Professional Documents
Culture Documents
Equity Method
Cost Method
Investment in
Starr Company Stock
60,000
Intercompany Investment Income
60,000
Adjustment of Purchased
Subsidiarys Net Income
Adjustment of Purchased
Subsidiarys Net Income (contd.)
Adjustment of Purchased
Subsidiarys Net Income (contd.)
Inventories (FIFO)
Plant assets (net)
Land
Building(eco. life 10 yrs.)
Machinery(eco. life 10yrs.)
Patent (eco. life 5 yrs.)
Goodwill (eco. life 30 yrs.)
Total
$ 25,000
$15,000
30,000
20,000
65,000
5,000
15,000
$110,000
Adjustment of Purchased
Subsidiarys Net Income (contd.)
Intercompany
Investment Income 30,500
Investment in
Starr Company Stock
30,500
Adjustment of Purchased
Subsidiarys Net Income (contd.)
$25,000
2,000
2,000
1,000
500
$30,500
Adjustment of Purchased
Subsidiarys Net Income (contd.)
Adjustment of Purchased
Subsidiarys Net Income (contd.)
a. Issuance of common stock (by Palm) in the
acquisition of Starr.
b. Direct out-of-pocket costs of business
combination.
c. Recognition of dividend declared by the
subsidiary-Starr.
d. Recognition of wholly owned subsidiarys
(Starr) net income.
e. Recognition of depre. and amor. on the stepup of Starrs net assets.
Adjustment of Purchased
Subsidiarys Net Income (contd.)
12/31/00
Intercompany
Investment Income
60,000 a
30,500 b
29,500
12/20/00
Step-up
Total
60,000
(24,000)
60,000
(30,500) (30,500)
(24,000)
$426,000
$79,500 $505,500
Note:
1. The ending balance on the carrying
amount (book value),$426,000,
equals the balance the total
stockholders equity of Starr on
12/31/2000 as follows (see the balance
sheet section of Starr on p293 of
textbook):
$200,000
58,000
168,000
$426,000
Balances,
Dec.31,1999
$ 25,000
Amort. for
Balances,
Year 2000 Dec. 31,2000
$(25,000)
$ 15,000
30,000
20,000
$ (2,000)
(2,000)
$15,000
28,000
18,000
$ 65,000
$ (4,000)
$61,000
$ (1,000)
(500)
$ 4,000
14,500
5,000
15,000
200,000
58,000
132,000
29,500
4,000
14,500
29,000
1,500
($65,000-4,000)
61,000
Note:
1. Income tax effects are disregarded
2. the computation of cost of goods
sold and operating expense are as
follows:
$25,000
1,000
2,000
1,000
$29,000
$1,000
500
$1,500
Palm
Corporation
Starr
Company
Eliminations Consolidated
Increase
Revenue:
Net Sales
Intercompany investment
income
Total revenue
1,100,000
680,000
29,500
1,780,000
(a)(29,500)
1,129,500
680,000
(29,500)
1,780,000
700,000
450,000
(a) 29,000
1,179,000
Operating expenses
217,667
130,000
(a) 1,500
349,167
Interest expenses
49,000
53,333
49,000
40,000
93,333
Statement of
Palm
Starr
Eliminations Consolidated
Retained Earnings Corporation Company Increase
Retained earnings,
beginning of year
134,000
Net income
109,500
60,000
(60,000)
109,500
243,500
192,000
(192,000)
243,500
30,000
Subtotal
Dividends
declared
Retained earnings,
end of year
30,000
213,500
168,000
(168,000)
134,000
213,500
(Continued)
Palm
Corporation
Starr
Company
Eliminations Consolidated
Increase
Cash
15,900
72,100
Intercomapny receivable
(payable)
24,000
(24,000)
136,000
115,000
251,000
88,000
131,000
219,000
Inventories
Other current assets
Investment in Starr
Company common stock
Plant assets (net)
Patent (net)
Goodwill (net)
505,500
88,000
(a) (505,500)
3,500,000
340,000
(a)
61,000
841,000
440,000
16,000
(a)
4,000
20,000
(a)
14,500
14,500
Liabilities
Palm
Starr
&Stockholders Equity Corporation Company
Income taxes payable
Eliminations Consolidated
Increase
40,000
20,000
60,000
Other liabilities
190,900
204,100
395,000
Common stock,$10par
400,000
400,000
200,000
(a) (200,000)
Additional paid-in
capital
365,000
58,000
(a) (58,000)
365,000
Retained earnings
213,500
168,000
(168,000)
213,500
Total liabilities
& stockholders
Notes:
1.The intercompany receivable and
payable, placed in adjacent columns
on
the same line, are offset without a formal
elimination.
