CHAPTER 10
ADDITIONAL CONSOLIDATION REPORTING ISSUES
ANSWERS TO QUESTIONS
Q10-1 The balance sheet, income statement, and statement of changes in retained earnings are an integrated set and generally need to be completed as a unit. Once completed, these statements can then be used in preparing a consolidated cash flow statement. Because both the beginning and ending consolidated balance sheet totals are needed in determining cash flows for the period, the cash flow statement cannot be easily incorporated into the existing three-part workpaper format.
Q10-2 Consolidated retained earnings do not include the earnings assigned to noncontrolling shareholders. As a result, dividends paid to noncontrolling shareholders are not included in the consolidated retained earnings statement. On the other hand, all the cash generated by the subsidiary is included in the consolidated cash flow statement and all uses of cash must also be included, including that distributed to noncontrolling shareholders in the form of dividends.
Q10-3 The indirect method focuses on reconciling between net income and cash flows from operations and does not attempt to report payments to suppliers or other specific uses of cash. It does report the change in inventory and accounts payable which are included in determining payments to suppliers. While adjusting net income for changes in inventory and accounts payable leads to a correct reporting of cash flows from operations, it does not permit explicit reporting of payments to suppliers.
Q10-4 Changes in inventory balances are used in computing the amount reported as payments to suppliers and do not need to be separately reported.
Q10-5 Sales must be included in the consolidated cash flows workpaper when the direct method is used. They are excluded from the workpaper when the indirect method is used.
Q10-9 The revenues and expenses of the subsidiary for the full year are included in the consolidated income statement when the acquisition occurs at the beginning of the year. When a mid-year acquisition occurs, the revenues and expenses of the acquired company prior to the date of acquisition were not transactions of the consolidated entity. The
eliminating entries at the end of the year must be expanded to eliminate those amounts. In addition, the eliminating entry used to assign income to the noncontrolling interest and eliminate dividends paid to the noncontrolling shareholders will be modified to include only the income earned and dividends declared for that portion of the year in which ownership was held by the parent.
Q10-10 An accurate measure of the overall profit contribution from each segment of business operations is often considered desirable in evaluating past operations and in planning future strategy. In some cases the tax impact of operating a particular division is very different from one or more other divisions, and that difference should be recognized in evaluating the segment. Even when such differences do not exist, better knowledge of the approximate after tax return from a particular subsidiary can be very helpful in assessing future investment and operating strategies.
Q10-11 When a consolidated tax return is filed, all intercorporate transfers are eliminated in computing taxable income and there should be no need to adjust recorded tax expense in preparing consolidated financial statements for the period. When the companies do not file a consolidated return, tax payments and expense accruals recorded by the individual companies presumably will include gains and losses on intercompany transfers. If an unrealized gain or loss is eliminated in consolidation, the amount reported as tax expense also should be adjusted to reflect only the tax expense on those items included in the consolidated income statement.
Q10-12 Assuming an unrealized profit has been reported, an additional elimination entry is needed to reduce tax expense and establish a deferred tax asset in the amount of the excess payment. If a loss is eliminated, additional tax expense and taxes payable must be established in the elimination process.
Q10-13 When one of the companies in the consolidated entity has recorded tax expense on unrealized profit in a preceding period, its retained earnings balance at the start of the period will be overstated by the amount of unrealized profit less the tax expense recorded thereon. In the period in which the item is sold and the profit is considered realized, the eliminating entries must include a debit to beginning retained earnings for the amount of the net overstatement and a debit to tax expense for the proper amount of expense to be recognized.
Q10-14 When taxes are not considered, income assigned to noncontrolling shareholders is reduced by a proportionate share of the unrealized profit. When taxes are considered, the reduction is based on a proportionate share of the after tax balance of unrealized profits.
assigned to noncontrolling common shareholders are deducted from consolidated revenue and expenses in computing consolidated net income and earnings per share. Subsidiary preferred dividends paid to the parent or other affiliates must be eliminated and are not deducted in computing consolidated earnings per share.
Q10-17 A subsidiary's contribution to consolidated earnings per share may be different from its contribution to consolidated net income if the subsidiary has convertible bonds or preferred stock outstanding that are treated as if they had been converted, or if the treasury stock method is used to include the dilutive effects of subsidiary stock rights or stock options outstanding.
