05 Fischer10e SM Ch05 Final

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CHAPTER 5
UNDERSTANDING THE ISSUES
1. The first approach that could be used to

e current year, consolidated net inreduce the overall consolidated interest
will include a gain on retirement of
cost but maintain the subsidiary as the debof $5,000 ($100,000 $95,000). In
tor would
have
the parent
urrent and each of the next 4 years,
advancing
$1,000,000 to the subsidiary so that the

lidated net income will be reduced by
4. In th
come
bonds
the c
conso
subsidiary may retire the bonds. The former

($5,000
5
years),
which
$1,00
debt
is retired,
amortization of
long-term
repre
inter-
paid
0
sents
and
the
a new
discount
intercompany debt originates. The

by the parent. In the current year, the
company interest expense would be elimiill receive $1,000 ($5,000 20%) of

nated during the consolidation
in on the retirement of bonds. In the
process.
Another approach would have the parent

nt and each of the next 4 years, NCI
NCI w
the ga
curre
purchasing the subsidiary bonds from outof income will be reduced by $200
share
side parties and holding them as an in00 20%).
($1,0
vestment. From a consolidated viewpoint,

5. It is
true that intercompany operating leasthe debt is retired. Therefore, interest ex-
es
eliminated
during
the
consolidation
pense would be eliminated during the conproce

ss will not have an effect on consolisolidation process.
dated
income. However, the excessive rent
2. At the 10% annual interest rate, a loss on
se amounts will still appear on the
expen
retirement of bonds will occur in the current

diarys
separately
stated
income
subsi
year since the parent paid a premium to rement and will reduce the NCI share of
state
tire the subsidiarys bonds. In the current

dated income. The high lease rates
consoli
and future years, consolidated net income

hift income from the NCI to the controlwill be increased by the difference between
interest.
will s
ling
interest expense and interest revenue. This

6. Either
type of lease can shift income to the
amount represents the amortization of the
contr
olling interest by incorporating a highpremium paid by the parent. At the 13%
er th
an market interest rate to calculate the
annual interest rate, a gain on retirement of
payme
nts. In a sales-type lease, the conbonds will occur in the current year since
trolli
ng interest can shift additional income
the parent paid a discount to retire the subby bu
ilding a profit into the capitalized cost
sidiarys bonds. In the current and future

of th
e leased asset.
years, consolidated net income will be reduced by the difference between interest
is no difference in the consolidated
7. There
revenue and interest expense. This amount

nys ability to recognize profit on sell-
compa
represents the amortization of the discount

quipment to its subsidiaries or leasing
ing e
paid by the parent to retire the bonds.

uipment to its subsidiaries (only if the
the eq
lease
is sales-type). In both cases, the prof3. Since Company S was the original issuer of
it is
deferred and amortized over the life of
the bonds, it will absorb the loss that results
the as
set or life of the lease. The controlling
in the current year from the parent retiring
inter
est has the opportunity to increase its
the bonds at a premium. The noncontrolling
interest will receive its share of this loss. In
t by leasing the asset to the subsidiary.
profi
The
lessor can build in an interest rate in

the current and future years, the subsidiexces
s of its cost of funds
arys income will be increased by the difference between interest expense and interest
revenue. The noncontrolling interest will receive its share of this amount.
247
Ch. 5Exercises
EXERCISES
EXERCISE 5-1
It is desirable to refinance for two reasons. First, interest rates are down, an
d it would be wise to
lock in at the lower rate. Second, the parent firm can borrow funds at a lower i
nterest rate. The
simplest way to accomplish the refinancing is to have the parent incur the new d
ebt and loan the
proceeds to the subsidiary; the subsidiary would use the funds to retire its deb
t with a gain on
retirement being recognized that would flow to the consolidated statements. The
parent would
not only enjoy a lower interest rate, but it could also structure the loan terms
, including the maturity date, to meet its needs. The parent could decide what rate to charge Pate
l Industries. The
rate charged would affect the reported income of Patel Industries and thus impac
t the distribution of income between the noncontrolling and controlling interests. Th
e intercompany debt
would be eliminated in the preparation of consolidated statements.
Marcus could incur new debt and use the proceeds to purchase Patel Industries out
standing
bonds. The bonds would remain as debt on the separate statements of Patel Indust
ries. The
bonds would also appear as an investment on the books of Marcus. The intercompan
y bonds,
however, would be eliminated in the consolidated statements. The consolidated in
come statement would show a gain on retirement in the year of the intercompany purchase. T
he NCI would
share in the gain, but this would be offset by interest adjustments in future pe
riods.
EXERCISE 5-2
(a) (1) The consolidated income statement for 20X3 will include a gai
n on retirement of the
bonds of $32,000 ($968,000 paid for $1,000,000 debt). The interest ex
pense of $80,000
will be eliminated as will the interest revenue of $84,000
($80,000 nominal + $4,000
discount amortization) recorded by the parent.
(2) The subsidiary income distribution schedule will get the benefit of th
e retirement gain of
$32,000 in the year the bonds are purchased, but subsidiary income
will be reduced
each year for the amortization of the purchase discount reco
rded by the parent
($4,000). The net effect for 20X3 is $28,000. The NCI would
receive 20% of this increase. The balance flows to the controlling interest.
(b) (1) The consolidated income statement includes nothing relative to the bon
ds. From a consolidated viewpoint, the bonds were retired in the prior per
iod. The interest expense
recorded by the subsidiary and the interest revenue recorded by the p
arent are eliminated.
(2) The income distribution of the subsidiary is reduced by $4,000 for the
amortization of
the purchase discount recorded by the parent. In the end, t
his adjustment is shared
20% by the NCI and 80% by the controlling interest.
248
Ch. 5Exercis
es
EXERC
ISE 5-3
(1)
Eliminations and Adjustments at December 31, 20X5:
Interest Revenue .......................................................

...............
8,700
Bonds Payable ..........................................................
...............
100,000
Loss on Retirement......................................................
.............
4,800c
Interest Expense ..................................................

................
9,500
Investment in Bonds ...............................................
..............
101,500a
Discount on Bonds Payable .........................................

........
2,500b
Interest Payable .......................................................

.................
9,000
Interest Receivable ...............................................
...............
9,000
Loss remaining at year-end:

Carrying value of bonds at December 31, 20X5 ..................
$
97,500b
Investment in bonds at December 31, 20X5 ........................
101,500a
$(4,000)
Loss amortized during the year:

Interest revenue eliminated (($100,000 9%) $300) ........
$
8,700
Interest expense eliminated (($100,000 9%) + $500) .......
9,500
(800)
Loss at January 1, 20X5 ........................................
...........
$(4,800)
a$101,800 $100,000 = $1,800 premium at 1/1/X5; $1,800 6 years left = $30

0/yr.
amortization; $101,800 $300 = $101,500 investment balance at 12/31/X5.

b
$100,000 $95,000 = $5,000 discount at 1/1/X1; $5,000 10 years = $500/y

r.
amortization; $500 5 years = $2,500.
$95,000 + $2,500 = $97,500 book value at 12/31/X5.
c
$95,000 + ($500 4 years) = $97,000 book value at 1/1/X5; $97,000 $101,
800
investment at 1/1/X5 = $4,800 loss (to be amortized at $4,800/6 = $800
/yr.).
(2)

...............
8,700
Bonds Payable ..........................................................
...............
100,000
Retained EarningsDien (80% $4,000*) ..............................
3,200
Retained EarningsCasper (20% $4,000*) ..........................
800
................
9,500
Investment in Bonds [$101,800 ($300 2 yrs.)] ...............
101,200
Discount on Bonds Payable ($2,500 balance, 1/1/X6 $500)
2,000
*$4,800 original loss on 1/1/X5 $800 amortization in 20X5 = $4,000 unamo

rtized loss on
1/1/X6

.................
9,000
...............
9,000

$
98,000
101,200
$(3,200)

...........
Interest revenue eliminated .......................................

$
8,700
Interest expense eliminated .......................................

9,500
(800)
..........
Loss at January 1, 20X6 ...........................................

...........
$(4,000)
249
Ch. 5Exercises
EXERCISE 5-4
Gain on retirement (January 2, 20X6):

Balance on issuers books ..................................................
.......
$48,734
Less purchase price (cost to retire bonds) ...............................
47,513
..
Gain on retirement ..................................................

.............
$
1,221
Schedule of interest adjustments:
Intercompany Interest,
Interest Expense
rest,
Year
nterest
Effective Interest
Adjustment to Issuer
Ending
(9%)
on Purchase (10%)
Income Distribution Schedule
12/31/X6
$4,386
Recorded Inte
Effective I
on Issuance
$4,751
$
365
12/31/X7
4,421
405
4,826
12/31/X8
4,459
450
4,909
$1,220*
*Does not add to gain on retirement due to rounding.
EXERCISE 5-5
(1)
Interest Revenue [(7% $60,000) + ($6,400 8)] .........................

5,000
......
Bonds Payable (60% $100,000) ............................................

60,000
Premium on Bonds Payable (60% $700) ....................................

420
Interest Expense [($4,200 (60% $100)] ...............................
4,140
Investment in Bonds (balance at year-end $53,600 + $800) .....
54,400
Gain on Retirement* .................................................
..................
6,880
*Book value of bonds on 1/2/X3 [$101,000 ($1,000/10 2) = $100,800]

Purchased ($100,800 60%) ........
$60,480
Price paid .......................................
53,60
0
Gain on retirement of bonds ...........
6,8
80
Interest Payable ($60,000 7%) ...........................................

.........
4,200
Interest Receivable .................................................
...................
4,200
An alternative way to calculate the gain:

Gain remaining at year-end:
Carrying value of bonds at December 31, 20X3
(60% $100,700) ...................................................
.................
$60,420
..
Investment in bonds at December 31, 20X3 ............................

54,400
$6,020
Gain amortized during the year:

Interest revenue eliminated .........................................
...............
$
5,000
Interest expense eliminated .........................................
..............
4,140
860
Gain at January 1, 20X3 ..........................................
...............
$6,880
250
Ch. 5Exercises
Exercise 5-5, Conclu

ded
(2)

.....................
5,000
Bonds Payable ..........................................................
.....................
60,000
Premium on Bonds Payable (60% $600) ....................................
360
Interest Expense ...................................................
.....................
4,
140
Investment in Bonds (balance at year-end) ($54,400 + $800) ...
55,20
0
Retained EarningsMirage ($6,020* x 80%) ............................
4,81
6
Retained EarningsCarlton ($6,020* x 20%) ............................
1,20
4
*Unamortized gain on retirement = $6,880 ($860 amortization for 1 yr.) =
$6,020

.......................
4,200
Interest Receivable ................................................
....................
4,
200
An alternative way to calculate the unamortized gain:

(60% $100,600) ..................................................
..................
$60,360
Investment in bonds at December 31, 20X4 ...........................
55,200
$5,16
...
0

Interest revenue eliminated ........................................
................
$
5,000
Interest expense eliminated ........................................
...............
4,140
860
.........
0
Remaining gain at January 1, 20X4 ...............................

$6,02
EXERCISE 5-6
Partial Schedule of Bond Premium Amortiz

ation
12-Year, 8% Bonds Sold to Yield 7%
(Lift)
Carrying
Intere
st
Premium
Amount
Date
Cash Paid
Expense
Amortized
January 1, 20X5
.....
of Bonds
........
..
........
January 1, 20X6
$107,943
$8,000
$444
$7,556
107,499
January 1, 20X7
25
475
8,000
January 1, 20X8
92
508
January 1, 20X9
56
544
7,5
107,024
8,000
7,4
106,516
8,000
7,4
105,972
Partial Schedule of Bond Discount Amort

ization
12-Year, 8% Bonds Sold to Yield 9% (S
hark)
Carrying
Cash
st
Discount
Date
Received
Amortized
January 2, 20X8
.....
Intere
Value
Revenue
of Bonds
........
........
January 1, 20X9
..
$94,005
$8,000
$460
$8,460
94,465
251
Ch. 5Exercises
Exercise 5-6, C
oncluded
(1)

...............
8,460
Bonds Payable ..........................................................
...............
100,000
......
Premium on Bonds Payable ...............................................

5,972
Gain on Retirement ................................................

..............
12,511
................
7,456
Investment in Bonds ...............................................
..............
94,465

.................
8,000
...............
8,000

$105,972
94,465
$11,507

..........
Interest expense eliminated .......................................

$
8,460
...........
Interest revenue eliminated .......................................

7,456
1,004
Gain at January 1, 20X8 ........................................
...........
$12,511
(2)
Subsidiary Life Industries Income
Distribution
Interest adjustment
Internally generated net
($8,460 $7,456) ...................
income ...................................
$1,004
$500,000
Retirement gain on bonds ............

12,511
Adjusted income ..........................
$511,507
NCI share .....................................
10%
NCI ...............................................
$ 51,151
252
Ch. 5Exercises
EXERCISE 57
(1) Asset Under Operating Lease ..............................................

..........
60,000
Cash ...............................................................
............................
6
0,000
Depreciation Expense ...................................................

..................
12,000
Accumulated DepreciationAsset Under
.......
000
Operating Lease ($60,000 5 years) ..............................

12,
Cash ...................................................................
............................
15,000
Rental Revenue .....................................................
....................
1
5,000
(2) Rent Expense .............................................................

....................
15,000
Cash ...............................................................
............................
1
5,000
(3) Fixed Asset ..............................................................

.......................
60,000
Accumulated DepreciationAsset Under Operating Lease ...........
12,000
Asset Under Operating Lease ........................................
6
............
0,000
Accumulated Depreciation ...........................................

..............
1
2,000
Rent Revenue ...........................................................

......................
15,000
Rent Expense .......................................................
......................
1
5,000
To eliminate the intercompany lease transactions.
EXERCISE 58
(1)
Lease Payment Amortization Sche
dule
% on
Date
nce
Interest at 12
Principal
Reduction
Payment
of Principal
Previous Bala
Balance
January 1, 20X1
$40,822
January 1, 20X1
$12,000
$12,000
January 1, 20X2
$3,459
8,541
January 1, 20X3
2,434
9,566
January 1, 20X4
1,285*
Total
7,178
28,822
12,000
20,281
12,000
10,715
12,000
10,715
0
$48,000
$40,822
*Adjusted for rounding
2
53
Ch. 5Exercises
Exercise 5-8, Conclude

d
(2)
...
Interest Revenue (see amortization schedule) ............................

3,459

.....................
3,459
To eliminate intercompany interest revenue and expense.
Obligations Under Capital Lease ($40,822 $12,000 first payment)

28,822
Interest Payable ........................................................
......................
3,459
Unearned Interest Income ................................................
..............
3,719
Minimum Lease Payments Receivable ..................................
36,000
....
To eliminate intercompany debt recorded by lessee against

net intercompany receivable of lessor.
Property, Plant, and Equipment ..........................................

............
40,822
Accumulated DepreciationAssets Under
........
Capital Lease ($40,822 5 years) .......................................

8,164
Assets Under Capital Lease .........................................

..............
40,822
Accumulated DepreciationProperty, Plant, and Equipment ....
8,164
To reclassify asset under capital lease and related
accumulated depreciation as a productive asset owned
by the consolidated entity.
(3)
...
Interest Revenue (see amortization schedule) ............................

2,434

.....................
2,434
Obligations Under Capital Lease .........................................

...........
20,281
......................
2,434
Unearned Interest Income ................................................
..............
1,285
....

24,000
To eliminate intercompany debt recorded by lessees
against net receivable of lessor.

............
40,822
Accumulated DepreciationAssets Under Capital
Lease (2 $8,164) ......................................................
.................
16,328
..............
40,822
16,328
accumulated depreciation as a productive asset
owned by the consolidated entity.
254
Ch. 5Exercises
EXERCISE 5-9
Interest Income (see amortization schedule) ...................................

2,690
Interest Revenue ..........................................................
..............
2,690
Obligations Under Capital Lease ................................................

.....
26,904
Interest Payable ...............................................................
................
2,690
Unearned Interest Income (see amortization) ..................................
4,790
Minimum Lease Payments Receivable ......................................
34,384
To eliminate intercompany debt recorded by lessee
against net intercompany receivable of lessor.
Property, Plant, and Equipment .................................................

......
35,000
Accumulated DepreciationAssets Under Capital Lease
($35,000/8 yrs.) ............................................................
.................
4,375
Assets Under Capital Lease ................................................
.......
35,000

4,375
accumulated depreciation as a productive asset owned
by the consolidated entity. Asset is depreciated over
8-year life.
Sales Profit on Leases .........................................................

............
10,000
Property, Plant, and Equipment ............................................
10,000
.....
To eliminate unrealized profit on intercompany sale and

to reduce asset to its cost to the consolidated entity.
Accumulated DepreciationProperty, Plant, and Equipment

($10,000/8 yrs.) ............................................................
.................
1,250
Depreciation Expense ......................................................
..........
1,250
To reduce depreciation on leased asset to depreciation
based on cost to consolidated entity.
Rental Income ..................................................................

................
1,000
Rent Expense...............................................................
..............
1,000
To eliminate intercompany rent revenue and
expense due to executory costs on lease.
255
Ch. 5Problems
PROBLEMS
PROBLEM 5-1
(1) Bonds Payable ............................................................

...................
50,000
...
Interest Income ($4,500 + $200 amortization) .............................

4,700
Investment in Bonds ($48,400 + $200 amortization) ..................
48,600
Interest Expense .....................................................

...................
4,500
.........
(2)
n
Gain on Extinguishment of Debt .......................................

