Chapter 07, Modern Advanced accounting-review Q & exr

CHAPTER 7 CONSOLIDATED FINANCIAL STATEMENTS: SUBSEQUENT TO DATE OF BUSINESS COMBINATION The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers. Pr. 7–1

Pr. 7–2

Pr. 7–3

Pr. 7–4

Pr. 7–5

Pr. 7–6

Pr. 7–7

Pr. 7–8

 Prem Corporation (15 minutes, easy)

Preparation of three-column ledger account for parent company’s investment in wholly owned subsidiary. Working paper elimination for first year following business combination. Goodwill is involved, but is unimpaired.  Pro Corporation (20 minutes, easy) Parent company’s equity-method entries for operations of partially owned subsidiary. Goodwill is involved, but is unimpaired.  Promo Corporation (30 minutes, easy) Parent company’s journal entries for operating results of wholly owned subsidiary under equity method of accounting. Three-column ledger accounts for parent company's investment and Intercompany Investment Income accounts. Preparation of working paper elimination involving unimpaired goodwill. goodwill.  Penn Corporation (30 minutes, medium) Given parent company’s journal entries under equity method of accounting for operating results of partially owned subsidiary and other information for first year following date of   business combination, prepare working paper eliminations for parent company and subsidiary. Goodwill is involved, but is unimpaired.  Pewter Corporation (30 minutes, minutes, medium) medium) Parent company’s journal entries under equity method of accounting for two partially owned subsidiaries; computation of minority interest in subsidiaries’ net assets; computation of  consolidated retained earnings. No goodwill or negative goodwill goodwill is involved. involved.  Parks Corporation (40 minutes, minutes, medium) medium) Given analyses of parent company’s ledger account for investment in partially owned subsidiary, minority interest in net assets of subsidiary, and current fair value differences, reconstruct parent company’s equity-method journal entries for operating results of subsidiary for first year subsequent to date of business combination. Also, prepare working paper  eliminations. eliminations. Goodwill is involved, involved, but is unimpaired.  Paseo Corporation (55 minutes, medium) Journal entries for parent company to record partially owned subsidiary’s operating results under equity method of accounting for first year following date of business combination. Preparation of working paper eliminations for parent company and subsidiary. Goodwill is involved, but is unimpaired.  Pavich Corporation (60 minutes, strong) Preparation of parent company’s equity-method journal entries for operating results of partially owned subsidiary for first two years following date of business combination. Preparation of  working paper eliminations at end of each of first two years following combination, and a three-column Retained Earnings of Subsidiary ledger account of parent company. Goodwill is involved, but is unimpaired.

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 Plumm Corporation (60 minutes, minutes, medium) medium)

Pr. 7–9

Pr. 7–10

Pr. 7–11

Reconstruct journal entries for parent company under equity method of accounting for firstyear operating results of wholly owned subsidiary; preparation of working paper for  consolidated financial statements and working paper elimination. Goodwill is involved, but is unimpaired.  Ping Corporation (65 minutes, strong) Parent company adjusting entries to change accounting for four-year operating results of   partially owned subsidiary to equity method of accounting from cost method. Working paper  for consolidated financial statements and related working paper eliminations. No goodwill is involved.  Petal Corporation (50 minutes, strong) Preparation of consolidated balance sheet of parent company and wholly owned subsidiary without the use of working paper for consolidated financial statements or working paper  eliminations. eliminations. Goodwill is involved, involved, but is unimpaired.

ANSWERS TO REVIEW QUESTIONS 1.

2.

3.

4.

5.

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The stateme statement nt is true because because workin working g paper paper elimi eliminati nations ons und under er the the equit equity y meth method od of accounti accounting ng differ from those under the cost method of accounting for a subsidiary’s operations. Consolidated  balances should not be, and are not, affected by the choice of an accounting method by the parent company. Cons Consol olid idate ated d finan financia ciall statem statemen ents ts are sup superi erior or to sepa separat ratee finan financi cial al state statem ments ents of the the pare parent nt company under the equity method of accounting because the consolidated statements include all revenue, expense, asset, and liability components of the affiliated companies’ income statements and balance sheets. Parent company unconsolidated financial statements include only a single item for the parent company’s share of the subsidiary's net income or losses and a single item for the  parent company's equity in the subsidiary’s net assets. In additi addition on to the the usual debit debitss and and credi credits ts to to reve revenu nuee and and expe expense nse ledg ledger er accou accounts, nts, the closin closing g entries for a parent company that uses the equity method of accounting include a credit to the Retained Earnings of Subsidiary account. The amount of the credit is the difference between the  parent company’s share of the subsidiary's adjusted net income for the accounting period and its share of the subsidiary’s dividends for the period. Use of a Retained Earnings of Subsidiary account identifies the portion of the parent company’s retained earnings not available for dividends to the parent’s stockholders. The The diff differ eren ence ce betw betwee een n $5,000 $5,000 (10% (10% of of the the subsi subsidi diary’ ary’ss report reported ed net net inc incom ome) e) and and $3,500 $3,500 (th (thee amount of the working paper elimination for the minority interest in the subsidiary’s net income) most likely results from depreciation and amortization of differences between current fair values and carrying amounts of the subsidiary's identifiable net assets on the date of the business combination. Adva Advanta ntage gess that that resu result lt from from the the use use of the the equi equity ty met metho hod, d, rathe ratherr than than the the cos costt meth method od,, of  accounting for a subsidiary’s operating results include the following: (1) The equity method emphasizes the economic economic substance of the the parent company–subsidiary relationship, consonant with financial accounting theory. (2) The equity equity method method permits permits use of parent company journal journal entries to reflect reflect many items items that must be included in working paper eliminations in the cost method. Formal journal entries  provide a better record than do working paper notations. (3) The equity method facilitates issuance of parent company unconsolidated financial statements, if required by the SEC. (4) Except where where there are intercompany intercompany profits profits (gains) or losses in assets and liabilities liabilities to be consolidated, parent company net income and retained earnings under the equity method are McGraw-Hill Companies, Inc., 2006  Modern Advanced Accounting, 10/e

6.

7.

identical to the related consolidated amounts. The equity method thus provides a useful selfchecking technique. No, No, Parnel Parnelll Corpo Corporati ration on and and Plank Plankto ton n Comp Company any do not not use use the the same same meth method od of acco accoun unti ting ng for  their subsidiaries’ operating results. The Intercompany Dividends Revenue ledger account indicates that Parnell uses the cost method of accounting, while the Intercompany Investment Income account evidences use of the equity method of accounting by Plankton. 138,000 a. Intercompany Dividends Receivable Investment in Subsidiary Company Common Stock 138,000 To record declaration of dividend by subsidiary (46,000 shares x $3 a share = $138,000). b. Intercompany Dividends Receivable Intercompany Dividends Revenue To record declaration of dividend by subsidiary (46,000 shares x $3 a share = $138,000).

8.

138,000 138,000

A Retain Retained ed Earnin Earnings gs of of Subsid Subsidiary iary ledg ledger er accou account nt is is requ require ired d for for a parent parent com compan pany y that that uses uses the the equ equity ity method of accounting for the subsidiary’s operations. In the equity method of accounting, the parent’s share of net income of the subsidiary is recognized as income by the parent company; thus, the entire income from the subsidiary recognized by the parent company is not available for dividends to parent company stockholders. stockholders. A Retained Retained Earnings of Subsidiary Sub sidiary ledger account thus is required for a parent company that uses the equity method method of accounting for a subsidiary’s subsidiary’s operations.

