Jeter AA 4e SolutionsManual Ch09

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CHAPTER 9

ANSWERS TO QUESTIONS

1. Constructive retirement refers to the purchase of an affiliate's outstanding bonds from outsiders.

From a consolidated entity viewpoint, the consolidated entity has retired its outstanding debt, and

is thus treated as an early extinguishment of debt. The difference between the carrying value of the

bonds and the purchase price to the purchasing affiliate is the constructive gain or loss on bond

retirement.

2. The gain or loss is composed of two elements: (1) the discount or premium on the books of the

issuer, and (2) the discount or premium paid by the purchaser. Discounts and/or premiums on the

books of the two affiliates will be subsequently amortized to income. The cumulative effect on

income of the amortization of the discount or premium by the two affiliates is equal to the

constructive gain or loss.

3. The allocation of a gain or loss would be made to each affiliate based on whether the affiliate paid

or issued the bonds for more or less than book value or par value. A discount (premium) to the

issuer would be allocated to the issuing company as a loss (gain), whereas a discount (premium) to

the purchasing affiliate would be a gain (loss). The sum of the two is the total constructive gain or

loss.

4. Support for allocating the total gain or loss to the issuing company is based on the contention that

the purchasing affiliate is acting as an agent for the issuing company. Since both companies are

under the control of the management of the parent company, the bonds could be transferred to the

issuing company. Thus, the purchase is in substance a retirement by the issuing company.

5. The noncontrolling interest is affected by the portion of the constructive gain or loss allocated to

the subsidiary. Because the loss is recognized in the consolidated income statement in the year the

bonds are purchased, a discount or premium amortization related to bonds that is made subsequent

to the purchase is added back or is subtracted from the subsidiary's reported income. Such

adjustments will increase or decrease the noncontrolling interest in the income of the subsidiary.

6. a. Investor Company b. Investee Company

Purchase price $338,000 Carrying value $360,000

Par value 350,000 Par value 350,000

Constructive gain $ 12,000 Constructive gain $ 10,000

7. The outside party (the maker of the note) is primarily liable; and Affiliate Y, who discounted the

note with an outside party, is contingently liable for it.

8. Stock dividends are viewed as a distribution of the earliest earnings accumulated in the retained

earnings account.

9. The retained earnings balance at the date of acquisition is reduced since the issuance of a stock

dividend is viewed as a distribution of the earliest earnings accumulated.

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9 - 2

10. A memorandum entry is required to recognize the number of shares received since a dividend in

stock is not considered income to the recipient.

11. In the year of declaration, one additional elimination entry is required to eliminate the effects of the

dividend. In subsequent periods the amounts of this entry are combined with the investment

elimination entry.

12. Preferred stock of a controlled corporation held by others not in the controlled group represents

noncontrolling interest in the controlled corporation. The rights of these shareholders depend on

the stock's preference; possibilities are an interest in net assets, earnings, and retained earnings of

the controlled corporation.

13. Excess of cost over book value is debited to Other Contributed Capital or to Retained Earnings;

excess of book value acquired over cost is credited to Other Contributed Capital.

14. The preferred stock's cumulative preference would increase the net loss allocable to the common

stockholders.

SOLUTIONS TO BUSINESS ETHICS CASE

The responsibility of the management of the company is to present accurately the financial

statements to the shareholders and investors. Accordingly if an error is detected in the books, it

should be rectified as soon as it is discovered so that shareholders and investors are not misled.

Intercompany sales are eliminated in the consolidating process. Failure to do so is a material

omission, particularly when the inventories in question have not been sold to outsiders but

remain in the inventories of the consolidated entity. You should not succumb to the pressure

exerted by the manager of the subsidiary.

SOLUTIONS TO EXERCISES

Exercise 9-1

Part A Cost of bond investment $820,000

Par value $1,000,000

Unamortized discount ($60,000 (16/20)) 48,000

Carrying value of bonds 952,000

Percent of bonds purchased .80

Carrying value of bonds purchased 761,600

Total constructive loss $58,400

Part B Pacelli Company Salez Company

Carrying value of bonds purchased $761,600 Cost of bond investment $820,000

Par value 800,000 Par value of bonds purchased 800,000

Constructive loss $ 38,400 Constructive loss $ 20,000


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Part C June 30 and December 31, 2012

Pacelli Company

Interest Expense (10%)(1/2)($1,000,000) 50,000

Cash 50,000

Interest Expense 3,000

Discount on Bonds Payable 3,000

$60,000 / 20 interest periods = $3,000

Salez Company

Cash 40,000

Interest Income ($800,000)(1/2)(10%) 40,000

Interest Income 1,250

Investment in Pacelli Company Bonds 1,250

$20,000 premium /16 periods = $1,250

Part D

Note: We have provided solutions assuming the use of any of the three methods. Since

the schedules start with the same reported income of Pacelli under all three methods, this

results in three different consolidated net income numbers.

2011 Partial Complete

Cost Method Equity Method Equity Method

Reported net income - Pacelli $260,000 $260,000 $260,000

Less: Dividend income ($60,000)(.80) 48,000

Less: Equity Income ($140,000)(.80) 112,000

Less: Adjusted Equity Income

($112,000-38,400-(80% of 20,000)) 57,600

Net income from independent operations - Pacelli 212,000 148,000 202,400

Less: Constructive loss on bond retirement 38,400 38,400 38,400

Pacelli's contribution to consolidated income 173,600 109,600 164,000

Reported net income of Salez $140,000

Less: Constructive loss on bond retirement 20,000

Salez's contribution to consolidated income 120,000

.80 96,000 96,000 96,000

Controlling interest in consolidated net income $269,600 $205,600 $260,000

Noncontrolling interest in consolidated income

($120,000 .20) $24,000 $24,000 $24,000


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Exercise 9-1 (continued)

Partial Complete

2012 Cost Method Equity Method Equity Method

Reported net income - Pacelli $280,000 $280,000 $280,000

Less: Dividend income ($60,000)(.80) 48,000

Less: Equity income ($190,000)(.80) 152,000

Less: Adjusted Equity income

($152,000 + $4,800 + (.80 $ 158,800

Net income from independent operations - Pacelli 232,000 128,000 121,200

Add: Constructive loss recorded* 4,800 4,800 4,800

Pacelli's contribution to consolidated income 236,800 132,800 126,000

Reported net income of Salez $190,000

Add: Constructive loss recorded** 2,500

Salez's contribution to consolidated income 192,500

0.80 154,000 154,000 154,000



($192,500 .20) $38,500 $38,500 $38,500

*($3,000 .80) = $4,800 or constructive loss divided by 8 years = $38,400/8 years = $4,800

** Constructive loss divided by 8 years = $20,000/8 = $2,500 Exercise 9-2 December 31, 2011 Cost and Partial Equity Complete Equity Loss on Constructive Retirement of Bonds 38,400 38,400

Discount on Bonds Payable 38,400 38,400 Loss on Constructive Retirement of Bonds 20,000 20,000

Investment in Pacelli Company Bonds 20,000 20,000 Bonds Payable 800,000 800,000

Investment in Pacelli Company Bonds 800,000 800,000 December 31, 2012 Beginning Retained Earnings - Pacelli Company 38,400

Discount on Bonds Payable 38,400 Investment in Salez 38,400

Discount on Bonds Payable 38,400 Discount on Bonds Payable 4,800 4,800

Interest Expense (($3,000 + $3,000) .80) 4,800 4,800


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Exercise 9-2 (continued) Cost and Partial Equity Complete Equity Beginning Retained Earnings - Pacelli 16,000 Noncontrolling Interest 4,000

Investment in Pacelli Company Bonds 20,000 Investment in Salez 16,000 Noncontrolling Interest 4,000

Investment in Pacelli Company Bonds 20,000

Investment in Pacelli Company Bonds 2,500 2,500 Interest Income ($1,250 + $1,250) 2,500 2,500

Interest Income 80,000 80,000

Interest Expense 80,000 80,000

Nominal interest of $100,000 .80 = $80,000 Bonds Payable 800,000 800,000

Investment in Pacelli Company 800,000 800,000 December 31, 2013 Cost and Partial Equity Complete Equity Beginning Retained Earnings - Pacelli 38,400

Discount on Bonds Payable 38,400 Discount on Bonds Payable 9,600

Beginning Retained Earnings - Pacelli 4,800

Interest Expense (($3,000 + $3,000) .80) 4,800 Investment in Salez 38,400


Investment in Salez 4,800

Interest Expense (($3,000 + $3,000) .80) 4,800 Beginning Retained Earnings - Pacelli 16,000 Noncontrolling Interest 4,000

