2011 Pearson Education, Inc.

publishing as Prentice Hall

4-1
Chapter 4

CONSOLIDATION TECHNIQUES AND PROCEDURES

Answers to Questions


1 Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its
subsidiary investment and income accounts. Since patents and patent amortization accounts are not
recorded on the parents books, they are created for consolidated statement purposes through workpaper
entries.

2 Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper
adjusting entry in which noncontrolling interest share is debited, noncontrolling interests share of
dividends is credited and noncontrolling interest is credited. The noncontrolling interest share (debit) is
carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest for
noncontrolling interest share is added to the beginning noncontrolling interest. The noncontrolling interest
share is calculated based on the subsidiarys reported net income adjusted to reflect fair value through the
amortization of the excess of fair value over book value. This is the approach illustrated throughout this
text.

3 Workpaper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity
accounts are alike in regard to the objectives of consolidation. Regardless of the configuration of the
workpaper entries, the final result of adjustments for these items is to eliminate them through workpaper
entries. In other words, the investment in subsidiary, income from subsidiary, and the capital stock,
additional paid-in capital, retained earnings, and other stockholders equity accounts of the subsidiary
never appear in consolidated financial statements.

4 When the parent does not amortize fair value/book value differentials on its separate books, the parents
income from subsidiary and investment in subsidiary accounts are overstated in the year of acquisition. In
subsequent years, the income from the subsidiary, investment in subsidiary, and parents beginning
retained earnings will be overstated. (This assumes that the asset is undervalued).The error may be
corrected in the workpapers with the following entries:

Year of acquisition
Income from subsidiary XXX
Investment in subsidiary XXX
Subsequent year
Income from subsidiary XXX
Retained earnings parent XXX
Investment in subsidiary XXX

4-2 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
By entering a correcting entry, all other workpaper entries are the same as if the parent provided for
amortization on its separate books.
If the errors are not corrected through the workpaper entries suggested above, the entry to
eliminate the income from subsidiary in the year of acquisition is prepared in the usual manner without
further complications because neither the beginning investment nor retained earnings accounts are affected
by the omission. In subsequent years the entry to eliminate income from subsidiary and dividends from
subsidiary will have to be changed to correct the beginning-of-the-period retained earnings as follows:

Income from subsidiary XXX
Retained earnings parent XXX
Dividends (subsidiary) XXX
Investment in subsidiary XXX

5 No. Workpaper adjustments are not entered in the general ledger of the parent or any other entity. They are
used in the preparation of consolidated financial statements for a conceptual entity for which there are no
formal accounting records.

6 Workpapers are tools of the accountant that facilitate the consolidation of parent and subsidiary financial
statements. Given the tools available, the accountant should select those that are most convenient in the
circumstances. If financial statements are to be consolidated, the financial statement approach is the
appropriate tool. The trial balance approach is most convenient when the data are presented in the form of
a trial balance. The accountant needs to be familiar with both approaches to perform the work as efficiently
as possible.

7 Workpaper adjustment and elimination entries as illustrated in this text are exactly the same when the trial
balance approach is used as when the financial statement approach is used. This is possible through a
check-off system that nullifies the closing process when the financial statement approach is used.

8 The retained earnings of the parent will equal consolidated retained earnings if the equity method of
accounting has been correctly applied. In consolidating the financial statements of affiliated companies, the
beginning retained earnings of the parent are used as beginning consolidated retained earnings. If the
equity method has not been correctly applied, parent beginning retained earnings will not equal beginning
consolidated retained earnings. In this case, retained earnings of the parent are adjusted to a correct equity
basis in order to establish the correct amount of beginning consolidated retained earnings. Thus, workpaper
adjustments to beginning retained earnings of the parent are needed whenever the beginning retained
earnings of the parent do not correctly reflect the equity method.

9 The noncontroling interest that appears in the consolidated balance sheet can be checked by first adjusting
the equity of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for any
unamortized excess of fair value over book value) and then multiplying by the noncontrolling interest
percentage. Consolidated retained earnings at a balance sheet date can be checked by comparing the
amount with the parents retained earnings on the same date. If consolidated retained earnings and parent
retained earnings are not equal, either consolidated retained earnings have been computed incorrectly, or
parent retained earnings do not reflect a correct equity method of accounting.

10 Consolidated assets and liabilities are reported for all equity holdersnoncontrolling as well as
controlling. Therefore, the change in net assets from operations for a period results from noncontrolling
interest share and controlling interest share.

11 A change in cash relates to all interests in the consolidated entity. This difference is one of many
inconsistencies in the concepts underlying consolidated financial statements. Consider, for example, the
error that could result from dividing cash provided by operations by outstanding parent shares to compute
cash flow per share.

Chapter 4 4-3

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
SOLUTIONS TO EXERCISES

Solution E4-1
1 d 6 d
2 c 7 b
3 a 8 b
4 d 9 a
5 b 10 b

Solution E4-2
Preliminary computations (in thousands)
I nvest ment cost J anuar y 2 $600
I mpl i ed t ot al f ai r val ue of Sal ( $600 / 80%) $750
Less: Book val ue ( 500)
Excess f ai r val ue over book val ue $250
Excess allocated to:
I nvent or y $ 25
Remai nder t o goodwi l l 225
Excess f ai r val ue over book val ue $250

1 Income from Sal
Sal s r epor t ed net i ncome $140
Less: Excess al l ocat ed t o i nvent or y ( sol d i n 2011) ( 25)
Sal adj ust ed i ncome $115
Pan s 80%shar e $ 92

2 Noncontrolling interest share

Sal s adj ust ed i ncome $115 20%noncont r ol l i ng i nt er est

$ 23

3 Noncontrolling interest December 31
Sal s equi t y book val ue $520
Add: Unamor t i zed excess ( Goodwi l l ) 225
Sal s equi t y f ai r val ue $745
20%noncont r ol l i ng i nt er est $149

4 Investment in Sal December 31
I nvest ment cost J anuar y 2 $600
Add: I ncome f r omSal ( gi ven) * 100

Less: Di vi dends ( $120 80%)
( 96)
I nvest ment i n Sal December 31 $604
* Assumes t hi s i s based on Sal s adj ust ed i ncome

5 Consol i dat ed net i ncome
Noncont r ol l i ng i nt er est shar e
Cont r ol l i ng i nt er est shar e equal s Par ent NI under equi t y
met hod.
$383. 4
$ 23
$360. 4

4-4 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E4-3
1 $700, 000 ( $300, 000 + $440, 000 - $40, 000 i nt er company)

Preliminary computations for 2 and 3
I nvest ment cost on J anuar y 1, 2011 $28, 000
I mpl i ed t ot al f ai r val ue of Sar ( $28, 000 / 70%) $40, 000
Book val ue of Sar 30, 000
Excess al l ocat ed ent i r el y t o Goodwi l l $10, 000

2 Pims separate income for 2013 $24, 000

Loss f r omi nvest ment i n Sar ( $1, 000 70%)
( 700)
Cont r ol l i ng shar e of consol i dat ed net i ncome $23, 300
Noncont r ol l i ng shar e + ( 300)
Consol i dat ed net i ncome $23, 000
3 I nvest ment cost J anuar y 1, 2011 $28, 000

Add: Shar e of i ncome l ess di vi dends 2011 2013


( $1, 400 i ncome - $1, 000 di vi dends) 70%
280
I nvest ment bal ance December 31, 2013 $28, 280

Solution E4-4

Preliminary computations
I nvest ment cost $580, 000
I mpl i ed t ot al f ai r val ue of Si n ( $580, 000 / 80%) $725, 000
Book val ue 600, 000
Tot al excess f ai r val ue over book val ue $125, 000

Excess allocated to:
Equi pment ( 5- year l i f e) $ 50, 000
Pat ent s ( 10- year amor t i zat i on per i od) 75, 000
Tot al excess f ai r val ue over book val ue $125, 000

Income from Sin 2011 2012
Si n s r epor t ed net i ncome $120, 000 $150, 000
Less: Depr eci at i on of excess al l ocat ed t o equi pment ( 10, 000) ( 10, 000)
Less: Amor t i zat i on of pat ent s ( 7, 500) ( 7, 500)
Si n s adj ust ed i ncome $102, 500 $132, 500
I ncome f r omSi n ( 80%) $ 82, 000 $106, 000

1a Consolidated net income for 2011
Pen s net i ncome = cont r ol l i ng shar e of consol i dat ed net
i ncome under equi t y met hod

$340, 000
Add: Noncont r ol l i ng i nt er est shar e 20, 500
Consol i dat ed net i ncome $360, 500
1b Investment in Sin December 31, 2011
Cost J anuar y 1 $580, 000

Add: I ncome f r omSi n 2011
82, 000

Less: Di vi dends f r omSi n 2011 ( $80, 000 80%)
( 64, 000)
I nvest ment i n Si n December 31 $598, 000

1c Noncontrolling interest share 2011
( $102, 500 adj ust ed i ncome 20%)

$ 20, 500

1d Noncontrolling interest December 31, 2012
Si n s equi t y book val ue at acqui si t i on dat e $600, 000
Add: I ncome l ess di vi dends f or 2011 and 2012 ( see not e) 100, 000
Si n s equi t y book val ue at December 31, 2012 700, 000
Unamor t i zed excess at December 31, 2012 90, 000
Chapter 4 4-5

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Si n s equi t y f ai r val ue at December 31, 2012 $790, 000
Noncont r ol l i ng i nt er est per cent age 20%
Noncont r ol l i ng i nt er est December 31, 2012 $158, 000
Solution E4-4 (continued)

Not e: Si n s i ncome l ess di vi dends:

2011 Net I ncome $ 120, 000
2011 Di vi dends ( 80, 000)
2012 Net I ncome 150, 000
2012 Di vi dends ( 90, 000)
Tot al $ 100, 000


Solution E4-5

1 c
2 a
3 b
4 c
5 d

Solution E4-6

Pat Corporation and Subsidiary
Par t i al Consol i dat ed Cash Fl ows St at ement
f or t he year ended December 31,

Cash Flows from Operating Activities
Cont r ol l i ng i nt er est shar e of consol i dat ed net i ncome $100, 000
Adjustments to reconcile net income to cash
provided by operating activities:

Noncont r ol l i ng i nt er est shar e $ 50, 000
Undi st r i but ed i ncome of equi t y i nvest ees ( 5, 000)
Loss on sal e of l and 100, 000
Depr eci at i on expense 120, 000
Pat ent s amor t i zat i on 16, 000
I ncr ease i n account s r ecei vabl e ( 105, 000)
I ncr ease i n i nvent or i es ( 45, 000)
Decr ease i n account s payabl e ( 20, 000) 111, 000
Net cash flows from operating activities $211, 000


