Test bank Advanced Accounting 10e by Beams Chapter 04
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Chapter 4 Test Bank
CONSOLIDATION TECHNIQUES AND PROCEDURES
Multiple Choice Questions
LO1
1.
Which of the following will be debited
account when the equity method is used?
a.
b.
c.
d.
LO1
2.
Investee net losses.
Investee net profits.
Investee declaration of dividends.
Depreciation of excess purchase
investee equipment.
to
cost
the
Investment
attributable
to
A parent company uses the equity method to account for its
wholly-owned subsidiary. The company correctly uses this method
and has fully reflected all items of subsidiary gain, loss,
income, deductions, and dividends. If the parent company is
preparing the consolidation working papers, which of the
following will be a correct working paper procedure for the
Investment account?
a. A debit for a subsidiary loss and a credit for dividends
received.
b. A credit for subsidiary income and a debit for dividends
received.
c. A debit for subsidiary dividends received and a credit for
a subsidiary loss.
d. A credit for a subsidiary loss and a credit for dividends
received.
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LO1
3.
A parent corporation owns 55% of the outstanding voting common
stock of one domestic subsidiary, but does not control the
subsidiary because it is in bankruptcy. Which of the following
statements is correct?
a. The parent corporation must still prepare consolidated
financial statements for the economic entity.
b. The parent corporation must stop using the equity method of
accounting for the subsidiary and start using the cost
method.
c. The parent company may continue to use the equity method
but the subsidiary cannot be consolidated.
d. The parent company would suspend the operation of the
Investment account until notified by the bankruptcy court
that the subsidiary has emerged from bankruptcy.
LO1
Use the following information to answer questions 4 through 9.
On January 1, 2005, Finch Corporation purchased 75% of the common stock
of Grass Co. Separate balance sheet data for the companies at the
combination date are given below:
Cash
Accounts Receivable
Inventory
Land
Plant assets
Accum. Depreciation
Investment in Lapp
Total assets
Accounts payable
Capital stock
Retained earnings
Total liabilities & equities
$
(
$
$
$
Finch
24,000
144,000
132,000
68,000
700,000
240,000 )
392,000
1,230,000
(
Grass
206,000
26,000
38,000
32,000
300,000
60,000 )
$
542,000
$
142,000
300,000
100,000
542,000
$
206,000
800,000
224,000
1,230,000
$
At the date of combination, the book values of Grass’s net assets were
equal to the fair value except for Grass’s inventory, which had a fair
value of $60,000.
Determine below what the consolidated balance would be for each of the
requested accounts.
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4.
What amount of Inventory will be reported?
a.
b.
c.
d.
5.
What amount of Goodwill will be reported?
a.
b.
c.
d.
6.
$ 69,333.
$100,000.
$130,666.
$150,000.
What is the amount of consolidated Retained Earnings?
a.
b.
c.
d.
9.
$206,000.
$261,000.
$302,500.
$348,000.
What is the reported amount for the minority interest?
a.
b.
c.
d.
8.
$10,500.
$20,000.
$42,000.
$75,500.
What amount of total liabilities will be reported?
a.
b.
c.
d.
7.
$170,000.
$169,000.
$186,500.
$192,000.
$224,000.
$299,000.
$324,000.
$346,666.
What is the amount of total assets?
a.
b.
c.
d.
$1,244,500.
$1,380,000.
$1,472,000.
$1,762,000.
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LO2
10.
Bird Corporation has several subsidiaries that are included in
its consolidated financial statements and several other
investments in corporations that are not consolidated. In its
year-end trial balance, the following intercompany balances
appear. Ostrich Corporation is the unconsolidated company; the
rest are consolidated.
Due from Pheasant Corporation
Due from Turkey Corporation
Cash advance to Skylark Company
Cash advance to Starling
Current receivable from Ostrich
$ 25,000
5,000
8,000
15,000
10,000
What amount should Bird report as intercompany receivables on
its consolidated balance sheet?
a.
b.
c.
d.
LO3
11.
$0.
$10,000.
$30,000.
$63,000.
The majority of errors in consolidated statements
a. result because the Investment in Subsidiary account on the
parent’s books and the subsidiary equity accounts on the
subsidiary’s books are reciprocal.
b. have conceptual problems from the minority interest
representation of the equity investment in consolidated net
assets by stockholders outside the affiliation structure.
c. involve the amortization of book/market differences.
d. appear when the consolidated balance sheet does not
balance.
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LO3
12.
At the beginning of 2005, Starling Inc. acquired an 80%
interest in Orchard Corporation when the book values of
identifiable net assets equaled their fair values. On December
26, 2005, Orchard declared dividends of $50,000, and the
dividends were unpaid at year-end. Starling had not recorded
the dividend receivable at December 31. A consolidated working
paper entry is necessary to
a. enter $50,000 dividends receivable in the consolidated
balance sheet.
b. enter $40,000 dividends receivable in the consolidated
balance sheet.
c. reduce the dividends payable account by $40,000 in the
consolidated balance sheet.
d. eliminate
the
dividend
payable
account
from
the
consolidated balance sheet.
LO3
13.
