Professional Documents
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CHAPTER 6
VARIABLE INTEREST ENTITIES, INTRA-ENTITY DEBT,
CONSOLIDATED CASH FLOWS, AND OTHER ISSUES
Answers to Problems
1. C
2. D
3. A
4. D
5. A
6. D Cash flow from operations:
Net income...................................................................
Depreciation.................................................................
Trademark amortization..............................................
Increase in accounts receivable................................
Increase in inventory...................................................
Increase in accounts payable....................................
Cash flow from operations.........................................
7. C
$45,000
10,000
15,000
(17,000)
(40,000)
12,000
(20,000)
$25,000
($12,000)
(1,000)
(25,000)
($38,000)
8. C
9. C Post-issue subsidiary valuation ($800,000 + $250,000)
Arcolas new ownership percentage (40,000 50,000)
Arcolas share of post-issue subsidiary valuation
Arcolas pre-issue equity balance
Increase to Arcolas investment account
10. D Jordans income from own operations.....................
Fey's income ...............................................................
Eliminate intra-entity interest income.......................
Eliminate intra-entity interest expense.....................
Recognize retirement gain on debt ($212,000 $199,000)
Consolidated net income .....................................
6-1
$1,050,000
80%
$ 840,000
800,000
$ 40,000
$200,000
80,000
(21,000)
22,000
13,000
$294,000
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$465,000
100,000
$4.65
6-2
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$400,000
(7,000) $393,000
100,000
1,700
4,830
(5,592)
$493,938
13. D 30% of Byrd's net income of $100,000; the intra-entity debt transaction is
attributed solely to the parent company.
14. A For 2013, the adjustment to beginning retained earnings should recognize
the gain on the retirement of the debt, the elimination of the 2012 interest
expense, and the elimination of the 2012 interest income.
Gain on Retirement of Bond:
Original book value ...............................................................
20092011 amortization ($600,000 20 yrs. 3 yrs.) ........
Book value, January 1, 2012 ................................................
Percentage of bonds retired ......................................
Book value of retired bonds ................................................
Cash received ($4,000,000 96.6%) ....................................
Gain on retirement of bonds ......................................
$10,600,000
(90,000)
$10,510,000
40%
$4,204,000
3,864,000
$ 340,000
$360,000
(12,000)
$348,000
$360,000
8,000
$368,000
$340,000
348,000
(368,000)
$320,000
6-3
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$ 424,000
3,960,000
1,696,000
440,000
6,520,000
(6,000,000)
$ 520,000
$300,000
200,000
(40,000)
$460,000
(30,000)
$430,000
$588,000
100%
$588,000
$738,000
80%
$590,400
6-4
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$592,000
148,000
80,000
150,000
970,000
64%
$620,800
656,000
$(35,200)
$628,000
100%
$628,000
656,000
$(28,000)
The power, through voting rights or similar rights, to direct the activities
of an entity that most significantly impact the entitys economic
performance.
Because (1) HCO Medias losses are limited by contract, and (2)
Hillsborough has the right to receive the residual benefits of the sales
generated on the HCO Media internet site above $500,000, Hillsborough
should consolidate HCO Media.
23.
6-5
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
23. (continued)
The total equity at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties. In most cases, if equity at risk is less than 10% of total assets,
the risk is deemed insufficient.
The equity investors in the VIE lack any one of the following three
characteristics of a controlling financial interest.
1. The power, through voting rights or similar rights, to direct the
activities of an entity that most significantly impact the entitys
economic performance.
2. The obligation to absorb the expected losses of the entity if they
occur (e.g., another firm may guarantee a return to the equity
investors)
3. The right to receive the expected residual returns of the entity (e.g.,
the investors' return may be capped by the entity's governing
documents or other arrangements with variable interest holders).
The power, through voting rights or similar rights, to direct the activities
of an entity that most significantly impact the entitys economic
performance.
c. Risks of the construction project that has TecPC has effectively shifted to
the owners of the VIE:
At the end of the 1st five-year lease term, if the parent opts to sell the facility,
and the proceeds are insufficient to repay the VIE investors, TecPC may be
required to pay up to 85% of the project's cost. Thus, a potential 15% risk.
Risks that remain with TecPC
If lease is not renewed, TecPC must either purchase the facility or sell it
on behalf of the VIE with a guarantee of Investors' (debt and equity)
balances representing a risk of decline in market value of asset
Debt guarantees
6-6
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
23. (continued)
d. TecPC possesses the following characteristics of a primary beneficiary:
Direct decision-making ability (end of five-year lease term).
Absorb a majority of the entity's expected losses if they occur (via debt
guarantees and guaranteed lease payments and residual value).
