Chap 004

Chapter 04 - Consolidation of Wholly Owned Subsidiaries
CHAPTER 4
CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
ANSWERS TO QUESTIONS
Q4-1 An adjusting entry is recorded on the company's books and causes the balances
reported by the company to change. Eliminating entries, on the other hand, are not
recorded on the books of the companies. Instead, they are entered in the consolidation
workpaper so that when the amounts included in the eliminating entries are added to, or
deducted from, the balances reported by the individual companies, the appropriate
balances for the consolidated entity are reported.
Q4-2 The differential represents the difference between the acuisition!date fair value
of the acuiree and its book value.
Q4-3 A company must acuire a subsidiary at a price eual to the subsidiary"s fair
value, and that subsidiary must have a total acuisition!date fair value less than its book
value.
Q4-4 Each of the stockholders' euity accounts of the subsidiary is eliminated in the
consolidation process. Thus, none of the balances is included in the stockholders' euity
accounts of the consolidated entity. That portion of the stockholders' euity claim
assigned to the noncontrolling shareholders is reported indirectly in the balance
assigned to the noncontrolling shareholders.
Q4-5 #urrent consolidation standards reuire recognition of the fair value of the
subsidiary's individual assets and liabilities at the date of acuisition. At least some
portion of the book value would not be included if the fair value of a particular asset or
liability was less than book value.
Q4-6 $ne hundred percent of the fair value of the subsidiary"s assets and liabilities at
the date of acuisition should be included. The type of asset or liability will determine
whether a change in its value will be recogni%ed following the date of acuisition.
Q4-7 &sing a clearing account can reduce the chance of error in preparing
consolidated statements. The number of accounts reuiring adjustment for the difference
between book value and fair value at the date of acuisition may be very large. 'ather
than including all such adjustments along with other eliminations in a single eliminating
entry, it is often easier to place the unamorti%ed balance in a differential clearing account
and then use one or more subseuent entries to assign the clearing account balance to
the appropriate individual accounts or account groups.
Q4-8 The differential account is a clearing account. Each time consolidated statements
are prepared, the balance in the investment account is eliminated and the unamorti%ed
portion of the differential is entered in the clearing account. It then is assigned to the
appropriate asset and liability accounts. This same process is followed each time
consolidated statements are prepared. The eliminating entries do not actually remove
the balance in the investment account from the parent's books( thus, the differential
continues to be a part of the investment account balance until fully amorti%ed.
4-1
Q4-9 The investment account in the financial statements of the parent company shows
its investment in the subsidiary as a single total and therefore does not provide
information on the individual assets and liabilities held by the subsidiary, nor their relative
values. The e)istence of a large differential indicates the parent paid well over book
value to acuire ownership of the subsidiary. *hen the differential is assigned to
identifiable assets or liabilities of the subsidiary, both the consolidated balance sheet and
consolidated income statement are likely to provide information not available in the
financial statements of the individual companies. The consolidated statements are likely
to provide a better picture of the assets actually being used and the resulting income
statement charges that should be reported.
Q4-10 Additional entries are needed to eliminate all income statement and retained
earnings statement effects of intercorporate ownership and any transfers of goods and
services between related companies.
Q4-11 +eparate parts of the consolidation workpaper are used to develop the
consolidated income statement, retained earnings statement, and balance sheet. All
eliminating entries needed to complete the entire workpaper normally are entered before
any of the three statements are prepared. The income statement portion of the
workpaper is completed first so that net income can be carried forward to the retained
earnings statement portion of the workpaper. *hen the retained earnings portion is
completed, the ending balances are carried forward and entered in the consolidated
balance sheet portion of the workpaper.
Q4-12 ,one of the dividends declared by the subsidiary are included in the
consolidated retained earnings statement. Those which are paid to the parent have not
gone outside the consolidated entity and therefore must be eliminated in preparing the
consolidated statements. Those paid to noncontrolling shareholders are treated as a
reduction in the net assets assigned to noncontrolling interest and also must be
eliminated.
Q4-13 #onsolidated net income is eual to the parent"s income from its own
operations, e)cluding any investment income from consolidated subsidiaries, plus the
income of each of the consolidated subsidiaries, adjusted for any differential write!off.
Q4-14 #onsolidated net income includes -.. percent of the revenues and e)penses of
the individual consolidating companies arising from transactions with unaffiliated
companies.
Q4-15 #onsolidated retained earnings is defined in current accounting practice as that
portion of the undistributed earnings of the consolidated entity accruing to the parent
company shareholders.
Q4-16 #onsolidated retained earnings at the end of the period is eual to the beginning
consolidated retained earnings balance plus consolidated net income attributable to the
controlling interest, less consolidated dividends.
Q4-17 The retained earnings statement shows the increase or decrease in retained
earnings during the period. Thus, income for the period is added to the beginning
balance and dividends are deducted in deriving the ending balance in retained earnings.
/ecause the consolidation workpaper includes the retained earnings statement, the
beginning retained earnings balance must be entered in the workpaper.
4-2
Q4-18 An additional eliminating entry normally must be entered in the workpaper to
e)pense an appropriate portion of the amount assigned to buildings and euipment.
,ormally, depreciation e)pense is debited and accumulated depreciation is credited.
Q4-19 The differential is simply a clearing account used in the consolidation process. If
the differential arises because the fair value of land held by the subsidiary is greater than
book value, the amount assigned to the differential will remain constant so long as the
subsidiary continues to hold the land. *hen the differential arises because the fair value
of depreciable or amorti%able assets is greater than book value, the amount debited to
the differential account each period will decrease as the parent amorti%es an appropriate
portion of the differential against investment income.
Q4-20 0ush!down accounting occurs when the assets and liabilities of the subsidiary
are revalued on the subsidiary's books as a result of the purchase of shares by the
parent company. The basis of accountability that the parent company would use in
accounting for its investment in the various assets and liabilities is used to revalue the
subsidiary's assets and liabilities( thereby pushing down the parent's basis of
accountability onto the books of the subsidiary.
Q4-21 0ush!down accounting is considered appropriate when a subsidiary is
substantially wholly owned by the parent.
Q4-22 *hen the assets and liabilities of the subsidiary are revalued at the date of
acuisition there will no longer be a differential. The parent's portion of the revised
carrying value of the net assets on the books of the subsidiary will agree with the
balance in the investment account reported by the parent.
4-3
SOLUTIONS TO CASES
C4-1 N! "#$ C#%&#'(!)*(#% P$#+&&
After the financial statements of each of the individual companies are prepared in
accordance with generally accepted accounting principles, consolidated financial
statements must be prepared for the economic entity as a whole. The individual
companies generally record transactions with other subsidiaries on the same basis as
transactions with unrelated enterprises. In preparing consolidated financial statements,
the effects of all transactions with related companies must be removed, just as all
transactions within a single company must be removed in preparing financial statements
for that individual company. It therefore is necessary to prepare a consolidation
workpaper and to enter a number of special journal entries in the workpaper to remove
the effects of the intercorporate transactions. The parent company also reports an
investment in each of the subsidiary companies and investment income or loss in its
financial statements. Each of these accounts must be eliminated as well as the
stockholders' euity accounts of the subsidiaries. The latter must be eliminated because
only the parent's ownership is held by parties outside the consolidated entity.
4-4
C4-2 A++#,%* P$&%*)*(#%
1E1$
To2 #hief Accountant
0rime #ompany
3rom2 , Accounting +taff
'e2 #ombining /roadly 4iversified /alance +heet Accounts
1any manufacturing and merchandising enterprises e)cluded finance, insurance, real
estate, leasing, and perhaps other types of subsidiaries from consolidation prior to -567
on the basis of 8nonhomogeneous9 operations. #ompanies generally argued that the
accounts of these companies were dissimilar in nature and combining them in the
consolidated financial statements would mislead investors. FASB 94 specifically
eliminated the e)ception for nonhomogeneous operations. :FASB 94, 0ar. 5; FASB 160
affirms the reuirement for consolidating entities in which a controlling financial interest
is held.
0rime #ompany controls companies in very different industries and combining the
accounts of its subsidiaries may lead to confusion by some investors( however, it may be
eually confusing to provide detailed listings of assets and liabilities by industry or other
breakdowns in the consolidated balance sheet. The actual number of assets and
liabilities presented in the consolidated balance sheet must be carefully considered, but
is the decision of 0rime"s management.
It is important to recogni%e that the notes to the consolidated financial statements are
regarded as an integral part of the financial statements and 0rime #ompany is reuired
to include in its notes to the financial statements certain information on its reportable
segments :FASB 131;. /ecause of the diversity of its ownership, 0rime may wish to
provide more than the minimum disclosures specified in FASB 131. +egment
information appears to be used uite broadly by investors and permits the company to
provide sufficient detail to assist the financial statement user in gaining a better
understanding of the various operating divisions of the company.