A parent company uses the equity method to account for its
wholly-owned subsidiary, but has applied it incorrectly. In
each of the past four full years, the company adjusted the
Investment account when it received dividends from the
subsidiary but did not adjust the account for any of the
subsidiary’s profits. The subsidiary had four years of profits
and paid yearly dividends in amounts that were less than
reported net incomes. Which one of the following statements is
correct if the parent company discovered its mistake at the end
of the fourth year, and is now preparing consolidation working
papers?
a. The parent company's Retained Earnings will be increased by
the cumulative total of four years of subsidiary profits.
b. The parent company's Retained Earnings will be increased by
the cumulative total of the first three years of subsidiary
profit, and the Subsidiary Income account will be increased
by the profit for the current year.
c. The parent company's Subsidiary Income account will be
increased by the cumulative total of four years of
subsidiary profits.
d. A prior period adjustment must be recorded for the
cumulative effect of four years of accounting errors.
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LO4
14.
Pigeon Corporation acquired a 60% interest in Home Company on
January 1, 2005, for $70,000 cash when Home had Capital Stock
of $60,000 and Retained Earnings of $40,000. All excess
purchase cost was attributable to equipment with a 10-year
(straight-line) life. Home suffered a $10,000 net loss in 2005
and paid no dividends. At year-end 2005, Home owed Pigeon
$12,000 on account. Pigeon’s separate income for 2005 was
$150,000. Consolidated net income for 2005 was
a.
b.
c.
d.
LO4
15.
$135,800.
$136,800.
$143,000.
$144,000.
On consolidated working papers, a subsidiary’s income has
a. to be reduced from beginning retained earnings.
b. to be completely eliminated.
c. to have an allocation between the noncontrolling interest
share and the parent’s share (which is eliminated).
d. only an entry in the parent company's general ledger.
LO4
16.
Which one of the following will increase consolidated retained
earnings?
a. An increase in the value of goodwill subsequent to the
parent's date of acquisition.
b. The amortization of a $10,000 excess in the fair value of a
note payable over its recorded book value.
c. The depreciation of a $10,000 excess in the fair value of
equipment over its recorded book value.
d. The sale of inventory by a subsidiary that had a $10,000
excess in fair value over recorded book value on the
parent's date of acquisition.
LO5
17.
In contrast with single entity organizations, consolidated
financial statements include which of the following in the
calculation of cash flows from operating activities under the
direct method?
a.
b.
c.
d.
The change in the balance sheet of the investee account.
Noncontrolling interest dividends.
Noncontrolling interest income expense.
Cash dividends from equity investees.
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LO5
18.
In contrast with single entity organizations, consolidated
financial statements include which of the following in the
calculation of cash flows from operating activities under the
indirect method?
a.
b.
c.
d.
LO5
19.
In contrast with single entity organizations, in preparing
consolidated financial statements which of the following is a
subtraction in the calculation of cash flows from operating
activities under the indirect method?
a.
b.
c.
d.
LO6
20.
new
The change in the balance sheet of the investee account.
Noncontrolling interest dividends.
Noncontrolling interest income expense.
Cash dividends from equity investees.
The change in the balance sheet of the investee account.
Noncontrolling interest dividends.
Noncontrolling interest income expense.
Undistributed income of equity investees.
Which of the following would be used if the trial balance
approach is followed?
a.
b.
c.
d.
Post-closing trial balances.
Adjusted trial balances.
Unadjusted trial balances.
All of the above are used equally.
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LO1
Exercise 1
Parrot Corporation acquired 80% of Hollow Co. on January 1, 2005 for
$24,000 cash when Hollow’s stockholders’ equity consisted of $10,000
of Common Stock and $3,000 of Retained Earnings. The difference
between the price paid by Parrot and the underlying equity acquired
in Hollow was allocated solely to a patent amortized over 10 years.
The separate company statements for Parrot and Hollow appear in the
first two columns of the partially completed consolidation working
papers.
Required:
Complete the consolidation working papers for Parrot and Hollow for
the year 2005.
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Parrot Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Parrot
Hollow
Debit
Credit
INCOME STATEMENT
Sales
20,000
$
Income of Hollow
$15,000
3,680
(
(
Cost of Sales
Other Expenses
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Accounts
Receivable-net
NonCntl.
(
$
Inventories
9,200) (
2,300) (
4,700)
4,000)
12,180
6,300
11,000
3,000
12,180
6,300
3,000) (
2,000)
20,180
$ 7,300
2,000
1,900
12,000
5,500
14,000
8,000
27,000
42,000
60,000
43,000
Patent
Land
Equipment and
Buildings-net
Investment in
Hollow Co.
TOTAL ASSETS
LIAB. & EQUITY
Accounts payable
Capital
Stock
Retained
Earnings
1/1 Noncontrol.
Interest
26,080
$ 141,080 $100,400
90,900
83,100
30,000
10,000
20,180
7,300
12/31 Noncontrol.
Interest
TOTAL LIAB. &
EQUITY
$
141,080 $100,400
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4-9
Consolidated
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LO2
Exercise 2
Cuckoo Company acquired all the voting stock of Perch Corporation on
January 1, 2004 for $70,000 when Perch had Capital Stock of $50,000
and Retained Earnings of $8,000. The excess of cost over book value
was allocated $3,000 to inventories that were sold in 2004, $4,000 to
equipment with a 4-year remaining useful life under the straight-line
method, and the remainder to goodwill.
Financial statements for Cuckoo and Perch at the end of the fiscal
year ended December 31, 2005 (two years after acquisition), appear in
the first two columns of the partially completed consolidation
working papers. Cuckoo has accounted for its investment in Slim using
an incomplete equity method of accounting.