$ 60,000
20,000
80,000
100,000
$20,000
PanTech recognizes the $20,000 excess net asset fair value as a bargain purchase
and records all of SoftPlus assets and liabilities at their individual fair values.
Cash
$20,000
Marketing software
160,000
Computer equipment
40,000
Long-term debt
(120,000)
Noncontrolling interest
(60,000)
Pantech equity interest
(20,000)
Gain on bargain purchase
(20,000)
-0b. Implied valuation and excess allocation for Softplus.
Noncontrolling interest fair value
60,000
Consideration transferred by Pantech
20,000
Total business fair value
80,000
Fair value of VIE net identifiable assets
60,000
Goodwill
$20,000
When the fair value of a VIE (that is a business) is greater than assessed
asset values, all identifiable assets and liabilities are reported at fair values
(unless a previously held interest) and the difference is treated as goodwill.
Cash
Marketing software
Computer equipment
Goodwill (excess business fair value)
Long-term debt
Noncontrolling interest
Pantech equity interest
6-7
$20,000
120,000
40,000
20,000
(120,000)
(60,000)
(20,000)
-0-
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Tech
45,000
Cloud
Computin
g
25,000
Consolidated
A&E
840,000
NCI
Balances
70,000
S 40,000
A 800,000
Capitalized software
Computer equipment
Communications
equipment
Research and
development asset
Patent
Goodwill
Total assets
965,000
1,050,000
140,000
40,000
1,105,000
1,090,000
900,000
320,000
1,220,000
3,800,000
700,000
1,800,000
175,000
200,000
5,660,000
Long-term debt
Common stockAnywhere Tech
Common stock-Cloud
Computing
Retained earnings
Noncontrolling interest
Total liabilities and equity
(925,000)
(600,000)
(1,525,000)
A1,800,000
175,000
A 200,000
(2,500,000)
(375,000)
(3,800,000)
Consideration transferred
Noncontrolling interest fair value
Acquisition-date fair value
Book value
Excess fair over book value
Research and development asset
Goodwill
(2,500,000)
(25,000)
(75,000)
(700,000)
S
S
10,000
30,000
2,040,000
A 1,200,000
2,040,000
(15,000)
(45,000)
(1,200,000)
(375,000)
(1,260,000)
(5,660,000)
$ 840,000
1,260,000
$2,100,000
100,000
$2,000,000
1,800,000
$ 200,000
26. (25 Minutes) (Consolidation entry for three consecutive years to report effects
of intra-entity bond acquisition. Straight-line method used. Parent uses equity
method)
a. Book Value of Bonds Payable, January 1, 2012
Book value, January 1, 2010 ................................................... $1,050,000
Amortization20102011 ($5,000 per year
[$50,000 premium 10 years] for two years) ..................
10,000
Book value of bonds payable, January 1, 2012..................... $1,040,000
Book value of 40% of bonds payable
(intra-entity portion), January 1, 2012 ..............................
$416,000
6-8
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$384,000
416,000
$ 32,000
$384,000
2,000
$386,000
$36,000
2,000
$34,000
$36,000
2,000
$38,000
26. (continued)
CONSOLIDATION ENTRY B (2012)
Bonds Payable ............................................................ 400,000
Premium on Bonds Payable ...................................... 14,000
Interest Income ........................................................... 38,000
Investment in Bonds...............................................
386,000
Interest Expense .....................................................
34,000
Gain on Retirement of Bonds ...............................
32,000
(To eliminate accounts stemming from intra-entity bonds [balances
computed above] and to recognize gain on the retirement of this debt.)
6-9
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
6-10
400,000
10,000
38,000
390,000
34,000
24,000
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
CONSOLIDATED TOTALS
28.
Revenues and Interest Income = $1,051,360 (add the two book values and
eliminate interest income on intra-entity bond)
Operating and Interest Expense = $751,760 (add the two book values and
eliminate interest expense on intra-entity bond)
Other Gains and Losses = $152,000 (add the two book values)
(30 Minutes) (Consolidation entry for two years to report effects of intraentity bond acquisition. Effective rate method applied.)
a. Loss on Repurchase of Bond
Cost of acquisition ..........................................
Book value ($668,778 1/8) ...........................
Loss on repurchase ........................................
$121,655
83,597
$ 38,058
$7,299
Interest expense:
$83,597 (book value [above]) 10% ........
$8,360
6-11
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$121,655
$8,000
7,299
701
$120,954
$83,597
$8,000
8,360
360
$83,957
Entry B12/31/12
Bonds Payable .................................................
83,957
Interest Income ................................................
7,299
Loss on Retirement of Debt ...........................
38,058
Investment in Bonds ..................................
120,954
Interest Expense ........................................