<ou have reuested information on those situations in which it may not be appropriate to
combine similar appearing accounts of two or more subsidiaries. The following is a
partial listing of such situations2 =a> the accounts of a subsidiary should not be included
along with other subsidiaries if control of the assets and liabilities does not rest with
0rime #ompany, as when a subsidiary is in receivership( =b> while the assets and liability
accounts of the subsidiary should be combined with the parent, the euity account
balances should not( =c> negative account balances in cash or accounts receivable
should be reclassified as liabilities rather than being added to the positive
4-5
C4-2 =continued>
balances of other affiliates, and =d> assets pledged for a specific purpose and not
available for other use by the consolidated entity generally should be separately
reported.
Primary citations:
3A+/ 5?
3A+/ -@-
3A+/ -A.
Secondary sources:
A'/ B-
3A+/ -?
4-6
C4-3 C#%&#'(!)*(%- )% U%.$#"(*)/' S,/&(!()$0
1E1$
T$2 #hief Accountant
Ama%ing #hemical #orporation
3'$12 , Accounting +taff
'e2 #onsolidation of &nprofitable /oatyard
This memo is intended to provide recommendations on the presentation of the boatyard
in Ama%ing #hemical"s consolidated financial statements. Ama%ing #hemical
#orporation currently has full ownership of the boatyard and should fully consolidate the
boatyard in its financial statements. #onsolidated statements should be prepared when
a company directly or indirectly has a controlling financial interest in one or more other
companies. :ARB 511 0ar. -; This reuirement has been reaffirmed by FASB 160.
0rior to the issuance of FASB 94, Ama%ing #hemical may have justified e)cluding the
boatyard from consolidation based on the differences in operating characteristics
between the subsidiary and the parent company( however, FASB 94 specifically deleted
the nonhomogeneity e)clusion :FASB 94, 0ar. 5;. Thus, Ama%ing #hemical appears to
be following generally accepted accounting procedures in fully consolidating the
boatyard in its financial statements and should continue to do so.
The operations of the boatyard appear to be distinct from the other operations of the
parent company and its losses appear to be sufficient to establish it as a reportable
segment :FASB 131, 0ar. -. and -6;. *hile the operating losses of the boatyard may
not be evident in analy%ing the consolidated income statement, a review of the notes to
the consolidated statements should provide adeuate disclosure of its operations as a
reportable segment. The financial statements for the current period should contain these
disclosures and if prior period statements have not included the boatyard as a reportable
segment it may be necessary to restate those statements.
3ailure of the president of Ama%ing #hemical to receive approval by the board of
directors for the purchase of the boatyard and his subseuent actions to keep
information about its operations from the board members appears to be a serious breach
of ethics. These actions by the president should immediately be brought to the attention
of the board of directors for appropriate action by the board.
Primary citations:
A'/ B-, 0ar. -
3A+/ 5?, 0ar. 5
3A+/ -@-, 0ar. -. and -6
3A+/ -A.
4-7
C4-4 A&&(-%(%- )% A+2,(&(*(#% D(""$%*()'
It may be difficult to determine the amount of the differential to be assigned to the
manufacturing facilities of /all #orporation. The euipment is relatively old and may be
in varying states of repair or operating condition. +ome units may be technologically
obsolete or of little value because production needs have changed. The CA..,...
estimated fair value of net assets therefore may be difficult to document and even more
difficult to assign to specific assets and liabilities.
Inventories should be compared to sales to determine if /all has e)cess balances on
hand. 3actors such as the degree of salability, physical condition, and e)pected sales
prices should be e)amined as well in determining the portion of the differential to be
assigned to inventory. The DI3$ inventory balances are likely to be below fair value
while the 3I3$ balances may be relatively close to fair value. The amount of differential
assigned to inventory will be significantly affected by the rate of change in inventory
costs since the DI3$ inventory method was adopted and the relative magnitude of
inventory on hand under each method.
,o mention is made of patents or other intangible assets developed by /all #orporation.
*hile /all #orporation could not record as assets its e)penditures on research and
development, the buyer should recogni%e all tangible and intangible assets at fair value
before goodwill is computed. Eoodwill normally is measured as the e)cess of the sum of
the consideration given in the acuisition and the fair value of the noncontrolling interest
over the fair value of the identifiable net assets of the acuired company. Timber must
evaluate the fair value of /all as a whole and consider the fair value of the euity interest
in /all that it is not acuiring.
4-
C4-5 N-)*(3 R*)(%! E)$%(%-&
,et assets of the subsidiary increase when positive earnings results occur and decrease
when negative results occur. A negative retained earnings balance indicates that the
other stockholders' euity balances of the subsidiary e)ceed the reported net assets of
the subsidiary.
a. The negative retained earnings balance of the subsidiary is eliminated in the
consolidation process and does not affect the dollar amounts reported in the
consolidated stockholders' euity accounts.
b. The consolidation process does not change in any substantive manner. 'ather than
debiting retained earnings in the entry to eliminate the stockholders' euity balances of
the subsidiary in the consolidation workpaper, the account must be credited.
c. Eoodwill is recorded whenever the fair value of the acuired company as a whole, as
evidenced by the fair value of the consideration given in the acuisition and the fair value
of the noncontrolling interest, e)ceeds the fair value of the net identifiable assets
acuired. In this case it is not known whether the fair value is above or below book
value. +loan #ompany recorded losses in prior periods and may have written down all
assets that had decreased in value. $n the other hand, management may have been
reluctant to recogni%e such losses in order to avoid reducing earnings even further. In
the e)treme, it may even have sold all assets that had appreciated in value. 1any
factors, including the future earning power of the company, will affect the purchase price
and it is therefore difficult to determine whether goodwill will be recorded in a situation
such as this.
4-!
C4-6 B)')%+ S4* R.#$*(%- I&&,&
a. &nder the first two alternatives, the cars and associated debt would appear on
#rumple's consolidated balance sheet. In the first case the debt is recorded directly by
#rumple. In the second case, the leasing subsidiary should be fully consolidated.
Although in economic substance there may be little difference between creating a
leasing subsidiary and creating a trust to accomplish the same goals, consolidation of a
trust generally has not been reuired under generally accepted accounting procedures.
Fowever, the recent issuance of FASB 160 changes the definition of a subsidiary to
include trusts. Although the 3A+/ is still grappling with specifically what entities to
include in consolidation, it now seems unlikely that a trust in which another company has
a controlling financial interest can escape being included in the consolidated financial
statements. If #rumple has the capability to name the directors of the trust and to
administer its activities, the activities of the trust may be carried out to benefit #rumple in
virtually the same manner as an operating corporate affiliate. The situation presented
provides an opportunity to think about the concept of control and the use of
nontraditional organi%ation structures in carrying out the business activities of a
company.
b. #rumple apparently has not considered selling additional common or preferred
shares. The sale of additional shares or use of convertible securities would be one set of
options to consider. If #rumple is willing to lease the automobiles, other leasing
companies or automobile manufacturers may be interested in participating. If the
availability of rental cars is considered important in the economic development of the
states into which #rumple intends to e)pand, the company may be able to negotiate low
cost loans or partially forgivable loans in acuiring the facilities and automobiles needed
for e)pansion.
c. +ome individuals may focus on the fact that #rumple will not get any residual
amounts if the trust is dissolved. Fowever, through management charges and selection
of lease rates, #rumple is likely to be able to leave as large or small a balance in the
trust as it wishes. +tudents may wish to look at the financial statements of one or more
leasing companies in arriving at their recommendation=s>.
3rom a financial reporting perspective, all three alternatives now should be reported in
essentially the same manner in the consolidated financial statements. Thus, the financial
reporting aspects of the three alternatives have become irrelevant. Fowever, even when
different alternatives lead to different reporting treatments, the choice of an alternative
should be based on economic considerations rather than on the financial reporting
effects. Even though the three financing alternatives #rumple is considering are reported
in the same manner, they each may have different legal, ta), and economic aspects that
should be considered by #rumple"s management.
4-10
C4-7 S,/&(!()$0 O5%$&4(.6 A7R C#$.#$)*(#% )%! I%*$%)*(#%)' L)&
a. =-> Airline service
=G> American Airlines, Inc.
=@> 3ort *orth, Te)as
=?> 4elaware
=B> 4elaware
=A> The ,ew <ork +tock E)change
=7> G.
=6> All of A1'"s subsidiaries are wholly owned e)cept several subsidiaries of
American Airlines.
b. =-> International Dease 3inance #orporation leases aircraft to airlines.
=G> AIE #apital #orporation and ,ational &nion 3ire Insurance #ompany of
0ittsburgh, 0ennsylvania are the direct owners of International Dease.
