07 Fischer10e SM Ch07 Final

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CHAPTER 7
UNDERSTANDING THE ISSUES
1. Equity prior to sale of new shares .......................................

..........................................
$200,000
Equity gained by sale ....................................................
................................................
600,000
Total equity after sale ..................................................
..................................................
$800,000
Parent interest ..........................................................
.....................................................
60%
Parent equity ............................................................
.....................................................
$480,000
Price paid ...............................................................
.......................................................
600,000
Excess of cost over book value ...........................................
.........................................
$120,000
Excess will likely be attributed to goodwill.
2.
Determination and Distribution of Excess Schedule
Company
Parent
NCI
Price
Value
(80%)
(20%)
Implied
Fair Value
Fair value of subsidiary
$500,000
$125,000
Less book value of interest acquired:
$625,000
Total equity
$450,000
450,000
$450,000
Interest acquired
80%
Book value
$360,000
20%
$ 90,000
Excess of fair value over book value

$140,000
$ 35,000
$175,000
Adjustment of identifiable accounts:
Amortization
Worksheet
Adjustment
per Year
Equipment
$ 17,500
Life
Key
$175,000
10
debit D
20X6:
Parent income ...........................................................

$120,000
Subsidiary income .....................................................
50,000
Equipment depreciation ............................................
(17,500)
.
Total income .............................................................

$152,500
Income purchased [1/2 year 0.10 ($50,000
$17,500 amortization)] ........................................
(1,625)
Consolidated net income ..........................................
$150,875
NCI [10% ($50,000 $17,500 amortization)] ........
$
3,250
Controlling:
Internally generated ............................................

$120,000
80% 1 ($50,000 $17,500) ..........................
$26,000
10% 1/2 ($50,000 $17,500) .......................
1,625
27,625
Total controlling interest ............................................
$147,625
369
----------------------- Page 2-----------------------
3.
Company
Parent
NCI
Price
Value
(80%)
(20%)
Implied
Fair Value
$800,000
$200,000
$1,000,000

Total equity
$900,000
Interest acquired
80%
Book value
$720,000
900,000
$900,000
20%
$180,000

$ 80,000
$ 20,000
100,000
Amortization
Worksheet
Adjustment
per Year
Equipment
$ 10,000
Life
Key
$100,000
10
debit D
20X5:
Cost of investment ....................................................

$
800,000
Equity increase:
Equity at July 1, 20X5, with 1/2 year income .........
$1,300,000
Equity at January 1, 20X1......................................
900,000
..
Increase ..................................................................
$
400,000
....
Interest ..................................................................
80%
320,000
Equipment depreciation ($10,000 4.5 80%) .......
(36,000)
Adjusted cost.............................................................
$1,084,000
Sale of 8,000 shares
a.
Gain on sale of investment (could be discontinued operation):
Sale price ($150 8,000) ...................................

1,200,000
Adjusted cost ......................................................
(1,084,000)
Gain ................................................................
....
b.
c.
116,000
There will be no consolidated statements.
The parent will report investment income

(perhaps gain on discontinued operations):
Income for 6 months ...........................................

100,000
Equipment depreciation (1/2 80% $10,000) .

(4,000)
..
Income ..............................................................
96,000
370
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a.
....
Increase in paid-in equity on sale of investment:
Sale price ($150 2,000) ..................................................

$
300,000
Adjusted cost (1/4 $1,084,000) ...........................................
(271,000)
Equity increase...........................................................
............
$
29,000
b. Consolidated statements are prepared as follows:

Parent income ............................................................
............
$150,000
Subsidiary income ($200,000 $10,000 depreciation) .........

190,000
.....
Consolidated net income ..................................................

$340,000
NCI:
....
(20% 1 $ 190,000) ..................................................

$
38,000
..
(20% 1/2 $190,000) .................................................

19,000
Total NCI interest .......................................................

............
$
57,000
Controlling:
..........
Internally generated ...............................................

$150,000
Subsidiary:
....
(60% 1 $ 190,000) ..................................................

114,000
..
(20% 1/2 $190,000) .................................................

19,000
Total controlling interest ...............................................

..........
$283,000
c.
Not applicable

a.
Gain on sale of investment (would not be discontinued operation):
Sale price ($150 6,000) ..............................

900,000
Adjusted cost (3/4 $1,084,000) ..................
(813,000)
....
b.
Gain ...........................................................
87,000
There will be no consolidated statements.
c.
The parent will report investment income under the equity method.
Amount
Period
Interest
Income
$190,000
$57,000
60%
1/2
190,000
38,000
20%
Total
$95,000
371
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4.
Company
Parent
NCI
Price
Value
Implied
Fair Valu
e
(80%)

750,000
$1,400,000
(20%)
$1,
$350,000

Common stock ($1 par)
100,
000
Paid-in capital in excess of par
900,0
Retained earnings
500,0
00
00
Preferred dividends in arrears
(12
,000)
488,000
Total equity
$1,488,000
$1,
$1,488,000
Interest acquired
80%
20%
Book value
$1,190,400
00
297,600

$ 209,600
$
52,400
262,0
Worksheet
Adjustment
Key
Goodwill
262,000
$
debit D
Parent income ...........................................................

$
120,000
80,000
$
200,000
NCI (20% $68,000) ................................................
$13,600
NCI preferred (6% $200,000) ................................
12,000 $
25,600
Controlling {$120,000 + [0.80 ($80,000 $12,000)]}
$
174,400
Income would be as follows if Company P owns 1/2 of preferred stock:
Parent income ...........................................................

$
120,000
80,000

$
200,000
NCI [20% ($80,000 $12,000)] .............................
$13,600
NCI preferred (6% $100,000) ................................
6,000 $
19,600
Controlling {$120,000 + [0.80 ($80,000 $12,000)]
+ (6% $100,000)}.............................................
$
180,400
372
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Ch. 7Exercises
EXERCISES
EXERCISE 7-1

Company
Parent
NCI
Implied
Price
Value
Fair Value
(60%)
$1,200,000
$
(40%)
$2,000,000
800,000

100,000
Retained earnings
360,000
New proceeds
Total equity
$1,660,000
1,200,000
$1,660,000
$1,660,000
Interest acquired
60%
Book value
$ 996,000
40%
$
664,000

$ 204,000
$ 136,000
340,000
Amortization
Worksheet
Adjustment
per Year
Life
Key
Building
$200,000
10,000
20
debit D1
Goodwill
140,000
debit D2
Total
$340,000
People Corporation and Subsidiary Sample Corporatio

n
Consolidated Balance Sheet
January 2, 20X4
Assets
Current assets ($600,000 + $100,000 + $1,200,000) ......................

$1,900,000
Goodwill .......................................................................
....................
140,000
Long-lived assets:
Land ......................................................................
..................... $
210,000
Property, plant, and equipment (add $200,000) .........................
1,300,000
1,510,
Total assets ...................................................................
...................
$3,550,000
Liabilities and Stockholders Equity
Current liabilities ............................................................

..................
$
350,000
Bonds payable ..................................................................
...............
1,200,000
Stockholders equity:
NCI [(40% $1,660,000) + $136,000] .......................................
800,000
Common stock ($5 par) .....................................................
.........
$
400,000
Retained earnings .........................................................
.............
800,000
1,200,
Total liabilities and stockholders equity .......................................
....
$3,550,000
373
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Ch. 7Exercises
EXERCISE 7-2

Company
Parent
NCI
Price
Value
(60%)
(40%)
Implied
Fair Value
$150,000
$100,000
$250,000

$100,000
Retained earnings
Total equity
$120,000
20,000
$120,000
$120,000
Interest acquired
60%
Book value
$ 72,000
40%
$ 48,000

$ 78,000
$ 52,000
$130,000
Amortization
Worksheet
Adjustment
per Year
Equipment
$ 13,000
Life
Key
$130,000
10
debit D
Analysis of 20% Interest, January 1, 20X3
Price paid for additional investment in Hardwood ............................

$
40,000
Less interest acquired:
Common stock ($10 par) ....................................................
........
$100,000
Retained earnings .........................................................
.............
50,000
........
Total stockholders equity .............................................

$150,000
Interest acquired .........................................................

...............
20%
30,000
Excess .........................................................................
....................
$
10,000
Equipment adjustment (8 remaining years $13,000 20%) .........
(20,800)
Parent paid-in capital in excess of par from stock retirement ..........
$
10,800
374
----------------------- Page 7-----------------------
Ch. 7Exercises
Exercise 7-2, Conclude

d
Barker Corporation and Subsidiary Hardwood Com

pany
Consolidated Balance Shee
t
December 31, 20X5
Assets
Current assets .................................................................

.................
$
350,000
Long-lived assets:
Property, plant, and equipmenta ..........................................
.......
1,045,000
Total assets ...................................................................

...................
$1,395,000
a$740,000 + $240,000 + $130,000 (5 $13,000 amortization)
Liabilities and Stockholders Eq

uity
Current liabilities ............................................................

..................
$
500,000
Stockholders equity:
NCIb .....................................................................
.......................
57,000
Common stock ($10 par) ..................................................

.........
$500,000
Paid-in capital in excess of par from stock retirement ................
10,800
Retained earningsc .......................................................
..............
327,200
83
8,00
Total liabilities and stockholders equity .......................................

....
$1,395,000
b20% $220,000
44,000
+ 40% interest [40% ($50,000 $20,000)]

12,000
+ 20% interest [20% ($120,000 $50,000)]
14,000
(20% 5 years $13,000 amortization)
(13,000)
Total NCI balance
57,000
cConversion:
60% interest [60% ($120,000 $20,000)] =

60,000
20% interest [20% ($120,000 $50,000)] =

14,000
Share of retained earnings
74,000
Amortizations:
2 years 60% $13,000
(15,600)
3 years 80% $13,000
(31,200)
Net adjustment
27,200
Parent retained earnings balance,
December 31, 20X5
300,000
Total
$327,200
375
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Ch. 7Exercises
EXERCISE 7-3

Company
Parent
NCI
Price
Value
Implied
Fair Value
(90%)
$418,500
(10%)
$465,00
$ 46,500

$100,00
0
Retained earnings
250,0
00
0
Total equity
$350,000
$350,00
$350,000
Interest acquired
90%
10%
Book value
$315,000
0
$ 35,000

$103,500
$ 11,500
$115,00
Amortization
Worksheet
Adjustment
per Year
Life
Key
Equipment
0
$115,00
$
5,750
20
debit D
Entries
Investment in Venus Company ....................................................

....
195,300
Retained Earnings* .......................................................
.............
137,475
Investment Income** ......................................................
............
57,825
To convert the investment to the equity method. This includes
10% interest that is to be adjusted to sophisticated equity balance.
Cash ...........................................................................
......................
700,000
Investment in Venus Company [8/9 ($418,500 cost +
$195,300 adjustment)] ................................................
...........
545,600
Gain on Sale of Investment ...............................................
.........
154,400
To record the sale of the 8,000 shares of Venus stock.
Adjustments to the investment account:
*Retained earnings account = 90% $170,000 change in retained earnings 3 ye

ars of
equipment depreciation (3 90% $5,750) = $137,475.
**Investment income = 90% ($70,000 $5,750 equipment depreciation) = $57,825.
376
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Ch. 7Exercises
EXERCISE 7-4
Entries on Carpenters books, January 1, 20X6:
Investment in Hinckley Company .................................................

....
2,960
.
Retained EarningsCarpenter .................................................