Required:
Complete the
Subsidiary.
consolidation
working
papers
for
Cuckoo
Company
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Cuckoo Company and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Cuckoo
Perch
Debit
Credit
INCOME STATEMENT
Sales
$ 206,000
Income from
Perch
12,000
$ 60,000
Cost of Sales
(150,000) ( 30,000)
Other expenses
( 38,000) ( 18,000)
Net income
Cuckoo Retained
Earnings 1/1
Perch Retained
Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Other current
assets
30,000
12,000
24,000
10,000
$
30,000
( 20,000) (
$
34,000
$ 12,000
4,000)
$ 18,000
14,000
7,000
Inventories
21,000
15,000
Land
Equipment and
Buildings-net
Investment in
Perch Corp.
11,000
6,000
64,000
55,000
TOTAL ASSETS
LIAB. & EQUITY
Liabilities
Capital Stock
Retained
Earnings
TOTAL LIAB. &
EQUITY
NonCntl
80,000
$
190,000
$ 83,000
56,000
15,000
100,000
50,000
34,000
18,000
190,000
83,000
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Consolidated
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LO2
Exercise 3
Owl Corporation acquired 90% of the voting stock of Hunt Corporation
on January 1, 2004 for $7,000 when Hunt had Capital Stock of $5,000
and Retained Earnings of $1,500. The excess of cost over book value
was allocated $150 to inventories that were sold in 2004, $200 to
undervalued land, $400 to undervalued equipment with a remaining
useful life of 5 years under the straight-line method, and the
remainder to goodwill.
Financial statements for Owl and Hunt Corporations at the end of the
fiscal year ended December 31, 2005 appear in the first two columns
of the partially completed consolidation working papers. Owl has
accounted for its investment in Hunt using the equity method of
accounting. Owl Corporation owed Hunt Corporation $100 on open
account at the end of the year. Dividends receivable in the amount
of $450 payable from Hunt to Owl is included in Owl’s net
receivables.
Required:
Complete the consolidation working papers for Owl Corporation and
Subsidiary.
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Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Owl
Hunt
Debit
Credit
INCOME STATEMENT
Sales
$
10,000
Income from Hunt
$ 6,500
1,270
Cost of Sales
Depreciation
expense
(
4,000) (
3,300)
(
1,000) (
1,000)
Other expenses
(
1,800) (
700)
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
(
$
4,470
1,500
2,510
2,000
4,470
1,500
2,000) (
1,000)
4,980
$ 2,500
1,440
1,900
Receivables-net
1,550
600
Inventories
1,500
1,200
Land
Equipment and
Buildings-net
Investment in
Hunt Corporation
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Dividends
payable
1,000
600
7,500
5,700
7,590
20,580
$10,000
3,000
2,000
1,000
500
11,600
5,000
4,980
20,580
2,500
$10,000
Capital Stock
Retained
Earnings
LIAB. & EQUITY
NonCntl
$
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4-13
Consolidated
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LO3
Exercise 4
Koel Corporation acquired all the voting stock of Rain Company for
$500,000 on January 1, 2005 when Rain had Capital Stock of $300,000
and Retained Earnings of $150,000. Rain’s assets and liabilities were
fairly valued except for the plant assets. The entire cost-book
differential is allocated to plant assets and is fully depreciated on
a straight-line basis over a 10-year period.
During 2005, Koel borrowed $25,000 on a short-term non-interestbearing note from Rain, and on December 31, 2005, Koel mailed a check
to Rain to settle the note. Rain deposited the check on January 5,
2006, but receipt of payment of the note was not reflected in Rain’s
December 31, 2005 balance sheet.
Required:
Complete the consolidation working papers.
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Koel Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Koel
Rain
Debit
Credit
INCOME STATEMENT
Sales
$ 500,000
Income from
Rain
135,000
$400,000
Cost of Sales
(350,000) (200,000)
Other expenses
(100,000) (60,000)
Net income
185,000
Koel Retained
Earnings 1/1
Rain Retained
Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
150,000
$ 185,000
$140,000
(70,000)
$ 485,000
$220,000
25,000
210,000
300,000
200,000
425,000
565,000
$
Capital Stock
Retained
Earnings
TOTAL EQUITIES
140,000
300,000
BALANCE SHEET
Note Receivable
from Koel
Other current
assets
Plant assetsnet
Investment in
Rain Company
TOTAL ASSETS
EQUITIES
Liabilities
NonCntl
$
975,000
$750,000
290,000
230,000
200,000
300,000
485,000
220,000
975,000
$750,000
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4-15
Balance
Sheet
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LO4
Exercise 5
Owl Corporation acquired 90% of Barn Corporation on January 1, 2005
for $72,000 cash when Barn’s stockholders’ equity consisted of
$30,000 of Common Stock and $30,000 of Retained Earnings. The
difference between the price paid by Owl and the underlying equity
acquired in Barn was allocated to a plant asset with a remaining 10year straight-line life that was overvalued by $5,000. The remainder
was attributable to goodwill.
The separate company statements for
Owl and Barn appear in the first two columns of the partially
completed consolidation working papers.
Required:
Complete the consolidation working papers for Owl and Barn for the
year 2005.