=@> Dos Angeles, #alifornia
=?> #alifornia
=B> International Dease"s common stock is not publicly traded because the company
is an indirect wholly owned subsidiary of American International Eroup.
=A> American International Eroup, Inc., is the parent of the consolidated group.
American International is a holding company with businesses that include
insurance, and related products, financial services, and asset management.
4-11
SOLUTIONS TO E8ERCISES
E4-1 7,'*(.'-C4#(+ Q,&*(#%& #% C#%&#'(!)*(#% P$#+&&
-. c
G. d :AI#0A Adapted;
@. d
?. b
B. a
E4-2 7,'*(.'-C4#(+ Q,&*(#%& #% C#%&#'(!)*(#% 9AICPA A!).*!:
-. c
G. a
@. d
?. c C?..,... H C-,7..,... ! C-,@..,...
E4-3 B)&(+ E'(;(%)*(#% E%*$0
#ommon +tock I /roadway #orporation G..,...
Additional 0aid!In #apital @..,...
'etained Earnings -..,...
Investment in /roadway #ommon +tock A..,...
4-12
E4-4 E'(;(%)*(%- E%*$(& 5(*4 D(""$%*()'
a. Eliminating entries2
E=-> #ommon +tock I /rown #ompany G.,...
'etained Earnings @7,...
4ifferential ?@,...
Investment in /rown #ompany +tock -..,...
#omputation of differential
3air value of consideration given C-..,...
/ook value of /rown's assets C6B,...
/ook value of /rown's liabilities =G6,...>
,et book value =B7,...>
4ifferential C ?@,...
E=G> Inventory B,...
/uildings and Euipment =net> G.,...
Eoodwill -6,...
4ifferential ?@,...
b. Journal entries used to record transactions, adjust account balances, and close
income and revenue accounts at the end of the period are recorded in the
company's books and change the reported balances. $n the other hand,
eliminating entries are entered only in the consolidation workpaper to facilitate the
preparation of consolidated financial statements. As a result, they do not change
the balances recorded in the company's accounts and must be reentered each time
a consolidation workpaper is prepared.
4-13
E4-5 B)')%+ S4* C#%&#'(!)*(#%
Eliminating entries2
E=-> #ommon +tock I Thorne #orporation -G.,...
'etained Earnings G?.,...
4ifferential @B,...
Investment in Thorne #orporation +tock @5B,...
Eliminate investment balance.
#omputation of differential
3air value of consideration given C@5B,...
/ook value of Thorne's assets CA?.,...
/ook value of Thorne's liabilities =G6.,...>
,et book value =@A.,...>
4ifferential C @B,...
E=G> Inventory @A,...
Eoodwill -5,...
/uildings =net> G.,...
4ifferential @B,...
Assign differential.
4-14
E4-6 A+2,(&(*(#% 5(*4 D(""$%*()'
a. Eoodwill is CA.,..., computed as follows2
/ook value of #onger's net assets2
#ommon stock outstanding C 6.,...
'etained earnings -@.,... CG-.,...
3air value increment2
Dand =C-..,... ! C6.,... C G.,...
/uildings =C?..,... ! CGG.,...> -6.,... G..,...
3air value of net assets C?-.,...
3air value of consideration given =?7.,...>
Eoodwill C A.,...
b. Eliminating entries needed2
E=-> #ommon +tock I #onger #orporation 6.,...
'etained Earnings -@.,...
4ifferential GA.,...
Investment in #onger #orporation +tock ?7.,...
Eliminate investment balance2
CGA.,... H C?7.,... ! C6.,... ! C-@.,...
E=G> Dand G.,...
/uildings -6.,...
Eoodwill A.,...
4ifferential GA.,...
4-15
E4-7 B)')%+ S4* W#$<.).$
a. Eliminating entry2

E=-> #ommon +tock I 3aith #orporation A.,...
'etained Earnings 5.,...
Investment in 3aith #orporation +tock -B.,...
b. /lank #orporation and 3aith #orporation
#onsolidated /alance +heet *orkpaper
4ecember @-, G.KG
/lank 3aith Eliminations #onsol!
Item #orp. #orp. 4ebit L #redit Idated
#ash AB,... -6,... 6@,...
Accounts 'eceivable 67,... @7,... -G?,...
Inventory --.,... A.,... -7.,...
/uildings and Euipment
=net> GG.,... -B.,... @7.,...
Investment in 3aith
#orporation +tock -B.,... =->-B.,... L
Total 4ebits A@G,... GAB,... 7?7,...
Accounts 0ayable 5G,... @B,... -G7,...
,otes 0ayable -B.,... 6.,... G@.,...
#ommon +tock
/lank #orporation -..,... -..,...
3aith #orporation A.,... =-> A.,...
'etained Earnings G5.,... 5.,... =-> 5.,... G5.,...
Total #redits A@G,... GAB,... -B.,... -B.,... 7?7,...
4-16
E4-8 B)')%+ S4* W#$<.).$ 5(*4 D(""$%*()'

E=-> #ommon +tock I 3aith #orporation A.,...
'etained Earnings 5.,...
4ifferential @5,...
Investment in 3aith #orporation +tock -65,...
E=G> Inventory G?,...
/uildings and Euipment =net> -B,...
4ifferential @5,...
Assign 4ifferential.
b. /lank #orporation and 3aith #orporation
4ecember @-, G.KG
/lank 3aith Eliminations #onsol!
Item #orp. #orp. 4ebit #redit idated
#ash GA,... -6,... ??,...
Accounts 'eceivable 67,... @7,... -G?,...
Inventory --.,... A.,... =G> G?,... -5?,...
/uildings and Euipment
=net> GG.,... -B.,... =G> -B,... @6B,...
Investment in 3aith
#orporation +tock -65,... =->-65,...
4ifferential =-> @5,... =G> @5,...
Total 4ebits A@G,... GAB,... 7?7,...
Accounts 0ayable 5G,... @B,... -G7,...
,otes 0ayable -B.,... 6.,... G@.,...
#ommon +tock
/lank #orporation -..,... -..,...
3aith #orporation A.,... =-> A.,...
'etained Earnings G5.,... 5.,... =-> 5.,... G5.,...
Total #redits A@G,... GAB,... GG6,... GG6,... 7?7,...
4-17
E4-9 W#$<.).$ "#$ W4#''0 O5%! S,/&(!()$0
a. Eliminating entry2
E=-> #ommon +tock I 0remium /uilders -?.,...
'etained Earnings -.,...
Inventory 7,...
/uildings and Euipment =net> -G,...
#ash and 'eceivables G,...
Investment in 0remium /uilders +tock -A7,...
b. Eold Enterprises and 0remium /uilders
January -, G.KB
Eold
Enter! 0remium Eliminations #onsol!
Item prises /uilders 4ebit #redit idated
#ash and 'eceivables 6.,... @.,... =-> G,... -.6,...
Inventory -B.,... @B.,... =-> 7,... B.7,...
/uildings and
Euipment =net> ?@.,... 6.,... =-> -G,... BGG,...
Investment in
0remium +tock -A7,... =->-A7,...
Total 4ebits 6G7,... ?A.,... -,-@7,...
#urrent Diabilities -..,... --.,... G-.,...
Dong!Term 4ebt ?..,... G..,... A..,...
#ommon +tock
Eold G..,... G..,...
0remium -?.,... =->-?.,...
'etained Earnings -G7,... -.,... =-> -.,... LLLLLLLL -G7,...
Total #redits 6G7,... ?A.,... -A5,... -A5,... -,-@7,...
c. Eold Enterprises and +ubsidiary
#onsolidated /alance +heet
January -, G.KB
#ash and 'eceivables C -.6,... #urrent Diabilities C G-.,...
Inventory B.7,... Dong!Term 4ebt A..,...
/uildings and #ommon +tock CG..,...
Euipment =net> BGG,... 'etained Earnings -G7,... @G7,...
Total Diabilities M
Total Assets C-,-@7,... +tockholders' Euity C-,-@7,...
4-1
E4-10 C#;.,*)*(#% #" C#%&#'(!)*! B)')%+&
a. Inventory C -?.,...
b. Dand C A.,...
c. /uildings and Euipment C BB.,...
d. Eoodwill2 3air value of consideration given C B7A,...
/ook value of net assets
at acuisition C?B.,...
3air value increment for2
Inventory G.,...
Dand =-.,...>
/uildings and euipment 7.,...
3air value of net assets
at acuisition =B@.,...>
/alance assigned to goodwill C ?A,...
e. Investment in Astor #orporation2 ,othing would be reported( the balance in the
investment account is eliminated.
4-1!
E4-11 7,'*(.'-C4#(+ Q,&*(#%& #% B)')%+ S4* C#%&#'(!)*(#%
-. d CG-B,... H C-@.,... N C6B,...