SOLUTIONS TO EXERCISES Ex. 7–1

Ex. 7–2

1. d  9. a 2. d  10. d  3. d  11. c ($80,000 x 0.80 = $64,000) 4. b 12. b ($1,600,000 + $80,000 = $1,680,000) 5. c 13. c 6. c 14. a 7. c 15. a 8. b 16. a Journal entries for Pence Corporation, year ended Sept. 30, 2006: 2006 Sept. 1 Intercompany Dividends Receivable 80,000 Investment in Spence Company Common Stock 18

Cash

80,000 Intercompany Dividends Receivable

30

80,000

Investment in Spence Company Common Stock Intercompany Investment Income

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80,000

980,000 980,000

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30

Ex. 7–3

Ex. 7–4

Inte Interc rcom ompa pany ny Inv Investm estmen entt Inco Incom me ($20,000 + $12,000 + $8,000) Investment in Spence Company Common Stock

234

40,000

The most logical explanation for each of the transactions or events follows: (1) The September September 1, 2005, $630,000 debit to Investm Investment ent in Subsidiary Subsidiary Common Common Stock is the the cost of the parent company’s investment in the subsidiary, acquired in a business combination. (2) The August August 16, 2006, debit to Intercompany Intercompany Dividen Dividends ds Receivable Receivable and credit credit to Investment in Subsidiary Common Stock in the amount of $36,000 is the parent company’s share of dividends declared by the subsidiary on that date. (3) The August August 27, 2006, credit cr edit to Intercompany Intercompany Divid Dividend endss Receivable Receivable in the amount amount of  $36,000 shows the collection of the dividend paid by the subsidiary. (4) The August August 31, 2006, debit to Investment Investment in Subsidiary Subsidiary Common Common Stock and credit to Intercompany Investment Income in the amount of $72,000 is the parent company's share of the subsidiary’s reported net income for the year ended on that date. (5) The August 31, 2006, debit to Intercompany Investment Investment Income Income and credit to Investment in Subsidiary Common Stock in the amount of $5,000 is the parent company’s share of the depreciation and amortization of the differences between current fair values and carrying amounts of the subsidiary’s identifiable net assets on the date of the business combination. PRISTINE CORPORATION AND SUBSIDIARY Working Paper Elimination May 31, 2006

Common Stock   Superb Superb Additional Paid-in Capital  Superb Superb Retained Earnings  Superb Superb Intercompany Investment Income  Pristine Pristine ($80,000 – $65,000) Land  Superb Superb Building (net)   Superb Superb ($50,000 – $5,000) Goodwill  Superb Superb Cost of Goods Sold  Superb Superb ($60,000 + $5,000) Investment in Superb Company Common Stock    Pristine   Pristine ($950,000 + $80,000 – $65,000 – $30,000) Dividends Dividends Declared Decla red  Superb Superb

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40,000

100,000 200,000 450,000 15,000 40,000 45,000 50,000 65,000 935,000 30,000

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Ex. 7–5

POLAR CORPORATION AND SUBSIDIARY Working Paper Elimination July 31, 2006

(a) Common Stock, no par    Solar    Solar  Retained Earnings  Solar  Solar  Intercompany Investment Income  Polar  Polar  ($50,000 – $30,000 – $12,000) Plant Assets (net)  Solar  Solar  Goodwill  Solar  Solar  Cost of Goods Sold  Solar Solar ($30,000 + $12,000) Investment in Solar Company Common Stock       Polar ($470,000 + $8,000 – $20,000) Dividends Dividends Declared Declar ed  Solar  Solar  Ex. 7–6

8,000 108,000 20,000 42,000 458,000 20,000

PARO CORPORATION AND SUBSIDIARY Working Paper Elimination February February 28, 2006

Common Stock   Savo Savo Retained Earnings  Savo Savo Intercompany Investment Income  Paro Paro ($60,000 – $16,000) Plant Assets (net)  Savo Savo ($60,000 – $6,000) Goodwill  Savo Savo Cost of Goods Sold  Savo Savo ($10,000 + $6,000) Investment in Savo Company Common Stock       Paro ($210,000 + $60,000 – $20,000 – $16,000) Dividends Dividends Declared Decla red  Savo Savo Ex. 7–7

50,000 250,000

50,000 80,000 44,000 54,000 10,000 16,000 234,000 20,000

a. Journal entries (explanations omitted) for Parry Corporation, Oct. 31, 2006:

Investment in Samuel Company Common Stock Intercompany Investment Income

50,000

Intercompany Investment Income Investment in Samuel Company Common Stock

25,000

Intercompany Dividends Receivable Investment in Samuel Company Common Stock

20,000

50,000 25,000 20,000

b. Working paper elimination (explanation omitted) for Parry Corporation and subsidiary, Oct. 31, 2006:

Common Stock   Samuel Samuel Additional Paid-in Capital  Samuel Samuel Retained Earnings  Samuel Samuel Plant Assets (net)  Samuel Samuel ($250,000 – $25,000) Goodwill  Samuel Samuel Intercompany Investment Income  Parry Parry ($50,000 – $25,000) Cost of Goods Sold  Samuel Samuel Investment in Samuel Company Common Stock    Parry   Parry ($760,000 + $50,000 – $25,000 – $20,000) Dividends Dividends Declared Declar ed  Samuel Samuel

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100,000 150,000 200,000 225,000 60,000 25,000 25,000 765,000 20,000

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Ex. 7–8

a. Journal entries entries for Pulp Corporation, Jan. 31, 2006:

Investment in Stump Company Common Stock Intercompany Investment Income

240,000

Cash Investment in Stump Company Common Stock

120,000

240,000 120,000

Intercompany Investment Income ($20,000 + $20,000) Investment in Stump Company Common Stock b.

40,000 40,000

PULP CORPORATION AND SUBSIDIARY Working Paper Elimination January 31, 2006

Common Stock, no par or stated value  Stump Stump Retained Earnings  Stump Stump Intercompany Investment Income  Pulp Pulp ($240,000 – $40,000) Plant Assets  Stump Stump ($100,000 – $20,000) Goodwill  Stump Stump Cost of Goods Sold  Stump Stump ($20,000 + $20,000) Investment in Stump Company Common Stock    Pulp   Pulp ($440,000 + $240,000 – $120,000 – $40,000) Dividends Dividends Declared Declar ed  Stump Stump Ex. 7–9

520,000 120,000

Retained Earnings of Subsidiary Date 2006 Dec. Dec. 31 31

2007 Dec. Dec. 31 31 Ex. 7–10

100,000 180,000 200,000 80,000 40,000 40,000

Explanation

Debit

Credit

Balance

Clos Closee net net inco incom me not not availa availabl blee for  for  dividends ($45,500 – $20,000)

25,500

25,500 cr  

Clos Closee net net inco incom me not not availa availabl blee for  for  dividends ($85,500 – $50,000)

35,500

61,000 cr  

Computation of balance of Pitt Corporation’s Intercompany Investment Income ledger account, Mar. 31, 2006: Pitt’s share of Scow’s net loss for Year 2006 ($130,000 x 0.90) $117,000 Adjustments -0-* Pitt’s debit balance of the Intercompany Investment Income account $117,000 *Impairment of goodwill attributable to a business combination with a partially owned subsidiary is debited to the parent company’s Impairment Loss ledger account.

Ex. 7–11

Balance of Ply Corporation’s Investment in Spade Company Common Stock ledger account, Dec. 31, 2006: Cost of investment, Jan. 2, 2006 Add: Add: Ply’s share of Spade’s Spade’s net income income (Intercompany Investment Investment Income Income account balance) ($160,000 x 0.75) Less: Dividends declared by subsidiary Balance, Dec. 31, 2006

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$345,000 120,000 (60,000) $405,000

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Ex. 7–12

Consolidated retained earnings of Plain Corporation and subsidiary, Dec. 31, 2006: Plain Plain Corpor Corporati ation on’’s Reta Retain ined ed Earnin Earnings gs ledg ledger er accou account nt balan balance ce,, Jan. Jan. 2, 2, 2006 2006 Add: Plain’s net income, year ended Dec. 31, 2006 Subtotal Less: Plain’s dividends, year ended Dec. 31, 2006 Total of Plain’s Retained Earnings and Retained Earnings of Subsidiary postclosing ledger account balances, Dec. 31, 2006 (equal to consolidated retained earnings) *Includes Plain’s share of Sano’s Year Year 2006 net income under the equity method of accounting.