2,960
To adjust investment to equity for shares sold.
Remaining shares may remain at cost, because
they will be consolidated.
Cash ...........................................................................
......................
40,000
Investment in Hinckley Company ............................................
10,960
...
Paid-In Capital in Excess of ParCarpenter .............................

29,040
To record sale of shares. Investment eliminated =
[(2,000 40,000) $160,000 original cost] plus
$2,960 equity adjustment.

Company
Parent
NCI
Price
Value
(80%)
(20%)
Implied
Fair Value
160,000
$ 40,000
$200,000

Total equity
150,000
150,000
Interest acquired
80%
Book value
120,000
$150,000
20%
$
$ 30,000

40,000
$ 10,000
$ 50,000

Am
ortization
Worksheet
Adjustment
per Year
Life
Key
Machine
4,000
$ 20,000
5
debit D1
Goodwill
30,000
debit D2
Total
$ 50,000
Equity adjustment:
Income ....................................................................
................... $110,000
Amortization of excess (4 years $4,000) .................................
(16,000)
Dividends .................................................................
..................
(20,000)
$ 74,000
Interest sold (2,000 50,000)
4%
$
2,960
377
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Ch. 7Exercises
EXERCISE 75
(1) Retained Earnings (3 80% $5,000) ......................................

12,000
Investment in Brown Corporation .....................................
.....
12,000
To adjust for building depreciation to December 31, 20X7.
.....
Investment in Brown Corporation ..........................................

26,000
Investment Income ...................................................

.............
26,000
To adjust current years share of income and investment
account for one-half of the years building depreciation
[(80% $35,000) (1/2 80% $5,000)].
Cash .....................................................................
......................
850,000
.....
Investment in Brown Corporation* ....................................

828,000
..........
Gain on Sale of Subsidiary ..........................................

22,000
To record the sale and the gain on the 24,000 shares
of Brown stock.
*($814,000 $12,000 + $26,000).
(2) Retained Earnings (3 80% $5,000) ......................................

12,000
.....
Investment in Brown Corporation .....................................

12,000
.....

13,000
Investment Income ...................................................

.............
13,000
To adjust one-half of current years share of income for
the first half of the year and one-half of the years building
depreciation, {1/2 [(80% $35,000) (1/2 80% $5,000)]}.
Note: A sophisticated equity adjustment for the other half of the in

vestment will be
necessary at year-end.
Cash .....................................................................
......................
425,000
.....
Investment in Brown Corporation* ....................................

414,000
.........
Gain on Sale of Investment ..........................................

11,000
To record the sale and the gain on the 12,000 shares
of Brown stock.
*[1/2 ($814,000 $12,000)] + $13,000.
3
78
----------------------- Page 11-----------------------
Ch. 7Exercises
Exercise 7-5, Concluded
(3) Only the 20% portion sold (25% of the investment) needs adjustment; the rema
ining 60% of
the investment) will be adjusted at year-end when consolidated statements
are prepared.
Retained Earnings [(3 80% $5,000)* 1/4] .........................

3,000
Investment in Brown Corporation ......................................
3,000
....
.....

6,500
Investment Income ....................................................

............
6,500
To adjust 25% of the current years share of income
for the first half of the year and 25% of the one-half
years building depreciation,
{1/4 [(80% $35,000) (1/2 80% $5,000)]}.
Cash .....................................................................
......................
212,500
....
Investment in Brown Corporation* .....................................

207,000
.......
Paid-In Capital in Excess of Par .....................................

5,500
To record the sale and the gain on the 6,000 shares of
Brown stock.
*[(1/4 $814,000) $3,000 + $6,500].
EXERCISE 7-6
(1)

Company
Parent
NCI
Price
Value
(80%)
(20%)
Implied
Fair Value
$280,000
$350,000
$ 70,000

$200,000
Retained earnings
90,0
(6,0
00
00)
Total equity
$284,000
$284,000
$284,000
Interest acquired
80%
Book value
$227,200
20%
$ 56,800

$ 52,800
$ 13,200
$ 66,00
Worksheet
Adjustment
Key
Goodwill
$ 66,00
debit D
379
----------------------- Page 12-----------------------
Ch. 7Exercises
Exercise 7-6, Concluded
(2)

Company
Parent
NCI
Price
Value
Implied
Fair Value
(80%)
(20%)

$280,000
$ 70,000
$350,000

Retained earnings
$200,000
90,000
Preferred dividend share of retained

earnings
(30,000)*
Total equity
$260,000
$260,000
Interest acquired
80%
Book value
$208,000
$260,000
20%
$ 52,000

$ 72,000
$ 18,000
$ 90,000
Worksheet
Adjustment
Key
Goodwill
$ 90,000
debit D
* $90,000 retained earnings 100/300 shares (preferred plus common stock)
(3)

Company
Parent
NCI
Price
Value
Implied
Fair Value
(80%)
(20%)

$280,000
$ 70,000
$350,000
$200,000
Retained earnings
90,000
Preferred dividends share of RE
(22,000)*
Total equity
$268,000
$268,000
Interest acquired
80%
Book value
$214,400
$268,000
20%
$ 53,600

$ 65,600
$ 16,400
$ 82,000
Worksheet
Adjustment
Key
Goodwill
$ 82,000
debit D
*(2 years $6,000) + (10% $100,000 par value)
380
----------------------- Page 13-----------------------
Ch. 7Exercises
EXERCISE 7-7
(1)

Company
Parent
NCI
Price
Value
(80%)
(20%)
Implied
Fair Value
$700,000
$175,000
$875,000

$800,000
Retained earnings
100,000

Total equity
$860,000
(40,000)
$860,000
$860,000
Interest acquired
80%
Book value
$688,000
20%
$172,000

$ 12,000
$
3,000
$ 15,000
Worksheet
Adjustment
Key
Goodwill
$ 15,000
debit D
(2) Investment in Ace .........................................................

..............
32,000
Retained Earnings .....................................................
............
32,000
To adjust for 80% of subsidiary income for 20X1 and 20X2
applicable to common stock, equal to 80%
($120,000 $80,000 current cumulative claim of
preferred stock).
Subsidiary Loss ...........................................................

...............
40,000
Investment in Ace .....................................................
.............
40,000
To adjust for 80% of subsidiary loss of $10,000 for
20X2 and 80% of the $40,000 current cumulative
claim of preferred stock.
381
----------------------- Page 14-----------------------
Ch. 7Exercises
EXERCISE 7-8

Company
Parent
NCI
Implied
Price
Value
Fair Value
(80%)
(20%)

$420,000
$105,000
$525,000

Common stock ($10 stated value)
$300,000
Retained earnings
160,000
(32,000
)
Total equity
$428,000
Interest acquired
80%
Book value
$342,400
$428,000
$428,000
20%
$ 85,600

$ 77,600
$ 19,400
$ 97,000
Worksheet
Adjustment
Key
Goodwill
$ 97,000
debit D
(1) Equity claim on Kim Company retained earnings:
..
Retained earnings, January 1, 20X7 ........................................

$210,000
Preferred claim (4 years $16,000) .........................................

64,000
Common shareholders claim .............................................
$146,000
...
(2) Cost-to-simple-equity conversion for preferred stock:
Preferred stockholders claim on retained earnings;

January 1, 20X5, through January 1, 20X7
(2 years $16,000) ....................................................
...........
$32,000
Ownership interest ........................................................
.............
50%
Cost-to-simple-equity conversion ..........................................
$16,000
.....
Investment in Kim Company Preferred Stock ............................

16,000
......
Retained EarningsZigler ...............................................

16,000
To adjust investment to simple equity.
Preferred StockKim Company (50% $200,000) ..................

100,000
Retained EarningsKim Company (50% $64,000
applicable to preferred stock) .........................................
.........
32,000
Investment in Kim Company Preferred Stock
....
($90,000 cost + $16,000 adjusted) ................................

106,000
Paid-In Capital in Excess of ParRetirement

of Preferred Stock ...............................................
26,000
..............
To eliminate the investment in preferred stock.
382
----------------------- Page 15-----------------------
Ch. 7Exercises
Exercise 7-8, Conclude

d
(3) Cost-to-simple-equity conversion for common stock:
Retained earnings, January 1, 20X7 .......................................

$210,000
...
Less preferred claim4 years 8% $200,000 .......................

64,000 $146,000
Retained earnings, December 31, 20X4 ................................
$160,000
Less preferred claim2 years 8% $200,000 ..................
32,000
128,000
Increase in retained earnings, common stock .......................
$
18,000
..............
Ownership interest ..............................................
80%
......
Cost-to-simple-equity conversion ................................

$
14,400
Entries:
Investment in Kim Company Common Stock .............................

14,400
Retained EarningsZigler ...............................................
14,400
......
To adjust investment to equity.
Common StockKim Company ($300,000 80%) ...................

240,000
Retained EarningsKim Company (80% $146,000
.......
applicable to common stock) ..........................................

116,800
Goodwill .................................................................
....................
97,000
Investment in Kim Company Common Stock ........................
434,400
NCI ..................................................................
......................
19,400
To eliminate investment, adjust NCI, and record goodwill.
383
----------------------- Page 16-----------------------
Ch. 7Problems
PROBLEM
S
PROBLEM
7-1
(1)
Price paid ..............................................................

.....................
$70,000
..........
Common stock ($10 par) ............................................

$
75,000
Retained earnings .................................................

...............
85,000
............
Total stockholders equity ...................................

$160,000
Interest acquired .................................................

.................
20%
32,000
Excess .................................................................
......................
$38,000
Equipment adjustment {[$105,000 (2 years $10,500)]
20%} .............................................................
....................
16,800
Debit parent retained earnings ..........................................
.........
$21,200
(2) See worksheet on page 389
Eliminations and Adjustments:

(CY1)
Eliminate intercompany income.
(CY2)
Eliminate intercompany dividends.
(EL)
Eliminate the controlling interest in the subsidiary
equity.
(D1)/(NCI) Distribute the excess on the original 60% investment to equipm
ent.
(D2)
retained earnings.
Distribute the excess on the 20% investment to parent
(A)
Depreciate the excess for 4 years as follows:

Sharper retained earnings, 2 years at 40% and 1 year
at 20% of 10,500
$10,500
Parish retained earnings, 2 years at 60% and 1 year a
t 80% of 410,500
21,000
Depreciation expense
10,500
Subsidiary Sharp Company Income Dist

ribution
Depreciation ............................. (A)

Internally generated net
$10,500
income ...............................
$35,
000
Adjusted net income ................
$24,
500
NCI share ................................
0%
NCI ..........................................
$ 4
,900
Parent Parish Company Income Dist

ribution

income ...............................
$100,00
0
80% Sharp adjusted
income of $24,500 .............
19
,600
Controlling interest ...................

0
384
----------------------- Page 17-----------------------
$119,60
Ch. 7Problems
Problem 7-1, Concluded
(2)
Parish Company and Subsidiary Sharp Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X5
Eliminations
Consolidated
Consolidated
Controlling
Trial Balance
and Adjustments
Income
Balance
Retained
Parish
Cr.
Earnings
Sharp
Statement
Sheet
Dr.
NCI
Current Assets ...............................................

196,000
55,000 ...............
.................
.................
.................
.................
.......................................................... 251,000
Investment in Sharp Company .......................
265,000 .............
(CY2)
4,000
(CY1)
28,000 ......
.................
.................
.................
.................
.................
140,000 ...............
.................
.................
.................
(EL)
.................
.................
.................
.................
.................
.................
63,000 ...............
.................
.................
(D1)
.................
.................
38,000 ...............
.................
.................
(D2)
.................
Property, Plant, and Equipment (net) .............