2. The FIFO methods used by Starr; thus,
the $25,000 difference attributable to
the
beginning inventories of Starr is
allocated
to the cost of goods sold for
year 2000.
Net Sales
Costs and expenses:
Costs and goods sold
Operating expenses
Interest expense
Income taxes expense
Total costs and
expenses
Net income
$1,780,000
$1,179,000
349,167
49,000
93,333
1,670,000
$109,500
Retained earnings,
beginning of year:
Add: Net income
Subtotals
Less: Dividends($0.75 a share)
Retained earnings,
end of year
$ 134,000
109,500
$ 243,500
30,000
$ 213,500
Current assets:
Cash
Inventories
Other
Total current assets
Plant assets (net)
Intangible assets:
Patent(net)
88,000
251,000
219,000
$ 558,000
841,000
$20,000
Liabilities:
Income taxes payable
Other
Total liabilities
Stockholders equity:
Common stock, $10 par
Additional paid-in capital
Retained earnings
60,000
395,000
$ 455,000
$ 400,000
365,000
213,500
978,500
1,100,000
29,500
Income Summary
Income Summary 1,020,000
1,129,500
700,000
217,667
49,000
53,333
109,500
5,500
104,000
30,000
30,000
Close dividends
declared
30,000
12/20/00
12/21/00
12/31/00
12/31/01
12/31/01
200,000
58,000
162,500a
5,500
84,500
57,000
14,000
4,000 b
1,500 b
Dividends Declared-Starr
a. 168,000-5,500
550,000
40,000
Cost of
Operating
Goods Sold
Exp.
Building Depre.
Machinery Depre.
Patent Amort.
Goodwill Amort.
Totals
$1,000
2,000
1,000
$4,000
$1,000
500
$1,500
Retained earnings,
beginning of year
208,000
Net income
244,500
90,000
(90,000)*
244,500
452,500
258,000
(252,500)
458,000
60,000
Subtotal
Dividends
declared
60,000
213,500
Retained earnings,
* end
Decrease
in intercompany
investment218,000
income($84,500),
plus total increase
of
year
392,500
(212,500)
398,000
in costs and expenses ($4,000 +$1,500), equals $90,000.