Ex. 7–13

$650,000

Consolidated net income of Pinson Corporation and subsidiary for Year 2006:  Net income of Pinson Corporation, exclusive of intercompany investment income Add: Pinson’s share of net income of Solomon ($120,000 x 0.90) Consolidated net income

Ex. 7–14

$500,000 $500,0 00 200,000* $700,000 50,000

$145,000 108,000 $253,000

entries for Pallid Corporation, Corporation, Jan. 31, 2006: a. Journal entries Investment in Sallow Company Common Stock ($120,000 x 0.85) Intercompany Investment Income Intercompany Dividends Re Receivable ($ ($60,000 x 0.85) Investment in Sallow Company Common Stock

102,000 102,000 51,000 51,000

Inte Interc rcom ompa pany ny Inve Invest stm ment ent Inco Incom me [($ [($10 10,0 ,000 00 + $5,0 $5,000 00)) x 0.85 0.85]] Investment in Sallow Company Common Stock PALLID CORPORATION AND SUBSIDIARY b. Working Paper Eliminations January 31, 2006

12,75 12,750 0

(a) Common Stock, no par or stated value  Sallow Sallow Retained Earnings  Sallow Sallow Intercompany Investment Income I ncome  Pallid Pallid ($102,000 – $12,750) Plant Assets  Sallow Sallow ($50,000 – $5,000) Goodwill  Pallid Pallid Cost of Goods Sold  Sallow Sallow ($10,000 + $5,000) Investment in Sallow Company Common Stock   Pallid Pallid ($190,000 ($190,000 + $102,000 – $51,000 – $12,750) Dividends Dividends Declared Declar ed  Sallow Sallow Minority Interest in Net Assets of Subsidiary [$30,000 – ($60,000 x 0.15)]

50,000 90,000

(b) Minority Interest in Net Income of Subsidiary [($120,000 – $15,000) x 0.15] Minority Interest in Net Assets of Subsidiary

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12,750

89,250 45,000 20,000 15,000

228,250 60,000 21,000 15,750 15,750

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Ex. 7–15

Statement of retained earnings section of working paper for consolidated financial statements of Putter Corporation and subsidiary, year ended May 31, 2007: Putter Corporation

Retained earnings, beginning of year Net income to parent Subtotal Dividends declared Retained earnings, end of year Ex. 7–16

Simmer Company

Eliminations increase (decrease)

692,000 180,000 872,000 90,000

150,000 120,000 270,000 50,000

(a) (122, 000) (120,000) (242,000) (a) (50,0 00)

720,000 180,000 900,000 90,000

782,000

220,000

(192,000)

810,000

Closing entries for Parton Corporation, May 31, 2006: Sales Intercompany Investment Income Income Summary

840,000 95,000

Income Summary Cost of Goods Sold Operating Expenses and Income Taxes Expense

590,000

Income Summary ($935,000 – $590,000) Retained Earnings of Subsidiary ($95,000 – $60,000) Retained Earnings ($345,000 – $35,000)

345,000

935,000 378,000 212,000 35,000 310,000

Retained Earnings Dividends Declared Ex. 7–17

Consolidated

50,000 50,000

a. Balance of Investment in Salisbury Company Common Stock  ledger account, Sept. 30, 2006 Add: Putnam’s share of Salisbury’s net income ($50,000 x 0.80) Subtotal Less: Putnam’s Putnam’s share of amortization amortization of current fair value difference ($4,500 x 0.80) Putnam’s share of dividends declared by Salisbury ($18,750 x 0.80) Balance of Investment in Salisbury Company Common Stock  account, Sept. 30, 2007

$265,000 40,000 $305,000 $ 3,600 15,000

18,600 $286,400

b. Balance of Intercompany Investment Income ledger account, Sept. 30, 2007 ($40,000 – $3,600)

$ 36,400

c. Amount of closing entry to Retained Earnings of Subsidiary ledger account, Sept. 30, 2007 ($36,400 – $15,000)

$ 21 21,400

d. Minority interest in net income of subsidiary, year ended Sept. 30, 2007 [($50,000 – $4,500) x 0.20]

$

e. Minority interest in net assets of subsidiary, Sept. 30, 2007 [($60,0000 + $9,100 – ($18,750 x 0.20)]

$ 65,350

9,100

CASES Case 7–1

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Rebuttals to each of the chief accountant's arguments are as follows:

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(1) Because consoli consolidated dated financial financial statements statements disregard legal legal form of the affiliated corporations in favor of economic substance of the parent company–subsidiary relationship, there is no reason for the parent company to use a method of accounting for  the subsidiary’s operations that emphasizes legal form. (2) The economic economic unit concept of consolidated consolidated financial financial statements treats the minority interest in a subsidiary’s net assets as a part of stockholders’ equity; thus, there is no need to use a method of accounting that emphasizes legal separateness of parent company and subsidiary. The presence of a minority interest does not preclude the preparation of  consolidated financial statements. (3) Although the the Intercompany Investment Investment Income ledger account theoretically does does not meet meet the definition of realized revenue, it is consistent with the accrual basis of accounting in that it permits the parent company to recognize the subsidiary’s operating results in the  parent company’s income statement. Rigid adherence to the revenue realization principle should not preclude accounting for economic substance of events. (4) Use of a Retained Earnings Earnings of Subsidiary ledger ledger account to segregate segregate net income income of a subsidiary not paid to the parent company as dividends safeguards against illegal dividend  payments by the parent company. (5) The fact that journal entries in ledger ledger accounts are used in the equity equity method method of accounting accounting to record amortization of differences between current fair values and carrying amounts of  the subsidiary’s net assets is an argument in favor of the equity method of accounting. Formal accounting records provide a better history than do working paper notations. Adherence to the historical-cost valuation principle should not bar the use of a preferable accounting method. Case 7–2 The literature researched by Nancy Wade is as follows: FAS 142, 142, ¶ 11. The accounting for a recognized intangible asset is based on its useful life to the reporting entity. An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. The estimate of the useful life of an intangible asset to an entity shall  be based on an analysis of all pertinent factors, in particular: a. The expe expecte cted d use use of the asset by enti entity ty..  b. The expected expected useful useful life life of another another asset or a group of assets to which which the the useful life life of the the intangible asset may relate (such as mineral rights to depleting assets). c. Any legal, legal, regulatory, regulatory, or contractual provisions provisions that that may limit limit the the useful useful life. life. d. Any legal, legal, regulatory regulatory,, or contractual provisions provisions that enable enable renewal renewal or extensio extension n of the asset’s legal or contractual life without substantial cost (provide there is evidence to support renewal or extension and renewal or extension can be accomplished without material modifications of the existing terms and conditions). e. The effects effects of obsoles obsolescenc cence, e, demand, demand, competiti competition, on, and other other econom economic ic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels). f. The level level of maintena maintenance nce expend expenditures itures required required to obtain the expecte expected d future cash flows flows from the asset (for example, a material level of required maintenance in relation to the carrying amount of the asset may suggest a very limited useful life). If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to  be indefinite. The term indefinite does not mean infinite. APB 20, ¶ 10. Changes in estimates used in accounting are necessary consequences of   periodic presentations of financial statements. Preparing financial statements requires estimating the effects of future events. Examples of items for which estimates are necessary are uncollectible receivables, inventory obsolescence, service lives and salvage values of  depreciable assets, warranty costs, periods benefited by a deferred cost, and recoverable The © The Solutions Manual, Chapter 7 

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mineral reserves. Future events and their effects cannot be perceived with certainty; estimating, therefore, requires the exercise of judgment. Thus accounting estimates change as new events occur, as more experience is acquired, or as additional information is obtained. APB 20, ¶ 31. The [Accounting Principles] Board concludes that the effect of a change in accounting estimate should be accounted for in (a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both. A change in an estimate should not be accounted for by restating amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods. APB 20, ¶ 33.  Disclosure. The effect on income before extraordinary items, net income and related per share amounts of the current period should be disclosed for a change in estimate that affects several future periods, such as a change in service lives of depreciable assets or  actuarial assumptions affecting pension costs. Disclosure of the effect on those income statement amounts is not necessary for estimates made each period in the ordinary course of  accounting for items such as uncollectible accounts or inventory obsolescence; however, disclosure is recommended if the effect of a change in the estimate is material. AU 342.05 Management is responsible for establishing a process for preparing accounting estimates. Although the process may not be documented or formally applied, it normally consists of       a.  b. c. d.