8,360
(To eliminate intra-entity debt holdings and recognize loss on
retirement.)
b. Interest Balances for 2013
Interest income: $120,954 (investment
balance for the year) 6% .........................................
$7,257
$8,396
28. (continued)
Investment Balance, December 31, 2013
Book value, January 1, 2013 (part a) ........................
Amortization of premium:
Cash interest ($100,000 8%) .............................
Effective interest income (above) .......................
Investment balance, December 31, 2013.......
6-12
$120,954
$8,000
7,257
743
$120,211
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$83,957
$8,000
8,396
396
$84,353
$7,213
$8,435
$120,211
$8,000
7,213
787
$119,424
$84,353
$8,000
8,435
435
$84,788
28. (continued)
Adjustment Needed to Investment in Bierman for Bond Retirement Loss:
Loss on retirement of debt (part a) .............................................
Amounts recognized in previous years:
Interest income:
2012
($7,299)
2013
(7,257)
($14,556)
Interest expense:
2012
$8,360
2013
8,396
16,756
6-13
$38,058
2,200
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$35,858
Entry *B12/31/14
Bonds Payable ............................................................
Interest Income ...........................................................
Investment in Bierman ...............................................
Investment in Bonds .............................................
Interest Expense ...................................................
84,788
7,213
35,858
119,424
8,435
$283,550
(221,749)
$61,801
Date
2010
2011
2012
Book
Value
$435,763
$438,055
$440,622
Effective
Interest
(12% Rate)
$52,292
$52,567
$52,875
Cash
Interest
$50,000
$50,000
$50,000
Amortization
$2,292
$2,567
$2,875
6-14
Year- End
Book Value
$438,055
$440,622
$443,497
$283,550
$25,000
22,684
2,316
$281,234
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Bonds Payable
Book value12/31/12 (computed above) ................
Cash interest ($500,000 10%) .................................
Effective interest expense ($443,497 12%) ...........
Amortization ..........................................................
Bonds payable, 12/31/13 ............................................
$443,497
$50,000
53,220
3,220
$446,717
223,359
22,684
61,801
26,610
281,234
29.(continued)
c. Loss on Retirement of Bond
Because Bloom uses the straight-line method of amortization, the loss on
retirement must be computed again.
Original issue price1/1/10..........................................................
Discount amortization (20102012) ([$64,237 11] 3 years).
Book value 12/31/12 ......................................................................
$435,763
17,519
$453,282
$226,641
283,550
$ 56,909
$283,550
(4,194)
$279,356
Interest Income
Cash interest ($250,000 10%) ....................................................
Premium amortization (above) .....................................................
Intra-entity interest income2013 .........................................
$25,000
(4,194)
$20,806
6-15
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Bonds Payable
Original issue price 1/1/10.............................................................
Discount amortization (20102013) [($64,237 11) 4 years] .
Book value 12/31/13 .................................................................
Opus ownership .......................................................................
Intra-entity portion12/31/13 ............................................
$435,763
23,359
$459,122
50%
$229,561
Interest Expense
Cash interest ($250,000 10%) ....................................................
Discount amortization ([$64,237 11] 1/2) ..............................
Intra-entity interest expense2013 .......................................
$25,000
2,920
$27,920
229,561
20,806
56,909
27,920
279,356
30. (8 Minutes) (Determine goodwill for an acquisition in which subsidiary has both
common stock and preferred stock)
Problem assigned as graded homework, will supply solution after students turn
in their answer
31. (30 Minutes) (Consolidation entries with subsidiary cumulative preferred
stock.)
Problem assigned as graded homework, will supply solution after students turn
in their answer
32. (30 Minutes) (Prepare consolidation entries for an acquisition where subsidiary
has outstanding preferred stock)
Consideration transferred for common stock
Consideration transferred for preferred stock
Noncontrolling interest in common stock
Acquisition-date fair value for Young
Youngs book value
Excess fair over book value
6-16
$ 7,368,000
3,100,000
4,912,000
$15,380,000
15,000,000
380,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$200,000
(100,000)
100,000
$280,000
CONSOLIDATION ENTRIES
Entries S and A combined
Preferred Stock (Young) ............................................ 1,000,000
Common Stock (Young) ............................................. 4,000,000
Retained Earnings (Young) ....................................... 10,000,000
Brand Name.................................................................
280,000
Building ......................................................................
200,000
Equipment ..............................................................
Investment in Young's preferred stock (100%) . .
Investment in Young's common stock (60%) .....
Noncontrolling Interest ........................................
100,000
3,100,000
7,368,000
4,912,000
6-17
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
32. (continued)
Entry I1
Dividend Income .........................................................
80,000
Dividends Paid ......................................................
80,000
(To offset intra-entity preferred stock dividend payments recognized as
income by parent$1,000,000 par value 8% dividend rate.)