1,600
Justin Corporation and Subsidiary Drew Corporatio

Consolidated Income Statement
For Year Ended December 31, 20X6
Sales ....................................................................
.................................
$3,040,000
Cost of goods sold .......................................................
.........................
1,405,000
Gross profit .......................................................
..............................
$1,635,000
Other expenses ($720,000 + $105,000) .....................................
..........
(825,000)
Gain on debt retirement ..................................................
......................
1,600
Consolidated net income ..................................................
....................
811,600
256
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Ch. 5Problems
PROBLEM 5-2
Patrick Company and Subsidiary Stunt Company

Worksheet for Consolidated Financial Statements
Eliminations
Controllin
Consolidated
Consolidated
g
Trial Balance
and Adjustments
Retained
Income
Balance
Patric
k
Stunt
Cr.
Statement
Sheet
Dr.
NCI
Earnings
Interest Receivable ................................

4,000
..........
..........
4,000
.........
..........
......
..........
(B2)
....
Other Current Assets .............................

248,200
315,200
..........
.........
......
563,400
..........
..........
....
Investment in Stunt Company ................

351,000
..........
(CV)
360,000
.........
......
..........
45,000 (EL)
..........
....
......
..........
..........
(D)
..........
..........
(B1)
....
......
..........
36,000
.........
..........
Investment in Stunt Bonds .....................

96,800
..........
96,800
.........
......
..........
....
....
Land .......................................................
80,000
60,000
..........
..........
.........
..........
......
140,000
....
Buildings and Equipment .......................

400,000
280,000
..........
.........
......
680,000
..........
..........
....
Accumulated Depreciation .....................

(120,000)
(60,000)
..........
.........
......
(180,000)
..........
..........
....
Goodwill .................................................
......
..........
(D)
40,000
..........
.........
..........
......
40,000
....
Interest Payable .....................................

......
(4,000)(B2)
4,000
..........
.........
..........
......
..........
....
Other Current Liabilities .........................

(98,000)
(56,000)
..........
..........
.........
..........
......
(154,000)
Bonds Payable (8%) ..............................
......
(100,000)(B1)
..........
.........
......
..........
....
....
....
....
100,000
..........
....
Discount on Bonds Payable ...................

......
4,800
4,800
.........
......
..........
..........
..........
Other Long-Term Liabilities ....................

(200,000)
..........
..........
.........
......
(200,000)
..........
..........
Common StockPatrick ........................

00,000)
..........
..........
.........
....
(100,000)
....
(B1)
....
....
(1
..........
..........
......
Other Paid-In Capital in Excess of

ParPatrick .......................................
00,000)
..........
..........
..........
.........
..........
....
(200,000)
Retained EarningsPatrick ...................
65,000)
..........
45,000
.........
....
..........
(2
......
(3
..........
..........
(CV)
......
....
......
..........
..........
408,380)
(B1)
.........
..........
Common StockStunt ...........................

....
(100,000)(EL)
..........
.........
..........
1,620
..........
(
......
90,000
(10,000)
..........
Other Paid-In Capital in Excess of

ParStunt ..........................................
(40,000)(EL)
36,000
..........
.........
(4,000)
..........
......
....
Retained EarningsStunt ......................

....
(260,000)(EL)
..........
.........
....
..........
......
..........
......
(B1)
4,000
.........
..........
234,000
..........
180
(29,820)
Net Sales ...............................................

(640,000)
(350,000)
..........
..........
(990,000)
..........
......
..........
Cost of Goods Sold ................................
......
....
(NCI)
..........
....
360,000
..........
......
200,000
560,000
..........
..........
....
..........
..........
....
..........
Operating Expenses ...............................

168,400
71,400
..........
239,800
......
..........
Interest Expense ....................................

......
8,600
..........
8,600
.........
..........
......
..........
....
(B1)
....
Interest Income ......................................

(8,400)
..........
(B1)
8,400
..........
.........
..........
......
..........
....
Dividend Income ....................................

(27,000)
..........
(CY2)
27,000
..........
.........
..........
......
..........
....
Dividends DeclaredPatrick .................

50,000
..........
..........
.........
50,000
..........
..........
..........
Dividends DeclaredStunt ....................

....
30,000
27,000
.........
..........
......
..........
(CY2)
3,000 .............
Total ...................................................
0
0
586,200
586,200
.........
..........
......
..........
.......
Consolidated Net Income ........................................................

.......................................................................
(190,200)
..........
.......
......
..........
To NCI (see distribution schedule) .........................................
....................................................................
7,020
(7,020) ...........
.
..........
To Controlling Interest (see distribution schedule) ........................
..............................................................
183,180
..........
(
183,180)
..........
Total NCI ......................................................................
................................................................................
.......................
(47,840) ..........
(47,840)
Retained EarningsControlling Interest, December 31, 20X2 ........................
................................................................................
.........
(54
1,560)
(541,560)
Totals .....................................................................
................................................................................
.....................................................................
0
257
Ch. 5Problems
Problem 5-2, Continued
Eliminations and Adjustments:

(CV)
Convert to simple equity method as of January 1, 20X2.
(CY2)
Eliminate the current-year dividend income of parent agains
t dividends declared
by subsidiary.
(EL)
Eliminate 90% of the subsidiary company equity balances at
the beginning of the
year against the investment account.
(D)/(NCI) Allocate the $36,000 excess of cost over book and $4,000 NCI ad
justment to
goodwill.
(B1)
ate the balance in
Eliminate intercompany interest revenue and expense. Elimin

the investment in bonds against bonds payable and the disco
unt on bonds payable. The loss on retirement at the start of the year is cal
culated as follows:

Investment in bonds at
December 31, 20X2 ..........................
$96,800
Bonds payable ........................................
$100,000
Discount on bonds ..................................
95,200
(4,800)
$1,600
Loss amortized during year:
Interest expense eliminated ....................
8,600
Interest revenue eliminated ....................

8,400
200
Remaining loss on January 1, 20X2 .......
$1,800
Amortize loss 90% to controlling interest ($1,620) and 10%

to NCI ($180).
(B2)
Eliminate $4,000 of intercompany interest receivable and pa
yable.
258
Ch. 5Prob
lems
Problem 5-2,
Concluded
Determination and Distribution of Excess Schedule

Com
pany
Parent
NCI
mplied
Price
Value
r Value
(90%)
(10%)
I
Fai
Fair value of subsidiary .....................

$390,000
$351,000
$ 39,000
Less book value of interest acquired:

Total equity..................................
350,000
$350,000
$350,000
Interest acquired ...............................
90%
10%
Book value ........................................

$315,000
$ 35,000
Excess of fair value over book value

$ 40,000
$ 36,000
4,000
Adjustment of identifiable accounts:

Worksheet
Amorti
zation
tment
Year
Key
Life
Adjus
per
Goodwill ............................................
$40,000
debit D
Subsidiary Stunt Company Income D

istribution

income ...................................
70,000
Interest adjustment .....................
200
Adjusted income .........................
$7
0,200
NCI share ....................................
NCI ..............................................
10%
7,020
Parent Patrick Company Income D

istribution

income ...................................
20,000
90% Stunt income of
$1
$70,200 .................................
63,180
Controlling interest ......................
$18
3,180
259
Ch. 5Problems
PROBLEM 5-3

Company
Parent
NCI
Price
Value
Implied
Fair Value
(80%)
(20%)

$1,700,000
$ 425,000
$2,125,000

Total equity..................................
$1,875,000
$1,875,000
1,875,000

80%
20%
Book value ........................................
$1,500,000
$ 375,000
Excess of fair value over book
$
value............................................
200,000
$
50,000
250,000

Worksheet
Amortization
Adjustment
Key
Life
per Year
Goodwill ............................................
debit D
$250,000
260
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Ch. 5Problems
General Appliance and Subsidiary Appliance Outlets

Trial Balance
Elim
inations
Consolidated
Consolidated
Controlling
General
ustments
Appliance
and Adj
Income
Balance
Retained
Ap
pliances
Outlets
Cr.
Earnings
Dr.
Statement
Sheet
NCI
Cash ................................................................
401,986
72,625
...........
...........
...........
......
.....
...........
474,611
Accounts Receivable (net) ..............................
752,500
105,000
...........
...........
.....
...........
857,500
...........
......
Interest Receivable .........................................

9,625
............
(LN2)
9,625
...........
.....
...........
...........
...........
......
Inventory .........................................................
1,950,000
900,000
...........
...........
...........
......
.....
...........
2,850,000
Investment in Appliance Outlets .....................
1,700,000 ..........
256,000
(EL)
1,756,000
.....
...........
...........
...........
(D)
.....
............
200,000
...........
...........
...........
Investment in 11% Bonds ...............................

256,000
............
(B)
256,000
...........
.....
...........
...........
Investment in Mortgage ..................................
(CV)
......
...........
......
...........
......
175,000
(LN1)
.....
............
175,000
...........
...........
...........
Property, Plant, and Equipment ......................

9,000,000
2,950,000
(F1)
27,500
.....
...........
22,50
...........
......
...........
......
11,9
Accumulated Depreciation ..............................

(1,695,000) (940,000) (F2)
5
...........
...........
.....
...........
(2,633,625)
Goodwill ..........................................................
...........
............
(D)
...........
...........
.....
...........
250,000
Accounts Payable ...........................................
(670,000)
(80,000)
...........
...........
.....
...........
(750,000)
9,62
......
Bonds Payable, 11% .......................................

(2,000,000) (500,000) (B)
...........
...........
.....
...........
(2,250,000)
Mortgage Payable ...........................................

...........
(175,000)(LN1)
...........
...........
.....
...........
...........
250,000
......
...........
......
Interest Payable ..............................................

(18,333)
(9,625)(LN2)
5
...........
...........
.....
...........
(18,333)
Discount on Bonds Payable ............................

10,470
12,000
(B)
6,000
...........
.....
...........
16,470
1,37
......
250,000
......
...........
......
175,000
......
Common Stock ($5 par)

General Appliances .....................................
(3,200,000) .........
...........
...........
.....
...........
200,00
...........
......
(3,
Paid-In Capital in Excess of Par

General Appliances .....................................
(4,550,000) .........
...........
...........
.....
...........
550,00
...........
......
(4,
Retained EarningsGeneral Appliances .......

(1,011,123) .........
(CV)
256,000
...
...........
...........
...........
.....
............
(B)
...........
...........
(1,255,123) ...........
Common Stock ($10 par)Appliance Outlets

...........
(800,000) (EL)
...........
...........
,000)
...........
...........
...........
........
12,000
......
640,000
(160

Appliance Outlets ........................................
...........
(625,000) (EL)
...........
...........
25,000)
...........
...........
Retained EarningsAppliance Outlets ...........
...........
(770,000) (EL)
CI)
50,000
...........
...
...........
...........
...........
0
01,000)
............
...........
...........
(B)
...........
...........
500,000
(1
616,000 (N
........
3,00
(2
Sales ...............................................................
(9,800,000)
(3,000,000)
...............
...........
(12,800
,000)
...........
...........
Gain on Sale of Building .................................
(27,500)
............
(F1)
...........
...........
.....
...........
...........
27,500
......
Interest Income ...............................................

(35,625)
............
(B)
...........
...........
.....
...........
...........
26,000
......
...........
5
.....
9,62
......
............
...........
...........
(LN2)
...........
...........
Dividend Income .............................................

(48,000)
............
(CY2)
...........
...........
.....
...........
...........
Cost of Goods Sold .........................................
4,940,000
1,700,000
48,000
......
...........
...........
...........
00
6,640,0
...........
Depreciation Expense .....................................

717,000
95,950
(F2)
1,375
811,575
.....
...........
...........
...........
......
Interest Expense .............................................

223,000
67,544
(B)
29,000
...........
.....
...........
...........
...........
......
...........
(LN2)
.....
...........
......
............
9,625
...........
251,919
...........
Other Expenses ..............................................

2,600,000
936,506
...........
...........
3,536,506 .........
...........
...........
Dividends Declared .........................................
320,000
60,000
(CY2)
48,000
...........
12,000
320,000
...........
0
4,125
.....
0
...........
2,824,125
...........
...........
2,82
......

................................................................................
.............
(1,560,000) ........
...........
...........
................................................................................
..........
40,600
(40,600)
...........
...........
To Controlling Interest (see distribution schedule).........................
................................................................................
..
1,519,400 .........
(1,519,400) ................................................................
................................................................................
.......................
Total NCI ......................................................................
................................................................................
.................................................
(5
14,600)
...........
(514
,600)
................................................................................
.....................................
(2,454,523)
(2,454,523)
261
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ions and test bank, visit
Ch. 5Problems
Totals ......................................................................
................................................................................
................................................................................
..................
0
262
Ch. 5Problems
Probl
em 5-3, Concluded
(CV)
56,000.
(CY2)
Convert investment to equity, 80% ($770,000 $450,000) = $2

Eliminate dividend income.
(EL)
Eliminate 80% of the subsidiary equity balances.
(D)/(NCI) Distribute the excess and the NCI adjustment according to the determi
nation and distribution of excess schedule.
(B)
Eliminate intercompany interest revenue and expense. Elimi
nate the balance in the
investment in bonds against the bonds payable. The loss on
retirement at the start of
the year is calculated as follows:

....
256,000
Investment in bonds at December 31, 20X6 ........

$
Net carrying value of bonds at December 31, 20X6
.
244,000
$12,000
................
29,000
Interest expense eliminated .....................

$
Interest revenue eliminated .....................
.................
26,000
3,000
Remaining loss at January 1, 20X6 ........
............
$15,000
The remaining unamortized loss is allocated 80% to the contr

olling retained earnings
and 20% to the NCI retained earnings.
(F1)
Eliminate the intercompany gain on sale of building.
(F2)
Reduce depreciation expense on the building for one-half y
ear, ($27,500 10) 1/2.
(LN1)
Eliminate the intercompany mortgage.
(LN2)
Eliminate the intercompany interest payable and receivable
on mortgage. Eliminate
the intercompany interest revenue and expense on mortgage, 1
/2 11% $175,000
= $9,625.
Subsidiary Appliance Outlets In

come Distribution

income ...................................
$200,000
Interest adjustment
($29,000 $26,000) ..............
3,000
Adjusted income .........................

$203,000
NCI share ....................................

20%
NCI ..............................................
$ 40,600
Parent General Appliances Inc

ome Distribution
Unrealized gain on sale

00
of building ..............................
income .................................
$1,383,125
$27,5
Gain realized through use of

building for one-half year .....
1,375
80% Appliance Outlets adjusted
income of $203,000 .............
162,400
Controlling interest ....................

$1,519,400
263
Ch. 5Problems
PR
OBLEM 5-4

C
ompany
Parent
Implied
Price
NCI
Value
F
air Value
(80%)

$437,500
$350,000
(20%)
$ 87,500

Total equity..................................
215,000
$215,000
$215,000
Interest acquired .........................

80%
Book value ........................................
$172,000
20%
$ 43,000

value............................................
$222,500
$178,000
$ 44,500

Worksheet
Amo
rtization
Adj
ustment
per Year
Key
Life
Buildings ...........................................
$
75,000
debit D1
$
3,750
20
Equipment .........................................
60,000
debit D2
12,000
Goodwill ............................................
87,500
debit D3
Total ............................................
$222,500
Account Adjustments
Annual
Current
to Be Amortized
Amount
Key
Year
Buildings ...............................
$
3,750
$
0
Prior
Years
Life
Total
3,750 $
20
3,750 $7,50
12,000
5
12,000 24,0
...... (A1)
Equipment .............................
12,000
00
...... (A2)
Total amortizations ........
$15,750
$15,750
$15,750
$31,
500
Intercompany Inventory Prof

it Deferral
Parent
Parent
Parent
Sub
Sub
Sub
Amount
Percent
Profit
Amount
Percent
Profit
Beginning ..............................
30%
$4,500
0%
$15,000
Ending ...................................
30
6,000
0
20,000
264
Ch. 5Proble
ms
Problem 5-4,
Continued
Subsidiary Stack Company Income Di

stribution
Loss on bond retirement ...............
$ 2,899

Buildings depreciation ...................
income .....................................
4,672
Equipment depreciation ................
Interest adjustmentbonds ..........
483
3,750
$2
12,000
Adjusted income ...........................
NCI share ......................................
NCI ................................................
6,506
20%
1,301
Parent Packard Company Income Dis

tribution
Ending inventory profit ..................

income .....................................
2,845
80% share of Stack
adjusted income of $6,506 ......
5,205
Beginning inventory profit .............
4,500
$6,000
$4
Controlling interest ........................
$4
6,550
Proof for Bond

Elimination

Investment in bonds at December 31, 20X5 ..............................
$100,775
..
Carrying value at December 31, 20X5 .....................................

98,359
$2,416

Interest expense eliminated .............................................
..........
$
8,328
Interest revenue eliminated .............................................
...........
7,845
483
Loss at January 1, 20X5 ...........................................
...........
$2,899
265
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Ch. 5Problems
Packard Company and Subsidiary Stack Company

Eliminations
Controlling
Consolidated
Consolidated
Trial Balance
and
Adjustments
Income
Balance
Retained
Packard
NCI
Stack
Cr.
Earnings
Dr.
Statement
Sheet
Cash ................................................................
71,070
32,031
..........
.
...........
...........
.
..........
...............
103,101
Accounts Receivable ......................................
90,000
60,000
.
(IA)
10,000
...........
..........
...............
140,000
..........
.
Inventory .........................................................
100,000
30,000
.
(EI)
6,000
...........
..........
...............
124,000
..........
.
Land ................................................................
150,000
45,000
..........
.
...........
...........
.
..........
...............
195,000
Investment in Stack .........................................
385,738
............
.
(CY1)
19,738
...........
..........
...............
...........
...........
,000
..........
............
...........
...............
(CY2)
...........
...........
...........
.
(EL)
..........
............
196,000
...............
...........
...........
...........
.
(D)
..........
............
178,000
...............
...........
...........
Investment in Stack Bonds .............................

