
Ending balance 15,000 85,000 100,000
Excess Value (Differential) Reclassification Entry:

Goodwill 100,000
NCI in NA of Stage Co. 15,000
Computation of differential
Compensation given by Parachute Theaters $765,000
Fair value of noncontrolling interest 135,000
Total fair value $900,000
Book value of Stage stock:
Common stock $100,000
Additional paid-in capital 500,000
Retained earnings, January 1 150,000
First quarter undistributed
earnings ($60,000 - $10,000) 50,000
10-38
Book value, April 1 (800,000)

Goodwill $100,000
10-39
P10-27 Consolidation Involving a Midyear Purchase
a. Journal entries recorded by Princeton Products:
Investment in Stanford Co. 247,50

0
Common Stock 80,000
Additional Paid-In Capital 167,500
Record purchase of Stanford Company stock:
$80,000 = $10 x 8,000 shares
$167,500 = $247,500 - $80,000

Income from Stanford Co. 13,500
Record equity-method income: $13,500 = $15,000 x 0.90
Cash 9,000
Record dividend received from Stanford: $9,000 = $10,000 x 0.90
b. Consolidation entries, December 31, 20X2:
Pre-acquisition Income and Dividend Consolidation Entry:

Sales 205,000
Other Expenses 18,000

Princeto Retained
n Commo
+ = +
NCI Products n Earning
10% 90% Stock s
Book Value At Acquisition Date 27,500 247,500 150,000 125,000
+ Net Income 1,500 13,500 15,000
- Dividends (1,000) (9,000) (10,000)
Ending Book Value 28,000 252,000 150,000 130,000

Income from Stanford Co. 13,500
NCI in NI of Stanford Co. 1,500
10-40
NCI in NA of Stanford Co. 28,000
P10-27 (continued)
Accumulated Depreciation Consolidation Entry

Accumulated Depreciation 61,000
Buildings and Equipment 61,000
Depreciation expense for the year is $20,000, however $16,000 of that amount occurred prior to
the acquisition, leaving only $4,000 as post-acquisition depreciation for Stanford. End of year
accumulated depreciation is recorded as $65,000 for Stanford, but should only reflect the
$4,000 of post consolidation depreciation of $4,000. A consolidation entry to remove the
$61,000 of depreciation recorded in the periods prior to the acquisition is recorded and the
depreciable assets are reduced by the same amount.
10-41
P10-27 (continued)
c.
Princeto Consolidation
n Stanford Entries
Products Co. DR CR Consolidated
Income Statement
Sales 390,000 250,000 205,000 435,000
Less: COGS (305,000) (145,000) 126,000 (324,000)
Less: Depreciation Expense (25,000) (20,000) 16,000 (29,000)
Less: Other Expenses (14,000) (25,000) 18,000 (21,000)
Income from Stanford Co. 13,500 0 13,500 0
Consolidated Net Income 59,500 60,000 218,500 160,000 61,000
NCI in Net Income 1,500 (1,500)
Controlling Interest in Net Income 59,500 60,000 220,000 160,000 59,500
Statement of Retained Earnings

Beginning Balance 135,000 100,000 125,000 25,000 135,000
Net Income 59,500 60,000 220,000 160,000 59,500
Less: Dividends Declared (40,000) (30,000) 10,000 (40,000)
20,000
Ending Balance 154,500 130,000 345,000 215,000 154,500
Balance Sheet
Cash 85,000 50,000 135,000
Accounts Receivable 100,000 60,000 160,000
Inventory 150,000 100,000 250,000
Buildings and Equipment 400,000 340,000 61,000 679,000
Less: Accumulated Depreciation (105,000) (65,000) 61,000 (109,000)
Investment in Stanford Co. 252,000 0 252,000 0
Total Assets 882,000 485,000 61,000 313,000 1,115,000
Accounts Payable 40,000 50,000 90,000