450,000
170,000
(D1)
105,000 (A)
............. 42,000 ...............
.................
.......................................................................
83,000
Current Liabilities ...........................................

(110,000)
(20,000) .............
.................
.................
.................
.................
....................................................... ( 130,000)
Common Stock ($10 par)Parish .................
(500,000) ............
.................
.................
.................
.................
.................
....................................................... (500,000)
Retained EarningsParish ............................
(198,000) ............
(A)
21,000
.................
.................
.................
.................
.................
.......................................................................
.................
.................
(D2)
.................
.................
(155,800) ..
Common Stock ($10 par)Sharp ..................
...............
(75,000)
.................
.................
............(15,000) ..............
21,200
.................
..
(EL)
60,000
.......................................................................
Retained EarningsSharp
...............
.......... (100,000)
(EL)
........ (NCI)
............. 42,000
.................
(34,700) ....
..
80,000
.................
.................
(A)
.................
.................
.................
.................
10,500
.................
.................
(D2)
.................
.................
.................
.................
16,800
Sales ..............................................................
(400,000)
(110,000) ...........
.................
.......... (510,000) ..
.............
.................
.......................................................................
Subsidiary Income ..........................................
(28,000) ............
(CY1)
28,000
.................
.................
.................
.................
.................
Cost of Goods Sold ........................................
200,000
60,000 ...............
.................
........... 260,000 ...
.............
.................
.......................................................................
Other Expenses .............................................
100,000
15,000
(A)
10,500 ......
.................
.................
.................
.................
.......................................................................
.................
.................
.................
.................
125,500 ...............
.................
.................
Dividends Declared ........................................
25,000
5,000 .................
(CY2)
............... 4,000
1,000 ........
............................................................ 25,000
0
.................
0
357,000 ....
.................
357,000
.................
Consolidated Net Income ........................................................

................................................................................
(124,500)
.................
.................
.................
To NCI .....................................................................
................................................................................
............
4,900
(4,900) .
..............
.................
385
----------------------- Page 18-----------------------
Ch. 7Problems
To Controlling Interest .....................................................

................................................................................
....
119,600
.................
(119,600) ............
..
Total NCI ......................................................................
................................................................................
..................................
(53,600) ...............
(53,600)
Retained EarningsControlling Interest, December 31, 20X5 ........................
................................................................................
.....................
(250,400)
(250,400)
Totals ......................................................................
................................................................................
................................................................................
...
0
386
----------------------- Page 19-----------------------
Ch. 7Problems
PROBLEM 7-2
(1)

Company
arent
NCI
Price
Value
70%)
(30%)
Implied
Fair Value
,000
$105,000
$350,000
(
$245

Common stock
$ 50,000
Other paid-in capital in excess of

par
100,000
Retained earnings
,000
150,000
Total equity
$300,000
Interest acquired
70%
Book value
,000
$300,000
$300
30%
$210
$ 90,000

5,000
$ 15,000
$ 50,000
$ 3
Amorti
zation
Worksheet
Adjustment
Year
Life
Equipment
5,000
per
Key
$ 20,000
4
debit D1
Goodwill
30,000
debit D2
Total
$ 50,000
Analysis of 20% Interest:
Price paid .....................................................................

....................
$92,000
Common stock .........................................................
............ $
50,000
Other paid-in capital in excess of par ...............................
100,000
....
Retained earnings ....................................................

............
190,000
Income for 4 months ..................................................
30,000
..........
.......
Total stockholders equity ........................................

$370,000
Interest acquired ....................................................

.............. 20%
74,000
Excess.....................................................................
...................
$
18,000
Equipment adjustment {[$20,000 (1 1/3 years $5,000)]
20%} ................................................................
.................
(2,667)
.....
Debit parent retained earnings ..................................

$15,333
387
----------------------- Page 20-----------------------
Ch. 7Problems
Problem 7-2, Continued
(2)
Entries under the simple equity method:
20X1
20X2
Debit
Credit
Debit
Credit
Investment in Craft Company ................

75,000 (2)
42,000 (1)
Subsidiary Income .........................

42,000
75,000
Cash ......................................................
27,000 (4)
14,000 (3)
Investment in Craft Company ........

14,000
27,000
(1)
70% of $60,000 net income
(2)
70% of $30,000 (first 4 months) net income plus 90% of $60,000 (se
cond 8 months)
net income
(3)
(3)
70% of $20,000 dividends
(4)
90% of $30,000 dividends
Balance in Investment in Craft Company:

$245,000 + $42,000 $14,000 + $92,000 + $75,000 $27,000 = $413,000
Balance in Subsidiary Income (20X2 only): 70% of $30,000 (January 1 thru

April 30) +
90% of $60,000 (May 1 thru December 31, 20X2) = $75,000.
388
----------------------- Page 21-----------------------
Ch. 7Problems
(4)
James Company and Subsidiary Craft Company
Eliminations
Consolidated
Consol.
ing
Trial Balance
Controll
and Adjustments
Income
Retaine
Balance
James
Cr.
Craft
Statement
Dr.
NCI
Earning
Sheet
Inventory, December 31 .................................

100,000
50,000 ...............
(EI)
............... 3,000 ................
..........
.......
.......................................................................
000
Other Current Assets .....................................
126,000
180,000 .............
.................
.................
.................
..........
147,
.......
.......................................................... 306,000
Investment in Craft Company ........................
413,000 ..............
(CY2)
27,000
(CY1)
75,000 ......
.................
..........
.................
.......
..............
.................
312,000 ...............
..........
.................
.................
.................
...
(EL)
.......
..............
.................
35,000 ...............
.................
.................
.................
...
(D1)
.......
.................
18,000 ...............
.................
.................
.................
...
(D2)
.......
..........
..............
..........
Land ...............................................................
50,000
50,000 ...............
.................
.................
.................
..........
.......
.......................................................... 100,000
Buildings and Equipment ...............................
350,000
320,000
(D1)
20,000 ......
.................
.................
..........
.......
.......................................................... 690,000
Accumulated Depreciation .............................
(100,000)
(60,000) ............
(A)
............. 10,000 ................
..........
.......................................................................
0,000)
.......
( 17
Goodwill .........................................................
..............
.................
(D1 )
30,000
.................
.................
.................
..........
30,000
...
.......
Other Intangibles ...........................................

20,000 ..............
.................
.................
.................
.................
..........
20,000
.......
Current Liabilities ...........................................

(120,000)
(40,000) ............
.................
.................
.................
..........
.......
........................................................( 160,000)
Bonds Payable ...............................................
..............
(100,000)
.................
.................
.................
.................
..........
...
.......
........................................................( 100,000)
Other Long-Term Liabilities ............................
(200,000) .............
.................
.................
.................
.................
..........
.......
........................................................(200,000)
Common StockJames ................................
(200,000) .............
.................
.................
.................
.................
........
.........
........................................................(200,000)
Other Paid-In Capital in Excess of Par
James .....................................................
(100,000) .............
.................
.................
.................
.................
........
.........
(100,000)
Retained EarningsJames ...........................
(214,000) .............
(A)
..............
.................
.................
(195,167) ..
3,500
...
...
..............
.................
(D2)
.................
.................
..........
.................
15,333
.................
Common StockCraft ...................................

............
(50,000)
(EL)
.......
.....
45,000.....
............
.................
..... (5,000) ..............
.........
.......................................................................
Other Paid-In Capital in Excess of Par
Craft ........................................................
............
(100,000)
(EL)
............
.................
... (10,000) ..............
.....
90,000.....
.........
...................................................................
Retained EarningsCraft ..............................
............
(190,000)
(EL)
(NCI)
............. 15,000
........
(29,833) ....
.....
171,000
.........
.......................................................................
...
..............
.................
(A)
.................
.................
..........
.................
1,500
.................
..............
.................
(D2)
.................
.................
..........
.................
2,667
.................
.......
...
.......
389
----------------------- Page 22-----------------------
Ch. 7Problems
Net Sales .......................................................

(520,000)
(450,000)
(IS)
50,000 ......
......... (920,000) ............
..
.................
.......................................................................
300,000
260,000
(EI)
3,000
(IS)
50,000 ................
...
.................
513,000 .
.......................................................................
Operating Expenses ......................................

120,000
100,000
(A)
5,000 ........
........... 225,000 ............
....
.................
.......................................................................
Subsidiary Income .........................................
(75,000) .............
(CY1)
75,000
.................
.................
.................
........
.................
.........

50,000
30,000 ...............
(CY2)
............. 27,000
3,000 ........ 50,000
.......................................................................
Purchased Income .........................................
..............
.................
.................
........
.................
(EL)
...
6,000
6,000 ........
.........
Total ...............................................................
0
0
545,000
545,000 ....
.................
.........
........
.................
................................................................................
(176,000) ..............
.........
........
.................
To NCI (see distribution schedule) .........................................
.............................................................................
8,200
(8,200) ..
....
.................
To Controlling Interest (see distribution schedule) ........................
......................................................................
167,800 ................
(167,800) ..
Total NCI ......................................................................
................................................................................
..................................
(50,033) ...........
...
(50,033)
................................................................................
......................
(
312,967)
(312,967)
Totals .....................................................................
................................................................................
................................................................................
...
0
390
----------------------- Page 23-----------------------
Ch. 7Problems
Problem 7-2, Conclud

ed

(CY1)
Eliminate the current-year entries for subsidiary income.
(CY2)
Eliminate current-year entries for subsidiary dividends.
(EL)
inning of the year
Eliminate 90% of Craft Company equity balances at the beg

against the investment account. Also eliminate 20% of the
January through April

20X2 income ($30,000) with a debit of $6,000 to Purchased
Income.
(D1)/(NCI) Distribute the $35,000 excess cost and $15,000 NCI adjustment as
required by
the determination and distribution of excess schedules to
Equipment and
Goodwill.
(A)
the 20X1
Depreciate the write-up to equipment over 2 years. Charge

depreciation against January 1, 20X2, Retained Earnings o
f James Company
and Craft Company and the 20X2 adjustment against Operati

ng Expenses.
(D2)
667 and debit James
Distribute excess on 20% investment. Eliminate NCI of $2,

Retained Earnings for $15,333.
(IS)
Eliminate the intercompany sale and purchase.
(EI)
Eliminate the $3,000 of gross profit in the ending invent
ory.
Subsidiary Craft Company Income Distrib

ution
Ending inventory profit .............

(EI)
Equipment depreciation ...........

(A)
income ...............................
$3,000
5,000
$90,000
Adjusted net income ................
$82,000
NCI share ................................
NCI ..........................................
$ 8,200
10%
Parent James Company Income Distribut

ion

income ...............................
$100,000
90% of Craft income ................

Less purchased income ...........
73,800
(EL) (6,000)
$167,800
39
1
----------------------- Page 24-----------------------
Ch. 7Problems
PROBLEM 7-3

Company
Parent
NCI
Price
Value
Implied
Fair Value
(70%)
(30%)
Price paid for investment

$325,500
$150,000*
$475,500

Common stock
$100,000
Retained earnings
Total equity
$500,000
400,000
$500,000
$500,000
Interest acquired
70%
Book value
$350,000
30%
$150,000

(24,500)
(24,500)
Worksheet
Adjustment
Key
Gain on acquisition
(24,500)
credit D
* NCI value cannot be less than fair (equal to book) value of interest in net as
sets.
Analysis of September 30, 20X7, purchase:

Price paid .....................................................................
..................
$105,000
Common stock ............................................................
...........
$100,000
....
Retained earnings, January 1 ............................................

400,000
Income, JanuarySeptember .................................................

25,000
......
Total stockholders equity .........................................

$525,000
Interest acquired .......................................................

.............
20%
105,000
Excess .........................................................................
..................
$
0

(CY1)
Eliminate the subsidiary income.
(CY2)
Eliminate the intercompany dividends.
(EL)
Eliminate 90% of Stallwards equity against the investment.
(D)
Distribute excess to gain on acquisition.
(PI)
Eliminate purchased income from the investment, $25,000 20% = $5,000
.
(LN)
Eliminate the intercompany accounts resulting from the 12% note:
(1)
Stallward but
Payment of installment and interest on December 31 was made by

not received by Away.
(S)
(2)
Balance on note.
(3)
Interest income and expense.
(1)
Eliminate intercompany services.
(2)
Eliminate profit in deferred charges, $16,500 1/3 = $5,500.
(IS)
Eliminate intercompany sales of $60,000.
(EI)
Eliminate the intercompany profit in ending inventory:
Sales
Cost of Goods Sold
$450,000
=
Aways Percent Profit: =

= 25%
Sales
$1,800,000
25% $10,000 = $2,500
392
----------------------- Page 25-----------------------
Ch. 7Problems
Problem 7-3,
Continued
(F1)
Eliminate the gain on the sale of tools.
(F2)
Adjust the depreciation on tools:
Depreciation taken [($25,000 5) ] ...........................

...........................
$2,500
Less correct depreciation [($15,000 5) ] ....................
........................
1,500
Depreciation adjustment ....................................
.........................................
$1,000
Subsidiary Stallward, Inc. Income

Distribution
Unrealized profit on
engineering services ..........
(S2) $5,500
income ...............................
$ 48,000
Adjusted income ......................

$ 42,500
NCI share ................................
10%
NCI ..........................................
$ 4,250
Parent Away Company Income Dist

ribution
Unrealized gain on sale

of tools ................................
(F1) $10,000
income ...............................
$2
02,000
Unrealized profit in ending
70% interest in income of
0
inventory .............................
Stallward for full year
(70% $42,500) ................
29,750
20% interest in income for
(EI)
2,50
one-quarter year [($42,500

$25,000) 20%] ................
3,500
Gain on acquisition ..................
24,500
Depreciation adjustment
on tools ..............................
(F2)
1,000

48,250
393
----------------------- Page 26-----------------------
Ch. 7Problems
$2
Away Company and Subsidiary Stallward, Inc.

Eliminations
Consolidated
Consolidated
Trial Balance
Controllin
and Adjustments
Income
Retained
Balance
Away
Cr.
Stallward
Statement
Sheet
Dr.
NCI
Cash ..............................................................
99,500
78,000 ...............
.................
.................
.................
.......
Earnings
..........
.......................................................... 177,500
Notes Receivable ...........................................
100,000 ..............
.................
(LN1)
25,000 ......
.................
.......
.................
..........
.................
.................
....
(LN2)
..........
Accounts Receivable .....................................

200,000
100,000 .............
.................
.................
.................
.......
..........
.............
.......
.................
75,000 ...............
.................
.......................................................... 300,000
Interest Receivable ........................................
3,000 ..............
.................
(LN1)
3,000 ........
.................
.......
.................
Dividends Receivable ....................................
4,500 ..............
.................
(CY1)
4,500 ........
.................
..........
..........
.......
.................
Inventories .....................................................
924,000
125,000 .............
(EI)
............... 2,500 ................
.......
..........
.......................................................................
,500
Investment in Stallward, Inc. .........................
469,200 ..............
(D)
(CY1)
............. 43,200 ................
.......
.................
1,046
24,500
..........
.......................................................................
.............
.................
(EL)
450,000 ....
.......
.................
.............
.......
.................
5,000 ...............
.................
(CY2)
....
4,500
.................
..........
.................
.................
Property, Plant, and Equipment .....................

1,250,000
500,000 .............
(F1)
............. 10,000 ................
.......
....
(PI)
..........
..........
.......................................................................
,000
(500,000)
(150,000)
(F2)
1,000 ........
.................
.................
.......
1,740
..........
........................................................(649,000)
Deferred Charges ..........................................
25,000 ..............
.................
(S2)
5,500 ........
.................
.......
..........
............................................................ 19,500
Patents and Licenses.....................................
..............
50,000
.................
.................
.................
.................
.......
...
..........
............................................................ 50,000
Cash in Transit ...............................................
...
..............
.................
(LN1)
28,000
.................
.................
.................
..........
.......
............................................................ 28,000
Accounts Payable ..........................................
(425,000)
(80,000) ............
.................
.................
.................
.......
..........
........................................................(505,000)
Notes Payable ...............................................
...
..............
(75,000)
(LN2)
75,000
.................
.................
.................
..........
.......
.................
Dividends Payable .........................................
...
..............
(5,000)
(CY1)
4,500
.................
.................
.................
..........
.......
.............................................................. (500)
Capital StockAway .....................................
(300,000) .............
.................
...............
.................
.................
.....
..
............
........................................................(300,000)
Retained EarningsAway .............................
(1,605,000) ......
.................
...............
.................
.................
(1,605,000)
..
.......................................................................
394
----------------------- Page 27-----------------------
Ch. 7Problems
Capital StockStallward ...............................

............
(100,000)
(EL)
............
.................
.... (10,000) ..............
.....
90,000.....
........
.......................................................................
Retained EarningsStallward .......................

............
(400,000)
(EL)
............
.................
.... (40,000) ..............
.....
360,000 ...
........
.......................................................................
Sales and Services ........................................
(1,800,000)
(750,000)
(S1)
40,000 ......
.................
.................
..........
.................
.......
.......................................................................
...
..............
.................
(IS)
.................
.................
..........
.................
60,000
.................
.......
...
..............
.................
.................
..........
.................
(F1)
10,000
(2,440,000)
.......
Subsidiary Income .........................................

(43,200) .............
(CY1)
43,200
.................
.................
.................
..........
.................
.......
Interest Income ..............................................

(3,000) .............
(LN3)
3,000
.................
.................
.................
.......
..........
.................
1,350,000
525,000 .............
.................
.................
.................
..........
.................
.......
.......................................................................
...
..............
(IS)
..........
.................
60,000
.................
(EI)
2,500
1,817,500 .
.......
Administrative and Selling Expenses .............

251,000
174,000
(S2)
5,500
(S1)
............. 40,000 ................
..........
.................
.......
.......................................................................
..............
..........
.................
1,000
.................
.................
389,500 ....
...
(F2)
.......
Interest Expense ............................................

..............
3,000
.................
(LN3)
3,000 ........
.................
..........
.................
...
.......
395
----------------------- Page 28-----------------------
Ch. 7Problems
Away Company and Subsidiary Stallward Inc.

(Concluded)
Eliminations
Controlling
nsolidated
Co
Consol.
Trial
Balance
Income
and Adjustments
Retained
Balance
Away
Stallward
Statement
Dr.
NCI
Earnings
Gain on Acquisition ........................................

....
.................
................. (D)
Cr.
Sheet
.............
24,500
(24,500) ....
.................
.................

.............
....
5,000
.................
(CY2)
4,500 ........
500 ...........
.................
Purchased Income .........................................
.............
....
................. (PI)
5,000
.................
5,000 ........
.................
.................
56,700 ....
0
.................
756,700
.................
0
7
.................

................................................................................
(252,500) ..............
.................
.................
To NCI (see distribution schedule) ..........................................
............................................................................
4,250
(4,250) ......
.................
To Controlling Interest (see distribution schedule) .........................
.....................................................................
248,250 ................
(248,250) ..
Total NCI ......................................................................
................................................................................
..................................
(53,750) ..............
(53,750)
................................................................................
......................
(1,853,250)
(1,853,250)
Totals ......................................................................
................................................................................
................................................................................
..
0
396
----------------------- Page 29-----------------------
Ch. 7Problems
PROBLEM 7-4

Company
Parent
NCI
Price
Value
Implied
Fair Value
(90%)
(10%)

$495,000
$ 55,000
$550,000

$100,000
300,000
Retained earnings
100,000
Total equity
$500,000
Interest acquired
90%
Book value
$450,000
$500,000
$500,000
10%
$ 50,000

$ 45,000
$ 5,000
$ 50,000
Amortization
Worksheet
Adjustment
per Year
Buildings
$
2,500
Life
Key
20
debit D
$ 50,000
Entries of July 1, 20X7:
Investment in Doer [10% ($25,000 income $10,000 dividends)

(10% $2,500 amortization 1/2 year)] .................................
1,375
Investment Income .....................................................
...........
1,375
To record the increase in the investment account for the
portion sold of income not received in dividends.
Investment in Doer [(10% $100,000 change)] (10% 4 years

$2,500 amortization) ......................................................
.........
9,000
............
9,000
To convert the portion of the investment sold to equity by
recording undistributed income less amortization for
previous years.
Cash ...........................................................................
......................
80,000
Investment in Doer [(1/9 $495,000) + $1,375 + $9,000] .........
65,375
Paid-In Capital in Excess of ParCipher ..................................
14,625
To record sale of 10% interest.
Entries on December 31, 20X7:
Investment in Doer [80% ($60,000 income $20,000

dividends) (80% $2,500 amortization)] ................................
30,000
Investment Income .....................................................

...........
30,000
To record the increase in the investment account for the
portion sold for income not received in dividends.
397
----------------------- Page 30-----------------------
Ch. 7Problems
Investment in Doer (80% $100,000 change)

(80% 4 years $2,500 amortization) ......................................
72,000
............
72,000
To convert the portion of the investment sold to equity by
recording undistributed income less amortizations for
previous years.
Cash ...........................................................................
......................
500,000
Loss on Sale of Investment* ....................................................
........
42,000
Investment in Doer [(8/9 $495,000) + $30,000 + $72,000] .....
542,000
To record sale of 8/9 interest.
*The loss could be a result of a discontinued segment.
PROBLEM 7-5
Adjustments for investment in preferred stock:
Investment in Channel Preferred Stock ..........................................

.
1,800
...
Subsidiary Income, Preferred Stock ........................................

1,800
To record dividend preference for 20X5.
Adjustments for investment in common stock:

From cost to fair value on January 1, 20X3
Fair value, 1,000 shares ($140,000 purchase cost/5,000 shares)
$28,000
Cost ......................................................................
......................
25,000
...
Adjustment to fair value on control date ..................................

$
3,000
Investment in Channel Company ..................................................

...
3,000
....
Unrealized Gain on Investments ............................................

3,000
Adjustment for 20X320X4:
Retained Earnings ..............................................................

.............
3,600
Investment in Channel Common Stock ......................................
3,600
Net correction for equity adjustments on common:
20X320X4:
Failure to deduct preferred dividend claims from

net income to arrive at income available to
common. Decrease investment and retained
earnings (2 $3,000 60% interest) = $(3,600).
Adjustment for 20X5:
Retained Earnings ..............................................................

.............
2,400
2,400
Deduct dividends accumulated on preferred
from income available to common and from
investment (80% $3,000) = $(2,400).
398
----------------------- Page 31-----------------------
Ch. 7Problems
Adjustment for sale of 10% interest:
Adjusted cost of shares, January 1, 20X3, 1,000 shares $28 .

$28,000
Share of income, 10% $75,000 ...............................................
7,500
Common dividends, 10% $5,000 ............................................
(500)
Deduction for preferred dividends paid or accrued, 10% $9,000
(900)
Equity-adjusted cost ...........................................................
........
$34,100
Entry to correct sale:

900
Paid-In Capital in Excess of ParBillings ............................
900
Calculation of balance:
Original cost ...........................................................
........................................... $25,000
Income, 10% $130,000 (20X1 thru 20X5) ...................................
...................
13,000
Common dividends paid, 10% $11,000 (20X2 and 20X3) ......................
(1,100)
.......
Preferred dividends paid or accrued, 10% $15,000 (20X1 thru 20X5) .......
(1,500)
Balance in investment account, December 31, 20X5 ........................
...........
$35,400
Entry to correct sale:
Gain on Sale of Investment .....................................................

............
400
Investment in Channel Company ($35,400 balance $35,000
removed) ........................................................
.....................
400
PROBLEM 7-6
Determination and Distribution of Excess Schedule, December 31, 20X3

Company
Parent
NCI
Price
Value
Implied
Fair Value
(80%)
(20%)

$720,000
$180,000
$900,000

$750,000
Retained earnings
50,000
Preferred arrearage (2 years

$8,000)
(16,000)
Total equity
$784,000
Interest acquired
80%
Book value
$627,200
$784,000
$784,000
20%
$156,800

$ 92,800
$ 23,200
$116,000
Amortization
Worksheet
Adjustment
per Year
Building
$ 1,400
Life
Key
$ 28,000
20
debit D1
Goodwill
88,000
debit D2
Total
$116,000
399
----------------------- Page 32-----------------------
Ch. 7Problems
Marsha Corporation and Subsidiary Transam Corporation

Eliminations
Controlling
Consolidated
Consolidated
Trial Balance
and Adjustments
Income
Retained
Balance
M
arsha
Cr.
Transam
Statement
Sheet
Dr.
NCI
Current Assets ...............................................

806,400
463,250 .............
...............
.................
.................
.....
....................................................... 1,269,650
Investment in Transam Corporation ...............
Earnings
..
............
720,000 ..............
(CV)
(EL)
........... 686,400 ................
.....
.................
59,200
............
.......................................................................
.............
.................
92,800 ...............
.....
.................
....
(D)
............
.................
.................
Land ...............................................................
400,000
210,000 .............
..
...............
.................
.................
............
.....
.......................................................... 610,000
Building ..........................................................
950,000
500,000
(D1)
28
,000 ......
.................
.................
............
.....
....................................................... 1,478,000
Accumulated DepreciationBuilding .............
(200,000)
(160,000)...........
(A1)
............... 4,200 ................
...
..............
.......................................................................
200)
Equipment ......................................................
1,500,000
740,000 .............
(F1)
............. 25,000 ................
.....
(364,
............
.......................................................................
,000
Accumulated DepreciationEquipment ........
(400,000)
(200,000)
(F1)
0 ........
.................
.................
...
2,215
5,00
..............
........................................................(590,000)
.............
................. (F2)
...............
.................
.....
.................
....
..
............
5,000
.................
Goodwill .........................................................
....
.............
................. (D2)
88,000
..
...............
.................
.................
............
.....
............................................................ 88,000
Liabilities ........................................................
(800,000)
(550,000)...........
..
...............
.................
.................
............
.....
..................................................... (1,350,000)
Common Stock ($20 par)Marsha ...............
(2,000,000) ......
.................
.............
.................
.................
...
....
..............
..................................................... (2,000,000)
Retained EarningsMarsha ..........................
(860,000) .............
(A1)
59,200 ......
.................
...
.................
.............
................. (F1)
...............
.................
(896,960) ..
2,240 (CV)
..............
....
..
20,000
.................
Preferred Stock ($100 par)Transam ...........

...........
(100,000)
.................
.............
.................
.................
......
....
(100,000) ..
Common Stock ($20 par)Transam .............

...........
(750,000)
(EL)
(NCI)
............. 23,200
...
(150,000) ..
......
600,000
..............
.......................................................................
Retained Earnings (common)Transam .......
...........
(124,000)
(PS)
.........
.................
.................
...
.................
......
16,000........
..............
.......................................................................
.............
................. (EL)
...............
.................
.................
.............
................. (A1)
...............
.................
.....
.................
86,400
560
.................
Retained Earnings (preferred)Transam ......

...........
.................
.................
16,000 ...............
.................
....
..
(44,240) ....
....
..
............
......
(PS)
(16,000) ....
400
----------------------- Page 33-----------------------
Ch. 7Problems
Sales ..............................................................
(2,100,000)
(1,000,000) ........
.................
............. (3,100,000) ....
...
.................
.......................................................................
Subsidiary Dividend Income ..........................
(21,400) .............
(CY)
..............
.................
.................
..........
.................
21,400...
.......
.......................................................................
1,155,000
600,000 .............
.................
............... 1,755,000 ....
.....
.................
.......................................................................
Other Expenses .............................................
650,000
320,000
(A1)
1,400
(F2)
5,000 ................
....
.................
966,400
.......................................................................
200,000
50,750 ...............
(CY)
............. 21,400
29,350 ......
.......................................................... 200,000
0
..........
0
933,200 ....
.................
933,200
.................
.......

................................................................................
(378,600) ..............
.......
..........
.................
To NCI (see distribution schedule) .........................................

.............................................................................
22,120
(22,120
) ....
.................
To Controlling Interest (see distribution schedule) ........................
......................................................................
356,480 ................
(356,480) ..
Total NCI ......................................................................
................................................................................
..................................
(303,010) ..........
....
...............................................................................
................................................................................
......................... (303,010)
................................................................................
......................
(1,053,440)
...............................................................................
................................................................................
............................................. (1,053,440)
Totals .....................................................................
................................................................................
................................................................................
...
0
401
----------------------- Page 34-----------------------
Ch. 7Problems

(CV)
Convert the investment to the equity method as of January 1
Retained earnings applicable to common stock

on January 1, 20X6 ($124,000 $16,000 arrearage
for 20X4 and 20X5) ..................................
............................
$108,000
Less retained earnings applicable to common stock
.........
on December 31, 20X3 ($50,000 $16,000) ..............

34,000
Change in retained earnings ...............................

.......................
$ 74,000
Parents interest ...........................................
..............................
80%
Equity conversion .........................................
..............................
$ 59,200
(CY)
(80% $26,750).
Eliminate the intercompany common stock dividends for 20X6
(PS)
Remove the retained earnings applicable to preferred stock
on January 1, 20X6,
from the retained earnings of Transam Corporation, 2 years
$8,000.
(EL)
quity.
Eliminate the parents 80% share of subsidiary common stock e
(D)/(NCI)
etermination and
Distribute the excess and NCI adjustment according to the d

distribution of excess schedule.
(D1)
Building.
(D2)
Goodwill.
Amortize the excess:
(A1)
e current year.
Adjust the depreciation on the buildingtwo past years and on
(F1)
iation $5,000.
Adjust equipment for $25,000 gain. Reduce prior year deprec
Eliminate $20,000 gain on January 1 from Marsha retained ea

rnings.
(F2)
in on sale.
Reduce current depreciation by $5,000 for 1/5 of current ga
402
----------------------- Page 35-----------------------
Ch. 7Probl
ems
Problem 7-6
, Concluded
Subsidiary Transam Corporation Income D

istribution
Building depreciation ................

(A1) $1,400
income ...............................
$80,000
Less preferred claim to
NCI (20X6 dividends) .........
8,000
Adjusted income ......................

$70,600
NCI share ................................

20%
NCI ..........................................
$14,120
Add preferred claim .................
8,000
Total NCI .................................

$22,120
Parent Marsha Corporation Income

Distribution
Internally generated
income ...............................
$295,000
Share of Transam adjusted income
(80% $70,600) ................
56,480
Realized gain on equipment
through use ........................
5,000

$356,480
403
----------------------- Page 36-----------------------
Ch. 7Problems
PROBLEM 7-7
(1)
Adjustment of investment account:
July 1, 20X8
Implied fair value of 5,000 shares [($226,200/15,000 shares) 5,000] ............

....
$ 75,400
Book value ($71,400 + $12,000 $9,000) ..........................................
..................
74,400
Unrealized gain ................................................................
.....................................
$
1,000
Correcting entry:
Investment in Boat Corporation .................................................
.........
1,000
Unrealized Gain on Investment ............................................
.......
1,000
(2) Supporting schedules for worksheet:
Determination and Distribution of Excess Schedule, July 1, 20X8

Company
Parent
NCI
Price
Value
Implied
Fair Value
(80%)
(20%)

01,600*
$ 75,400
$377,000
$3

$250,000
Retained earnings
107,000
January 1June 20 income

Total equity
77,000
$377,000
$3
$377,000
Interest acquired
80%
Book value
01,600
20,000
20%
$3
$ 75,400

0
$
0
*$74,400 + $1,000 gain + $226,200
January 2, 20X8, Engine Corporation preferred, 250 shares:

Price paid ................................................................
...................
$7,000
Preferred stock ....................................................
...............
$
50,000
Retained earnings, preferred stock,
[$50,000/($200,000 + $50,000)] $100,000
retained earnings on January 1, 20X8 ..........................
20,000
......
.....
Total stockholders equity .................................

70,000
Interest acquired (250 2,500) ......................................
10%
7,000
Excess.....................................................................
...................
$
0
404
----------------------- Page 37-----------------------
Ch. 7Problems
January 2, 20X8, Engine Corporation common, 14,000 shares (14,000 shares/20,000

shares =
70%):
Company
Parent
NCI
Price
Value
(70%)
(30%)
Implied
Fair Value
6,000
$ 84,000
$280,000
$19

$200,000
Retained earnings (for common

shares)
80,000*
Total equity
0,000
$280,000
Interest acquired
70%
Book value
6,000
30%
$19
$ 84,000

0
$
0
*($200,000/250,000) $100,000
405
----------------------- Page 38-----------------------
Ch. 7Problems
$28
$280,000
Titan Corporatio
n and Subsidiaries Boat Corporation and Engine Corporation
Eliminations
onsolidated
onsol.
C
C
Controlling
Trial Bal
ance
Income
lance
and Adjustments
NCI
Retained
NCI
Engine
Statement
Sheet
Dr.
Boat
Engine
Cash ...........................................
87,000
95,000 .............
.................
...............
...............
Titan
Cr.
Earnings
Ba
Boat
100,000
.............
................
282,000
Accounts Receivable ..................
210,000
105,000 ...........
............. 22,400 ...........
...............
158,200
(IA)
................
................................. 450,800
Inventories ..................................
90,000
115,000 ...........
............... 6,400 ...........
...............
290,000
(EI)
................
................................. 488,600
Advance to Boat Corporation ......
.
...............
..............
17,000 ......
...............
...............
17,000 ..........
(LN)
................
...
..............
Dividends Receivable .................
..
...............
..............
24,000 ......
...............
...............
..............
Property, Plant, and Equipment ..
325,000
470,000 ...........
.................
...............
...............
24,000 .........
(DP)
................
...
777,600
.............
................
1,572,600
Accumulated Depreciation ..........
(55,000)
(160,000) .........
.................
...............
...............
(180,000)
.............
................
(395,000)
Investment in Boat Corporation:
6% Bonds ..............................
..
...............
..............
23,800 ......
...............
...............
..............
Common Stock ......................
.
...............
..............
.................
...............
...............
........ ............... (CY2)
..........
...............
..............
23,800 ..........
(B)
................
...
293,600 ...........
................
.................
........
24,000
(CY1a)16,000 ...
............... ................
...
.................
........
........ ...............
..............
(PI)
16,000
..............
...............
............... ................
...
..............
.................
........
........ ...............
..............
(EL1)
285,600
..............
...............
............... ................
...
..............
Investment in Engine Corporation:
Preferred Stock .....................
...
...............
..............
7,000 ........
...............
...............
..............
7,400 .........
(PS2)
................
...
.................
........
........ ...............
..............
(PS)
400
.................
...............
............... ................
..
...............
Common Stock ......................
207,200 ...........
.
...............
..............
..........
...............
...............
..............
(CY1b)11,200 ...
................
...
.................
........
........ ...............
..............
(EL2)
196,000
..............
...............
............... ................
...
..............
Notes Payable ............................
(14,000)
(44,000) ...........
.................
...............
...............
(45,000)
.............
................
(103,000)
Accounts Payable .......................
(96,000)
(86,000)
(IA)
.................
...............
...............
...............
.......
............... (LN)
.................
...............
(170,000)
22,400 ..
................
..
.................
........
17,000
.............
............... ................
(312,600)
Bonds Payable ............................
(150,000)
(125,000)
(B)
.................
...............
...............
(285,000)
25,000 ..
................
(535,000)
Discount on Bonds Payable ........
..
...............
..............
.................
...............
...............
8,000 .........
.............
................
8,000
Dividends Payable ......................
(22,000)
(30,000) ..
(DP)
24,000 .............
.................
...............
............... ................
(28,000)
Preferred Stock ($20 par)Titan
...............
..............
...............
...............
...............
(400,000)
406
(400,000) ..........
.............
..
................
----------------------- Page 39-----------------------
Ch. 7Problems
Common Stock ($10 par)Titan

...............
..............
.................
...............
...............
(600,000) ..........
.............
................
(600,000)
Retained EarningsTitan ...........
...............
.................
...............
(154,600) ..
Common Stock ($10 par)Boat .
50,000) ..........
.................
................
(154,600) ..........
.............
...............
.................
(EL1)
200,000 ...........
.......... (50,000) ...........
(2
.
..............................................
Retained EarningsBoat ...........
07,000) ..........
.................
................
.................
(EL1)
85,600 .............
.......... (21,400) ...........
(1
.
..............................................
Preferred Stock ($20 par)
Engine ................................
.....
(50,000)
(PS2)
.................
...............
.................
.................
...........
5,000 .............
(45,000) ..
Common Stock ($10 par)

Engine ................................
.....
(200,000)
(EL2)
.................
...............
............
.................
...........
140,000 ...........
...........(60,000)
..............................................
Retained Earnings (common)
Engine ................................... .................
.........
.......
(100,000)
(PS1)
20,000 .............
.................
...............
............... ................
.................
.................
.........
56,000
.............
(24,000) ..
....... ...............
(EL2)
.................
...............
.................
407
----------------------- Page 40-----------------------
Ch. 7Problems
Titan Corporatio
n and Subsidiaries Boat Corporation and Engine Corporation
(Concluded)
Eliminations
Consolidated
Consol.
Controlling
Trial Bal
ance
Income
Balance
and Adjustments
NCI
NCI
Engine
Statement
Sheet
Dr.
Boat
Engine
Retained
Titan
Cr.
Earnings
Boat
Retained Earnings (preferred)

Engine ...................................
....... ............... (PS2)
20,000 ......
...............
.............
.................
.........
2,000
(PS1)
(18,000) ..
....
Sales ...........................................
(500,000)
(650,000)
(IS)
............ (2,177,600) ....
................
(1,050,000)
22,400 ..
................
..............................................
Other Revenue ...........................
(2,100) .......
...
...............
(B)
1,050 .............
(1,050) ...
. .............. ................
..
...............
Gain on Bond Retirement ...........
.....
...............
00
(1,500) ...
...............
.................
..........
.............. (B)
1,5
............... ................
..
Unrealized Gain on Investment ...

...
...............
(1,000)
(1,000) .......
Subsidiary Income:
Common StockBoat ...........
...............
(CY1a)16,000
.................
...............
...............
...............
(16,000) ..........
.............
................
..
Preferred StockEngine .......

..
...............
(PS)
.................
...............
...............
400
...............
(400) .............
.............
................
..
Common StockEngine .......

...............
(CY1b)11,200
.................
...............
...............
...............
(11,200) ..........
.............
................
..
Cost of Goods Sold .....................

300,000
400,000
(EI)
22,400 ...........
1,334,000
................
650,000
6,400(IS)
................
..............................................
Other Expenses ..........................
160,000
230,000 ...........
750
......... 747,750 ............
................
..............................................
358,500
(B)
................
Dividends Declared .....................

30,000 ....
..............
24,000 ......
6,000 ......
,000 ......
Purchased Income ......................
.....
22,000
(CY2)
22
.................
...............
(PI)
16,000 ....
...............
16,000
...............
0
694,450 ....
...............
694,450
...............
..........
.............
................
..
0
0
...............
................
..

.......................................................................
(83,400) ..........
............... ................
..
...............
To NCIBoat (see distribution schedule) .....................................
...........................................................
6,960
(6,960) ....
................
.....
............
To NCIEngine (see distribution schedule) ...................................
..........................................................
8,400 ...........
(8,400) ....
......
...........
To Controlling Interest (see distribution schedule) .......................
............................................................
68,040 ...........
...............
(6
8,040) ....
NCIBoat .........................................................................
................................................................................
...................
(72,360) ...........
................
(72,360)
NCIEngine .......................................................................
................................................................................
....................................
(155,400) ...........
(155,400)
................................................................................
...........................
(200,640)
(200,640)
Totals ....................................................................
................................................................................
................................................................................
.....
0
408
----------------------- Page 41-----------------------
Ch. 7Problems
(CY1a)
poration.
Eliminate the current years income from the investment in Boat Cor
(CY1b)
ration
Eliminate the current years income from investment in Engine Corpo

Common Stock.
(CY2)
Eliminate intercompany dividends.
(PI)
nt in Boat
Eliminate the income purchased on July 1, 20X8, from the investme

Corporation (80% $20,000).
(EL1)
Eliminate the parents interest in the equity of Boat Corporation.
(PS1)
erred.
Segregate Engine Corporation Retained Earnings to common and pref

Preferred pro rata interest in Retained Earnings:
$50,000
$100,000 = $20,000
$250,000
(PS2)
Earnings
Eliminate the parents 10% interest in preferred stock and Retained

(preferred)Engine, against Investment in Engine CorporationPreferre
d Stock.
Eliminate the income from Preferred StockEngine against investment.
(EL2)
Retained
Eliminate the parents interest in Engine Corporation common stock.

earnings applicable to common stock:
$200,000
$100,000
= $80,000. Parents share 70% $80,000 =
$56,000.
$250,000
(IS)
Eliminate the intercompany sale of merchandise from Boat Corporat
ion to Engine
Corporation.
(IA)
Eliminate the intercompany receivable and payable from sale of me
rchandise from
Boat Corporation to Engine Corporation.
(EI)
Eliminate the profit from Engine ending inventory:

$22,400 ($22,400 1.4) = $6,400.
(B)
Eliminate the intercompany interest revenue and expense. Eliminat
e the balance of
the investment in bonds account against the bonds payable account.
The gain on
retirement as of the date that consolidation is required is calcu
lated as follows:
Gain remaining at year-end:

Carrying value of bonds at December 31, 20X8 .............
$25,000
Investment in bonds at December 31, 20X8 ..................
23,800
$1,200
Gain amortized during the year:

Interest revenue eliminated ($750 stated interest for half
year + 1/2 year amortization of discount of $300*) .......
$
1,050
Interest expense eliminated
(1/2 year 6% $25,000) ...................................
750
300
......
Gain at July 1, 20X8 .............................................

................
$1,500
*$1,200/2 years left = $600; $600 year = $300
(DP)
Eliminate the intercompany dividends receivable and payable.
(LN)
Eliminate advance to Boat Corporation.
409
----------------------- Page 42-----------------------
Ch. 7Problems
Problem 7-7
, Concluded
Subsidiary Boat Corporation Income

Distribution
Interest adjustment
($1,050 $750) ..................

(B)
income ...............................
$40,000
00
$ 3
Unrealized profit in ending

Gain on retirement of
inventory .............................
(EI)
bonds .................................
1,500
,400
6
(B)
Adjusted income ......................

$34,800
NCI share ................................
20%
NCI ..........................................
$ 6,960
Subsidiary Engine Corporation Income

Distribution

income ...............................
$20,000
Adjusted income ......................

$20,000
Less preferred interest:

NCI [90% ($50,000/$250,000)
$20,000].............................
3,600
Controlling (10% 1/5
$20,000).............................
400
Common stock interest ............
$16,000
NCI share (30%) ......................
4,800
Total NCI ($3,600 + $4,800) ....

$ 8,400
Parent Titan Corporation Incom

e Distribution

income ...............................
$44,600
80% Boat Corporation
income for one-half year

[($34,800 $20,000) 80%]
11,840
Controlling share of Engines
preferred stock income ......
400
70% common stock interest
in income of Engine
(70% $16,000) ................
11,200
Total controlling interest ..........

$68,040
410
----------------------- Page 43-----------------------
Ch. 7Problems
PROBLEM 7-8
(1)

Company
t
NCI
Value
Paren
Implied
Pric
Fair Value
(60%)
(40%)
$ 74,000
$185,000
$111,000

$100,000
20,000
Retained earnings
30,000
Preferred arrearage (2 years

$4,000)
(8,000)
Total equity
$142,000
$142,000
$142,000
Interest acquired
40%
60%
Book value
00
$ 56,800
$ 85,2

$ 17,200
$ 43,000
$ 25,80

Amortizati
on
Worksheet
Adjustment
ar
Life
Equipment
75
per Ye
Key
$ 43,000
8
5,3
debit D
411
----------------------- Page 44-----------------------
Ch. 7Problems
Black Jack Corporation and Subsidiary Zeppo Company

Eliminations
Controlling
Consolidated
Consolidated
Trial Balance
and Adjustments
Income
Retained
Balance
Blac
k Jack
Cr.
Zeppo
Statement
Sheet
Dr.
NCI
Earnings
Cash ..............................................................
30,400
10,000 ...............
....
.............
.................
.................
...............
..
............................................................ 40,400
Accounts Receivable (net) .............................
80,000
76,000 ...............
(IA)
............... 8,000 ................
..
...............
.......................................................................
00
148,0
Inventories .....................................................
230,000
44,000 ...............
(EI)
............... 2,600 ................
...............
..
.......................................................................
00
Other Current Assets .....................................
20,000
8,000 .................
.............
.................
.................
..
271,4
....
...............
............................................................ 28,000
Property, Plant, and Equipment .....................
1,450,000
122,000
(D)
000 ......
.................
.................
..
43,
...............
....................................................... 1,610,000
.................
.................
.......
(F1)
...............

(420,000)
(25,000)
(F1)
00
(A)
............. 10,750 ................
..
.................
1,0
...............
..........
..
.................
5,000 ...............
.................
.......................................................................
..........
.................
(F2)
.............
.................
..
.......
....
...............
1,000
.................
(453,7
50)
Investment in Zeppo Preferred Stock ............
56,000 ..............
.................
P)
56,000 ......
.................
(EL
...............
..
.................
Investment in Zeppo Common Stock .............

121,200 ..............
.................
b)
3,600 ...............
.................
..
.................
(CY1
...............
..........
.................
.................
.......
(ELC)
...............
.................
.................
.......
(D)
...............
..
.................
91,800 ...............
.................
..........
..
.................
25,800 ...............
.................
Liabilities ........................................................
(350,000)
(18,000)
(IA)
8,0
00 ........
.................
.................
...............
..
........................................................(360,000)
Common StockBlack Jack ..........................
(1,000,000) ......
.................
...........
.................
.................
......
.................
..................................................... (1,000,000)
Paid-In Capital in Excess of ParBlack Jack
........
.................
.................
2,000 ...............
.................
.........
(ELP)
.................
........................................................... (2,000)
Retained EarningsBlack Jack .....................
(195,000) .............
(A)
.........
.................
.................
.................
..........
.................
(F1)
.............
.................
..
.................
..........
.................
(BI)
.............
.................
(188,305) ..
3,225 ........
.................
.......
....
...............
2,400
.................
1,070
.......
....
.................
Preferred Stock ($100 par)Zeppo ...............

.........
........
(50,000)
(ELP)
50,000
......
...........
.................
.................
.................
.................
Common Stock ($10 par)Zeppo .................
........
(100,000)
(ELC)
60,000
.........
......
...........
.................
.................
(40,000) ....
Paid-In Capital in Excess of ParZeppo .......

........
(20,000)
(ELC)
...........
.................
.................
.........
......
(8,000) ......
12,000
Retained Earnings (preferred)Zeppo ..........

.........
........
.................
(ELP)
8,000
(PS)
8,000 ........
.................
.................
.................
Retained EarningsZeppo ............................
........
(41,000)
(PS)
17,200 ......
.................
.........
8,000 (NCI)
(26,470) ....
412
----------------------- Page 45-----------------------
Ch. 7Problems
...
..............
.................
(ELC)
.................
.................
..........
.................
19,800
.................
..............
.................
(F1)
.................
.................
..........
.................
1,600
.................
..............
.................
(BI)
.................
.................
..........
.................
180
.................
..............
.................
(A)
.................
.................
..........
.................
2,150
.................
.......
...
.......
...
.......
...
.......
Sales ..............................................................
(420,000)
(96,000)
(IS)
28,000 ......
......... (488,000) ..........
....
.................
.......................................................................
300,000
60,000
(EI)
2,600
(IS)
............. 28,000 ................
..........
.................
.......
.......................................................................
.................
333,350 ....
...
(BI)
.......
Other Expenses .............................................

80,000
26,000
(A)
5,375
(F2)
1,000 ................
....
.................
110,375
..............
..........
.................
1,250
.................
.......................................................................
25,000
4,000 .................
(CY1a) 4,000 ........
.................
25,000 ......
413
----------------------- Page 46-----------------------
Ch. 7Problems
Black
Jack Corporation and Subsidiary Zeppo Company
(Concluded)
Eliminations
Controlling
olidated
Cons
Consolidated
Trial B
alance
Income
and Adjustments
Retained
Zeppo
atement
Dr.
NCI
Earnings
Balance
Black Jack
Cr.
St
Sheet
Subsidiary IncomePreferred .......................

(4,0
00) .............
(CY1a)
4,000
...............
....
.............
................. .................
.................
Subsidiary IncomeCommon .......................
(3,6
00) .............
(CY1b)
3,600
...............
....
.............
................. .................
.................
5,000 ....
0
.................
265,000
.................
0
26
.................

................................................................................
(44,275) ..............
.................
.................
To NCI (see distribution schedule) ..........................................
............................................................................
590
(590)
.................
.................
To Controlling Interest (see distribution schedule) .........................
.....................................................................
43,685 ................
(43,685) ....
Total NCI ......................................................................
................................................................................
..................................
(75,060) ..............
(75,060)
................................................................................
......................
(206,990)
(206,990)
Totals ......................................................................
................................................................................
................................................................................
..
0
414
----------------------- Page 47-----------------------
Ch. 7Problems

(CY1a)
Eliminate the entries made concerning the investment in preferred s
tock during
20X8.
(CY1b)
k during
Eliminate the entries made concerning the investment in common stoc

20X8.
(PS)
d share is
Distribute retained earnings at the beginning of the year; preferre

$4,000 2 years of arrearage.
(ELP)
Eliminate the investment in preferred stock:
Adjustment to paid-in capital in excess of par resulting from retire

ment
of preferred stock on January 1, 20X7:
......
Price paid .....................................................

$ 56,000
Book value:
.........
Par ............................................................
$ 50,000
Dividend arrearage ............................................

58,000
8,000
Gain to paid-in capital in excess of par ..............

$ 2,000
(ELC)
stock.
Eliminate 60% of subsidiary equity against the investment in common

This equity includes 60% of the January 1, 20X8, retained earnings a
pplicable to
common stock ($41,000 less $8,000 preferred claim).
(D)/(NCI) Distribute the excess of book value to plant asset (see schedule).
(A)
Amortize the decrease in depreciation for one past year and for the
current year.
(F1)
iation of
Eliminate the gain on equipment sale ($5,000), less one years deprec
$1,000 at the beginning of the year.
(F2)
Decrease depreciation for the current year.
(IS)
Eliminate intercompany sales.
(IA)
Eliminate intercompany trade debt.
(BI)
Eliminate the beginning inventory profit:

Black Jack Corporation, $800, deduct from controlling retained earni
ngs.
Zeppo Company, $450, allocate 40% to NCI and 60% to controlling reta
ined
earnings.
(BI) (Parent seller) $2,800 ($2,800/1.4) = $800 profit
(BI) (Subsidiary seller) $1,200 ($1,200/1.6) = $450 profit
(EI)
00.
Eliminate profit in ending inventory: Black Jack, $2,000; Zeppo, $6

(EI) (Parent seller) $7,000 ($7,000/1.4) = $2,000 profit.
(EI) (Subsidiary seller) $1,600 ($1,600/1.6) = $600 profit
415
----------------------- Page 48-----------------------
Ch. 7Problems
Problem 7-8
, Concluded
Subsidiary Zeppo Company Income Di

stribution
Unrealized gross profit

600
in ending inventory ............ (EI)

income .....................................
$10,000
Depreciation adjustment ......... (A)

5,375
Realized gross profit in
beginning inventory ............ (BI)
450
Realized profit on
equipment sale ................. (F1)
1,000
Adjusted income ............................

$5,475
Less preferred share .....................
4,000
$1,475
NCI share ......................................

40%
NCI ................................................
590
Parent Black Jack Corporation Income

Distribution
Unrealized gross profit

000
in ending inventory ............ (EI)

income .....................................
$40,000
Share of Zeppo common income
(60% $1,475)) .......................
885
Realized gross profit in
beginning inventory ............ (BI)
800
Subsidiary preferred
income .....................................
4,000
$2,
Controlling interest .........................

$43,685
(2) Entries to record sale:
(a)
Adjust investment for amortization of excess cost:

Retained Earnings ($5,375 2 years 60% ownership) .........
6,450
Investment in Zeppo Common Stock ..........................
.........
6,450
(b)
Adjust the investment account for unrealized profit

on inventory sales, 60% $600:
Retained Earnings ..............................................

......................
360
Investment in Zeppo Common Stock ..........................
.........
360
(c)
To record the sale:
Cash ...........................................................
..............................
130,000
Investment in Zeppo Common Stock* .........................
.........
114,390
Gain on Sale of Subsidiary Interest .......................
...............
15,610
*Equity balance on December 31, 20X8 [$121,200 ($6,450 + $360)].
Note: The gain on the sale and subsidiary income on the common stock wou
ld be shown in
the discontinued segment section of the income statement for
20X8.
416
----------------------- Page 49-----------------------
Ch. 7Problems
APPENIDIX PROBLEMS
PROBLEM 7A-1
Analysis of 30% purchase
September 1, 20X9:
Price paid .....................................................
..................
$92,000
.....
Equity, December 31, 20X9...............................

$252,000
Add dividends declared December 31 ...................
40,000
Deduct income for last 4 months ........................

(32,000)
....
Total stockholders equity, Sept. 1, 20X9 .........

$260,000
Interest acquired ......................................
30%
78,000
...............
......
Debit Moot retained earnings. ..................................

$14,000
Moot Corporation and Subsidiary Ferre

l Corporation
Worksheet for Consolidated Bala
nce Sheet
December 31,
20X9
Eliminations
Consolida
ted
Balance Sheet
and Adjustments
Balanc
e
Moot
Dr.
Cr.
Ferrel
NCI
Shee
Cash ........................................
101,000
(IA)
8,000 .....
167,250
................
............................... 276,250
Accounts Receivable ...............
72,000 ............
(IA)
178,450
.............. 8,000
............................................. 242,450
Notes Receivable ....................
28,000 ............
..............
87,500
................
............................... 115,500
Dividends Receivable ..............
.............
........
(CY)
36,000 ............
36,000 .....
.......
Inventories ...............................
68,000 ............
(EI)
122,000
.............. 6,000
............................................. 184,000
Property, Plant, and
Equipment ............................
252,000 ..........
(F)
487,000
............ 14,000
............................................. 725,000
Accumulated Depreciation ......
(64,000)
(F)
350 ........
( 117,000)
................
............................. (180,650)
Investment in Ferrel
Corporation ..........................
.............
(EL)
........
.
........
.............
(D)
240,800 ............
226,800 ...
.......
...............
..............
14,000 ............
.......
Accounts Payable ...................

(76,000) ..........
..............
(222,000)
................
............................. (298,000)
Notes Payable .........................
(89,000) ..........
..............
(79,000)
................
............................. (168,000)
Dividends Payable .................. ...............
0)
(CY)
36,000 ............
................
(40,00
................................. (4,000)
Moot .....................................
.............
..............
(400,000) ..........
................
(400,000)
)
Ferrel .................................... ...............

(EL)
90,000 ............
(100,000
... (10
,000)
.............................................
417
----------------------- Page 50-----------------------
Ch. 7Problems
Retained EarningsMoot .......

.
(D)
.........
...............
14,000 ............
(501,000) .........
.......
.............................................
..........
...........
(EI)
...............
..........
...........
(F)
6,000
13,650
...............
..............
.....
.....
...............
..............
.....
.....
(467,350)
Retained EarningsFerrel ......
(152,000)
(EL)
... (15,200)
...............
136,800 ..........
.............................................
0
0 ...
0
...............
304,800
304,80
NCI ............................................................................
............................................................
(25,200)
(25,200)
Totals ......................................................................
...............................................................................
0
418
----------------------- Page 51-----------------------
Ch. 7Problems
Problem 7A-1, Concluded

(CY) Eliminate intercompany dividends.
(EL)
Eliminate the pro rata equity at year-end.
(D)
Adjust parent retained earnings for excess cost on 30% investment.
(EI)
Eliminate the ending inventory profit by Moot, 20% $30,000 = $6,00
(F)
Equipment profit, $14,000 10 years = $1,400 per year.
0.
Amortize to date, $1,400 1/4 = $350.