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Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Owl
Barn
Debit
Credit
INCOME STATEMENT
Sales
$
60,000
Income of Barn
3,510
Cost of Sales
Depreciation
Expense
Other
Expenses
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Accounts
Receivable-net
$22,000
( 13,000) (
9,500)
(
2,000) (
3,000)
( 23,000) (
6,100)
25,510
3,400
25,000
30,000
25,510
3,400
( 15,000) (
3,000)
35,510
$30,400
26,520
7,000
22,000
10,000
Inventories
20,000
14,000
Land
Equipment and
Buildings-net
Investment in
Barn Corporation
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Capital
Stock
Retained
Earnings
Noncontrolling
Interest
$
TOTAL LIAB. &
EQUITY
27,000
42,000
70,000
38,000
72,810
238,330
$111,000
32,820
50,600
170,000
30,000
35,510
30,400
238,330
$111,000
$
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4-17
Min
Int
Consolidated
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LO4
Exercise 6
Lorikeet Company has the following information collected in order to
do make a cash flow statement and uses the direct format for Cash
Flow from Operations.
The annual report year end is December 31,
2005.
Noncontrolling Interest Dividends
Dividends Received from Equity Investees
Cash Paid to Employees
Cash Paid for Other Operating Activities
Cash Paid for Interest Expense
Cash Proceeds from the Sale of Equipment
Cash Paid to Suppliers
Cash Received from Customers
$20,000
17,000
37,000
34,000
22,300
70,000
192,700
412,600
Required:
1. Prepare the Cash Flow for Operations part of the cash flow
statement for Lorikeet.
LO4
Exercise 7
Bronzewing Company has the following information collected in order
to do make a cash flow statement and uses the indirect format for
Cash Flow from Operations.
The annual report year end is December
31, 2005.
Noncontrolling Interest Dividends
Undistributed Income of Equity Investees
Depreciation Expense
Consolidated Net Income
Increase in Accounts Payable
Amortization of Patent
Decrease in Accounts Receivable
Increase in Inventories
Gain on sale of equipment
Noncontrolling Interest Expense
$17,000
7,500
65,000
175,000
15,000
13,000
48,000
27,500
45,000
17,000
Required:
1. Prepare the Cash Flow for Operations part of the cash flow
statement for Bronzewing.
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4-18
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LO6
Exercise 8
Swift Corporation paid $88,500 for a 70% interest in Cave Corporation
on January 1, 2005, when Cave’s Capital Stock was $70,000 and its
Retained Earnings $30,000. The fair values of Cave's identifiable
assets and liabilities were the same as the recorded book values on
the acquisition date. Trial balances at the end of the year on
December 31, 2005 are given below:
Cash
Accounts Receivable
Inventory
Investment in Cave
Cost of Goods Sold
Operating Expenses
Dividends
$
$
Liabilities
Capital stock, $10 par value
Additional Paid-in Capital
Retained Earnings
Sales Revenue
Dividend Income
$
$
Swift
Inc.
4,500 $
25,000
100,000
88,500
60,000
22,000
15,000
315,000 $
47,000 $
100,000
10,000
31,000
120,000
7,000
315,000 $
Cave
Inc.
20,000
30,000
80,000
40,000
37,000
10,000
217,000
27,000
70,000
30,000
90,000
217,000
During 2005, Swift made only two journal entries with respect to its
investment in Cave. On January 1, 2005, it debited the Investment in
Cave account for $88,500 and on November 1, 2005, it credited
Dividend Income for $7,000.
Required:
1. Prepare a consolidated income statement and a statement of
retained earnings for Swift and Subsidiary for the year ended
December 31, 2005.
2. Prepare a consolidated balance sheet for Swift and Subsidiary as
of December 31, 2005.
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4-19
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LO6
Exercise 9
Emu Corporation paid $77,000 for a 60% interest in Chick Inc. on
January 1, 2005, when Chick’s Capital Stock was $80,000 and its
Retained Earnings $20,000. The fair values of Chick's identifiable
assets and liabilities were the same as the recorded book values on
the acquisition date. Trial balances at the end of the year on
December 31, 2005 are given below:
Cash
Accounts Receivable
Inventory
Investment in Cave
Cost of Goods Sold
Operating Expenses
Dividends
$
$
Liabilities
Capital stock, $10 par value
Additional Paid-in Capital
Retained Earnings
Sales Revenue
Dividend Income
$
$
Emu
Inc.
4,500 $
25,000
100,000
77,000
71,500
22,000
15,000
315,000 $
Chick
Inc.
20,000
30,000
70,000
47,000 $
100,000
11,000
31,000
120,000
6,000
315,000 $
27,000
80,000
50,000
37,000
10,000
217,000
20,000
90,000
217,000
During 2005, Emu made only two journal entries with respect to its
investment in Chick. On January 1, 2005, it debited the Investment in
Chick account for $77,000 and on November 1, 2005, it credited
Dividend Income for $6,000.
Required:
1. Prepare a consolidated income statement and a statement of
retained earnings for Emu and Subsidiary for the year ended
December 31, 2005.
2. Prepare a consolidated balance sheet for Emu and Subsidiary as
of December 31, 2005.