Q10-18 The net of tax interest savings from the assumed conversion of the bond into common stock is included in the numerator and the additional shares are added to the denominator of the earnings per share computation for the subsidiary. In doing so, earnings per share of the subsidiary will be reduced. Moreover, the additional shares added to the denominator will potentially alter the ownership ratio held by the parent; thus, the amount of subsidiary income included in the consolidated earnings per share computation is likely to be reduced.
Q10-19 Those rights, warrants, and options treated as stock outstanding in the denominator of the earnings per share computation of the subsidiary will reduce the amount of subsidiary income included in the consolidated earnings per share computation to the extent that the ownership ratio held by the parent is reduced. The actual shares will not be reported as such, because they are assumed to be either eliminated or assigned to the noncontrolling interest.
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.
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. [FASB 57, Par. 2]
Nevertheless, the fact that Cowl Company is unable to generate sufficient cash from its separate operations to pay its bills appears to be of sufficient importance that disclosure would be appropriate in both the Management Discussion and Analysis (MD&A) section of
Cowl’s annual report and in the notes to the financial statements. The SEC establishes the disclosure requirements for MD&A and requires discussion of currently known trends, demands, commitments, events, or uncertainties that are reasonably expected to have
material effects on the registrant’s financial condition or results of operations, or that would cause reported financial information not to be necessarily indicative of future operating results or financial condition. [SEC Regulation S-K, Item 303]
C10-2 (continued)
FASB Statement No. 95, ―Statement of Cash Flows,” does not specify those situations in which a discussion of operating cash flows must be included in the notes to the financial
statements. However, if the negative cash flow from Cowl Company’s operations significantly
affects the operating cash flows of the consolidated entity, one or more notes to the financial statements should be used to provide information to the financial statement readers. One possible form for doing so would be to include supplemental cash flow information if the operations of the parent are identified as a separate reportable segment [FASB 131, Par. 16].
Primary citations:
FASB 57, Par. 2
SEC Regulation S-K, Item 303
Secondary citations:
FASB 95
C10-3 Income Tax Expense
a. When prior-period intercompany profits are realized through resale to a nonaffiliate in the current period, tax expense reported by the consolidated entity will be greater than actual tax payments made by the separate companies.
b. Two reporting procedures are usually discussed in dealing with income tax allocation for consolidated entities. One procedure is to report the additional amount paid as a deferred tax asset or as prepaid income tax in the consolidated balance sheet. An alternate approach is to net the overpayment for unrealized profits against deferred income taxes payable.
c. Whenever separate tax returns are filed and unrealized profits are recorded on intercompany transfers of land, buildings and equipment, or other assets, income tax expense reported in the consolidated income statement in the period of the intercompany transfer will be less than tax payments made. A similar effect occurs when one affiliate purchases the bonds of another affiliate and a constructive loss on bond retirement is reported in the consolidated income statement.
C10-4 Consolidated Cash Flows
a. The factors contributing to the increase in net income over the prior period are key in this case. One possible explanation is that operating earnings of the combined companies actually declined and the increase in net income resulted from a substantial gain on sale of a division or other assets in the current period. Another possibility would be a decrease in noncash charges deducted in computing income. Cash generated by operations often is well above operating earnings as a result of charges such as amortization of intangible assets or depreciation. A decrease in these charges will increase net income but not change cash flows
Changes in the net amounts invested in receivables, inventories, and other current assets are included in the computation of cash flows from operations. Increases in these balances can substantially reduce the reported cash flows from operations without affecting net income.
b. Both sales and the balance in accounts receivable should increase when less stringent criteria are used in extending credit. Similarly, both should decrease when credit terms are tightened. If the companies have relaxed credit standards during the current period, net income may be greater as a result of increased sales; however, cash flows are likely to increase to a lesser degree as accounts receivable increase.
c. An inventory write-down under lower of cost or market and other noncash charges will not reduce cash flows from operations. The amount expensed would be added back to consolidated net income in arriving at cash generated by operating activities.
d. Assuming an allowance account is used, this particular write-off will not appear in either the income statement or computation of cash flows from operations. There is no charge in the income statement and no change in the net receivable balance as a result of a simple write-off of an account receivable.
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 Lamb shareholders $45,000 Dividends paid to noncontrolling interest of
Mint Company ($10,000 x .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
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
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
Total $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
Total $(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 Becon Corporation shareholders (25,000) Dividends paid to noncontrolling interests (6,000)
Total $ (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
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 Noncash Expenses, Revenue, and Gains
Included in Income:
Depreciation Expense 73,000 Goodwill Impairment Loss 3,000 Gain on Sale of Equipment (8,000) 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:
E10-6 Direct Method Cash Flow Statement
Consolidated Enterprises Inc. and Subsidiary Consolidated Statement of Cash Flows For the Year Ended December 31, 20X3
Cash Flows from Operating Activities:
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
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation Expense $73,000
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 Jones 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.