Solution E4-7
Pro Corporation and Subsidiary
Par t i al Consol i dat ed Cash Fl ows St at ement
f or t he year ended December 31,

Cash Flows from Operating Activities
Cash r ecei ved f r omcust omer s $322, 500
Di vi dends r ecei ved f r omequi t y i nvest ees 7, 000
Less: Cash pai d t o suppl i er s $182, 500
Cash pai d t o empl oyees 27, 000
Cash pai d f or ot her oper at i ng i t ems 23, 500
Cash pai d f or i nt er est expense 12, 000 245, 000
Net cash flows from operating activities $ 84, 500

4-6 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
SOLUTIONS TO PROBLEMS

Solution P4-1 ( i n t housands of $)

Preliminary computations
I nvest ment i n Sen ( 75%) J anuar y 1, 2011 $2, 400
I mpl i ed f ai r val ue of Sen ( $2, 400 / 75%) $3, 200
Book val ue of Sen ( 2, 400)
Tot al excess of f ai r val ue over book val ue $ 800
Excess al l ocat ed:
10%t o i nvent or i es ( sol d i n 2011) $ 80
40%t o pl ant asset s ( usef ul l i f e 8 year s) 320
50%t o goodwi l l 400
Tot al excess of f ai r val ue over book val ue $ 800

1 Goodwi l l at December 31, 2015 ( not amor t i zed) $ 400

2 Noncontrolling interest share for 2015
Net i ncome ( $1, 000 sal es - $600 expenses) $ 400
Less: Amor t i zat i on of excess
Pl ant asset s ( $320 / 8 yr s. ) ( 40)
Adj ust ed Sen i ncome $ 360
25%Shar e $ 90

3 Consolidated retained earnings December 31, 2014
Equal t o Pea s December 31, 2014 r et ai ned ear ni ngs
Si nce t hi s a t r i al bal ance, r epor t ed r et ai ned ear ni ngs
equal s begi nni ng of 2015 r et ai ned ear ni ngs.


$1, 670

4 Consolidated retained earnings December 31, 2015
Pea s r et ai ned ear ni ngs December 31, 2014 $1, 670
Add: Pea s net i ncome f or 2015 1, 085
Less: Pea s di vi dends f or 2015 ( 500)
Consol i dat ed r et ai ned ear ni ngs December 31 $2, 255

5 Consolidated net income for 2015
Consol i dat ed sal es $5, 000
Less: Consol i dat ed expenses ( $3, 785 + $40 depr eci at i on) ( 3, 825)
Tot al consol i dat ed i ncome 1, 175
Less: Noncont r ol l i ng i nt er est shar e ( 90)
Cont r ol l i ng shar e of consol i dat ed net i ncome f or 2015 $1, 085

6 Noncontrolling interest December 31, 2014
Sen s st ockhol der s equi t y at book val ue $2, 400
Unamor t i zed excess af t er f our year s:
I nvent or y 0
Pl ant asset s ( $320 - $160) 160
Goodwi l l 400
Sen s st ockhol der s equi t y at f ai r val ue $2, 960
25%Sen s st ockhol der s equi t y at f ai r val ue $ 740

7 Noncontrolling interest December 31, 2015
Sen s st ockhol der s equi t y at book val ue $2, 600
Unamor t i zed excess af t er f i ve year s:
I nvent or y 0
Pl ant asset s ( $320 - $200) 120
Goodwi l l 400
Sen s st ockhol der s equi t y at f ai r val ue $3, 120
Chapter 4 4-7

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
25%Sen s st ockhol der s equi t y at f ai r val ue $ 780

4-8 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-2

1 Pal Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2011
( i n t housands)


Pal
80%
Sal
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 620

$ 200

$ 820
I ncome f r omSal 21 a 21
Cost of goods sol d 400
*
130
*
530
*

Oper at i ng expenses 154
*
40
*
194
*

Consol i dat ed NI $ 96
Noncont r ol . i nt er est shar e
( $1530, 000 30%)

c 9

9
*

Cont r ol l i ng shar e $ 87 $ 30 $ 87
Retained Earnings
Ret ai ned ear ni ngs Pal

$ 130

$ 130

Ret ai ned ear ni ngs Sal
$ 22 b 22
Net i ncome 87 30 87
Di vi dends 60
*
20
*
a 14
c 6 60
*


Ret ai ned ear ni ngs

December 31

$ 157

$ 32

$ 157
Balance Sheet
Cash

$ 91

$ 30

$ 121
Recei vabl es net 120 60 180
I nvent or i es 48 40 88
PP&E net 240 70 310
I nvest ment i n Sal 98 a 7
b 91

$ 597 $ 200 $ 699
Account s payabl e $ 60 $ 36 $ 96
Ot her l i abi l i t i es 40 24 64
Capi t al st ock 300 100 b100 300
Ot her pai d- i n capi t al 40 8 b 8 40
Ret ai ned ear ni ngs 157 32 157
$ 597 $ 200
Noncont r ol l i ng i nt er est J anuar y 1 b 39
Noncont r ol l i ng i nt er est December 31 c 3 42
160 160 $ 699
* Deduct

Workpaper entries
a To el i mi nat e i ncome f r omSal and di vi dends r ecei ved f r omSal and adj ust t he
i nvest ment i n Sal account t o i t s begi nni ng of t he per i od bal ance.
b To el i mi nat e r eci pr ocal i nvest ment i n Sal and equi t y amount s of Sal and t o
ent er begi nni ng noncont r ol l i ng i nt er est .
c To ent er noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome and di vi dends.
Chapter 4 4-9

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-2 ( cont i nued)

2 Pal Corporation and Subsidiary
Consol i dat ed I ncome St at ement
f or t he year ended December 31, 2011
( i n t housands)
Sal es $820
Less: Cost of goods sol d 530
Gr oss pr of i t 290
Oper at i ng expenses 194
Consol i dat ed net i ncome 96
Less: Noncont r ol l i ng i nt er est shar e 9
Cont r ol l i ng shar e of consol i dat ed net i ncome $ 87

Pal Corporation and Subsidiary
Consol i dat ed Ret ai ned Ear ni ngs St at ement
f or t he year ended December 31, 2011
Consol i dat ed r et ai ned ear ni ngs J anuar y 1 $130
Add: Cont r ol l i ng shar e of onsol i dat ed net i ncome 87
Less: Di vi dends of Pal ( 60)
Consol i dat ed r et ai ned ear ni ngs December 31 $157

Pal Corporation and Subsidiary
Consol i dat ed Bal ance Sheet
at December 31, 2011
Assets
Cur r ent asset s:
Cash $121

Recei vabl es net
180
I nvent or i es 88 $389

Pl ant asset s net
310
Tot al asset s $699

Liabilities and Stockholders Equity
Li abi l i t i es:
Account s payabl e $ 96
Ot her l i abi l i t i es 64 $160

St ockhol der s equi t y:
Capi t al st ock, $10 par $300
Ot her pai d- i n capi t al 40
Consol i dat ed r et ai ned ear ni ngs 157
497
Add: Noncont r ol l i ng i nt er est 42 539
Tot al l i abi l i t i es and st ockhol der s equi t y $699

4-10 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-3

Pan Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2011
( i n t housands)

Pan

Saf 75%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$800

$200

$1, 000
I ncome f r omSaf 27. 6 a 27. 6
Cost of sal es 500* 100* 600*
Ot her expenses 194* 52* c 11. 2 257. 2*
Consol i dat ed Net I ncome $ 142. 8
Noncont r ol l i ng shar e f 9. 2 9. 2*
Cont r ol l i ng shar e of NI
$133. 6 $ 48 $ 133. 6

Retained Earnings
Ret ai ned ear ni ngs Pan

$360

$ 360
Ret ai ned ear ni ngs Saf
$ 68 b 68
Cont r ol l i ng shar e of NI 133. 6 48 133. 6
Di vi dends 100* 32* a 24
f 8 100*
Ret ai ned ear ni ngs
December 31

$393. 6

$ 84


$ 393. 6

Balance Sheet
Cash

$ 106

$ 30

$ 136
Account s r ecei vabl e 172 40 212
Di vi dends r ecei vabl e
f r omSaf

12

e 12

I nvent or i es 190 20 210
Not e r ecei vabl e f r omPan 10 d 10
Land 130 60 190
Bui l di ngs net
340 160 500
Equi pment net
260 100 360
I nvest ment i n Saf 363. 6 a 3. 6
b 360

Pat ent s b 112 c 11. 2 100. 8

$1, 573. 6 $420 $1, 708. 8

Account s payabl e $ 170 $ 20 $ 190
Not e payabl e t o Saf 10 d 10
Di vi dends payabl e 16 e 12 4
Capi t al st ock, $10 par 1, 000 300 b 300 1, 000
Ret ai ned ear ni ngs 393. 6 84 393. 6

$1, 573. 6 $420

Noncont r ol l i ng i nt er est J anuar y 1 b 120
Noncont r ol l i ng i nt er est December 31 f 1. 2 121. 2
550 550 $1, 708. 8
*Deduct
Chapter 4 4-11

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-3 ( cont i nued)

Supporting Calculations

Safs value at acquisition
Book val ue at December 31, 2011 $384
Less: 2011 Net i ncome ( 48)
Add: 2011 Di vi dends 32
Book val ue on J anuar y 1, 2011 $368
Fai r val ue of pat ent s 112
Saf s f ai r val ue on J anuar y 1, 2011 $480

Pur chase pr i ce ( f ai r val ue) of Pan s 75%shar e $360
Noncont r ol l i ng i nt er est ( 25%) $120

Pat ent s have a t en- year l i f e, so amor t i zat i on i s $11, 200 per year .