Identifyi Identifying ng situations situations for which which accounting accounting estimates estimates are required. required. Identifyi Identifying ng the the relevan relevantt factors that may may affect affect the accounting accounting estimat estimate. e. Accumulatin Accumulating g relevant, relevant, sufficie sufficient, nt, and reliable reliable data data on which which to base the estimate. estimate. Developi Developing ng assumptions assumptions that represent represent manageme management's nt's judgm judgment ent of the most most likely likely circumstances and events with respect to the relevant factors. e. Determinin Determining g the estimated estimated amount amount based on the the assumptions assumptions and and other other relevant relevant factors. f. Determinin Determining g that the the accounting accounting estimat estimatee is presented presented in conform conformity ity with with applicable applicable accounting principles and that disclosure is adequate. The risk of material misstatement of accounting estimates normally varies with the complexity and subjectivity associated with the process, the availability and reliability of relevant data, the number and significance of assumptions that are made, and the degree of uncertainty associated with the assumptions. AU 420.14 Accounting estimates (such as service lives and salvage values of depreciable assets and provisions for warranty costs, uncollectible receivables, and inventory obsolescence) are necessary in the preparation of financial statements. Accounting estimates change as new events occur and as additional experience and information are acquired. This type of  accounting change is required by altered conditions that affect comparability but do not involve the consistency standard. The independent auditor, in addition to satisfying himself with respect to the conditions giving rise to the change in accounting estimate, should satisfy himself  that the change does not include the effect of a change in accounting principle. Provided he is so satisfied, he need not comment on the change in his report. However, an accounting change of this type having a material effect on the financial statements may require disclosure in a note to the financial statements. A review review of the foregoing literature may lead Nancy N ancy Wade Wade to respond to John Raymond’s Raymond’s request as follows: (1) Unle Unless, ss, per  per  APB  APB 20, 20, paragraph 10, new events have occurred, more experience has been acquired, or additional information has been obtained that would support an extension of  the composite economic life of Selvidge Company’s depreciable plant assets to ten years from five years, the change should not be made. This is especially true if the five-year  economic life was used in the pro forma data for the business combination reported in Punjab Corporation’s consolidated financial statements for the year ended December 31, 2005 (see Chapter 5 of the text). The requirements for accounting estimates set forth in AU 342.05 leave no room for arbitrary extensions of economic lives of plant assets.

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142, paragraph 11c, makes it clear that legal life is an outer limit on the amortization (2) FAS 142,  period for intangible assets, not a conventional limit. Unless favorable changes have occurred in forecasts of obsolescence, demand, competition, or other economic factors (FAS 142, 142, paragraph 11e), there is no basis for an arbitrary extension of the economic life of Selvidge’s Selvidge’s patent. p atent. Overall, Nancy Wade should resist John Raymond’s efforts to enhance the consolidated operating results of Punjab Corporation and Selvidge Company by unwarranted changes to or  adoptions of excessive economic lives for depreciable and amortizable assets. Case 7–3 The view of student Carl is supportable; that of student Rachel is not. Once the board of  directors of the partially owned subsidiary has declared a dividend, liabilities to the parent company and to minority stockholders must be recognized. The liabilities for declared but unpaid dividends clearly meet the provisions of  Statement of Financial Accounting Concepts  No. 6 , “Elements of Financial Statements,” paragraph 35 of which defines liabilities as “probable future sacrifices of economic benefits arising from present obligations of a  particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” Taking student Rachel’s view to the extreme, dividends payable to the parent company of a partially owned subsidiary also should be displayed with consolidated stockholders’ equity.

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15 Minutes, Easy Pre m Corporation

Pr. 7–1 Investment in Supp Company Stock

a.

Date

Explanation

Debit

Credit

20 05 Dec. 31 Balance

Balance 1 9 2 0 0 0 dr

20 06 Dec. 8 Dividend declared by Supp

6 0 0 0

31 Net income of Supp 31 Amortization ($20,000 + $6,000)

3 0 0 0 0 2 6 0 0 0

1 8 6 0 0 0 dr   2 1 6 0 0 0 dr   1 9 0 0 0 0 dr  

Prem Corporation and Subsidiary

b.

Working Paper Elimination December 31, 2006 (a) Common Stock—Supp Additional Paid-in Capital—Supp

1 0 0 0 0 4 0 0 0 0

Retained Earnings—Supp Intercompany Investment Income—Prem

5 0 0 0 0

($30,000 – $26,000) Plant Assets (net)—Supp ($60,000 – $6,000)

4 0 0 0 5 4 0 0 0

Goodwill—Supp Cost of Goods Sold—Supp ($20,000 + $6,000) Investment in Supp Company Common

1 2 0 0 0 2 6 0 0 0

Stock—Prem Dividends Declared—Supp

1 9 0 0 0 0 6 0 0 0

To carry out the following: (1) Eliminate intercompany investment investment and equity

(2)

accounts of subsidiary sub sidiary at beginning of year, year, and subsidiary dividend. Provide Provide for Year 2006 depreciat depreciation ion and amortization amortization on differences between between combination date current fair values and carrying amounts amounts of 

(3)

Supp’s net assets. Allocate Allocate unamortiz unamortized ed differences differences between between combination date current fair values values and carrying amounts of Supp’s net assets to appropriate assets.

(Income tax effects are disregarded.)

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McGraw-Hill Companies, Inc., 2006  Modern Advanced Accounting, 10/e

 

20 Minutes, Easy Pro Corporation

Pr. 7–2 Pro Corporation Journal Entries

20 06 Sept ept 5 Inte Interc rcom ompa pany ny Divi Divide dend nds s Rec Recei eiva vabl ble e [(10 [(100, 0,00 000 0 x $1) $1) x 0.80] Investment in Soy Company Common Stock

8 0 0 0 0 8 0 0 0 0

To record dividend declared by Soy Company, payable September September 26, 2006. 26 Cash

8 0 0 0 0

Intercompany Dividends Receivable To record receipt of dividend from Soy Company. 30 Investme Investment nt in Soy Soy, Compan Company y Common Common Stock Stock ($300,000 x 0.80)

8 0 0 0 0

2 4 0 0 0 0

Intercompany Investment Income To record 80% of net income of Soy Company for the

2 4 0 0 0 0

year ended ended September 30, 2006. (Income (I ncome tax effects are disregarded.) 30 Intercomp Intercompany any Inves Investme tment nt Income Income [($60,000 [($60,000 + $8,000 $8,000 + $4,000) x 0.80]

5 7 6 0 0

Investment in Soy Company Common Stock To amortize differences between current fair values

5 7 6 0 0

and carrying amounts of Soy Company’s Company’s identifiable net assets on Sept. Sept. 30, 2005. (Income tax effects are disregarded.)

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30 Minutes, Easy Promo Corporation

Pr. 7–3 Promo Corporation

a.

Journal Entries 20 06 Mar 1 Intercompany Dividends Receivable (50,000 x $0.40) Investment in Sanz Company Common Stock To record dividend declared by Sanz Company,

2 0 0 0 0 2 0 0 0 0

payable Mar. 15, 2006. 15 Cash

2 0 0 0 0 Intercompany Dividends Receivable

2 0 0 0 0

To record receipt of dividend from Sanz Company. 31 Investment in Sanz Company Common Stock

6 0 0 0 0

Intercompany Investment Income To record 100% of Sanz Company’s net income for 

6 0 0 0 0

the year ended Mar. Mar. 31, 2006. (Income tax effects are disregarded.) 31 Intercompany Investment Income Investment in Sanz Company Common Stock

2 8 0 0 0 2 8 0 0 0

To amortize differences between current fair values and carrying amounts of Sanz Company’s Company’s identifiable net assets on Mar. 31, 2006, as follows: Inve Invent ntor orie ies— s—to to cos costt of goo goods ds sol sold d Other plant assets—depreciation ($80,000 ÷ 10)

$20, $20,00 000 0 8,000

Total amortization applicable to Year 2006

$28,000

(Income tax effects are disregarded.)

Investment in Sanz Company Common Stock

b.

Date

Explanation

Debit

Credit

20 05 Mar 31 Balance

Balance

4 9 0 0 0 0 dr

20 06 Mar 1 Dividend declared by Sanz 31 Net income of Sanz

 

2 0 0 0 0

4 7 0 0 0 0 dr   5 3 0 0 0 0 dr  

2 8 0 0 0

5 0 2 0 0 0 dr

6 0 0 0 0

31 Amortization of differences between between current fair values and carrying carrying amounts of Sanz’s identifiable net assets

 

Intercompany Investment Income Date

Explanation

Debit

20 06 Mar 31 Net income of Sanz 31 Amortization of differences between between

Credit

6 0 0 0 0

Balance

6 0 0 0 0 cr

 

current fair values and carrying carrying amounts of Sanz’s identifiable net assets

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244

2 8 0 0 0

3 2 0 0 0 cr

McGraw-Hill Companies, Inc., 2006  Modern Advanced Accounting, 10/e

 

Promo Corporation

Pr. 7–3 Promo Corporation

c.