G. b CG@,... H C-56,... I =C?.B,... ! CGAB,... N C-B,... N CG.,...>
@. c C-,-.5,... H Total Assets of Top #orp. C 6??,...
Dess2 Investment in +un #orp. =-56,...>
/ook value of assets of Top #orp. C A?A,...
/ook value of assets of +un #orp. ?.B,...
Total book value C-,.B-,...
0ayment in e)cess of book value
=C-56,... ! C-?.,...> B6,...
Total assets reported C-,-.5,...
?. c C7.-,B.. H =CA-,B.. N C5B,... N CG6.,...> N =CG6,... N C@7,...
N CG..,...>
B. d CGB7,B.. H The amount reported by Top #orporation
A. a C?.7,B.. H The amount reported by Top #orporation
4-20
E4-12 C#%&#'(!)*(#% E%*$(& "#$ W4#''0 O5%! S,/&(!()$0
a. Journal entries recorded by Trim #orporation2
=-> Investment in 'ound #orporation +tock ?..,...
#ash ?..,...
'ecord investment.
=G> #ash GB,...
Investment in 'ound #orporation +tock GB,...
'ecord dividends from 'ound #orporation.
=@> Investment in 'ound #orporation +tock 6.,...
Income from +ubsidiary 6.,...
'ecord euity!method income.
b. Eliminating entries2
E=-> Income from +ubsidiary 6.,...
4ividends 4eclared GB,...
Investment in 'ound #orporation +tock BB,...
Eliminate income from subsidiary.
E=G> #ommon +tock O 'ound #orporation -G.,...
'etained Earnings, January - G6.,...
Investment in 'ound #orporation +tock ?..,...
Eliminate beginning investment balance.
4-21
E4-13 B)&(+ C#%&#'(!)*(#% E%*$(& "#$ F,''0 O5%! S,/&(!()$0
a. Journal entries recorded by 0urple #ompany2
=-> Investment in Amber #orporation +tock B..,...
#ash B..,...
'ecord investment.
=G> #ash G.,...
Investment in Amber #orporation +tock G.,...
'ecord dividends from Amber #orporation.
=@> Investment in Amber #orporation +tock B.,...
Income from +ubsidiary B.,...
E=-> Income from +ubsidiary B.,...
4ividends 4eclared G.,...
Investment in Amber #orporation +tock @.,...
E=G> #ommon +tock O Amber #orporation @..,...
'etained Earnings, January - G..,...
Investment in Amber #orporation +tock B..,...
4-22
E4-14 W4#''0 O5%! S,/&(!()$0 5(*4 D(""$%*()'
a. Journal entries recorded by *inston #orporation2
=-> Investment in #anton #orporation +tock -76,...
#ash -76,...
'ecord investment.
=G> #ash -G,...
Investment in #anton #orporation +tock -G,...
'ecord dividends from #anton #orporation.
=@> Investment in #anton #orporation +tock @.,...
Income from +ubsidiary @.,...
=?> Income from +ubsidiary ?,...
Investment in #anton #orporation +tock ?,...
Amorti%e differential assigned to euipment2
C?,... H CG6,... P 7 years
b. Eliminating entries 4ecember @-, G.K@2
E=-> Income from +ubsidiary GA,...
4ividends 4eclared -G,...
Investment in #anton #orporation +tock -?,...
E=G> #ommon +tock O #anton #orporation A.,...
'etained Earnings, January - 5.,...
4ifferential G6,...
Investment in #anton #orporation +tock -76,...
E=@> Euipment G6,...
4ifferential G6,...
Assign beginning differential.
E=?> 4epreciation E)pense ?,...
Accumulated 4epreciation ?,...
Amorti%e differential related to euipment.
4-23
E4-15 B)&(+ C#%&#'(!)*(#% W#$<.).$
E=-> Income from +ubsidiary @.,...
4ividends 4eclared -.,...
Investment in +haw #orporation +tock G.,...
E=G> #ommon +tock O +haw #orporation -..,...
'etained Earnings, January - B.,...
Investment in +haw #orporation +tock -B.,...
4-24
E4-15 =continued>
b. /lake #orporation and +haw #orporation
#onsolidation *orkpaper
4ecember @-, G.K@
/lake +haw Eliminations #onsol!
+ales G..,... -G.,... @G.,...
Income from +ubsidiary @.,... =-> @.,...
#redits G@.,... -G.,... @G.,...
4epreciation E)pense GB,... -B,... ?.,...
$ther E)penses -.B,... 7B,... -6.,...
4ebits =-@.,...> =5.,...> =GG.,...>
Income, carry forward -..,... @.,... @.,... -..,...
'et. Earnings, Jan. - G@.,... B.,... =G> B.,... G@.,...
Income, from above -..,... @.,... @.,... -..,...
@@.,... 6.,... @@.,...
4ividends 4eclared =?.,...> =-.,...> =-> -.,... =?.,...>
'et. Earnings, 4ec. @-,
carry forward G5.,... 7.,... 6.,... -.,... G5.,...
#urrent Assets -?B,... -.B,... GB.,...
4epreciable Assets @GB,... GGB,... BB.,...
Investment in +haw
#orporation +tock -7.,... =-> G.,...
=G>-B.,...
4ebits A?.,... @@.,... 6..,...
#urrent Diabilities B.,... ?.,... 5.,...
Dong!Term 4ebt -..,... -G.,... GG.,...
#ommon +tock
/lake #orporation G..,... G..,...
+haw #orporation -..,... =G>-..,...
'etained Earnings,
from above G5.,... 7.,... 6.,... -.,... G5.,...
#redits A?.,... @@.,... -6.,... -6.,... 6..,...
4-25
E4-16 B)&(+ C#%&#'(!)*(#% W#$<.).$ "#$ S+#%! Y)$
E=-> Income from +ubsidiary @B,...
4ividends 4eclared -B,...
Investment in +haw #orporation +tock G.,...
E=G> #ommon +tock O +haw #orporation -..,...
Investment in +haw #orporation +tock -7.,...
4-26
E4-16 =continued>
b. /lake #orporation and +haw #orporation
4ecember @-, G.K?
/lake +haw Eliminations #onsol!
+ales G@.,... -?.,... @7.,...
Income from +ubsidiary @B,... =-> @B,...
#redits GAB,... -?.,... @7.,...
$ther E)penses -B.,... 5.,... G?.,...
4ebits =-7B,...> =-.B,...> =G6.,...>
Income, carry forward 5.,... @B,... @B,... 5.,...
'et. Earnings, Jan. - G5.,... 7.,... =G> 7.,... G5.,...
Income, from above 5.,... @B,... @B,... 5.,...
@6.,... -.B,... @6.,...
4ividends 4eclared =B.,...> =-B,...> =-> -B,... =B.,...>
#arry forward @@.,... 5.,... -.B,... -B,... @@.,...
#urrent Assets G-.,... -B.,... @A.,...
4epreciable Assets @..,... G-.,... B-.,...
Investment in +haw
#orporation +tock -5.,... =-> G.,...
=G>-7.,...
4ebits 7..,... @A.,... 67.,...
#urrent Diabilities 7.,... B.,... -G.,...
Dong!Term 4ebt -..,... -G.,... GG.,...
#ommon +tock
/lake #orporation G..,... G..,...
+haw #orporation -..,... =G>-..,...
'etained Earnings,
from above @@.,... 5.,... -.B,... -B,... @@.,...
#redits 7..,... @A.,... G.B,... G.B,... 67.,...
4-27
E4-17 C#%&#'(!)*(#% W#$<.).$ 5(*4 D(""$%*()'
E=-> Income from +ubsidiary GB,...
Investment in +hort #ompany +tock -B,...
E=G> #ommon +tock O +hort #ompany -..,...
'etained Earnings, January - B.,...
4ifferential @.,...
Investment in +hort #ompany +tock -6.,...
E=@> 4epreciable Assets =net> @.,...
4ifferential @.,...
E=?> 4epreciation E)pense B,...
4epreciable Assets =net> B,...
Amorti%e differential.
4-2
E4-17 =continued>
b. Qennelly #orporation and +hort #ompany
4ecember @-, G.KB
Qennelly +hort Eliminations #onsol!
Item #orp. #o. 4ebit #redit idated
+ales G..,... -G.,... @G.,...
Income from +ubsidiary GB,... =-> GB,...
#redits GGB,... -G.,... @G.,...
4epreciation E)pense GB,... -B,... =?> B,... ?B,...
$ther E)penses -.B,... 7B,... -6.,...
4ebits =-@.,...> =5.,...> =GGB,...>
Income, carry forward 5B,... @.,... @.,... 5B,...
'et. Earnings, Jan. - G@.,... B.,... =G> B.,... G@.,...
Income, from above 5B,... @.,... @.,... 5B,...
@GB,... 6.,... @GB,...