Investment in Pacelli Company Bonds 20,000 Investment in Pacelli Company Bonds 5,000

Beginning Retained Earnings - Pacelli 2,000 Noncontrolling Interest 500 Interest Income ($1,250 + $1,250) 2,500


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Exercise 9-2 (continued) Cost and Partial Equity Complete Equity Investment in Salez 16,000 Noncontrolling Interest 4,000

Investment in Pacelli Company Bonds 20,000 Investment in Pacelli Company Bonds 5,000

Investment in Salez 2,000 Noncontrolling Interest 500 Interest Income ($1,250 + $1,250) 2,500




Investment in Pacelli Company 800,000 800,000 Exercise 9-3

Part A Cost of bond investment ($510,000 .90) $459,000 Par value $850,000

Unamortized premium ($42,500 ) 34,000 Carrying value of bonds 884,000 Percent of bonds purchased (510/850) .60 Carrying value of bonds purchased 530,400 Total constructive gain $71,400 Part B Fairfield Company Weber Company Cost of bond investment $459,000 Carrying value of bonds purchased $530,400 Par value 510,000 Par value 510,000 Constructive gain $ 51,000 Constructive gain $ 20,400 Part C June 30 and December 31, 2012

Fairfield Company

Cash ($510,000 .1012

6) 25,500

Interest Income 25,500 Investment in Weber Company Bonds 6,375

Interest Income 6,375 $51,000 / 8 periods = $6,375


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Weber Company Interest Expense 42,500

Cash ($850,000 .1012

6) 42,500

Premium on Bonds 4,250 Interest Expense 4,250 $34,000 / 8 periods = $4,250 Part D

Note: We have provided solutions assuming the use of any of the three methods. Since

the schedules start with the same reported income of Fairfield under all three methods, this

results in three different consolidated net income numbers.

2011 Partial Complete Cost Method Equity Method Equity Method Reported net income - Fairfield $275,000 $275,000 $275,000

Less: Dividend income ($60,000 .90) 54,000 Less: Equity income ($190,000)(.90) 171,000 Less: Adjusted Equity income (171,000+51,000 + .9(20,400)) 240,360 Net income from independent operations Fairfield 221,000 104,000 34,640 Add: Constructive gain on bond retirement 51,000 51,000 51,000 Fairfield's contribution to consolidated income 272,000 155,000 85,640 Reported net income - Weber $190,000 Add: Constructive gain on bond retirement 20,400 Weber's contribution to consolidated income 210,400

.90 189,360 189,360 189,360 Controlling interest in consolidated net income $461,360 $344,360 $275,000 Noncontrolling interest in consolidated income

($210,400 .10) $21,040 $21,040 $21,040


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Exercise 9-3 (continued) 2012 Partial Complete Cost Method Equity Method Equity Method Reported net income - Fairfield $350,000 $350,000 $350,000 Less: Dividend income ($80,000 .90) 72,000 Less Equity income ($225,000)(.90) 202,500 Less: Adjusted Equity income ($202,500 - $12,750 - (.9)5,100) 185,160 Net income from independent operations - Fairfield 278,000 147,500 164,840 Less: Constructive gain recorded* 12,750 12,750 12,750 Fairfield's contribution to consolidated income 265,250 134,750 152,090 Reported net income - Weber $225,000 Less: Constructive gain recorded** 5,100 Weber's contribution to consolidated income 219,900 .90 197,910 197,910 197,910 Controlling interest in consolidated net income $463,160 $332,660 $350,000 Noncontrolling interest in consolidated income ($219,900 .10) $21,990 $21,990 $21,990 * $6,375 2 = $12,750 or $51,000/4 periods = $12,750 **$4,250 .60 = $2,550; $2,550 2 = $5,100 Exercise 9-4 December 31, 2011 Cost and Partial Equity Complete Equity

Premium on Bonds Payable ($34,000 .60) 20,400 20,400 Constructive Gain on Bond Retirement 20,400 20,400

Investment in Weber Company Bonds 51,000 51,000

Constructive Gain on Bond Retirement 51,000 51,000 Bonds Payable 510,000 510,000



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Exercise 9-4 (continued) December 31, 2012 Cost and Partial Equity Complete Equity Investment in Weber Co. Bonds 51,000

Beginning Retained Earnings - Fairfield 51,000 Investment in Weber Co. Bonds 51,000

Investment in Weber Co. Stock 51,000

Interest Income ($6,375 12,750 12,750 Investment in Weber Company Bonds 12,750 12,750

Premium on Bonds Payable 20,400

Beginning Retained Earnings - Fairfield 18,360 Noncontrolling Interest 2,040


Investment in Weber Co. Stock 18,360 Noncontrolling Interest 2,040

Interest Expense (($4,250 2) .60) 5,100 5,100 Premium on Bonds Payable 5,100 5,100


Interest Expense 51,000 51,000 Bonds Payable 510,000 510,000



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December 31, 2013 Cost and Partial Equity Complete Equity Investment in Weber Co. Bonds 51,000

Beginning Retained Earnings - Fairfield 51,000 Investment in Weber Co. Bonds 51,000

Investment in Weber Co. Stock 51,000 Beginning Retained Earnings Fairfield 12,750 Interest Income ($6,375 12,750 12,750

Investment in Weber Company Bonds 25,500 12,750 Investment in Weber Co. Stock 12,750

Interest Income ($6,375 12,750 Investment in Weber Company Bonds 25,500


Beginning Retained Earnings - Fairfield 18,360 Noncontrolling Interest 2,040


Investment in Weber Co. Stock 18,360 Noncontrolling Interest 2,040

Beginning Retained Earnings Fairfield 4,590 Noncontrolling Interest 510

Interest Expense (($4,250 2) .60) 5,100 Premium on Bonds Payable 10,200

Investment in Weber Co. Stock 4,590 Noncontrolling Interest 510

Interest Expense (($4,250 2) .60) 5,100 Premium on Bonds Payable 10,200


Interest Expense 51,000 51,000 Bonds Payable 510,000 510,000



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Exercise 9-5

1. Carrying value of debt - 1/2/2011 $505,000

Less: Premium amortization - (($5,000/20) 2 periods) 500

Carrying value of debt - 12/31/2011 $504,500

2. Stated interest (30% of $500,000 .11) $16,500

Add: Discount amortization (($10,000/20) 2 periods) 1,000

Interest revenue $17,500

3. Stated interest ($500,000 .11) $55,000

Less: Premium amortization ($5,000/20)(2) 500

Interest expense $54,500

4. Cost of bond investment (1/2/2011) $140,000

Add: Discount amortization * 1,000

Investment account balance - 12/31/2011 $141,000

* $500,000 par 30% less $140,000 paid divided by 10 years = $1,000


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5. Reported net income - Peoples $300,000

Less: Dividend income ($90,000 .80) 72,000

Independent net income 228,000

Add: Constructive gain on bond retirement 10,000

Less: Constructive gain recorded during year (1,000)

Contribution of Peoples to consolidated income 237,000

Reported net income - Schmidt $320,000

Less: amortization of difference between implied and

book value - COGS (60,000)

Add: Constructive gain on bond retirement

($505,000 - $500,000) .30 = 1,500

Less: Constructive gain recorded during year (150)

Income after adjustment for constructive gain 261,350

.80

Parent's share of adjusted income 209,080

Controlling interest in consolidated net income $446,080

Computation and Allocation of Difference between Implied and Book Value Acquired

Parent Non- Entire

Share Controlling Value

Share

Purchase price and implied value $900,000 225,000 1,125,000

Less: Book value of equity acquired: 800,000 200,000 1,000,000

Difference between implied and book value 100,000 25,000 125,000

Allocated to inventory (48,000) (12,000) (60,000)

Balance 52,000 13,000 65,000

Goodwill (52,000) (13,000) (65,000)

Balance - 0 - - 0 - - 0

6. Noncontrolling interest in consolidated income $261,350 .20 = $52,270

Exercise 9-6

Part A Face (Par) value of note $60,000

Interest ($60,000 .12 ) 1,800

Maturity value 61,800

Less: Discount ($61,800 .13 ) 1,339

Proceeds $60,461


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Part B Parent Wyatt Elimination Consolidated

Company Corporation Entries Balances

Dr (Cr) Dr (Cr) Debit Credit Dr (Cr)

Notes Receivable 60,000 60,000 60,000* 60,000

Notes Receivable Discounted (60,000) (60,000) 60,000* (60,000)

*Elimination entry

Notes Receivable Discounted 60,000

Notes Receivable 60,000

The results of the elimination entry is to show that the consolidated entity has a contingent liability for

$60,000.

Exercise 9-7

Part A Memorandum entry - Received a stock dividend of 1,050 shares of Salata Company common

stock (7,000 shares .15)

Part B Investment in Salata Company 70,000

Beginning Retained Earnings - Perez 70,000

($500,000 - $400,000) .70 = $70,000

Common Stock ((1,500 shares $100) .70) 105,000

Other Contributed Capital ((1,500 $60) .70) 63,000

Stock Dividend Declared 168,000

((10,000 shares .15 $160) .70 = $168,000)

Beginning Retained Earnings Salata 500,000

Other Contributed Capital 100,000

Common Stock 1,000,000

Land (Difference between Implied and Book Value) 285,714

Investment in Salata Company ($1,250,000 + $70,000) 1,320,000

Noncontrolling interest [$535,714* + ($500,000 400,000) x .30] 565,714

* $1,250,000/.7 = $1,785,714 x .3 = $535,714

Part C Investment in Salata Company ($180,000 .70) 126,000

Beginning Retained Earnings - Perez 126,000

Retained earnings balance 1/1/2012

($500,000 + $80,000 - $240,000*) $340,000

Retained earnings balance - date of acquisition $400,000

Less: Stock dividend 240,000 160,000

Increase in retained earnings $180,000

* (($1,000,000/$100) .15 $160)


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Exercise 9-8

Part A 2011

Cash ($90,000 .90) 81,000

Investment in Swartz Corporation 81,000

2012

Cash ($40,000 .9) 36,000


Part B Equity in Subsidiary Income ($65,000)(.90) 58,500


Dividends Declared ($90,000 .90) 81,000

Common Stock - Swartz Corporation 500,000

Beginning Retained Earnings - Swartz Corporation 200,000

Difference between Implied and Book Value 100,000


Noncontrolling interest 80,000

Land 100,000


Part C Equity in Subsidiary Income ($80,000)(.90) 72,000



Retained earnings - 1/1/2013 ($200,000 + $65,000 - $90,000 + $80,000 - $40,000) $215,000

Common Stock - Swartz Corporation 500,000

Beginning Retained Earnings - Swartz Corporation 215,000



Noncontrolling interest [$80,000 + ($215,000 200,000) x .10] 81,500

Land 100,000


Cost of investment $720,000

Equity income (2011), .90 $65,000 58,500

Dividends (2011), .90 $90,000 (81,000)

Equity income (2012), .90 $80,000 72,000

Dividends (2012), .90 $90,000 (81,000)

Investment account $733,500

Part D 2011

Cash ($90,000 .90) 81,000

Dividend Income ($65,000 .90) 58,500



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2012

Cash ($40,000 .9) 36,000

Dividend Income 36,000

Exercise 9-9

Part A Cost Method Investment in Sung Company Preferred Stock 70,000 Investment in Sung Company Common Stock 400,000

Cash 470,000 Cash (preferred stock) 14,400

Dividend Income ($200,000 12% 30%) 7,200 Investment in Sung Company Preferred Stock 7,200

($200,000 12% 30%)

Cash ($50,000 - $48,000) 80%) 1,600 Dividend Income (common stock) 1,600

Equity Method (complete and partial) Investment in Sung Company Preferred Stock 70,000 Investment in Sung Company Common Stock 400,000

Cash 470,000 Cash (preferred stock) 14,400

Equity in Subsidiary Income Preferred Stock 7,200 Investment in Sung Company Common Stock 7,200

Cash 1,600 Investment in Sung Company Common Stock 1,600

Investment in Sung Company Common Stock 52,800

Equity in Subsidiary Income ($90,000 ($200,000 .12))(.80) 52,800

Preferred Common Stock Stock Arrears $24,000 Current year 24,000 $2,000 Total 48,000 2,000 Percentage interest .30 .80 $14,400 $1,600


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Part B Reported net income - 2011 $90,000

Allocation to preferred stock interest ($200,000 .12) 24,000 .70 = $16,800

Residual to common stock interest $66,000 .20 = 13,200 Noncontrolling interest in 2011 net income $30,000

Part C Cost Method Investment in Sung Company Preferred Stock 7,200

Dividends Declared 7,200 Dividend Income 8,800

Dividends Declared 8,800 Beginning Retained Earnings - Sung Company 24,000 Preferred Stock 200,000 Other Contributed Capital (or Retained Earnings) 9,333

Investment in Sung Company Preferred Stock 70,000 Noncontrolling interest 163,333

Computation and Allocation of Difference between Implied and Book Value Acquired (Preferred)

Parent Non- Entire


Share

Purchase price and implied value $70,000 163,333 233,333

Less: Book value of equity acquired

Preferred Stock (60,000) (140,000) (200,000)

Retained Earnings (dividends in arears) (7,200) (16,800) (24,000)


Beginning Retained Earnings - Sung Company ($100,000 - $24,000) 76,000 Common Stock 400,000 Land (Difference between Implied and Book Value)* 24,000

Investment in Sung Company Common Stock 400,000 Noncontrolling interest 100,000

[$500,000 - $400,000 ($100,000-$24,000)] = $24,000

Equity Method (complete and partial) Investment in Sung Company Preferred Stock 7,200 Investment in Sung Company Common Stock 7,200

Dividends Declared Preferred Stock 14,400

Equity in Subsidiary Income 52,800 Dividends declared Common Stock 1,600 Investment in Sung Company Common Stock 51,200


9 - 17

Exercise 9-9 (continued) Beginning Retained Earnings - Sung Company 24,000 Preferred Stock 200,000 Other Contributed Capital (or Retained Earnings) 9,333

Investment in Sung Company Preferred Stock 70,000 Noncontrolling interest 163,333

Beginning Retained Earnings - Sung Company

($100,000 - $24,000) 76,000 Common Stock 400,000 Land (Difference between Implied and Book Value) 24,000

Investment in Sung Company Common Stock 400,000 Noncontrolling interest 100,000

Exercise 9-10

Case 1 Case 2 Case 3

Beginning Retained Earnings - Sam'sa 2,000 11,600 9,000

Preferred Stock 40,000 40,000 40,000

Other Contributed Capital* 13,000 3,400 6,000

Investment in Preferred Stock 55,000 55,000 55,000

* The difference between the implied value of the preferred stock investment and the book value

acquired is not allocated to specific assets or liabilities, but rather is accounted for as an equity

transaction and debited to Other Contributed Capital.

Beginning Retained Earnings - Sam'sa 105,000

81,000 87,500

Common Stock 500,000 500,000 500,000

Other Contributed Capital 160,000 160,000 160,000

Land (difference between

implied & book value) 151,667 175,667 169,167

Investment in Common Stock 550,000 550,000 550,000

Noncontrolling interest 366,667 366,667 366,667

aAllocation of Retained Earnings of $110,000:

Case 1 Case 2 Case 3

To Preferred Stock $5,000 $29,000 $22,500

To Common Stock 105,000 81,000 87,500

$110,000 $110,000 $110,000

Par value $100,000 $100,000 $100,000

Call premium 5,000 5,000 5,000

Dividends in arrears 24,000

Fully participating (1/6)(110-5) ______ ______ 17,500

Total 105,000 129,000 122,500

Par value 100,000 100,000 100,000

Retained earnings to preferred 5,000 29,000 22,500

Petersons percentate 40% 40% 40%

Beginning Retained Earnings Sams 2,000 11,600 9,000


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Alternatively: $5,000 + ($100/$100+$500) $105,000 = $5,000 + $17,500 = $22,500;

600$

500$$105,000 = $87,500

Exercise 9-11

Cost Method

Case 1 2 3 4

Reported net income - Perez Co. $200,000 $200,000 $200,000 $200,000

Less: Dividend incomea 32,800 20,000 31,500 25,900

Independent income 167,200 180,000 168,500 174,100

Perez Company's interest in net income of Serranob 60,800 60,800 56,000 56,000

Controlling interest in consolidated net income $228,000 $240,800 $224,500 $230,100

a Computation of dividend income

Preferred Stock Common

Case 1 Noncumulative, nonparticipating Arrears* Current Stock Total

Current $8,000 $37,000 $45,000

.4 .8

$3,200 $29,600 $32,800

Case 2 Cumulative and nonparticipating

Arrears ($100,000 .08 2) $16,000 $16,000

Current ______ $8,000 $21,000 29,000

$16,000 8,000 21,000 $45,000

.4 .8

$3,200 $16,800 $20,000

Preferred Stock Common

Case 3 Noncumulative and fully participating Arrears* Current Stock Total

Current $8,000 $24,000 (1) $32,000

Participating:

($100/$400) $13,000 3,250

($300/$400) $13,000 ______ 9,750 13,000

$11,250 $33,750 $45,000

.4 .8

$4,500 $27,000 $31,500 (1) $300,000 .08


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Case 4 Cumulative and fully participating

Arrears ($100,000 .08) $8,000 $8,000

Current $8,000 $24,000 32,000

Participating:

($100/$400) $5,000 1,250

($300/$400) $5,000 _____ _____ 3,750 5,000

$8,000 9,250 27,750 $45,000

.4 .8

$3,700 $22,200 $25,900

*Dividends in arrears at date of acquisition are accounted for as a liquidating dividend.

b Allocation of reported net income of Serrano, $80,000

Cases 1 and 2 Preferred Stock $8,000 .4 = $3,200

Common Stock ($80,000 - $8,000) $72,000 .8 = 57,600

Total $60,800

Cases 3 and 4 Preferred Common

Stock Stock Total

Current year $8,000 $24,000 $32,000

Participating

($100/$400) $48,000 12,000

($300/$400) $48,000 _____ 36,000 48,000

20,000 60,000 $80,000

.4 .8

$8,000 $48,000 $56,000


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Exercise 9-12

Part A Cost of bond investment $77,362

Par value $100,000

Unamortized discount 6,462

Carrying value of bonds 93,537

Percent of bonds purchased .80

Carrying value of bonds purchased (rounded up) 74,830

Total constructive loss $2,532

Part B Pacman Company Space Invaders Company

Carrying value of bonds purchased $74,830 Cost of bond investment $77,362

Par value 80,000 Par value of bonds purchased 80,000

Constructive loss $ 5,170 Constructive gain $ 2,638

Part C July 1 and January, 2012

Pacman Companys amortization schedule

Date

(a)

Interest

Expense

(10%)

(b)

Cash

Payment

(c)

Discount

Amortization

(a-b)

(d)

Carrying value

(on Balance

Sheet)

12/31/2009 $ 92,278

6/30/2010 4,614 4,000 614 92,892

12/31/2010 4,645 4,000 645 93,537

6/30/2011 4,677 4,000 677 94,214

12/31/2011 4,711 4,000 711 94,925

6/30/2012 4,746 4,000 746 95,671

12/31/2012 4,783 4,000 783 96,454

6/30/2013 4,823 4,000 823 97,277

12/31/2013 4,864 4,000 864 98,141

6/30/2014 4,907 4,000 907 99,048

12/31/2014 4,952 4,000 952 100,000


9 - 21


Space Invaders Companys amortization schedule

Date

(a)

Interest

Income

(b)

Cash

Receipt

(c)

Premium

Amortization

(d)

Carrying value

(on Balance

Sheet)

12/31/2010 77,362

6/30/2011 3,481 3,200 281 77,643

12/31/2011 3,494 3,200 294 77,937

6/30/2012 3,507 3,200 307 78,244

12/31/2012 3,521 3,200 321 78,565

6/30/2013 3,535 3,200 335 78,900

12/31/2013 3,551 3,200 351 79,251

6/30/2014 3,566 3,200 366 79,617

12/31/2014 3,583 3,200 383 80,000

June 30, 2011

Pacman Company


Cash 4,000

Interest Expense 677

Discount on Bonds Payable 677

Space Invaders Company

Cash 3,200

Interest Income ($80,000)(1/2)(8%) or (0.80)(4,000) 3,200

Investment in Pacman Company Bonds 281

Interest Income 281

December 31, 2011

Pacman Company


Cash 4,000

Interest Expense 711

Discount on Bonds Payable 711

Space Invaders Company

Cash 3,200

Interest Income ($80,000)(1/2)(8%) or (0.80)(4,000) 3,200

Interest Income 294

Investment in Pacman Company Bonds 294


9 - 22


Part D

Note: We have provided solutions assuming the use of any of the three methods.

2010 Partial Complete

Cost Method Equity Method Equity Method

Reported net income - Pacman $260,000 $316,000 $312,677

Less: Dividend income ($60,000)(.70) -42,000

Less: Equity Income ($140,000)(.70) -98,000

Less: Adjusted Equity Income

($98,000 - 5,170 + (70% of 2,638)) -94,677

Net income from independent operations - Pacman 218,000 218,000 218,000

Less: Constructive loss on bond retirement -5,170 -5,170 -5,970

Pacman contribution to consolidated income 212,830 212,830 212,830

Reported net income of Space Invaders $140,000


Space Invaders contribution

to consolidated income 142,638

.70 99,847 99,847 99,847



($142,638 .30) $42,791 $42,791 $42,791


9 - 23

Partial Complete

2011 Cost Method Equity Method Equity Method

Reported net income - Pacman $280,000 $371,000 $371,708

Less: Dividend income ($60,000)(.70) -42,000

Less: Equity income ($190,000)(.70) -133,000

Less: Adjusted Equity income

($133,000 + ($677 +711) - (.70 281+294))) -133,708

Net income from independent operations - Pacman 238,000 238,000 238,000

Add: Constructive loss recorded* (677+711) 1,110 1, 110 1, 110

Pacman contribution to consolidated income 239,388 239,388 239,388

Reported net income of Space Invaders $190,000

Less: Constructive gain recorded** 575

Space Invaders contribution to

consolidated income 189,425

0.70 132,598 132,598 132,598



($189,425 .30) $56,828 $56,828 $56,828

* discount amortized ($677+711)

** discount amortized (281+294)


9 - 24

Exercise 9-13 December 31, 2010 Cost and Partial Equity Complete Equity Loss on Constructive Retirement of Bonds 5,170 5,170

Discount on Bonds Payable 5,170 5,170 Investment in Pacman Company Bonds 2,638 2,638

Gain on Constructive Retirement of Bonds 2,638 2,638 Bonds Payable 80,000 80,000

Investment in Pacman Company Bonds 80,000 80,000 December 31, 2011 Cost and Partial Equity Complete Equity Beginning Retained Earnings - Pacman Company 5,170

Discount on Bonds Payable 5,170 Investment in Space Invaders 5,170

Discount on Bonds Payable 5,170 Discount on Bonds Payable 1,110 1,110

Interest Expense (($677 + $711) .80) 1,110 1,110 Beginning Retained Earnings Pacman (70%) 1,847 Noncontrolling Interest (30%) 791

Investment in Pacman Company Bonds 2,638 Investment in Space Invaders (70%) 1,847 Noncontrolling Interest (30%) 791

Investment in Pacman Company Bonds 2,638

Investment in Pacman Company Bonds 575 575 Interest Income ($281 + $294) 575 575

Interest Income (intercompany interest) 6,400 6,400



Investment in Pacman Company 80,000 80,000


9 - 25

December 31, 2012 Cost and Partial Equity Complete Equity Beginning Retained Earnings - Pacman 5,170


Beginning Retained Earnings - Pacman 1,110

Interest Expense ((746 + 783) .80) 1,223 Investment in Space Invaders 5,170


Investment in Space Invaders 1,110

Interest Expense ((746 + 783) .80) 1,223 Investment in Pacman Company Bonds 2,638 Beginning Retained Earnings Pacman (70%) 1,847 Noncontrolling Interest (30%) 791 Beginning Retained Earnings - Pacman 402.5 Noncontrolling Interest 172.5 Interest Income ($307 + $321) 628.0 Investment in Pacman Company Bonds 1,203 Investment in Pacman Company Bonds 2,638 Beginning Retained Earnings Pacman (70%) 1,847 Noncontrolling Interest (30%) 791 Beginning Retained Earnings - Pacman 402.5 Noncontrolling Interest 172.5 Interest Income ($307 + $321) 628.0 Investment in Pacman Company Bonds 1,203 Interest Income 6,400 6,400



Investment in Pacman Company 80,000 80,000


9 - 26

SOLUTIONS TO PROBLEMS

Problem 9-1 Case 1 2

Part A Issue price $512,000 $488,000 Amortization 2006 to 2009 ($12,000/10) 3 3,600 3,600 Carrying value - 1/1/2005 508,400 491,600 Purchase price 514,000 486,000 Total constructive gain (loss) $ (5,600) $ 5,600 Pace Corporation Carrying value - 1/1/2009 $508,400 $491,600 Par value 500,000 500,000 Constructive gain (loss) $ 8,400 $ (8,400) Supra Corporation Purchase price $514,000 $486,000 Par value 500,000 500,000 Constructive gain (loss) $ (14,000) $ 14,000

Part B Pace Corporation

Case 1 Interest Expense ($500,000 .15 ) 37,500 Cash 37,500

Premium on Bonds Payable ($12,000/20) 600

Interest Expense 600 Case 2 Interest Expense 37,500

Cash 37,500 Interest Expense 600

Discount on Bonds Payable ($12,000/20) 600

Supra Corporation Case 1 Cash 37,500

Interest Income ($500,000 .15 6/12) 37,500 Interest Income 1,000

Investment in Pace Corp. Bonds ($14,000/14) 1,000 Case 2 Cash 37,500

Interest Income 37,500 Investment in Pace Corp. Bonds ($14,000/14) 1,000



9 - 27

Problem 9-1 (continued)

Part C

Issue Price

Pace Corporation $512,000 $488,000

Bonds Payable $500,000 $500,000

Unamortized Premium (discount) after 4 years ($12,000 ($1,200 x 4) 7,200 (7,200)

Carrying Value of Bonds $507,200 $492,800

Cash Payment for Interest - 2009 $75,000 $75,000

(Premium) Discount Amortization (per year) (1,200) 1,200

Bond Interest Expense - 2009 $73,800 $76,200

Increase (decrease) in Net Income from Amortization $1,200 $(1,200)

Purchase Price

Supra Corporation $514,000 $486,000

Investment in Pace Corp. Bonds $512,000 $488,000

Cash Receipts for Interest - 2009 $75,000 $75,000

(Premium) Discount Amortization ($14,000/7) (2,000) 2,000

Bond Interest Income - 2009 $73,000 $77,000

Increase (decrease) in Net Income from Amortization $(2,000) $2,000

Case

1 2 3 4

Amount of constructive gain (loss) recognized by Pace Corporation $1,200 $(1,200) $1,200

$(1,200)

Amount of constructive gain (loss) recognized by Supra Corporation (2,000) 2,000 2,000

(2,000)

Part D

Case 1 Premium on Bonds Payable 8,400

Gain on Constructive Retirement of Debt 8,400



Loss on Constructive Retirement of Debt 14,000

Investment in Pace Corporation Bonds 14,000





Bonds Payable 500,000


9 - 28



Case 2 Loss on Constructive Retirement of Debt 8,400




Investment in Pace Corp. Bonds 14,000

Gain on Constructive Retirement of Debt 14,000


Investment in Pace Corp. Bonds 2,000



Bonds Payable 500,000


Problem 9-2

Part A Prezo Company

Purchase price of bonds $225,000

Par value of bonds ($400,000 .60) 240,000

Constructive gain $ 15,000

Satz Company

Premium amortization per period:

Premium balance 12/31/2009 $9,000

Number of interest periods to maturity 6

Amortization per period $1,500

Bonds Payable $400,000

Unamortized premium ($9,000 + $1,500) 10,500

Carrying value - 7/1/2009 410,500

.60

Carrying value of bonds retired 246,300

Par value 240,000



9 - 29

Problem 9-2 (continued) PREZO COMPANY AND SUBSIDIARY

Consolidated Statements Workpaper

Part B For the Year Ended December 31, 2009

Prezo Salz Eliminations Noncontrolling Consolidated

Company Company Dr. Cr. Interest Balances

Income Statement

Sales 2,680,000 1,860,000 4,540,000

Dividend Income 120,000 (7) 120,000

Other Income 266,000 120,000 (2) 2,143

(5) 12,000 371,857

Gain on Constructive (1) 15,000

Retirement of Bonds (3) 6,300 21,300

Total Revenue 3,066,000 1,980,000 4,933,157

Expenses 2,678,000 1,580,000(4) 900(5) 12,000 4,246,900

Net/Consolidated Income 388,000 400,000 686,257

Noncontrolling Interest in Consolidated Income

($400,000 + $6,300 - $900) .20 81,080 (81,080)

Net Income to Retained Earnings 388,000 400,000 135,043 33,300 81,080 605,177

Retained Earnings Statement

1/1 Retained Earnings:

Prezo Company 480,000 480,000

Satz Company 300,000 (8) 300,000

Net Income from above 388,000 400,000 135,043 33,300 81,080 605,177

Dividends Declared:

Prezo Company (250,000) (250,000)

Satz Company (150,000) (7) 120,000 (30,000)

12/31 Retained Earnings to Balance Sheet 618,000 550,000 435,043 153,300 51,080 835,177


9 - 30

Problem 9-2 (continued) Prezo Salz Eliminations Noncontrolling Consolidated


Balance Sheet

Current Assets 920,000 580,000 1,500,000

Investment in Satz Company Common Stock 880,000 (8) 880,000

Investment in Satz Co. Bonds 227,143 (1) 15,000 (2) 2,143

(6) 240,000

Other Assets 2,345,457 1,320,000 3,665,457

Total Assets 4,372,600 1,900,000 5,165,457

Bonds Payable 700,000 400,000 (6) 240,000 860,000

Premium on Bonds Payable 20,000 9,000 (3) 6,300 (4) 900 23,600

Other Liabilities 1,434,600 141,000 1,575,600

Common Stock

Prezo Company 1,600,000 1,600,000

Satz Company 800,000 (8) 800,000

Retained Earnings from above 618,000 550,000 435,043 153,300 51,080 835,177

Noncontrolling Interest in Net Assets (8) 220,000 220,000

271,080 271,080

Total Liabilities and Equity 4,372,600 1,900,000 1,496,343 1,496,343 5,165,457


9 - 31


Explanations of workpaper entries

(1) Investment in Satz Company Bonds 15,000

Constructive Gain on Bond Retirement 15,000

To recognize constructive gain and adjust the bond investment to par value

(2) Interest Income ($15,000 gain/7 periods) 2,143

Investment in Satz Company Bonds 2,143

To adjust interest income for the gain recorded this period

(3) Premium on Bonds Payable 6,300

Constructive Gain on Bond Retirement 6,300

To recognize constructive gain and adjust the intercompany bonds to par value

(4) Interest Expense ($6,300 gain/7 periods = $900) 900

Premium on Bonds Payable 900

To adjust interest expense for the gain recorded this period

(5) Interest Income ($240,000 .10 ) 12,000


To eliminate intercompany interest.

(6) Bonds Payable 240,000

Investment in Satz Company Bonds 240,000

To eliminate intercompany bond investment and liability

(7) Dividend Income 120,000

Dividends Declared 120,000

To eliminate intercompany dividends

(8) Beginning Retained Earnings Satz 300,000

Common Stock Satz 800,000

Investment in Satz Company Common Stock 880,000


To eliminate investment account and create noncontrolling interest account

Part C Income of Prezo from independent operations ($388,000 - $120,000) $268,000


Less: Portion of constructive gain recorded this period ($15,000/7) (2,143)

Prezo's contribution to combined income 280,857

Reported net income of Satz $400,000


Less: Portion of constructive gain recorded this period (900)

Satz's contribution to consolidated income 405,400

Prezos percentage .80 324,320

Controlling interest in consolidated net income $605,177


9 - 32

Problem 9-3 PASTA COMPANY AND SUBSIDIARY

Consolidated Statement Workpaper

Part A For the Year Ended December 31, 2011

Pasta Salsa Eliminations Noncontrolling Consolidated


Income Statement

Sales 370,000 200,000 570,000

Other Revenues 15,000 2,000 17,000

Total Revenue 385,000 202,000 587,000

Cost of Goods Sold 180,000 110,000 290,000

Other Expenses 80,000 30,000 110,000

Gain or Loss on Constructive Retirement of Bonds (3) 1,500 (2) 6,000 (4,500)

Total Cost & Expense 260,000 140,000 395,500


Noncontrolling Interest in Consolidated Income* 12,100 (12,100)


*($62,000 - $1,500) .20 = $12,100



Pasta Company 96,000 96,000

Salsa Company 85,000 (5) 85,000


Dividends Declared:

Pasta Company (30,000) (30,000)

Salsa Company - Stock (30,000) (1) 24,000 (6,000)



9 - 33

Problem 9-3 (continued) Pasta Salsa Eliminations Noncontrolling Consolidated


Balance Sheet

Current Assets 171,000 169,000 340,000

Investment in Salsa Company Stock 148,000 (5) 148,000

Investment in Salsa Company Bonds 94,000 (2) 6,000 (4) 100,000

Other Assets 300,000 315,000 615,000

Total Assets 713,000 484,000 955,000

Accounts Payable 72,000 40,000 112,000

Long-Term Bonds Payable 250,000 200,000 (4) 100,000 350,000

Discount on Bonds Payable (3,000) (3) 1,500 (1,500)

Common Stock:

Pasta Company 200,000 200,000

Salsa Company 130,000 (1) 30,000

(5) 100,000


1/1 Noncontrolling Interest in Net Assets* (5) 37,000 43,000

(1) 6,000

12/31 Noncontrolling Interest in Net Assets 49,100 49,100

Total Liabilities and Equity 713,000 484,000 322,500 322,500 955,000

No entry is necessary to establish reciprocity since there was a liquidating dividend last year

(1) To reverse the effects of the stock dividend.

(2) To recognize the constructive loss not recorded by Pasta Company and adjust the bond investment to par value.

(3) To recognize the constructive gain not recorded by Salsa Company and adjust the intercompany bonds payable to par value.

(4) To eliminate the intercompany bond investment and liability.

(5) To eliminate the investment account and create noncontrolling interest account.

* $38,000 + ($85,000 $90,000) x .20 = $37,000


9 - 34


Pasta Company

Cost of bond investment $ 94,000

Par value of bonds purchased 100,000


Salsa Company

Carrying value of bonds $197,000

Percent purchased ($100,000/$200,000) .50



Constructive loss $ 1,500

Part B Investment in Salsa Company Stock 49,600

Beginning Retained Earnings - Pasta Company 49,600

$62,000 .80 = $49,600

Retained earnings - 1/1/2012 $117,000

Retained earnings - date of acquisition $90,000

Less: Liquidating dividend - 2010 (5,000)

Stock dividend - 2011 (30,000) 55,000

Undistributed net income $62,000

Problem 9-4

Part A Investment in South Company Stock 160,000

Equity in Subsidiary Income 160,000

Cash ($100,000 .80) 80,000

Investment in South Company Stock 80,000

Investment in South Company Bonds 315,000

Cash 315,000

Cash ($300,000 .10 ) 15,000


Interest Income ($15,000/5 periods) 3,000

Investment in South Company Bonds 3,000


9 - 35


Supporting Computation

Prince Company

Cost of bond investment $315,000


Constructive loss $ 15,000

South Company

Premium on bonds payable $ 40,000

Amortization periods remaining as of December 31, 2011 4

Amortization per period $ 10,000

Carrying value July 1, 2011:

Bonds payable $500,000

Premium on bonds payable ($40,000 + $10,000) 50,000

Carrying value - July 1, 2011 550,000

Percentage of bonds purchased .60





9 - 36

Problem 9-4 (continued) PRINCE COMPANY AND SUBSIDIARY



Prince South Eliminations Noncontrolling Consolidated


Income Statement

Sales 3,000,000 2,000,000 5,000,000

Equity in Subsidiary Income 160,000 (1) 160,000

Other Income 100,000 200,000 (6) 15,000 (3) 3,000 288,000

Total Revenue 3,260,000 2,200,000 5,288,000

Expenses 2,800,000 2,000,000(5) 6,000(6) 15,000 (4,791,000)

Gain or Loss on Constructive Retirement of Bonds (2) 15,000 (4) 30,000 15,000


Noncontrolling Interest

(($200,000 + $30,000 - $6,000) .20) 44,800 (44,800)




Prince Company 600,000 600,000

South Company 300,000 (8) 300,000


Dividends Declared:

Prince Company (250,000) (250,000)

South Company (100,000) (1) 80,000 (20,000)

12/31 Retained Earnings to

Balance Sheet 810,000 400,000 496,000 128,000 24,800 817,200


9 - 37

Problem 9-4 (continued) Prince South Eliminations Noncontrolling Consolidated


Balance Sheet

Current Assets 826,000 700,000 1,526,000

Investment in South Company Common Stock 1,120,000 (1) 80,000

(8) 1,040,000

Investment in South Company Bonds 312,000 (3) 3,000 (2) 15,000

(7) 300,000

Other Assets 1,252,000 1,400,000 2,652,000

Total Assets 3,510,000 2,100,000 4,178,000

Bonds Payable 300,000 500,000 (7) 300,000 500,000

Premium on Bonds Payable 20,000 40,000 (4) 30,000 (5) 6,000 36,000

Other Liabilities 380,000 160,000 540,000

Capital Stock

Prince Company 2,000,000 2,000,000

South Company 1,000,000(8) 1,000,000


1/1 Noncontrolling Interest in Net Assets (8) 260,000 260,000


Total Liabilities and Equity 3,510,000 2,100,000 1,829,000 1,829,000 4,178,000

Explanations for workpaper eliminating entries are on the following page.


9 - 38



(1) Equity in Subsidiary Income 160,000


Investment in South Company 80,000

To reverse the effect of parent company entries during the year for

subsidairy dividend and income.

(2) Gain (Loss) on Constructive Retirement of Bond 15,000

Investment in South Company -Bonds 15,000

To recognize constructive loss and adjust bond investment to par value.

(3) Investment in South Company -Bonds 3,000

Other Income (Interest) 3,000

To adjust interest income for loss recorded.

(4) Premium on Bond Payable 30,000

Gain (Loss) on Constructive Retirement of Bonds 30,000

To recognize constructive gain and adjust intercompany bonds to par value.

(5) Expenses (Interest) 6,000

Premium on Bond Payable 6,000

To adjust interest expense for gain recorded.

(6) Other Income (Interest) 15,000

Expenses (Interest) 15,000

To eliminate the intercompany interest.

(7) Bonds Payable 300,000

Investment in South Company -Bonds 300,000

To eliminate the intercompany bond investment and liability.

(8) 1/1 Retained Earnings South Company 300,000

Common Stock South Company 1,000,000

Investment in South Company Common Stock 1,040,000

Noncontrolling interest [$250,000 + ($300,000 $250,000) x 0.2 260,000

To eliminate the investment account and create noncontrolling interest account.


9 - 39

Problem 9-5 PABST COMPANY AND SUBSIDIARY


For the Year Ended December 31, 2011

Pabst Secor Eliminations Noncontrolling Consolidated


Income Statement

Sales 700,000 450,000 1,150,000

Expenses (580,000) (350,000) (930,000)

Net Income 120,000 100,000 220,000

Preferred Stock ($40,000(1)

.7) 28,000

Common Stock ($60,000(2)

.2) 12,000 (40,000)

Net Income to Retained Earnings 120,000 100,000 40,000 180,000

(1) $400,000 .10; (2) $100,000 - $40,000



Pabst Company 507,000 (1) 140,000 647,000

Secor Company

Preferred Stock 56,000*(2) 56,000

Common Stock 374,000 (3) 374,000

Net Income from above 120,000 100,000 40,000 180,000

Dividends Declared (100,000) (100,000)


*Dividends in arrears + call premium = ($400,000 .10 1 year) + ($4 4,000 shares) = $40,000 + $16,000 = $56,000


9 - 40

Problem 9-5 (continued) Pabst Secor Eliminations Noncontrolling Consolidated


Balance Sheet

Current Assets 1,618,000 890,000 2,508,000

Investment - Common Stock 680,000 (1) 128,000 (3) 808,000

Preferred Stock 135,000 (1) 12,000 (2) 147,000

Other Assets 1,025,000 1,000,000(3) 36,000 2,061,000

3,458,000 1,890,000 4,569,000

Liabilities 931,000 360,000 1,291,000

Preferred Stock

Pabst Company 400,000 400,000

Secor Company 400,000 (2) 400,000

Common Stock

Pabst Company 1,000,000 1,000,000

Secor Company 500,000 (3) 500,000

Other Contributed Capital

Pabst Company 600,000 (2) 34,000 566,000

Secor Company 100,000 (3) 100,000


1/1 Noncontrolling Interest in Net Assets (2) 343,000 343,000

(3) 202,000 202,000


3,458,000 1,890,000 1,640,000 1,640,000 4,569,000

(1) To establish reciprocity. $40,000 .3 = $12,000; ($374,000 ($230,000 $16,000)) .80 = $128,000

(2) To eliminate the investment preferred stock account and create noncontrolling interest account.

(3) To eliminate the investment common stock account and create noncontrolling interest account.

Computation to verify difference between implied and book value.

Total stockholders' equity - date of purchase $1,230,000

Preferred stock $400,000

Retained earnings ($4 per share 4,000 shares) 16,000

Book value interest of preferred stock 416,000 = $416,000 $450,000 = $34,000

Book value interest of common stock $814,000 = $814,000 $850,000 = $36,000


9 - 41

Problem 9-6

Part A

Computation and Allocation of Difference between Implied and Book Value Acquired (Common Stock)

Parent Non- Entire


Share



Common Stock (360,000) (40,000) (400,000)

Retained Earnings* (144,000) (16,000) (160,000)


Allocated to land (other assets) (96,000) (10,667) (106,667)

Balance - 0 - - 0 - - 0

Computation and Allocation of Difference between Implied and Book Value Acquired (Preferred Stock)

Parent Non- Entire


Share



Preferred Stock (40,000) (60,000) (100,000)

Retained Earnings (16,000) (24,000) (40,000)


*Based on ratio of capital balances since there are no preferred dividends in arrears.

Preferred stock 000,500$

000,100$$200,000 = $40,000

Common stock 000,500$

000,400$$200,000 = $160,000


9 - 42

Problem 9-6 (continued) PAL CORPORATION AND SUBSIDIARY



PAL Saltz Eliminations Noncontrolling Consolidated

Corporation Inc. Dr. Cr. Interest Balances

Income Statement

Sales 890,000 750,000 1,640,000

Other Revenues 91,000 50,000 (2) 68,000 73,000

Total Revenue 981,000 800,000 1,713,000

Cost of Goods Sold 500,000 400,000 900,000

Other Expenses 330,000 280,000 610,000


Noncontrolling Interest in Consolidated Income

Preferred Stock ($24,000* .60) 14,400

Common Stock ($96,000 .10) ______ 9,600 (24,000)

Net Income to Retained Earnings 151,000 120,000 68,000 24,000 179,000

* ($100/$500 $120,000)



PAL Corporation 560,000 (3) 10,000 (1) 100,000 650,000

Saltz, Inc.

Preferred Stock 74,000 (3) 74,000

Common Stock 256,000 (4) 256,000

Net Income from above 151,000 120,000 68,000 24,000 179,000

Dividends Declared

Preferred Stock (26,000) (2) 10,400 (15,600)

Common Stock (64,000) (2) 57,600 (6,400)



9 - 43

Problem 9-6 (continued) PAL Saltz Eliminations Noncontrolling Consolidated

Corporation Inc. Dr. Cr. Interest Balances

Balance Sheet

Current Assets 810,000 380,000 1,190,000

Investment in Saltz, Inc.

Common Stock 600,000 (1) 86,400 (4) 686,400

Preferred Stock 60,000 (1) 13,600 (3) 73,600

Other Assets 1,276,000 600,000 (4) 106,667 1,982,667

2,746,000 980,000 3,172,667

Liabilities 1,335,000 120,000 1,455,000

Preferred Stock 100,000 (3) 100,000

Common Stock - PAL Corporation 700,000 700,000

Saltz, Inc. 400,000 (4) 400,000


1/1 Noncontrolling Inerest in Net Assets (3) 110,400 110,400

(4) 76,267 76,267


2,746,000 980,000 1,114,667 1,114,667 3,172,667

(1) To establish reciprocity $34,000 .40 = $13,600; $96,000 .90 = $86,400

(2) To eliminate intercompany dividends $26,000* .40 = $10,400; $64,000** .90 = $57,600

(3) To eliminate the preferred stock investment account and create noncontrolling interest account.

(4) To eliminate the common stock investment account and create noncontrolling interest account.

* ($100,000 .10 2) + [($90,000 - $60,000) ($100/$500) = $26,000; ** ($90,000 - $26,000) = $64,000.


9 - 44


1. Supporting computations for workpaper.

Allocation of beginning retained earnings

Preferred Common

Stock Stock Total

Dividends in arrears - 1/1/2011 $ 10,000 $0 $ 10,000

Participating (1/5) 64,000 (4/5) 256,000 320,000

$ 74,000 $ 256,000 $ 330,000

2. Computation of dividend allocation 2011

Dividends in arrears $ 10,000 $0 $ 10,000

Current year's dividend 10,000 40,000 50,000

Participating dividend (1/5) 6,000 (4/5) 24,000 30,000

$ 26,000 $ 64,000 $ 90,000

3. Computation of net income allocation 2010

Current year's dividend $ 10,000 $0 $ 10,000

Participating (1/5) 24,000 (4/5) 96,000 120,000

$ 34,000 $ 96,000 $ 130,000

4. Computation of net income allocation 2011

Current year's dividend $ 10,000 $ 40,000 $ 50,000

Participating (1/5) 14,000 (4/5) 56,000 70,000

$ 24,000 $ 96,000 $ 120,000

Problem 9-7 Book Value Interest

Account Preferred Common

Part A Balance Stock Stock

Preferred stock $200,000 $200,000 $0

Common stock 500,000 500,000

Retained earnings 160,000 16,000* 144,000

Total $860,000 216,000 644,000

Percentage interest held 20% 80%

Book value interest acquired $ 43,200 $ 515,200

* (8,000 $27) - $200,000


9 - 45


Part B

Computation and Allocation of Difference between Implied and Book Value Acquired (Common Stock)

Parent Non- Entire


Share


Less: Book value of equity acquired 515,200 128,800 644,000


Allocated to Inventory ($150,000 - $120,000) (24,000) (6,000) (30,000)

Allocated to Equipment ($640,000 - $560,000) (64,000) (16,000) (80,000)

Balance 46,800 11,700 58,500

Goodwill (46,800) (11,700) (58,500)

Balance - 0 - - 0 - - 0

Preferred Common Part C Stock Stock Total

1. Dividends in arrears ($200,000 .09) $ 18,000 $ 0 $ 18,000 Current year 18,000 14,000 32,000 36,000 14,000 $50,000 Percentage interest held 20% 80% Total dividends received $7,200 $11,200 $ 18,400 2. Reported net income - S Company $ 100,000 Less: Depreciation for the period $80,000/5 (16,000) Add: Realized profit in beginning inventory ($77,500/1.25)= $62,000; $77,500 - $62,000 = 15,500 Less: Unrealized profit in ending inventory ($54,000/1.25) = $43,200; $54,000 - $43,200 = (10,800) Realized net income of S Company 88,700 Allocation to preferred stockholders 18,000 Residual to common stockholders $ 70,700 Noncontrolling interest in consolidated income

Preferred stock $18,000 .80 = $ 14,400

Common stock $70,700 .20 = 14,140 Total $ 28,540 3. P Company's net income $ 234,500 Dividend income (18,400) P Company's share of realized income of S Company -

Preferred stock $18,000 .20 = $ 3,600

Common stock $70,700 .80 = 56,560 60,160 Controlling interest in consolidated net income $ 276,260


9 - 46

Problem 9-7 (continued) s 4. Retained earnings - P Company $ 430,000 P Company's share of increase in S Company's retained earnings from date of acquisition:

Preferred stock ($34,000* - $16,000) .20 = 3,600

Common stock ($276,000 - $144,000) .80 = 105,600

Unrealized profit on sales to P Company at 1/1/2011 ($15,500 .80) (12,400) Cumulative effect to 1/1/2011 of amortization of difference between implied and book value: Inventory ($30,000 x .80) (24,000)

Equipment ($16,000 2 years) x .80 (25,600) Consolidated retained earnings - 1/1/2011 $ 477,200 * $16,000 + $18,000 = $34,000


9 - 47

Problem 9-8

Part A


Parent Non- Entire


Share


Less: Book value of equity acquired:

Common Stock 160,000 40,000 200,000


Retained Earnings 34,400 5,600 43,000a


Equipment (10,000) (2,500) (12,500)

Inventories (5,000) (1,250) (6,250)

Land (5,000) (1,250) (6,250)

Balance 45,600 11,400 57,000

Goodwill (45,600) (11,400) (57,000)

Balance - 0 - - 0 - - 0

a Allocation of retained earnings:

Retained earnings balance, date of purchase $62,000

Allocation of preferred stock

Call premium $4,000

Dividends in arrears 15,000 19,000

Allocation to common stock $43,000


9 - 48

Problem 9-8 (continued) PARSON INDUSTRIES AND SUBSIDIARY Consolidated Statements Workpaper