E10-8 Midyear Acquisition
a. The retained earnings balance reported for the consolidated entity as of January 1, 20X1, would be $400,000.
b. Separate earnings of Yarn Manufacturing $140,000 Net income reported by Spencer Corporation $60,000
Portion of year ownership was held by Yarn x 4/12
Income earned following acquisition 20,000
Consolidated net income $160,000
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 Yarn 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
E10-9 Purchase of Shares at Midyear
a. Journal entries recorded by Highbeam in 20X2:
(1) Investment in Copper Company Stock 319,500
Cash 319,500
Record purchase of Copper Company Stock.
(2) Cash 13,500
Investment in Copper Company Stock 13,500 Record dividends from Copper Company.
(3) Investment in Copper Company Stock 27,000
Income from Subsidiary 27,000 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 3,000
Dividends Declared 1,500
Noncontrolling Interest 1,500 Assign income to noncontrolling interest:
$3,000 = $30,000 x .10 $1,500 = $15,000 x .10
E(3) Common Stock — Copper Company 160,000 Additional Paid-In Capital 40,000 Retained Earnings, January 1 150,000
Sales 90,000
Total Expenses 80,000
Dividends Declared 5,000
E10-10 Tax Deferral on Gains and Losses
Eliminating entries, December 31, 20X7:
E(1) Sales 90,000
Cost of Goods Sold 70,000
Inventory 20,000
Eliminate downstream inventory sale: $20,000 = ($90,000 - $60,000) x 2/3
E(2) Deferred Tax Asset 8,000
Income Tax Expense 8,000
Eliminate tax expense on unrealized intercompany profit on inventory transfer.
E(3) Gain on Sale of Land 100,000
Land 100,000
Eliminate upstream gain on sale of land.
E(4) Deferred Tax Asset 40,000
Income Tax Expense 40,000
Eliminate tax expense on unrealized intercompany profit on land transfer.
E10-11 Unrealized Profits in Prior Year
Eliminating entries, December 31, 20X8:
E(1) Retained Earnings, January 1 12,000
Income Tax Expense 8,000
Cost of Goods Sold 20,000
Eliminate beginning inventory profit.
E(2) Deferred Tax Asset 40,000 Retained Earnings, January 1 45,000 Noncontrolling Interest 15,000
Land 100,000
E10-12 Allocation of Income Tax Expense
a. Allocation of tax expense incurred in 20X5:
Winter Ray Guard Block 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:
Winter Corporation $130,000
Ray Guard Corporation 30,000
Block Company 40,000
Consolidated income before tax $200,000
Income tax expense (80,000)
Consolidated net income $120,000
Income to noncontrolling interests:
Ray Guard Corporation ($30,000 - $12,000) x .20 $ 3,600
E10-13 Effect of Preferred Stock on Earnings per Share
Because both companies paid preferred dividends in 20X1 and neither issue is convertible, only one basic consolidated earnings per share number will be reported for 20X1:
Operating income of Amber Corporation $ 59,000 Net income of Newtop Company $45,000
Less: Preferred dividends (5,000)
Earnings available to Newtop common shareholders 40,000
Consolidated net income $99,000
Less: Income to noncontrolling interest ($40,000 x .30) (12,000) Income to common shareholders of Amber Corporation $87,000 Less: Preferred dividends of Amber Corporation (9,000) Earnings available to common shareholders $78,000
Consolidated earnings per share for 20X1
($78,000 / 12,000 shares) $6.50
E10-14 Effect of Convertible Bonds on Earnings per Share
Basic earnings per share:
Operating income of Crystal Corporation $45,000 Contribution to consolidated EPS from Evans Company
($30,000 / 10,000) x 6,000 shares 18,000 Earnings available to common shareholders $63,000
Consolidated earnings per share for 20X2
($63,000 / 30,000 shares) $2.10
Diluted earnings per share:
Operating income of Crystal Corporation $45,000 Contribution to consolidated EPS from Evans Company:
$30,000 + $12,000 (a) x 6,000 shares
10,000 shares + 10,000 shares 12,600
Earnings available to common shareholders $57,600
Consolidated earnings per share for 20X2
($57,600 / 30,000 shares) $1.92
E10-15 Effect of Convertible Preferred Stock on Earnings per Share