Taxes Payable 70,000 55,000 125,000
Bonds Payable 250,000 100,000 350,000
Common Stock 200,000 150,000 150,000 200,000
Additional Paid-In Capital 167,500 0 167,500
Retained Earnings 154,500 130,000 345,000 215,000 154,500
NCI in NA of Stanford Co. 28,000 28,000
Total Liabilities & Equity 882,000 485,000 495,000 243,000 1,115,000
10-42
P10-28 Deferred Tax Assets and Liabilities in a Consolidated Balance Sheet
a. Peace Tax Basis Calculations:
Deferred Tax Asset $8,000

Tax Rate ÷ 0.40
Book-Tax Difference (future deductible difference) 20,000
Amount related to Vacation Payable (15,000)
Remainder related to Allowance for Doubtful Accounts 5,000
Deferred Tax Liability $6,000

Tax Rate ÷ 0.40
Book-Tax Difference (future taxable difference) related to Equipment 15,000
Tax basis of Accounts Receivable = $55,000 (50,000 book value + 5,000 book-tax difference
related to the allowance)
Tax basis of Accrued Vacation Payable = 0 as no tax deduction is taken until the vacation is
paid out to employees.
Tax basis of Equipment = $145,000 (160,000 book value – 15,000 book-tax difference related to
extra tax depreciation taken to date.
As stated in the problem, all other items have no book-tax differences.
Soft Tax Basis Calculations:
Deferred Tax Asset $1,000

Tax Rate ÷ 0.40
Book-Tax Difference (future deductible difference) related
to Allowance for Doubtful Accounts 2,500
Deferred Tax Liability $2,000

Tax Rate ÷ 0.40
Book-Tax Difference (future taxable difference) related to Equipment 5,000
Tax basis of Accounts Receivable = $14,500 (12,000 book value + 2,500 book-tax difference
related to the allowance)
Tax basis of Equipment = $20,000 (25,000 book value – 5,000 book-tax difference related to
extra tax depreciation taken to date.
10-43
Tax basis of Patent = 0 as this was an asset identified in the due diligence for the acquisition
and was not previously recorded by Soft.
P10-28 (continued)
As stated in the problem, all other items have no book-tax differences.
b. The fair value of the DTAs and DTLs will be the tax-effected differences between the tax
bases and the book bases of Soft’s identifiable assets and liabilities.
Soft Corporation
Fair Value Tax Basis Difference Tax-effected

Cash $ 8,000 $ 8,000 0 0
Accounts Receivable, net 12,000 14,500 2,500 1,000
Inventory 10,000 7,000 (3,000) (1,200)
Equipment, net 40,000 20,000 (20,000) (8,000)
Patent 20,000 0 (20,000) (8,000)
Accounts Payable $ 13,000 $ 13,000 0 0

Long Term Debt 8,000 8,000 0 0
Total DTA = 1,000 related to Accounts receivable
Total DTL = 17,200 related to Inventory, Equipment and Patent
c. Consolidation entries:
Retained
= Common +
Peace Stock Earnings
Book value at
acquisition date 30,000 20,000 10,000

Common Stock 20,000
Investment in Soft Co. 30,000
10-44
P10-28 (continued)
Excess Value (Differential) Calculations:

Peace = Inventory + Equip + Patent + Goodwill - DTL
Beginning Balance 30,000 3,000 15,000 20,000 7,200 (15,200)
Excess Value (Differential) Reclassification Entry:

Inventory 3,000
Equipment 15,000
Patent 20,000
Goodwill 7,200
Investment in Soft 30,000
Accumulated Depreciation Consolidation Entry

Equipment 10,000
d.
Consolidation Entries
Peace Soft DR CR Consolidated
Balance Sheet
Cash 30,000 8,000 38.000
Inventory 75,000 7,000 3,000 85,000
Deferred Tax Asset 8,000 1,000 9,000
Equipment 200,000 35,000 15,000 10,000 240,000
Less: Accumulated
Depreciation (40,000) (10,000) 10,000 (40,000)
Investment in Soft 60,000 30,000 0
30,000
Patent 20,000 20,000
Goodwill 7,200 7,200
Total Assets 383,000 53,000 55,200 70,000 421,200