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SOLUTIONS
Multiple Choice Questions
1
b
2
d
3
c
4
c
Parent’s inventory of $132,000 plus subsidiary’s
book value of inventory of $38,000 plus 75% of
the excess of the fair value over the book value
= $132,000+$38,000+(75%)x($22,000) = $186,500
5
d
Purchase price minus 75% of Grass’s underlying
book value - $16,500 of excess cost over book
value allocated to inventory (see 9) =
$392,000 – (75%)x(400,000) - $16,500 = $75,500
6
d
Just add the liability amounts together
7
b
(25%)x($400,000) = $100,000
8
a
The parent’s Retained Earnings is the amount of
consolidated Retained Earnings
9
c
Cash
Accounts Receivable
Inventory
$132,000+$38,000+$16,500=
Land
Plant assets-net
Goodwill
Total assets
10
b
11
d
12
c
13
b
$230,000
170,000
186,500
100,000
700,000
75,500
$1,472,000
Intercompany receivables and
payables from unconsolidated
subsidiaries would not be
eliminated.
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14
c
15
c
16
b
17
d
18
c
19
d
20
b
Pigeon’s separate income
Less: 60% of Home’s $10,000 loss
=
Less: Equipment depreciation
$10,000/ 10 years =
Consolidated net income
$
150,000
(
6,000 )
(
$
1,000 )
143,000
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Exercise 1
Parrot Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Parrot
Hollow
Debit
Credit
INCOME STATEMENT
Sales
20,000
$
Cost of Sales
Other
Expenses
$ 35,000
$ 15,000
3,680
Income of Hollow
a
(
9,200) (
4,700)
(
2,300) (
4,000) c
$ 3,680
(
$
Inventories
12,180
6,300
11,000
3,000
12,180
6,300
3,000) (
b
(
7,660)
$1,260 (
1,260)
11,000
3,000
12,180
a
$ 1,600 (
400)
3,000
$ 20,180
20,180
$ 7,300
2,000
1,900
12,000
5,500
17,500
14,000
8,000
22,000
$
b
TOTAL ASSETS
$
LIB. & EQUITY
Accounts payable
Capital
Stock
Retained
Earnings
1/1 Noncontrol.
Interest
12/31 Noncontrol.
Interest
TOTAL LIAB. &
EQUITY
$
13,900)
$ 12,180
2,000)
Patent
Land
Equipment and
Buildings-net
Investment in
Hollow Co.
(
1,360
Minority Income
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Accounts
Receivable-net
Consolidated
NonCntl.
27,000
42,000
60,000
43,000
13,600
c
3,900
12,240
1,360
69,000
103,000
a
b
26,080
2,080
24,000
141,080
$100,400
$227,640
90,900
83,100
$174,000
30,000
10,000
20,180
7,300
b
30,000
10,000
20,180
b
2,600
2,600
3,460
141,080
$100,400
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3,460
$227,640
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Exercise 2
Cuckoo Company and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
INCOME STATEMENT
Sales
Income from
Perch
Cuckoo
Perch
$ 206,000
$60,000
12,000
Cost of Sales
(150,000)
( 38,000)
( 18,000)
Net income
Cuckoo Retained
Earnings 1/1
Perch Retained
Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
30,000
12,000
24,000
10,000
30,000
( 20,000)
$
Debit
Credit
$266,000
a
b
$ 1,000
11,000
d
1,000
( 30,000)
Other expenses
$
Balance
Sheet
( 180,000)
(
29,000
a
4,000
c
10,000
20,000
$12,000
(
57,000)
29,000
4,000)
b $( 4,000)
(
20,000)
34,000
$18,000
$ 29,000
14,000
7,000
21,000
Inventories
21,000
15,000
36,000
Land
Equipment and
Buildings-net
Investment in
Perch Corporation
11,000
6,000
17,000
64,000
55,000
Capital Stock
Retained
Earnings
TOTAL LIAB. &
EQUITY
3,000
c
5,000
80,000
Goodwill
TOTAL ASSETS
LIAB. & EQUITY
Liabilities
c
$
$
d
a
b
c
1,000
5,000
7,000
68,000
121,000
5,000
190,000
$83,000
$200,000
56,000
15,000
71,000
100,000
50,000
34,000
18,000
29,000
190,000
$83,000
$200,000
c
50,000
100,000
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Exercise 3
INCOME STATEMENT
Sales
$
Income from Hunt
Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Owl
Hunt
Debit
Credit
Balance
Sheet
10,000
$16,500
$6,500
1,270
a $1,270
Cost of Sales
Depreciation
expense
(
4,000)
(
3,300)
(
1,000)
(
1,000)
Other expenses
(
1,800)
(
700)
c
4,470
1,500
Retained Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
2,510
2,000
4,470
2,500
(
$
2,000)
(
$ 2,500
1,440
1,900
Receivables-net
1,550
600
Inventories
Goodwill
1,500
1,200
Land
Equipment and
Buildings-net
Investment in
Hunt Corporation
TOTAL ASSETS
1,000
$
(
2,080)
(
2,500)
$(150) (
150)
4,470
b
2,510
2,000
4,470
1,000)
4,980
7,300)
80
Minority income
Net income
(
a
$ 900
(100) (
2,000)
$4,980
$3,340
d
e
100
450
1,600
b
400
2,700
400
600
b
200
1,800
7,500
5,700
b
320
8,490
21,480
$10,000
3,000
1,000
2,000
500
d
e
100
450
11,600
5,000
b
5,000
5,880
3,500
c
a
b
13,440
80
1,270
7,220
$ 23,280
LIAB. & EQUITY
Accounts payable
Dividends payable
Capital Stock
Retained earnings
Noncntl. interest
1/1
Noncntl. interest
12/31
LIAB. & EQUITY
$
11,600
4,980
b
700
700
850
$
21,480
4,900
1,050
$10,000
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750
$ 23,280
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Exercise 4
Koel Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Koel
Rain
Debit
Credit
INCOME STATEMENT
Sales
Income from
Rain
$
500,000
$400,000
135,000
(350,000)
(200,000)
Other expenses
(100,000)
( 60,000)
185,000
140,000
Koel Retained
Earnings 1/1