100,775
............
.
(B)
100,775
...........
..........
...............
...........
Buildings .........................................................
500,000
250,000 (D1)
,000
...........
...........
..........
...............
825,000
..........
.
8
.
..........
.
..........
.
..........
.
75
.

(300,000)
(70,000)
..........
.
(A1)
7,500
...........
.
..........
...............
(377,500)
Equipment .......................................................
200,000
120,000 (D2)
,000
...........
...........
..........
...............
380,000
60
.

(100,000)
(84,000)
..........
.
(A2)
24,000
...........
.
..........
...............
(208,000)
Goodwill ..........................................................
...........
............
(D3)
,500
...........
...........
..........
...............
87,500
87
.

(55,000)
(25,000) (IA)
000
...........
...........
..........
...............
(70,000)
10,
.
Bonds Payable ................................................

...........
(100,000) (B)
000
...........
...........
..........
...............
...........
100,
.
Discount (premium) .........................................

...........
1,641
.
(B)
1,641
...........
..........
...............
...........
..........
.
Common Stock ($10 par)Stack ...................

...........
(10,000) (EL)
00
...........
...........
(2,000) ...............
...........
8,0
Paid-In Capital in Excess of ParStack .........

...........
(90,000) (EL)
00
...........
...........
(18,000) ...............
...........
72,0
Retained EarningsStack ..............................

...........
(145,000) (EL)
(NCI)
44,500
...........
........
...............
...........
116,000
...
...........
50
............
...........
(70,350) ...............
(A1A2)
...........
...........
Common Stock ($10 par)Packard ...............

(100,000)
............
...........
........
...........
...........
(100,000)
Paid-In Capital in Excess of ParPackard .....

(600,000)
............
...........
........
...........
...........
(600,000)
3,1
...........
...
...........
...
Retained EarningsPackard ..........................

(400,000)
............
(A1A2)
...........
...........
......
...........
...........
,500
..........
............
...........
(382,900)
(BI)
...........
...........
Loss (gain) on bond retirement .......................

............
(B)
2,899
...........
2,899
..........
...........
...........
Sales ...............................................................
12,600
.....
4
.
(600,000)
000
..........
(220,000) (IS)
...........
...........
50,
.
(770,000)
...........

410,000
120,000
.
(IS)
50,000
...........
..........
...........
...........
...........
,000 (BI)
..........
............
4,500
...........
..........
.
(EI)
6
.
481,500
...........
Depreciation ExpenseBuildings ...................

30,000
10,000 (A1)
750
...........
43,750
........
...........
...........
Depreciation ExpenseEquipment ................
15,000
12,000 (A2)
0
...........
........
...........
3,
...
12,00
...
39,000
...........
Other Expenses ..............................................

110,000
45,000
.
...........
155,000
..........
...........
...........
..........
.

...........
8,328
.
(B)
8,328
...........
..........
...........
...........
..........
.
Interest Revenue .............................................

(7,845)
............
(B)
7,845
...........
...........
..........
...........
...........
Subsidiary Income ..........................................

(19,738)
............
(CY1)
738
...........
...........
..........
...........
...........
19,
.
Dividends DeclaredStack ............................

...........
10,000
(CY2)
8,000
...........
2,000
...........
...........
...........
Dividends DeclaredPackard ........................

20,000
............
...........
...........
........
20,000
...........
...........
...
Totals ..........................................................
0
0
82
658,982
...........
..........
...........
...........
658,9
.
................................................................................
.............
(47,851)
.
..........
...........
...........
................................................................................
..........
1,301
(1,301)
...........
...........
To Controlling Interest (see distribution schedule).........................
................................................................................
..
46,550
.
..........
(46,550)
...........
Total NCI ......................................................................
................................................................................
.................................................
(89,651)
...........
(89,651)
................................................................................
.....................................
(409,450)
(409,450)
Totals .....................................................................
................................................................................
................................................................................
...................
0
266
Ch.
5Problems
Problem 54, Concluded
(CY1)
Current-year subsidiary income.
(CY2)
Current-year dividend.
(EL)
Eliminate controlling interest in subsidiary equity.
(D)/(NCI) Distribute excess and NCI adjustment.

(A1)
Amortize excessbuildings.
(A2)
Amortize excessequipment.
(IS)
Eliminate intercompany sale during current period.
(IA)
Eliminate intercompany unpaid trade accounts.
(BI)
Defer beginning inventory profit.
(EI)
Defer ending inventory profit.
(B)
Eliminate intercompany bonds.
P
ROBLEM 5-5

Company
Implied
Fair Value
Parent
Price
(80%)

$437,500
$350,000
NCI
Value
(20%)
$ 87,500

Total equity..................................
215,000
$215,000
$215,000

80%
Book value ........................................
$172,000
20%
$ 43,000
value............................................
$222,500
$178,000
$ 44,500

Worksheet
Amortization
Ad
justment
per Year
Key
Life
Buildings ...........................................
$
75,000
debit D3
$
3,750
Equipment .........................................
60,000 credit D4
12,000
20
Goodwill ............................................
87,500
debit D5
Total ............................................
$222,500
Account Adjustments
Annual
to Be Amortized
Amount
Key
Current
Year
Buildings ...............................
$
3,750
$
7,500
...... $11,250 ..........................
Prior
Years
Life
Total
20
3,750 $
(A1)
Equipment .............................
12,000
,000
5
24,000 36
12,000
...... (A2)
Total amortizations ..........
$15,750
$15,750
$31,500
47,250
267
Ch. 5Problems
Problem 55, Continued
Intercompany Inventory P
rofit Deferral
Parent
Parent
Parent
Sub
Sub
Sub
Amount
Percent
Profit
Amount
Percent
Profit
Beginning ..............................
30%
$6,000
0%
$20,000
Ending ...................................
30
7,500
0
25,000
Subsidiary Stack Company Income D

istribution
Buildings depreciation .................

$ 3,750
Equipment depreciation ..............

income ...................................
$31,672
12,000
Interest adjustmentbonds ........

483
Adjusted income .........................

$16,405
NCI share ....................................
20%
NCI ..............................................
$ 3,281
Parent Packard Company Income D

istribution
Ending inventory profit ................

$7,500
income .....................................
$57,845
80% share of Stack
adjusted income of $16,405 ....
13,124
6,000

$69,469
Proof for Bo
nd Retirement

$100,620
..
Carrying value at December 31, 20X6 .....................................

98,687
$1,933

Interest expense eliminated .............................................
..........
$
8,328
Interest revenue eliminated .............................................
...........
7,845
483
Remaining loss at January 1, 20X6 ................................
.....
$2,416
268
----------------------- Page 23----------------------To download more
slides, ebook, solutions and test bank, visit
Ch. 5Problems
Packard Company and Subsidiary Stack Company

Eliminations
Controlling
Consolidated
Consolidated
Trial Balance
and
Adjustments
Income
Balance
Retained
Packard
NCI
Stack
Cr.
Earnings
Dr.
Statement
Sheet
Cash ................................................................
101,710
61,031
.........
..
...........
...........
...........
...........
162,741
110,000
60,000
.........
..
(IA)
12,000
...........
...........
...........
158,000
Inventory .........................................................
120,000
45,000
.........
..
(EI)
7,500
...........
...........
...........
157,500
Land ................................................................
150,000
45,000
.........
..
...........
...........
...........
...........
195,000
Investment in Stack
403,075
..
(CY1)
...........
............
25,337
...........
...........
...........
...........
8,000
...........
............
...........
...........
(CY2)
...........
...........
...........
..
(EL)
...........
............
207,738
...........
...........
...........
...........
..
(D)
...........
............
178,000
...........
...........
...........
.........
.........
.........
Investment in Stack Bonds .............................

100,620
............
..
(B)
100,620
...........
...........
...........
...........
Buildings .........................................................
500,000
250,000 (D1)
5,000
...........
...........
...........
...........
825,000
.........

(330,000)
(80,000)
.........
..
(A1)
11,250
...........
...........
...........
(421,250)
Equipment .......................................................
200,000
120,000 (D2)
0,000
...........
...........
...........
...........
380,000

(115,000)
(96,000)
.........
..
(A2)
36,000
...........
...........
...........
(247,000)
Goodwill ..........................................................
...........
............
(D3)
7,500
...........
...........
...........
...........
87,500

(35,000)
(25,000) (IA)
,000
...........
...........
...........
...........
(48,000)
12
Bonds Payable ................................................

...........
(100,000) (B)
000
...........
...........
...........
...........
...........
100,
Discount (premium) .........................................

...........
1,313
..
(B)
1,313
...........
...........
...........
...........
.........
Common Stock ($10 par)Stack ...................

...........
(10,000) (EL)
,000
...........
(2,000)
...........
...........
...........
Paid-In Capital in Excess of ParStack .........

...........
(90,000) (EL)
000
...........
(18,000)
...........
...........
...........
72,
Retained EarningsStack ..............................

...........
(159,672) (EL)
8 (NCI)
44,500
...........
..........
...........
...........
...........
483
(69,651)
...........
300
..........
............
...........
...........
............
...........
...........
Common Stock ($10 par)Packard ...............

(100,000)
............
...........
..........
...........
Paid-In Capital in Excess of ParPackard .....
(600,000)
............
127,73
.
(B)
...........
...........
(A1A2)
...........
...........
...........
(100,000)
6,
.
...........
.
...........
..........
...........
...........
...........
(600,000)
Retained EarningsPackard ..........................

(442,223)
............
(A1A2)
0
...........
...........
........
...........
...........
...........
6,000
...........
............
...........
(409,090)
(BI)
...........
...........
...........
1,933
...........
............
...........
...........
(B)
...........
...........
Sales ...............................................................
(700,000)
(230,000) (IS)
,000
...........
(870,000)
...........
...........
...........
480,000
125,000
..
(IS)
60,000
...........
...........
...........
...........
...........
7,500 (BI)
...........
............
6,000
...........
25,20
...
60
.........
(EI)
546,500
...........

30,000
10,000 (A1)
,750
...........
..........
...........
43,750
...........

15,000
12,000 (A2)
00
...........
..........
...........
39,000
...........
3
.
12,0
.
Other Expenses ..............................................

125,000
43,000
..
...........
168,000
...........
...........
...........
.........

...........
8,328
..
(B)
8,328
...........
...........
...........
...........
.........

(7,845)
............
(B)
7,845
...........
...........
...........
...........
...........
(25,337)
............
(CY1)
25
,337
...........
...........
...........
...........
...........
Dividends DeclaredStack ............................

...........
10,000
(CY2)
8,000
...........
2,000
...........
...........
...........
Dividends DeclaredPackard ........................

20,000
............
...........
...........
..........
20,000
...........
...........
.
Totals ..........................................................
0
0
586
706,586
...........
...........
...........
...........
706,

................................................................................
.............
(72,750)
...........
...........
...........
To NCI (see distribution schedule) .............................................
................................................................................
..........
3,281
(3,281)
...........
...........
To Controlling Interest (see distribution schedule) ............................
................................................................................
...
69,469
...........
(69,469)
...........
Total NCI ......................................................................
................................................................................
.................................................
(90,932)
...........
(90,932)
................................................................................
.....................................
(458,559)
(458,559)
Totals .....................................................................
................................................................................
................................................................................
...................
0
269
Ch. 5Problems
Problem 5-5, Conc

luded
(CY1)
(CY2)
(EL)
Eliminate controlling interest in subsidiary equity.
(D)/(NCI) Distribute excess and adjust NCI.

(A)
Amortize excess.
(IS)
Eliminate intercompany sales during current period.
(IA)
(BI)
(EI)
(B)
PROBLEM 5
-6

Company
Parent
NCI
Price
Value
(80%)
(20%)
Implied
Fair Valu
e

00
$400,000
$100,000
$500,0

Common stock ($1 par) ...............
$ 10,
000
Paid-in capital in excess of par ...
90
,000
Retained earnings .......................
100,
000
00
Total equity ............................

$200,000
$200,000
80%
$200,0
20%
Book value ........................................

$160,000
$ 40,000
00
value............................................
$240,000
$ 60,000
$300,0

Worksheet
Key
Amortization
Life
Buildings ...........................................
$130,000
debit D1
20
6,500
Equipment .........................................
50,000
debit D2
5
10,000
Goodwill ............................................
120,000
debit D3
Total ............................................
$300,000
Adjustment
per Year
270
Ch. 5Problems
Probl
em 5-6 Continued
Account Adjustments
Annual
Total
to Be Amortized
Amount
Key
Current
Prior
Life
Year
Years
Buildings ...............................
0
$
6,500
6,500
2
$
6,500 $
...... $13,000 ..........................

Equipment .............................
5
10,000
,000 20,000
(A1)
10,000
10
...... (A2)
$16,500
$33,000
$16,500
$16,500
Intercompany Inventory
Profit Deferral
Parent
Parent
Sub
Parent
Sub
Sub
Amount
Percent
rcent
Profit
Amount
Pe
Profit
Beginning ..............................
0%
25%
$2,250
$9,000
Ending ...................................
0
25
3,000
12,000
Subsidiary Spartan Company Incom

e Distribution
Amortizations ..............................
0
3,000
income .....................................
$27,324
Interest adjustment, bonds ..........
920
2,250
Gain on bond retirement ...............
6,833
$16,50
Adjusted income ...........................

$15,987
NCI share ......................................

20%
NCI ................................................
$ 3,197
Parent Postman Company Income

Distribution

income .....................................
$173,59
6
80% Sparton adjusted income
of $15,987 ...............................
12,790
$186,386
271
Ch. 5Problems
Postman Company and Subsidiary Spartan Company

El
iminations
Controlling
Consolidated
Consolidated
Trial Balance
and Ad
justments
Income
Balance
Retained
Postman
CI
Spartan
Cr.
Earnings
Dr.
Statement
Sheet
Cash ................................................................
144,486
99,347
...........
...........
...........
..
.........
...........
243,833
90,000
(IA)
.........
60,000
7,000
...........
...........
143,000
...........
..
Inventory .........................................................
120,000
55,000
...........
(EI)
3,000
...........
..
.........
...........
172,000
Land ................................................................
200,000
60,000
...........
...........
...........
..
.........
...........
260,000
Investment in Spartan .....................................
429,859
............
(CY1)
21,859
...........
.........
...........
...........
...........
,000
.........
............
...........
...........
(CY2)
...........
...........
...........
(EL)
.........
............
176,000
...........
...........
...........
...........
(D)
.........
............
240,000
...........
...........
...........
Investment in Spartan Bonds ..........................

96,110
............
(B)
96,110
...........
.........
...........
...........
Buildings .........................................................
600,000
100,000 (D1)
00
...........
...........
.........
...........
830,000
...........
..
8
..
...........
..
...........
..
...........
..
130,0
..

(310,000)
(40,000)
...........
(A1)
13,000
...........
..
.........
...........
(363,000)
Equipment .......................................................
150,000
80,000 (D2)
000
...........
...........
.........
...........
280,000
50,
..

(90,000)
(50,000)
...........
(A2)
20,000
...........
..
.........
...........
(160,000)
Goodwill ..........................................................
...........
00
.........
............
...........
...........
(D3)
...........
120,000
120,0
..

(55,000)
(25,000) (IA)
,000
...........
...........
.........
...........
(73,000)
7
..
Bonds Payable .... ...........................................

...........
(100,000) (B)
00
...........
...........
.........
...........
...........
100,0
..
Discount (Premium) ........................................

...........
(2,023) (B)
,023
...........
...........
.........
...........
...........
2
..
...........
.........
............
...........
...........
...........
...........
...........
..
Common Stock ($1 par)Spartan ..................

...........
(10,000) (EL)
00
...........
...........
(2,000)
...........
...........
8,0
Paid-In Capital in Excess of ParSpartan .....

...........
(90,000) (EL)
0
...........
...........
(18,000)
...........
...........
72,00
Retained EarningsSpartan ..........................

...........
(120,000) (EL)
0 (NCI)
60,000
...........
.......
...........
...........
96,00
....
...........
00
.......
............
...........
...........
...........
............
...........
...........
0
(80,250)
(A1A2)
...........
...........
(BI)
...........
...........
Common Stock ($1 par)Postman ................

(100,000)
............
...........
.......
...........
...........
(100,000)
Paid-In Capital in Excess of ParPostman ....

(800,000)
............
...........
.......
...........
...........
(800,000)
Retained EarningsPostman .........................
3,3
....
45
...........
....
...........
....
(300,000)
.....
...........
,800
.........
............
...........
...........
............
...........
(285,000)
(A1A2)
...........
...........
(BI)
...........
...........
13,200
......
1
..
Gain on Bond Retirement ...............................

...........
............
...........
(B)
6,833
(6,833)
..
.........
...........
...........
Sales ...............................................................
(850,000)
(320,000) (IS)
20,
000
...........
(1,150,000) .......
.
...........
...........
500,000
200,000
(IS)
20,000
...........
.........
...........
...........
...........
,000 (BI)
.........
............
2,250
...........
(EI)
680,750
...........
...........
..
3
..