4ividends 4eclared =?.,...> =-.,...> =-> -.,... =?.,...>
carry forward G6B,... 7.,... 6.,... -.,... G6B,...
#ash -B,... B,... G.,...
Accounts 'eceivable @.,... ?.,... 7.,...
Inventory 7.,... A.,... -@.,...
4epreciable Assets =net> @GB,... GGB,... =@> @.,... =?> B,... B7B,...
Investment in +hort
#ompany +tock -5B,... =-> -B,...
=G> -6.,...
4ifferential =G> @.,... =@> @.,...
4ebits A@B,... @@.,... 75B,...
Accounts 0ayable B.,... ?.,... 5.,...
,otes 0ayable -..,... -G.,... GG.,...
#ommon +tock
Qennelly #orporation G..,... G..,...
+hort #ompany -..,... =G>-..,...
'etained Earnings,
from above G6B,... 7.,... 6.,... -.,... G6B,...
#redits A@B,... @@.,... G?.,... G?.,... 75B,...
4-2!
E4-18 C#%&#'(!)*(#% W#$<.).$ "#$ S,/&(!()$0
E=-> Income from +ubsidiary @B,...
4ividends 4eclared -B,...
Investment in Erowth #ompany +tock G.,...
E=G> #ommon +tock O Erowth #ompany -..,...
Investment in Erowth #ompany +tock -7.,...
4-30
E4-18 =continued>
b. Dand #orporation and Erowth #ompany
4ecember @-, G.K?
Dand Erowth Eliminations #onsol!
+ales G@.,... -?.,... @7.,...
Income from +ubsidiary @B,... =-> @B,...
#redits GAB,... -?.,... @7.,...
$ther E)penses -B.,... 5.,... G?.,...
4ebits =-7B,...> =-.B,...> LLLLLLLLL LLLLLLLL =G6.,...>
Income, carry forward 5.,... @B,... @B,... 5.,...
'et. Earnings, Jan. - @-6,... 7.,... =G> 7.,... @-6,...
Income, from above 5.,... @B,... @B,... 5.,...
?.6,... -.B,... ?.6,...
4ividends 4eclared =B.,...> =-B,...> LLLLLLLLL =-> -B,... =B.,...>
carry forward @B6,... 5.,... -.B,... -B,... @B6,...
#urrent Assets G@6,... -B.,... @66,...
4epreciable Assets B..,... @..,... 6..,...
Investment in Erowth
#ompany +tock -5.,... =-> G.,...
=G>-7.,...
4ebits 5G6,... ?B.,... -,-66,...
Accum. 4epreciation G..,... 5.,... G5.,...
#urrent Diabilities 7.,... B.,... -G.,...
Dong!Term 4ebt -..,... -G.,... GG.,...
#ommon +tock
Dand #orporation G..,... G..,...
Erowth #ompany -..,... =G>-..,...
'etained Earnings,
from above @B6,... 5.,... -.B,... -B,... @B6,...
#redits 5G6,... ?B.,... G.B,... G.B,... -,-66,...
4-31
E4-19 P,&4-D#5% A++#,%*(%-
a. Entry to record acuisition of Douis stock on books of Jefferson2
Investment in Douis #orporation +tock 765,...
#ash 765,...
b. Entry to record revaluation of assets on books of Douis #orporation2
Dand -B,...
/uildings B.,...
Euipment G.,...
'evaluation #apital 6B,...
c. Investment elimination entry in consolidation workpaper =no other entries needed>2
#ommon +tock I Douis #orporation G..,...
Additional 0aid!In #apital ?GB,...
'etained Earnings 75,...
'evaluation #apital 6B,...
Investment in Douis #orporation +tock 765,...
4-32
SOLUTIONS TO PROBLE7S
P4-20 A&&(-%;%* #" D(""$%*()' (% W#$<.).$
a. Teresa #orporation and +ally Enterprises
January -, G.K?
+ally
Teresa Enter! Eliminations #onsol!
Item #orp. prises 4ebit #redit idated
#ash and 'eceivables ?.,... G.,... A.,...
Inventory 5B,... ?.,... -@B,...
Dand 6.,... 5.,... -7.,...
/uildings and Euipment ?..,... G@.,... =G> -.,... A?.,...
Investment in
+ally Enterprises +tock G5.,... =->G5.,...
4ifferential =-> ?.,... =G> ?.,...
Eoodwill =G> @.,... @.,...
Total 4ebits 5.B,... @6.,... -,.@B,...
Accumulated 4epreciation -7B,... AB,... G?.,...
Accounts 0ayable A.,... -B,... 7B,...
,otes 0ayable -..,... B.,... -B.,...
#ommon +tock
Teresa #orporation @..,... @..,...
+ally Enterprises -..,... =->-..,...
'etained Earnings G7.,... -B.,... =->-B.,... G7.,...
Total #redits 5.B,... @6.,... @@.,... @@.,... -,.@B,...
b. Teresa #orporation and +ubsidiary
January -, G.K?
#ash and 'eceivables C A.,...
Inventory -@B,...
Dand -7.,...
/uildings and Euipment CA?.,...
Dess2 Accumulated 4epreciation =G?.,...> ?..,...
Eoodwill @.,...
Total Assets C75B,...
Accounts 0ayable C 7B,...
,otes 0ayable -B.,...
#ommon +tock C@..,...
'etained Earnings G7.,... B7.,...
Total Diabilities and
+tockholders' Euity C75B,...
4-33
P4-21 C#;.,*)*(#% #" C#%&#'(!)*! B)')%+&
a. Inventories =C--.,... N C-7.,...> CG6.,...
b. /uildings and Euipment =net> =C@B.,... N C@7B,...> C7GB,...
c. Investment in 4ecibel stock will be fully eliminated and will not
appear in the consolidated balance sheet.
d. Eoodwill 3air value of consideration given CG6.,...
3air value of 4ecibel's net assets2
#ash and receivables C ?.,...
Inventory -7.,...
/uildings and euipment =net> @7B,...
Accounts payable =5.,...>
,otes payable =GB.,...>
3air value of net identifiable
assets =G?B,...>
Eoodwill to be reported C @B,...
,ote2 Eoodwill on books of 4ecibel is not an identifiable asset
and therefore is not included in the computation of 4ecibel's
net identifiable assets at the date of acuisition.
e. #ommon +tock C?..,...
f. 'etained Earnings C-.B,...

4-34
P4-22 B)')%+ S4* C#%&#'(!)*(#% 9AICPA A!).*!:
#ase Inc. and 3rey Inc.
4ecember @-, G.K?
#ase 3rey Eliminations #onsol!
Item Inc. Inc. 4ebit #redit idated
#ash 6GB,... @@.,... -,-BB,...
Accounts and
$ther 'eceivables G,-?.,... 6@B,... G,57B,...
Inventory G,@-.,... -,.?B,... @,@BB,...
Dand AB.,... @..,... =G> GB.,... -,G..,...
4eprec. Assets =net> ?,B7B,... -,56.,... A,BBB,...
Investment in
3rey Inc. +tock G,A6.,... =->G,A6.,...
Dong!Term Investments
and $ther Assets 6AB,... @6B,... -,GB.,...
4ifferential =-> GB.,... =G> GB.,...
Total 4ebits -?,.?B,... ?,67B,... -A,?5.,...
Accounts 0ayable
and $ther #urrent
Diabilities G,?AB,... -,-?B,... @,A-.,...
Dong!Term 4ebt -,5..,... -,@..,... @,G..,...
#ommon +tock, CGB 0ar @,G..,... -,...,... =-> -,...,... @,G..,...
Additional 0aid!In
#apital G,-..,... -5.,... =-> -5.,... G,-..,...
'etained Earnings ?,@6.,... -,G?.,... =-> -,G?.,... LLLLLLLLL ?,@6.,...
Total #redits -?,.?B,... ?,67B,... G,5@.,... G,5@.,... -A,?5.,...
4-35
P4-23 C#%&#'(!)*! B)')%+ S4*
E=-> #ommon +tock O Dake #orporation -..,...
'etained Earnings -G.,...
4ifferential @G,...
Investment in Dake #orporation +tock GBG,...
E=G> /uildings and Euipment ?.,...
Accumulated 4epreciation 6,...
4ifferential @G,...
b. Thompson #ompany and Dake #orporation
4ecember @-, G.K@
Thompson Dake Eliminations #onsol!
Item #o. #orp. 4ebit #redit idated
#ash @.,... G.,... B.,...
Accounts 'eceivable -..,... ?.,... -?.,...
Dand A.,... B.,... --.,...
/uildings and Euipment B..,... @B.,... =G> ?.,... 65.,...
Investment in Dake
#orporation +tock GBG,... =->GBG,...
4ifferential =-> @G,... =G> @G,...
Total 4ebits 5?G,... ?A.,... -,-5.,...