Basic earnings per share:
Operating income of Eagle 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 Eagle Corporation (16,000) Earnings available to common shareholders $70,400
Consolidated earnings per share for 20X1
($70,400 / 10,000 shares) $7.04
Diluted earnings per share:
Operating income of Eagle 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 Eagle Corporation (16,000) Earnings available to common shareholders $58,400
Consolidated earnings per share for 20X1
SOLUTIONS TO PROBLEMS
P10-16 Direct Method Computation of Cash Flows
Car Corporation and Subsidiary Operating Cash Flows
For the Year Ended December 31, 20X1
Cash Flows from Operating Activities:
Cash Received from Customers $533,000 Cash Payments to Suppliers (268,000) Net Cash Provided by Operating Activities $265,000
Computation of payments received from customers
Sales of Car Corporation $400,000
Sales to outside parties by Bus Company ($240,000 - $100,000) 140,000 Increase in Car Corporation accounts receivable (9,000)
Decrease in Bus Company’s accounts receivable 2,000
Payments received from customers $533,000
Computation of payments to suppliers
Cost of goods sold by Car Corporation excluding sale of
inventory purchased from Bus Company ($235,000 - $40,000) $195,000 Cost of goods sold on sales by Bus Company
to outside parties ($105,000 - $70,000) 35,000 Cost of goods sold on intercompany sales
resold in period ($70,000 x .40) 28,000 Decrease in Car Corporation inventory (22,000) Increase in Bus Company inventory 16,000 Decrease in accounts payable of Car Corporation 31,000 Increase in accounts payable of Bus Company (15,000)
P10-17 Preparing a Statement of Cash Flows
a. Metal Corporation and Ocean Company Consolidated Cash Flow Workpaper
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
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
Cash Flows from Investing Activities:
Purchase of Land (d) 10,000
Purchase of Buildings and Equipment (e) 35,000
P10-17 (continued)
b. Consolidated statement of cash flows for 20X3
Metal Corporation and Subsidiary Consolidated Statement of Cash Flows
Year Ended December 31, 20X3
Cash Flows from Operating Activities
Consolidated Net Income $ 83,500 Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Depreciation Expense 36,500 Amortization Expense 1,000 Increase in Accounts Receivable (15,000) Increase in Inventory (8,000) Increase in Accounts Payable 5,000 Decrease in Wages Payable (6,000)
Net Cash Provided by Operating Activities $97,000
Cash Flows from Investing Activities:
Purchase of Land $(10,000) Purchase of Buildings and Equipment (35,000)
Net Cash Used in Investing Activities (45,000)
Cash Flows from Financing Activities:
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)
Net Increase in Cash $ 32,000
Cash at Beginning of Year 68,500
Cash at End of Year $100,500
P10-18 Preparing a Statement of Cash Flows – Direct Method
a. Metal Corporation and Ocean Company Consolidated Cash Flow Workpaper
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 (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
Retained Earnings 130,000 (k) 30,000 (l) 74,500 174,500 Noncontrolling Interest 27,000 (m) 5,000 (l) 9,000 31,000 830,500 141,000 141,000 929,000
Sales 490,000 (b)490,000
P10-18 (continued)
Cash Flows from Operating Activities:
Cash Received from Customers (b) 475,000
Cash Paid to Suppliers (c)301,000
b. Consolidated statement of cash flows for 20X3
Metal Corporation and Subsidiary Consolidated Statement of Cash Flows
Year Ended December 31, 20X3
Cash Flows from Operating Activities:
Cash Received from Customers $475,000 Cash Paid to Suppliers $301,000
Net Cash Used in Investing Activities (45,000)
Cash Flows from Financing Activities:
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)
Net Increase in Cash $ 32,000
Cash at Beginning of Year 68,500
P10-18 (continued)
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 $83,500