30,000
5,000 (A1)
00
...........
41,500
.......
...........
...........
6,5
....

15,000
10,000 (A2)
0
...........
35,000
.......
...........
...........
10,00
....
Other Expenses ..............................................

140,000
70,000
...........
210,000
.........
...........
...........
...........
..

...........
7,676
(B)
7,676
...........
.........
...........
...........
...........
..

(8,596)
............
(B)
,596
...........
...........
.........
...........
...........
8
..

(21,859)
............
(CY1)
859
...........
...........
.........
...........
...........
21,
..
Dividends DeclaredSpartan .........................

...........
10,000
(CY2)
8,000
...........
2,000
...........
...........
...........
Dividends DeclaredPostman .......................

20,000
............
...........
...........
.......
20,000
...........
...........
....
Totals ..............................................................
0
0
28
681,728
...........
.........
...........
...........
681,7
..

................................................................................
.............
(189,583)
..
.........
...........
...........
................................................................................
..........
3,197
(3,197)
...........
...........
................................................................................
...
186,386
..
.........
(186,386)
...........
Total NCI ......................................................................
................................................................................
.................................................
(101,447)
...........
(101,447)
................................................................................
.....................................
(451,386)
(451,386)
Totals .........................................................................
................................................................................
................................................................................
...................
0
272
Ch. 5Problems
Problem 5-6, Concluded
(CY1)
(CY2)
(EL)
Eliminate controlling interest in Sub equity.

(A)
Amortize excess.
(IS)
(IA)
(BI)
(EI)
(B)
Proof for Bond Retirement

.
Carrying value at December 31, 20X5 ......................................

$102,023
96,110
$5,913

Interest revenue eliminated ..............................................
..........
$
8,596
Interest expense eliminated ..............................................

.........
7,676
920
.........
Gain at January 1, 20X5 .............................................

$6,833
273
Ch. 5Problems
PROBLEM
5-7

Compan
y
Parent
NCI
Price
Value
Impl
ied
Fair V
alue
(80%)

0,000
$400,000
(20%)
$50
$100,000

Common stock ($1 par) ...............
10,000
90,000
00,000
Total equity ............................
$200
,000
$200,000
$200,000

80%
20%
Book value ........................................

$160,000
$ 40,000
value............................................
$240,000
$ 60,000
,000
$300

Worksheet
nt
Amortization
Key
Adjustme
per Year
Life
Buildings ...........................................
$130,000
debit D1
$
6,500
20
Equipment .........................................
50,000
debit D2
10,000
Goodwill ............................................
120,000
debit D3
Total ............................................
$300,000
Account Adjustments
Current
Annual
mount
Key
to Be Amortized
Year
Prior
Years
Life
Total
Buildings ...............................
6,500
$
20
$13,000
6,500
...... $19,500 ..........................
(A1)
Equipment ............................
10,000
10,000
5
20,000 30,000
...... (A2)
Total amortizations ........
$16,500
$16,500
$33,000
$49,500
274
Ch. 5Problems
Prob
lem 5-7 Continued
Profit Deferral
Parent
Parent
Sub
Parent
Sub
Sub
Amount
Percent
Percent
Profit
Profit
Amount
Beginning ..............................
0%
25%
$3,000
$12,000
Ending ...................................
0
25
2,500
10,000
Subsidiary Spartan Company Inco

me Distribution
Amortizations ..............................
00
2,500
income .....................................
$17,348
Interest adjustment, bonds ..........
998
3,000
Adjusted income ...........................

350
NCI share ......................................

20%
NCI ................................................
70
$16,5
Parent Postman Company Incom

e Distribution

income .....................................
$178,6
50
80% Sparton adjusted income
of $350 ....................................
280
$178,930
275
Ch. 5Problems
Postman Company and Subsidiary Spartan Company

El
iminations
Controlling
Consolidated
Consolidated
Trial Balance
and Ad
justments
Income
Balance
Retained
Postman
CI
Spartan
Cr.
Earnings
Dr.
Statement
Sheet
Cash ................................................................
290,486
99,347
...........
...........
...........
..
.........
...........
389,833
120,000
91,000
(IA)
6,000
...........
.........
...........
205,000
...........
..
Inventory .........................................................
140,000
55,000
...........
(EI)
2,500
...........
..
.........
...........
192,500
Land ................................................................
200,000
60,000
...........
...........
...........
..
.........
...........
260,000
Investment in Spartan .....................................
435,737
............
(CY1)
13,878
...........
.........
...........
...........
...........
,000
............
...........
(CY2)
...........
...........
..
8
..
.........
...........
...........
...........
(EL)
.........
............
189,859
...........
...........
...........
...........
(D)
.........
............
240,000
...........
...........
...........
Investment in Spartan Bonds ..........................

96,760
............
(B)
96,760
...........
.........
...........
...........
Buildings ........................................................
600,000
100,000 (D1)
00
...........
...........
.........
...........
830,000
...........
..
...........
..
...........
..
130,0
..

(340,000)
(45,000)
...........
(A1)
19,500
...........
..
.........
...........
(404,500)
Equipment .......................................................
150,000
80,000 (D2)
000
...........
...........
.........
...........
280,000
50,
..

(105,000)
(60,000)
...........
(A2)
30,000
...........
..
.........
...........
(195,000)
Goodwill ..........................................................
...........
............
(D3)
00
...........
...........
.........
...........
120,000
(40,000)
(34,000) (IA)
,000
...........
...........
.........
...........
(68,000)
120,0
..
6
..
Bonds Payable ................................................

...........
(100,000) (B)
00
...........
...........
.........
...........
...........
100,0
..
Discount (Premium) ........................................

...........
(1,675) (B)
,675
...........
...........
.........
...........
...........
1
..
...........
............
...........
...........
...........
..
.........
...........
...........
Common Stock ($1 par)Spartan ..................

...........
(10,000) (EL)
00
...........
...........
(2,000)
...........
...........
8,0
Paid-In Capital in Excess of ParSpartan .....

...........
(90,000) (EL)
0
...........
(18,000)
...........
...........
72,00
Retained EarningsSpartan ..........................

...........
(137,324) (EL)
(NCI)
60,000
...........
.......
...........
...........
109,859
....
...........
00 (B)
.......
............
1,183
...........
...........
............
...........
...........
0
(81,448)
(A1A2)
...........
...........
(BI)
...........
...........
Common Stock ($1 par)Postman ................

(100,000)
............
...........
.......
...........
...........
(100,000)
Paid-In Capital in Excess of ParPostman ....

(800,000)
............
...........
.......
...........
...........
(800,000)
Retained EarningsPostman .........................

(475,455)
............
(A1A2)
...........
...........
.....
...........
...........
...........
,400
.........
............
...........
(451,385)
(BI)
...........
...........
...........
(B)
.........
............
4,730
...........
...........
...........
6,6
....
60
...........
....
...........
....
26,400
......
2
..
...........
..
Sales ...............................................................
(900,000)
(350,000) (IS)
25,
000
...........
(1,225,000) .......
.
...........
...........
530,000
230,000
...........
(IS)
25,000
.........
...........
...........
,500 (BI)
.........
............
3,000
...........
...........
...........
..
(EI)
2
..
734,500
...........

30,000
5,000 (A1)
00
...........
41,500
.......
...........
...........
6,5
....

15,000
10,000 (A2)
0
...........
35,000
.......
...........
...........
10,00
....
Other Expenses ..............................................

155,000
80,000
...........
235,000
.........
...........
...........
...........
..

...........
7,652
(B)
7,652
...........
.........
...........
...........
...........
..

(8,650)
............
(B)
,650
...........
...........
.........
...........
...........
8
..

(13,878)
............
(CY1)
878
...........
...........
.........
...........
...........
13,
..
Dividends DeclaredSpartan .........................

...........
10,000
(CY2)
8,000
...........
2,000
...........
...........
...........
Dividends DeclaredPostman .......................

20,000
............
...........
...........
.......
20,000
...........
...........
....
Totals ..............................................................
0
0
62
708,062
...........
.........
...........
...........
708,0
..

................................................................................
.............
(179,000)
..
.........
...........
...........
................................................................................
..........
(70)
70
...........
...........

................................................................................
...
178,930
..
.........
(178,930)
...........
Total NCI ......................................................................
................................................................................
.................................................
(99,518)
...........
(99,518)
................................................................................
.....................................
(610,315)
(610,315)
Totals .........................................................................
................................................................................
................................................................................
...................
0
276
Ch. 5Problems
(CY1)
(CY2)
(EL)

(A)
Amortize excess.
(IS)
(IA)
(BI)
(EI)
(B)

$5,913 = $1,183 NCI portion + $4,730 controlling portion
Proof:

Carrying value at December 31, 2006 .......................................
$101,675
Investment in bonds at December 31, 2006 ..............................
96,760
$4,915

Interest revenue eliminated ...............................................
.........
$
8,650
Interest expense eliminated ...............................................
........
7,652
998
..
Remaining gain at January 1, 2006 ...................................

$5,913
277
Ch. 5Problems
PROBLEM 5-8
(1) (a) $14,000 decrease in income. The $21,000 gain is eliminated. Depreciati
on expense is
reduced by 1/3 of the gain, $7,000.
(b) $10,000 decrease in income. The gain on the ending inventory is def
erred. The profit
would be 1/3 1/2 $60,000.
(c) $9,000 increase. The intercompany bonds are retired on the workshe
et which creates a
$9,000 gain in 20X2.
(2)
(Shaws 10% is included in NCI.)
y appear in a separate
(Shaws 10% is included in NCI; however, the NCI ma

column of a retained earnings statement.)
[Same note as for (g) above.]
278
Ch. 5Problems
PROBLEM 5-9

Company
NCI
Price
Value
Implied
Parent
Fair Value
(90%)

$750,000
$675,000
(10%)
$ 75,000

Total equity..................................
600,000
$600,000
$600,000

90%
Book value ........................................
$540,000
10%
$ 60,000

value............................................
$150,000
$135,000
$ 15,000

Worksheet
Amortization
Adjustment
per Year
Key
Goodwill ............................................
$150,000
debit D
Life
Income Distrib
ution Schedules
Subsidiary Sundown Company Income D

istribution
Interest adjustment
($10,702 $9,621) ................
income ...................................
$8,758
$1,081
Realized equipment gain ............

2,000
Adjusted income .........................

$9,677
NCI share ....................................
20%
NCI ..............................................
968
Parent Princess Company Income

Distribution

0
$6,00
income .....................................
$60,702
90% Sundown adjusted income
of $9,677 .................................
8,709

$63,411
279
----------------------- Page 34----------------------To download more slides, ebook
, solutions and test bank, visit
Ch. 5Problems
Prin
cess Company and Subsidiary Sundown Company

Eliminations
Controlling
Consolidated
Consolidated
Trial Bal
ance
and Adjustments
Retained
Income
Sundown
Statement
Dr.
NCI
Earnings
Inventory ................................................
80,000
..........
(EI)
00
.........
..........
..........
99,000
Equipment ..............................................
1,522,413
..........
10,000
..........
..........
Accumulated Depreciation .....................
(600,000)(F1)
4,000
.........
..........
..........
,000)
Balance
Princess
Cr.
Sheet
25,000
6,0
371,190
(F1)
(200,000)
..........
(794
2,000
..........
..........
..........
........
Investment in Sundown Stock ................

..........
(CV)
180,000 (EL)
.........
..........
..........
..
675,000
720,000
........
..........
.........
(F2)
..........
..
..........
.........
..........
(D)
..........
135,000
........
Investment in Sundown Bonds ...............

..........
..........
(B)
8
.........
..........
..........
90,888
90,88
........
..........
..
..
Goodwill .................................................
..........
(D)
150,000
.........
..........
..........
0,000
..........
..........
Bonds Payable, 9% ................................

(200,000) (B)
100,000
.........
..........
..........
0,000)
..........
..........
(10
Discount on Bonds Payable ...................

6,345
..........
(B)
73
.........
..........
..........
3,172
..........
15
3,1
Common Stock ($10 par)

Princess ..............................................
..........
..........
.........
..........
..........
0,000)
(200,000)
..........
(20

Princess ..............................................
..........
..........
.........
..........
..........
0,000)
(300,000)
..........
(30
Retained Earnings, January 1, 20X6

Princess ..............................................
..........
..........
(CV)
.........
..........
(582,294)
(401,376)
180,000
........
..
..........
18
..
..........
.........
(F1)
..........
5,400 (B)
..........
Common Stock ($10 par)Sundown .....

(200,000)(EL)
180,000
.........
(20,000) ..........
6,3
........
..........
..........
..........

Sundown ............................................
(100,000)(EL)
90,000
.........
(10,000) ..........
..........
..........
........
..
Sundown ............................................
(500,000)(EL)
450,000 (B)
.........
..........
..........
..........
702
........
..
0
..
..........
.........
(F1)
600
(NCI)
(65,102) ..........
Sales ......................................................
(260,000)(IS)
50,000
(510,000)
..........
..........
..
..........
15,00
........
(300,000)
..........
........

72,000 (EI)
6,000 (IS)
0
128,000
..........
..........
..
100,000
50,00
........
Interest Income ......................................

)
..........
(B)
10,702
.........
..........
..........
..
(10,702
..........
........
Other Expenses .....................................

160,000
..........
(F2)
00
308,000
..........
..........
..
21
..
19,242
9,621
..........
..........
(B)
..........
150,000
2,0
........
9,6
........
...........
0
0
1,228,702
..........
1,228,702
..........
........
..
.......................................................................
(64,379)
..........
..........
........
..
To NCI (see distribution schedule) ..........................................
...................................................................
968
(968)
..........
........
..
To Controlling Interest (see distribution schedule) .........................
.............................................................
63,411
..........
(63,411)
........
..
Total NCI ......................................................................
................................................................................
.......................
(96,070) ..........
(9
6,070)
................................................................................
.........
(645,705)
(645,
705)
Totals ......................................................................
................................................................................
....................................................................
0
280
Ch. 5Problems
(CV)
Conversion entry, 90% ($500,000 $300,000) = $180,000.
(EL)
Eliminate pro rata share of subsidiary equity balances against th
e investment account.
(D)/(NCI) Distribute the excess and adjust NCI according to the determination an
d distribution of
excess schedule.
(F1)
Reduce machine to cost to consolidated entity. Unrecognized gain
of $6,000 remaining at beginning of year is split 90% to controlling retained ear
nings and 10% to NCI
retained earnings.
(F2)
Reduce current-year depreciation expense due to sale of machine,
$10,000 5 years
= $2,000.
(B)
Eliminate intercompany interest revenue and expense. Eliminate th
e balance in the
investment in bonds against the bonds payable. The gain on retire
ment at the start of
the year is calculated as follows:

..............
.......
[($200,000 $6,345) ] ...................................

$96,827
Investment in bonds at December 31, 20X6 .................
90,888
$5,939

........
Interest revenue eliminated ($89,186 12%) ......................

$10,702
Interest expense eliminated [($200,000 $7,582) 10%]....
9,621
1,081
.............
Remaining gain at January 1, 20X6 ........................

$7,020
The remaining unamortized gain is allocated 90% to the controllin

g retained earnings
and 10% to the NCI retained earnings.
(IS)
Eliminate intercompany merchandise sales.
(EI)
$6,000.
Eliminate intercompany profit in ending inventory, 30% $20,000 =
281
----------------------- Page 36-----------------------
To download more slides, ebook,

solutions and test bank, visit
Ch. 5Problems
PROBLEM 5-10
Par
atec Corporation and Subsidiary Sym Corporation
Consolidated
Controlling
Consolidated
Trial B
alance
Income
Eliminations and Adjustments

Retained
Balance
Paratec
Sym
Statement
Dr.
Earnings
Cr.
Sheet
Cash .................................................
00
40,000
.............
..........
.............
............
00
190,0
...
230,0
Accounts Receivable (net) ...............

0
142,000
.............
..........
.............
............
50
738,35
...
880,3
Inventory ..........................................
00
75,000
.............
..........
.............
............
00
500,0
...
575,0
Prepaid Rent on Equipment .............

.
7,000
7,000
.............
............
.............
............
(CL1)
............
Investment in Bonds .........................

00
65,000
.............
..........
.............
............
00
Investment in Sym Corporation ........
00
............
(CV)
..........
.............
250,0
...
315,0
400,0
...
............
160,000
............
............
.
............
510,000
.............
.............
............
(EL)
............
50,000
.............
.............
............
(D)
............
............
............
Land .................................................
00
85,000
.............
..........
.............
............
00
250,0
...
335,0
Plant and Equipment ........................

,950,000
295,000(CL2)
120,000
..........
.............
............
,365,000
1
...
2
Accumulated Depreciation
Plant and Equipment ....................
(60,000)
.............
36,000
.............
............
0)
(250,00
(CL2)
(346,0
00)
Equipment Under Operating Lease ..
00
............
120,000
.............
120,0
.............
............
(CL2)
............
Assets Under Operating Lease .....
00) ............
(CL2)
..........
.............
36,000
............
(36,0
...
............
Goodwill ...........................................
.
............
(D)
50,000
..........
.............
............
000
............
...
50,
Accounts Payable ............................
(385,00
0)
..........
00)
(52,000)
.............
Deferred Rent Revenue ...................

000) ............
(CL1)
..........
.............
.............
............
Common Stock (no par)Paratec ...

0,000) .......
........
.............
(2,000,0
...
(437,0
(7,
...
............
7,000
............
(2,00
.....
.............
............