Entry I2
Dividend Income .........................................................
192,000
Dividends Paid ......................................................
192,000
(To eliminate intra-entity dividend payments [60% of $320,000] on common
stock. Because the $320,000 in dividends remaining after Entry I1 equals
exactly 8 percent of the common stock par value, the participation factor
does not affect the distribution.)
Entry E
Amortization Expense ................................................
44,000
Equipment ...................................................................
10,000
Building ..................................................................
Brand Name ...........................................................
(To record 2013 amortization of specific accounts
recognized within acquisition price of preferred stock.)
40,000
14,000
33. (15 Minutes) (The effect that various events have on a consolidated statement
of cash flows.)
Sale of building. The $44,000 in cash received from the sale is listed as a
cash inflow within the company's investing activities. If the company is
using the direct method in presenting cash flows from operating activities,
the $12,000 gain is not presented. However, if the indirect method is used,
the gain (a positive) must be eliminated from net income by a subtraction.
6-18
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
34. (20 Minutes) (Determine cash flows from operations for a consolidated entity.)
DIRECT METHOD
Cash revenues (add book values, eliminate intra-entity transfers,
and add decrease in accounts receivable) ...................................
$648,000
Cash inventory purchases (add book values, eliminate
intra-entity transfers, eliminate unrealized gains, add increase in
inventory, and add decrease in accounts payable).......................
(370,000)
Depreciation and amortization (omit as noncash expenses)............
-0Other expenses (add book values) ......................................................
(40,000)
Gain on sale of equipment (omit because this is an investing activity)
-0Equity in earnings of Knight (intra-entity so not included) ..............
-0Net cash flow from operating activities ...................................
$238,000
INDIRECT METHOD
Consolidated net income (computed below) .....................................
Adjustments:
Depreciation and amortization ..................................................
Gain on sale of equipment .........................................................
Increase in inventory ..................................................................
Decrease in accounts receivable ..............................................
Decrease in accounts payable ..................................................
Net cash flow from operating activities ..............................
6-19
$216,000
61,000
(30,000)
(11,000)
8,000
(6,000)
$238,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$150,000
130,000
(10,000)
$270,000
60,000
$4.50
$120,000
30,000
$4.00
$144,000
40,000
$3.60
Because diluted earnings per share is less than basic earnings per share, the
convertible bonds are dilutive and should be included.
Porters share of Streets diluted earnings:
Total shares assuming Street bond conversion .....
Shares owned by Porter.............................................
Porter's ownership percentage (30,000 40,000) ...
Street's earnings for diluted EPS (above) ...............
Porter's ownership percentage.................................
Earnings attributed to Porter company ...................
6-20
40,000
30,000
75%
$144,000
75%
$108,000
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$150,000
108,000
32,000
$290,000
60,000
8,000
68,000
$4.26
36. (15 Minutes) (Compute diluted EPS. Subsidiary has stock warrants outstanding)
Figures For Sonston's Diluted EPS
Net Income ......................................................................
Shares outstanding .........................................................
Assumed conversion of stock warrants .......................
Repurchase of treasury stock with proceeds of stock
Warrants (10,000 $10 = $100,000 $20) .....................
Shares for diluted earnings per share computation.....
$200,000
40,000
10,000
(5,000)
5,000
45,000
$600,000
182,000
$782,000
100,000
6-21
$290,000
56,000
$346,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
80,000
30,000
110,000
$480,000
(15,000)
252,580
$717,580
$110,000
52,000
(20,000)
$142,000
50,000
$2.84
6-22
30,000
10,000
(8,000)
20,000
52,000
27,000
$95,000
52%
$49,400
(rounded)
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$110,000
(4,500)
$105,500
$ 49,400
-0$154,900
50,000
20,000
70,000
$2.21
(rounded)
38. (continued)
Alternative derivation of Masons diluted EPS:
Consolidated net income
Consolidated interest saved (net of intra-entity interest)
Consolidated net income assuming bond conversion
Subsidiary net income
$(90,000)
Excess fair value amortization
25,000
Subsidiary interest saved
(30,000)
Income applicable to diluted EPS
$(95,000)
Noncontrolling interest share
0.48
Parent's net income applicable to diluted EPS
$(175,000)
(25,500)
(200,500)
(45,600)
$(154,900)
70,000
$2.21
6-23
$490,000
100%
$490,000
$647,500
80%
$518,000
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
16,000
16,000
40.(continued)
b. Albuquerque's adjusted acquisition-date fair value is $840,000 (see above) prior
to the issuance of the new shares. The 4,000 additional shares increase
subsidiary's total value by $132,000 (the price of the stock) to $972,000.