Safs Adjusted Income
Saf s net i ncome $ 48
Less: Amor t i zat i on of Pat ent s ( 11. 2)
Saf s adj ust ed i ncome $ 36. 8
Pan s 75%shar e $ 27. 6
Noncont r ol l i ng i nt er est 25%shar e $ 9. 2



4-12 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-4

Pal Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2011
( i n t housands)

Pal

Sun 75%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$800

$200

$1, 000
I ncome f r omSun 36 a 36
Cost of sal es 500* 100* 600*
Ot her expenses 194* 52* 246*
Consol i dat ed NI $ 154
Noncont r ol l i ng shar e c 12 12*
Cont r ol l i ng shar e of NI
$142 $ 48 $ 142

Retained Earnings
Ret ai ned ear ni ngs Pal

$360

$360
Ret ai ned ear ni ngs Sun
$ 68 b 68
Cont r ol l i ng shar e of NI 142 48 142
Di vi dends 100* 32* a 24
c 8 100*
Ret ai ned ear ni ngs Dec 31
$402 $ 84 $402

Balance Sheet
Cash

$ 118

$ 30

$ 148
Account s r ecei vabl e 160 40 200
Di vi dends r ecei vabl e
f r omSun

12

e 12

I nvent or i es 190 20 210
Not e r ecei vabl e f r omPal 10 d 10
Land 130 60 190
Bui l di ngs net
340 160 500
Equi pment net
260 100 360
I nvest ment i n Sun 372 a 12
b 360

Goodwi l l b 112 112

$1, 582 $420 $1, 720

Account s payabl e $ 170 $ 20 $ 190
Not e payabl e t o Sun 10 d 10
Di vi dends payabl e 16 e 12 4
Capi t al st ock, $10 par 1, 000 300 b 300 1, 000
Ret ai ned ear ni ngs 402 84 402

$1, 582 $420

Noncont r ol l i ng i nt er est J anuar y 1 b 120
Noncont r ol l i ng i nt er est December 31 c 4 124
550 550 $1, 720
* Deduct
Chapter 4 4-13

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-4( cont i nued)

Supporting Calculations
Suns value at acquisition:
Book val ue at December 31, 2011 $384
Less: 2011 Net i ncome ( 48)
Add: 2011 Di vi dends 32
Book val ue on J anuar y 1, 2011 $368

Pur chase pr i ce of Pal s 75%shar e $360
I mpl i ed f ai r val ue of Sun ( $360 / 75%) $480
Sun s book val ue 368
Excess al l ocat ed t o Goodwi l l $112
Noncont r ol l i ng i nt er est ( 25%x $480) $120

SunsAdjusted Income
Saf s net i ncome $48
Less: Amor t i zat i on of Goodwi l l ( 0)
Sun s adj ust ed i ncome $48
Pal s 75%shar e $36
Noncont r ol l i ng i nt er est 25%shar e $12

Solution P4-5

Preliminary computations

Allocation of excess fair value over book value
Cost of 70%i nt er est J anuar y 1 $490, 000
I mpl i ed f ai r val ue of Sul ( $490, 000 / 70%) $700, 000
Book val ue of Sul ( 600, 000)
Excess f ai r val ue over book val ue $100, 000
Noncont r ol l i ng i nt er est 30%of f ai r val ue at acqui si t i on $210, 000

Excess allocated
Under val ued i nvent or y i t ems sol d i n 2011 $ 5, 000
Under val ued bui l di ngs ( 7 year l i f e) 14, 000
Under val ued equi pment ( 3 year l i f e) 21, 000
Pat ent s 40, 000
Remai nder t o Goodwi l l 20, 000
Excess f ai r val ue over book val ue $100, 000

Calculation of income from Sul
Sul s net i ncome $100, 000
Less: Under val ued i nvent or i es sol d i n 2011 ( 5, 000)
Less: Addi t i onal Depr eci at i on on bui l di ng ( $14, 000/ 7 year s) ( 2, 000)
Less: Addi t i onal Depr eci at i on on equi pment ( $21, 000/ 3 year s) ( 7, 000)
Less: Pat ent amor t i zat i on ( $40, 000/ 40 year s) ( 1, 000)
Sul s adj ust ed i ncome $ 85, 000
Par s 70%cont r ol l i ng i nt er est shar e $ 59, 500
Noncont r ol l i ng i nt er est s 30%shar e $ 25, 500

4-14 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-5 ( cont i nued)

Workpaper entries for 2011

a I ncome f r omSul 59, 500
Di vi dends ( Sul ) 35, 000
I nvest ment i n Sul 24, 500

b Capi t al st ock ( Sul ) 500, 000
Ret ai ned ear ni ngs ( Sul ) J anuar y 1 100, 000
Unamor t i zed excess 100, 000
I nvest ment i n Sul 490, 000
Noncont r ol l i ng i nt er est J anuar y 1 210, 000

c Cost of sal es ( f or i nvent or y i t ems) 5, 000

Bui l di ngs net
14, 000

Equi pment net
21, 000
Pat ent s 40, 000
Goodwi l l 20, 000
Unamor t i zed excess 100, 000

d Depr eci at i on expense 2, 000

Bui l di ngs net
2, 000

e Depr eci at i on expense 7, 000

Equi pment net
7, 000

f Ot her expenses 1, 000
Pat ent s 1, 000

g Account s payabl e 10, 000
Account s r ecei vabl e 10, 000

h Di vi dends payabl e 14, 000
Di vi dends r ecei vabl e 14, 000

i Noncont r ol l i ng I nt er est Shar e 25, 500

Di vi dends Sul
15, 000
Noncont r ol l i ng I nt er est 10, 500

Chapter 4 4-15

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-5 ( cont i nued)
Par Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2011
( i n t housands)

Par

Sul 70%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 800

$ 700

$1, 500
I ncome f r omSul 59. 5 a 59. 5
Cost of sal es 300* 400* c 5 705*
Depr eci at i on expense 154* 60* d 2
e 7
223*
Ot her expenses 160* 140* f 1 301*
Consol i dat ed NI $ 271
Noncont r ol l i ng shar e i 25. 5 25. 5*
Cont r ol l i ng shar e of NI
$ 245. 5 $ 100 $ 245. 5

Retained Earnings
Ret ai ned ear ni ngs Par

$ 300

$ 300
Ret ai ned ear ni ngs Sul
$ 100 b 100
Net i ncome 245. 5 100 245. 5
Di vi dends 200* 50* a 35
i 15 200*
Ret ai ned ear ni ngs Dec 31
$ 345. 5 $ 150 $ 345. 5
Balance Sheet
Cash

$ 86

$ 60

$ 146
Account s r ecei vabl e 100 70 g 10 160
Di vi dends r ecei vabl e 14 h 14
I nvent or i es 150 100 250
Ot her cur r ent asset s 70 30 100
Land 50 100 150
Bui l di ngs net
140 160 c 14 d 2 312
Equi pment net
570 330 c 21 e 7 914
I nvest ment i n Sul 514. 5 a 24. 5
b 490

Pat ent s c 40 f 1 39
Goodwi l l c 20 20
Unamor t i zed excess b 100 c 100

$1, 694. 5 $ 850 $2, 091

Account s payabl e $ 200 $ 85 g 10 $ 275
Di vi dends payabl e 100 20 h 14 106
Ot her l i abi l i t i es 49 95 144
Capi t al st ock, $10 par 1, 000 500 b 500 1, 000
Ret ai ned ear ni ngs 345. 5 150 345. 5

$1, 694. 5 $ 850

Noncont r ol l i ng i nt er est J anuar y 1 b 210
Noncont r ol l i ng i nt er est December 31 i 10. 5 220. 5
919 919 $2, 091
* Deduct
4-16 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-6

Supporting computations

Owner shi p per cent age 13, 500/ 15, 000 shar es = 90%

I nvest ment cost ( 13, 500 shar es $15)
$202, 500
I mpl i ed f ai r val ue of Syn ( $202, 500 / 90%) $225, 000
Book val ue of Syn 165, 000
Excess f ai r val ue over book val ue $ 60, 000

Excess allocated to
Land $ 20, 000
Remai nder t o pat ent s 40, 000
Excess f ai r val ue over book val ue $ 60, 000

Income from Syn
Syn s r epor t ed net i ncome $ 24, 000
Less: Pat ent amor t i zat i on ( 4, 000)
Syn s adj ust ed i ncome $ 20, 000

Pen s shar e of Syn s i ncome ( 90%) $ 18, 000
Noncont r ol l i ng i nt er est shar e ( 10%) $ 2, 000

Investment in Syn December 31, 2012
Cost J anuar y 1, 2011 $202, 500
Pen s shar e of t he change i n Syn s r et ai ned ear ni ngs
( $42, 000 - $15, 000) 90%
24, 300
Less: Pen s shar e ( 90%) of Pat ent amor t i zat i on f or 2 year s ( 7, 200)
I nvest ment i n Syn December 31 $219, 600

Chapter 4 4-17

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-6 ( cont i nued)

Pen Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2012
( i n t housands)

Pen

90%Syn
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 400

$ 100

$ 500
I ncome f r omSyn 18 a 18
Cost of sal es 250* 50* 300*
Ot her expenses 100. 6* 26* c 4 130. 6*
Consol i dat ed NI $ 69. 4
Noncont r ol l i ng shar e g 2 2 *
Cont r ol l i ng shar e of NI
$ 67. 4 $ 24 $ 67. 4

Retained Earnings
Ret ai ned ear ni ngs Pen

$ 177

$ 177
Ret ai ned ear ni ngs Syn
$ 34 b 34
Net i ncome 67. 4 24 67. 4
Di vi dends 50* 16* a 14. 4
g 1. 6 50*
Ret ai ned ear ni ngs Dec 31
$ 194. 4 $ 42 $ 194. 4

Balance Sheet
Cash

$ 18

$ 15

$ 33
Account s r ecei vabl e 80 20 f 5 95
Di vi dends r ecei vabl e- - Syn 7. 2 d 7. 2
I nvent or i es 95 10 105
Not e r ecei vabl e Pen
5 e 5
I nvest ment i n Syn 219. 6 a 3. 6
b 216

Land 65 30 b 20 115
Bui l di ngs net
170 80 250
Equi pment net
130 50 180
Pat ent s b 36 c 4 32

$ 784. 8 $ 210 $ 810
Account s payabl e $ 85. 4 $ 10 f 5 $ 90. 4
Not e payabl e t o Syn 5 e 5
Di vi dends payabl e 8 d 7. 2 . 8
Capi t al st ock 500 150 b 150 500
Ret ai ned ear ni ngs 194. 4 42 194. 4

$ 784. 8 $ 210

Noncont r ol l i ng i nt er est J anuar y 1 b 24
Noncont r ol l i ng i nt er est December 31 g . 4 24. 4
281. 2 281. 2 $ 810
* Deduct
4-18 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-7

Preliminary computations

Allocation of excess fair value over book value
Cost of 70%i nt er est J anuar y 1 $490, 000
I mpl i ed f ai r val ue of Sol ( $490, 000 / 70%) $700, 000
Book val ue of Sol ( 600, 000)
Excess f ai r val ue over book val ue $100, 000