Paratec ......................................
6,350) .......
.............
(CV)
160,000
(1,07
(1,236,350) ...................................
Common Stock (no par)Sym ........
(200,000)(EL)
........
.............
200,000
............
.............
.....
............
Sym ...........................................
(310,000)(EL)
310,000
........
.............
............
.............
.....
............
Sales ................................................
720,000) (500,000)
.............
..........
(5,220,000) .......
(4,
...
............
Rental Income ..................................

00) ............
(CL1)
12,000
..........
.............
............
(12,0
...
............
Cost of Goods Sold ..........................

068,000
300,000
.............
..........
3,368,000.........
3,
...
............
Rent Expense ...................................

.
12,000
.............
12,000
.............
............
Other Expenses ...............................
00
101,000
.............
..........
826,000
............
............
(CL1)
............
725,0
...
............
Dividends Declared ..........................

00
............
.............
..........
.............
295,000
Total ..............................................
0
895,000
895,000
.............
............
295,0
...
............
0
............

.............................................................................
(1,026,000)
(1,026,000) .......
Consolidated Retained Earnings, December 31, 20X8 ..............................
................................................................................
..
(1,967,350)
(1
,967,350)
282
----------------------- Page 37----------------------To download more slides, ebook, solutions a
nd test bank, visit
Ch. 5Problems
Totals .......................................................................
................................................................................
........................................................
0
283
Ch. 5Problems
Problem 5-10, Conc
luded
(CV)
$150,000).
Convert to equity method as of January 1, 20X8, 100% ($310,000
(EL)
Eliminate the parents investment in the subsidiary and the subs
idiary equity accounts.
(D)
Establish the goodwill.
(CL1)
Eliminate the prepaid rent, the deferred rent revenue, and the
current-year rent expense and income.
(CL2)
Reclassify the equipment under operating lease and its related
accumulated depreciation to the plant and equipment account and related accumulated
depreciation.
PROBLEM 511

Company
Parent
NCI
Price
Value
(80%)
(20%)
Implie
Fair Valu

00
$450,000
$112,500
$562,5

Common stock ($1 par) ...............
000
$ 10,
190,
190,
000
000
00
Total equity ............................

$390,000
$390,000
80%
$390,0
20%
Book value ........................................

$312,000
$ 78,000
00
value............................................
$138,000
$34,500
$172,5

Worksheet
Amortization
Key
Adjustment
per Year
Life
Buildings ...........................................
$100,000
debit D1
20
00
$5,0
Goodwill ............................................
72,500
debit D2
Total ............................................
$172,500
ual
nt
Account Adjustments
Current
to Be Amortized
Year
Ann
Prior
Life
Years
Total
Amou
Key
Buildings ...............................
$5,000
20
$5,000
$5,000
$10,000 ...........................
$5,000
$10,000
(A1)
$5,000
$5,000
284
Ch. 5Problems
Probl
em 5-11 Continued
Profit Deferral
Parent
Parent
Sub
Parent
Sub
Sub
Amount
Percent
Percent
Profit
Profit
Amount
Beginning ..............................
0%
$2,500
$10,000 25%
Ending ...................................
0
3,000
12,000 25
Subsidiary Simon Company Incom

e Distribution

,000
$3
Amortization ................................
5,000
income .....................................
$40,804
2,500
Adjusted income ...........................

$35,304
NCI share ......................................

20%
NCI ................................................
$ 7,061
Parent Press Company Inco

me Distribution

income .....................................
$174,1
96
80% Simon adjusted income
of $35,304 ...............................
28,243
$202,439
285
----------------------- Page 40----------------------To download more slides, ebook,
Ch. 5Problems
Problem 5-11 Continued
Press Company and Subsidiary Simon Company

W
orksheet for Consolidated Financial Statements

Eliminations
Controlling
onsolidated
C
Consolidated
Trial Balan
ce
and Adjustments
Retained
Income
Simon
Statement
Dr.
NCI
Earnings
Cash .................................................
73,637
.........
........
.........
.........
Balance
Press
Cr.
Sheet
72,363
.........
146,000
Accounts Receivable ........................

45,000
.........
(IA)
........
.........
.........
72,000
6,000
111,000
Inventory...........................................
56,000
.........
(EI)
........
.........
.........
120,000
3,000
173,000
Land .................................................
100,000
.........
........
.........
.........
Investment in Simon .........................
.........
.........
(CY1)
........
.........
.........
.........
........
.........
........
(CY2)
.........
.........
8,000
.........
.........
(EL)
.........
100,000
.........
200,000
506,643
32,643
........
.........
.........
........
.........
344,000
........
.........
(D)
.........
.........
138,000
........
Receivable ....................................
.........
.........
(CL2)
........
.........
....... ..
103,452
103,452
........
.........
........
.........
Minimum Lease Payments
Unearned Interest ............................

.........
(CL2)
17,619
........
.........
.........
(17,619)
.........
........
Buildings ..........................................
400,000(D1)
100,000
........
.........
.........
300,000
800,000
.........
Accumulated Depreciation ...............

(220,000)
.........
(A1)
........
.........
.........
)
Equipment ........................................
100,000
.........
........
.........
.........
1,
(220,000)
10,000
(450,000
150,000
.........
350,000
100,000
.........
.........
.........
........

(50,000)
.........
........
.........
.........
(90,000)
.........
........
.........
........
(CL3)
.........
.........
........
.........
.........
(CL3)
.........
.........
18,000
(158,000
)
EquipmentCapital Lease ..............
100,000
.........
(CL3)
.......
.........
.........
.........
100,000
.
........
Capital Lease ................................
(18,000)(CL3)
18,000
........
.........
.........
Goodwill ............................................
.........
.........
........
.........
.........
........
(D2)
.........
72,500
.........
.........
72,50
0
(40,000)(IA)
6,000
........
.........
.........
0)
(60,000)
.........
(94,00
Bonds Payable .................................

.........
.........
........
.........
.........
.........
.........
........
Discount (Premium) .........................

.........
.........
........
.........
.........
.........
.........
........
Obligation Under Capital Lease .......

(76,637)(CL2)
........
.........
76,637
.........
.........
.........
........
Accrued InterestCapital Lease .....

(9,196)(CL2)
........
.........
9,196
.........
Common Stock ($1 par)Simon .....

(10,000)(EL)
........
(2,000)
.........
.........
........
8,000
.........
.........
.........
........
Simon ........................................
(190,000)(EL)
152,000
........
(38,000) .........
.........
.........
........
Retained EarningsSimon ..............

(230,000)(EL)
184,000
........
.........
.........
.........
.........
........
.........
........
(BI)
.........
.........
........
(A1)
.........
.........
........
500
(NCI)
.........
1,000
.........
.........
(79,000) .........
.........
34,500
........
.........
.........
........
.........
.........
........
286
Ch. 5Problems

W
Concluded
Eliminations
Controlling
Consolidated
Consolidated
Trial Balan
ce
and Adjustments
Retained
Income
Simon
Statement
Dr.
NCI
Earnings
Common Stock ($1 par)Press ......

........
.........
........
.........
.........
Balance
Press
Cr.
Sheet
(100,000) .
.........
(100,000)
Press .........................................
........
.........
........
.........
.........
(800,000) .
.........
(800,000)
Retained EarningsPress ...............

........
(A1)
........
.........
(450,000)
.........
........
.........
........
.........
........
(BI)
.........
4,000
.........
2,000
.........
.........
.........
(444,000)
Sales ................................................
(400,000)(IS)
40,000
(1,160,000) ...
.........
240,000
.........
(IS)
........
.........
.........
.........
650,500
(EI)
.........
Depreciation ExpenseBuildings ....

10,000(A1)
45,000
.........
3,000(BI)
.........
.........
.........
........
.........
.........
........
(800,000)
.........
........
450,000
40,000
........
.........
2,500
........
5,000
.........
30,000
.........
........
Depreciation ExpenseEquipment
28,000
.........
........
.........
.........
15,000
.........
........
.........
.........
.........
........
Other Expenses ...............................

72,000
.........
212,000
.........
.........
140,000
.........
........
.........
43,000
.........
.........
Interest Expense ..............................

9,196
.........
(CL1)
........
.........
.........
Interest Revenue ..............................
) .........
(CL1)
9,196
.........
9,196
........
(9,196
.........
........
.........
........
.........
.........
.........
.........
.........
........
.........
.........
........
Subsidiary Income ............................

.........
(CY1)
32,643
........
.........
.........
(32,643)
.........
........
Dividends DeclaredSimon ............

10,000
.........
(CY2)
........
2,000
.........
.........
8,000
........
Dividends DeclaredPress .............

.........
.........
........
.........
20,000
Totals ................................................
0
849,291
........
.........
.........
20,000
.........
........
0
849,291
........

........................................................
(209,500) .........
.........
........
.....................................................
7,061
(7,061) .........
........
.............................................
202,439
.........
...............................................................................
......................................................... (202,439)
Total NCI ......................................................................
................................................................................
......
(124,061) .........
(124,06
.....................................................................
(626,439)
(626,439)
Totals .........................................................................
................................................................................
.................................................
0
287
Ch. 5Problems
Problem 5-11 Concluded
(CY1)
(CY2)
(EL)
(D)/(NCI) Distribute excess.

(A)
Amortize excess.
(IS)
(IA)
(BI)
(EI)
CL1
Intercompany interest on capital lease.
CL2
Eliminate Obligation under capital lease plus accrued interest agai
nst minimum lease
payments receivable and unearned interest.
CL3
Reclassify leased asset as owned asset.
288
----------------------- Page 43-----------------------
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sit
Ch. 5Proble
ms
PROBLE
M 5-12

Compa
ny
Parent
NCI
Im
plied
Price
Value
Fair
Value
(80%)

62,500
$450,000
(20%)
$5
$112,500

Common stock ($1 par) ..............
10,000
190,000
190,000
90,000
Total equity ...........................

$390,000
$390,000
80%
$3
20%
Book value ........................................

$312,000
$ 78,000
value ...........................................
$1
72,500
$138,000
$ 34,500

Worksheet
Amortizati
on
ent
ar
Key
Adjustm
per Ye
Life
Buildings ...........................................
$100,000
debit D1
$5,000
20
Goodwill ............................................
72,500
debit D2
Total ............................................
$172,500
Account Adjustments
Annual
Current
Prior
to Be Amortized
Amount
Year
Life
Total
Years
Key
Buildings ...............................
$5,000
$5,000
$15,000 ...........................
Total amortizations .........
$5,000
$15,000 ...........................
20
$10,000
(A1)
$5,000
$10,000
rofit Deferral
Parent
Parent
Sub
Percent
Profit
Parent
Profit
Sub
Sub
Amount
Percent
Beginning ..............................
0%
$3,000
Amount
Ending ..................................
0
2,000
$12,000
25%
8,000
25
289
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Ch. 5Problems
Proble
m 5-12 Continued
Subsidiary Simon Company Incom

e Distribution

00
$2,0
Amortization ................................
000
income .....................................
$22,504
5,
Beginning inventory profit ..............

3,000
Adjusted income ............................

$18,504
NCI share .......................................
20%
NCI .................................................
$ 3,701
Parent Press Company Inco

me Distribution

income .....................................
80% x Simon adjusted income
of $18,504 ................................
14,803
$152,496
Controlling interest .........................
$167,299
290
----------------------- Page 45----------------------To download more slides, ebook, s
olutions and test bank, visit
Ch. 5Problems
Pre
ss Company and Subsidiary Simon Company
Work
sheet for Consolidated Financial Statements
ated
Eliminations
Controlling
and Adjustments
Consolid
Consolidated
Trial Balance
Inc
ome
Simon
ent
Retained
NCI
Balance
Press
Cr.
Sheet
Dr.
Earnings
Cash .................................................
78,274
.............
........
............
.............
Statem
140,000
............
....
218,274

55,000
.............
(IA)
.....
............
.............
135,000
87,000
7,000 ......
Inventory...........................................
66,000
.............
(EI)
.....
............
.............
234,000
170,000
2,000 ......
Land .................................................
100,000
.............
........
............
.............
168,726
............
....
268,726

.......
.............
03 .
............
.............
(CY1)
............
516,646 ....
18,0
...........
........
(CY2)
............
............
............
............
...........
...
.............
(EL)
............
.............
............
.
368,643 ........
............
...........
...
.............
............
.............
............
.
138,000 ........
............
8,000
.............
(D)
.
....

Receivable ....................................
.......
.............
89 .
............
.............
80,089 ....
80,0
(CL2)
............
Unearned InterestMinimum Lease

Payment ........................................
(10,123) ...
.......
(CL2)
10,123 ............
....
........
............
.............
............
Buildings ..........................................
800,000
400,000(D1)
........
............
100,000
.............
............
....
1,300,000
Accumulated DepreciationBldg. ...

(230,000)
.............
(A1)
..
............
.............
(495,00
(250,000)
15,000 .........
Equipment ........................................
100,000
.............
........
............
.............
150,000
............
....
350,000
...........
........
(CL3)
............
100,000
.............
............
............
............
.
....
Accumulated DepreciationEquip.
(60,000)
.............
(CL3)
..
............
.............
(201,00
(105,000)
36,000 .........

100,000
.............
(CL3)
.
............
.............
............
100,000 ..........
............
Capital Lease ................................
(36,000)(CL3)
36,000
........
............
.............
............
............
............
....
Goodwill ............................................
...........
(D2)
72,500
........
............
.............
............
............
72,500
.
....

(30,000)(IA)
7,000
........
............
.............
(60,000)
............
....
(83,000)
Bonds Payable .................................

...........
.............
........
............
.............
............
............
............
.
....

...........
.............
........
............
.............
............
............
............
.
....
...........
........
.............
............
.............
............
............
............
.
....

(62,470)(CL2)
62,470
........
............
.............
............
............
............
....

(7,496)(CL2)
7,496
......
............
.............
............
............
......
............
291
Ch. 5Problems

Concluded
Eliminations
Controlling
Consolidated
Consolidated
Trial Bala
nce
and Adjustments
Retained
Income
Simon
Statement
Dr.
NCI
Earnings

(10,000)(EL)
8,000
............
(2,000) ...........
Balance
Press
Cr.
Sheet
............
............
............
Paid-In Capital in Excess of

ParSimon ...................................
(190,000)(EL)
152,000
............
(38,000) ...........
............
............
............

(260,804)(EL)
208,643
............
............
.............
............
............
............
............
...........
(BI)
............
600
(NCI)
.............
............
34,500
...........
(A1)
............
2,000
.............
............
............
...........
.
............
............
.
............
............
............
............
...........
.............
(84,061) ...........
.
........
.............
............
............
.............
(100,00
(100,000) ..
............

Press .........................................
........
.............
............
............
.............
(800,00
........
(A1)
8,000
............
............
.............
............
............
(BI)
............
(800,000) ..
............
(636,839) ..
............
............
2,400
.............
............
............
...........
.
............
............
.............
............
(626,439)
Sales ................................................
(450,000)(IS)
35,000
(1,315,000) ...
.............
.
............
............
............
(900,000)
............
...........

290,000
.............
(IS)
...........
............
.............
.
550,000
35,000
...........
............
0
.
............
(EI)
804,000 ...........

10,000(A1)
45,000 ...........
2,000(BI)
.............
3,00
...........
5,000
.............
30,000
............
............
28,000
.............
............
............
.............
15,000
............
............
............
.............
43,000 ............
.............
............
............
...........
Other Expenses ...............................

92,000
.............
252,000 ............
.............
.
160,000
............
...........

7,496
.............
(CL1)
6 ...........
............
.............
.
............

) ..........
(CL1)
7,496
............
............
.............
.
(7,496
............
...........
7,49
...........
.............
............
.............
................
............
...........

(CY1)
18,003
............
............
.............
.
(18,003)
............
...........
............
............
.

10,000
.............
(CY2)
2,000 ...
.........
.............
............
............
............
8,000
............
20,000 ..
............
20,000 .
Totals ................................................
0
852,731
...........
............
.............
.
0
852,731
...........

........................................................
(171,000) ..........
.............
...........
.
.....................................................
3,701
(3,701) ...........
...........
.
.............................................
167,299 ............
(167,299) ...................................................................
...................................................................
Total NCI ......................................................................
................................................................................
......
(125,762) ...........
(125,76
.....................................................................
(773,738)
(773,73
8)
292
----------------------- Page 47----------------------To download more slides, ebook, solutions a
nd test bank, visit
Ch. 5Problems
Totals .......................................................................
................................................................................
...............................................
0
293
Ch. 5Problems
(CY1)
(CY2)
(EL)
(D)
Distribute excess.
(A)
Amortize excess.
(IS)
(IA)
(BI)
(EI)
(CL1)
(CL2)
Eliminate obligation under capital lease plus accrued interest ag
ainst minimum lease
(CL3)
PROBLEM 5-13

Company
Parent
NCI
Implied
Price
Value
(80%)
(20%)
Fair Value

$450,000
$112,500
$562,500

Common stock ($1 par) ...............
$ 10,000
190,000

Total equity ............................
$390,000
$390,000
190,000
$390,000

80%
20%
Book value ........................................
$312,000
$ 78,000
value............................................
$138,000
$ 34,500
$172,500
294
Ch. 5Problems
Problem
5-13 Continued

Worksheet
Amortization
Adjustment
per Year
Key
Life
Buildings ...........................................
$100,000
debit D1
$5,000
20
Goodwill ............................................
72,500
debit D2
Total ............................................
$172,500
Account Adjustments
Annual
to Be Amortized
Amount
Total
Current
Prior
Year
Years
Life
Key
Buildings ...............................
$5,000
$5,000
$10,000
$5,000
$5,000
$10,000
20
$5,000
$5,000
rofit Deferral
Parent
Parent
Sub
Parent
Sub
Sub
Amount
Percent
cent
Profit
Amount
Per
Profit
Beginning ..............................
0%
25%
$2,500
$10,000
Ending ...................................
0
25
3,000
12,000
Subsidiary Simon Company Income

Distribution

000
Amortization ................................
000
income .....................................
$40,804
2,500
$3,
5,
Adjusted income ...........................