Accum. 4epreciation G@.,... 7B,... =G> 6,... @-@,...
Accounts 0ayable 6.,... -.,... 5.,...
Ta)es 0ayable ?.,... 7.,... --.,...
,otes 0ayable -..,... 6B,... -6B,...
#ommon +tock G..,... -..,... =->-..,... G..,...
'etained Earnings G5G,... -G.,... =->-G.,... G5G,...
Total #redits 5?G,... ?A.,... G5G,... G5G,... -,-5.,...
4-36
P4-24 C#;.$4%&(3 P$#/';6 C#%&#'(!)*(#% (% S,/&2,%* P$(#!
a. Journal entries recorded by Thompson #ompany2
=-> #ash -G,...
Investment in Dake #orporation +tock -G,...
'ecord dividends from subsidiary.
=G> Investment in Dake #orporation +tock @G,...
Income from +ubsidiary @G,...
=@> Income from +ubsidiary ?,...
Investment in Dake #orporation +tock ?,...
Amorti%e differential2 C?.,... P -. years
E=-> Income from +ubsidiary G6,...
4ividends 4eclared -G,...
Investment in Dake #orporation +tock -A,...
E=G> #ommon +tock O Dake #orporation -..,...
'etained Earnings, January - -G.,...
4ifferential @G,...
Investment in Dake #orporation +tock GBG,...
E=@> /uildings and Euipment ?.,...
Accumulated 4epreciation 6,...
4ifferential @G,...
E=?> 4epreciation E)pense ?,...
Accumulated 4epreciation ?,...
E=B> Accounts 0ayable G,B..
Accounts 'eceivable G,B..
Eliminate intercorporate receivablePpayable.
4-37
P4-24 =continued>
c. Thompson #ompany and Dake #orporation
4ecember @-, G.K?
Thompson Dake Eliminations #onsol!
Item #o. #orp. 4ebit #redit idated
+ervice 'evenue A-.,... G?.,... 6B.,...
Income from +ubsidiary G6,... =-> G6,...
#redits A@6,... G?.,... 6B.,...
#ost of +ervices
0rovided ?7.,... -@.,... A..,...
4epreciation E)pense @B,... -6,... =?> ?,... B7,...
$ther E)penses B7,... A.,... --7,...
4ebits =BAG,...> =G.6,...> =77?,...>
Income, carry forward 7A,... @G,... @G,... 7A,...
'et. Earnings, Jan. - G5G,... -G.,... =G> -G.,... G5G,...
Income, from above 7A,... @G,... @G,... 7A,...
@A6,... -BG,... @A6,...
4ividends 4eclared =@.,...> =-G,...> =-> -G,... =@.,...>
carry forward @@6,... -?.,... -BG,... -G,... @@6,...
#ash 7?,... ?G,... --A,...
Accounts 'eceivables -@.,... B@,... =B> G,B.. -6.,B..
Dand A.,... B.,... --.,...
/uildings and Euipment B..,... @B.,... =@> ?.,... 65.,...
Investment in Dake
#orporation +tock GA6,... =-> -A,...
=G>GBG,...
4ifferential =G> @G,... =@> @G,...
4ebits -,.@G,... ?5B,... -,G5A,B..
Accum. 4epreciation GAB,... 5@,... =@> 6,...
=?> ?,... @7.,...
Accounts 0ayable 7-,... -7,... =B> G,B.. 6B,B..
Ta)es 0ayable B6,... A.,... --6,...
,otes 0ayable -..,... 6B,... -6B,...
#ommon +tock
Thompson #ompany G..,... G..,...
Dake #orporation -..,... =G>-..,...
'etained Earnings,
from above @@6,... -?.,... -BG,... -G,... @@6,...
#redits -,.@G,... ?5B,... @GA,B.. @GA,B.. -,G5A,B..
4-3
P4-25 A+2,(&(*(#% )* O*4$ *4)% F)($ =)', #" N* A&&*&
a. $wnership acuired for CG6.,...2
E=-> #ommon +tock O /est #ompany 6.,...
'etained Earnings -7B,...
4ifferential GB,...
Investment in /est #ompany +tock G6.,...
E=G> Dand G.,...
Eoodwill -G,...
Inventory 7,...
4ifferential GB,...
b. $wnership acuired for CGB-,...2
E=-> #ommon +tock O /est #ompany 6.,...
4ifferential ?,...
Investment in /est #ompany +tock GB-,...
E=G> Dand G.,...
4ifferential ?,...
Inventory 7,...
'etained Earnings -7,...
4-3!
P4-26 I%*$+#$.#$)* R+(3)/'& )%! P)0)/'&
E=-> #ommon +tock O ,ormal #ompany -B.,...
#apital in E)cess of 0ar -?.,...
4ifferential G.,...
'etained Earnings B,...
Investment in ,ormal #ompany +tock @.B,...
E=G> Eoodwill G.,...
4ifferential G.,...
E=@> /onds 0ayable B.,...
Investment in ,ormal #ompany /onds B.,...
Eliminate intercompany bonds.
E=?> Accounts 0ayable -.,...
Accounts 'eceivable -.,...
Eliminate intercompany receivablePpayable.
4-40
P4-26 =continued>
b. Qim #orporation and ,ormal #ompany
January -, G.K7
Qim ,ormal Eliminations #onsol!
Item #orp. #ompany 4ebit #redit idated
#ash 7.,... @B,... -.B,...
Accounts 'eceivable 5.,... AB,... =?> -.,... -?B,...
Inventory 6?,... 6.,... -A?,...
/uildings and Euipment ?..,... @..,... 7..,...
Investment in2
,ormal #ompany +tock @.B,... =->@.B,...
,ormal #ompany /onds B.,... =@> B.,...
4ifferential =-> G.,... =G> G.,...
Eoodwill =G> G.,... G.,...
Total 4ebits 555,... ?6.,... -,-@?,...
Accumulated 4epreciation -A.,... 7B,... G@B,...
Accounts 0ayable B.,... G.,... =?> -.,... A.,...
/onds 0ayable G..,... -..,... =@> B.,... GB.,...
#ommon +tock
Qim #orporation @..,... @..,...
,ormal #ompany -B.,... =->-B.,...
#apital in E)cess of 0ar -?.,... =->-?.,...
'etained Earnings G65,... =B,...> LLLLLLLLL =-> B,... G65,...
Total #redits 555,... ?6.,... @5.,... @5.,... -,-@?,...
c. Qim #orporation and +ubsidiary
January -, G.K7
#ash C-.B,...
Accounts 'eceivable -?B,...
Inventory -A?,...
/uildings and Euipment C7..,...
Dess2 Accumulated 4epreciation =G@B,...> ?AB,...
Eoodwill G.,...
Total Assets C655,...
Accounts 0ayable C A.,...
/onds 0ayable GB.,...
#ommon +tock C@..,...
'etained Earnings G65,... B65,...
Total Diabilities and +tockholders' Euity C655,...
4-41
P4-27 B)')%+ S4* C#%&#'(!)*(#%
a. Entry on 0rimary's books to record acuisition of +treet stock2
Investment in +treet +tock AB.,...
/onds 0ayable AB.,...
,ote2 The bonds go directly to the stockholders of +treet and are not
recorded on the books of +treet.
E=-> #ommon +tock I +treet #ompany G..,...
Additional 0aid!In #apital -@.,...
'etained Earnings -?6,...
4ifferential -7G,...
Investment in +treet +tock AB.,...
E=G> Inventory ?,...
Dand G.,...
/uildings and Euipment B.,...
0atent ?.,...
4iscount on /onds 0ayable -.,...
Eoodwill ?6,...
4ifferential -7G,...
E=@> #urrent 0ayables A,B..
'eceivables A,B..
The 3A+/ now reuires that no allowance accounts be carried forward from the
acuiree in a business combination. Fowever, because of immateriality and the short!
lived nature of the carry forward subseuent to the date of combination, the allowance in
this problem has not been offset against the receivable. If such an offset is desired, the
following elimination entry would be made2
E=?> Allowance for /ad 4ebts -,...
'eceivables -,...
4-42
P4-27 =continued>
c. 0rimary #orporation and +treet #ompany
January G, G.K6
0rimary +treet Eliminations #onsol!
Item #orp. #ompany 4ebit #redit idated
#ash -G,... 5,... G-,...
'eceivables ?-,... @-,... =@> A,B.. AB,B..
Inventory 6A,... A6,... =G> ?,... -B6,...
Investment in
+treet +tock AB.,... =->AB.,...
Dand BB,... B.,... =G> G.,... -GB,...
/uildings and Euipment 5A.,... A7.,... =G> B.,... -,A6.,...
0atent =G> ?.,... ?.,...
Eoodwill =G> ?6,... ?6,...