Rain Retained
Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
$135,000
(550,000)
d
5,000
(165,000)
185,000
300,000
300,000
150,000
$
185,000
c
150,000
$140,000
185,000
( 70,000)
$
BALANCE SHEET
Note Receivable
from Koel
Other current
assets
Plant assetsnet
Investment in
Rain Company
TOTAL ASSETS
$900,000
b
Cost of Sales
Net income
Balance
Sheet
485,000
b
$220,000
$485,000
25,000
210,000
200,000
300,000
a
c
25,000
50,000
a
25,000
d
5,000
b
c
65,000
500,000
$535,000
425,000
670,000
565,000
$
$70,000
975,000
$750,000
$1,205,000
290,000
230,000
520,000
Capital Stock
Retained
Earnings
200,000
300,000
485,000
220,000
485,000
TOTAL LIAB & EQUITY $
975,000
$750,000
$1,205,000
LIAB & EQUITY
Liabilities
c
300,000
200,000
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Exercise 5
Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers at December 31, 2005
Eliminations
Min
Owl
Barn
Int
Debit
Credit
INCOME STATEMENT
Sales
$
60,000
Income from Barn
$ 22,000
3,510
Cost of Sales
Depreciation
Expense
Other
Expenses
$ 82,000
a
(
13,000)
(
9,500)
(
2,000)
(
3,000)
(
23,000)
(
6,100)
$ 3,510
d
$
450
Minority Income
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Accounts
Receivable-net
$ 340
(
$
Inventories
25,510
3,400
25,000
30,000
25,510
3,400
15,000)
(
(
22,500)
(
4,550)
(
29,100)
(
340)
25,510
b
30,000
25,000
25,510
3,000)
a
2,700
$(
300) (
15,000)
35,510
$30,400
$ 35,510
26,520
7,000
33,520
22,000
10,000
32,000
20,000
14,000
34,000
Goodwill
b
Land
Equipment and
Buildings-net
Investment in
Barn Corporation
Consolidated
27,000
42,000
70,000
38,000
22,500
22,500
69,000
c
450
b
b
4,500
72,000
a
810
103,950
72,810
TOTAL ASSETS
EQUITIES
Accounts payable
Capital
Stock
Retained
Earnings
1/1 Minority
Interest
12/31 Minority
Interest
$
TOTAL EQUITIES
$
238,330
$111,000
294,970
32,820
50,600
83,420
170,000
30,000
170,000
35,510
30,400
35,510
b
6,000
6,000
6,040
238,330
$111,000
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$294,970
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Preliminary computations
Investment cost on January 1, 19X4
Less: Book value acquired = (90%)x($60,000) =
Excess cost over book value acquired =
$
$
Excess allocated to:
Overvalued equipment ($5,000) x (90%)=
Remainder to goodwill
Excess cost over book value
$(
Income from Barn Corporation:
Equity in Barn’s net income (90%)x(3,400)=
Depreciation “savings” on equipment $4,500/10 yrs =
Income from Barn
Investment in Barn account:
Initial investment cost
Plus: Income from Barn
Less: Dividends (3,000)x(90%)=
Investment in Barn at December 31
$
4,500)
22,500
18,000
$
3,060
$
450
1,260
$
(
$
Exercise 6
Lorikeet
Company
and
Subsidiary
Consolidated
Cash Flows for the Year Ended December 31,2005
Cash Flows from Operating Activities
Cash Received from Customers
Dividends Received from Equity Investees
Less
Cash Paid to Suppliers
Cash Paid to Employees
Cash Paid for Other Operating Activities
Cash Paid for Interest Expense
Net cash flows from operating activities
72,000
54,000
18,000
72,000
3,510
2,700)
72,810
Statement
of
$412,600
17,000
$192,700
37,000
34,000
22,300
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(286,000)
$143,600
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Exercise 7
Bronzewing
Company
and
Subsidiary
Consolidated
Cash Flows for the Year Ended December 31,2005
Statement
Cash Flows from Operating Activities
Consolidated Net Income
Adjustments to reconcile net income to cash
Noncontrolling Interest Expense
Undistributed Income of Equity Investees
Depreciation Expense
Increase in Accounts Payable
Amortization of Patent
Decrease in Accounts Receivable
Increase in Inventories
Gain on sale of equipment
Net cash flows from operating activities
of
$175,000
(
(
(
$17,000
7,500 )
65,000
15,000
13,000
48,000
27,500 )
45,000 )
78,000
253,000
Exercise 8
Requirement 1
Swift and Subsidiary Corporation
Consolidated Income Statement
for the year ended December 31, 2005
Sales Revenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Minority Interest Income
Total Expenses and Minority Income
Consolidated Net Income
Retained Earnings, January 1, 2005
Dividends
Retained Earnings, December 31, 2005
$
$
210,000
100,000
110,000
59,000
3,900
$
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62,900
47,100
31,000
( 15,000)
63,100
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Requirement 2
Swift and Subsidiary Corporation
Consolidated Balance Sheet
December 31, 2005
Assets
Cash
Accounts Receivable
Inventory
Goodwill
Total Assets
Equities
Liabilities
Capital Stock
Additional Paid-in Capital
Retained Earnings
Minority Interest
Total Liabilities and Equities
$
$
$
$
24,500
55,000
180,000
18,500
278,000
74,000
100,000
10,000
63,100
30,900
278,000
Minority Interest Calculation:
$30,000 Beginning equity + $3,900 Net income - $3,000 Dividends = $30,900
Exercise 9
Requirement 1
Emu and Subsidiary Corporation
Consolidated Income Statement
for the year ended December 31, 2005