$35,304
NCI share ......................................
20%
NCI ................................................
$ 7,061
Parent Press Company Incom

e Distribution
Equipment gain ...........................

0
$15,00
income .....................................
$174,196

of $35,304 ...............................
28,243
Realized gain ................................
3,000
295
$190,439

Ch. 5Problems

W
Eliminations
Controlling
onsolidated
C
Consolidated
Trial Balan
ce
and Adjustments
Retained
Income
Simon
Statement
Dr.
NCI
Earnings
Cash .................................................
73,637
.............
............
............
.............
Balance
Press
Cr.
Sheet
72,363
............
146,000

45,000
.............
(IA)
...........
............
.............
111,000
72,000
6,000
Inventory...........................................
56,000
.............
(EI)
...........
............
.............
173,000
120,000
3,000
Land .................................................
100,000
.............
............
............
.............
100,000
............
200,000

..........
.............
32,643 .
............
.............
506,643 .
(CY1)
............
............
............
(CY2)
............
8,000
.............
............
............
............
............
.........
.............
(EL)
............
.............
............
344,000 ..
............
............
.........
.............
(D)
............
.............
............
138,000 ..
............

Receivable ....................................
.........
.............
103,452
............
.............
103,452 ..
(CL2)
............

(17,619)
..........
(CL2)
17,619 ............
............
............
.............
............
Buildings ...........................................
400,000(D1)
100,000
............
............
.............
00,000
800,000
............
1,3

(220,000)
.............
(A1)
..........
............
.............
(450,00
(220,000)
10,000 .
Equipment ........................................
100,000
.............
(F1)
..........
............
.............
335,000
150,000
15,000 .
............
............
(CL3)
............
100,000
.............

(50,000)
.............
............
............
............
(90,000)
............
............
............
.............
............
............
............
.............
............
.............
............
............
............
............
............
(F2)
............
............
............
............
............
...........
(155,00
3,000
.............
.............
(CL3)
............
.............

100,000
.............
(CL3)
........
............
.............
............
18,000
............
100,000 ...
............
Capital Lease ................................
(18,000)(CL3)
18,000
............
............
.............
............
............
............
Goodwill ............................................
............
(D2)
72,500
............
............
.............
0
............
............
72,50

(40,000)(IA)
6,000
............
............
.............
0)
(60,000)
............
(94,00
Bonds Payable .................................

............
.............
............
............
.............
............
............
............

............
.............
............
............
.............
............
............
............
............
............
.............
............
.............

(76,637)(CL2)
............
............
76,637
.............
............
............
............
............
............
............

(9,196)(CL2)
............
............
............
............
............
9,196
.............

(10,000)(EL)
8,000
............
(2,000) ...........
............
............
............
296
Ch. 5Problems

Concluded
Consolidated
Eliminations
Controlling
Consolidated
Trial Balan
ce
Income
and Adjustments
Retained
Balance
Press
Simon
Statement
Dr.
NCI
Cr.
Sheet
Earnings

Simon .......................................
(190,000)(EL)
152,000
............
(38,000) ...........
(230,000)(EL)
184,000
............
............
.............
............
............
............
............
...........
............
............
............
............
............
(BI)
............
500
(NCI)
.............
............
34,500
............
(A1)
............
1,000
.............
............
............
............
............
............
............
............
............
.............
(79,000) ...........

........
.............
............
............
.............
(100,00
(100,000) ..
............

Press .........................................
.......
.............
............
............
.............
(800,00
........
(A1)
4,000
............
............
.............
(800,000) ...
............
............
............
............
............
(BI)
............
2,000
.............
(450,000) ..
............
............
.............
............
(444,000)
Sales ................................................
............
............
............
............
............
............
(800,000)
(400,000)(IS)
(1,160,000) ...
40,000
.............
............
............

240,000
.............
(IS)
...........
............
.............
465,000
40,000
............
......................................................
(EI)
3,000(BI)
665,500 ............
.............
2,500
............

10,000(A1)
45,000 ............
5,000
.............
30,000
............
............
28,000
.............
............
............
.............
15,000
............
............
......................................................
.............
(F2)
40,000 ...........
.............
Other Expenses ...............................

72,000
.............
212,000 ...........
.............
9,196
.............
(CL1)
6 ...........
............
.............
3,00
............
140,000
............
............
9,19
............

)
(CL1)
9,196
............
............
.............
(9,196
............
............
Gain on Fixed Asset Sale .................

(F1)
15,000
............
............
.............
(15,000)
............
............

(CY1)
32,643
............
............
.............
(32,643)
............
............

10,000
.............
(CY2)
...........
2,000 ...
8,000
............
20,000 ..
.........
............
.............
............
Totals ............................................
0
867,291
..........
............
.............
............
20,000 .
0
867,291 .
............

........................................................
(197,500) ..........
.............
............
.....................................................
7,061
(7,061) ...........
............
.............................................
190,439 ............
(190,439) ...................................................................
...................................................................
Total NCI ......................................................................
................................................................................
......
(124,061) ...........
(124,06
297
----------------------- Page 52----------------------To download more slides, ebook, solutio
ns and test bank, visit
Ch. 5Problems

.....................................................................
(614,439)
(614,439)
Totals ......................................................................
................................................................................
....................................................................
0
298
Ch. 5Problems
(CY1)
(CY2)
(EL)

(A)
Amortize excess.
(IS)
(IA)
(BI)
(EI)
(F1)
Fixed asset profit at beginning of year.
(F2)
Fixed asset profit realized.
(CL1)
(CL2)
Eliminate obligation under capital lease plus accrued interest aga
inst minimum lease
(CL3)
PROBLEM 5-14
Company
Implied
Parent
NCI
Price
Value
Value Analysis Schedule

(100%)
(0%)
Fair Value
Company fair value ..................................................

$562,500
$450,000
$112,500
Fair value of net assets excluding goodwill ..............
490,000
392,000
98,000
Goodwill ...................................................................
$
72,500 $
58,000 $
14,500
Gain on acquisition

Company
Parent
NCI
Price
Value
(80%)
(20%)
Implied
Fair Value

$450,000
$112,500
$562,500

Common stock ($1 par) ...............
$ 10,000
190,000
190,000
$390,000
Total equity ............................

$390,000

80%
20%
$390,000
Book value ........................................

$312,000
$ 78,000
value............................................
$138,000
$ 34,500
$172,500
299
Ch. 5Problems
Problem
5-14 Continued

Worksheet
Amortization
Adjustment
per Year
Key
Buildings ...........................................
$100,000
debit D1
$5,000
Goodwill ............................................
72,500
debit D2
Total ............................................
$172,500
Life
20
Account Adjustments
Annual
to Be Amortized
Amount
Total
Current
Prior
Life
Year
Years
Key
Buildings ...............................
$5,000
$10,000
$15,000
20
$5,000

$5,000
$10,000
$15,000
$5,000
rofit Deferral
Parent
Parent
Sub
Parent
Sub
Sub
Amount
Percent
cent
Profit
Amount
Per
Profit
Beginning ..............................
0%
25%
$3,000
Ending ...................................
0
25
2,000
$12,000
8,000
Subsidiary Simon Company Income

Distribution

000
$2,
Amortization ................................
,000
income .....................................
$22,504

3,000
Adjusted income ...........................

$18,504
NCI share ......................................

20%
NCI ................................................
$ 3,701
Parent Press Company Incom

e Distribution

income .....................................
$152,496

of $18,504 ...............................
14,803
Realized gain ................................
3,000
Total ..............................................
$170,299
300
----------------------- Page 55----------------------To download more slides, eboo
k, solutions and test bank, visit
Ch. 5Problems

Eliminations
Controlling
Consolidated
Consolida
ted
Trial Ba
lance
and Adjustments
Retained
Income
Balan
ce
Press
Simon
Statement
Dr.
NCI
Cr.
Earnings
She
et
Cash .................................................
78,274
.............
..
............
............
.............
218,274
140,000
..........

00
55,000
.............
(IA)
7,000 ...........
............
.............
135,000
87,0
Inventory...........................................
0
66,000
.............
(EI)
2,000 ...........
............
.............
234,000
170,00
Land .................................................
6
100,000
.............
..
............
............
.............
268,726
168,72
..........

6 ...........
.............
18,003 .
............
.............
........
516,64
(CY1)
....
............
..
............
........
............
,643 ...........
........
8,000
.............
............
..........
....
.............
(EL)
............
.............
............
368
....
(CY2)
............
.............
(D)
............
.............
............
138
....
Receivable ....................................
9 ...........
.............
80,089 .
............
.............
........
80,08
(CL2)
....
............
,000 ...........
........

3) ..........
(CL2)
............
............
........
(10,12
10,123 ............
.............
....
Buildings ...........................................
0
400,000(D1)
100,000
..
............
............
.............
1,300,000
800,00
..........

)
(230,000)
.............
(A1)
5,000 ...........
............
.............
(495,00
(250,000
1
Equipment ........................................
0
100,000
.............
(F1)
5,000 ...........
............
.............
335,000
150,00
1
(CL3)
100,000
.............
..........
....

)
(60,000)
.............
..
............
............
.............
........
(105,000
..........
....
..
........
............
............
............
..
............
........
(F1)
............
..
............
........
(F2)
............
3,000
.............
............
..........
....
............
3,000
.............
............
..........
....
............
............
6,000 ...........
.............
(CL3)
............
.............
(195,00
100,000
.............
(CL3)
00 ...........
............
.............
............
100,0
......
......
Capital Lease ................................
(36,000)(CL3)
36,000
..
............
............
.............
........
............
..........
....
Goodwill ............................................
............
(D2)
72,500
..
............
............
.............
72,500
............
..........

0)
(30,000)(IA)
..
............
............
(83,000)
7,000
.............
(60,00
..........
Bonds Payable ................................

............
.............
..
............
............
.............
........
............
..........
....
Discount (Premium) ........................

............
.............
..
............
............
.............
........
............
..........
....
............
..
............
........
.............
............
.............
............
..........
....

(62,470)(CL2)
..
............
............
........
62,470
.............
............
..........
....

(7,496)(CL2)
............
............
......
7,496
.............
............
............
......
301
Ch. 5Problems

Concluded
Eliminations
Controlling
Consolidated
Conso
lidated
Trial B
alance
and Adjustments
Retained
Income
alance
Press
Simon
Statement
Dr.
NCI
Cr.
Earnings
Sheet

(10,000)(EL)
..
............
..........
8,000
(2,000) ...........
............
..........
..

Simon .......................................
(190,000)(EL)
152,000
..
............
(38,000) ...........
..........
............
..........
..

(260,804)(EL)
208,643
..
............
............
.............
............
..........
..
..........
............
............
34,500 ...........
............
(BI)
............
....
............
............
(A1)
600
............
(NCI)
.............
2,000
(84,061) ...........

..........
.............
..
............
............
.............
(100,00
............
........
(100,000)
..........

Press .........................................
..........
.............
..
............
............
.............
(800,00
..........
(A1)
............
............
..........
............
....
............
............
(BI)
............
............
(F1)
....
....
............
(636,839)
8,000 ............
.............
..
2,400
.............
12,000
............
(800,000)
..........
............
........
............
........
(614,439) ........
Sales ................................................
0)
(450,000)(IS)
35,000
....
(1,315,000) ...
.............
............
(900,00
........

0
290,000
.............
(IS)
35,000 ...........
............
.............
............
550,00
............
............
(EI)
3,000
804,000 ...........
............
0
10,000(A1)
..
45,000 ...........
..........
2,000(BI)
.............
5,000
.............
30,00
..........
..
15,00
0
3,000
..........
28,000
.............
(F2)
40,000 ............
.............
Other Expenses ...............................

0
92,000
.............
....
252,000 ...........
.............
............
..
160,00
........

............
7,496
.............
(CL1)
7,496 ...........
............
.............
............
,496) ..........
(CL1)
............
............
............
............
....
............
............
(7
7,496 ............
.............
.............
............
.............

03) ..........
(CY1)
............
............
............
............
........
(18,0
18,003 ............
.............

10,000
.............
(CY2)
8,000 ...........
2,000 ...
..........
0 ...........
.............
..
............
............
000 .
Totals ................................................
0
0
870,731
0,731 ...........
............
.............
............
............
..
20,00
..........
20,
87

........................................................
(174,000) ..........
.............
............
....................................................
3,701
(3,701) ...........
............
.............................................
170,299 ...........
(170,299) ...................................................................
...................................................................
Total NCI ......................................................................

................................................................................
......
(125,762) ...........
(125,76
.....................................................................
(764,738)
(764,738)
Totals ......................................................................
................................................................................
................................................
0
302
Ch. 5Problems

(CY1)
(CY2)
(EL)

(A)
Amortize excess.
(IS)
(IA)
(BI)
(EI)
(F1)
Fixed asset profit at beginning of year.
(F2)
Fixed asset profit realized.
(CL1)
(CL2)
Eliminate Obligation under capital lease plus accrued interest ag
ainst minimum lease
(CL3)
PROBLEM 5-15

Company
Parent
NCI
Price
Value
(80%)
(20%)
Implied
Fair Value

$320,000
$ 80,000
$400,000

Total equity ............................
$380,000
380,000
$380,000

80%
20%
Book value ........................................
$304,000
$ 76,000
value............................................
$ 16,000
$
4,000
$ 20,000

Worksheet
Amortization
Adjustment
Key
Life
per Year
Goodwill ............................................
debit D
$20,000
303
Ch. 5Problems
Problem 5
-15 Continued
Subsidiary Slammer Company Income D

istribution

income .................................
$42,937
Adjusted income .......................

$42,937
NCI share ..................................

20%
NCI ............................................
$ 8,587
Parent Plessor Industries Inco

me Distribution
Sales profit on leases ..................

income .................................
$129,361
Profit realized through use
of machine ...........................
912
80% Slammer adjusted
income of $42,937 ...............
34,350

$157,325
$7,298
304
----------------------- Page 59----------------------To download more slides, eb
ook, solutions and test bank, visit
Ch. 5Problems
Plessor Industries and Subsidiary Slammer Company

Eliminations
Controlling
Consolidated
Consolidated
Tria
l Balance
and Adjustments
Retained
Income
Balance
Plessor
r.
Slammer
Statement
Sheet
Dr.
NCI
C
Earnings
Cash .......................................................
0,000
40,745
..........
.......
.........
..........
..........
100,745
6
...
Accounts Receivable ..............................

7,778
76,000
..........
9
...
.......
.........
..........
..........
173,778
Inventory ................................................
,000
120,000
..........
.......
.........
..........
260,000
140
...
..........
Minimum Lease Payments Receivable ..

,000
..........
80,000
.........
.............
..........
..........
(CL2a)
..........
..........
..........
.........
(CL2b)
..........
..........
47,000
.........
.............
127
Unearned Interest Income ......................

,417)
..........
(CL2a)
.......
.........
..........
.............
.
..........
(CL2b)
.......
.........
.............
(14
...
9,191
..........
5,226
..........
.........
...
..........
Investment in Slammer Company ..........

,000
..........
(CV)
40,000 (EL)
344,000
.........
..........
..........
.............
320
..........
..........
.........
(D)
..........
Assets Under Capital Lease ...................

.
156,068
..........
103,770
.........
..........
.............
.........
(CL3a)
..........
.........
(CL3b)
..........
..........
16,000
.........
.............
..........
52,298
.........
.............
..........
..........
Accumulated DepreciationAssets
Under Capital Lease ..............................
.
(27,291)(CL3a)
20,754
.......
.........
..........
.............
.
.......
.............
(CL3b)
.........
6,537
..........
.........
...
..........
.........
...
..........
Property, Plant, and Equipment .............

1,900,000 310,000(CL3a)
103,770 (F1)
7,298
.........
..........
..........
.............
.
.......
..........
(CL3b)
.........
2,358,770
52,298
..........
.........
...
..........
Accumulated DepreciationProperty,
Plant, and Equipment .........................
1,077,000) (72,000)(F2)
20,754
.........
..........
.............
.
..........
6,537
.........
(1,175,379)
(
912
..........
..........
Goodwill .................................................
.
..........
(D)
20,000
.......
.........
..........
20,000
(CL3a)
..........
.........
(CL3b)
..........
.........
...
..........
Accounts Payable ..................................

,000)
(45,065)(CL2a)
.......
.........
..........
.............
7,587
.
.......
4,476
.........
...
..........
63,222
.........
...
..........
..........
(CL2b)
.........
(181,002)
.
..........
(CL2b)
.......
.........
.............
..........
..........
Obligations Under Capital Lease ............

.
(100,520)(CL2a)
.......
.........
..........
.............
(148
...
37,298
..........
.........
...
..........
305
Ch. 5Problems
Plessor Industries and Subsidiary Slammer Company

Concluded
Eliminations
Controlling
Consolidated
Cons
olidated
Trial
Balance
and Adjustments
Retained
Income
alance
Plessor
Slammer
Statement
Dr.
NCI
Cr.
Earnings
Sheet
Common Stock ($10 par)Plessor ........