Accrued Vacation
15,000
Payable 15,000
Deferred Tax Liability 6,000 2,000 15,200 23,200
Long Term Debt 100,000 8,000 108,000
Common Stock 150,000 20,000 20,000 150,000
Retained Earnings 50,000 10,000 10,000 50,000
Total Liabilities &
Equity 383,000 53,000 30,000 15,200 421,200
10-45
P10-29 Tax Allocation in Consolidated Balance Sheet
Consolidation entries (not required):

Powde Commo Retained
NCI + r = n +
30% 70% Stock Earnings
Ending book value 120,000 280,000 150,000 250,000
Adjustment to Basic Consolidation Entry

NCI Powder
Ending Book Value 120,000 280,000
- Gross profit deferral, net of taxes (up) (3,600) (8,400)
- Gross profit deferral, net of taxes (down) (15,000)
- Gain on Assets Sale, net of taxes (up) (9,000) (21,000)
Adjusted Book Value 107,400 235,600
108,000 242,000
Deferred Gain Calculations:
Powder' NCI's
Total = s share + share
Upstream GP Deferral (net of taxes) (12,000) (8,400) (3,600)
Downstream GP Deferral (net of taxes) (15,000) (15,000)
Upstream Gain on Asset Sale (net of taxes) (30,000) (21,000) (9,000)
Total (57,000) (44,400) (12,600)

Common Stock 150,000 ← Common Stock
Retained Earnings 250,000 ← Beginning balance in RE
Income from Solid Co. 44,400 ← Powder’s share GP Deferrals – Gain
NCI in NI of Solid Co. 12,600 ← NCI share of GP Deferral – Gain
Investment in Solid Co. 235,600 ← Powder's share of BV with adjustments
NCI in NA of Solid Co. 107,400 ← NCI share of BV of net assets with adjustments
Total = Re-sold + Ending Inventory

Sales 70,000 0 70,000
COGS 50,000 0 50,000
Gross Profit 20,000 0 20,000
10-46
10-47
P10-29 (continued)

Sales 70,000
Inventory 20,000
Eliminate Tax Expense on Unrealized Profit on Inventory Transfer:

Total = Re-sold + Ending Inventory

Sales 85,000 0 85,000
COGS 60,000 0 60,000
Gross Profit 25,000 0 25,000

Sales 85,000
Inventory 25,000

Accumulated
Equipment Depreciation
Powder 90,000 Actual 0
30,000 80,000
Solid Co. 120,000 "As If" 80,000
Eliminate the Gain on Equipment and Correct Asset's Basis:

Gain on sale 50,000
Equipment 30,000
Eliminate Tax Expense on Unrealized Profit from Asset Transfer:

10-48
P10-29 (continued)
a.
Consolidation
Entries
Solid Consolidate
Powder Co. DR CR d
Balance Sheet
Cash 44,400 20,000 64,400
Inventory 170,000 120,000 20,000 245,000
25,000
Land 90,000 30,000 120,000
Less: Accumulated (180,000
Depreciation ) (80,000) 80,000 (340,000)
Investment in Solid Co. 235,600 0 235,600 0
Deferred Tax Asset 8,000 38,000
10,000
20,000
Total Assets 980,000 450,000 68,000 360,600 1,137,400

Wages Payable 80,000 30,000 110,000
Bonds Payable 200,000 0 200,000
Common Stock 100,000 150,000 150,000 100,000
70,000 12,600
85,000 50,000
50,000 8,000
60,000
10,000
20,000
NCI in NA of Solid Co. 107,400 107,400
10-49
P10-29 (continued)
b. Powder Corporation and Subsidiary

Consolidated Balance Sheet
December 31, 20X9
Cash $ 64,400
Accounts Receivable 180,000
Inventory 245,000
Land 120,000
Buildings and Equipment $830,000
Less: Accumulated Depreciation (340,000) 490,000
Total Assets $1,137,400
Accounts Payable $ 90,000
Wages Payable 110,000
Bonds Payable 200,000
Stockholders' Equity:
Controlling Interest:
Common Stock $100,000
Total Controlling Interest $630,000
Noncontrolling Interest 107,400
Total Stockholders’ Equity 737,400
Total Liabilities and Stockholders' Equity $1,137,400
10-50
P10-30 Computations Involving Tax Allocation
a. Equity-method journal entries recorded by Poom Manufacturing:
Investment in Satellite Industries 142,500