+ A decrease in dividends and an increase in retained earnings. (Continued)
Common Stock,
$10 par
Palm
Corporation
Starr
Company
Eliminations
Increase
400,000
Consolidated
400,000
200,000
(a)(200,000)
Additional paid-in
capital
365,000
58,000
(a) (58,000)
365,000
Retained earnings
392,500
218,000
(212,500)
398,000
Retained earnings
of subsidiary
5,500
Total stockholders
equity
Total liabilities &
stockholders
(a) (5,500)
1,163,000
476,000
(476,000)
1,163,000
x,xxx,xxx
xxx,xxx
(476,000)
x,xxx,xxx
Income Summary
244,500
Retained Earnings of
44,500
Subsidiaries a
Retained Earnings b
200,000
Retained Earnings
134,000 Bal. On 12/31/99
104,500 R/E contributed by
Palm in Year 2000
Div. of 2000
30,000
200,000 R/E contributed by
Palm in Year 2001
Div. of 2001
60,000
348,000 Bal. On 12/31/2001
Intercompany
Dividends Payable
($40,000 x 0.95)
40,000
2,000
38,000
Intercompany Dividends
Payable
Cash
To record payment of dividend
declared Nov. 24, 2000, to
stockholders of record Dec. 1, 2000
2,000
38,000
40,000
38,000
38,000
12/16 Cash
2,000
Intercompany
Dividends Receivable
38,000
85,500
85,500
$ 26,000
$ 60,000
80,000
50,000
190,000
30,000
$1,192,250
1,154,250
$
38,000
$26,000
4,000
10,000
5,000
$45,000
$42,750
Date
Explanation
1999
12/31 Issuance of common stock
in business combination
31 Direct out-of-pocket costs of
business combination
2000
11/24 Dividend declared by Sage
12/31 Net income of Sage
31 Amortization of differences
between current fair values
and carrying amounts of
Debit
Credit
Balance
1,140,000
1,140,000 dr
52,250
1,192,250 dr
38,000 1,154,250 dr
85,500
1,239,750 dr
Date
Explanation
Debit Credit Balance
2000
12/31 Net Income of Sage
85,500 85,500 cr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets
42,750
42,750 cr
Post Corporation
Analysis of Investment in Sage Company Common Stock
Ledger Account (For Year Ended December 31,2000)
Beginning balances
Net income of Sage
($90,000 x 0.95)
Amortization of
differences between
current fair values
and carrying
amounts of Sages
identifiable net
Total
85,500
Contd.
(950)
(38,000)
Total
(950)
(38,000)
Post Corporation
Analysis of Minority Interest in Net Assets of Sage Company
For Year Ended December 31,2000
Carrying Current
Amount Fair Value
Excess
Beginning balances
Net income of Sage($90,000 x 0.05)
Amortization of differences
between current fair values
and carrying amounts of
Sages identifiable net assets
$48,450
4,500
($45,000 x 0.05)
(2,000)
Total
$12,300
$60,750
4,500
(2,250)
(2,250)
(2,000)
$ 400,000
235,000
384,000
$1,019,000
$ 26,000
$ (26,000)
$ 60,000
80,000
50,000
$ (4,000)
(10,000)
$ 60,000
76,000
40,000
$190,000
$ 30,000
$ (14,000)
$ (5,000)
$176,000
$ 25,000
400,000(1)
235,000(1)
Retained Earnings-Sage
334,000(1)
42,750(2)
25,000(3)
Goodwill (net)-Post($38,000-$950)
37,050(3)
43,000(4)
Operating Expenses-Sage
2,000(4)
Contd.
Investment in Sage Company
Common Stock-Post
1,196,050(1)
Dividends Declared-Sage
40,000(1)
58,750(1)
$ 26,000
2,000
Machinery depreciation
10,000
Leasehold amortization
5,000
Totals
$ 43,000
$ 2,000
$ 2,000
2,250
2,250
$ 90,000
(45,000)
$45,000
$
2,250
Common Stock
400,000
Add. Paid-in Cap.
235,000
Retained Earnings
334,000
Plant Assets
190,000
Leashold
30,000
Inventory
26,000
Goodwill
38,000 b
Investment in Sage
Minority Interest
1,192,250
60,750 a
Notes (contd.)
2. The working paper eliminations for Post
Corporation and subsidiary on 12/31/2000
are doing the follows:
a. Eliminate stockholders equity of subsidiary
as of 1/1/2000.
b. Increase the assets (i.e., plant assets and
Leashold) of the subsidiary to the fair value
on the business combination date adjusted
for depreciation,
Notes (contd.)
c. The recognition of additional
depreciation expense due to asset step
up and the recognition of additional
cost of goods sold due to inventory
step-up (assuming FIFO).
d. The recognition of goodwill adjusted
for the goodwill amortization,
Notes (contd.)
e. Elimination of intercompany investment
income post (due to income of Post
and Sage will be consolidated in the
consolidated income statement).