(IA)
$8,000 payment in transit.
PROBLEM 7A-2
(1)

Company
Parent
NCI
Implied
Value
Price
Fair Value
(100%)
$2,600,000
$2,600,0
(0%)
00
N/A
$1,000,000
190,000
Retained earnings
980,000
Total equity
$2,170,000
$2,170,0
00
Interest acquired
100%
Book value
00
$2,170,0

000
430,000

Adjustment
Worksheet Key
Goodwill
430,000
debit D
419
----------------------- Page 52-----------------------
Ch. 7Problems
430,
Problem 7A-2, Continu

ed
Book, Inc. and Subsidiary C

ray, Inc.
Worksheet for Consolidated Balanc
e Sheet
December 31,
20X4
Eliminations
Cons
olidated
Trial Balance
and Adjustments
Balance
ray
Sheet
Book
Cr.
Dr.
Cash .........................................
330,000 ............
825,000
.................
............................. 1,155,000
Accounts and Other Current
Receivables ..........................
835,000 ............
.. 720,000
2,140,000
(IA)
.....
..............................................
..................
...........
.................
(B2)
........
8,000
2,247,000
Inventories ................................
1,045,000 .........
90,000
2,310,000
(EI)
............................. 3,265,000
Land .........................................
300,000 ............
650,000
.................
.................................950,000
Depreciable Assets (net) ..........
4,575,000
1,980,000 .........
.................
............................. 6,555,000
Goodwill ....................................
..........
(D)
430,000
..................
.........
.................
430,000
Investment in Cray, Inc. ...........
......
.................
,000 ..
...........
........
.................
2,860,000 ....
2,430
(EL)
..................
........
430,000 ........
(D)
Long-Term Investments and

Other Assets .........................
385,000 ............
320,000
865,000
(B1)
.................................930,000
Accounts Payable and Other
Current Liabilities ..................
(1,145,000) (IA)
.............
(2,465,000)
.....
720,000 ....
..............................................
...........
(B2)
8,000
..................
.................
........
(2,882,000)
Long-Term Debt .......................
(1,300,000) (B1)
(1,900,000)
320,000 ....
........................... (2,880,000)
Common Stock ($25 par) .........
(1,000,000) (EL)
(3,200,000)
1,000,000 .
........................... (3,200,000)
Additional Paid-In Capital
in Excess of Par ...................
(190,000)
(EL)
(3,260,000)
190,000 ....
........................... (3,260,000)
Retained Earnings ....................
(3,400,000)
(1,240,000) (EL)
1,240,000 .
........................... (3,310,000)
...........
.............
(EI)
...........
.............
..................
.................
........
.....
..................
.................
........
.....
90,000
.................
Totals ....................................
0
3,998,000
,998,000
0
3
............................................ 0
420
----------------------- Page 53-----------------------
Ch. 7Problems
(EL)
uity
Eliminate the parents investment in the subsidiary and the subsidiary eq

accounts.
(D)
Distribute excess to goodwill.
(B1)
tained
Eliminate the intercompany long-term debt. There is no adjustment to re

earnings because issue and repurchase of the bonds were at face value.
(B2)
Eliminate the intercompany receivable and payable for interest bonds (1
/2 year
10% 1/2 interest period $320,000).

(EI)
1/2 =
Eliminate the unearned gross profit in Crays ending inventory, $180,000

$90,000.
(IA)
Eliminate the intercompany receivable and payable for the full price of
$720,000.
421
----------------------- Page 54-----------------------
Ch. 7Problems
(2)
Book, Inc. and Subsidiary Cray, Inc.

Consolidated Statement of Retained Earnings
December 31, 20X4:

......
Balance, January 1, 20X4 ................................................

$2,506,000
Consolidated net income ($890,000 + $260,000 $90,000
inventory profit) ................................................
1,060,000
..............
Dividends declared:
Book .............................................................
..................
(256,000)
Balance, December 31, 20X4 ..............................................
..
$3,310,000
PROBLEM 7A-3

Company
Parent
NCI
Price
Value
(90%)
(10%)
Implied
Fair Value
$324,000
$ 36,000
$360,000

Total equity
$270,000
270,000
Interest acquired
90%
$270,000
Book value
$243,000
10%
$ 27,000

$ 81,000
$
9,000
$ 90,000

Am
ortization
Worksheet
Adjustment
per Year
Life
Key
Land
$ 20,000
debit D1
Building
2,000
40,000
20
debit D2
Goodwill
30,000
debit D3
Total
$ 90,000
422
----------------------- Page 55-----------------------
Ch. 7Problems
Problem 7A-3, Continued
Press Company and Subsidiary Soap Company

Worksheet for Consolidated Balance Sheet
Eliminations
idated
Consol
Trial Balance
and Adjustments
Sheet
Balance
Press
Cr.
Cr.
Soap
NCI
Dr.
Dr.
Assets:
Accounts Receivable .........................................................
65,000
50,000 .............
(IA)
........... 8,000
...... 107,000
..
.............................................................................
...............
Bond Interest Receivable ....................................................
1,500 ..............
.........
....
(BI)
1,500 ....
.................
.................
Minimum Lease Payments Receivable ...............................
80,000 ..............
.........
....
(L1)
80,000 ..
.................
.................
Unearned Interest Income ...................................................
(2,961) ............
(L1)
2,961 .............
.............
.................
.................
Inventory ...................................................................
..........
86,000
80,000 .............
(EI)
........... 6,000
...... 160,000
.............................................................................
...............
Other Current Assets ........................................................
60,236
183,668 ...........
.............
.............
...... 243,904
...
.............................................................................
...............
Investment in Soap Company .............................................
351,000 ..............
.........
....
(EL)
270,000
.................
.................
....
...............
...............
(D)
81,000 ............
.................
.........
.................
Investment in Soap Bonds ..................................................

59,225 ..............
.........
....
(B2)
59,225 ..
.................
.................
Land ........................................................................
............
60,000
30,000
(
D1)
20,000 ..
.............
...... 110,000
.............................................................................
...............
Buildings and Equipment .....................................................
300,000
230,000
(
L2)
111,332
.............
.................
.................
...............
40,000
.............
2 .................
...............
.............
(D2)
681,33
Accumulated DepreciationBuildings and Equipment .......

(100,000)
(50,000) ..........
(A)
........... 4,000 .................
.................
....
(L3)
...............
...............
35,000 ............
.........
.................
189,000
Equipment Under Capital Lease .........................................
...............
111,332
.........
....
(L2)
111,332
.................
.................
Accumulated DepreciationEquipment Under Lease ........
...............
(35,000)
(L3)
35,000 .............
.............
.................
.................
Goodwill ....................................................................
..........
...............
...............
(D3)
30,000
.............
.............
30,0
00 .................
Totals .........................................................................
.............
960,000
600,000
Liabilities and Equity:

Accounts Payable ............................................................
78,000
70,000
(
...
IA)
8,000 ....
.............
.................
140,000
..
Bond Interest Payable .......................................................

...............
2,500
(BI)
1,500 .............
.............
.................
1,000
..
Lease Interest Payable ......................................................

...............
5,707
(L1)
5,707 .............
.............
.................
.................
Other Current Liabilities ...................................................

....
57,000
48,911 .............
.............
.............
.................
105,911
Lease Obligation Payable ...................................................
...............
71,332
(L1)
71,332 .............
.............
.................
.................
423
----------------------- Page 56-----------------------
Ch. 7Problems
Bonds Payable ...............................................................

.....
150,000
100,000
(
B2)
60,000 ..
.............
.................
190,000
..
Premium on Bonds ............................................................

...............
1,550
(B2)
930
.............
.............
.................
620
Common StockPress .......................................................
200,000 ..............
...........
..
.............
.............
.................
200,000
Other Paid-In Capital in Excess of ParPress ...................
150,000 ..............
...........
..
.............
.............
.................
150,000
Retained EarningsPress ..................................................
325,000 ..............
(A)
3,600 (B2)
1,535 ....
.................
317,535
...............
5,400
.............
.................
...............
.............
(EI)
.................
Common StockSoap ........................................................

...............
100,000
(EL)
90,000 .............
............. 10,0
00 .................
Other Paid-In Capital in Excess of ParSoap ....................

...............
70,000
(EL)
63,000 .............
............... 7,0
00 .................
Retained EarningsSoap ...................................................

...............
130,000
(EL)
117,000
(NCI)
9,000 ............. 21,170
.................
600
400
...............
(B2)
170
.................
...............
.............
...............
.............
(EI)
.................
...............
.............
(A)
.................
.................
NCI.............................................................................
.............
...............
...............
.........
....
.............
38,170 .................
38,170
Totals .........................................................................
.............
960,000
600,000
666,762
666,762
1,332,236
............................................................................
1,332,236
424
----------------------- Page 57-----------------------
Ch. 7Problems

(EL)
Eliminate 90% of the subsidiary equity accounts against the investm
ent in subsidiary account.
(D)/(NCI)
Distribute the excess of cost over book value and NCI adjustment to
net assets as required
by the determination and distribution of excess schedule.
(A)
Depreciate the write-up to building for two years.
(EI)
Eliminate the intercompany gross profit in the ending inventory.
(IA)
Eliminate the intercompany receivable and payable.
(BI)
payable.
Eliminate the bond interest receivable against 60% of bond interest
(B2)
Eliminate the bond investment against 60% of bonds payable and prem
ium on bonds. The
resulting gain of $1,705 is allocated 90% and 10% to retained earni

ngs of parent and
subsidiary, respectively.
(L1)
Eliminate the lease payable (lease obligation payable plus lease in
terest payable) against the
lease receivable (minimum lease payments receivable less unearned i
nterest income).
(L2)
Reclassify the leased equipment.
(L3)
Reclassify the accumulated depreciation on the leased equipment.
425

07 Fischer10e SM Ch07 Final

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----------------------- Page 1-----------------------

UNDERSTANDING THE ISSUES

1. Equity prior to sale of new shares .......................................

Excess of fair value over book value

Adjustment of identifiable accounts:

Parent income ...........................................................

Total income .............................................................

Internally generated ............................................

Less book value of interest acquired:

Excess of fair value over book value

Adjustment of identifiable accounts:

Cost of investment ....................................................

Sale of 8,000 shares

Gain on sale of investment (could be discontinued operation):

Sale price ($150 8,000) ...................................

There will be no consolidated statements.

The parent will report investment income

Income for 6 months ...........................................

Equipment depreciation (1/2 80% $10,000) .

Sale of 2,000 shares

Increase in paid-in equity on sale of investment:

Sale price ($150 2,000) ..................................................

b. Consolidated statements are prepared as follows:

Subsidiary income ($200,000 $10,000 depreciation) .........

Consolidated net income ..................................................

(20% 1 $ 190,000) ..................................................

(20% 1/2 $190,000) .................................................

Total NCI interest .......................................................

Internally generated ...............................................

(60% 1 $ 190,000) ..................................................

(20% 1/2 $190,000) .................................................

Total controlling interest ...............................................

Sale of 6,000 shares

Gain on sale of investment (would not be discontinued operation):

Sale price ($150 6,000) ..............................

There will be no consolidated statements.

Fair value of subsidiary

Less book value of interest acquired:

Preferred dividends in arrears

Excess of fair value over book value

Adjustment of identifiable accounts:

Parent income ...........................................................

Income would be as follows if Company P owns 1/2 of preferred stock:

Parent income ...........................................................

Consolidated net income ..........................................

Determination and Distribution of Excess Schedule

Less book value of interest acquired:

Excess of fair value over book value

Adjustment of identifiable accounts:

People Corporation and Subsidiary Sample Corporatio

Current assets ($600,000 + $100,000 + $1,200,000) ......................

Liabilities and Stockholders Equity

Current liabilities ............................................................

Determination and Distribution of Excess Schedule

Less book value of interest acquired:

Excess of fair value over book value

Adjustment of identifiable accounts:

Analysis of 20% Interest, January 1, 20X3

Price paid for additional investment in Hardwood ............................

Total stockholders equity .............................................

Interest acquired .........................................................

Exercise 7-2, Conclude

Barker Corporation and Subsidiary Hardwood Com

Current assets .................................................................