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation Expense $36,500
Amortization Expense 1,000
Increase in Accounts Receivable (15,000) Increase in Inventory (8,000) Increase in Accounts Payable 5,000 Decrease in Wages Payable (6,000)
Total Adjustments 13,500
P10-19 Consolidated Statement of Cash Flows
a. Traper Company and Arrow Company Consolidation Cash Flow Workpaper
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
Cash Flows from Operating Activities:
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 Inventory (c) 50,000 Increase in Accounts Payable (h) 22,000
Decrease in Interest Payable (i) 15,000
Cash Flows from Investing Activities:
Sale of Land (d) 10,000
Purchase of Buildings and Equipment (e)130,000
P10-19 (continued)
Explanation of Workpaper Entries:
(a) Increase in cash balance
(b) Decrease in accounts receivable
(c) Increase in inventory
(d) Sale of land
(e) Purchase of buildings and equipment
(f) Goodwill impairment loss recognized in 20X4
(g) Depreciation charges for 20X4
(h) Increase in accounts payable
(i) Decrease in interest payable
(j) Sale of bonds
(k) Amortize bond premium
(l) Traper Company dividend $25,000
(m) Consolidated net income $79,000
P10-19 (continued)
b. Consolidated statement of cash flows for 20X4:
Traper Company and Subsidiary Consolidated Statement of Cash Flows
For Year Ended December 31, 20X4
Cash Flows from Operating Activities:
Consolidated Net Income $79,000 Noncash Expenses, Revenue, Losses, and Gains
Included in Income:
Purchase of Buildings and Equipment (130,000)
P10-20 Consolidated Statement of Cash Flows — Direct Method
a. Traper Company and Arrow Company Consolidation Cash Flow Workpaper
Buildings and Equipment 850,000 (e)130,000 980,000 Goodwill 40,000 (f) 12,000 28,000
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
P10-20 (continued)
Cash Flows from Operating Activities:
Cash Received from Customers (b)635,000
Cash Paid to Suppliers (c)403,000
Cash Paid for Interest on
Bonds Payable (h) 86,000
Cash Flows from Investing Activities:
Sale of Land (d) 10,000
Purchase of Buildings and Equipment (e)130,000
Cash Flows from Financing Activities:
Sale of Bonds (i) 100,000
Dividends Paid:
To Traper Shareholders (j) 25,000 To Noncontrolling Shareholders (l) 3,000 Increase in Cash (a) 98,000 745,000 745,000
Explanation of Workpaper 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) Traper Company dividend $25,000
(k) Consolidated net income $79,000
P10-20 (continued)
b. Consolidated statement of cash flows for 20X4:
Traper Company and Subsidiary Consolidated Statement of Cash Flows
For Year Ended December 31, 20X4
Cash Flows from Operating Activities:
Cash Received from Customers $635,000 Cash Payments to Suppliers $403,000
Cash Payments of Interest 86,000 (489,000) Net Cash Provided by Operating Activities $146,000
Cash Flows from Investing Activities:
Sale of Land $ 10,000
Purchase of Buildings and Equipment (130,000)
Net Cash Used in Investing Activities (120,000)
Cash Flows from Financing Activities:
Sale of Bonds $100,000
Dividends Paid:
To Parent Company Shareholders (25,000) To Noncontrolling Shareholders (3,000)
Net Cash Provided by Financing Activities 72,000
Net Increase in Cash $ 98,000
Cash Balance at Beginning of Year 83,000
Cash Balance at End of Year $181,000
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 $ 79,000
P10-21 Consolidated Statement of Cash Flows
Accounts Receivable 121,000 (b) 10,000 111,000
Inventory 230,000 (c)130,000 360,000
Land 95,000 (d) 5,000 100,000
Buildings and Equipment 800,000 (e)150,000 650,000
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
Cash Flows from Operating Activities:
Consolidated Net Income (j) 160,000 Depreciation Expense (f) 40,000
Gain on Sale of Equipment (e) 30,000 Decrease in Accounts Receivable (b) 10,000
P10-22 Consolidated Statement of Cash Flows — Direct Method
Common Stock 300,000 300,000
Retained Earnings 290,000 (h) 65,000 (i) 148,000 373,000
Cash Received from Customers (b)1,080,000