)
..........
..........
..
.........
..........
(700,000)
(700,000
........
..........

)
..
Plessor ............................................
..........
..........
.........
..........
..........
(325,000)
Retained EarningsPlessor ..................

)
..........
..........
0,000
.........
..........
.....
Common Stock ($10 par)Slammer .....
(CV)
(335,000)
(325,000
........
(295,000
4
........
..........
(300,000)(EL)
.........
240,000
(60,000) ..........
........
...
Retained EarningsSlammer ................

(130,000)(EL)
104,000(NCI)
4,000
.........
(30,000) ..........
..........
..........
..
..........
...
Sales ......................................................
,400,000)(600,000)
..........
....
(2,000,000) ......
..........
............
(1
......
.
Sales Profit on Leases ...........................

,298)
..........
(F1)
7,298
....
.........
..........
..........
............
(7
......
.
Interest Income ......................................

063)
..........
(CL1a)
7,587
....
.........
..........
..........
............
(12,
......
.
..........
..........
......
.

00
380,000
..........
....
1,160,000 .......
............
..........
780,0
......
.

12,063
..........
7,587
.........
..........
............
(CL1a)
..........
..........
(CL1b)
.........
....
............
4,476
..........
..........
.
..........
..........
.........
..........
..........
(CL1b)
..........
Other Expenses .....................................

00
165,000
..........
912
674,088
..........
............
(F2)
..........
Dividend Income ....................................

000)
..........
(CY2)
12,000
....
.........
..........
..........
............
(12,
......
.
4,476
............
Dividends Declared ................................

000
15,000
..........
12,000
.........
3,000
............
.
510,0
56,
(CY2)
56,000
.
0
0
46,632
.........
............
746,632
..........
..........
7
.

.......................................................................
(165,912)
..........
..........
.
............
...................................................................
8,587
(8,587) ..........
.
............
.............................................................
157,325
..........
(157,325)
......
.......
Total NCI ......................................................................
................................................................................
.......................
(95,587) ..........
(95,587)
................................................................................
.........
(436,325)
(436,325)
Totals ......................................................................
................................................................................
....................................................................
0
(CV)
Conversion to equity as of beginning of year, 80% ($130,000
$80,000) = $40,000.
(CY2)
(EL)
Eliminate the intercompany dividends.

Eliminate 80% of the subsidiary equity.
(D)/(NCI) Distribute the excess and NCI adjustment to goodwill.
306
----------------------- Page 61----------------------To download more slides, ebook, solutions and test bank, visi
t
Ch. 5Problems
(CL1a)
n factory lease:
Eliminate the intercompany interest expense and revenue o
Original balance ........................................

...................................
$103,770
First lease payment .....................................
.................................
(25,000)
First-year interest (12% $78,770) .......................
.......................
9,452
Second lease payment ....................................
.............................
(25,000)
Balance for second year ......................
.................................
$
63,222
Interest for second year (12% $63,222) .......

.....................
$
7,587
(CL2a)
Eliminate obligation under capital lease plus accrued int
erest payable against minimum lease payments receivable and unearned interest incom
e:
Obligations balance, January 1, 20X3:

Original balance ........................................
...................................
$103,770
Principal, January 1, 20X2 ..............................
.............................
(25,000)
Principal, January 1, 20X3 ($25,000 $9,452) .............
...............
(15,548)
Balance ......................................
..........................................
$
63,222
Accrued interest payable .....................

.................................
$
7,587
Minimum lease payments, January 1, 20X3:

3 $25,000 plus $5,000 option ...........................
.........................
$
80,000
Unearned interest income, January 1, 20X3:
Original balance, $130,000* $103,770 principal balance ..
........
26,230
Earned in 20X2...........................................
..................................
(9,452)
Earned in 20X3...........................................
..................................
(7,587)
Balance ......................................
..........................................
$
9,191
*($25,000 5) + $5,000
(CL3a)
Reclassify asset under capital lease and related accumula
ted depreciation for 2 years.
Depreciation is $103,770 10, or $10,377 per year.
(CL1b)
Eliminate the intercompany interest expense and revenue o
n equipment lease. Interest is 12% ($52,298 original balance $15,000 first paymen
t), or $4,476.
(CL2b)
Eliminate obligation under capital lease ($52,298 $15,000
, or $37,298) and accrued
interest payable, $4,476, against minimum lease payments
receivable (3 $15,000 +
$2,000 purchase option, or $47,000) and unearned interest
income:
Unearned interest income at December 31, 20X3:

Original balance, $62,000* $52,298 principal balance ....
..........
$
9,702
Earned in 20X3...........................................
..................................
4,476
Balance ......................................
..........................................
5,226
*($15,000 x 4) + $2,000
(CL3b)
Reclassify the asset and related accumulated depreciation
. Depreciation is $52,298
8, or $6,537 per year.
(F1)
Eliminate the sales profit on intercompany equipment leas
e and reduce equipment to
its cost to the consolidated entity.
(F2)
Reduce the depreciation to depreciation based on cost of
equipment to consolidated
entity:
Recorded depreciation expense for 1 year ($52,298 8) ....

........
$
6,537
Depreciation expense based on cost ($45,000 8) ..........

...........
5,625
Depreciation adjustment ......................
.................................
$
912
307
Ch. 5Problems
PRO
BLEM 5-16

C
ompany
Parent
NCI
Implied
Price
Value
air Value
(80%)

$600,000
$480,000
(20%)
$120,000

500,000
Total equity ............................

$500,000
$500,000

80%
Book value ........................................
$400,000
20%
$100,000

value............................................
$100,000
$ 80,000
$ 20,000

Worksheet
Am
ortization
Adj
ustment
per Year
Key
Goodwill ............................................
$100,000
debit D
Life
Subsidiary Swing Company Income D

istribution

income ...................................
$17,440
Realized gain on machine ...........
509
Adjusted income .........................

$17,949
NCI share ....................................
20%
NCI ..............................................
$ 3,590
Parent Patter, Inc. Inco

me Distribution
Internally generated loss ...............

80% Swing adjusted
$16,440
income of $17,949 .................

$14,359
$ 2,081
308
----------------------- Page 63----------------------To download more slides, eb
ook, solutions and test bank, visit
Ch. 5Problems
Patter, Inc. and Subsidiary Swing Company

Consolidated
Consolidated
Eliminations
Controlling
Trial
Balance
and Adjustments
Retained
Income
Balance
Patter
Swing
Statement
Dr.
Cr
NCI
Earnings
Sheet
Cash .......................................................
1,013
26,050
..........
.......
.........
..........
..........
117,063
9
...
Inventory ................................................
0,000
20,000
..........
.......
.........
..........
90,000
7
...
..........

000
50,000(OL2)
140,000 (F1)
3,560
.........
..........
..........
..........
.
.......
..........
(CL3a)
.........
..........
.
.......
..........
(CL2b)
.........
547,116
320,
17,560
.........
...
..........
23,116
.........
...
..........
..........
..........
,000)
(20,000)(F1)
18,000
.........
..........
..........
509
509
(70
(OL2)
..........
..........
(F2)
5,017
.........
..........
..........
.........
(CL3a)
..........
..........
5,779
.........
(117,778)
..........
..........
.........
(CL3b)
..........

0,676
..........
..........
17,560
.........
..........
..........
4
(CL3a)
..........
..........
23,116
.........
..........
..........
..........
.........
(CL2b)
..........
Under Capital Lease ...........................
,796)
..........
(CL3a)
.......
.........
..........
..........
5,017
.
.......
5,779
..........
(CL3b)
.........
..........
(10
...
..........
..........
Assets Under Operating Lease ..............

.
420,000
..........
140,000
.........
..........
280,000
.........
...
..........
.........
(OL2)
..........
Assets Under Operating Lease ...........
.
(80,000)(OL2)
18,000
.......
.........
..........
(62,000)
.
412,000
12,000
.........
..........
.
..........
..........
.........
...
..........
.........
(CL2a)
..........
...........................................................
.........
..........
(CL2b)
21,000
.........
..........
..........
379,000
Unearned Interest Income on Leases ....

.
(4,000)(CL2a)
.......
.........
..........
..........
1,139
.........
...
..........
.
.......
2,861
.........
...
..........
..........
(CL2b)
.........
..........
..........
Goodwill .................................................
.
..........
(D)
100,000
.......
.........
..........
100,000
.........
...
..........
Investment in Swing Company ...............

000
..........
(CV)
101,288 (EL)
501,288
.........
..........
..........
..........
480,
.........
..........
80,000
.........
..........
..........
..........

000)
(180,000)
..........
.......
.........
..........
(310,000)
,560)
..........
(CL2a)
.......
.........
..........
..........
.
.......
..........
(CL2b)
.........
..........
(D)
..........
(130,
...
..........
(24
...
9,444
..........
15,116
..........
.........
...
..........

4,440)
..........
(CL2a)
1,417
.......
.........
..........
..........
..........
.
.......
.........
...
..........
..........
(CL2b)
.........
..........
3,023
..........
Common Stock ($10 par)Patter ..........

0)
..........
..........
.....
.........
..........
(200,000)
(
...
(200,00
.....
..........
Paid-In Capital in Excess of ParPatter

0)
..........
..........
.....
.........
..........
(300,000)
..........
Retained EarningsPatter ....................

3)
..........
..........
101,288
.........
..........
..........
(CV)
..........
..........
(F1)
.........
..........
.......
(300,00
.....
(278,33
2,441
..........
...
(377,180)
309
----------------------- Page 64----------------------To download more slides, e
book, solutions and test bank, visit
Ch. 5Problems
Patter, Inc. and Subsidiary Swing Company

Concluded
Eliminations
Controlling
Consolidated
Consolidated
Tri
al Balance
and Adjustments
Retained
Income
Balance
Patter
Cr.
Swing
Statement
Sheet
Dr.
NCI
Earnings
Common Stock ($10 par)Swing ..........

.
(100,000)(EL)
.........
.........
..........
80,000
(20,000) ..........
Paid-In Capital in Excess of ParSwing

.
(300,000)(EL)
.........
.........
..........
240,000
(60,000) ..........
Retained EarningsSwing ....................

.
(226,610)(EL)
.........
.
.........
.
.........
181,288(NCI)
20,000
.........
..........
..........
..........
.......
...
..........
..........
(F1)
.........
..........
610
(64,712)
Sales ......................................................
0,000)
(130,000)
..........
..........
(430,000)
..........
..........
..........
Rent Income ...........................................

...
(34,000)(OL1)
11,000
..........
(23,000)
..........
..........
Interest IncomeCapital Lease .............
.
(4,440)(CL1a)
1,417
.........
.........
..........
..........
(30
..........
.......
..........
.........
.
..........
.......
...
..........
..........
(CL1b)
.........
..........
3,023
..........
Depreciation Expense ............................

41,000
23,000
..........
509
.........
..........
..........
..........
(CL5a)
..........
.......
...
..........
..........
..........
..........
..........

4,440
..........
..........
1,417
.........
..........
..........
(F2)
..........
63,491
..........
...
..........
3,023
.........
..........
..........
..........
Selling and General Expense .................

70,000
38,000
..........
..........
108,000
..........
..........
0,000
90,000
..........
..........
280,000
..........
..........
Rent Expense.........................................
11,000
..........
..........
.......
(CL1b)
..........
..........
19
..........
(OL1)
11,000
.........
..........
0
..........
..........
...........................................................
0
964,557
964,557
.........
..........
..........
..........

.......................................................................
(1,509)
..........
..........
..........
....................................................................
3,590
(3,590) ..........
..........
To Controlling Interest (see distribution schedule) ........................
..............................................................
(2,081)
..........
2,08
1
..........
Total NCI ......................................................................
................................................................................
.......................
(148,302) ..........
(148,302)
................................................................................
.........
(375,099)
(375,099)
Totals .....................................................................
................................................................................
.....................................................................
0
310
Ch. 5Problems
Problem 5-16, Continue

d
(CV)
Conversion to equity at the beginning of the year [80% ($226,61
0 $100,000)].
(EL)
Eliminate the 80% ownership portion of the subsidiary equity ac
counts against the investment.
(D)/(NCI) Distribute the excess cost to goodwill.
(OL1)
lease.
Eliminate the intercompany rent revenue and expense on operating
(OL2)
Reclassify the asset under the operating lease and the related a
ccumulated depreciation to productive asset owned by the consolidated entity (3 yea
rs at $6,000).
(CL1a)
Eliminate the intercompany interest expense/revenue on machine:
Original balance ...............................................

............................
$17,560
First lease payment ............................................
..........................
(5,000)
First-year interest (15% $12,560) ..............................
1,884
................
Second lease payment ...........................................

......................
(5,000)
Balance ................................................
................................
$
9,444
............
Interest for second year (15% $9,444) ..................

$
1,417
(CL2a)
Eliminate the obligation under capital lease plus accrued intere
st payable against minimum lease payments receivable and unearned interest income:
Obligations balance, January 1, 20X5:

Original balance .......................................
............................
$17,560
......................
Principal, January 1, 20X4 .............................

(5,000)
.........
Principal, January 1, 20X5 ($5,000 $1,884) .............

(3,116)
Balance ..........................................
.................................
$
9,444
Minimum lease payments, January 1, 20X5:

...................
(2 $5,000) + $2,000 option .............................

$12,000
Unearned interest income, January 1, 20X5:

.............
Original balance ($22,000* $17,560) ....................

$
4,440
Earned in 20X5 .........................................

............................
(1,884)
Earned in 20X4 .........................................
............................
(1,417)
Balance ..........................................
.................................
$
1,139
*($5,000 x 4) + $2,000
(CL3a)
Reclassify the machine under the capital lease and related depre
ciation. Cost,
$17,560; accumulated depreciation, [($17,560 7) 2] = $5,017.
(F1)
Defer remaining gain on asset at the beginning of the year, $3,5
60* less 1 years
amortization of $509** = $3,051. Because profit was recorded by

the subsidiary, the
retained earnings adjustment is allocated to NCI ($3,051 20% = $
610) and controlling interest ($3,051 80% = $2,441).
*$17,560 $14,000 = $3,560
** $3,560/7 = $509
(F2)
Adjust the current years depreciation for 1/7 of the gain, $509.
311
Ch. 5Problems
(CL1b)
Eliminate intercompany interest expense/revenue on truck lease:
Original balance ................................................

$23,116
...............
Initial payment .................................................

.................
8,000
...................
...........
Balance .................................................
$15,116
First-year interest at 20% ......................................

3,023
Entry
(CL1b)
......
Payment at start of second year .................................

(8,000)
...................
Balance .................................................
$10,139
Remaining minimum payments ($8,000 + $5,000) ..........

13,000
Future unearned interest ................................
$
2,861
Entry
..........
(CL2b)
(CL2b)
Eliminate present value of obligation under capital lease, $15,11
6; current interest
payable, $3,023; and future unearned interest of $2,861 against m
inimum lease
payments of $21,000 [($8,000 2) + $5,000]. Reclassify the asset a
s an owned
productive asset.
(CL3b)
asset,
Reclassify and adjust the depreciation as applicable to the owned

$23,116 4 = $5,779.
312
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Ch. 5Problems
APPENDIX PROBLEMS
PROBLEM 5A-1
Pau
lz Heavy Equipment and Subsidiary Steven Truck Company

Eliminations
Controlling
Consolidated
Cons
olidated
Trial
Balance
and Adjustments
Retained
Income
alance
Paulz
Steven
Statement
Dr.
NCI
Cr.
Earnings
Sheet
Cash .......................................................
485
123,307
..........
....
.........
..........
..........
213,792
90,
......
Accounts Receivable (net) .....................

00
120,000
..........
....
.........
..........
348,000
228,0
......
..........
Inventory ................................................
00
140,000
..........
....
.........
..........
..........
340,000
000
10,000
..........
10,000
.........
..........
............
(CL2s)
..........
..........
97,000
.........
............
..........
..........
(CL2p)
..........
Unguaranteed Residual Value ...............

6,000
..........
6,000
.........
..........
............
(CL2s)
..........
200,0
......
97,
.
..........
Unearned Interest Income ......................
.
..........
.
(9
,673)
412
............
(444)
(CL2s)
.........
..........
1,237(CL1s)
..........
..........
9,673(CL1s)
..........
.
..........
..........
(CL2p)
381
.........
............

833
109,388
..........
27,833
.........
..........
............
(CL2s)
..........
..........
09,388
.........
............
(CL3p)
..........
..........
1
.
Under Capital Lease ...........................

556)
(13,674)(CL3s)
18,556
....
.........
..........
..........
............
(18,
......
.
..........
..........
27,
..........
(CL3p)
....
.........
............
13,674
..........
..........

,075,000
1,145,000
(CL2s) 32,596
(F1)
60,000
..........
..........
............
....
..........
(CL3p)
.........
3,301,984
2
.
..........
......
109,388
..........
..........
......
.
..........
00)
(160,000)(F2)
750
17,730
.........
..........
(713,0
(CL3s)
..........
..........
..........
13,674
.........
(903,654)
..........
..........
Investment in Steven Truck Company ...

,045,800 .......
(CY2)
1)
124,000
..........
............
..........
..........
(CL3p)
..........
28,000
..........
(EL)
1
(CY
.
..........
9
49,800
............
.........
..........
..........

00)
(85,000)
..........
....
.........
..........
(185,000)
(100,0
......
..........