Part B For the Year Ended December 31, 2017 Parson Succo Eliminations Noncontrolling Consolidated Income Statement Industries Company Dr. Cr. Interest Balances Sales 404,000 300,000 (5) 100,000 604,000 Dividend Income 4,000 (8) 4,000 0 Total Revenue 408,000 300,000 604,000 Cost of Goods Sold 200,000 160,000 (6) 4,167 (5) 100,000 (7) 2,500 261,667 Operating Expenses 36,400 50,000 (4) 6,000 93,025 (11) 625 Income Taxes 40,200 27,000 67,200 276,600 237,000 421,892 Net/Consolidated Income 131,400 63,000 182,108 Noncontrolling Interest in Consolidated Income

Preferred Stock ($15,000 1.00) 15,000

Common Stock ($41,375* .20) 8,275 (23,275) Net Income to Retained Earnings 131,400 63,000 114,792 102,500 23,275 158,833 Retained Earnings Statement 1/1 Retained Earnings - Parson Industries 157,400 (4) 2,400 (1) 24,000 (7) 2,500 (3) 24,000 192,000 (10) 5,000 (11) 3,500 Succo Company Preferred Stock 34,000 34,000 Common Stock 73,000 (9) 73,000 Net Income from above 131,400 63,000 114,792 102,500 23,275 158,833 Dividends Declared Parson Industries (65,000) (65,000) Succo Company Preferred Stock (45,000) (45,000) Common Stock (5,000) (8) 4,000 (1,000) 12/31 Retained Earnings to Balance Sheet 223,800 120,000 201,192 154,500 11,275 285,833

* ($63,000 - $6,000 loss - $625 depreciation) - $15,000


9 - 49

Problem 9-8 (continued) Parson Succo Eliminations Noncontrolling Consolidated Industries Company Dr. Cr. Interest Balances

Balance Sheet

Cash and Receivables 396,800 205,000 (2) 10,000 591,800

Inventories 200,000 170,000 (6) 4,167 365,833

Land 300,000 120,000 (10) 6,250 426,250

Buildings and Equipment 697,000 245,000 (3) 50,000

(10) 12,500 1,004,500

Accumulated Depreciation (100,000) (70,000) (3) 20,000

(4) 9,000

(11) 5,000 (204,000)

Investment in Succo Company 300,000 (1) 24,000 (9) 324,000 0

Goodwill (10) 57,000 57,000

Difference between Implied and Book Value (9) 82,000 (10) 82,000 0

Total Assets 1,793,800 670,000 2,241,383

Current Liabilities 370,000 100,000 (2) 10,000 460,000

Bonds Payable 400,000 100,000 500,000

Preferred Stock - Succo Company 100,000 100,000

Common Stock

Parson Industries, $10 par 600,000 600,000

Succo Company, $10 par 200,000 (9) 200,000

Other Contributed Capital

Parson Industries 200,000 200,000

Succo Company 50,000 (9) 50,000


1/1 Noncontrolling interest in Net Assets (4) 600 (3) 6,000 84,275

(10) 1,250 (9) 81,000

(11) 875

12/31 Noncontrolling interest in Net Assets 195,550 195,550

Total Liabilities and Equity 1,793,800 670,000 695,667 695,667 2,241,383


9 - 50



(1) Investment in Succo Company 24,000

1/1 Retained Earnings - Parson Industries 24,000

To establish reciprocity (convert to equity),

(($73,000 - $43,000) .80 = $24,000).

(2) Current Liabilities (Accounts Payable) 10,000

Cash and Receivables (Accounts Receivables) 10,000

To eliminate intercompany receivable and payable.

(3) Buildings and Equipment 50,000

1/1 Retained Earnings - Parson Industries ($30,000 .80) 24,000

1/1 Noncontrolling Interest 6,000

Accumulated Depreciation 20,000

To eliminate unrealized loss on intercompany sale of equipment and to

restate property and equipment at original cost to Succo Company

(4) 1/1 Retained Earnings - Parson Industries ($3,000 .80) 2,400

1/1 Noncontrolling interest 600

Operating expenses (depreciation expense) ($80,000 $50,000)/5 6,000

Accumulated Depreciation 9,000

To adjust depreciation recorded during the current and prior years.

(5) Sales 100,000

Cost of Goods Sold (purchases) 100,000

To eliminate intercompany sales.

(6) Cost of Goods Sold (Ending Inventory Income Statement) 4,167

Inventory (Balance Sheet) ($25,000 $25,000/1.20) 4,167

To eliminate unrealized intercompany profit in ending inventory.

(7) 1/1 Retained Earnings Parson Industries 2,500

Cost of Goods Sold ($15,000 $15,000/1.20) 2,500

To recognize profit realized during the year.

(8) Dividend Income 4,000

Dividends declared 4,000

To eliminate intercompany dividends.

(9) 1/1 Retained Earnings Succo- Common Stock 73,000

Common Stock Succo 200,000

Other Contributed Capital Succo 50,000


Investment in Succo Company 324,000

Noncontrolling interest account [$75,000 + ($73,000 - $43,000) x .2] 81,000

To eliminate the investment account and create noncontrolling interest account.


9 - 51


(10)Buildings and Equipment 12,500

Land 6,250

Goodwill 57,000

1/1 Retained Earnings Parson Industries 5,000


Difference between Implied and Book Value 82,000 To allocate the difference between implied and book value.

(11) 1/1 Retained Earnings - Parson Industries* 3,500

Noncontrolling interest* 875

Operating Expense (Depreciation) 625

Accumulated Depreciation 5,000 To depreciate the difference between implied and book value. * $625 x 7 x .8 = $3,500; $625 x 7 x .2 = $875

Supporting Computations:

(3)(4) Loss on sale of equipment - $80,000 - $50,000 = $30,000; Loss recognized per year $6,000.

2

1$6,000 = $3,000 recognized last year

(6) 20.1

000,25$ = $20,833; gross profit $4,167

(7) 20.1

000,15$ = $12,500; gross profit $2,500

(10), (11) Allocation of difference 2010 2011-16 2017 Unamortized Equipment $12,500/20 $625 $3,750 $625 $7,500 Inventories 6,250 6,250 --- Land 6,250 --- 6,250 Goodwill 57,000 57,000 Total $82,000 $6,875 $3,750 $625 $70,750


9 - 52


Part C Reported net income - Parson Industries $131,400 Less: Dividend income 4,000 127,400 Add: Realized gross profit in beginning inventory 2,500 Less: Unrealized gross profit in ending inventory (4,167) Parson's contribution to consolidated income 125,733

Reported net income - Succo Company $63,000 Less: Amortization of difference (625) Less: Recorded loss on upstream sale of fixed asset (6,000) Succo Company's realized reported income 56,375 Less: Net income allocated to preferred stockholders 15,000 Net income allocated to common stockholders 41,375

Parson Industries' interest .80 33,100 Controlling interest in consolidated net income $158,833


9 - 53

Problem 9-9

Part A


Parent Non- Entire


Share


Less: Book value of equity acquired:

Common Stock 160,000 40,000 200,000


Retained Earnings 34,400 5,600 43,000a


Equipment (10,000) (2,500) (12,500)

Inventories (5,000) (1,250) (6,250)

Land (5,000) (1,250) (6,250)

Balance 45,600 11,400 57,000

Goodwill (45,600) (11,400) (57,000)

Balance - 0 - - 0 - - 0

a Allocation of Retained Earnings:

Retained Earnings balance, date of purchase $62,000

Allocation of Preferred Stock

Call premium $4,000

Dividends in arrears 15,000 19,000

Allocation to common stock $43,000


9 - 54

Problem 9-9 (continued) Noncon-

Part B Parson Succo Eliminations trolling Consolidated

Income Statement Industries Company Dr. Cr Interest Balances

Sales 404,000 300,000 (4) 100,000 604,000

Equity in Subsidiary Income 31,433 (7) 31,433 -

435,433 300,000 604,000

Cost of Goods Sold 200,000 160,000 (5) 4,167 (4) 100,000 261,667

(6) 2,500

Operating Expenses 36,400 50,000 (3) 6,000 93,025

(10) 625

Income Taxes 40,200 27,000 67,200

Total Expenses 276,600 237,000 421,892


Noncontrolling Interest in Cons. Income

Preferred Stock ($15,000 X 1.00) 15,000

Common Stock ($41,372 X .20) 8,275 (23,275)



1/1 Retained Earnings -

Parson Industries 192,000 192,000

Succo Company

Preferred Stock 34,000 34,000

Common Stock 73,000 (8) 73,000


Dividends Declared

Parson Industries (65,000) (65,000)

Succo Company

Preferred Stock (45,000) (45,000)

Common Stock

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