4iscount on
/onds 0ayable =G> -.,... -.,...
4ifferential =->-7G,... =G>-7G,...
Total Assets -,6.?,... 6G6,... G,-?7,B..
Allowance for /ad 4ebts G,... -,... @,...
Accumulated
4epreciation ?--,... GG.,... A@-,...
#urrent 0ayables @6,... G5,... =@> A,B.. A.,B..
/onds 0ayable 6B.,... -..,... 5B.,...
#ommon +tock @..,... G..,... =->G..,... @..,...
Additional
0aid!In #apital -..,... -@.,... =->-@.,... -..,...
'etained Earnings -.@,... -?6,... =->-?6,... LLLLLLLLL -.@,...
Total Diabilities
and Euity -,6.?,... 6G6,... 6G6,B.. 6G6,B.. G,-?7,B..
4-43
P4-27 =continued>
d. 0rimary #orporation and +ubsidiary
January G, G.K6
#ash C G-,...
'eceivables C AB,B..
Dess2 Allowance for /ad 4ebts =@,...> AG,B..
Inventory -B6,...
Dand -GB,...
/uildings and Euipment C-,A6.,...
Dess2 Accumulated 4epreciation =A@-,...> -,.?5,...
0atent ?.,...
Eoodwill ?6,...
Total Assets C-,B.@,B..
#urrent 0ayables C A.,B..
/onds 0ayable C 5B.,...
Dess2 4iscount on /onds 0ayable =-.,...> 5?.,...
+tockholders" Euity
#ommon +tock C @..,...
Additional 0aid!In #apital -..,...
'etained Earnings -.@,... B.@,...
Total Diabilities and
+tockholders' Euity C-,B.@,B..
4-44
P4-28 C#%&#'(!)*(#% W#$<.).$ )* E%! #" F($&* Y)$ #" O5%$&4(.
E=-> Income from +ubsidiary GG,...
4ividends 4eclared -A,...
Investment in 'oller #ompany +tock A,...
E=G> #ommon +tock O 'oller #ompany A.,...
'etained Earnings, January - ?.,...
4ifferential G6,...
Investment in 'oller #ompany +tock -G6,...
E=@> /uildings and Euipment G.,...
Eoodwill 6,...
4ifferential G6,...
E=?> 4epreciation E)pense G,...
Accumulated 4epreciation G,...
Amorti%e differential2
CG,... H CG.,... P -. years
E=B> Eoodwill Impairment Doss B,B..
Eoodwill B,B..
*rite down goodwill for impairment.
4-45
P4-28 =continued>
b. 1ill #orporation and 'oller #ompany
4ecember @-, G.K6
1ill 'oller Eliminations #onsol!
+ales GA.,... -6.,... ??.,...
Income from +ubsidiary GG,... =-> GG,...
#redits G6G,... -6.,... ??.,...
#ost of Eoods +old -GB,... --.,... G@B,...
*age E)pense ?G,... G7,... A5,...
4epreciation E)pense GB,... -.,... =?> G,... @7,...
Interest E)pense -G,... ?,... -A,...
$ther E)penses -@,B.. B,... -6,B..
Eoodwill Impairment Doss =B> B,B.. B,B..
4ebits =G-7,B..> =-BA,...> LLLLLLLL LLLLLLLL =@6-,...>
Income, carry forward A?,B.. G?,... G5,B.. B5,...
'et. Earnings, Jan. - -.G,... ?.,... =G> ?.,... -.G,...
Income, from above A?,B.. G?,... G5,B.. B5,...
-AA,B.. A?,... -A-,...
4ividends 4eclared =@.,...> =-A,...> LLLLLLLL =-> -A,... =@.,...>
carry forward -@A,B.. ?6,... A5,B.. -A,... -@-,...
#ash -5,B.. G-,... ?.,B..
Accounts 'eceivable 7.,... -G,... 6G,...
Inventory 5.,... GB,... --B,...
Dand @.,... -B,... ?B,...
/uildings and Euipment @B.,... -B.,... =@> G.,... BG.,...
Investment in 'oller
#ompany +tock -@?,... =-> A,...
=G>-G6,...
4ifferential =G> G6,... =@> G6,...
Eoodwill =@> 6,... =B> B,B.. G,B..
4ebits A5@,B.. GG@,... 6.B,...
4-46
P4-28 =continued>
Accum. 4epreciation -?B,... ?.,... =?> G,... -67,...
Accounts 0ayable ?B,... -A,... A-,...
*ages 0ayable -7,... 5,... GA,...
,otes 0ayable -B.,... B.,... G..,...
#ommon +tock
1ill #orporation G..,... G..,...
'oller #ompany A.,... =G> A.,...
'etained Earnings,
from above -@A,B.. ?6,... A5,B.. -A,... -@-,...
#redits A5@,B.. GG@,... -6B,B.. -6B,B.. 6.B,...
4-47
P4-29 C#%&#'(!)*(#% W#$<.).$ )* E%! #" S+#%! Y)$ #" O5%$&4(.
E=-> Income from +ubsidiary @?,...
Investment in 'oller #ompany +tock -?,...
E=G> #ommon +tock O 'oller #ompany A.,...
'etained Earnings, January - ?6,...
4ifferential GA,...
Investment in 'oller #ompany +tock -@?,...
E=@> /uildings and Euipment G.,...
Eoodwill G,B..
'etained Earnings, January - B,B..
4ifferential GA,...
E=?> 4epreciation E)pense G,...
Amorti%e differential2
CG,... H CG.,... P -. years
4-4
P4-29 =continued>
b. 1ill #orporation and 'oller #ompany
4ecember @-, G.K5
+ales G5.,... G..,... ?5.,...
Income from +ubsidiary @?,... LLLLLLL =->@?,...
#redits @G?,... G..,... ?5.,...
#ost of Eoods +old -?B,... --?,... GB5,...
*age E)pense @B,... G.,... BB,...
4epreciation E)pense GB,... -.,... =?> G,... @7,...
Interest E)pense -G,... ?,... -A,...
$ther E)penses G@,... -A,... @5,...
4ebits =G?.,...> =-A?,...> LLLLLLLL LLLLLLLL =?.A,...>
Income, carry forward 6?,... @A,... @A,... 6?....
'et. Earnings, Jan. - -@A,B.. ?6,... =G> ?6,... -@-,...
=@> B,B..
Income, from above 6?,... @A,... @A,... 6?,...
GG.,B.. 6?,... G-B,...
4ividends 4eclared =@.,...> =G.,...> LLLLLLLL =-> G.,... =@.,...>
carry forward -5.,B.. A?,... 65,B.. G.,... -6B,...
#ash ?B,B.. @G,... 77,B..
Accounts 'eceivable 6B,... -?,... 55,...
Inventory 57,... G?,... -G-,...
Dand B.,... GB,... 7B,...
/uildings and Euipment @B.,... -B.,... =@> G.,... BG.,...
Investment in 'oller
#ompany +tock -?6,... =-> -?,...
=G>-@?,...
4ifferential =G> GA,... =@> GA,...
Eoodwill =@> G,B.. G,B..
4ebits 77B,B.. G?B,... 65B,...
4-4!
P4-29 =continued>
Accum. 4epreciation -7.,... B.,... =@> G,...
=?> G,... GG?,...
Accounts 0ayable B-,... -B,... AA,...
*ages 0ayable -?,... A,... G.,...
,otes 0ayable -B.,... B.,... G..,...
#ommon +tock
1ill #orporation G..,... G..,...
'oller #ompany A.,... =G> A.,...
'etained Earnings,
from above -5.,B.. A?,... 65,B.. G.,... -6B,...
#redits 77B,B.. G?B,... -56,... -56,... 65B,...
4-50
P4-29 =continued>
c. 1ill #orporation and +ubsidiary
4ecember @-, G.K5
#ash C 77,B..
Accounts 'eceivable 55,...
Inventory -G-,...
Dand 7B,...
/uildings and Euipment CBG.,...
Dess2 Accumulated 4epreciation =GG?,...> G5A,...
Eoodwill G,B..
Total Assets CA7-,...
Accounts 0ayable C AA,...
*ages 0ayable G.,...
,otes 0ayable G..,...
#ommon +tock CG..,...
'etained Earnings -6B,... @6B,...
Total Diabilities and +tockholders' Euity CA7-,...
1ill #orporation and +ubsidiary
#onsolidated Income +tatement
<ear Ended 4ecember @-, G.K5
+ales C?5.,...
#ost of Eoods +old CGB5,...
*age E)pense BB,...
4epreciation E)pense @7,...
Interest E)pense -A,...
$ther E)penses @5,...
Total E)penses =?.A,...>
#onsolidated ,et Income C 6?,...
1ill #orporation and +ubsidiary
#onsolidated 'etained Earnings +tatement
<ear Ended 4ecember @-, G.K5
'etained Earnings, January -, G.K5 C-@-,...
