241

Chapter 8

CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTSElectronic supplement

W8-1 Midyear poolings are accounted for by recording the investment at the book value of the subsidiary's net assets at the time of pooling. In other words, the investment is recorded equal to beginning of the period net assets, increased by earnings up to the date of pooling and reduced by dividends paid prior to pooling. Since pooled income is equal to the combined income of the pooled entities for the entire year in which the pooling occurs, the investor records income from the pooled subsidiary up to the date of pooling.

242 Consolidations - Changes in Ownership Interests

W8-2

Pelvis's income excluding direct costs of combination $300,000Less: Direct costs of combination (75,000)Add: Income from Solace for year ($100,000 x 90%) 90,000

Consolidated net income $315,000

W8-3

1 Income and dividends from Schenck

Income from Schenck Sales ($1,500,000 - $1,200,000 expenses) x 90% $270,000

Dividends ($210,000 - $70,000 pre-pooling dividends) x 90% $126,000

2 Investment balance December 31, 2000

Stockholders' equity December 31, 2000 ($1,000,000 + $500,000 + $300,000 income - $210,000 dividends) $1,590,000Percent ownership 90%Investment balance December 31, 2000 $1,431,000

Alternative computation:Schenck's equity at January 1 $1,500,000Add: Income January 1 - May 1 100,000Less: Dividends paid prior to pooling (70,000)Schenck's equity at May 1 1,530,000Percent pooled 90%Investment balance May 1 1,377,000Add: Income from Schenck May 1 - December 31 ($1,500,000 - $1,200,000) x 90% x 2/3 year 180,000Less: Dividends ($210,000 - $70,000) x 90% (126,000)Investment balance December 31, 2000 $1,431,000

243Chapter 8

W8-4

1 Entry to record pooling

Investment in Stockard $3,060,000Other paid-in capital 100,000

Capital stock, $5 par $2,100,000Retained earnings 700,000Income from Stockard 360,000

To record 90% pooling of interest computed as follows:

Total stockholders' equity at September 1 ($3,100,000 + $400,000 income - $100,000 dividends) $ 3,400,000Percent acquired 90%Investment in Stockard $ 3,060,000

Capital stock after pooling ($10,000,000 + $2,100,000) $12,100,000Paid-in capital before pooling: Padgett's $10,100,000 Stockard's ($2,200,000 x 90%) 1,980,000 12,080,000Reduction in maximum retained earnings $ 20,000

(Retained earnings $900,000 - $100,000 dividends) x 90% $ 720,000Less: Reduction in retained earnings 20,000Retained earnings $ 700,000

2 Share of Stockard's dividends and income

Cash $ 90,000Investment in Stockard $ 90,000

To record share of Stockard's $100,000 dividends after September 1.

Investment in Stockard $225,000Income from Stockard $225,000

To record share of Stockard's income from September 1 through December 31 ($250,000 x 90%).

Check: Investment in Stockard = $3,060,000 - $90,000 dividends + $225,000 income = $3,195,000Underlying equity = $3,550,000 x 90% = $3,195,000

244 Consolidations - Changes in Ownership Interests

W8-5

1a Issuance of stock for combination

Investment in Seay $4,000,000Other paid-in capital 1,000,000

Common stock, $10 par $4,000,000Income from Seay 1,000,000

To record issuance of 400,000 shares in a pooling of interests with Seay and take up income from Seay for the first eight months.

1b Entries to account for investment in 2000

Cash $ 500,000Investment in Seay $ 500,000

To record receipt of dividends from Seay.

Investment in Seay $ 500,000Income from Seay $ 500,000

To take up income from Seay for last four months of 2000.

2 Polly Corporation and SubsidiaryPartial Balance Sheetat December 31, 2000

Stockholders' equity Common stock, $10 par $12,000,000

Retained earnings 5,000,000a

Consolidated stockholders' equity $17,000,000

aPolly's retained earnings January 1, 2000 $ 3,000,000

Net income ($4,500,000 + $1,500,000 from Seay) 6,000,000 Dividends paid (4,000,000) Consolidated retained earnings December 31, 2000 $ 5,000,000

Check:Investment in Seay December 31, 2000: ($4,000,000 + $500,000 - $500,000) $ 4,000,000Seay's stockholders' equity December 31, 2000: ($3,500,000 on January 1 + $1,500,000 net income - $1,000,000 dividends) $ 4,000,000

245Chapter 8

W8-6 [AICPA adapted]

1 b

Purl's separate income for 2000 $1,575,000Add: Purl's income from Scott: Scott's income for last six months of 2000 $375,000 Less: Deferred inventory profit (45,000) 330,000Consolidated net income $1,905,000

2 c

Purl's separate income for 2000 $1,575,000Add: Purl's income from Scott Scott's income for 2000 $600,000 Less: Deferred inventory profit (45,000) 555,000Consolidated net income $2,130,000

W8-7 [AICPA adapted]

Entry on June 30, 2000 to record the poolingInvestment in Shaw ($9,000,000 x 90%) $8,100,000

Capital stock (630,000 shares x $5) $3,150,000Additional paid-in capital 90,000Retained earnings 4,860,000

1 a Common stock $6,500,000 + $3,150,000 = $9,650,000

2 b Additional paid-in capital $4,400,000 + $90,000 = $4,490,000

3 c Retained earnings $6,100,000 + $4,860,000 = $10,960,000

4 c Consolidated net income $2,100,000 + ($800,000 x 90%) = $2,820,000

5 c Minority interest ($9,000,000 + $500,000 - $350,000) x 10% = $915,000

246 Consolidations - Changes in Ownership Interests

W8-8

Preliminary computation

Entry to record pooling on April 1, 2000Investment in Simon $486,000Other paid-in capital 100,000

Capital stock, $10 par $550,000Retained earnings 36,000

To record 90% pooling with Simon. Investment in Simon is computed as: (Stockholders' equity at January 1 $560,000 - $20,000 dividends) x 90%.

Entry to record dividends received from Simon in 2000Cash $ 54,000

Investment in Simon $ 54,000

Entry to record share of Simon's income on December 31, 2000Investment in Simon $ 90,000

Income from Simon $ 90,000

Proctor Corporation and SubsidiaryConsolidated Balance Sheet Working Papers

at December 31, 2000 | | 90% | Adjustments and |Consolidated | Proctor | Simon | Eliminations |Balance Sheet | | | | |Assets | | | | |Cash |$ 278,000|$ 70,000| | | $ 348,000 Other assets | 2,400,000| 650,000| | | 3,050,000 Investment in Simon | 522,000| | |a 522,000| Total assets |$3,200,000|$720,000| | | $3,398,000 | | | | |Equities | | | | |Liabilities |$ 124,000|$140,000| | | $ 264,000 Capital stock - $10 par| 1,550,000| 300,000|a 300,000| | 1,550,000 Additional paid-in | | | | | capital | | 200,000|a 200,000| | Retained earnings | 1,526,000| 80,000|a 80,000| | 1,526,000 Minority interest | | | |a 58,000| 58,000 Total equities |$3,200,000|$720,000| | | $3,398,000 | | | | |

247Chapter 8

W8-9

Supporting computations

Poe accounts for its investment in Spy under an incomplete equity method.($20,000 x 3/4 year x 100%) + ($20,000 x 1/4 year x 75%) = $18,750

Schedule to convert to equity basisRetained Investment Income

Earnings-Poe in Spy from Spy Gain on SalePrior year's effectsInventory December 31, 2003 ($5,400 x 100%) $(5,400) $(5,400)

Current year's effectsInventory December 31, 2003 5,400 $ 5,400Inventory December 31, 2004 ($3,000 x 75%) (2,250) (2,250)Correction of $17,500 reported gain less $15,000 correct gain on salea (2,500) $(2,500)

Adjustments $(5,400) $(4,750) $ 3,150 $(2,500)

aComputation of correct gain assuming no unrealized profit is: $75,000 - [25% x ($230,000 + $15,000 - $5,000)] = $15,000

Working paper entry to correct for prior errors

a Gain on sale $2,500Retained earnings-Poe December 31, 2003 5,400

Income from Spy $3,150Investment in Spy 4,750

Alternative beginning-of-the-period sale assumption The 25% interest sold could have been based on a beginning-of-the-period sale assumption in which case the gain would be $20,100 computed as: $75,000 - [25% x ($230,000 beginning equity of Spy - $5,400 unrealized profit - $5,000 pre-sale dividends)]. In this case, the $59,250 ending minority interest would consist of:

Minority interest December 31, 2003 $ 54,900Add: 25% of realized income ($20,000 income + $5,400 - $3,000) x 25% 5,600Less: 25% of dividends actually received ($5,000 x 25%) (1,250) Minority interest December 31, 2004 $ 59,250

Under the beginning-of-the-period sale assumption, Poe's net income and consolidated net income would consist of:Sales - cost of sales - other expenses $ 63,750Gain on sale 20,100Income from Spy (75% of Spy's realized income) ($20,000 + $5,400 - $3,000) x 75% 16,800Net income (equal to consolidated net income) $100,650

248 Consolidations - Changes in Ownership Interests

W8-9 (continued)

Poe Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2004 | | | Adjustments and |Consolidated | Poe | Spy 75% | Eliminations | Statements | | | | |Income Statement | | | | |Sales |$463,750 |$130,000 |b 130,000| | $463,750 Income from Spy | 18,750 | |e 21,900|a 3,150| Gain on Spy stock | 17,500 | |a 2,500| | 15,000 Cost of sales | 260,000*| 100,000*|d 3,000|b 130,000| | | | |c 5,400| 227,600* Other expenses | 140,000*| 10,000*| | | 150,000* Minority expense | | |h 500 | | 500* Net income |$100,000 |$ 20,000 | | | $100,650 | | | | |Retained Earnings | | | | |Retained earnings - Poe|$200,000 | |a 5,400| | $194,600 Retained earnings - Spy| |$ 30,000 |f 30,000| | Net income | 100,000 | 20,000 | | | 100,650 Dividends | 50,000*| 10,000*| |e 8,750| |h 1,250| 50,000* Retained earnings | | | | | December 31, 2004 | $250,000 |$ 40,000 | | | $245,250 | | | | |Balance Sheet | | | | |Cash |$107,500 |$ 20,000 | | | $127,500 Inventories | 100,000 | 50,000 | |d 3,000| 147,000 Other current assets | 110,000 | 30,000 | |g 13,000| 127,000 Plant assets | 300,000 | 200,000 | | | 500,000 Investment in Spy | 182,500 | |c 5,400|a 4,750| | | | |e 13,150| | | | |f 170,000| | $800,000 |$300,000 | | | $901,500 | | | | |Accounts payable |$150,000 |$ 60,000 |g 13,000| | $197,000 Capital stock | 400,000 | 200,000 |f 200,000| | 400,000 Retained earnings | 250,000 | 40,000 | | | 245,250 | $800,000 |$300,000 | | | Minority interest October 1, 2004 | | | ($240,000 X 25%) | |f 60,000| Minority interest December 31, 2004 |h 750| | 59,250 | | | | $901,500 | | | | *Deduct

Minority interest expense is 25% of ($5,000 income - $3,000 deferred inventory profit).

249Chapter 8

W8-10

Supporting computations

Investment in Skrye account

July 1, 2000: 90% interest recorded at book value ($310,000 beginning stockholders' equity + $20,000 income to July 1) x 90% $297,000

December 2000: Dividends received ($20,000 x 90%) (18,000)

December 31, 2000: Income from Skrye (last half year) Share of Skrye's reported income ($20,000 x 90%) $18,000 Add: Constructive gain on bonds ($50,600 - $49,100) 1,500 Less: Unrealized inventory profit from upstream sales ($1,000 x 90%) (900) 18,600

Balance December 31, 2000 297,600

July 1, 2001: 5% interest acquired for cash 29,500

December 2001: Dividends received ($20,000 x 95%) (19,000)

December 31, 2001: Income from Skrye

First half year (assume unrealized inventory profits realized ($20,000 + $1,000) x 90% $18,900 Last half year $20,000 - $1,200 unrealized inventory profit from upstream sales) x 95% 17,860 Amortization of gain on bonds ($1,500/3 years) (500) Patent amortization 12,000 (see below) / 10 years x 1/2 year (600) 35,660

Balance December 31, 2001 $343,760

Preacquisition income (assume unrealized inventory profits from 2000 are realized in first half of 2001) $21,000 x 5% acquired $1,050

Minority interest expense for 2001Skrye's reported income $40,000Add: Unrealized profits-beginning inventory 1,000Less: Unrealized profits-ending inventory (1,200)Skrye's realized income 39,800Minority interest percentage 5% $1,990

Patent (on 5% purchase)Purchase price $29,500Equity purchased:

Starting equity $330,000Net income to date 20,000

Book value $350,000Interest purchased 5% 17,500

250 Consolidations - Changes in Ownership Interests

Patent $12,000

251Chapter 8

W8-10 (continued)

Psi Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2001 | | | Adjustments and |Consolidated | Psi |Skrye 95%| Eliminations | Statements | | | | | Income Statement | | | | |Sales |$ 613,840 |$250,200 |a 48,000| | $ 816,040 Income from Skrye | 35,660 | |e 35,660| | Interest income | | 4,800 |d 4,800| | Cost of sales | 400,000*| 170,000*|c 1,200|a 48,000| | | | |b 1,000| 522,200 * Operating expenses | 141,400*| 45,000*|g 600| | 187,000*Interest expense | 8,600*| | |d 4,300| 4,300*Preacquisition income | | |f 1,050| | 1,050*Minority expense | | |i 1,990| | 1,990*Net income |$ 99,500 |$ 40,000 | | | $ 99,500 | | | | |Retained Earnings | | | | |Retained earnings-Psi |$ 200,000 | | | | $ 200,000 Retained earnings-Skrye| |$ 80,000 |f 80,000| | Net income | 99,500 | 40,000 | | | 99,500 Dividends | 50,000*| 20,000*| |e 19,000| |i 1,000*| 50,000 *Retained earnings | | | | | December 31, 2001 |$ 249,500 |$100,000 | | | $ 249,500 | | | | |Balance Sheet | | | | |Cash |$ 47,500 |$ 8,600 | | | $ 56,100 Accounts receivable | 88,240 | 67,000 | |h 2,040| 153,200 Inventories | 120,000 | 40,000 | |c 1,200| 158,800 Plant assets - net | 500,000 | 200,000 | | | 700,000 Investment - Psi bonds | | 49,400 | |d 49,400| Investment-Skrye stock| 343,760 | |b 950|e 16,660| | | | |d 1,500| | | | |f 326,550| Patent | | |f 12,000|g 600| 11,400 |$1,099,500 |$365,000 | | | 1,079,500 | | | | |Accounts payable |$ 50,000 |$ 11,000 |h 2,040| | $ 58,960 Other current | | | | | liabilities | 9,200 | 4,000 | | | 13,200 9% bonds payable | 100,000 | |d 50,000| | 50,000 Premium on bonds | | | | | payable | 800 | |d 400| | 400 Capital stock $10 par | 500,000 | 150,000 |f 150,000| | 500,000 Other paid-in capital | 190,000 | 100,000 |f 100,000| | 190,000 Retained earnings | 249,500 |100,000 | | | 249,500 |$1,099,500 |$365,000 | | | | | |Minority interest beginning |b 50|f 16,500| Minority interest December 31, 2001 | |i 990| 17,440 | | | $1,079,500 | | | *Deduct

252 Consolidations - Changes in Ownership Interests