(all the above accounts are debited in the
elimination entries)
(the following accounts are credited in the
elimination entries)
Notes (contd.)
f. Elimination of investment in sage account
balance (due to the assets and liabilities of
both companies are to be combined in the
consolidated balance sheet statement).
g. Recognize minority interest as a liability
($60,750- $2,000 div. for subsidiary).
h. Elimination of dividends declared by Sage
($40,000= 38,000+2000).
Notes :(contd.)
The balance of investment account is $1,196,050. The
components of this balance include:
1,192,250 (beg. Balance)
+ 42,750 a
950 b
38,000 c
1,196,050
a.Posts share of net increase in Sages income of 2000 after adjusting
for depreciation exp., etc. (i.e., 85,500 - 42,750). b.amor. of goodwill
c.Posts share of dividends.
Income Statement
Post
Corp.
Sage
Eliminations Consolidated
Company Inc. (Dec.)
Revenue:
Net Sales
Intercompany investment income
Total revenue
5,611,000 1,089,000
42,750
6,700,000
(a) (42,750)
5,653,750 1,089,000
(42,750)
6,700,000
4,668,000
3,925,000
700,000
(a) 43,000
Operating expenses
556,950*
129,000
(a)
710,000
170,000
2,000
687,950
880,000
(b) 2,250
2,250
Statement of
Retained Earnings
Retained earnings,
beginning of year
Post
Corp.
1,050,000
Sage
Eliminations Consolidated
Company Inc. (Dec.)
334,000 (a) (334,000)
1,050,000
Net income
461,800
90,000
(90,000)
461,800
Subtotal
1,511,800
424,000
(424,000)
1,511,800
158,550
Dividends declared
158,550
Retained earnings,
end of year
1,353,250
384,000
(384,000)
1,353,250
Balance Sheet/
Assets
Post
Corp.
Sage
Eliminations Consolidated
Company Inc. (Dec.)
Inventories
861,000
439,000
1,300,000
Other current
assets
639,000
371,000
1,010,000
Investment in Sage
Company common
stock
1,196,050
176,000
4,926,000
(a)
25,000
25,000
(a)
37,050
132,050
(958,000)
7,393,050
Leasehold (net)
Goodwill (net)
Total assets
95,000
6,391,050 1,960,000
(a)(1,196,050)
Liabilities
&Stockholders Equity
Liabilities
Post
Corp.
2,420,550
Sage
Company
941,000
Minority interest in
net assets of
subsidiary
Common stock,$1 par
Eliminations
Inc. (Dec.)
3,361,550
(a)
(b)
58,750
2,250
1,057,000
Consolidated
61,000
1,057,000
400,000
(a) (400,000)
Additional paid-in
capital
1,560,250
235,000
(a) (235,000)
1,560,250
Retained earnings
1,353,250
384,000
(384,000)
1,353,250
Total liabilities
& stockholders
$4,668,000
Operating expenses
687,950
880,000
2,250
6,238,200
$ 461,800
Retained earnings,
beginning of year:
Add: Net income
Subtotals
Less: Dividends ($0.15 a share)
Retained earnings,
end of year
$ 1,050,000
461,800
$1,511,800
158,550
$ 1,353,250
Current assets:
Inventories
Other
Total current assets
Plant assets (net)
Intangible assets:
Leasehold (net)
Goodwill (net)
$ 1,300,000
1,010,000
$ 2,310,000
4,926,000
$
25,000
132,050
157,050
Contd.