Cash Paid to Suppliers (c)1,015,000
P10-23 Consolidated Statement of Cash Flows [AICPA Adapted]
Brimer, Inc., and Subsidiary Consolidated Statement of Cash Flows For the Year Ended December 31, 20X6
Cash Flows from Operating Activities:
Consolidated Net Income $231,000
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation 82,000 [1]
Net Cash Provided by Operating Activities $384,000
Cash Flows from Investing Activities:
Purchase of Equipment $(127,000) Sale of Equipment 40,000
Net Cash Used in Investing Activities (87,000)
Cash Flows from Financing Activities:
Payment on Note Payable $(150,000) Sale of Treasury Stock 44,000 Cash Dividend Paid by Parent Company (58,000) Cash Dividend Paid to Minority Stockholders
of Subsidiary (15,000) [2]
Net Cash Used in Financing Activities (179,000)
Net Increase in Cash $118,000
Cash at Beginning of Year 195,000
Cash at End of Year $313,000
Supplemental Schedule of Noncash Investing and Financing Activities:
P10-23 (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:
P10-24 Statement of Cash Flows Prepared from Consolidation Workpaper
a. Workpaper for consolidated statement of cash flows:
Detecto Corporation and Strand Company
Accounts Receivable 135,000 (b) 15,000 120,000 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) 40,000 540,000 Patents 30,000 (g) 5,000 25,000
872,000 1,025,800
Accumulated Depreciation 210,000 (h) 40,000 250,000 Accounts Payable 114,200 (i) 19,200 95,000 Bonds Payable 90,000 (j) 100,000 190,000
Common Stock 100,000 100,000
Retained Earnings 273,000 (k) 50,000 (l) 79,400 302,400 Decrease in Accounts Receivable (b) 15,000
Increase in Inventory (c) 59,000 Decrease in Accounts Payable (i) 19,200
Cash Flows from Investing Activities:
Purchase of Land (d) 5,000
Acquisition of Buildings and
Equipment from Bond Issue (e)100,000 Issuance of Bonds for Buildings
and Equipment (j) 100,000
P10-24 (continued)
b. Consolidated cash flow statement for 20X3:
Detecto Corporation and Subsidiary Consolidated Statement of Cash Flows For the Year Ended December 31, 20X3
Cash Flows from Operating Activities:
Consolidated Net Income $ 91,000 Noncash Expenses, Revenue, Losses and Gains
Included in Income:
Amortization Expense 5,000
Depreciation Expense 40,000 Decrease in Accounts Receivable 15,000 Increase in Inventory (59,000) Decrease in Accounts Payable
(19,200)
Net Cash Provided by Operating Activities $ 72,800
Cash Flows from Investing Activities:
Purchase of Land $ (5,000)
Purchase of Buildings and Equipment (40,000)
Net Cash Used in Investing Activities (45,000)
Cash Flows from Financing Activities: Dividends Paid:
To Parent Company Shareholders $(50,000) To Noncontrolling Shareholders (8,000) Net Cash Received from
Financing Activities (58,000)
Net Decrease in Cash $(30,200)
Cash Balance at Beginning of Year 92,000
Cash Balance at End of Year $ 61,800
P10-25 Midyear Purchase of Controlling Interest
a. Equity-method entries recorded by Mega Theaters during 20X1:
(1) Investment in Blase Company Common Stock 765,000
Cash 765,000
Record purchase of Blase Company stock.
(2) Cash 25,500
Investment in Blase Company
Common Stock 25,500
Record dividends from Blase Company: $30,000 x .85
(3) Investment in Blase Company Common Stock 97,750
Income from Blase Company 97,750 Record equity-method income:
P10-25 (continued)
b. Eliminating entries, December 31, 20X1:
E(1) Income from Blase Company 97,750
Dividends Declared 25,500
Investment in Blase Company
Common Stock 72,250
Eliminate income from subsidiary: $25,500 = ($40,000 - $10,000) x .85
E(2) Income to Noncontrolling Interest 17,250
Dividends Declared 4,500
Noncontrolling Interest 12,750 Assign income to noncontrolling interest:
$17,250 = ($175,000 - $60,000) x .15 $4,500 = ($40,000 - $10,000) x .15
E(3) Common Stock 100,000
Additional Paid-In Capital 500,000 Retained Earnings, January 1 150,000
Sales 240,000 Eliminate beginning investment balance,
subsidiary stockholders’ equity, and subsidiary preacquisition income and dividends.