Albuquerque' ownership decreases to 2/3 (16,000 shares out of a total of
24,000) for a fair value equivalency of $648,000. Reducing the $672,000 (see a.)
to $648,000 requires a $24,000 decrease to the parents APIC.
Additional Paid-In Capital ..........................................
Investment in Marmon ..........................................
24,000
24,000
41. (55 Minutes) (Prepare consolidation entries following a subsidiary stock issue
to outside parties.)
Initially, Aronsen owns 18,000 shares (or 90%) of Siedel's outstanding shares
(the total number of shares can be determined by dividing the subsidiary's
common stock account by the $10 per share par value). After issuing 4,000
additional shares, the parent must prepare an adjustment to reflect the
change in its share of the subsidiarys unamortized acquisition-date fair
value. Because that entry has not been recorded, it is included on the
consolidation worksheet as Entry C1 (labeled in this manner as a correction).
Other consolidation procedures follow as described in previous chapters.
6-24
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$649,000
(480,000)
$169,000
89,000
$80,000
16 yrs
$ 5,000
81,000
81,000
3,150
3,150
6-25
240,000
112,000
380,000
549,000
183,000
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Entry A
Land ............................................................................
Copyrights ...................................................................
Investment in Siedel (75%)....................................
Noncontrolling Interest (25%) ..............................
89,000
70,000
119,250
39,750
15,000
15,000
5,000
5,000
6-26
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
42. (50 Minutes) (Prepare consolidation worksheet for business combination. Intraentity bond acquisition is made during the current year.)
Acquisition-date fair-value allocation and amortization:
Equipment
Trademarks
$30,000
$40,000
10-year life
20-year life
As indicated in the problem, the parent is applying the partial equity method.
Hence an Entry *C must be recorded on the worksheet to convert the recorded
figures (amortization is needed for the three years prior to 2014) to equity
balances:
Amortization expense ($5,000 3 years) = .............
$15,000 (Entry *C)
Unrealized gain in ending inventory (downstream):
Ending balance ...........................................................
Markup ($20,000 $100,000) .....................................
Unrealized gain to be eliminated ..............................
$10,000
20%
$ 2,000
(Entry G)
$282,000
50%
$141,000
145,500
$ 4,500
(Entry B)
Amortization during 2014 changed the carrying value of the bond payable from
$282,000 to $288,000 (found in the balance sheet) and the investment from
$145,500 to $147,000. This amortization also affects interest income and
expense accounts.
Entry A reflects remaining values after three years of amortizations.
6-27
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
42.(continued)
Accounts
Revenues...............................................
Cost of goods sold...............................
Expenses...............................................
Interest expensebonds ....................
Interest incomebond investment.....
Loss on extinguishment of bonds......
Equity in income of Stabler.................
Net income.........................................
Pavin
(740,000)
455,000
125,000
36,000
-0-0(123,000)
(247,000)
(345,000)
(247,000)
155,000
(437,000)
(361,000)
(123,000)
61,000
(423,000)
217,000
175,000
613,000
35,000
87,000
-0-
Stabler
(505,000)
240,000
158,500
-0(16,500)
-0-0(123,000)
-0245,000
-01,250,000
147,000
541,000
-0810,000
(225,000)
(300,000)
12,000
(300,000)
(437,000)
(1,250,000)
(167,000)
(100,000)
-0(120,000)
(423,000)
(810,000)
6-28
Consolidation Entries
Debit
Credit
(TI)100,000
(G) 2,000
(TI) 100,000
(E) 5,000
(B)
18,000
(B) 16,500
(B) 4,500
(I) 123,000
(*C) 15,000
(S) 361,000
(D)
(D) 61,000
(A) 21,000
(A) 34,000
61,000
(P)
33,000
(G)
2,000
(*C) 15,000
(S) 481,000
(A)
55,000
(I)
123,000
(B) 147,000
(E)
3,000
(E)
2,000
(P) 33,000
(B) 150,000
(B)
6,000
(S) 120,000
1,046,000
1,046,000
Consolidated
Totals
(1,145,000)
597,000
288,500
18,000
-04,500
-0(237,000)
(330,000)
-0(237,000)
155,000
(412,000)
219,000
260,000
-0-0804,000
32,000
1,315,000
(359,000)
(250,000)
6,000
(300,000)
(412,000)
(1,315,000)
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
43. (45 Minutes) (Prepare consolidation entries after intra-entity bond acquisition.)
a. Allocation of Acquisition-date Excess Fair Value
Consideration transferred
$312,000
Noncontrolling interest fair value
208,000
Acquisition-date fair value
$520,000
Book value acquired
300,000
Fair value in excess of book value $220,000
Annual Excess
Excess allocated to patents based
Life
Amortizations
on fair value
90,000 12 years
$7,500
Customer list
$130,000 10 years
13,000
Total
$20,500
CONSOLIDATION ENTRIES
Entry *TL
Investment in Herman ................................................