Sales Revenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Minority Interest Income
Total Expenses and Minority Income
Consolidated Net Income
Retained Earnings, January 1, 2005
Dividends
Retained Earnings, December 31, 2005
$
210,000
121,500
88,500
$ 59,000
1,200
$
60,200
28,300
31,000
( 15,000)
44,300
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Requirement 2
Emu and Subsidiary Corporation
Consolidated Balance Sheet
December 31, 2005
Assets
Cash
Accounts Receivable
Inventory
Goodwill
Total Assets
Equities
Liabilities
Capital Stock
Additional Paid-in Capital
Retained Earnings
Minority Interest
Total Liabilities and Equities
$
$
$
$
24,500
55,000
170,000
17,000
266,500
74,000
100,000
11,000
44,300
37,200
266,500
Minority Interest Calculation:
$40,000 Beginning equity + $1,200 Net income - $4,000 Dividends = $37,200
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4-31
Chapter 4 Test Bank
CONSOLIDATION TECHNIQUES AND PROCEDURES
Multiple Choice Questions
LO1
1.
Which of the following will be debited
account when the equity method is used?
a.
b.
c.
d.
LO1
2.
Investee net losses.
Investee net profits.
Investee declaration of dividends.
Depreciation of excess purchase
investee equipment.
to
cost
the
Investment
attributable
to
A parent company uses the equity method to account for its
wholly-owned subsidiary. The company correctly uses this method
and has fully reflected all items of subsidiary gain, loss,
income, deductions, and dividends. If the parent company is
preparing the consolidation working papers, which of the
following will be a correct working paper procedure for the
Investment account?
a. A debit for a subsidiary loss and a credit for dividends
received.
b. A credit for subsidiary income and a debit for dividends
received.
c. A debit for subsidiary dividends received and a credit for
a subsidiary loss.
d. A credit for a subsidiary loss and a credit for dividends
received.
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LO1
3.
A parent corporation owns 55% of the outstanding voting common
stock of one domestic subsidiary, but does not control the
subsidiary because it is in bankruptcy. Which of the following
statements is correct?
a. The parent corporation must still prepare consolidated
financial statements for the economic entity.
b. The parent corporation must stop using the equity method of
accounting for the subsidiary and start using the cost
method.
c. The parent company may continue to use the equity method
but the subsidiary cannot be consolidated.
d. The parent company would suspend the operation of the
Investment account until notified by the bankruptcy court
that the subsidiary has emerged from bankruptcy.
LO1
Use the following information to answer questions 4 through 9.
On January 1, 2005, Finch Corporation purchased 75% of the common stock
of Grass Co. Separate balance sheet data for the companies at the
combination date are given below:
Cash
Accounts Receivable
Inventory
Land
Plant assets
Accum. Depreciation
Investment in Lapp
Total assets
Accounts payable
Capital stock
Retained earnings
Total liabilities & equities
$
(
$
$
$
Finch
24,000
144,000
132,000
68,000
700,000
240,000 )
392,000
1,230,000
(
Grass
206,000
26,000
38,000
32,000
300,000
60,000 )
$
542,000
$
142,000
300,000
100,000
542,000
$
206,000
800,000
224,000
1,230,000
$
At the date of combination, the book values of Grass’s net assets were
equal to the fair value except for Grass’s inventory, which had a fair
value of $60,000.
Determine below what the consolidated balance would be for each of the
requested accounts.
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4.
What amount of Inventory will be reported?
a.
b.
c.
d.
5.
What amount of Goodwill will be reported?
a.
b.
c.
d.
6.
$ 69,333.
$100,000.
$130,666.
$150,000.
What is the amount of consolidated Retained Earnings?
a.
b.
c.
d.
9.
$206,000.
$261,000.
$302,500.
$348,000.
What is the reported amount for the minority interest?
a.
b.
c.
d.
8.
$10,500.
$20,000.
$42,000.
$75,500.
What amount of total liabilities will be reported?
a.
b.
c.
d.
7.
$170,000.
$169,000.
$186,500.
$192,000.
$224,000.
$299,000.
$324,000.
$346,666.
What is the amount of total assets?
a.
b.
c.
d.
$1,244,500.
$1,380,000.
$1,472,000.
$1,762,000.
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4-3
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LO2
10.
Bird Corporation has several subsidiaries that are included in
its consolidated financial statements and several other
investments in corporations that are not consolidated. In its
year-end trial balance, the following intercompany balances
appear. Ostrich Corporation is the unconsolidated company; the
rest are consolidated.
Due from Pheasant Corporation
Due from Turkey Corporation
Cash advance to Skylark Company
Cash advance to Starling
Current receivable from Ostrich
$ 25,000
5,000
8,000
15,000
10,000
What amount should Bird report as intercompany receivables on
its consolidated balance sheet?
a.
b.
c.
d.