Income from Satellite Industries 142,500
Record equity-method income for 20X5: $190,000 x 0.75
Cash 112,500
Investment in Satellite Industries 112,500
Record dividends for 20X5: $150,000 x 0.75
b. Income assigned to noncontrolling interest:
Net income of Satellite Industries $190,000

Unrealized inventory profit ($30,000 x 0.60) (18,000)
Unrealized profit on sale of land ($120,000 x 0.60) (72,000)
Satellite's realized net income $100,000
Proportion of stock held by noncontrolling interest x 0.25
Income to noncontrolling interest $ 25,000
c. Consolidated net income and income to controlling Interest:
Operating income of Poom Manufacturing $700,000

Inventory profits realized in 20X5 20,000
Realized operating income of Poom Manufacturing $720,000
Realized income of Satellite Industries 100,000
Consolidated income before provision for taxes $820,000
Provision for income taxes on:
Operating income ($720,000 x 0.40) $288,000
Income from Satellite Industries ($112,500 x 0.20 x 0.40) (297,000)
9,000
Income to noncontrolling interest (25,000)
d. Net assets assigned to noncontrolling interest in consolidated balance sheet at

December 31, 20X5:
Net assets reported by Satellite Industries $900,000

Less: Unrealized inventory profits ($30,000 x 0.60) (18,000)
Unrealized profit on land ($120,000 x 0.60) (72,000)
Realized net assets of Satellite Industries $810,000
Proportion of stock held by noncontrolling interest x .25
Net assets assigned to noncontrolling interest $202,500
10-51
P10-31 Worksheet Involving Tax Allocation

a. Consolidation entries:

NCI Pillow Common Retained
30% + 70% = Stock +
Original Book Value 60,000 140,000 50,000 150,000
+ Net Income 10,800 25,200 36,000
- Dividends (3,000) (7,000) (10,000)
Ending Book Value 67,800 158,200 50,000 176,000
Adjustment to Basic Consolidation Entry:

NCI Pillow
30% 70%
Net Income 10,800 25,200
+ Reversal of X6 GP, net of taxes (Up) 1,800 4,200
- Deferral of X7 GP, net of taxes (Up) (4,500) (10,500)
- Gain on Asset Sale, net of taxes (9,000)
(Down)
Income to be eliminated 8,100 9,900
------------------------------------------------------------------------------------------------
Ending Book Value 67,800 158,200

+ Reversal of X6 GP, net of taxes (Up) 1,800 4,200
- Deferral of X7 GP, net of taxes (Up) (4,500) (10,500)
- Gain on Asset Sale, net of taxes (9,000)
(Down)
Adjusted Book Value 65,100 142,900

Common Stock 50,000 ← Common Stock
150,00
Retained Earnings 0 ← Beginning balance in RE
Income from Sheet 9,900 ← Pillow’s share of NI + GP Reversal - GP Def. - Gain
NCI in NI of Sheet 8,100 ← NCI share of Tarp Co.'s NI + GP Reversal - GP Def.
Dividends Declared 10,000 ← 100% of Tarp Co.'s dividends
Investment in Sheet 142,900 ← Pillow's share of BV + GP Reversal - GP Def. - Gain
NCI in NA of Sheet 65,100 ← NCI share of BV of net assets + GP Reversal - GP Def.
Eliminate Beginning Inventory Profit:

4,20
Investment in Sheet 0
1,80
NCI in NA of Sheet 0
4,00
Income Tax Expense 0
10-52

Sales 120,000
Inventory 25,000
P10-31 (continued)

Accumulated
Equipment Depreciation
Sheet 65,000 Actual 0
85,000 100,000
Pillow 150,000 "As If" 100,000
Eliminate the Gain on Equipment and Correct Asset's Basis:

Gain on sale 15,000
Equipment 85,000
Eliminate Tax Expense on Unrealized Profit from Asset

Transfer:
10-53
P10-31 (continued)
b.
Consolidation Entries
Pillow Sheet DR CR Consolidated
Income Statement
Sales 580,000 300,000 120,000 760,000
Less: COGS (435,000) (210,000) 10,000 (540,000)
95,000
Less: Depreciation Expense (40,000) (20,000) (60,000)
Less: Tax Expense (44,000) (24,000) 4,000 10,000 (56,000)
6,000
Less: Other Expenses (11,400) (10,000) (21,400)
Income from Sheet 9,900 0 9,900 0
Gain on Sale of Equipment 15,000 0 15,000 0
Consolidated Net Income 74,500 36,000 148,900 121,000 82,600
NCI in Net Income 8,100 (8,100)
Controlling Interest in Net Income 74,500 36,000 157,000 121,000 74,500
Statement of Retained Earnings

Beginning Balance 370,000 150,000 150,000 370,000
Net Income 74,500 36,000 157,000 121,000 74,500
Less: Dividends Declared (20,000) (10,000) 10,000 (20,000)
Ending Balance 424,500 176,000 307,000 131,000 424,500
Balance Sheet
Cash 35,800 56,000 91,800
Inventory 220,000 60,000 25,000 255,000
Land 60,000 20,000 80,000
Less: Accumulated Depreciation (150,000) (160,000) 100,000 (410,000)
Patents 70,000 0 70,000
Investment in Sheet 138,700 0 4,200 142,900 0
Deferred Tax Asset 10,000 16,000
6,000
Total Assets 954,500 416,000 105,200 267,900 1,207,800

Wages Payable 70,000 20,000 90,000
Bonds Payable 200,000 100,000 300,000
Deferred Income Taxes 120,000 40,000 160,000
Common Stock 100,000 50,000 50,000 100,000
NCI in NA of Sheet 1,800 65,100 63,300
10-54
P10-32 Earnings per Share with Convertible Securities
Basic earnings per share
Punch Manufacturing income from operations $100,000

Short Retail Stores net income $49,200
Preferred dividends ($100,000 x 0.08) (8,000)
Earnings available $41,200
Short shares outstanding ÷20,000
Computed EPS for Short $ 2.06
Shares held by Punch Manufacturing x16,000
Contribution to Punch Manufacturing earnings 32,960
Total earnings of Punch Manufacturing $132,960
Preferred dividends of Punch Manufacturing (22,000)
Earnings to Punch common shareholders $110,960
Punch Manufacturing shares outstanding ÷ 15,000
Basic earnings per share $ 7.40
Diluted earnings per share
Punch Manufacturing income from operations $100,000

Short Retail Stores net income $49,200
Assumed conversion of bonds:
$20,000 x 0.60 12,000
Earnings available $61,200
Short shares outstanding 20,000
Assumed conversion of bonds 8,000
Assumed conversion of preferred 12,000
Total shares ÷40,000
Computed EPS for Short $ 1.53
Shares held by Punch Manufacturing x16,000
Contribution to Punch Manufacturing earnings 24,480
Total earnings of Punch Manufacturing $124,480
Preferred dividends of Punch Manufacturing (22,000)
Earnings to Punch common shareholders $102,480
Punch Manufacturing shares outstanding ÷ 15,000
Diluted earnings per share $ 6.83
10-55
P10-33 Comprehensive Earnings per Share
Basic earnings per share
Plug Corporation operating income $300,000

Socket net income $115,000
Preferred dividends ($200,000 x 0.11) (22,000)
Earnings available to common shareholders $
93,000
Socket shares outstanding ÷ 40,000
Computed EPS for Socket $
2.325
Shares held by Plug Corporation x 32,000
Contribution to Plug Corporation earnings 74,400
Total earnings of Plug Corporation $374,400
Plug Corporation shares outstanding ÷100,000
Basic earnings per share $ 3.74
Diluted earnings per share
Plug Corporation operating income $300,000