7,000
Land ......................................................................
7,000
(To eliminate unrealized gain created by previous intra-entity transfer.
Investment is adjusted here because transfer was downstream and equity
method has been applied by parent. Thus, retained earnings have already
been corrected.)
Entry *G
Retained Earnings 1/1/13 (Herman) ..........................
8,000
Cost of Goods Sold ..............................................
8,000
(To remove unrealized inventory gain from prior year so that it can be
properly realized in current year. Amount is computed as shown below.)
Intra-entity profit2012 .............................................
Transfer price2012 ..................................................
Markup ($25,000 $125,000) .....................................
Unrealized gain in 1/1/13 inventory
($40,000 20%) .....................................................
$25,000
$125,000
20%
$8,000
Entry S
Common Stock (Herman) ..........................................
100,000
Retained Earnings, 1/1/13 (Herman)
(adjusted for Entry *G) .........................................
292,000
Investment in Herman (60%) ..........................
235,200
Noncontrolling Interest in Herman (40%) ......
156,800
(To eliminate Herman's stockholders' equity accounts and to record
beginning of year balance for noncontrolling interest.)
6-29
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
43. a. (continued)
Entry A
Patents ......................................................................
75,000
Customer List..............................................................
104,000
Investment in Herman ...........................................
107,400
Noncontrolling Interest ........................................
71,600
(To recognize unamortized balances as of 1/1/13 of amounts allocated within
original acquisition price. Allocations have been reduced by two years of
amortizations.)
Entry I
Equity income of Herman...........................................
3,000
Investment in Herman......................................
(To eliminate intra-entity equity income accrual)
Hermans income.............................................................. $25,000
Excess amortizations....................................................... (20,500)
2012 intra-entity inventory gross profit..........................
8,000
2013 intra-entity inventory gross profit..........................
(7,500)
Accrual-based income..................................................... $5,000
Freds ownership percentage..........................................
60%
Equity in earnings of Herman.......................................... $3,000
Entry D
Investment in Herman ................................................
Dividends Paid ......................................................
(To eliminate intra-entity dividend payments.)
Entry E
Amortization Expense ................................................
Patents....................................................................
Customer List.........................................................
(To recognize current year amortization expense.)
2,400
2,400
20,500
Entry P
Accounts Payable ......................................................
60,000
Accounts Receivable ............................................
(To remove intra-entity debt created by inventory transfers.)
6-30
3,000
7,500
13,000
60,000
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
43. a. (continued)
Entry B
Bonds Payable ............................................................
Premium on Bonds Payable ......................................
Interest Income ...........................................................
Investment in Parent Bonds ................................
Interest Expense ...................................................
Gain on Retirement of Bonds...............................
20,000
1,069
1,873
19,005
1,283
2,654
(To eliminate effect created by bond acquisition and recognize the related
retirement gain [$21,386 $18,732]. Amounts are calculated below.)
Investment
Liability
Book
Value
(given)
Effective
Interest
$18,732
21,386
$1,873 (10%)
1,283 (6%)
Cash
Interest
(8%)
$1,600
1,600
Excess
Amortizations
$273
317
Entry Tl
Sales ............................................................................
120,000
Cost of Goods Sold (or purchases) ....................
(To eliminate intra-entity transfers made during current year.)
Year- End
Book
Value
$19,005
21,069
120,000
Entry G
Cost of Goods Sold ....................................................
7,500
Inventory.................................................................
7,500
(To defer intra-entity inventory profits until 2013 as calculated below):
Intra-entity profit .........................................................................
Transfer price 2013 .....................................................................
Markup ($30,000 $120,000) .....................................................
Unrealized gain in ending inventory ($30,000 25%) .............
$30,000
$120,000
25%
$7,500
$25,000
(20,500)
8,000
(7,500)
$5,000
40%
$2,000
6-31
$228,400
2,000
(1,600)
$228,800
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
43. (continued)
c. The balances in the individual records as of December 31, 2014 pertaining to
the Intra-entity bonds are as follows:
Investment
Liability
Beginning
Book
Value
(see part a.)
Effective
Interest
$19,005
21,069
$1,901 (10%)
1,264 (6%)
Cash
Interest
(8%)
$1,600
1,600
Excess
Amortizations
$301
336
Year- End
Book
Value
$19,306
20,733
The adjustment to recognize the original gain by the parent can be computed as
follows:
Original gain on retirement (see part a) ........................
Interest income recorded on investment in 2013
(see part a) ..................................................................
Interest expense recorded on liability in 2013
(see part a) .................................................................
Required increase as of January 1, 2014 ......................