Liabilities
Other than minority
interest
$3,361,550
61,000
$3,422,550
$1,057,000
1,560,250
1,353,250
3,970,500
5,653,750
Income Summary
5,191,950
Cost of Goods Sold
3,925,000
Operating Expenses
556,950
Interest and Income
Taxes Expense
710,000
461,800
4,750
Retained Earnings
457,050
($461,800-$4,750)
Retained Earnings
Dividends Declared
158,550
158,550
Debit
Credit
Balance
1,105,000 cr
457,050 1,507,050 cr
158,550
1,348,500 cr
Debit
Credit
4,750
Balance
4,750 cr
Date
Explanation
Debit
Credit
Balance
1999
1,140,000
1,140,000 dr
52,250
1,192,250 dr
Date
Explanation
Debit
Credit
Balance
2000
12/31
38,000
85,500
1,154,250 dr
1,239,750 dr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets
31 Amortization of
goodwill
42,750 1,197,000 dr
950 1,196,050 dr
Date
Explanation
Debit
Credit
Balance
2001
12/31
47,500
99,750
1,148,550 dr
1,248,300 dr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets
31 Amortization of
goodwill
18,050* 1,230,250 dr
950 1,229,300 dr
Explanation
Debit
Credit
Balance
2000
12/31
85,500
85,500 cr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets
31
Closing entry
42,750
42,750
42,750 cr
-0-
Date
Explanation
Debit
Credit
Balance
2001
12/31
99,750
99,750 cr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets
* Building depreciation($80,000/20)
18,050*
81,700 cr
$ 4,000
10,000
5,000
$ 19,000
$ 18,050
400,000
235,000
379,250
4,750
81,700
Plant Assets(net)-Sage($176,000-$14,000)
162,000
Leasehold(net)-Sage ($25,000-$5,000)
20,000
Goodwill (net)-Post($37,050-$950)
36,100
17,000
Operating Expenses-Sage
2,000
Contd.
Investment in Sage Company
Common Stock-Post
1,229,300
Dividends Declared-Sage
50,000
58,500
Building depreciation
$ 2,000
Machinery depreciation
10,000
Leasehold amortization
5,000
Totals
$ 17,000
Operating
Expenses
$ 2,000
$ 2,000
4,300
4,300
$105,000
(19,000)
$ 86,000
$
4,300
1,348,500
384,000
(a) (379,250)
1,353,250
Net income
352,600
105,000
(105,000)*
352,600
Subtotal
1,701,100
489,000
(484,250)
1,705,850
158,550
50,000
(a)(50,000)
158,550
1,542,550
439,000
(434,250)
1,547,300
Dividends declared
Retained earnings,
end of year
Contd.
Balance Sheet
Post Corp.
Sage
Company
x,xxx,xxx
Retained earnings
Retained earnings of
subsidiary
Total stockholders
equity
Total liabilities
& stockholders
equity
Consolidated
(a) 58,5000
(b)
4,300
62,800
62,800
xxx,xxx
xxx,xxx
1,057,000
Additional paid-in
capital
Eliminations Inc.
(Dec.)
1,057,000
400,000
(a) (400,000)
1,560,250
235,000
(a) (235,000)
1,560,250
1,542,550
439,000
(434,250)
1,547,300
4,750
(a)
(4,750)
4,164,550
1,074,000
(1,074,000)
4,164,550
x,xxx,xxx
x,xxx,xxx
(1,011,200)
xxxx,xxx
$1,074,000
182,000
$1,256,000
62,800
Closing Entries
$ 81,700
47,500
$ 34,200
Retained Earnings
of Subsidiary
(81,700-47,500)
Retained earnings
(352,600-34,200)
461,800
34,200
318,400
Explanation
Debit
Credit
Balance
1999
12/31
Balance
1,050,000 cr
2000
31 Close Dividends
Declared account
457,050
158,550
1,507,050 cr
1,348,500 cr
2001
31 Close Dividends
Declared account
318,400
158,550
1,666,900 cr
1,508,350 cr
Explanation
Debit
Credit
Balance
2000
4,750
4,750 cr
34,200
38,950 cr
2001
$ 38,950
1,900
$ 37,050