Excess allocated
Under val ued i nvent or y i t ems sol d i n 2011 $ 5, 000
Under val ued bui l di ngs ( 7 year l i f e) 14, 000
Under val ued equi pment ( 3 year l i f e) 21, 000
Remai nder t o goodwi l l 60, 000
Excess f ai r val ue over book val ue $100, 000

Calculation of income from Sol
Sol s r epor t ed net i ncome $100, 000
Less: Under val ued i nvent or i es sol d i n 2011 ( 5, 000)
Less: Depr eci at i on on bui l di ng ( $14, 000/ 7 year s) ( 2, 000)
Less: Depr eci at i on on equi pment ( $21, 000/ 3 year s) ( 7, 000)
Adj ust ed i ncome f r omSoul $ 86, 000
Par s 70%cont r ol l i ng shar e $ 60, 200
30%Noncont r ol l i ng i nt er est shar e $ 25, 800

Workpaper entries for 2011
a I ncome f r omSol 60, 200
Di vi dends ( Sol ) 35, 000
I nvest ment i n Sol 25, 200

b Capi t al st ock ( Sol ) 500, 000
Ret ai ned ear ni ngs ( Sol ) - J anuar y 1 100, 000
Unamor t i zed excess 100, 000
I nvest ment i n Sol 490, 000
Noncont r ol l i ng i nt er est - J anuar y 1 20, 000

c Cost of sal es ( f or i nvent or y i t ems) 5, 000

Bui l di ngs net
14, 000

Equi pment net
21, 000
Goodwi l l 60, 000
Unamor t i zed excess 100, 000

d Depr eci at i on expense 2, 000

Bui l di ngs net
2, 000

e Depr eci at i on expense 7, 000

Equi pment net
7, 000

f Noncont r ol l i ng I nt er est Shar e 25, 800

Di vi dends Sol
15, 000
Noncont r ol l i ng I nt er est 10, 800

g Account s payabl e 10, 000
Account s r ecei vabl e 10, 000

h Di vi dends payabl e 14, 000
Di vi dends r ecei vabl e 14, 000

Chapter 4 4-19

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-7 ( cont i nued)

Par Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2011
( i n t housands)

Par

Sol 70%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 800

$ 700

$1, 500
I ncome f r omSol 60. 2 a 60. 2
Gai n on equi pment 10 10
Cost of sal es 300* 400* c 5 705*
Depr eci at i on expense 155* 60* d 2 224*
e 7
Ot her expenses 160* 140* 300*
Consol i dat ed NI $ 281
Noncont r ol l i ng shar e f 25. 8 25. 8*
Cont r ol l i ng shar e of NI
$ 255. 2 $ 100 $ 255. 2

Retained Earnings
Ret ai ned ear ni ngs Par

$ 300

$ 300
Ret ai ned ear ni ngs Sol
$ 100 b 100
Cont r ol l i ng shar e of NI 255. 2 100 255. 2
Di vi dends 200* 50* a 35
f 15 200*
Ret ai ned ear ni ngs Dec 31
$ 355. 2 $ 150 $ 355. 2

Balance Sheet
Cash

$ 96

$ 60

$ 156
Account s r ecei vabl e 100 70 g 10 160
Di vi dends r ecei vabl e 14 h 14
I nvent or i es 150 100 250
Ot her cur r ent asset s 70 30 100
Land 50 100 150
Bui l di ngs net
140 160 c 14 d 2 312
Equi pment net
570 330 c 21 e 7 914
I nvest ment i n Sol 515. 2 a 25. 2
b 490

Goodwi l l c 60 60
Unamor t i zed excess b 100 c 100

$1, 705. 2 $ 850 $2, 102
Account s payabl e $ 200 $ 85 g 10 $ 275
Di vi dends payabl e 100 20 h 14 106
Ot her l i abi l i t i es 50 95 145
Capi t al st ock, $10 par 1, 000 500 b 500 1, 000
Ret ai ned ear ni ngs 355. 2 150 355. 2

$1, 705. 2 $ 850

Noncont r ol l i ng i nt er est J anuar y 1 b 210
Noncont r ol l i ng i nt er est December 31 f 10. 8 220. 8
919 919 $2, 102
* Deduct
4-20 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-8

Supporting computations

Owner shi p per cent age 13, 500/ 15, 000 shar es = 90%

I nvest ment cost ( 13, 500 shar es $15)
$202, 500
I mpl i ed f ai r val ue of Son ( $202, 500 / 90%) $225, 000
Book val ue of Son 165, 000
Excess f ai r val ue over book val ue $ 60, 000

Excess allocated to
Land $ 20, 000
Remai nder t o goodwi l l 40, 000
Excess f ai r val ue over book val ue $ 60, 000

Income from Son
Pun s cont r ol l i ng shar e of Son s i ncome ( $24, 000 90%)
$ 21, 600

Investment in Son December 31, 2012
Cost J anuar y 1, 2011 $202, 500
Pun s shar e of t he change i n Son s r et ai ned ear ni ngs
( $42, 000 - $15, 000) 90%
24, 300
I nvest ment i n Son December 31 $226, 800

Noncont r ol l i ng i nt er est at December 31, 2012 ( 10%of f ai r val ue)
( ( $225, 000 + $42, 000 - $15, 000) x 10%)
$ 25, 200

Chapter 4 4-21

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-8 ( cont i nued)

Pun Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2012
( i n t housands)

Pun

90%Son
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 400

$ 100

$ 500
I ncome f r omSon 21. 6 a 21. 6
Cost of sal es 250* 50* 300*
Expenses 100. 6* 26* 126. 6*
Consol i dat ed NI $ 73. 4
Noncont r ol l i ng shar e c 2. 4 2. 4*
Cont r ol l i ng shar e of NI
$ 71 $ 24 $ 71

Retained Earnings
Ret ai ned ear ni ngs Pun

$ 181

$ 181
Ret ai ned ear ni ngs Son
$ 34 b 34
Cont r ol l i ng shar e of NI 71 24 71
Di vi dends 50* 16* a 14. 4
c 1. 6 50*
Ret ai ned ear ni ngs Dec 31
$ 202 $ 42 $ 202

Balance Sheet
Cash

$ 18

$ 15

$ 33
Account s r ecei vabl e 80 20 f 5 95
Di vi dends r ecei vabl e 7. 2 d 7. 2
I nvent or i es 95 10 105
Not e r ecei vabl e Pun
5 e 5
I nvest ment i n Son 226. 8 a 7. 2
b 219. 6

Land 65 30 b 20 115
Bui l di ngs net
170 80 250
Equi pment net
130 50 180
Goodwi l l b 40 40

$ 792 $ 210 $ 818

Account s payabl e $ 85 $ 10 f 5 $ 90
Not e payabl e t o Son 5 e 5
Di vi dends payabl e 8 d 7. 2 . 8
Capi t al st ock 500 150 b 150 500
Ret ai ned ear ni ngs 202 42 202

$ 792 $ 210

Noncont r ol l i ng i nt er est J anuar y 1 b 24. 4
Noncont r ol l i ng i nt er est December 31 c . 8 25. 2
285. 2 285. 2 $ 818
* Deduct
4-22 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-9

Pas Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2011
( i n t housands)

Pas

80%Sel
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 200

$ 110

$ 310
I ncome f r omSel 17 a 17
Cost of sal es 80* 40* b 12. 5 132. 5*
Depr eci at i on expense 40* 20* d 5 65*
Ot her expenses 25. 5* 10* g 1. 25 36. 75*
Consol i dat ed NI $ 75. 75
Noncont r ol l i ng shar e c 4. 25 4. 25*
Cont r ol l i ng shar e of NI
$ 71. 5 $ 40 $ 71. 5

Retained Earnings
Ret ai ned ear ni ngs Pas

$ 75

$ 75
Ret ai ned ear ni ngs Sel
$ 50 b 50
Cont r ol l i ng shar e of NI 71. 5 40 71. 5
Di vi dends 40* 20* a 16
c 4 40*
Ret ai ned ear ni ngs Dec 31
$ 106. 5 $ 70 $ 106. 5

Balance Sheet
Cash

$ 29. 5

$ 30

$ 59. 5
Tr ade r ecei vabl es net
28 40 e 4 64
Di vi dends r ecei vabl e 8 f 8
I nvent or i es 40 30 70
Land 15 30 45
Bui l di ngs net
65 70 135
Equi pment net
200 100 b 25 d 5 320
I nvest ment i n Sel 211 a 1
b 210

Pat ent s b 25 g 1. 25 23. 75

$ 596. 5 $ 300 $ 717. 25

Account s payabl e $ 40 $ 50 e 4 $ 86
Di vi dends payabl e 100 10 f 8 102
Ot her l i abi l i t i es 50 20 70
Capi t al st ock 300 150 b 150 300
Ret ai ned ear ni ngs 106. 5 70 106. 5

$ 596. 5 $ 300

Noncont r ol l i ng i nt er est J anuar y 1 b 52. 5
Noncont r ol l i ng i nt er est December 31 c . 25 52. 75
302 302 $ 717. 25
* Deduct
Chapter 4 4-23

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-9 ( cont i nued)

Supporting computations
I nvest ment cost J anuar y 1, 2011 $210, 000
I mpl i ed f ai r val ue of Sel ( $210, 000 / 80%) $262, 500
Book val ue of Sel 200, 000
Excess f ai r val ue over book val ue $ 62, 500
Excess al l ocat ed:
Under val ued i nvent or y $ 12, 500
Under val ued equi pment 25, 000
Remai nder t o pat ent s 25, 000
Excess f ai r val ue over book val ue $ 62, 500

4-24 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-10

Pik Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2011
( i n t housands)

Pi k
80%
Sel
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 200

$ 110

$ 310
I ncome f r omSel 18 a 18
Cost of sal es 80* 40* b 12. 5 132. 5*
Depr eci at i on expense 40* 20* d 5 65*
Ot her expenses 25. 5* 10* 35. 5*
Consol i dat ed NI $ 77
Noncont r ol l i ng shar e c 4. 5 4. 5*
Cont r ol l i ng shar e of NI
$ 72. 5 $ 40 $ 72. 5

Retained Earnings
Ret ai ned ear ni ngs Pi k

$ 75

$ 75
Ret ai ned ear ni ngs Sel
$ 50 b 50
Cont r ol l i ng shar e of NI 72. 5 40 72. 5
Di vi dends 40* 20* a 16
c 4 40*
Ret ai ned ear ni ngs Dec 31
$ 107. 5 $ 70 $ 107. 5