Entry *B (as of December 31, 2014)
Bonds Payable.............................................................
Premium on Bonds Payable ......................................
Interest Income ...........................................................
Investment in Herman ...........................................
Investment in Freds bonds .................................
Interest Expense ...................................................
$2,654
$1,873
1,283
590
$2,064
20,000
733
1,901
2,064
19,306
1,264
$552,800
65,000
138,200
34,000
$790,000
750,000
$ 40,000
6-32
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
100,000
200,000
450,000
40,000
552,800
65,000
172,200
6-33
(rounded)
(rounded)
$53,310
(44,175)
$9,135
$4,265
$6,185
$53,310
$5,000
4,265
735
$52,575
$44,175
$5,000
6,185
1,185
$45,360
50,000
4,265
9,135
4,640
6,185
52,575
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
80,000
52,000
8,000
20,000
44. (continued)
d. Original allocation to franchises (given) .......................
Amortization at $1,000/year (20122013) .................
Consolidated franchises12/31/13 .........................
$40,000
(2,000)
$38,000
6-34
$300,000
200,000
44,000
$544,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$230,000
100,000
(20,000)
10,000
(140,000)
(40,000)
$140,000
$50,000
(175,000)
$(102,000)
100,000
57,000
6-35
(125,000)
55,000
70,000
80,000
$150,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
The above statement uses the indirect method for computing cash flows from
operations. Under the direct method, the following computation is appropriate.
CASH FROM OPERATING ACTIVITIES
Revenues .....................................................................
Purchases ...................................................................
Expenses .....................................................................
Cash from operations ................................................
$990,000
(820,000)
(30,000)
$140,000
45. (continued)
Development of Cash Flow Balances via Direct Method
OPERATING ACTIVITIES
Revenues (the consolidated balance plus the decrease in
accounts receivable) ........................................................................
Cost of goods sold (cash purchases) (the consolidated
balance plus the increase in inventory plus the
decrease in accounts payable) .......................................................
Depreciation and amortization (not cash expenses) .........................
Gain on sale of building (sales price is shown below as
an investing activity) ........................................................................
Interest expense (the consolidated balance) .....................................
Cash flows from operating activities...................................................
INVESTING ACTIVITIES
Sale of building ($30,000 book value sold at a $20,000 gain)...........
Purchase of equipment (Buildings and Equipment account
increased by $50,000. Building with a $30,000 book value
was sold [a decrease]. Depreciation [without Databases
amortization] was $95,000 [a decrease]. Only a purchase
of $175,000 would turn these two decreases of $125,000 into
an increase of $50,000) ....................................................................
Cash flows from investing activities....................................................
FINANCING ACTIVITIES
Dividends paid by parent (the consolidated balance) ......................
Dividends paid by subsidiary (amount paid to
noncontrolling interest20%) ........................................................
Issuance of bonds .................................................................................
Issuance of common stock by the parent (increase in
common stock and additional paid-in capital) .............................
Cash flows from financing activities....................................................
6-36
$990,000
820,000
-0-030,000
$140,000
$50,000
(175,000)
$(125,000)
$(100,000)
(2,000)
100,000
57,000
$55,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
46. (40 Minutes) (Compute basic and diluted earnings per share. Subsidiary has
stock warrants outstanding and convertible debt.)
Basic EPSAustin, Inc.
Consolidated net income to parent................................
Austins preferred dividends ..........................................
Earnings applicable to Austins basic EPS .............
$284,000
(40,000)
$244,000
50,000
$4.88
30,000
5,000
(2,500)
10,000
42,500
Shares controlled by parent (24,000 plus 50% of increment created by warrants [or 1,250]) .......................
25,250
59.4%
$75,438
(rounded)
50,000
$3.93
6-37
20,000
70,000
(rounded)
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
47. (50 Minutes) (Determine consolidated totals. Subsidiary has preferred shares
outstanding that are equity instruments.)
Consideration transferred for common and preferred stock
Skylers book value
Excess fair value assigned to intangible asset (10-year life)
$560,000
450,000
$110,000
Annual amortization
$11,000
$18,000
33%
$6,000
$20,000
$5,000
$5,000
$8,000
Historical cost:
Recorded value.................................................................................
Depreciation expense ($12,000 4)................................................
Accumulated depreciation ($18,000 + $3,000)...............................
$30,000
$3,000
$21,000
6-38
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
47. (continued)
Accounts
Sales................................................
Cost of goods sold..........................
Expenses.........................................
Gain on sale of equipment.............
Net income....................................
(400,000)
(100,000)
60,000
(440,000)
(150,000)
(10,000)
-0(160,000)
Cash.................................................
Accounts receivable.......................
Inventory..........................................
Investment in Skyler Corp..............