G.K5 ,et Income 6?,...
CG-B,...
4ividends 4eclared, G.K5 =@.,...>
'etained Earnings, 4ecember @-, G.K5 C-6B,...
4-51
P4-30 C#;.$4%&(3 P$#/';6 W4#''0 O5%! S,/&(!()$0
a. Journal entries recorded by 0ower #orporation2
=-> #ash -.,...
Investment in &pland 0roducts +tock -.,...
'ecord dividends from &pland 0roducts.
=G> Investment in &pland 0roducts +tock @.,...
Income from +ubsidiary @.,...
=@> Income from +ubsidiary B,...
Investment in &pland 0roducts +tock B,...
Amorti%e differential2 CB.,... P -. years
E=-> Income from +ubsidiary GB,...
Investment in &pland 0roducts +tock -B,...
E=G> #ommon +tock O &pland 0roducts -..,...
4ifferential @.,...
Investment in &pland 0roducts +tock GG.,...
Eliminate beginning investment balance2
C@.,... H CB.,... I :=CB.,... P -.> ) ? years;
E=@> /uildings and Euipment B.,...
Accumulated 4epreciation G.,...
4ifferential @.,...
E=?> 4epreciation E)pense B,...
Accumulated 4epreciation B,...
E=B> Accounts 0ayable -.,...
#ash and 'eceivables -.,...
Eliminate intercorporate receivablePpayable.
4-52
P4-30 =continued>
c. 0ower #orporation and &pland 0roducts #ompany
4ecember @-, G.KB
0ower &pland Eliminations #onsol!
Item #orp. 0roducts 4ebit #redit idated
+ales G..,... -..,... @..,...
Income from +ubsidiary GB,... LLLLLLL =-> GB,...
#redits GGB,... -..,... @..,...
#ost of Eoods +old -G.,... B.,... -7.,...
4epreciation E)pense GB,... -B,... =?> B,... ?B,...
Inventory Dosses -B,... B,... G.,...
4ebits =-A.,...> =7.,...> LLLLLLLLL LLLLLLLLL =G@B,...>
Income, carry forward AB,... @.,... @.,... AB,...
'et. Earnings, Jan. - @-6,... 5.,... =G> 5.,... @-6,...
Income, from above AB,... @.,... @.,... AB,...
@6@,... -G.,... @6@,...
4ividends 4eclared =@.,...> =-.,...> LLLLLLLLL =-> -.,... =@.,...>
carry forward @B@,... --.,... -G.,... -.,... @B@,...
#ash and 'eceivables ?@,... AB,... =B> -.,... 56,...
Inventory GA.,... 5.,... @B.,...
Dand 6.,... 6.,... -A.,...
/uildings and Euipment B..,... -B.,... =@> B.,... 7..,...
Investment in &pland
0roducts +tock G@B,... =-> -B,...
=G>GG.,...
4ifferential =G> @.,... =@> @.,...
4ebits -,--6,... @6B,... -,@.6,...
Accum. 4epreciation G.B,... -.B,... =@> G.,...
=?> B,... @@B,...
Accounts 0ayable A.,... G.,... =B> -.,... 7.,...
,otes 0ayable G..,... B.,... GB.,...
#ommon +tock
0ower #orporation @..,... @..,...
&pland 0roducts -..,... =G>-..,...
'etained Earnings,
from above @B@,... --.,... -G.,... -.,... @B@,...
#redits -,--6,... @6B,... @-.,... @-.,... -,@.6,...
4-53
P4-31 C#;.$4%&(3 P$#/';6 D(""$%*()' A..#$*(#%;%*
a. Journal entries recorded by Jersey #orporation2
=-> Investment in Dime #ompany +tock G.@,...
#ash G.@,...
Acuisition of Dime #ompany stock.
=G> #ash G.,...
Investment in Dime #ompany +tock G.,...
'ecord dividends from Dime #ompany.
=@> Investment in Dime #ompany +tock A.,...
Income from +ubsidiary A.,...
=?> Income from +ubsidiary @,...
Investment in Dime #ompany +tock @,...
Amorti%e differential assigned to
depreciable assets2 =C@@,... P -- years>
4-54
P4-31 =continued>
E=-> Income from +ubsidiary B7,...
Investment in Dime #ompany +tock @7,...
E=G> #ommon +tock O Dime #ompany B.,...
'etained Earnings, January - -..,...
4ifferential B@,...
Investment in Dime #ompany +tock G.@,...
E=@> Eoodwill G.,...
/uildings and Euipment @@,...
4ifferential B@,...
E=?> 4epreciation E)pense @,...
Accumulated 4epreciation @,...
Amorti%e differential related to
depreciable assets.
E=B> Accounts 0ayable -A,...
Accounts 'eceivable -A,...
Eliminate intercorporate
receivablePpayable.
4-55
P4-31 =continued>
c. Jersey #orporation and Dime #ompany
4ecember @-, G.K7
Jersey Dime Eliminations #onsol!
+ales 7..,... ?..,... -,-..,...
Income from +ubsidiary B7,... =-> B7,...
#redits 7B7,... ?..,... -,-..,...
#ost of Eoods +old B..,... GB.,... 7B.,...
4epreciation E)pense GB,... -B,... =?> @,... ?@,...
$ther E)penses 7B,... 7B,... -B.,...
4ebits =A..,...> =@?.,...> =5?@,...>
Income, carry forward -B7,... A.,... A.,... -B7,...
'et. Earnings, Jan. - G5.,... -..,... =G> -..,... G5.,...
Income, from above -B7,... A.,... A.,... -B7,...
??7,... -A.,... ??7,...
4ividends 4eclared =B.,...> =G.,...> L =-> G.,... =B.,...>
carry forward @57,... -?.,... -A.,... G.,... @57,...
#ash 6G,... GB,... -.7,...
Accounts 'eceivable B.,... BB,... =B> -A,... 65,...
Inventory -7.,... -..,... G7.,...
Dand 6.,... G.,... -..,...
/uildings and Euipment B..,... -B.,... =@> @@,... A6@,...
Investment in Dime
#ompany +tock G?.,... =-> @7,...
=G> G.@,...
4ifferential =G> B@,... =@> B@,...
Eoodwill =@> G.,... G.,...
4ebits -,-GG,... @B.,... -,GA5,...
Accum. 4epreciation -BB,... 7B,... =?> @,... G@@,...
Accounts 0ayable 7.,... @B,... =B> -A,... 65,...
1ortgages 0ayable G..,... B.,... GB.,...
#ommon +tock
Jersey #orporation @..,... @..,...
Dime #ompany B.,... =G> B.,...
'etained Earnings,
from above @57,... -?.,... -A.,... G.,... @57,...
#redits -,-GG,... @B.,... @@G,... @@G,... -,GA5,...
4-56
P4-32A P,&4-D#5% A++#,%*(%-
a. Entry to record acuisition of Dindy stock on books of Ereenly2
Investment in Dindy #ompany +tock 5@B,...
#ash 5@B,...
b. Entry to record revaluation of assets on books of Dindy #ompany at date of
combination2
Inventory B,...
Dand 6B,...
/uildings -..,...
Euipment 7.,...
'evaluation #apital GA.,...
'evalue assets to reflect fair
values at date of combination.
c. Investment elimination entry in consolidation workpaper prepared 4ecember @-,
G.KA =no other entries needed>2
#ommon +tock O Dindy #ompany -..,...
Additional 0aid!In #apital ?..,...
d. Euity!method entries on the books of Ereenly during G.K72
#ash B.,...
Investment in Dindy #ompany +tock B.,...
'ecord dividend from Dindy #ompany.
Investment in Dindy #ompany +tock 66,...
Income from Dindy #ompany 66,...
4-57
P4-32A =continued>
e. Eliminating entries in consolidation workpaper prepared 4ecember @-, G.K7
=no other entries needed>2
E=-> Income from Dindy #ompany 66,...
4ividends 4eclared B.,...
Investment in Dindy #ompany +tock @6,...
E=G> #ommon +tock O Dindy #ompany -..,...
'etained Earnings, January - -7B,...
f. Eliminating entries in consolidation workpaper prepared 4ecember @-, G.K6 =no
other entries needed>2
E=-> Income from Dindy #ompany 5.,...
4ividends 4eclared B.,...
Investment in Dindy #ompany +tock ?.,...
E=G> #ommon +tock O Dindy #ompany -..,...
'etained Earnings, January - G-@,...
Investment in Dindy #ompany +tock 57@,...
Eliminate beginning investment balance2
CG-@,... H C-7B,... N C66,... ! CB.,...
C57@,... H C5@B,... N C66,... ! CB.,...

4-5

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Chapter 04 - Consolidation of Wholly Owned Subsidiaries

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