Balance Sheet
Cash

$ 29. 5

$ 30

$ 59. 5
Tr ade r ecei vabl es net
28 40 e 4 64
Di vi dends r ecei vabl e 8 f 8
I nvent or i es 40 30 70
Land 15 30 45
Bui l di ngs net
65 70 135
Equi pment net
200 100 b 25 d 5 320
I nvest ment i n Sel 212 a 2
b 210

Goodwi l l b 25 25

$ 597. 5 $ 300 $ 718. 5

Account s payabl e $ 40 $ 50 e 4 $ 86
Di vi dends payabl e 100 10 f 8 102
Ot her l i abi l i t i es 50 20 70
Capi t al st ock 300 150 b 150 300
Ret ai ned ear ni ngs 107. 5 70 107. 5

$ 597. 5 $ 300


Noncont r ol l i ng i nt er est J anuar y 1 b 52. 5
Noncont r ol l i ng i nt er est December 31 c . 5 53
302 302 $ 718. 5
* Deduct
Chapter 4 4-25

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-10 ( cont i nued)

Supporting computations
I nvest ment cost J anuar y 1, 2011 $210, 000
I mpl i ed f ai r val ue of Sel ( $210, 000 / 80%) $262, 500
Book val ue of Sel 200, 000
Excess f ai r val ue over book val ue $ 62, 500
Excess al l ocat ed:
Under val ued i nvent or y $ 12, 500
Under val ued equi pment 25, 000
Remai nder t o goodwi l l 25, 000
Excess f ai r val ue over book val ue $ 62, 500

Income from Sel
Sel s r epor t ed net i ncome $ 40, 000
Less amor t i zat i on of excess f ai r val ue:
I nvent or y ( 12, 500)
Depr eci at i on ( $25, 000 / 5 year s) ( 5, 000)
Sel s adj ust ed i ncome $ 22, 500

Pi k s 80%cont r ol l i ng shar e $ 18, 000
20%Noncont r ol l i ng i nt er est shar e $ 4, 500


4-26 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-11

Supporting computations
I nvest ment cost December 31, 2011 $170, 000
I mpl i ed f ai r val ue of St u ( $170, 000 / 80%) $212, 500
Book val ue of St u 150, 000
Excess f ai r val ue over book val ue $ 62, 500


Al l ocat i on
of Excess

Amor t i zat i on
2012 2015
Unamor t i zed
Excess
December 31, 2015
I nvent or i es $ 8, 750 $ 8, 750 $ - - -
Pl ant asset s net
22, 500 10, 000 12, 500
Pat ent s 31, 250 25, 000 6, 250
$62, 500 $43, 750 $18, 750


Pil Corporation and Subsidiary
Consol i dat ed Bal ance Sheet Wor kpaper s
on December 31, 2015


Pi l

St u 80%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
Bal ance Sheet
Assets
Cash

$ 41, 000

$ 35, 000

$ 76, 000
Tr ade r ecei vabl es 60, 000 55, 000 c 5, 000 110, 000
Di vi dends r ecei vabl e 8, 000 d 8, 000
Advance t o St u 25, 000 e 25, 000
I nvent or i es 125, 000 35, 000 160, 000
Pl ant asset s net
300, 000 175, 000 b 12, 500 487, 500
I nvest ment i n St u 191, 000 a 191, 000
Pat ent s b 6, 250 6, 250
Unamor t i zed excess a 18, 750 b 18, 750
Tot al asset s
$750, 000 $300, 000 $839, 750

Equities
Account s payabl e

$ 50, 000

$ 45, 000

c 5, 000

$ 90, 000
Di vi dends payabl e 10, 000 d 8, 000 2, 000
Advance f r omPi l 25, 000 e 25, 000
Capi t al st ock 400, 000 100, 000 a 100, 000 400, 000
Ret ai ned ear ni ngs 300, 000 120, 000 a 120, 000 300, 000
Noncont r ol l i ng i nt er est a 47, 750 47, 750
Tot al equi t i es $750, 000 $300, 000 $839, 750

Chapter 4 4-27

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-12

Preliminary computations
I nvest ment cost $480, 000
I mpl i ed f ai r val ue Sci ( $480, 000 / 80%) $600, 000
Book val ue of Sci 450, 000
Excess f ai r val ue over book val ue $150, 000

Allocation of differential
Pl ant asset s $100, 000
Goodwi l l 50, 000
Excess f ai r val ue over book val ue $150, 000

Amortization
Pl ant asset s $100, 000/ 4 year s = $25, 000 per year

Investment account balance at December 31, 2012
Under l yi ng book val ue $580, 000
Add: Unamor t i zed excess al l ocat ed t o pl ant asset s
( $100, 000 - $50, 000 depr eci at i on) 50, 000
Add: Unamor t i zed goodwi l l 50, 000
Fai r val ue of Sci at December 31 $680, 000
I nvest ment account bal ance at December 31 ( 80%) $544, 000
Noncont r ol l i ng i nt er est at December 31 ( 20%) $136, 000

The i nvest ment account bal ance i s over st at ed at $560, 000 f or
t he $16, 000 di vi dend r ecei vabl e.

4-28 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-12 ( cont i nued)

Pat Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2012
( i n t housands)

Pat

Sci 80%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$1, 800

$ 600

$2, 400
I ncome f r omSci 76 c 76
Cost of sal es 1, 200* 300* 1, 500*
Oper at i ng expense 380* 180* e 25 585*
Consol i dat ed NI $ 315
Noncont r ol l i ng shar e f 19 19*
Cont r ol l i ng shar e of NI
$ 296 $ 120 $ 296

Retained Earnings
Ret ai ned ear ni ngs Pat

$ 244

$ 244
Ret ai ned ear ni ngs Sci
$ 100 d 100
Cont r ol l i ng shar e of NI 296 120 296
Di vi dends 200* 40* c 32
f 8 200*
Ret ai ned ear ni ngs Dec 31
$ 340 $ 180 $ 340

Balance Sheet
Cash

$ 12

$ 30

a 40

$ 82
Account s r ecei vabl e 52 40 h 10 82
I nvent or i es 164 120 284
Advance t o Sci 40 a 40
Ot her cur r ent asset s 160 10 170
Land 320 60 380
Pl ant asset s net
680 460 d 75 e 25 1, 190
I nvest ment i n Sci 560 b 16
c 44
d 500

Di vi dends r ecei vabl e b 16 g 16
Goodwi l l d 50 50

$1, 988 $ 720 $2, 238

Account s payabl e $ 48 $ 30 h 10 $ 68
Di vi dends payabl e 20 g 16 4
Ot her l i abi l i t i es 200 90 290
Capi t al st ock 1, 400 400 d 400 1, 400
Ret ai ned ear ni ngs 340 180 340

$1, 988 $ 720

Noncont r ol l i ng i nt er est J anuar y 1 d 125
Noncont r ol l i ng i nt er est December 31 f 11 136
827 827 $2, 238
* Deduct

Chapter 4 4-29

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-13

Supporting computations
I nvest ment cost J anuar y 1, 2011 $ 80, 000
I mpl i ed f ai r val ue of Ski ( $80, 000 / 80%) $100, 000
Book val ue of Ski 90, 000
Excess f ai r val ue over book val ue $ 10, 000

Excess allocated to
I nvent or y ( sol d i n 2011) $ 1, 000
Equi pment ( 4- year r emai ni ng use l i f e) 4, 000
I nt angi bl e asset s ( 40- year amor t i zat i on per i od) 5, 000
Excess f ai r val ue over book val ue $10, 000

Income from Ski for 2011
Ski s net i ncome $ 15, 000
Less: Excess al l ocat ed t o i nvent or i es ( 1, 000)
Less: Amor t i zat i on of excess al l ocat ed t o equi pment
( $4, 000/ 4 year s) ( 1, 000)
Less: Amor t i zat i on of i nt angi bl es ( $5, 000/ 40 year s) ( 125)
Ski s adj ust ed i ncome f or 2011 $ 12, 875

Pl y s 80%cont r ol l i ng i nt er est shar e $ 10, 300
Noncont r ol l i ng i nt er est shar e f or 2011 ( 20%) $ 2, 575

Income from Ski for 2012
Ski s net i ncome $ 20, 000
Less: Amor t i zat i on of excess al l ocat ed t o equi pment
( $4, 000/ 4 year s) ( 1, 000)
Less: Amor t i zat i on of i nt angi bl es ( $5, 000/ 40 year s) ( 125)
Ski s adj ust ed i ncome f or 2012 $ 18, 875

Pl y s 80%cont r ol l i ng i nt er est shar e $ 15, 100
Noncont r ol l i ng i nt er est shar e f or 2012 ( 20%) $ 3, 775

Not e: Si nce t he pr i or year s i ncome i s not af f ect ed by t he cur r ent year s
er r or of omi ssi on, t he wor kpaper s f or 2012 ar e easi er t o pr epar e wi t hout
an addi t i onal conver si on- t o- equi t y ent r y.