Working Paper Elimination March 31, 2006 (a) Common Stock, $1 par—Sanz Additional Paid-In Capital—Sanz Retained Earnings—Sanz Intercompany Investment Income—Promo

5 0 1 0 0 1 5 0 3 2

0 0 0 0

0 0 0 0

0 0 0 0

Land—Sanz Other Plant Assets—Sanz ($80,000 – $8,000)

5 0 0 0 0 7 2 0 0 0

Goodwill—Sanz Cost of Goods Sold—Sanz

4 0 0 0 0 2 0 0 0 0

Oper Operat atin ing g Expe xpenses nses—S —San anz z Investment in Sanz Company Common Stock—Promo

8 0 0 0 5 0 2 0 0 0

Dividends Declared—Sanz To carry out the following:

2 0 0 0 0

(1) Eliminate intercompany intercompany investment investment and equity equity accounts of subsidiary at beginning of year, and subsidiary dividend. (2) Provide for Year Year 2006 2006 depreciation depreciation and amortization amortization of differences between combination date current fair values and carrying amounts amounts of  Sanz’s identifiable net assets to appropriate assets. (Income tax effects are disregarded.)

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30 Minutes, Medium Penn Corporation

Pr. 7–4 Penn Corporation and Subsidiary Working Paper Eliminations October 31, 2006

(a) Co Common Stock—Soper Additional Paid-in Capital—Soper Retained Earnings—Soper

2 0 0 0 0 (1) 6 0 0 0 0 (2 (2) 7 0 0 0 0 (3)

Intercompany Investm Investment ent Income—Penn ($40,000 – $22,400)

1 7 6 0 0

Plant Assets (net)—Soper ($80,000 – $8,000) Goodwill (net)—Penn

7 2 0 0 0 4 0 0 0 0

Cost of Goods Sold—Soper  [$20,000 + ($8,000 x 0.75)]

2 6 0 0 0

Operating Expenses—Soper ($8,000 x 0.25) Investment in Soper Company Common Stock—Penn ($240,000 – $16,000 +

2 0 0 0

$40,000 – $22,400) Dividends Declared—Soper ($16,000 ÷ 0.80)

2 4 1 6 0 0 2 0 0 0 0

Minority Interest in Net Assets of Subsidiary [($250,000 x 0.20) – ($20,000 x 0.20)]

4 6 0 0 0

To carry out the following: (1) Eliminate intercompany intercompany investment investment and equity equity accounts of subsidiary at beginning of year, and subsidiary dividends. (2) Provide for Year Year 2006 2006 depreciation depreciation and amortization amortization on differences between between combination date current fair values and carrying amounts amounts of  Soper’s identifiable net assets. (3) Allocate Allocate unamortiz unamortized ed differences differences between between combination date current fair values and carrying amounts of Soper’s net assets as sets to appropriate assets. (4) Establish Establish minority minority inter interest est in net assets assets of  subsidiary at beginning of year, year, less minority interest share of dividends declared by subsidiary during year. (Income tax effects are disregarded.) (b) Minority Minority Inter Interest est in Net Net Income Income of Subsidiar Subsidiary y ($17,600 x 20%/80%) Minority Interest in Net Assets of Subsidiary

4 4 0 0 4 4 0 0

To establish minority in interest terest in subsidiary’s sub sidiary’s adjusted net income for Year 2006. Computations: (1) $50,000 ÷ 0.20 = $250,000; $250,000 – ($20,000 + $80,000) = $150,000 stockholders’ equity on Oct. 31, 2005; $150,000 + $50,000 – $20,000 = $180,000 stockholders’ equity on Oct. 31, 2006; $180,000 x 1/9 = $20,000 (2) (3)

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246

$180,000 x 3/9 = $60,000 $180,000 x 5/9 = $100,000; $100,000 – $50,000 + $20,000 $20,000 = $70,000

McGraw-Hill Companies, Inc., 2006  Modern Advanced Accounting, 10/e

30 Minutes, Easy Pewter Corporation

Pr. 7–5 Pewter Corporation

a.

Journal Entries (1) 20 06 Jan 2 Inv Investm estmen entt in Ste Stewart art Company any Com Common Stoc Stock k (800 x $70) Cash

5 6 0 0 0 5 6 0 0 0

To record payment of cash for 80% of the outstanding common stock of Stewart Company in a business combination. 2 Investme Investment nt in Skate Skate Company Company Common Common Stock Stock (2,100 (2,100 x $40) Cash

8 4 0 0 0 8 4 0 0 0

To record payment of cash for 70% of the outstanding common stock of Skate Company in a business combination. (2)

Dec

31 Investme Investment nt in Stewart Stewart Comp Company any Common Common Stock Stock ($36,000 x 0.80)

2 8 8 0 0

Investment in Skate Company Common Stock ($12,000 x 0.70)

8 4 0 0

Intercompany Investment Income To record share of subsidiaries’ net income or net loss

2 0 4 0 0

for Year 2006. (3)

31 Intercompany Dividends Receivable Investment in Stewart Company Common

1 9 1 0 0

Stock ($16,000 x 0.80) Investment in Skate Company Common

1 2 8 0 0

Stock ($9,000 x 0.70) To record declaration of dividends by subsidiaries s ubsidiaries

6 3 0 0

during Year 2006.

Pewter Corporation

b.

Computation of Minority Interest in Net Assets of Subsidiaries December 31, 2006

Stockholders’ equity of subsidiaries, Dec. 31, 2006: Common stock Additional paid-in capital Retained earnings Total stockholders’ equity Minority interest percentage Minority interest in net assets of subsidiaries

Stewart

Skate

Company

Company

$ 5 0 0 0 0

$ 6 0 0 0 0 2 0 0 0 0

4 0 0 0 0

1 9 0 0 0

$ 9 0 0 0 0

$ 9 9 0 0 0

.0 2 0 $ 1 8 0 0 0

.0 3 0 $ 2 9 7 0 0

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Pewter Corporation (concluded)

Pr. 7–5 Pewter Corporation

c.

Computation of Consolidated Retained Earnings December 31, 2006 Retained earnings of Pewter Corporation, before giving effect to journal entry in a (2) on page 247. Add: Effect of journal entry in a (2)

$ 3 0 4 6 0 0 2 0 4 0 0

Retained earnings of Pewter Corporation, reflecting equity method method of accounting for f or subsidiaries’ operations (equal to consolidated retained earnings)

The © The

248

$ 3 2 5 0 0 0

McGraw-Hill Companies, Inc., 2006  Modern Advanced Accounting, 10/e

40 Minutes, Medium Parks Corporation

Pr. 7–6 Parks Corporation

a.

Journal Entries 20 06 May 31 Intercompany Dividends Receivable Investment in State Company Common Stock To record dividends declared by State Company. 31 Investment in State Company Common Stock

3 0 0 0 0 3 0 0 0 0

8 0 0 0 0

Intercompany Investment Income To record 80% of State Company’s net income for the

8 0 0 0 0

year ended May 31, 2006. (Income tax effects are disregarded.) 31 Intercompany Investment Income Investment in State Company Common Stock

7 2 0 0 7 2 0 0

To amortize difference between current fair values and carrying amounts of State Company’s identifiable net assets on May 31, 2005 ($9,000 x 0.80 = $7,200). (Income tax effects are disregarded.)

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Parks Corporation (concluded)

Pr. 7–6 Parks Corporation and Subsidiary

b.

Working Paper Eliminations May 31, 2006 (a) Common Stock—State (10,000 x $1) Additional Paid-in Capital—State (10,000 x $4) Retained Earnings—State ($500,000 – $50,000) Intercompany Investment Income—Parks

1 4 4 5 7

0 0 0 2

0 0 0 8

0 0 0 0

0 0 0 0

Land—State Buildings—State

3 9 0 0 0 3 2 0 0 0

Machinery—State Goodwill—Parks

2 0 0 0 0 5 0 0 0 0

Cost of Goods Sold—State Investment in State Company Common Stock—Parks

9 0 0 0 5 7 2 8 0 0

Dividends Declared—State ($30,000 + $7,500)

3 7 5 0 0

Minority Interest in Net Assets of Subsidiary ($120,000 – $7,500)

1 1 2 5 0 0

To carry out the following: (1) Eliminate intercompany investment investment and equity accounts of subsidiary at beginning of year, and subsidiary dividend. (2) Provide for Year Year 2006 2006 depreciation depreciation on differences between between combination date current fair values values and carrying amounts amounts of State’s identifiable net assets. (3) Allocate unamortized unamortized differences between between combination date current fair values and carrying amounts of State’s net assets to appropriate accounts. (4) Establish Establish minority minority inter interest est in net assets assets of  subsidiary at beginning of year, year, less minority interest share of dividends declared by subsidiary during year. (Income tax effects are disregarded.) (b) Minority Interest in Net Income of Subsidiary Minority Interest in Net Assets of Subsidiary

1 8 2 0 0 1 8 2 0 0

To establish minority in interest terest in subsidiary’s sub sidiary’s adjusted net income for Year Year 2006. (20,000 – 1,800)

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McGraw-Hill Companies, Inc., 2006  Modern Advanced Accounting, 10/e

55 Minutes, Medium Paseo Corporation

Pr. 7–7 Paseo Corporation

a.