Computation of differential
Compensation given by Mega Theaters $765,000 Fair value of noncontrolling interest 135,000
Total fair value $900,000
Book value of Blase stock:
P10-26 Consolidation Involving a Midyear Purchase
a. Journal entries recorded by Famous Products:
(1) Investment in Sanford Company Stock 247,500
Common Stock 80,000
Additional Paid-In Capital 167,500 Record purchase of Sanford Company stock:
$80,000 = $10 x 8,000 shares $167,500 = $247,500 - $80,000
(2) Cash 9,000
Investment in Sanford Company Stock 9,000 Record dividend received from Sanford:
$9,000 = $10,000 x .90
(3) Investment in Sanford Company Stock 13,500
Income from Subsidiary 13,500 Record equity-method income:
$13,500 = $15,000 x .90
b. Eliminating entries, December 31, 20X2:
E(1) Income from Subsidiary 13,500
Dividends Declared 9,000
Investment in Sanford Company Stock 4,500 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 1,500
Dividends Declared 1,000
Noncontrolling Interest 500
Assign income to noncontrolling interest: $1,500 = $15,000 x .10
$1,000 = $10,000 x .10
E(3) Common Stock — Sanford Company 150,000 Retained Earnings, January 1 100,000
Sales 205,000 Eliminate beginning investment balance,
P10-26 (continued)
c. Famous Products Corporation and Sanford Company Consolidation Workpaper
Consolidated Net Income 61,000
Income to Noncon-
P10-27 Tax Allocation in Consolidated Balance Sheet
a. Acme Powder Corporation and Brown Company Consolidated Balance Sheet Workpaper
Accounts Receivable 120,000 60,000 180,000 Inventory 170,000 120,000 (2) 20,000
(3) 25,000 245,000
Land 90,000 30,000 120,000
Buildings and Equipment 500,000 300,000 (4) 30,000 830,000 Investment in Brown
Company Stock 280,000 (1)280,000
Deferred Tax Asset (2) 8,000 (3) 10,000
(4) 20,000 38,000
Debits 1,204,400 530,000 1,477,400
Accum. Depreciation 180,000 80,000 (4) 80,000 340,000
Accounts Payable 70,000 20,000 90,000
Wages Payable 80,000 30,000 110,000
Bonds Payable 200,000 200,000
Common Stock 100,000 150,000 (1)150,000 100,000 Retained Earnings, 574,400 250,000 (1)250,000
(2) 8,400 (3) 15,000
(4) 21,000 530,000 Noncontrolling Interest (2) 3,600 (1)120,000
(4) 9,000 107,400 Credits 1,204,400 530,000 525,000 525,000 1,477,400
Eliminating entries, December 31, 20X9 (not required)
E(1) Common Stock — Brown Company 150,000
Retained Earnings 250,000
P10-27 (continued)
E(2) Deferred Tax Asset 8,000
Retained Earnings 8,400
Noncontrolling Interest 3,600
Inventory 20,000
Eliminate inventory profit of Brown Company:
$8,000 = $20,000 x .40
$8,400 = ($20,000 - $8,000) x .70 $3,600 = ($20,000 - $8,000) x .30
E(3) Deferred Tax Asset 10,000
Retained Earnings 15,000
Inventory 25,000
Eliminate inventory profit of Acme Powder Corporation:
$10,000 = $25,000 x .40 $15,000 = $25,000 - $10,000
E(4) Buildings and Equipment 30,000 Deferred Tax Asset 20,000
Retained Earnings 21,000
Noncontrolling Interest 9,000
Accumulated Depreciation 80,000 Eliminate unrealized profit on equipment:
P10-27 (continued)
b. Acme 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
Deferred Tax Asset 38,000
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
Retained Earnings 530,000 Total Controlling Interest $630,000 Noncontrolling Interest 107,400
Total Stockholders’ Equity 737,400
P10-28 Computations Involving Tax Allocation
a. Basic equity-method journal entries recorded by Broom Manufacturing:
(1) Cash 112,500
Investment in Satellite
Industries Stock 112,500 Record dividends for 20X5:
$150,000 x .75
(2) Investment in Satellite Industries Stock 142,500
Income from Subsidiary 142,500 Record equity-method income for 20X5:
$190,000 x .75
b. Income assigned to noncontrolling interest:
Net income of Satellite Industries $190,000 Unrealized inventory profit ($30,000 x .60) (18,000) Unrealized profit on sale of land ($120,000 x .60) (72,000) Satellite's realized net income $100,000 Proportion of stock held by noncontrolling interest x .25 Income to noncontrolling interest $ 25,000
c. Consolidated net income and income to controlling Interest:
Operating income of Broom Manufacturing $700,000 Inventory profits realized in 20X5 20,000 Realized operating income of Broom 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 .40) $288,000 Income from Satellite Industries
($112,500 x .20 x .40) 9,000 (297,000)
Consolidated Net Income $523,000
P10-29 Workpaper Involving Tax Allocation
Eliminate income from subsidiary: $25,200 = $36,000 x .70
E(2) Income to Noncontrolling Interest 8,100
Dividends Declared 3,000
Noncontrolling Interest 5,100 Assign income to noncontrolling interest:
$8,100 = ($36,000 + $6,000 - $15,000) x .30 $3,000 = $10,000 x .30
$5,100 = $8,100 - $3,000
E(3) Common Stock ─ Custom Pizza 50,000 Retained Earnings, January 1 150,000 Investment in Custom Pizza Common
Stock 140,000
Noncontrolling Interest 60,000 Eliminate beginning investment balance.