4-30 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-13 ( cont i nued)

Ply Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2011


Pl y

Ski 80%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 160, 000

$ 80, 000

$ 240, 000
I ncome f r omSki 10, 300 a 10, 300
Cost of sal es 105, 000* 35, 000* b 1, 000 141, 000*
Oper at i ng expenses 35, 000* 30, 000* c 1, 000
d 125
66, 125*
Consol i dat ed NI $ 32, 875
Noncont r ol l i ng shar e f 2, 575 2, 575*
Cont r ol l i ng shar e of NI
$ 30, 300 $ 15, 000 $ 30, 300

Retained Earnings
Ret ai ned ear ni ngs Pl y

$ 70, 000

$ 70, 000
Ret ai ned ear ni ngs Ski
$ 30, 000 b 30, 000
Cont r ol l i ng shar e of NI 30, 300 15, 000 30, 300
Di vi dends 10, 000* 5, 000* a 4, 000
f 1, 000 10, 000*
Ret ai ned ear ni ngs Dec 31
$ 90, 300 $ 40, 000 $ 90, 300

Balance Sheet
Cash

$ 24, 700

$ 15, 000

$ 39, 700
Tr ade r ecei vabl es net
25, 000 20, 000 45, 000
Di vi dends r ecei vabl e 4, 000 0 e 4, 000
I nvent or i es 40, 000 30, 000 70, 000
Pl ant & equi pment net
100, 000 55, 000 b 4, 000 c 1, 000 158, 000
I nvest ment i n Ski 86, 300 a 6, 300
b 80, 000

I nt angi bl es b 5, 000 d 125 4, 875

$ 280, 000 $ 120, 000 $ 317, 575

Account s payabl e $ 20, 700 $ 15, 000 $ 35, 700
Di vi dends payabl e 9, 000 5, 000 e 4, 000 10, 000
Capi t al st ock 100, 000 40, 000 b 40, 000 100, 000
Ot her pai d- i n capi t al 60, 000 20, 000 b 20, 000 60, 000
Ret ai ned ear ni ngs 90, 300 40, 000 90, 300

$ 280, 000 $ 120, 000

Noncont r ol l i ng i nt er est J anuar y 1 b 20, 000
Noncont r ol l i ng i nt er est December 31 f 1, 575 21, 575
118, 000 118, 000 $ 317, 575
* Deduct
Chapter 4 4-31

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-13 ( cont i nued)

Ply Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2012


Pl y

Ski 80%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 170, 000

$ 90, 000

$ 260, 000
I ncome f r omSki 16, 000 a 16, 000
Cost of sal es 110, 000* 35, 000* 145, 000*
Oper at i ng expenses 30, 000* 35, 000* c 1, 000
d 125
66, 125*
Consol i dat ed NI $ 48, 875
Noncont r ol l i ng shar e f 3, 775 3, 775*
Cont r ol l i ng shar e of NI
$ 46, 000 $ 20, 000 $ 45, 100

Retained Earnings
Ret ai ned ear ni ngs Pl y

$ 90, 300

$ 90, 300
Ret ai ned ear ni ngs Ski
$ 40, 000 b 40, 000
Cont r ol l i ng shar e of NI 46, 000 20, 000 45, 100
Di vi dends 15, 000* 10, 000* a 8, 000
f 2, 000 15, 000*
Ret ai ned ear ni ngs Dec 31
$ 121, 300 $ 50, 000 $ 120, 400

Balance Sheet
Cash

$ 26, 700

$ 20, 000

$ 46, 700
Tr ade r ecei vabl es net
45, 000 30, 000 75, 000
Di vi dends r ecei vabl e 4, 000 e 4, 000
I nvent or i es 40, 000 30, 000 70, 000
Pl ant & equi pment net
95, 000 60, 000 b 3, 000 c 1, 000 157, 000
I nvest ment i n Ski 94, 300 a 8, 000
b 86, 300

I nt angi bl e asset s b 4, 875 d 125 4, 750

$ 305, 000 $ 140, 000 $ 353, 450
Account s payabl e $ 17, 700 $ 25, 000 $ 42, 700
Di vi dends payabl e 6, 000 5, 000 e 4, 000 7, 000
Capi t al st ock 100, 000 40, 000 b 40, 000 100, 000
Ot her pai d- i n capi t al 60, 000 20, 000 b 20, 000 60, 000
Ret ai ned ear ni ngs 121, 300 50, 000 120, 400

$ 305, 000 $ 140, 000

Noncont r ol l i ng i nt er est J anuar y 1 b 21, 575
Noncont r ol l i ng i nt er est December 31 f 1, 775 23, 350
132, 775 132, 775 $ 353, 450
* Deduct
4-32 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-14

Preliminary computations
I nvest ment cost $ 99, 000
I mpl i ed f ai r val ue of Si m( $99, 000 / 90%) $110, 000
Book val ue of Si m 80, 000
Excess f ai r val ue over book val ue $ 30, 000

Excess al l ocat ed t o:
I nvent or i es ( sol d i n 2011) $ 10, 000
Pat ent s ( 10- year r emai ni ng usef ul l i f e) 20, 000
Excess f ai r val ue over book val ue $ 30, 000

1 Analysis of investment in Sim account

Fai r val ue of Si mJ anuar y 5, 2011 $110, 000
Add: Change i n r et ai ned ear ni ngs f r om
J anuar y 5, 2011 t o December 31, 2013

50, 000
Less: Amor t i zat i on of excess
Al l ocat ed t o i nvent or i es and amor t i zed i n 2011 ( 10, 000)
Al l ocat ed t o pat ent s and amor t i zed over 10 year s

( $20, 000/ 10 year s) 3 year s
( 6, 000)
Fai r val ue at December 31, 2013 144, 000
Add: I ncome f r omSi mf or 2014 18, 000
Less: Di vi dends i n 2014 ( 10, 000)
Fai r val ue at December 31, 2014 $152, 000

I nvest ment i n Si mon December 31, 2013 ( 90%f ai r val ue) $129, 600
I nvest ment i n Si mon December 31, 2014 ( 90%f ai r val ue) $136, 800
Noncont r ol l i ng i nt er est on Dec. 31, 2013 ( 10%f ai r val ue) $ 14, 400
Noncont r ol l i ng i nt er est on Dec. 31, 2014 ( 10%f ai r val ue) $ 15, 200

Chapter 4 4-33

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-14 ( cont i nued)

Pep Company and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2014


Pep

Si m
Adj ust ment s and
El i mi nat i ons
I ncome
St at ement
Ret ai ned
Ear ni ngs
Bal ance
Sheet
Debits
Cash

$ 11, 000

$ 15, 000

$ 26, 000
Account s r ecei vabl e 15, 000 25, 000 40, 000
Pl ant asset s 220, 000 180, 000 400, 000
I nvest ment
i n Si m

136, 800
a 7, 200
b 129, 600

Pat ent s b 14, 000 c 2, 000 12, 000
Cost of goods sol d 50, 000 30, 000 $ 80, 000*
Oper at i ng expenses 25, 000 40, 000 c 2, 000 67, 000*
Di vi dends 20, 000 10, 000 a 9, 000 $ 20, 000*
d 1, 000

$477, 800 $300, 000

$478, 000

Credits
Accumul at ed
depr eci at i on


$ 90, 000


$ 50, 000


140, 000
Li abi l i t i es 80, 000 30, 000 110, 000
Capi t al st ock 100, 000 60, 000 b 60, 000 100, 000
Pai d- i n- excess 20, 000 20, 000
Ret ai ned ear ni ngs 71, 600 70, 000 b 70, 000 71, 600
Sal es 100, 000 90, 000 190, 000
I ncome f r omSi m 16, 200 a 16, 200

$477, 800 $300, 000

Noncont r ol l i ng i nt er est Dec 31, 2013 b 14, 400
Noncont r ol l i ng i nt er est shar e
( $18, 000 adj . i nc. x 10%)

d 1, 800

1, 800*

Cont r ol l i ng shar e of NI
$ 41, 200

41, 200
Consol i dat ed r et ai ned ear ni ngs
$ 92, 800

92, 800
Noncont r ol l i ng i nt er est Dec 31, 2014 d 800 15, 200
164, 000 164, 000 $478, 000
* Deduct

a To el i mi nat e i ncome f r omsubsi di ar y and di vi dends r ecei ved and r educe t he
i nvest ment account t o i t s begi nni ng- of - t he- per i od bal ance.
b To el i mi nat e r eci pr ocal i nvest ment and subsi di ar y equi t y amount s, est abl i sh
begi nni ng noncont r ol l i ng i nt er est , and adj ust pat ent s f or t he unamor t i zed excess
as of t he begi nni ng of t he per i od.
c To amor t i ze excess al l ocat ed t o pat ent s f or 2014.
d To ent er noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome and di vi dends.

4-34 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-15

1 Journal entries on Pegs books

January 1, 2011
I nvest ment i n Sup ( 90%) 18, 000
Cash 18, 000
To r ecor d pur chase of 90%of Sup s st ock f or cash.

July 1, 2011
I nvest ment i n El l ( 25%) 7, 000
Cash 7, 000
To r ecor d pur chase of 25%of El l s st ock f or cash.

November 2011
Cash 2, 700
I nvest ment i n Sup ( 90%) 2, 700
To r ecor d r ecei pt of 90%of Sup s $3, 000 di vi dends.

November 2011
Cash 1, 250
I nvest ment i n El l ( 25%) 1, 250
To r ecor d r ecei pt of 25%of El l s $5, 000 di vi dends.

December 31, 2011
I nvest ment i n Sup ( 90%) 4, 500
I ncome f r omSup 4, 500
To r ecor d Shar e of Sup s r epor t ed i ncome
( $28, 000 - $23, 000) 90%

December 31, 2011
I nvest ment i n El l ( 25%) 700
I ncome f r omEl l 700
To r ecor d i nvest ment i ncome f r omEl l f or
20119 comput ed as:
Shar e of El l s r epor t ed i ncome $ 750

( $30, 000- $24, 000) 1/ 2 year 25%

Less: Amor t i zat i on of excess
[ $7, 000 ( $24, 000 25%) ]
10 year s 1/ 2 year


( 50)

$ 700

Chapter 4 4-35

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-15 ( cont i nued)

2 Pegs separate company financial statements

Peg Corporation
I ncome St at ement
f or t he year ended December 31, 2011

Revenues
Sal es $100, 000
I ncome f r omSup 4, 500
I ncome f r omEl l 700
Tot al r evenue $105, 200
Costs and expenses
Cost of sal es $ 60, 000
Ot her expenses 25, 000
Tot al cost s and expenses 85, 000
Net i ncome $ 20, 200

Peg Corporation
Ret ai ned Ear ni ngs St at ement
f or t he year ended December 31, 2011

Ret ai ned ear ni ngs J anuar y 1 $ 20, 000
Add: Net i ncome 20, 200
Deduct : Di vi dends ( 10, 000)
Ret ai ned ear ni ngs December 31 $ 30, 200

Peg Corporation
Bal ance Sheet
at December 31, 2011

Assets
Cur r ent asset s:
Cash $ 18, 950
Ot her cur r ent asset s 40, 000 $ 58, 950

Pl ant asset s net
120, 000
I nvest ment s:
I nvest ment i n Sup ( 90%) $ 19, 800
I nvest ment i n El l ( 25%) 6, 450 26, 250

Tot al asset s $205, 200

Liabilities and stockholders equity
Cur r ent l i abi l i t i es $ 25, 000
St ockhol der s equi t y:
Capi t al st ock $150, 000
Ret ai ned ear ni ngs December 31 30, 200 180, 200

Tot al l i abi l i t i es and st ockhol der s equi t y $205, 200

4-36 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-15 ( cont i nued)

3 Consol i dat i on wor kpaper s t r i al bal ance f or mat

Peg Corporation and Subsidiary
Consol i dat i on Wor kpaper s
f or t he year ended December 31, 2011


Peg
90%
Sup
Adj ust ment s and
El i mi nat i ons
I ncome
St at ement
Ret ai ned
Ear ni ngs
Bal ance
Sheet
Debits
Cash

$ 18, 950

$ 4, 000

$ 22, 950
Ot her cur r ent asset s 40, 000 11, 000 51, 000
Pl ant asset s net
120, 000 14, 000 134, 000
I nvest ment i n
Sup

19, 800
a 1, 800
b 18, 000

I nvest ment i n El l 6, 450 6, 450
Cost of sal es 60, 000 16, 000 $ 76, 000*
Ot her expenses 25, 000 7, 000 32, 000*
Di vi dends 10, 000 3, 000 a 2, 700 $ 10, 000*
d 300*
Tot al debi t s
$300, 200 $55, 000 $214, 400

Credits
Cur r ent l i abi l i t i es

$ 25, 000

$ 7, 000

$ 32, 000
Capi t al st ock 150, 000 18, 000 b 18, 000 150, 000
Ret ai ned ear ni ngs 20, 000 2, 000 b 2, 000 20, 000
Sal es 100, 000 28, 000 128, 000
I ncome f r omSup 4, 500 a 4, 500
I ncome f r omEl l 700 700
Tot al cr edi t s
$300, 200 $55, 000

Noncont r ol l i ng
i nt er est - J anuar y 1

b 2, 000

Noncont r ol l i ng i nt er est shar e
$5, 000 10%

d 500

500*

Cont r ol l i ng shar e of NI
$ 20, 200

20, 200
Consol i dat ed r et ai ned ear ni ngs
$ 30, 200

30, 200
Noncont r ol l i ng i nt er est
December 31

d 200

2, 200
$214, 400

Chapter 4 4-37

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-15 ( cont i nued)

4 Consolidated financial statements
Peg Corporation and Subsidiary
Consol i dat ed I ncome St at ement
f or t he year ended December 31, 2011
Revenues
Sal es $128, 000
I ncome f r omEl l ( equi t y met hod) 700
Tot al r evenues $128, 700
Costs and expenses
Cost of sal es $ 76, 000
Ot her expenses 32, 000
Tot al cost s and expenses 108, 000
Tot al consol i dat ed i ncome 20, 700
Less: Noncont r ol l i ng i nt er est shar e 500
Cont r ol l i ng shar e of NI $ 20, 200

Peg Corporation and Subsidiary
Consol i dat ed Ret ai ned Ear ni ngs St at ement
f or t he year ended December 31, 2011
Consol i dat ed r et ai ned ear ni ngs J anuar y 1 $ 20, 000
Add: Cont r ol l i ng shar e of NI 20, 200
Deduct : Di vi dends ( 10, 000)
Consol i dat ed r et ai ned ear ni ngs December 31 $ 30, 200

Peg Corporation and Subsidiary
Consol i dat ed Bal ance Sheet
at December 31, 2011
Assets
Cur r ent asset s:
Cash $ 22, 950
Ot her cur r ent asset s 51, 000 $ 73, 950

Pl ant asset s net
134, 000
I nvest ment s and ot her asset s:
I nvest ment i n El l 6, 450
Tot al asset s $214, 400
Liabilities and stockholders equity
Cur r ent l i abi l i t i es $ 32, 000
St ockhol der s equi t y:
Capi t al st ock $150, 000
Consol i dat ed r et ai ned ear ni ngs 30, 200
Noncont r ol l i ng i nt er est 2, 200 182, 400
Tot al l i abi l i t i es and st ockhol der s equi t y $214, 400

Solution P4-16

Partial consolidated statement of cash flows using the direct method
Pil Corporation and Subsidiaries
Par t i al Consol i dat ed St at ement of Cash Fl ows
f or t he cur r ent year
Cash Flows from Operating Activities
Cash r ecei ved f r omcust omer s $1, 600, 000
Di vi dends f r omequi t y i nvest ees 40, 000
I nt er est r ecei ved f r omshor t - t er ml oan 5, 000
Cash pai d f or ot her expenses ( 450, 000)
Cash pai d t o suppl i er s ( 630, 000)
Net cash f l ow f r omoper at i ng act i vi t i es $ 565, 000

4-38 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-17

Direct Method

Pes Corporation and Subsidiary
Consol i dat ed St at ement of Cash Fl ows
f or t he year ended December 31, 2011

Cash Flows from Operating Activities
Cash r ecei ved f r omcust omer s $670, 000
Cash pai d t o suppl i er s ( $348, 000)
Cash pai d f or oper at i ng expenses ( 157, 500) ( 505, 500)
Net cash f l ows f r omoper at i ng act i vi t i es 164, 500
Cash Flows from Investing Activities
Pur chase of pl ant and equi pment ( 125, 000)
Net cash f l ows f r omi nvest i ng act i vi t i es ( 125, 000)
Cash Flows from Financing Activities
Payment of cash di vi dends cont r ol l i ng
( 36, 000)
Payment of cash di vi dends noncont r ol l i ng
( 2, 000)
Payment of l ong- t er ml i abi l i t i es ( 11, 000)
Net cash f l ows f r omf i nanci ng act i vi t i es ( 49, 000)
Decr ease i n cash f or t he year ( 9, 500)
Cash on J anuar y 1 65, 000
Cash on December 31 $ 55, 500

Reconciliation of net income to cash provided by operating activities

Cont r ol l i ng shar e of NI $130, 000
Adj ust ment s t o r econci l e net i ncome t o cash
pr ovi ded by oper at i ng act i vi t i es:
Noncont r ol l i ng i nt er est shar e $ 5, 000
Depr eci at i on expense 51, 000
Pat ent s amor t i zat i on 500
I ncr ease i n account s payabl e 22, 000
I ncr ease i n account s r ecei vabl e ( 5, 000)
I ncr ease i n i nvent or i es ( 20, 000)
I ncr ease i n ot her cur r ent asset s ( 19, 000) 34, 500
Net cash f l ows f r omoper at i ng act i vi t i es $164, 500

Chapter 4 4-39

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-17 ( cont i nued)

Indirect Method

Pes Corporation and Subsidiary
Consol i dat ed St at ement of Cash Fl ows
f or t he year ended December 31, 2011

Cash Flows from Operating Activities
Cont r ol l i ng shar e of NI $130, 000

Adj ust ment s t o r econci l e net i ncome t o net cash
f r omoper at i ng act i vi t i es:
Noncont r ol l i ng shar e of NI $5000


Depr eci at i on $ 51, 000
Pat ent s amor t i zat i on 500
I ncr ease i n account s r ecei vabl e ( 5, 000)
I ncr ease i n i nvent or i es ( 20, 000)
I ncr ease i n ot her cur r ent asset s ( 19, 000)
I ncr ease i n account s payabl e 22, 000 34, 500
Net cash f l ows f r omoper at i ng act i vi t i es 164, 500
Cash Flows from Investing Activities
Pur chase of pl ant and equi pment ( 125, 000)
Net cash f l ows f r omi nvest i ng act i vi t i es ( 125, 000)
Cash Flows from Financing Activities
Payment of cash di vi dends cont r ol l i ng
( 36, 000)
Payment of cash di vi dends noncont r ol l i ng
( 2, 000)
Payment of l ong- t er ml i abi l i t i es ( 11, 000)
Net cash f l ows f r omf i nanci ng act i vi t i es ( 49, 000)
Decr ease i n cash f or t he year ( 9, 500)
Cash on J anuar y 1 65, 000
Cash on December 31 $ 55, 500

Note: The cash flows from investing activities and cash flows from financing
activities sections of the statement of cash flows are the same under the
direct and indirect method.

4-40 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-18 [ AI CPA]

Indirect Method

Puh, Inc. and Subsidiary
St at ement of Cash Fl ows (Indirect Method)
f or t he year ended December 31, 2011

Cash Flows from Operating Activities
Cont r ol l i ng shar e of NI $ 198, 000
Adj ust ment s t o r econci l e net i ncome t o cash
pr ovi ded by oper at i ng act i vi t i es:
Noncont r ol l i ng i nt er est shar e $ 33, 000
Depr eci at i on expense 82, 000
Pat ent s amor t i zat i on 3, 000
Decr ease i n account s r ecei vabl e 22, 000
I ncr ease i n account s payabl e 121, 000
I ncr ease i n def er r ed i ncome t axes 12, 000
I ncr ease i n i nvent or i es ( 70, 000)
Gai n on mar ket abl e equi t y secur i t i es ( 11, 000)
Gai n on sal e of equi pment ( 6, 000) 186, 000
Net cash f l ows f r omoper at i ng act i vi t i es 384, 000
Cash Flows from Investing Activities
Pur chase of equi pment $( 127, 000)
Pr oceeds f r omsal e of equi pment 40, 000
Net cash f l ows f r omi nvest i ng act i vi t i es ( 87, 000)
Cash Flows from Financing Activities
Cash r ecei ved f r omsal e of t r easur y st ock 44, 000
Payment of cash di vi dends cont r ol l i ng
( 58, 000)
Payment of cash di vi dends noncont r ol l i ng
( 15, 000)
Payment on l ong- t er mnot e ( 150, 000)
Net cash f l ows f r omf i nanci ng act i vi t i es ( 179, 000)
I ncr ease i n cash f or t he year 118, 000
Cash on J anuar y 1 195, 000
Cash on December 31 $ 313, 000

Li st i ng of non- cash i nvest i ng and f i nanci ng act i vi t i es:

I ssued common st ock i n exchange f or l and wi t h a f ai r val ue of $215, 000.

Chapter 4 4-41

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-18 ( cont i nued)

Indirect Method

Puh, Inc. and Subsidiary
Wor kpaper s f or t he St at ement of Cash Fl ows (Indirect Method)
f or t he year ended December 31, 2011

Cash Fl ow

Cash Fl ow Cash Fl ow
Year s Reconci l i ng I t ems Fr om I nvest i ng Fi nanci ng
Change Debi t Cr edi t Oper at i ons Act i vi t i es Act i vi t i es
Asset Changes
Cash 118, 000
Al l owance t o r educe MES 11, 000 e 11, 000
Account s r ecei vabl e net
( 22, 000) f 22, 000
I nvent or i es 70, 000 g 70, 000
Land* 215, 000 h 215, 000
Pl ant and equi pment 65, 000 k 62, 000 j 127, 000
Accumul at ed depr eci at i on ( 54, 000) l 82, 000 k 28, 000
Pat ent s net
( 3, 000) m 3, 000
Tot al asset changes 400, 000

Changes in Equities
Account s & accr ued payabl e 121, 000 n 121, 000
Not e payabl e l ong- t er m ( 150, 000) o 150, 000
Def er r ed i ncome t axes 12, 000 p 12, 000
Noncont r ol l i ng i nt er est i n
St o
18, 000 b 33, 000 d 15, 000
Common st ock, $10 par * 100, 000 h 100, 000
Addi t i onal pai d- i n capi t al 123, 000 h 115, 000
i 8, 000
Ret ai ned ear ni ngs 140, 000 a 198, 000 c 58, 000
Tr easur y st ock at cost 36, 000 i 36, 000
Tot al changes i n
equi t i es

400, 000


Cont r ol l i ng shar e of NI a 198, 000 198, 000
Noncont r ol l i ng i nt er est shar e b 33, 000 33, 000
Gai n on MES e 11, 000 ( 11, 000)
Pur chase of equi pment j 127, 000 ( 127, 000)
Sal e of equi pment k 40, 000 40, 000
Gai n on equi pment k 6, 000 ( 6, 000)
Depr eci at i on expense l 82, 000 82, 000
Payment on l ong- t er mnot e o 150, 000 ( 150, 000)
Amor t i zat i on of pat ent s m 3, 000 3, 000
Decr ease i n r ecei vabl es f 22, 000 22, 000
I ncr ease i n i nvent or i es g 70, 000 ( 70, 000)
I ncr ease i n account s payabl e n 121, 000 121, 000
I ncr ease i n def er r ed i ncome t axes p 12, 000 12, 000
Pr oceeds f r omt r easur y st ock i 44, 000 44, 000
Payment of di vi dends cont r ol l i ng
c 58, 000 ( 58, 000)
Payment of di vi dends noncont r ol l i ng
d 15, 000 ( 15, 000)
1, 229, 000 1, 229, 000
384, 000 ( 87, 000) ( 179, 000)

Cash i ncr ease f or t he year = $384, 000 $87, 000 $179, 000 = $118, 000.
* Non- cash i t em: Pur chased $215, 000 l and t hr ough common st ock i ssuance.
4-42 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-19

Indirect Method

Pil Corporation and Subsidiary
Consol i dat ed St at ement of Cash Fl ows
f or t he year ended December 31, 2011

Cash Flows from Operating Activities
Cont r ol l i ng shar e of NI $ 500, 000
Adj ust ment s t o r econci l e net i ncome t o cash
pr ovi ded by oper at i ng act i vi t i es:
Noncont r ol l i ng i nt er est shar e $ 40, 000
Depr eci at i on expense 200, 000
Pat ent s amor t i zat i on 10, 000
I ncr ease i n account s payabl e 17, 000
I ncome l ess di vi dends equi t y i nvest ee
( 30, 000)
I ncr ease i n account s r ecei vabl e ( 210, 000) 27, 000
Net cash f l ows f r omoper at i ng act i vi t i es 527, 000
Cash Flows from Investing Activities
Pur chase of equi pment $( 500, 000)
Net cash f l ows f r omi nvest i ng act i vi t i es ( 500, 000)
Cash Flows from Financing Activities
Cash r ecei ved f r oml ong- t er mnot e $ 200, 000
Payment of cash di vi dends cont r ol l i ng
( 137, 000)
Payment of cash di vi dends noncont r ol l i ng
( 20, 000)
Net cash f l ows f r omf i nanci ng act i vi t i es 43, 000
I ncr ease i n cash f or t he year 70, 000
Cash on J anuar y 1 360, 000
Cash on December 31 $ 430, 000

Chapter 4 4-43

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-19 ( cont i nued)

Indirect Method
Pil Corporation and Subsidiary
Wor kpaper s f or t he St at ement of Cash Fl ows ( I ndi r ect Met hod)
f or t he year ended December 31, 2011

Cash Fl ows Cash Fl ows Cash Fl ows
Year s Reconci l i ng I t ems Fr om I nvest i ng Fi nanci ng
Change Debi t Cr edi t Oper at i ons Act i vi t i es Act i vi t i es
Asset Changes
Cash $ 70, 000
Account s r ecei vabl e net
210, 000 e 210, 000
I nvent or i es 0
Pl ant & equi pment net
300, 000 f 200, 000 g 500, 000
Equi t y i nvest ment s 30, 000 l 30, 000 m 60, 000
Pat ent s ( 10, 000) h 10, 000

Tot al asset changes $ 600, 000

Changes in Equities
Account s payabl e $ 17, 000 i 17, 000
Di vi dends payabl e 13, 000 k 13, 000
Long- t er mnot e payabl e 200, 000 j 200, 000
Common st ock 0
Ot her pai d- i n capi t al 0
Ret ai ned ear ni ngs 350, 000 a 500, 000 c 150, 000
Noncont r ol . i nt er est 20% 20, 000 b 40, 000 d 20, 000
Changes i n
equi t i es $ 600, 000
Cont r ol l i ng shar e of NI a 500, 000 $ 500, 000
Noncont r ol l i ng i nt er est shar e b 40, 000 40, 000
Pur chase of pl ant & equi pment g 500, 000 $( 500, 000)
Depr eci at i on pl ant & equi pment
f 200, 000 200, 000
Amor t i zat i on of pat ent s h 10, 000 10, 000
I ncr ease i n account s r ecei vabl e e 210, 000 ( 210, 000)
I ncome l ess di vi dends f r om
i nvest ees m 60, 000 l 30, 000 ( 30, 000)
I ncr ease i n account s payabl e i 17, 000 17, 000
Recei ved cash f r oml ong- t er mnot e j 200, 000 0 $ 200, 000
Payment of di vi dends cont r ol l i ng
c 150, 000 k 13, 000 ( 137, 000)
Payment of di vi dends noncont r ol l i ng
d 20, 000 ( 20, 000)
1, 950, 000 1, 950, 000 $ 527, 000 $( 500, 000) $ 43, 000

Cash i ncr ease f or t he year = $527, 000 $500, 000 + $43, 000 = $70, 000.

4-44 Consolidation Techniques and Procedures

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-19 ( cont i nued)

Direct Method

Pil Corporation and Subsidiary
Consol i dat ed St at ement of Cash Fl ows
f or t he year ended December 31, 2011

Cash Flows from Operating Activities
Cash r ecei ved f r omcust omer s $2, 390, 000
Cash r ecei ved f r omequi t y i nvest ees 30, 000
Cash pai d t o suppl i er s ( $1, 433, 000)
Cash pai d f or oper at i ng expenses ( 460, 000) ( 1, 893, 000)
Net cash f l ows f r omoper at i ng act i vi t i es 527, 000
Cash Flows from Investing Activities
Pur chase of equi pment $ ( 500, 000)
Net cash f l ows f r omi nvest i ng act i vi t i es ( 500, 000)
Cash Flows from Financing Activities
Cash r ecei ved f r oml ong- t er mnot e $ 200, 000
Payment of cash di vi dends cont r ol l i ng
( 137, 000)
Payment of cash di vi dends noncont r ol l i ng
( 20, 000)
Net cash f l ows f r omf i nanci ng act i vi t i es 43, 000
I ncr ease i n cash f or t he year 70, 000
Cash on J anuar y 1 360, 000
Cash on December 31 $ 430, 000

Reconciliation of net income to cash provided by
operating activities

Cont r ol l i ng shar e of NI $ 500, 000
Adj ust ment s t o r econci l e net i ncome t o cash
pr ovi ded by oper at i ng act i vi t i es:
Noncont r ol l i ng i nt er est shar e $ 40, 000
I ncome l ess di vi dends equi t y i nvest ee
( 30, 000)
Depr eci at i on expense 200, 000
Pat ent s amor t i zat i on 10, 000
I ncr ease i n account s payabl e 17, 000
I ncr ease i n account s r ecei vabl e ( 210, 000) 27, 000
Net cash f l ows f r omoper at i ng act i vi t i es $ 527, 000

Chapter 4 4-45

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P4-19 ( cont i nued)

Direct Method

Pil Corporation and Subsidiary
Wor kpaper s f or t he St at ement of Cash Fl ows ( Di r ect Met hod)
f or t he year ended December 31, 2011


Cash Fl ow
Cash Fl ow Cash Fl ow
Year s Reconci l i ng I t ems Fr om I nvest i ng Fi nanci ng
Change Debi t Cr edi t Oper at i ons Act i vi t i es Act i vi t i es
Asset Changes
Cash $ 70, 000
Account s r ecei vabl e net 210, 000 a 210, 000
I nvent or i es 0
Pl ant & equi pment net 300, 000 b 200, 000 c 500, 000
Equi t y i nvest ment s 30, 000 d 30, 000
Pat ent s ( 10, 000) e 10, 000
Tot al asset changes $ 600, 000
Changes i n Equi t i es
Account s payabl e $ 17, 000 f 17, 000
Di vi dends payabl e 13, 000 g 13, 000
Long- t er mnot e payabl e 200, 000 h 200, 000
Ret ai ned ear ni ngs* 350, 000
Noncont r ol . i nt er est 20% 20, 000 i 40, 000 j 20, 000
Changes i n equi t i es $ 600, 000
Ret . ear ni ngs change*
Sal es $2, 600, 000 a 210, 000 $2, 390, 000
I ncome f r omequi t y
i nvest ees 60, 000 d 30, 000 30, 000
Cost of goods sol d ( 1, 450, 000) f 17, 000 ( 1, 433, 000)
Depr eci at i on expense ( 200, 000) b 200, 000 0
Ot her oper at i ng expenses ( 470, 000) e 10, 000 ( 460, 000)
Noncont r ol l i ng i nt er est
shar e ( 40, 000) i 40, 000 0
Di vi dends decl ar ed

Pi l ( 150, 000) g 13, 000
k 137, 000
Ret ai ned ear ni ngs
change $ 350, 000
Recei ved cash f r oml ong- t er mnot e h 200, 000 $ 200, 000
Payment of di vi dends cont r ol l i ng
k 137, 000 ( 137, 000)
Payment of di vi dends noncont r ol l i ng
j 20, 000 ( 20, 000)
Pur chase of equi pment c 500, 000 $( 500, 000)
1, 377, 000 1, 377, 000 $ 527, 000 $( 500, 000) $ 43, 000

* Ret ai ned ear ni ngs changes r epl ace t he r et ai ned ear ni ngs account f or r econci l i ng pur poses.

Cash i ncr ease f or t he year = $527, 000 - $500, 000 + $43, 000 = $70, 000.