Journal Entries 20 06 Mar 31 Inv Investm estmen entt in Ste Stepp ppe e Co Company Com Comm mon Stock tock [(25,000 x $1.20) x 0.82] Intercompany Investment Income

2 4 6 0 0 2 4 6 0 0

To record 82% of Steppe Company’s net income for  the year ended Mar. Mar. 31, 2006. (Income tax effects are disregarded.) 31 Intercompany Investment Income Investment in Steppe Company Common Stock

6 1 5 0 6 1 5 0

To amortize differences between Steppe Company’s identifiable assets’ current fair value and carrying amounts on Mar. 31, 2005, as follows: Building—depreciation ($50,000 ÷ 10)

$5,000

Patent—amortization Patent—amortization ($20,000 ($20 ,000 ÷ 8) Total otal diffe differe renc nces es appl applic icab able le to year ear 200 2006 6

2,500 $7,50 $7,500 0

Amort Amortiz izati ation on for for Yea Yearr 2006 2006 ($7,50 ($7,500 0 x 0.82) 0.82)

$6,150 $6,150

(Income tax effects are disregarded.) di sregarded.)

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Paseo Corporation (concluded)

Pr. 7–7 Paseo Corporation and Subsidiary

b.

Working Paper Eliminations March 31, 2006 (a) Co Common Stock—Steppe Additional Paid-in Capital—Steppe Retained Earnings—Steppe Intercompany Investm Investment ent Income—Paseo Income—Paseo ($24,600 –

5 0 0 0 0 7 5 0 0 0 1 3 5 0 0 0

$6,150) Land—Steppe

1 8 4 5 0 2 0 0 0 0

Building (net)—Steppe ($50,000 – $5,000) Patent (net)—Steppe ($20,000 – $2,500)

4 5 0 0 0 1 7 5 0 0

Goodwill (net)—Paseo [$328,000 – ($350,000 x 0.82)] Cost of Goods Sold—Steppe Oper Operat atin ing g Expen xpense ses— s—St Step eppe pe

4 1 0 0 0 5 0 0 0 2 5 0 0

Investment in Steppe Company Common Stock—Paseo

3 4 6 4 5 0

Minority Interest in Net Assets of Subsidiary ($350,000 x 0.18)

6 3 0 0 0

To carry out the following: (1) Eliminate intercompan i ntercompany y investment and equity accounts of subsidiary at beginning of year. year. (2) Provide for Year Year 2006 2006 depreciation depreciation and amortization amortization on differences between between combination date current fair values and carrying amounts amounts of Steppe Company’s identifiable assets. (3) Allocate Allocate unamortiz unamortized ed differences differences between between combination date current fair values and carrying amounts of Steppe’s net assets to appropriate assets. (4) Establish Establish minority minority inter interest est in net assets assets of  subsidiary at beginning of year. (Income tax effects are disregarded.) (b) Minority Interest in Net Income of Subsidiary

4 0 5 0

Minority Interest in Net Assets of Subsidiary To establish minority in interest terest in subsidiary’s sub sidiary’s adjusted net income for Year 2006 as follows: Net income of subsidiary Less: Net reduction in elimination (a) above

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252

4 0 5 0

$30,000 7,500

Adjusted net income of subsidiary

$22,500

Mino Minori rity ty inte intere rest st shar share: e: $22, $22,50 500 0 x 0.18 0.18

$ 4,05 4,050 0

McGraw-Hill Companies, Inc., 2006  Modern Advanced Accounting, 10/e

60 Minutes, Strong Pavich Corporation

Pr. 7–8 Pavich Corporation

a.

Journal Entries 20 06 Sept 30

Ca Cash ($10,000 x 0.75) Investment in Sisler Company Common Stock To record dividend received from Sisler Company.

30 Investme Investment nt in Sisler Sisler Compa Company ny Common Common Stock Stock ($80,000 x 0.75) Intercompany Investment Income To record 75% of Sisler Company’s net income for the year ended ended Sept. 30, 2006. (Income tax effects are disregarded.) 30 Intercomp Intercompany any Inves Investme tment nt Income Income [($30,000 [($30,000 + $5,000 $5,000 + $4,000) x 0.75] Investment in Sisler Company Common Stock To amortize differences between current fair values and carrying amounts of Sisler Company’s Company’s identifiable net assets on Oct. 1, 2005. (Income tax effects are disregarded.) 20 07 Sept 30 Ca Cash ($75,000 x 0.75) Investment in Sisler Company Common Stock To record dividend received from Sisler Company. 30 Investme Investment nt in Sisler Sisler Compa Company ny Common Common Stock Stock ($120,000 x 0.75) Intercompany Investment Income To record 75% of Sisler Company’s net income for the year ended ended Sept. 30, 2007. (Income tax effects are disregarded.) 30 Intercomp Intercompany any Inves Investme tment nt Income Income [($5,000 [($5,000 + $4,000) $4,000) x 0.75] Investment in Sisler Company Common Stock To amortize differences between current fair values and carrying amounts of Sisler Company’s Company’s identifiable net assets on Oct. 1, 2005. (Income tax effects are disregarded.)

7 5 0 0 7 5 0 0

6 0 0 0 0 6 0 0 0 0

2 9 2 5 0 2 9 2 5 0

5 6 2 5 0 5 6 2 5 0

9 0 0 0 0 9 0 0 0 0

6 7 5 0 6 7 5 0

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Pavich Corporation (continued) b.

Pr. 7–8 Pavich Corporation and Subsidiary Working Paper Eliminations September 30, 2006

(a) Co Common Stock—Sisler Additional Paid-in Capital—Sisler Retained Earnings—Sisler

2 5 0 0 0 0 1 0 0 0 0 0 2 0 0 0 0 0

Intercompany Investment Income—Pavich ($60,000 – $29,250)

3 0 7 5 0

Plant Assets (net)—Sisler ($50,000 – $5,000) Patents (net)—Sisler ($20,000 – $4,000)

4 5 0 0 0 1 6 0 0 0

Goodwill—Pavich [$547,500 – ($650,000 x 0.75)] Cost of Goods Sold—Sisler ($30,000 + $5,000) Operating Expenses—Sisler

6 0 0 0 0 3 5 0 0 0 4 0 0 0

Investment in Sisler Company Common Stock— Pavich ($547,500 – $7,500 + $60,000 – $29,250) Dividends Declared—Sisler

5 7 0 7 5 0 1 0 0 0 0

Minority Interest in Net Assets of Subsidiary [($650,000 x 0.25) – ($10,000 x 0.25)] To carry out the following:

1 6 0 0 0 0

(1) Eliminate intercompany investment investment and equity accounts of subsidiary at beginning of year, year, and subsidiary dividend. (2) Provide for Year Year 2006 depreciation and and amortizaamortization on differences di fferences between combination date current fair values and carrying carrying amounts of Sisler’s identifiable net assets. (3) Allocate Allocate unamortiz unamortized ed differences differences between between combination date current fair values and carrying amounts of Sisler’s net assets to appropriate accounts. (4) Establish minority interest in net net assets of  subsidiary at beginning of year, year, less minority interest share of dividends declared by subsidiary during year. (Income tax effects are disregarded.) (b) Minority Minority Inter Interest est in Net Net Income Income of Subsidiar Subsidiary y [($80,000 – $39,000) x 0.25] Minority Interest in Net Assets of Subsidiary

1 0 2 5 0 1 0 2 5 0

To establish minority in interest terest in subsidiary’s sub sidiary’s adjusted net income for Year 2006.