E(4) Tax Expense 4,000
Retained Earnings, January 1 4,200 Noncontrolling Interest 1,800
Cost of Goods Sold 10,000
Eliminate unrealized profits in beginning inventory on upstream sale.
E(5) Sales 120,000
Cost of Goods Sold 95,000
Inventory 25,000
Eliminate unrealized profits in ending inventory on upstream sale.
E(6) Deferred Tax Asset 10,000
Tax Expense 10,000
Eliminate tax expense on unrealized intercompany profit: $25,000 x .40
E(7) Buildings and Equipment 85,000 Gain on Sale of Equipment 15,000
Accumulated Depreciation 100,000 Eliminate unrealized profit on downstream
P10-29 (continued)
b. Hardtack Bread Company and Custom Pizza Corporation Consolidation Workpaper
Consolidated Net Income 82,600
P10-29 (continued)
Custom
Hardtack Pizza Eliminations Consol- Item Bread Co. Corp. Debit Credit idated
Cash 35,800 56,000 91,800
Accounts Receivable 130,000 40,000 170,000 Inventory 220,000 60,000 (5) 25,000 255,000
Land 60,000 20,000 80,000
Buildings and Equipment 450,000 400,000 (7) 85,000 935,000
Patents 70,000 70,000
Investment in Custom
Pizza Stock 158,200 (1) 18,200
(3)140,000
Deferred Tax Asset (6) 10,000
(8) 6,000 16,000
Debits 1,124,000 576,000 1,617,800
Accumulated Depreciation 150,000 160,000 (7)100,000 410,000
Accounts Payable 40,000 30,000 70,000
Wages Payable 70,000 20,000 90,000
Bonds Payable 200,000 100,000 300,000
Deferred Income Tax 120,000 40,000 160,000 Common Stock 100,000 50,000 (3) 50,000 100,000 Retained Earnings,
from above 444,000 176,000 326,500 131,000 424,500 Noncontrolling Interest (4) 1,800 (2) 5,100
P10-30 Earnings per Share with Convertible Securities
Basic earnings per share
Branch Manufacturing income from operations $100,000 Short Retail Stores net income $49,200
Preferred dividends ($100,000 x .08) (8,000)
Earnings available $41,200
Short shares outstanding ÷20,000 Computed EPS for Short $ 2.06 Shares held by Branch Manufacturing x16,000
Contribution to Branch Manufacturing earnings 32,960 Total earnings of Branch Manufacturing $132,960 Preferred dividends of Branch Manufacturing (22,000) Earnings to Branch common shareholders $110,960 Branch Manufacturing shares outstanding ÷ 15,000 Basic earnings per share $ 7.40
Diluted earnings per share
Branch Manufacturing income from operations $100,000 Short Retail Stores net income $49,200
Assumed conversion of bonds:
$20,000 x .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 Branch Manufacturing x16,000
P10-31 Comprehensive Earnings per Share
Basic earnings per share
Mighty Corporation operating income $300,000 Longfellow net income $115,000
Preferred dividends ($200,000 x .11) (22,000) Earnings available to common shareholders $ 93,000 Longfellow shares outstanding ÷ 40,000 Computed EPS for Longfellow $ 2.325 Shares held by Mighty Corporation x 32,000
Contribution to Mighty Corporation earnings 74,400 Total earnings of Mighty Corporation $374,400 Mighty Corporation shares outstanding ÷100,000
Basic earnings per share $ 3.74
Diluted earnings per share
Mighty Corporation operating income $300,000 Longfellow net income $115,000
Assumed conversion of bonds
($500,000 x .08) x .60 24,000 Earnings available to common $139,000 Longfellow 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 Longfellow $ 1.418 Shares held by Mighty Corporation x 32,000
Contribution to Mighty Corporation Earnings 45,376 Total earnings of Mighty Corporation $345,376 Interest savings on assumed conversion
of bonds ($800,000 x .10) x .60 48,000 $393,376
Mighty Corporation shares ÷125,000