Socket net income $115,000
Assumed conversion of bonds
($500,000 x 0.08) x 0.60 24,000
Earnings available to common $139,000
Socket shares outstanding 40,000
Assumed conversion of bonds 30,000
Assumed conversion of preferred 20,000
Exercise of warrants:
10,000 - [($8 x 10,000) / $40] 8,000
Total shares ÷ 98,000
Computed EPS for Socket $ 1.418
Shares held by Plug Corporation x 32,000
Contribution to Plug Corporation Earnings 45,376
Total earnings of Plug Corporation $345,376
Interest savings on assumed conversion
of bonds ($800,000 x 0.10) x 0.60 48,000
$393,376
Plug Corporation shares ÷125,000
Diluted earnings per share $ 3.15
10-56

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Christensen 13e CH10 SM

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Chapter 10 – Additional Consolidation Reporting Issues

ADDITIONAL CONSOLIDATION REPORTING ISSUES

C10-1 The Effect of Security Type on Earnings per Share

C10-2 Evaluating Consolidated Statements

From: , Accounting Staff

Re: Disclosure of Transfer of Cash from Subsidiary to Parent

C10-3 Income Tax Expense

C10-4 Consolidated Cash Flows

E10-1 Analysis of Cash Flows

a. The consolidated cash balance at January 1, 20X2, was $83,000, computed as

Balance at December 31, 20X2 $ 57,000

b. Dividends of $48,000 were reported:

Dividends paid to Plant shareholders $45,000

c. Consolidated net income was $207,000, computed as follows:

Cash flow from operations $284,000

E10-2 Statement of Cash Flows

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

b. A total of $320,000 will be reported as cash provided by operations, computed as follows:

Consolidated net income $271,000

c. Cash used in investing activities will be reported at $161,000, computed as follows:

Purchases of equipment $(295,000)

d. Cash used in financing activities will be reported at $81,000, computed as follows:

Sale of stock $150,000

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

E10-3 Computation of Operating Cash Flows

E10-4 Consolidated Operating Cash Flows

b. Cash payments to suppliers was $288,000 ($160,000 + $95,000 + $35,000 - $15,000 +

c. Cash flows from operating activities was $194,000 ($482,000 - $288,000).

E10-5 Preparation of Statement of Cash Flows

Consolidated Enterprises Inc. and Subsidiary

Cash Flows from Operating Activities:

Cash Flows from Investing Activities:

Cash Flows from Financing Activities:

E10-6 Direct Method Cash Flow Statement

Consolidated Enterprises Inc. and Subsidiary

Cash Flows from Operating Activities:

Cash Flows from Investing Activities:

Cash Flows from Financing Activities:

(a) $923,000 = $900,000 + $23,000

Reconciliation of consolidated net income to net cash provided by operating

Consolidated Net Income $464,000

E10-7 Analysis of Consolidated Cash Flow Statement

a. Dividends paid to noncontrolling interest $ 6,000

d. Dividends paid to noncontrolling shareholders are reported as a cash outflow in

E10-8 Midyear Acquisition

b. Separate earnings of Pole Manufacturing $140,000

c. Consolidated retained earnings, January 1, 20X1 $400,000

d. Purchase price on August 30, 20X1 $503,500

E10-9 Purchase of Shares at Midyear

a. Journal entries recorded by Pie in 20X2:

Investment in Slice Co. 319,500

Investment in Slice Co. 27,000

Book Value Calculations:

Basic Consolidation Entry

E10-10 Deferred Tax Assets and Liabilities Arising in Acquisition

Fair Value $28,000

Fair Value $40,000

Fair Value $15,000

Fair Value $115,000

Total Deferred Tax Assets acquired = 800

Total Deferred Tax Liabilities acquired = 18,000 (12,000 + 4,000 + 2,000)

Deferred Tax Liability, Net on the balance sheet = 17,200

E10-11 Tax Deferral on Gains and Losses

Consolidation entries, December 31, 20X7: