b. woods chapter 8

Consolidations - Changes in Ownership InterestsChapter 8

PRIVATE

Chapter 8

CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS

Answers to Questions1 Preacquisition earnings and dividends are the earnings and dividends applicable to an investment interest prior to its acquisition during an accounting period. Assume that P purchases an 80 percent interest in S on July 1, 2001 and that S has earnings of $100,000 between January 1 and July 1, 2001 and pays $50,000 dividends on May 1, 2001. In this case, preacquisition earnings and dividends are $80,000 and $40,000, respectively.

2 Preacquisition earnings are not recorded by a parent company under the equity method because the investor only recognizes income subsequent to acquisition on the interest acquired. Preacquisition earnings appear as a deduction in the consolidated income statement in the period that an interest is acquired because the revenues and expenses of the subsidiary are consolidated for the entire year of acquisition in order to provide the most informative disclosure.

3 Minority stockholders of Sub Company held a 20 percent interest during the first half year and a 10 percent interest during the last half year and at year-end. But minority interest income for the year and total minority interest at year-end are computed for the 10 percent interest held by minority stockholders throughout the year. Income applicable to the 10 percent interest acquired during the year is reported in the consolidated income statement as preacquisition income.

4 Preacquisition income is similar to minority interest expense because it represents the income of a subsidiary attributable to stockholders outside the consolidated entity. But preacquisition income is not income of the minority stockholder group at the date of the financial statements. In fact, preacquisition income relates to a previous majority stockholder group when the interest acquired exceeds 50 percent. In such a case, it seems improper to report the deduction as minority interest expense in the consolidated income statement. With proper description and disclosure, however, there should be no serious objection to combining preacquisition income and minority interest expense in the consolidated income statement.

5 Intercompany transactions for pooled companies must be eliminated for all periods in which financial statements are presented. Thus, the effect of any gain or loss from Pam's purchase of plant assets in January 2008 must be eliminated in the preparation of consolidated financial statements of the pooled entity for 2008.

6 The gain or loss on the sale of an equity interest is the difference between the proceeds from the sale and the recorded book value of the interest sold, provided that the investment is accounted for as a one-line consolidation. If another method of accounting has been used, the investment account must be converted to the equity method so that any gain or loss on sale is the same as if a one-line consolidation had been used previously.

7 Conceptually, the income applicable to an equity interest sold during an accounting period should be included in investment income and consolidated net income. In this case, the gain or loss on sale is computed on the basis of the book value of the interest at the time of sale, and income is assigned to the increased minority interest only after the date of sale. As a practical expedient, a beginning-of-the-period sale date can be used such that no income is recognized on the interest sold up to the time of sale, and the gain or loss is computed on the book value at the beginning of the period. When this expedient is used, income must be assigned to the increased minority interest for the entire year of sale. The combined investment income and gain or loss on sale are the same under both approaches provided that the assumptions (beginning of the year and time of sale) are followed consistently.

8 Assuming that no gain or loss is recognized, no adjustment of the parent's investment account is necessary when the subsidiary sells additional shares to outside parties at book value because the parent's share of underlying book value does not change. If additional shares are sold above book values, the parent's share of the underlying equity of the subsidiary increases. This increase is recorded by the parent company as follows:

Investment in subsidiary

$XX

Additional paid-in capital

$XX

If the subsidiary sells additional shares below book value, the parent's interest is decreased and the parent company records decreases in its investment and additional paid-in capital accounts. In all three cases (book value, above book value, or below book value), the parent company's ownership percentage decreases from 80 percent (8,000 of 10,000 shares) to 662/3 percent (8,000 of 12,000 shares).

If gain or loss is recognized, the change in underlying book value, adjusted for one-sixth [(80% - 662/3%) 80%] of any unamortized cost book value differential is reported as gain or loss. An alternative computation is to assume that the parent sold one-sixth of its interest for 662/3 percent of the proceeds, the difference being the amount of gain or loss.

9 The acquisition of the 2,000 shares directly from the subsidiary increases the parent's percentage interest from 80 percent (8,000 of 10,000 shares) to 5/6 (10,000 of 12,000 shares). The change in the interest held does not affect the way in which the parent company records its additional investment. The parent company in all cases increases its investment account by the amount of cash paid or other consideration given for the additional investment. It makes no difference if the purchase price is above or below book value.

10 Treasury stock transactions by a subsidiary change the parent company's proportionate interest in the subsidiary. Any changes in the parent's share of the underlying book value of the subsidiary require adjustments in the parent company's investment in subsidiary and additional paid-in capital accounts.

11 Gains and losses to a parent company (or equity investor) do not result from the treasury stock transactions of its subsidiaries (or equity investees). Although the parent's investment interest may increase or decrease from such transactions, the predominate view is that such changes are of a capital nature and should be accounted for by additional paid-in capital adjustments rather than by recorded gains and losses.

12 Stock splits and stock dividends by a subsidiary do not affect the amounts that appear in the consolidated financial statements. But stock dividends by a subsidiary result in capitalization of subsidiary retained earnings and the amounts involved in eliminations for the subsidiary's stockholders' equity accounts are affected.

SOLUTIONS TO EXERCISESSolution E8-1Allocation of Sweet's net income:Majority income

($100,000 x 70% x 1 year) + ($100,000 x 20% x 1/2 year)

$ 80,000Minority income ($100,000 x 10% x 1 year)

$ 10,000Preacquisition income ($100,000 x 20% x 1/2 year)

$ 10,000Allocation of Sweet's dividends:Dividends to Pie ($30,000 x 70%) + ($30,000 x 90%)

$ 48,000Minority interest ($60,000 x 10%)

$ 6,000Preacquisition interests ($30,000 x 20%)

$ 6,000Solution E8-21Income from Superstore for 2009:

40% interest x $240,000 x 2/3 year

$ 64,000

60% interest x $240,000 x 1/3 year

48,000

$112,0002Preacquisition income:

$240,000 x 20% x 2/3 year

$ 32,0003Minority interest expense for 2009:

$240,000 x 40%

$ 96,000Solution E8-3Entry to record sale of 10% interest:

Cash

$750,000

Investment in Swamp

$660,000

Gain on sale

90,000

To record sale of 15% interest in Swamp and

recognize gain on sale computed as follows:

Selling price of 15% interest

$750,000

Book value of interest sold

660,000

Gain on sale of interest

$ 90,000Entry to record investment income for 2003:

Investment in Swamp($600,000 x 85%)

$510,000

Income from Swamp

$510,000

To record income from Swamp.

Check:Investment balance January 1, 2003

$4,400,000

Less: Book value of interest sold

(660,000)

Add: Income from Swamp

510,000Investment balance December 31, 2003

$4,250,000Underlying equity ($4,600,000 x 85%)

$3,910,000

Add: Goodwill

340,000Investment balance December 31, 2003

$4,250,000Solution E8-41Gain on sale of 20% interest

Beginning of the period sale assumptionSelling price

$130,000

Book value of interest ($436,000 investment

account balance x 20%/80%)

109,000Gain on sale

$ 21,000Actual sale date assumptionSelling price

$130,000

Book value of interest sold:

Beginning of the period balance

$436,000

Add: Income ($150,000 x 1/3 year x 80%)

40,000

476,000

Interest sold

25% 119,000Gain on sale

$ 11,0002Income from Savage

Beginning of the period sale assumptionIncome from Savage($150,000 x 60%)

$ 90,000Actual sale date assumptionJanuary 1 to May 1:

Share of Savage's income ($150,000 x 80% x 1/3 year)

$ 40,000

May 1 to December 31:

Share of Savage's income ($150,000 x 60% x 2/3 year)

60,000Income from Savage

$100,0003Investment in Savage December 31, 2006

Beginning of Actual

Period Sale Sale Date

Assumption AssumptionInvestment balance January 1

$436,000

$436,000

Book value of interest sold

(109,000)

(119,000)

Income from Savage

90,000

100,000

Dividends

(48,000)

(48,000)

Investment balance December 31, 2006

$369,000

$369,000Solution E8-51aCost-book value differential

Cost

$1,290,000

Book value acquired ($1,480,000 January 1 balance + $100,000

income for 5 months - $60,000 dividends in January and

April) x 70%

1,064,000Goodwill

$ 226,0001bIncome from StorkIncome from Stork ($240,000 x 7/12 year x 70%)

$98,0001cInvestment in Stork at December 31

Investment cost

$1,290,000

Add: Income from Stork

98,000Deduct: Dividends ($60,000 x 70%)

(42,000)

Investment in Stork December 31, 2009

$1,346,0002Consolidation working paper entries:

aIncome from Stork

$ 90,000

Investment in Stork

$ 48,000

Dividends

42,000

To eliminate income and dividends from

Stork and adjust investment account to

its cost on June 1.

bCommon stock, $10 par-Stork

$1,000,000

Retained earnings-Stork

480,000

Goodwill

226,000

Preacquisition income

70,000

Investment in Stork

$1,290,000

Minority interest

444,000

Dividends

42,000

To eliminate reciprocal investment and

equity balances, record preacquisition

income and beginning minority interest,

and eliminate preacquisition dividends.

Solution E8-61Investment in SowerInvestment balance December 31, 2003 ($9,000,000 x 80%)

$ 7,200,000

Cost of new shares ($25 x 60,000 shares)

1,500,000 Investment in Sower after new investment

$ 8,700,0002Goodwill from new investment

Sower's stockholders' equity after issuance

($9,000,000 + $1,500,000)

$10,500,000

Petal's ownership percentage

(480,000 + 60,000 shares)/660,000 shares

.8182Petal's book value after issuance

8,591,100

Less: Petal's book value before issuance

(7,200,000)

Increase in book value from purchase (book value acquired)$ 1,391,100Cost of 60,000 shares

$ 1,500,000

Book value acquired

(1,391,100)

Goodwill from acquisition of new shares

$ 108,900Solution E8-71Sod issues 30,000 shares to Pod at $20 per share

Pod's ownership interest before issuance: 176,000/220,000 shares = 80%Pod's ownership interest after issuance: 206,000/250,000 shares = 82.4%2Sod sells 30,000 shares to the public at $20 per share

Pod's ownership interest after issuance: 176,000/250,000 shares = 70.4%3Sod sells 30,000 shares to the public; no gain or loss recognized:

Investment in Sod

$115,200


$115,200

To record increase in investment in Sod

computed as follows:

Book value before issuance ($3,200,000 x 80%)

$2,560,000

Book value after issuance ($3,800,000 x 70.4%)

2,675,200


$ 115,2004Sod sells 30,000 shares to the public; gain is recognized:

Investment in Sod

$115,200

Gain on sale of investment

$115,200

To record increase in investment in Sod


Share of proceeds (30,000 shares x $20) x 70.4%

$422,400

Book value sold $2,560,000 x (80% - 70.4%)/80%

307,200

Gain on sale of Sod stock

$115,200Solution E8-8Primetime buys shares1aPercentage ownership after additional investment:

700,000/1,000,000 = 70%

1bGoodwill from additional investment:

Book value of interest after sale

$2,600,000 x 70%

$1,820,000

Book value of interest before sale

$2,100,000 x 2/3

1,400,000

Book value of interest acquired

420,000

Cost of interest

500,000

Goodwill from additional investment

$ 80,000Outsiders buy shares2aPercentage ownership after sale:

600,000/1,000,000 = 60%

2bChange in underlying book value of investment in Satellite:

Satellite's underlying equity after sale

$2,600,000

Primetime's interest

60%

Book value of Primetime's investment in

Satellite after the sale

1,560,000

Less: Book value before the sale

1,400,000

Increase in book value of investment

$ 160,0002cEntry to adjust investment account:

Investment in Satellite

$160,000


$160,000

Solution E8-9Preliminary computations of cost-book value differentials:

April 1 acquisition

Cost of 4,000 shares

$ 64,000

Book value acquired:

Beginning stockholders' equity

$280,000

Add: Income for 3 months ($80,000 x 1/4 year) 20,000 Stockholders' equity April 1

300,000

Interest acquired 4,000/20,000 shares

20% 60,000Goodwill

$ 4,000July 1, 2007 acquisition

Cost of 8,000 shares

$166,000


Beginning stockholders' equity

$360,000

Add: Income for 6 months ($80,000 x 1/2 year) 40,000

Less: Dividends May 1

(10,000)

Stockholders' equity July 1

390,000

Interest acquired 8,000/20,000 shares

40% 156,000Goodwill

$ 10,0001Income from Sum2006Income from Sum for 2006 ($80,000 x 20% x 3/4 year)

$ 12,0002007Income from Sum for 2007

20% share of reported income ($80,000 x 20%)

$ 16,000

40% share of reported income ($80,000 x 40% x 1/2 year)

16,000 Income from Sum

$ 32,0002Minority interest December 31, 2007 ($420,000 x 40%)

$168,0003Preacquisition income

Sum income

$80,000

Time before acquisition

1/2

Percent acquired in 2007

40%

Preacquisition income($80,000 x .5 x .4)

$16,000

4Investment balance at December 31, 2007

Cost of 20% investment

$ 64,000

Income from Sum for 2006

12,000

Cost of 40% investment

166,000

Income from Sum for 2007

32,000

Less: Dividends ($2,000 + $6,000)

(8,000)

Investment in Sum

$266,000Check:

Share of Sum's December 31, 2007 equity ($420,000 x 60%)

$252,000

Add: Goodwill

14,000 Investment in Sum

$266,000Solution E8-10Preliminary computationsInvestment cost July 1, 2004

$675,000

Less: Book value of interest acquired:

Equity of Sandridge Mines December 31, 2003

$700,000

Add: Income for 1/2 year

50,000 Equity of Sandridge Mines July 1, 2004

750,000

Book value of 90% interest acquired

90% (675,000)

Excess (book value = underlying equity)

0

1Investment income from Sandridge Mines

Income from Sandridge-2004 ($100,000 x 1/2 year x 90%)

$ 45,000Income from Sandridge-2005:

January 1 to July 1 ($80,000 x 1/2 year x 90%)

$ 36,000

July 1 to December 31 ($80,000 x 1/2 year x 80%)

32,000

$ 68,000Investment in Sandridge Mines

Cost July 1, 2004

$675,000

Add: Income from Sandridge-2004

45,000

Less: Dividends paid in December ($50,000 x 90%)

(45,000)


675,000

Less: Book value of 1/9 interest sold on July 1, 2005a

(79,000)

Add: Income from Sandridge-2005

68,000

Less: Dividends paid in December ($30,000 x 80%)

(24,000)


$640,000aSale of 10% interest July 1, 2005:


$700,000

Add: Income less dividends-2004

50,000

Add: Income for 1/2 year-2005

40,000Equity of Sandridge Mines July 1, 2005

790,000

Interest sold

10% Underlying equity of interest sold

$ 79,000 Gain on sale of 1/9 interest ($85,000 proceeds - $79,000)

$ 6,000Solution E8-10 (continued)

2Minority interest expense

Minority interest expense-2004 ($100,000 income x 10% interest) $ 10,000Minority interest expense-2005:

($80,000 x 1/2 year x 10%) + ($80,000 x 1/2 year x 20%)

$ 12,000Minority interest December 31, 2004

Equity of Sandridge Mines January 1, 2004

$700,000

Add: Income less dividends for 2004

50,000Equity of Sandridge Mines December 31, 2004

750,000

Minority interest percentage

10% Minority interest December 31, 2004



$750,000

Add: Income less dividends for 2005

50,000Equity of Sandridge Mines December 31, 2005

800,000



$160,000Solution E8-11Preliminary computations:

Investment cost January 1, 2003

$700,000

Book value acquired ($800,000 equity x 75%)

(600,000)

Excess cost over book value acquired

$100,0001Underlying book value December 31, 2003

$1,000,000 equity x 75%

$750,0002Percentage ownership before purchase of additional shares

30,000 shares owned/40,000 shares outstanding = 75% interest

Percentage ownership after purchase of additional shares

40,000 shares owned/50,000 shares outstanding = 80% interest3Investment in Sanyo balance January 3, 2004


$ 700,000

Add: Share of Sanyo's income less dividends

for 2003 ($200,000 x 75%)

150,000Investment in Sanyo December 31, 2003

850,000

Add: Additional investment-January 3, 2004 (10,000 shares x $30) 300,000 Investment in Sanyo balance January 3, 2004

$1,150,0004Percentage ownership if shares sold to outside entities

30,000 shares owned/50,000 shares outstanding = 60% interest5Investment in Sanyo balance January 3, 2004

Investment in Sanyo December 31, 2003 (see 3 above)

$850,000

Add: Increase in book value from change in ownership interest:

Book value after additional 10,000 shares

were issued ($1,300,000 equity x 60%)

$780,000

Book value before additional 10,000 shares

were issued ($1,000,000 equity x 75%)

(750,000) 30,000 Investment in Sanyo balance January 3, 2004

$880,000Solution E8-12Preliminary computations:

Cost of additional investment (2,000 shares x $70)

$140,000

Less: Book value acquired

Book value after issuance:

$690,000 x 10,000/12,000 shares

$575,000

Book value before issuance:

$550,000 x 8,000/10,000 shares

(440,000) (135,000)

Excess cost over book value of 2,000 shares acquired

$ 5,000January 2, 2004

Investment in Saton

$140,000

Cash

$140,000

To record purchase of additional 2,000 shares of Saton.

December 2004

Cash

$ 50,000

Investment in Saton

$ 50,000

To record receipt of dividends ($60,000 x 10,000/12,000 shares).

December 31, 2004

Investment in Saton

$ 75,000

Income from Saton($90,000 x 10,000/12,000) $ 75,000

To record income from Saton.

Solution E8-131Investment in Striper

Cost

$1,800,000

Add: 90% of $300,000 increase in equity

270,000 Investment in Striper January 1, 2005

$2,070,0002Entry on Patrick's books (no gain or loss recognized)

Investment in Striper

$180,000


$180,000

To recognize change in book value of investment from Striper's sale of additional shares, computed as follows:

Underlying equity after issuance ($2,400,000 x 75%) $1,800,000

Underlying equity before issuance ($1,800,000 x 90%) (1,620,000)

$ 180,0003Entry on Patrick's books (gain or loss recognized)

Investment in Striper

$105,000

Gain on change in equity interest

$105,000

To recognize change in book value of investment from Striper's sale of additional shares, computed as follows:

Change in equity (from 2 above)

$180,000

Goodwill adjustment ($450,000 x 15/90)

(75,000)

Gain

$105,000SOLUTIONS TO PROBLEMS

Solution P8-1Preliminary computations:

Cost of 40,000 shares July 1, 2004

$620,000

Book value acquired ($550,000 + $50,000 income) x 80%

(480,000)


$140,000Cost of 10,000 shares January 1, 2005

$162,000

Book value after issuance ($762,000 x 5/6)

$635,000

Book value before issuance ($600,000 x 80%)

(480,000) (155,000)


$ 7,000

1Investment in Spindle-December 31, 2004

Investment cost

$620,000

Add: Income from Spindle-

$100,000 x 1/2 year x 80%

40,000

Less: Dividends ($50,000 x 80%)

(40,000)

Investment in Spindle December 31, 2004

$620,0002Income from Spindle-2005

Share of Spindle's income ($150,000 x 5/6)

$125,000

3Investment in Spindle-December 31, 2005


$620,000

Add: Additional investment

162,000

Add: Income from Spindle-2005

125,000

Less: Dividends for 2005 ($60,000 x 5/6)

(50,000)

Investment in Spindle December 31, 2005

$857,000Check:

Share of Spindle's equity ($852,000 x 5/6)

$710,000

Goodwill

147,000 Investment in Spindle December 31, 2005

$857,000Solution P8-21Investment in Smithtown

Underlying equity $26,000,000 x 80%

$20,800,000

Goodwill

2,000,000 Investment in Smithtown January 1, 2008

$22,800,0002Percentage interest after stock issuance

Shares owned 960,000/1,600,000 outstanding shares = 60% interest3No gain or loss recognized on issuance of additional shares

Investment in Smithtown

$2,000,000

Other paid-in capital

$2,000,000

To recognize change in ownership interest

computed as: Underlying equity after sale

($38,000,000 x 60%) less underlying equity

before sale of additional shares ($26,000,000

x 80%).

4Gain or loss recognized on issuance of additional shares

Investment in Smithtown

$1,500,000

Gain on partial sale of Smithtown

$1,500,000

To recognize increase in underlying

equity of $2,000,000 less goodwill sold

($2,000,000 x 25%).

Alternative computation of gain:

Assumed proceeds from sale ($12,000,000 issue price x

60% accruing to Prince)

$7,200,000

Less: Book value of interest assumed sold

$22,800,000 x (80% - 60%)/80%

(5,700,000)

Gain on sale

$1,500,000Solution P8-31Journal entry to record sale as of actual sale date

Cash

$120,000

Loss on sale of interest

1,500

Investment in Shawnee

$121,500

To record sale of 1/9 of investment

in Shawnee. Book value of interest

sold is computed as follows:


$1,039,500

Add: Income from Shawnee for one-half year

($280,000 x 1/2 year x 90%)

126,000

Less: Dividends ($80,000 x 90%)

(72,000)

Book value of investment on July 1, 2006

$1,093,500

Book value of interest sold ($1,093,500/9)

$ 121,5002Journal entry to record sale as of January 1, 2006

Cash

$120,000

Gain on sale

$ 12,500


107,500

To record sale of 1/9 of investment

in Shawnee. Book value of interest

sold is computed as follows:


$1,039,500

Less: Dividends

(72,000)

Book value adjusted for dividends

$ 967,500

Book value of interest sold ($967,500/9)

$ 107,5003Reconciliation


Investment in Shawnee Beginning of Year

Actual Sale Date Sale Date Balance January 1, 2006

$1,039,500

$1,039,500

Add: Income from Shawnee

January 1 - July 1

126,000

112,000

July 1 - December 31

112,000

1l2,000

Less: Dividends

First half-year

(72,000)

(72,000)

Last half-year

(64,000)

(64,000)

Less: Book value of interest sold (121,500)

(107,500)

Balance December 31, 2006

$1,020,000

$1,020,000Solution P8-4Entries on Panama's books to reflect the change in ownership interest:

Option 1 Panama sells 30,000 shares of Shenandoah

Cash

$1,500,000

Investment in Shenandoah

$ 870,000

Retained earnings (for gain on sale) 630,000

To record sale of 30,000 shares at $50

per share.

Option 2 Shenandoah issues and sells 40,000 shares to the public


$ 630,000


$ 630,000

To record adjustment in ownership


Book value after sale of 40,000 shares

($12,440,000 x 75%)

$9,330,000

Book value before sale of 40,000 shares

($10,440,000 x 5/6)

(8,700,000)

Increase in book value of investment from sale

$ 630,000Option 3 Shenandoah reissues 40,000 shares of treasury stock


$ 630,000


$ 630,000

To record adjustment in ownership

computed the same as 2 above.

Consolidated Stockholders' Equity

at January 1, 2005

Option 1 Option 2 Option 3 Common stock

$10,000,000$10,000,000$10,000,000


3,000,000 3,630,000 3,630,000

Retained earnings

7,630,000 7,000,000 7,000,000

Minority interesta

2,610,000 3,110,000 3,110,000 Total stockholders' equity

$23,240,000$23,740,000$23,740,000a Minority interest under option 1: $10,440,000 x 25%

Minority interest under options 2 and 3: $12,440,000 x 25%

Solution P8-5Preliminary computations:

Cost of 9,000 shares (90% interest) January 1, 2005

$810,000

Book value acquired ($500,000 + $300,000) x 90%

(720,000)

Excess cost over book value acquired

$ 90,0001Investment balance December 31, 2005

Cost January 1, 2005 (9,000 shares x $90)

$810,000

Add: Share of Sala's 2005 income ($50,000 x 90%)

45,000 Investment in Sala December 31, 2005

$855,0002Goodwill at December 31, 2006

Goodwill from January 1, 2005 purchase

$ 90,000

Goodwill from January 1, 2006 purchase:

Book value before purchase ($850,000 x 90%)

$ 765,000

Book value after purchase ($1,350,000 x 14/15)(1,260,000)

Book value acquired

(495,000)

Cost of additional 5,000 shares

500,000 Goodwill at January 1, 2006

$ 5,000Goodwill from 2006 purchase

5,000 Goodwill at December 31, 2006

$ 95,0003Additional paid-in capital

Book value after issuance ($1,350,000 x 60%)

$810,000

Book value before issuance ($850,000 x 90%)

(765,000)

Additional paid-in capital (gain is not recognized)


Subsidiary equity January 1, 2005

$ 800,000

Increase for 2005

50,000

Increase for 2006

70,000

Sale of additional shares

500,000Subsidiary equity December 31, 2006

1,420,000

Minority interest percentage 6,000/15,000 shares


$ 568,000Solution P8-61Investment in Stake December 31, 2007

Investment in Stake January 2, 2006

$ 94,000

Increase for 2006 ($30,000 retained earnings increase x 70%) 21,000

Purchase of additional 20% interest June 30, 2007

38,000

Increase 2007:

($30,000 x 1/2 year x 70%) + ($30,000 x 1/2 year x 90%)

24,000

Dividends 2007: ($10,000 x 90%)

(9,000)

Investment in Stake December 31, 2007

$168,0002Goodwill December 31, 2007

January 2, 2006 purchase:

Cost of 70% interest

$94,000

Less: Book value acquired ($120,000 x 70%)

(84,000)

Goodwill

$10,000June 30, 2007 purchase:

Cost of 20% interest

$38,000

Less: Book value acquired ($165,000 x 20%)

(33,000)

Goodwill

$ 5,000 Goodwill December 31, 2007

$ 15,0003Consolidated net income

Sales

$600,000

Cost of sales

(400,000)

Expenses

(70,000) Total consolidated income

130,000

Minority interest expense

$ 3,000

Preacquisition income

3,000 (6,000)

Consolidated net income

$124,000Alternative:

Post's reported income=Consolidated net income

$124,000

Solution P8-6 (continued)

4Consolidated retained earnings December 31, 2007

Beginning retained earnings

$200,000

Add: Consolidated net income-2007

124,000

Less: Dividends

(64,000)

Consolidated retained earnings-ending

$260,000Alternative solution:

Post's reported ending retained earnings= Consolidated retained earnings-ending

$260,0005Minority interest December 31, 2007

Equity of Stake December 31, 2007

$170,000



$ 17,000Solution P8-71Percy Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2007

Sales

$3,200,000

Cost of sales

(1,900,000)

Gross profit

1,300,000

Depreciation expense

(700,000)

Other expenses

(150,000)

Total consolidated income

450,000

Preacquisition income ($150,000 x 1/4 year x 10%)

(3,750)

Minority interest expense ($150,000 x 20%)

(30,000)

Consolidated net income

$ 416,2502Schedule to allocate Sawyer's income and dividends

Majority Minority Preacquisition Total Sawyer's income 70% $105,000 20% $ 30,000 $135,000

10% 11,250 $3,750 15,000 Allocation $116,250 $ 30,000 $3,750 $150,000Dividends 70% $ 56,000 20% $ 16,000 $ 72,000

10% 4,000 $4,000 8,000 Allocation $ 60,000 $ 16,000 $4,000 $ 80,000Solution P8-8Preliminary computations

Cost October 1, 2003

$82,400


Book value on January 1, 2003 $70,000

Add: Income January 1 to October 1

($24,000 x 3/4 year)

18,000

Deduct: Dividends March 15

(5,000)

Book value October 1 83,000

Interest acquired 80% 66,400Goodwill

$16,000Income from Sat for 2003

Share of Sat's net income ($24,000 x 1/4 year x 80%)

$4,800

Less: Unrealized profit in Sat's ending inventory

(1,000)

Income from Sat

$3,800Preacquisition income ($24,000 x 3/4 year x 80%)

$14,400

Preacquistion dividends ($5,000 x 80%)

$4,000

Minority interest expense ($24,000 x 20%)

$4,800Solution P8-8 (continued)

Pop Corporation and Subsidiary

Consolidation Working Papers


| | | Adjustments and |Consolidated

| Pop | Sat 80% | Eliminations | Statements | | | |

Income Statement | | | |

Sales |$112,000 |$ 50,000 |a 12,000 | $150,000 Income from Sat | 3,800 | |c 3,800 | Cost of sales | 60,000*| 20,000*|b 1,000 a 12,000| 69,000* Operating expenses | 25,100*| 6,000*|

| 31,100* Preacquisition income| | |d 14,400 | 14,400* Minority expense | | |e 4,800 | 4,800*

Net income |$ 30,700 |$ 24,000 | | $ 30,700 | | | |

Retained Earnings | | | |

Retained earningsPop|$ 30,000 | | | $ 30,000 Retained earningsSat| |$ 20,000 |d 20,000 | Net income | 30,700| 24,000| | 30,700 Dividends | 20,000*| 10,000*| c 4,000|

e 2,000|

| | | d 4,000| 20,000* Retained earnings | | | |

December 31, 2003 |$ 40,700 |$ 34,000 | | $ 40,700 | | | | Balance Sheet | | | |

Cash |$ 5,100 |$ 7,000 | | $ 12,100 Accounts receivable | 10,400 | 17,000 | f 6,000| 21,400 Note receivable | 5,000 | 10,000 | | 15,000 Inventories | 30,000 | 16,000 | b 1,000| 45,000 Plant assetsnet | 88,000 | 60,000 | | 148,000 Investment in Sat | 82,200 | |c 200 |

| | | d 82,400| Goodwill | | |d 16,000 | 16,000 |$220,700 |$110,000 | | $257,500 | | | |

Accounts payable |$ 15,000 |$ 16,000 |f 6,000 | $ 25,000 Notes payable | 25,000 | 10,000 | | 35,000 Capital stock | 140,000 | 50,000 |d 50,000 | 140,000 Retained earnings | 40,700| 34,000| | 40,700 |$220,700 |$110,000 | | | |

Minority interest-beginning | d 14,000| Minority interest December 31, 2003 | e 2,800| 16,800 | | $257,500 | | *Deduct

Solution P8-9Supporting computations:

Cost-book value differential

Investment cost

$175,000

Less: Book value acquired ($250,000 equity on January 1

plus $10,000 net income (1/4 year) less $10,000

dividends) x 70%

175,000Cost-book value differential

0

Allocation of Sid's reported net income

Parent company ($40,000 x 3/4 year x 70%)

$ 21,000

Preacquisition income ($40,000 x 1/4 year x 70%)

7,000

Minority interest expense ($40,000 x 1 year x 30%)

12,000 Sid's net income

$ 40,000Pal's income from Sid

Equity in Sid's income

$ 21,000

Constructive gain on parent's bonds

($105,700 book value on July 1 less $102,850)

2,850

Recognition of constructive gain on separate books

($2,850 x 6/114 months)

(150)

Gain on intercompany sale of equipment - downstream

[$30,000 - ($36,000/2)]

(12,000)

Piecemeal recognition of gain on equipment - downstream

($12,000/3 years x 1/2 year)

2,000

Gain on intercompany sale of land - upstream

($10,000 - $8,000 cost) x 70%

(1,400)

Income from Sid

$ 12,300Solution P8-9 (continued)

Pal Corporation and Subsidiary




| Pal | Sid 70% | Eliminations | Statements Income Statement | | | | |

Sales |$287,100 |$150,000 | | | $437,100 Income from Sid | 12,300 | |e 12,300| | Gain on bonds | | | |a 2,850| 2,850 Gain on plant assets | 12,000 | 2,000 |b 12,000| |

| | |d 2,000| | Interest income | | 5,850 |a 5,850| | Interest expense | 11,400*| | |a 5,700| 5,700* Expensesincludes | | | | |

cost of goods sold | 200,000*| 117,850*| |c 2,000| 315,850* Preacquisition income| | |f 7,000| | 7,000* Minority expense | | |i 11,400 | | 11,400* Net income |$100,000 |$ 40,000 | | | $100,000 | | | | |

Retained Earnings | | | | |

Retained earningsPal|$250,000 | | | | $250,000 Retained earningsSid| |$ 50,000 |f 50,000| | Net income | 100,000| 40,000| | | 100,000 Dividends | 50,000*| 20,000*| |e 7,000|

|i 6,000|

| | | |f 7,000| 50,000* Retained earnings | | | | |

December 31, 2006 |$300,000 |$ 70,000 | | | $300,000 | | | | |

Balance Sheet | | | | |

Cash |$ 17,000 |$ 4,000 | | | $ 21,000 Interest receivable | | 6,000 | |h 6,000| Inventories | 140,000 | 60,000 | | | 200,000 Other current assets | 110,000 | 20,000 | |g 7,000| 123,000 Plant assetsnet | 502,700 | 107,300 |c 2,000|b 12,000|

| | | |d 2,000| 598,000 InvestmentSid common| 180,300 | | |e 5,300|

| | | |f 175,000| InvestmentPal bonds | | 102,700 | |a 102,700| |$950,000 |$300,000 | | | $942,000 | | | | |

Interest payable |$ 6,000 | |h 6,000| | Other current | | | | |

liabilities | 38,600 |$ 30,000 |g 7,000| | $ 61,600 12% bonds payable | 100,000 | |a 100,000| | Premium on bonds | 5,400 | |a 5,400| | Common stock | 500,000 | 200,000 |f 200,000| | 500,000 Retained earnings | 300,000| 70,000| | | 300,000 |$950,000 |$300,000 | | |

Minority interest ($250,000 x 30%) | |f 75,000| Minority interest December 31, 2006 | | |

($268,000 x 30%) | |i 5,400| 80,400 | | | $942,000 | | | Solution P8-10Supporting computations:

Investment cost of 70% interest

$450,000

Book value of interest acquired

350,000 Goodwill

$100,000Investment cost of 10% interest

$77,500


Beginning equity January 1, 2004

$550,000

Add: Income for 1/2 year

50,000

Less: June dividends

(25,000)

Book value at July 1, 2004

$575,000

Interest acquired

10% 57,500Goodwill

$20,000Investment in Sam account:


$450,000

Add: 2003 share of retained earnings

increase ($50,000 x 70%)

$35,000

Less: Unrealized profit in ending

inventory

(5,000)

Less: Unrealized gain on land

(8,000) 22,000Investment balance December 31, 2003

$472,000Add: Investment cost of 10% interest

77,500

Add: Income from Sam for 2004 $100,000 x 70% interest x 1 year

$70,000

$100,000 x 10% interest x 1/2 year 5,000

Add: Beginning inventory profits

5,000

Less: Ending inventory profits

(6,000)

Less: Gain: intercompany sale machinery (40,000)

Add: Piecemeal recognition of gain

($40,000/5 x 1/2 year)

4,000 38,000

Less: Dividends from Sam

($25,000 x 70%) + ($25,000 x 80%)

(37,500)Investment balance December 31, 2004

$550,000


Poco Corporation and Subsidiary



___________________________________________________________________________

| | 80% | Adjustments and |Consolidated

| Poco | Sam | Eliminations | Statements | | | | |

Income Statement | | | | |

Sales |$900,000 |$500,000 |a 48,000| | $1,352,000 Income from Sam | 38,000 | |f 38,000| | Gain on machinery | 40,000 | |d 40,000| | Cost of sales | 400,000*| 300,000*|c 6,000|a 48,000|

| | | |b 5,000| 653,000* Depreciation expense | 90,000*| 60,000*| |d 4,000| 146,000*Other expenses | 160,000*| 40,000*| | | 200,000*Preacquisition income | | |g 5,000| | 5,000*Minority expense | | |h 20,000| | 20,000*Net income |$328,000 |$100,000 | | | $ 328,000 | | | | |


Retained earningsPoco|$155,000 | | | | $ 155,000 Retained earningsSam | |$250,000 |g 250,000| | Net income | 328,000|100,000| | | 328,000 Dividends | 200,000*| 50,000*| |f 37,500|

|h 10,000|

| | | |g 2,500| 200,000* Retained earnings | | | | |

December 31, 2004 |$283,000 |$300,000 | | |$ 283,000 | | | | |


Cash |$ 20,000 |$ 80,000 | | |$ 100,000 Accounts receivable | 90,000 | 30,000 | |i 25,000| 95,000 Dividends receivable | 20,000 | | |j 20,000| Inventories | 90,000 | 70,000 | |c 6,000| 154,000 Other current items | 20,000 | 80,000 | | | 100,000 Land | 50,000 | 40,000 | |e 8,000| 82,000 Buildingsnet | 60,000 | 105,000 | | | 165,000 Machinerynet | 100,000 | 320,000 | |d 36,000| 384,000 Investment in Sam | 550,000 | |b 5,000|g 562,500|

| | |e 8,000|f 500| Goodwill | | |g 120,000| | 120,000

|1,000,000|$725,000 | | |$1,200,000 | | | | |

Accounts payable |$177,000 |$ 40,000 |i 25,000| |$ 192,000 Dividends payable | 100,000 | 25,000 |j 20,000| | 105,000 Other liabilities | 140,000 | 60,000 | | | 200,000 Capital stock,$10 par | 300,000 | 300,000 |g 300,000| | 300,000 Retained earnings | 283,000|300,000| | | 283,000 |1,000,000|$725,000 | | | | | |

Minority interest, January 1, 2004 | |g 110,000| Minority interest, December 31, 2004 | |h 10,000| 120,000 | | |$1,200,000 | | | *DeductSolution P8-11Preliminary computations:

Investment cost of 85% of Sly August 1, 2003

$522,750Book value August 1, 2003:

Capital stock

$500,000

Retained earnings

100,000

Add: Income for 7 months

35,000

Less: Dividends for 1/2 year

(20,000)

Stockholders' equity August 1, 2003

615,000

Interest acquired

.85$522,750Investment cost August 1, 2003

$522,750

Equity in income $60,000 x 5/12 year x 85%

$ 21,250

Less: Deferred inventory profit from

upstream sale $5,000 x 85%

(4,250)

Less: Deferred profit from sale of

equipment $10,000 profit - ($2,000 x 1/4 year) (9,500)

Income from Sly 2003

7,500

Less: Dividends from Sly $20,000 x 85%

(17,000)

Investment in Sly December 31, 2003

$513,250Minority interest expense ($60,000 - $5,000) x 15% = $8,250Preacquisition earnings ($35,000 x 85%) = $29,750Solution P8-11 (continued)

Working paper entries:

aSales

$ 60,000

Cost of sales

$ 60,000

To eliminate intercompany sales.

bCost of sales

$ 5,000

Inventories

$ 5,000

To defer unrealized inventory profits.

cSales

$ 50,000

Cost of sales

$ 40,000

Plant assets-net

10,000

To eliminate intercompany sale of inventory item to be used as equipment.

dPlant assets-net

$ 500

Operating expense

$ 500

To record depreciation for 1/4 year on intercompany gain on plant asset.

eIncome from Sly

$ 7,500

Investment in Sly

9,500

Dividends

$ 17,000

To eliminate income and dividends and return investment account to its beginning-of-the-period balance.

fCapital stock

$500,000

Retained earnings

100,000

Preacquisition earnings

29,750

Dividends

$ 17,000

Investment in Sly

522,750

Minority interest January 1

90,000

To eliminate reciprocal equity and investment balances, and enter preacquisition earnings and beginning minority interest.

gDividends payable

$ 17,000

Dividends receivable

$ 17,000

To eliminate reciprocal dividends receivable and payable amounts.

hMinority Interest Expense

$ 8,250

Dividends

$ 6,000

Minority Interest

2,250

To eneter Minority Interest share of subsidiary income and dividends.

Alternative to entry c:

Sales

$50,000

Cost of sales

$50,000

Cost of sales

$10,000

Plant assets-net

$10,000


Pak Corporation and Subsidiary




| Pak | Sly 85% | Eliminations | Statements | | | | |


Sales |$ 910,000 |$400,000 |a 60,000| |

| | |c 50,000| |$1,200,000 Income from Sly | 7,500 | |e 7,500| | Cost of sales | 500,000 | 250,000*|b 5,000|a 60,000|

| | | |c 40,000| 655,000* Operating expense | 200,000*| 90,000*| |d 500| 289,500*Preacquisition earnings| | |f 29,750| | 29,750*Minority expense | | |h 8,250| | 8,250*Net income |$ 217,500 |$ 60,000 | | |$ 217,500 | | | | |


Retained earningsPak |$ 192,500 | | | |$ 192,500 Retained earningsSly | |$100,000 |f 100,000| | Net income | 217,500| 60,000| | | 217,500 Dividends | 100,000*| 40,000*| |e 17,000|

|h 6,000|

| | | |f 17,000| 100,000* Retained earnings | | | | |

December 31, 2003 |$ 310,000 |$120,000 | | |$ 310,000 | | | | |


Cash |$ 33,750 |$ 10,000 | | |$ 43,750 Dividends receivable | 17,000 | | |g 17,000| Accounts receivable | 120,000 | 70,000 | | | 190,000 Inventories | 300,000 | 150,000 | |b 5,000| 445,000 Plant assetsnet | 880,000 | 500,000 |d 500|c 10,000| 1,370,500 Investment in Sly | 513,250 | |e 9,500|f 522,750| |$1,864,000 |$730,000 | | |$2,049,250 | | | | |

Accounts payable |$ 154,000 |$ 90,000 | | |$ 244,000 Dividends payable | | 20,000 |g 17,000| | 3,000 Capital stock | 1,400,000 | 500,000 |f 500,000| | 1,400,000 Retained earnings | 310,000|120,000| | | 310,000 |$1,864,000 |$730,000 | | | | | |

Minority interest January 1, 2003 | |f 90,000| Minority interest December 31, 2003 | |h 2,250| 92,250 | | |$2,049,250 | | | Solution P8-12Supporting computations:

Intangible Assets (IA)

InvestmentBook ValueExcess Allocated

Cost Acquired to IA 80% interest January 5, 2005

$600,000 $480,000 $120,000

10% interest July 1, 2008

82,500 67,500 15,000 Total

$682,500 $547,500 $135,000Amortization of IA

2005 2006 2007 2008 80% interest January 5, 2005

$12,000 $12,000 $12,000 $12,000

10% interest July 1, 2008

750 Total

$12,000 $12,000 $12,000 $12,750Schedule to convert to equity method

Pin's

RetainedInvestment Income

Earnings in Sit from SitPrior years' effectAmortization of IA

$(36,000)$(36,000)

Inventory profit December 31, 2007 (5,000) (5,000)

Current year's effectAmortization of IA

(12,750) $(12,750)

Inventory profit December 31, 2007

5,000 5,000

Inventory profit December 31, 2008

(10,000) (10,000)

Share of loss on upstream sale of

machinery less piecemeal recognition

($10,000 - $1,000) x 90%

8,100 8,100 Preclosing adjustments (working

paper entry a)

$(41,000)$(50,650) $ (9,650)

Preclosing balances per books 300,000 765,000 85,000 Correct preclosing balances

$259,000$714,350 $ 75,350Minority interestDecember 31, 2007 $650,000 equity x 10% continuing interest = $65,000December 31, 2008 ($700,000 + $9,000 unrealized loss) x 10% = $70,900Preacquisition income ($100,000 x 1/2 year x 10%) = $5,000Minority interest expense ($100,000 + $10,000 loss on

sale of machinery - $1,000 piecemeal recognition of loss) x 10% = $10,900


Pin Corporation and Subsidiary




| Pin | Sit | Eliminations | Statements | | | | |


Sales |$1,265,000 |$ 600,000 |b 50,000| | $1,815,000 Income from Sit | 85,000 | |a 9,650| |

| | |g 75,350| | Cost of sales | 800,000*| 300,000*|c 10,000|b 50,000| 1,055,000*

| | | |d 5,000| Depreciation expense | 180,000*| 70,000*|f 1,000| | 251,000*Other expenses | 120,000*| 120,000*|i 12,750| | 252,750*Loss on plant assets | | 10,000*| |e 10,000| Preacquisition income| | |h 5,000| | 5,000*

Minority expense | | |k 10,900| | 10,900*Net income |$ 250,000 |$ 100,000 | | | $ 240,350 | | | | |


Retained earningsPin|$ 300,000 | |a 41,000| | $ 259,000 Retained earningsSit| |$ 150,000 |h 150,000| |

Net income | 250,000| 100,000| | | 240,350 Dividends | 150,000*| 50,000*| |h 2,500|

|k 5,000|

| | | |g 42,500| 150,000* Retained earnings | | | | |

December 31, 2008 |$ 400,000 |$ 200,000 | | | $ 349,350 | | | | |


Cash |$ 220,000 |$ 160,000 | | | $ 380,000 Receivables | 200,000 | 160,000 | |j 20,000| 340,000 Inventory | 170,000 | 140,000 | |c 10,000| 300,000 Plant and equipment | 1,417,500 | 720,000 |e 10,000| | 2,147,500 Accumulated | | | | |

depreciation | 272,500*| 180,000*| |f 1,000| 453,500*

Investment in Sit | 765,000 | |d 5,000|a 50,650|

| | | |g 32,850|

| | | |h 686,500| Intangible assets | | |h 99,000|i 12,750| 86,250 |$2,500,000 |$1,000,000 | | | $2,800,250 | | | | |

Current liabilities |$ 300,000 |$ 100,000 |j 20,000| | $ 380,000 Other liabilities | 300,000 | 200,000 | | | 500,000 Capital stock | 1,500,000 | 500,000 |h 500,000| | 1,500,000 Retained earnings | 400,000| 200,000| | | 349,350 |$2,500,000 |$1,000,000 | | | | | |

Minority interest January 1, 2008 | |h 65,000| Minority interest December 31, 2008 | |k 5,900| 70,900 | | |$2,800,250 | | | *Deduct

Solution P8-13 [AICPA adapted]

Supporting computations:

Consolidated net income checkPop's separate income ($925,000 reported income -

$232,000 subsidiary income - $75,000 dividend income)

$618,000

Add: Gain on sale of stock

16,000

Less: Amortization of patent

(10,000)

Less: Inventory profits

(4,000)

Pop's separate realized income

620,000

Pop's share of Sink's income ($152,000 x 80%) +

($160,800 x 75%)

242,200 Consolidated net income

$862,200Minority interest checkMinority interest January 1, 2005

($940,000 - $12,000) x 20%

$185,600

Addition July 1, 2005 ($928,000 + $152,000) x 5%

54,000

239,600

Add: Minority interest income

($152,000 x 20%) + ($160,800 x 25%)

70,600

Deduct: Minority interest dividends

(25,000)

Minority interest December 31, 2005

$285,200Working paper entries in general journal formaCash

$ 45,000

Accounts receivable

$ 45,000

To correct for omission of payment in

transit at year end.

bRetained earnings-Pop

$ 20,000

Operating expenses

10,000

Patents

10,000

Investment in Sink stock

$ 40,000

To correct error in recording investment

in the patent account.

cInvestment in Sink stock

$ 16,000

Gain on sale of 5% interest

$ 16,000

To recognize gain on sale of Sink stock

and to adjust the investment account for

the excess credit from sale $70,000

[($940,000 + $140,000) x 5%].


dDividend income

$ 75,000


$ 75,000

To correct error in recording dividends

received under the equity method.

eRetained earnings-Pop

$ 9,600

Minority interest-beginning

2,400

Cost of sales

$ 12,000

To eliminate intercompany profit in

beginning inventory of Pop computed as

follows: $52,000 - ($52,000 1.3) = $12,000.

fSales

$ 96,000

Cost of sales

$ 96,000

To eliminate reciprocal sales and cost of

sales amounts: $80,000 x 1.2 = $96,000.

gCost of sales

$ 4,000

Inventory

$ 4,000

To eliminate unrealized profit in ending

inventory of Sink computed as follows:

$24,000 - ($24,000 1.2) = $4,000.

hBonds payable

$ 60,000

Unamortized discount on bonds payable

$ 1,200

Investment in Sink bonds

58,000

Gain on constructive retirement of bonds

800

To eliminate intercompany bonds and enter

the constructive gain.

iIncome from Sink

$232,000

Dividends

$ 75,000


157,000

To eliminate equity in Sink's income and

adjust the investment account.

jCommon stock-Sink

$250,000

Contributed capital-Sink

50,000

Retained earnings-Sink

640,000


$698,000

Minority interest

242,000

To eliminate reciprocal investment and

equity amounts and enter minority interest


January 1, 2005 minority interest ($940,000 x 20%)$188,000

Add: July 1 sale ($940,000 + $140,000) x 5%

54,000

Minority interest

$242,000

kMinority Interest Expense

$ 70,600

Dividends

$ 25,000

Minority Interest

45,600

To record the minority interest share of subsidiary income and dividends.


Pop Company and Subsidiary




| Pop | Sink | Eliminations | Statements | | | | |


Sales |$4,000,000 |$1,700,000 |f 96,000| | $5,604,000 Cost of sales | 2,982,000*| 1,015,000*|g 4,000|e 12,000|

| | | |f 96,000| 3,893,000*Operating expenses | 400,000*| 377,200*|b 10,000| | 787,200*Dividend income | 75,000 | |d 75,000| | Income from Sink | 232,000 | |i 232,000| | Interest expense | | 7,800*| | | 7,800*Gain on stock5% | | | |c 16,000| 16,000

Gain on bonds | | | |h 800| 800 Minority expense | | |k 70,600| | 70,600*Net income |$ 925,000 |$ 300,000 | | | $ 862,200 | | | | |


Retained earningsPop |$2,100,000 | |b 20,000| |

| | |e 9,600| | $2,070,400 Retained earningsSink | |$ 640,000 |j 640,000| |

Net income | 925,000| 300,000| | | 862,200 Dividends | 170,000*| 100,000*| |i 75,000|

|k 25,000| 170,000*Retained earnings | | | | |

December 31, 2005 |$2,855,000 |$ 840,000 | | |$2,762,600 | | | | |


Cash |$ 486,000 |$ 249,600 |a 45,000| |$ 780,600 Accounts receivable | 235,000 | 185,000 | |a 45,000| 375,000 Inventories | 475,000 | 355,000 | |g 4,000| 826,000 Machinery and equipment | 2,231,000 | 530,000 | | | 2,761,000 Patents | | |b 10,000| | 10,000 InvestmentSink stock | 954,000 | |c 16,000|b 40,000|

| | | |d 75,000|

| | | |i 157,000|

| | | |j 698,000| InvestmentSink bonds | 58,000 | | |h 58,000|

|$4,439,000 |$1,319,600 | | $4,752,600 | | | | |

Accounts payable |$ 384,000 |$ 62,000 | | |$ 446,000 Bonds payable | | 120,000 |h 60,000| | 60,000 Bond discount | | 2,400*| |h 1,200| 1,200*Common stock | 1,200,000 | 250,000 |j 250,000| | 1,200,000 Contributed capital | | 50,000 |j 50,000| | Retained earnings | 2,855,000| 840,000| | | 2,762,600 |$4,439,000 |$1,319,600 | | | | | |

Minority interest 25% |e 2,400|j 242,000| Minority interest December 31, 2005 | |k 45,600| 285,200 | | |$4,752,600 | | | *Deduct

Solution P8-14Indirect Method

Poff Corporation and Subsidiary

Consolidated Statement of Cash Flows


Cash Flows from Operating Activities

Consolidated net income $300,000

Adjustments to reconcile net income to cash

provided by operating activities:

Minority interest expense $ 22,000

Depreciation expense 528,000

Decrease in accounts receivable 2,500

Decrease in prepaid expenses 20,000

Decrease in accounts payable (203,500)

Increase in inventories (130,000)

Gain on sale of 10% interest (5,700)

233,300 Net cash flows from operating activities 533,300

Cash Flows from Investing Activities

Purchase of equipment $(100,000)

Sale of 10% interest in subsidiary 72,700 Net cash flows from investing activities (27,300)

Cash Flows from Financing Activities

Cash paid on longterm note $(300,000)

Payment of cash dividends majority (200,000)

Payment of cash dividends minority (10,000)

Net cash flows from financing activities (510,000)

Decrease in cash for 2004 (4,000)

Cash on hand January 1, 2004 50,500Cash on hand December 31, 2004 $ 46,500Solution P8-14 (continued)

Poff Corporation and Subsidiary

Working Papers for the Statement of Cash Flows (Indirect Method)


| | Reconciling Items |Cash Flows|Cash Flows|Cash Flows

| Year's | | from | Investing| Financing

| Change | Debit Credit |Operations|Activities|Activities | | | | | |

Asset Changes | | | | | |

Cash | (4,000)| | | | |

Accounts receivablenet | (2,500)|e 2,500| | | |

Inventories | 130,000 | |k 130,000| | |

Prepaid expenses | (20,000)|l 20,000| | | |

Equipment | 90,000 |h 10,000|g 100,000| | |

Accumulated depreciation|(498,000)|f 500,000|h 2,000| | |

Land and buildings | 0 | | | | |

Accumulated depreciation| (28,000)|f 28,000| | | |

Total asset changes |(332,500)| | | | |

| | | | | |

Changes in Equities | | | | | |

Accounts payable |(203,500)| |i 203,500| | |

Dividends payable | 0 | | | | |

Longterm note payable |(300,000)| |j 300,000| | |

Common stock | 0 | | | | |

Retained earnings | 100,000 |a 300,000|c 200,000| | |

Minority interest 20% | 71,000 |b 22,000|d 10,000| | |

| |h 59,000| | | |

Changes in equities |(332,500)| | | | |

| | | | |

Consolidated net income | |a 300,000| 300,000 | |

Minority interest expense | |b 22,000| 22,000 | |

Purchase of equipment |g 100,000| | | (100,000)|

Depreciationequipment | | | | |

and buildings | |f 528,000| 528,000 | |

Gainsale of 10% subsidiary | | | | |

interest |h 5,700| | (5,700)| |

Decrease in accounts receivable | |e 2,500| 2,500 | |

Increase in inventories |k 130,000| | (130,000)| |

Decrease in prepaid expenses | |l 20,000| 20,000 | |

Decrease in accounts payable |i 203,500| | (203,500)| |

Cash paid on longterm note |j 300,000| | | | (300,000)

Payment of dividendsmajority |c 200,000| | | | (200,000)

Payment of dividendsminority |d 10,000| | | | (10,000)

Sale of 10% interest in subsidiary| |h 72,700| | 72,700 | |1,890,700|1,890,700| | |

| 533,300 | (27,300)| (510,000)

Cash decrease for 2004 = $533,300 $27,300 $510,000 = $(4,000).

b. woods chapter 8

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