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McGraw-Hill Companies, Inc., 2006  Modern Advanced Accounting, 10/e

Pavich Corporation (continued)

Pr. 7–8 Pavich Corporation and Subsidiary Working Paper Eliminations September 30, 2007

(a) Common Stock—Sisler Additional Paid-in Capital—Sisler Retained Earnings—Sisler ($200,000 + $80,000 – $10,000 – $23,250)

2 5 0 0 0 0 1 0 0 0 0 0 2 4 6 7 5 0

Retained Earnings of Subsidiary—Pavich ($30,750 – $7,500)

2 3 2 5 0

Intercompany Investm Investment ent Income—Pavich ($90,000 – $6,750)

8 3 2 5 0

Plant Assets (net)—Sisler ($45,000 – $5,000) Patents (net)—Sisler ($16,000 – $4,000) Goodwill—Pavich

4 0 0 0 0 1 2 0 0 0 6 0 0 0 0

Cost of Goods Sold—Sisler Operating Expenses—Sisler

5 0 0 0 4 0 0 0

Investment in Sisler Company Common Stock— Pavich ($570,750 – $56,250 + $90,000 – $6,750)

5 9 7 7 5 0 7 5 0 0 0

Dividends Declared—Sisler Minority Interest in Net Assets of Subsidiary [($160,000 + $10,250) – ($75,000 x 0.25)] To carry out the following:

1 5 1 5 0 0

(1) Eliminate intercompany investment investment and equity accounts of subsidiary sub sidiary at beginning of year and subsidiary dividend. (2) Provide for Year Year 2007 depreciation and and amortizaamortization on differences di fferences between combination date current fair values and carrying carrying amounts of Sisler’s identifiable net assets. (3) Allocate Allocate unamortiz unamortized ed differences differences between between combination date current fair values and carrying amounts of Sisler’s net assets to appropriate accounts. (4) Establish Establish minority minority inter interest est in net assets assets of  subsidiary at beginning of year, year, less minority interest share of dividends declared by subsidiary during year. (Income tax effects are disregarded.) (b) Minority Minority Inter Interest est in Net Net Income Income of Subsidiar Subsidiary y [($120,000 – $9,000) x 0.25] Minority Interest in Net Assets of Subsidiary To establish minority in interest terest in subsidiary’s sub sidiary’s net

2 7 7 5 0 2 7 7 5 0

income for Year 2007.

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Pavich Corporation (concluded)

Pr. 7–8 Retained Earnings of Subsidiary

c.

Date

Explanation

20 06 Sept Sept 30 Close Close net net inco income me not not ava availa ilabl ble e for dividends ($30,750 – $7,500)

Debit

Credit

Balance

2 3 2 5 0

2 3 2 5 0 cr  

2 7 0 0 0

5 0 2 5 0 cr  

20 07 Sept Sept 30 Close Close net net inco income me not not ava availa ilabl ble e for dividends ($83,250 – $56,250)

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McGraw-Hill Companies, Inc., 2006  Modern Advanced Accounting, 10/e

60 Minutes, Medium Plumm Corporation

Pr. 7–9 Plumm Corporation

a.

Journal Entries 20 06 Nov 30 Investment in Stamm Company Common Stock Intercompany Investment Income To record 100% of Stamm Company’s net income for 

9 0 0 0 0 9 0 0 0 0

the year ended Nov. 30, 2006. 30 Intercompany Investment Income Investment in Stamm Company Common Stock

2 0 0 0 0 2 0 0 0 0

To amortize differences between Stamm Company’s assets’ current fair values and carrying carrying amounts on Nov. Nov. 30, 2005 as follows: Inventories—to cost of of goods sold (Income tax effects are disregarded.)

$20,000

30 Cash

3 0 0 0 0

Investment in Stamm Company Common Stock To record receipt of dividends from Stamm Company during Year 2006.

3 0 0 0 0

Plumm Corporation and Subsidiary

b.

Working Paper Eliminations November 30, 2006 (a) Co Common Stock—Stamm Additional Paid-in Capital—Stamm Retained Earnings—Stamm Intercompany Investment Income—Plumm Cost of Goods Sold—Stamm Goodwill—Stamm

8 0 0 0 0 2 0 0 0 0 0 2 2 0 0 0 0 7 0 0 0 0 2 0 0 0 0 4 0 0 0 0

Investment in Stamm Company Common Stock—Plumm

6 0 0 0 0 0

Dividends Declared—Stamm To carry out the following:

3 0 0 0 0

(1) Eliminate intercompany investment investment and equtiy accounts of subsidiary at beginning of Year 2006 and subsidiary dividends. (2) Provide for Year 2006 amortization amortization of differences between between combination date current fair values values and carrying amounts of Stamm’s identifiable net assets. (3) Allocate Allocate unamortiz unamortized ed differences differences between between combination date current fiar values and carrying amounts of Stamm’s net identifiable assets to appropriate assets. (Income tax effects are disregarded.)

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Plumm Corporation (concluded)

Pr. 7–9 Plumm Corporation and Subsidiary

Working Paper for Consolidated Financial Statements November 30, 2006 Eliminations Plumm

Stamm

increase

Corporation

Company

(decrease)

8 0 0 0 0 0

4 1 5 0 0 0

Consolidated

Income Statement

Revenue: Sales Intercompany investment income

7 0 0 0 0

Total revenue

1 2 1 5 0 0 0 (a) ( 7 0 0 0 0 )

8 7 0 0 0 0

4 1 5 0 0 0

5 0 0 0 0 0 2 3 3 3 3 3

1 1 0 0 0 0 1 5 5 0 0 0

2 6 6 6 7

6 0 0 0 0

7 6 0 0 0 0 1 1 0 0 0 0

3 2 5 0 0 0 9 0 0 0 0

2 0 0 0 0 * ( 9 0 0 0 0 )

1 1 0 5 0 0 0 1 1 0 0 0 0

of year Net income

6 4 0 0 0 0 1 1 0 0 0 0

2 2 0 0 0 0 9 0 0 0 0

(a) 2 2 0 0 0 0 ) ( 9 0 0 0 0 )

6 4 0 0 0 0 1 1 0 0 0 0

Subtotals Dividends declared

7 5 0 0 0 0 6 0 0 0 0

3 1 0 0 0 0 3 0 0 0 0

( 3 1 0 0 0 0 ) (a) ( 3 0 0 0 0 )†

7 5 0 0 0 0 6 0 0 0 0

Retained earnings, end of year

6 9 0 0 0 0

2 8 0 0 0 0

( 2 8 0 0 0 0 )

6 9 0 0 0 0

Costs and expenses: expenses: Cost of goods sold Operating expenses Income taxes expense Total costs and expenses Net income

( 7 0 0 0 0 ) (a)

2 0 0 0 0

1 2 1 5 0 0 0 6 3 0 0 0 0 3 8 8 3 3 3 8 6 6 6 7

Statement of Retained Earnings

Retained earnings, beginning

Balance Sheet Assets

Investment in Stamm Company common stock Other Goodwill

6 0 0 0 0 0 1 8 4 0 0 0 0

(a)( 6 0 0 0 0 0 )

Total assets

2 4 4 0 0 0 0

9 6 0 0 0 0

Liabilities

6 5 0 0 0 0

4 0 0 0 0 0

Common stock, $1 par Additonal paid-in capital Retained earnings

5 0 0 0 0 0 6 0 0 0 0 0 6 9 0 0 0 0

8 0 0 0 0 2 0 0 0 0 0 2 8 0 0 0 0

(a) ( 8 0 0 0 0 ) (a)( 2 0 0 0 0 0 ) ( 2 8 0 0 0 0 )

5 0 0 0 0 0 6 0 0 0 0 0 6 9 0 0 0 0

Total liabilities & stockholders’ equity

2 4 4 0 0 0 0

9 6 0 0 0 0

( 5 6 0 0 0 0 )

2 8 4 0 0 0 0

9 6 0 0 0 0 (a)

4 0 0 0 0

( 5 6 0 0 0 0 )

2 8 0 0 0 0 0 4 0 0 0 0 2 8 4 0 0 0 0

Liabilities & Stockholders’ Equity

1 0 5 0 0 0 0

* An An increase in total costs and expenses expenses and a decrease in net income. † A decrease in dividends and an increase in retained earnings.

65 Minutes, Strong

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Ping Corporation

Pr. 7–10 Ping Corporation and Subsidiary

a.