30,000
300,000
260,000
560,000
40,000
100,000
180,000
-0-
680,000
(180,000)
-01,650,000
500,000
(90,000)
-0730,000
(140,000)
(240,000)
-0(620,000)
(210,000)
(440,000)
(1,650,000)
(90,000)
(180,000)
(100,000)
(200,000)
-0(160,000)
(730,000)
Accounts payable...........................
Long-term liabilities........................
Preferred stock...............................
Common stock................................
Additional paid-in capital................
Retained earnings, 12/31................
Total liab. and stockholders equity
6-39
(S) 150,000
(400,000)
(87,000)
60,000
(427,000)
(P) 28,000
(G)
6,000
(S) 450,000
(A) 110,000
(TA) 10,000
(ED) 2,000
(A) 110,000
(P)
(TA) 18,000
(E) 11,000
28,000
(S) 100,000
(S) 200,000
715,000
Consolidated
Totals
(1,110,000)
704,000
319,000
-0(87,000)
715,000
70,000
372,000
434,000
-01,190,000
(286,000)
99,000
1,879,000
(202,000)
(420,000)
-0(620,000)
(210,000)
(427,000)
(1,879,000)
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
47. (continued)
CONSOLIDATED TOTALS
6-49
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
100,000
200,000
150,000
450,000
Entry A
Intangible Asset ................................................................
110,000
Investment in Skyler Corp...........................................
(To recognize excess fair value attributed to intangible asset.)
Entry E
Amortization Expense.......................................................
Intangible Asset............................................................
(To record current years amortization of intangible asset.)
Entry P
Accounts Payable..............................................................
Accounts Receivable...................................................
(To eliminate intra-entity debt.)
110,000
11,000
11,000
28,000
28,000
Entry TA
Equipment..........................................................................
10,000
Gain on Sale of Equipment...............................................
8,000
Accumulated Depreciation..........................................
18,000
(To eliminate effects as of 1/1 created by intra-entity transfer of equipment.)
Entry TI
Sales .................................................................................
90,000
Cost of Goods Sold......................................................
(To eliminate intra-entity inventory transfers for the current year.)
90,000
Entry G
Cost of Goods Sold...........................................................
6,000
Inventory.......................................................................
6,000
(To defer unrealized intra-entity gain remaining at the end of the current year.
Markup is 33% [30,000 gross profit 90,000 transfer price] indicating that the
ending inventory of 18,000 contains an unrealized profit of 6,000 [18,000 33%].)
Entry ED
Accumulated Depreciation................................................
2,000
Depreciation Expense.................................................
2,000
(To eliminate excess depreciation resulting from intra-entity gain of 8,000 on
transfer of equipment [see Entry TA]. Equipment is being depreciated over a
remaining life of four years.)
6-50
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
48. (30 minutes) (Consolidated Cash Flow Statement with current year business
combination)
Plaster Inc. and Subsidiary Stucco Company
Consolidated Statement of Cash Flows
For the year ended 12/31/13
CASH FLOW FROM OPERATING ACTIVITIES
Consolidated net income
Depreciation expense
Amortization expense
Decrease in accounts receivable (net of acquisition)
Increase in inventory (net of acquisition)
Decrease in accounts payable (net of acquisition)
Net cash flow provided by operating activities
$274,000
187,500
8,750
3,600
(102,000)
(8,000)
89,850
$363,850
(856,000)
800,000
(108,000)
$692,000
$199,850
43,000
$242,850
2011
2012
2013
2014
2015
2016
2017
1,000,000.00
110,000.00
943,497.77
946,717.50
950,323.60
954,362.43
958,885.93
963,952.24
969,626.51
0.32197
5.65022
113,219.73
113,606.10
114,038.83
114,523.49
115,066.31
115,674.27
116,355.18
6-51
321,973.24
621,524.53
943,497.77
56,502.23
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
3,219.73
3,606.10
4,038.83
4,523.49
5,066.31
5,674.27
6,355.18
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
2018
2019
2020
975,981.69
983,099.49
991,071.43
1,000,000.00
117,117.80
117,971.94
118,928.57
110,000.00
110,000.00
110,000.00
46,299.01
911,547.79
114,038.83
904,024.59
911,547.79
920,049.00
929,655.37
940,510.57
952,776.95
966,637.95
982,300.88
1,000,000.00
117,523.20
118,501.21
119,606.37
120,855.20
122,266.37
123,861.00
125,662.93
127,699.12
6-52
7,117.80
7,971.94
8,928.57
56,502.23
904,024.59
376,159.86
527,864.73
904,024.59
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
95,975.41
7,523.20
8,501.21
9,606.37
10,855.20
12,266.37
13,861.00
15,662.93
17,699.12
95,975.41
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.