(7,939)(CL2s)
740
....
.........
..........
............
..........
(CL2p)
....
.........
............
..........
(CL2p)
....
.........
............
..........
(740)
......
.
..........
..........
......
.
7,939
..........

,260)
(79,388)(CL2s)
....
.........
..........
............
..........
(9
......
.
..........
..........
......
.
9,260
79,388
..........
Common Stock ($5 par)Paulz .............

00,000) ......
..........
..
.........
..........
(1,800,0
Retained EarningsPaulz .....................
)
..........
(CL1s)
330
.........
..........
....
(1,8
........
..........
(864,834
305
(CL3s)
(864,859)
.........
Common Stock ($5 par)Steven ..........

(800,000)(EL)
640,000
..
.........
(160,000) ..........
..........
..........
........
...
Retained EarningsSteven ...................

(387,250)(EL)
309,800(CL3s)
83
.........
(77,457) ..........
..........
..........
..........
(CL1s)
....
.........
............
76
..........
..........
Sales ......................................................
,200,000)
(1,400,000)
..........
....
(4,600,000)
..........
............
Gain on Sale of Assets ...........................
(60,000)(F1)
60,000
...
..........
......
.
(3
......
.
..........
......
....
............
.........
..........
Interest Income ......................................

,939)
(1,152)(CL1s)
1,152
....
.........
..........
..........
............
(7
......
.
..........
(CL1p)
....
.........
............
..........
7,939
..........
..........
..........
......
.
313
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Ch. 5Problems
Problem 5A-1 Continued
Paulz
Heavy Equipment and Subsidiary Steven Truck Company
Concluded
Consolidated
Eliminations
Controlling
Consolida
ted
Trial Ba
lance
Income
e
and Adjustments
Retained
Balanc
Steven
Statement
Paulz
Cr.
Dr.
NCI
Earnings
Shee
Rent Income ...........................................

82)
..........
(CL4p)
2,182
..
.........
..........
..........
......
(2,1
........
.......

82,000 770,000
..........
..
2,652,000 .......
..........
......
1,8
........
.......

7,939
..........
(CL1s)
.........
..........
..........
......
740
740
.......
..........
..........
(CL1p)
..........
..........
.......
Depreciation Expense ............................

45,000
..........
(F2)
.........
..........
..........
......
135,000
750
.......
7,939
......
..........
.........
..........
178,837
..........
(CL3s)
..........
..........
..........
413
.......
......
Other Expenses .....................................
6
483,213
..........
(CL4p)
2,182
1,405,357 .......
..........
......
.......
Subsidiary Income ..................................

)
..........
(CY1)
124,000
...
.........
..........
..........
......
(124,000
.......
.......
Dividends Declared ................................

35,000
..........
,000
.........
7,000
......
(CY2)
144,000
924,32
144,000
28
.......
0
0
1,456,655
..........
1,456,655
..........
.......
......
.......................................................................
(363,806)
..........
..........
.......
......
...................................................................
19,150
(19,150) ..........
.......
......
.............................................................
344,656
..........
(344,656)
...........
..
Total NCI ......................................................................
................................................................................
.......................
(249,607) ............
................................................................................
.........
(1,065,515)
(1,065,515)
Totals ......................................................................
................................................................................
....................................................................
0
(CY1)
account.
Eliminate the current-year subsidiary income to the investment
(CY2)
.
Eliminate the current-year dividends to the investment account
(EL)
Eliminate 80% of the subsidiary equity balances.
(CL1s)
Eliminate intercompany interest expense/revenue recorded on tr
uck, $740, and interest on residual value. [See table in
entry (CL2s).] Eliminate the interest on the unguaranteed resi
dual value recorded in 20X5.
(CL2s)
Eliminate the intercompany debt, the unguaranteed residual va
lue, and reclassify the asset at cost:
Lessee
Lessor
Interest
Interest
Intere
st
Date
Balance
Balance
Payment
Payment
Difference
January 1, 20X5
............
$17,833
............
$22,596
$10,000
$10,000
....
January 1, 20X6
10,000
10,000
$
(8%)
(8%)
......
$1,427
$1,808
9,260
14,404
381
January 1, 20X7
740
1,152
............
5,556
10,000
10,000
412
January 1, 20X8
............
444
..
............
............
..........
6,000
444
$1,2
37
314
Ch
. 5Problems
Problem 5A1, Continued
(CL3s)
Reclassify and adjust the depreciation on the truck, ($27,833
3) versus 1/3
($32,596 $6,000 residual). Adjust past and current year by $4
13 ($9,278 $8,865).
(CL1p)
Eliminate interest revenue and expense on equipment lease, 10
% ($109,388 original balance $30,000 payment, January 1, 20X6), or $7,939.
(CL2p)
Eliminate obligation under capital lease ($109,388 $30,000) p
lus accrued interest
payable ($7,939) against minimum lease payments receivable, [
(3 $30,000) +
$7,000 purchase option, or $97,000], and unearned interest in
come, computed as follows:
....
Original balance of payments receivable .....................

$127,000
...............
Original principal balance ..................................

109,388
$17,612
Interest earned in 20X6 ...........................
.................
(7,939)
Unearned interest income, December 31, 20X6 ......
$
9,673
(CL3p)
Reclassify the equipment under capital lease and related accu
mulated depreciation
for one year. Annual depreciation is $109,388 8, or $13,674.
(CL4p)
Eliminate the intercompany rent revenue and expense, $2,182,
which is $1,500 executory costs plus $682 contingent payment, computed as follo
ws:
Previous growth rate of net income ..........................

...............................
8%
(20X5 net income, $81,650 20X4 net income of $75,60
0, or 1.08;
20X4 net income, $75,600 20X3 net income of $70,000
, or 1.08)
20X6 net income, excluding gain on asset sale ...............
.......................
$95,000
Less 1.08 $81,650, 20X5 net income ..........................
.........................
88,182
Increase in income due to cost saving .............
...............................
$
6,818
Contingent payment, 10% of increase ...............

.............................
$
682
(F1)
Eliminate the gain on the intercompany sale of warehouse and
reduce the asset to its
cost to the consolidated entity.
(F2)
Adjust current years depreciation for one-quarter year, or $75
0 ($60,000 gain 20year life = $3,000 annual depreciation adjustment).
315
Ch. 5Problems
Problem 5A-1, Co
ncluded
Subsidiary Steven Truck Company Income Dist

ribution
Unrealized gain on sale

of warehouse.........................
income .................................
$60,000
$155,000
Unearned interest on
Gain realized through use
residual..................................
of warehouse .......................
412
750
Adjustment of depreciation
on lease ...............................
413
Adjusted income .......................
$ 95,751
NCI share ..................................
NCI ............................................
$ 19,150
20%
Parent Paulz Heavy Equipment Income Dis

tribution

income .................................
$268,055
80% Steven adjusted

income of $95,751 ...............
76,60
$344,656
PROBLEM
5A-2
(1)
Interest Income ........................................................

.......................
5,136
......................
4,623
Unearned Interest Income ..........................................

................
513
Property, Plant, and Equipment (original cost to lessor) ...............

50,098
..
Obligations Under Capital Lease ........................................

............
28,894
.......................
4,623
Unearned Interest Income (includes above $513 adjustment) .......
4,279
Minimum Lease Payments Receivable .................................
.....
36,000
Unguaranteed Residual Value .......................................
............
5,000
Assets Under Capital Lease ........................................
...............
46,894
To eliminate intercompany debt, the unguaranteed
residual value, and the asset under the capital lease.
Accumulated DepreciationAssets Under Capital Lease

(1/3 $46,894) .....................................................
......................
15,631
Accumulated DepreciationProperty, Plant, and
Equipment [1/3 ($50,098 $5,000 residual)] ...............
..
15,033
Depreciation Expense .......................................
...................
598
To reclassify accumulated depreciation.
316
Ch. 5Problems
Problem 5A-2, Conclude

d
(2)
Interest Income .........................................................

......................
3,078
.....................
2,48
3
Unearned Interest Income ...........................................
...............
595
Retained EarningsPenn ....................................................

..........
513
Unearned Interest Income ...........................................
...............
513
To adjust for interest income recorded on residual
value in 20X1.

............
50,098
Obligations Under Capital Lease .........................................

...........
15,517
......................
2,483
Unearned Interest Income (includes $513 and $595 adjustments)
1,796
18,000
....
...........
0
Unguaranteed Residual Value ........................................

5,00

..............
46,894
To eliminate intercompany debt, the unguaranteed
residual value, and the asset under the capital lease.
Accumulated DepreciationAssets Under

Capital Lease (2 $15,631) ..........................................
.............
31,262
Accumulated DepreciationProperty, Plant, and
..............
Equipment (2 $15,033) .....................................

30,066
.................
Depreciation Expense .........................................

598
...........
Retained EarningsPenn .........................................

598
To reclassify accumulated depreciation.
317
----------------------- Page 72-----------------------
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Ch. 5Cases
CASES
CASE 5-1
First, lets consider the existing outstanding bonds. There is a major difference
in interest rates
between those available to Power Pro and Swift-Craft. To the extent possible, th
e debt should
be directly or indirectly retired. Direct retirement would be accomplished by Po
wer Pro lending
funds to Swift-Craft, which Swift-Craft would in turn use to retire the bonds. T
he other alternative
is for Power Pro to purchase the existing bonds that it could then hold as an in
vestment. Assuming the current borrowing rate is 11% for Swift-Craft, the bonds would trade nea
r face value.
The direct borrowing route would allow the parent to choose the inter
est rate it wanted to
charge. Any rate under 11% would benefit the NCI share of income because it woul
d increase
the subsidiarys reported income. The intercompany debt and interest revenue/expen
se would
be eliminated in consolidation.
The indirect route (purchasing the Swift-Craft bonds) would probably leave the N
CI shareholders in the same position they are in now. The parent receives the 11% interest a
nd can borrow
at 7.5%. The bonds are retired for consolidation purposes in the period in which
they are purchased by Power Pro. The intercompany interest revenue/expense on the bonds is e
liminated.
It would appear that Power Pro will build and equip the new plant. It can add a
reasonable profit.
The higher the price, the greater the shift of income from the subsidiary to the
parent. When
consolidating, the profit is removed from the gain account and the asset account
s. It is deferred
over the period of use as a decrease in Depreciation Expense.
Power Pro could sell the assets to Swift-Craft in return for a long-term mortgag
e. Again, any rate
under 11% is a bonus to the NCI shareholders. Again, the intercompany debt and i
nterest revenue/expense are eliminated in the consolidation process.
The best situation might be for Power Pro to lease the assets to Swift-Craft und
er a financingtype lease. It would be a sales-type lease; thus, the profit would be deferred i
n the same manner as if the asset were sold to Swift-Craft. This would allow Power Pro to dete
rmine the interest
rate and would provide it with control over the accounting for the assets. Any r
ate below 11% is
beneficial to the NCI, and any profit below that charged by outside parties is a
plus to the NCI
shareholders.
The intercompany debt and the interest revenue/expense resulting from the lease
are eliminated in the consolidation process. The assets under the lease are reclassified to
appear as normal, owned assets.
318
----------------------- Page 73-----------------------
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Ch. 5Cases
CASE 5-2
(1)
Option 1:
Consolidated Income Stateme

nt
Sales ...................................................................
..................................
$
320,000
Cost of goods sold ......................................................
..........................
(220,000)
Gross profit .....................................................
................................
$
100,000
Expenses ................................................................
..............................
(40,000)
Interest expense ........................................................
...........................
(20,000)
Gain on bond retirement .................................................
......................
15,000
Net income .......................................................
...............................
$
55,000
Consolidated Balance
Sheet
Assets
Liabilities and Equity
Cash ....................................
................ Current liabilities
173,000
$
45,000
Other current assets ............
.................................... NCI
250,000
82,000*
Plant and equipment ............
00,000... Common stock (par)
1,3
300,000
Accumulated depreciation ...
) ........... Retained earnings
(500,000
796,000**
Total ...............................
3,000....................................
$1,22
Total
$1,223,000
*NCI = 20% ($100,000 + $285,000 + $10,000 income + $15,000 gain on bond

retirement).
**Retained earnings = $746,000 + $30,000 Magna income + [80% ($10,000 Met
ros
income + $15,000 gain on bond retirement)].
(2)
Option 2:
There would be no difference. The bonds would still be retired from a con
solidated viewpoint with the parent paying $185,000 to retire the bonds. The gain woul
d still be credited to
the subsidiary income distribution schedule and thus would be allocated 2
0% to the NCI
and 80% to the parent. The bonds would still be eliminated from the conso
lidated balance
sheet.
319
Ch. 5Cases
CA
SE 5-3
(1)
Entries:
Pannier:
Note Receivable ........................................................

.....................
125,000
Sales .............................................................
.............................
125,000
Cost of Goods Sold .....................................................
....................
100,000
Inventory .........................................................
...........................
100,000
Jodestar:
Equipment...............................................................
........................
125,000
Note Payable ......................................................
........................
125,000
(2)
Consolidated statements:
Consolidated Income St
atement
Sales ..................................................................
...................................
$
320,00
0
Cost of goods sold .....................................................
...........................
(220,000
)
Gross profit ....................................................
.................................
$
100,00
0
Expenses ...............................................................
...............................
(40,0
00)
Interest expense .......................................................
............................
(20,0
00)
Net income ......................................................
................................
$
40,0
00
Consolidated Balanc
e Sheet
Assets
Liabilities and Equity
Cash ....................................
358,000................ Current liabilities
$
45,000
Inventory ..............................
90,000.................. Long-term debt
200,000
Other current assets ............
210,000.................................... NCI
79,000*
Plant and equipment ............
1,250,000... Common stock (par)
300,000
Accumulated depreciation ...
500,000) ........... Retained earnings
784,000
Total ...............................
$1,408,000....................................
Total
$1,408,000
*NCI = 20% ($100,000 + $285,000 + $10,000 Jodestar income).

Inventory is reduced by $100,000 and equipment is increased by $100,000
for the cost of
the equipment sold to the subsidiary.
320
Ch. 5Cases
Case 5-3, Conc

luded
(3)
Entries:
Pannier:
Minimum Lease Payments Receivable (4 $29,977) ....................

119,908
Cash ...................................................................
............................
29,977
Inventory .........................................................
...........................
100,000
Unearned Interest Income ..........................................
................
24,885
Sales-Type Profit on Lease ........................................
................
25,000
Jodestar:
Asset Under Capital Lease ..............................................

...............
125,000
Cash ..............................................................
.............................
29,977
Obligation Under Capital Lease ....................................
.............
95,023
(4)
There would be no difference in the consolidated statements.
321

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----------------------- Page 1----------------------To download more slides, ebook, solutions and test bank, visit

UNDERSTANDING THE ISSUES

1. The first approach that could be used to

$1,000,000 to the subsidiary so that the

subsidiary may retire the bonds. The former

intercompany debt originates. The

company interest expense would be elimiill receive $1,000 ($5,000 20%) of

Another approach would have the parent

side parties and holding them as an in00 20%).

vestment. From a consolidated viewpoint,

pense would be eliminated during the conproce

retirement of bonds will occur in the current

tire the subsidiarys bonds. In the current

and future years, consolidated net income

interest expense and interest revenue. This

sidiarys bonds. In the current and future

revenue and interest expense. This amount

represents the amortization of the discount

paid by the parent to retire the bonds.

lessor can build in an interest rate in

Eliminations and Adjustments at December 31, 20X5:

Interest Revenue .......................................................

Interest Expense ..................................................

Discount on Bonds Payable .........................................

Interest Payable .......................................................

Loss remaining at year-end:

Loss amortized during the year:

a$101,800 $100,000 = $1,800 premium at 1/1/X5; $1,800 6 years left = $30

amortization; $101,800 $300 = $101,500 investment balance at 12/31/X5.

$100,000 $95,000 = $5,000 discount at 1/1/X1; $5,000 10 years = $500/y

Eliminations and Adjustments at December 31, 20X6:

Interest Revenue .......................................................

*$4,800 original loss on 1/1/X5 $800 amortization in 20X5 = $4,000 unamo

Interest Payable .......................................................

Loss remaining at year-end:

Loss amortized during the year:

Interest revenue eliminated .......................................

Interest expense eliminated .......................................

Loss at January 1, 20X6 ...........................................

Gain on retirement (January 2, 20X6):

Gain on retirement ..................................................

Schedule of interest adjustments:

Eliminations and Adjustments at December 31, 20X3:

Interest Revenue [(7% $60,000) + ($6,400 8)] .........................

Bonds Payable (60% $100,000) ............................................

Premium on Bonds Payable (60% $700) ....................................

*Book value of bonds on 1/2/X3 [$101,000 ($1,000/10 2) = $100,800]

Price paid .......................................

Interest Payable ($60,000 7%) ...........................................

An alternative way to calculate the gain:

Investment in bonds at December 31, 20X3 ............................

Gain amortized during the year:

Exercise 5-5, Conclu

Eliminations and Adjustments at December 31, 20X4:

Interest Revenue .......................................................

*Unamortized gain on retirement = $6,880 ($860 amortization for 1 yr.) =

Interest Payable .......................................................

An alternative way to calculate the unamortized gain:

Gain amortized during the year:

Remaining gain at January 1, 20X4 ...............................

Partial Schedule of Bond Premium Amortiz

Partial Schedule of Bond Discount Amort

Eliminations and Adjustments at December 31, 20X8:

Interest Revenue .......................................................