Adjusting Entries December 31, 2006 (1)

Investment in Stang Company Common Stock [($75,000 – $30,000) x 0.80] Intercompany Dividends Receivable ($9,000 x 0.80) Retained Earnings of Subsidiary

3 6 0 0 0 7 2 0 0

[($59,000 – $30,000) x 0.80] Intercompany Investment Investment Income ($25,000 x

2 3 2 0 0

0.80) To convert accounting for investment in subsidiary to

2 0 0 0 0

equity method method from cost method of accounting. (Income tax effects are disregarded.) (2)

Intercompany Investment Income Retained Earnings of Subsidiary

3 2 0 0 9 6 0 0

Investment in Stang Company Common Stock

1 2 8 0 0

To amortize combination date excess of current fair  f air  value over carrying amount of signboard leases as follows: Year 2006: ($20,000 x 1/5 x 0.80 = $3,200) Years 2003 through 2005: ($20,000 x 3/5 x 0.80 = $9,600) (Income tax effects are disregarded.)

Ping Corporation (continued)

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Ping Corporation and Subsidiary

b.

Working Paper for Consolidated Financial Statements December 31, 2006 Eliminations Ping

Stang

increase

Corporation

Corporation

(decrease)

4 2 0 0 0 0

3 0 0 0 0 0

Consolidated

Income Statements

Revenue: Net sales Intercompany investment income

1 6 8 0 0

Total revenue Cost and expenses: Cost of goods sold Other expenses

7 2 0 0 0 0 (a) ( 1 6 8 0 0 )

4 3 6 8 0 0

3 0 0 0 0 0

3 1 5 0 0 0 6 5 0 0 0

2 4 0 0 0 0 3 5 0 0 0

( 1 6 8 0 0 )

7 2 0 0 0 0

(a)

4 0 0 0

5 5 5 0 0 0 1 0 4 0 0 0

(b)

4 2 0 0

4 2 0 0

Minority interest in net income of subsidiary Total costs and expenses

3 8 0 0 0 0

2 7 5 0 0 0

8 2 0 0 *

6 6 3 2 0 0

5 6 8 0 0

2 5 0 0 0

( 2 5 0 0 0 )

5 6 8 0 0

of year Net income

1 5 0 0 0 5 6 8 0 0

5 9 0 0 0 2 5 0 0 0

(a) ( 4 5 4 0 0 ) ( 2 5 0 0 0 )

2 8 6 0 0 5 6 8 0 0

Subtotals Dividends declared

7 1 8 0 0

8 4 0 0 0 9 0 0 0

( 7 0 4 0 0 ) (a) ( 9 0 0 0 )†

8 5 4 0 0

Retained earnings, end of year

7 1 8 0 0

7 5 0 0 0

1 7 2 0 0 0

1 9 9 1 0 0

Net income Statement of Retained Earnings

Retained earnings, beginning

( 6 1 4 0 0 )

8 5 4 0 0

Balance Sheet Assets

Current assets Intercompany dividends receivable (payable) Investment in Stang Company common stock Land Building and equipment Accumulated depreciation

7 2 0 0

Signboard leases (net) Total assets

( 7 2 0 0 )

1 4 3 2 0 0 2 5 0 0 0 2 0 0 0 0 0 ( 1 0 2 0 0 0 )

3 7 1 1 0 0

(a)( 1 4 3 2 0 0 ) 1 0 5 0 0 4 0 0 0 0 ( 7 0 0 0 ) 8 4 0 0

4 4 5 4 0 0

2 4 3 8 0 0

6 0 0 0 0 3 0 0 0 0 0

1 8 0 0 6 7 0 0 0 1 0 0 0 0 0

7 1 8 0 0

7 5 0 0 0

3 5 5 0 0 2 4 0 0 0 0 ( 1 0 9 0 0 0 ) (a)

4 0 0 0

( 1 3 9 2 0 0 )

1 2 4 0 0 5 5 0 0 0 0

Liabilities & Stockholders’ Equity

Dividends payable Other current liabilities Common stock, no par Retained earnings Minority interest in net assets of subsidiary Retained earnings of subsidiary Total liabilities & stockholders’ equity

(a)( 1 0 0 0 0 0 ) ( 6 1 4 0 0 ) (a) (b)

8 5 4 0 0 3 5 8 0 0

(a) ( 1 3 6 0 0 )

1 3 6 0 0 4 4 5 4 0 0

3 1 6 0 0 4 2 0 0

1 8 0 0 1 2 7 0 0 0 3 0 0 0 0 0

2 4 3 8 0 0

( 1 3 9 2 0 0 )

5 5 0 0 0 0

* An An increase in total costs and expenses, etc., and a decrease in net income. in come. †A decrease in dividends and increase in retained earnings.

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Ping Corporation and Subsidiary Working Paper Eliminations December 31, 2006 (a) Co Common Stock—Stang Retained Earnings—Stang ($59,000 – $13,600) Retained Earnings of Subsidiary—Ping ($23,200 – $9,600) Intercompany Investm Investment ent Income—Ping ($20,000 ($20,0 00 – $3,200) Signboard Leases (net)—Stang ($20,000 – $16,000) Other Expenses—Stang ($20,000 x 1/5)

1 0 0 0 0 0 4 5 4 0 0 1 3 6 0 0 1 6 8 0 0 4 0 0 0 4 0 0 0

Investment in Stang Company Common Stock— Ping Dividends Declared—Stang

1 4 3 2 0 0 9 0 0 0

Minority Interest in Net Assets of Subsidiary ($33,400 – $1,800)

3 1 6 0 0

To carry out the following: (1) To eliminate eliminate intercompany intercompany investment investment and equity equity accounts of subsidiary at beginning of year, and subsidiary dividend. (Subsidiary’s beginning retained earnings, $59,000, is reduced by amount recorded in parent company’s account, $13,600.) (2) To establish cost and amortizat amortization ion attributabl attributable e to excess of current fair value over over carrying amount of subsidiary’s signboard leases on date of business combination. (3) To provide for Year 2006 amortization amortization expense expense on excess of combination date current fair fa ir value over  carrying amount of Stang’s signboard leases. (4) To establish establish minority minority interest interest in net assets of  subsidiary at beginning of Year 2006 [($100,000 + $59,000 + $8,000) x 0.20 = $33,400], less minority interest share of dividend declared by subsidiary during Year Year 2006 ($9,000 x 0.20 = $1,800). (Income tax effects are disregarded.) (b) Minority Interest in Net Income of Subsidiary

4 2 0 0

Minority Interest in Net Assets of Subsidiary To establish minority in interest terest in subsidiary’s sub sidiary’s adjusted

4 2 0 0

net income for Year Year 2006 [($25,000 – $4,000) x 0.20 = $4,200].

50 Minutes, Strong Petal Corporation

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Petal Corporation and Subsidiary Consolidated Balance Sheet December 31, 2006 Assets

Cash ($3,500,000 + $625,000) Trade accounts receivable (net) ($1,400,000 + $1,500,000) Inventories ($1,000,000 + $2,500,000)

$ 4 1 2 5 0 0 0 2 9 0 0 0 0 0 3 5 0 0 0 0 0

Plant assets (net) ($2,000,000 + $3,100,000 + $13,100,000 – $500,000) Other assets ($100,000 + $475,000 – $300,000 + $10,000)

17 7 0 0 0 0 0 2 8 5 0 0 0

Goodwill*

2 8 0 0 0 0 0

Total assets

$31 3 1 0 0 0 0 Liabilities & Stockholders’ Equity

Trade accounts payable and other current liabilities ($1,500,000 + $1,100,000)

$ 2 6 0 0 0 0 0

Long-term debt ($4,000,000 + $2,600,000 – $400,000 + $5,000) Other liabilities ($750,000 + $250,000)

6 2 0 5 0 0 0 1 0 0 0 0 0 0

Common stock, $1 par Additional paid-in capital

10 0 0 0 0 0 0 5 0 0 0 0 0 0

Retained earnings

6 5 0 5 0 0 0

Total liabilities & stockholders’ equity

$31 3 1 0 0 0 0

*Computation of goodwill

Cost of Petal Corporation’s investment (1,000,000 shares x $19) Less: Current fair value of Sepal Corporation’s Corporation’s identifiable net assets on date of business comination: Carrying amount of of ne net asset s ($1,000,000 + $400,000 + $1,600,000) Differences between current fair values values and carrying amounts of  identifiable net assets: Plant assets (net) ($16,400,000 – $3,300,000) Other assets ($200,000 – $500,000) Long-term debt ($2,200,000 – $2,600,000) Goodwill

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$19 0 0 0 0 0 0

$3 0 0 0 0 0 0

13 1 0 0 0 0 0 ( 3 0 0 0 0 0 ) 4 0 0 0 0 0

16 2 0 0 0 0 0 $ 2 8 0 0 0 0 0

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