LO3
11.
$0.
$10,000.
$30,000.
$63,000.
The majority of errors in consolidated statements
a. result because the Investment in Subsidiary account on the
parent’s books and the subsidiary equity accounts on the
subsidiary’s books are reciprocal.
b. have conceptual problems from the minority interest
representation of the equity investment in consolidated net
assets by stockholders outside the affiliation structure.
c. involve the amortization of book/market differences.
d. appear when the consolidated balance sheet does not
balance.
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LO3
12.
At the beginning of 2005, Starling Inc. acquired an 80%
interest in Orchard Corporation when the book values of
identifiable net assets equaled their fair values. On December
26, 2005, Orchard declared dividends of $50,000, and the
dividends were unpaid at year-end. Starling had not recorded
the dividend receivable at December 31. A consolidated working
paper entry is necessary to
a. enter $50,000 dividends receivable in the consolidated
balance sheet.
b. enter $40,000 dividends receivable in the consolidated
balance sheet.
c. reduce the dividends payable account by $40,000 in the
consolidated balance sheet.
d. eliminate
the
dividend
payable
account
from
the
consolidated balance sheet.
LO3
13.
A parent company uses the equity method to account for its
wholly-owned subsidiary, but has applied it incorrectly. In
each of the past four full years, the company adjusted the
Investment account when it received dividends from the
subsidiary but did not adjust the account for any of the
subsidiary’s profits. The subsidiary had four years of profits
and paid yearly dividends in amounts that were less than
reported net incomes. Which one of the following statements is
correct if the parent company discovered its mistake at the end
of the fourth year, and is now preparing consolidation working
papers?
a. The parent company's Retained Earnings will be increased by
the cumulative total of four years of subsidiary profits.
b. The parent company's Retained Earnings will be increased by
the cumulative total of the first three years of subsidiary
profit, and the Subsidiary Income account will be increased
by the profit for the current year.
c. The parent company's Subsidiary Income account will be
increased by the cumulative total of four years of
subsidiary profits.
d. A prior period adjustment must be recorded for the
cumulative effect of four years of accounting errors.
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LO4
14.
Pigeon Corporation acquired a 60% interest in Home Company on
January 1, 2005, for $70,000 cash when Home had Capital Stock
of $60,000 and Retained Earnings of $40,000. All excess
purchase cost was attributable to equipment with a 10-year
(straight-line) life. Home suffered a $10,000 net loss in 2005
and paid no dividends. At year-end 2005, Home owed Pigeon
$12,000 on account. Pigeon’s separate income for 2005 was
$150,000. Consolidated net income for 2005 was
a.
b.
c.
d.
LO4
15.
$135,800.
$136,800.
$143,000.
$144,000.
On consolidated working papers, a subsidiary’s income has
a. to be reduced from beginning retained earnings.
b. to be completely eliminated.
c. to have an allocation between the noncontrolling interest
share and the parent’s share (which is eliminated).
d. only an entry in the parent company's general ledger.
LO4
16.
Which one of the following will increase consolidated retained
earnings?
a. An increase in the value of goodwill subsequent to the
parent's date of acquisition.
b. The amortization of a $10,000 excess in the fair value of a
note payable over its recorded book value.
c. The depreciation of a $10,000 excess in the fair value of
equipment over its recorded book value.
d. The sale of inventory by a subsidiary that had a $10,000
excess in fair value over recorded book value on the
parent's date of acquisition.
LO5
17.
In contrast with single entity organizations, consolidated
financial statements include which of the following in the
calculation of cash flows from operating activities under the
direct method?
a.
b.
c.
d.
The change in the balance sheet of the investee account.
Noncontrolling interest dividends.
Noncontrolling interest income expense.
Cash dividends from equity investees.
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LO5
18.
In contrast with single entity organizations, consolidated
financial statements include which of the following in the
calculation of cash flows from operating activities under the
indirect method?
a.
b.
c.
d.
LO5
19.
In contrast with single entity organizations, in preparing
consolidated financial statements which of the following is a
subtraction in the calculation of cash flows from operating
activities under the indirect method?
a.
b.
c.
d.
LO6
20.
new
The change in the balance sheet of the investee account.
Noncontrolling interest dividends.
Noncontrolling interest income expense.
Cash dividends from equity investees.
The change in the balance sheet of the investee account.
Noncontrolling interest dividends.
Noncontrolling interest income expense.
Undistributed income of equity investees.
Which of the following would be used if the trial balance
approach is followed?
a.
b.
c.
d.
Post-closing trial balances.
Adjusted trial balances.
Unadjusted trial balances.
All of the above are used equally.
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LO1
Exercise 1
Parrot Corporation acquired 80% of Hollow Co. on January 1, 2005 for
$24,000 cash when Hollow’s stockholders’ equity consisted of $10,000
of Common Stock and $3,000 of Retained Earnings. The difference
between the price paid by Parrot and the underlying equity acquired
in Hollow was allocated solely to a patent amortized over 10 years.
The separate company statements for Parrot and Hollow appear in the
first two columns of the partially completed consolidation working
papers.
Required:
Complete the consolidation working papers for Parrot and Hollow for
the year 2005.
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Parrot Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Parrot
Hollow
Debit
Credit
INCOME STATEMENT
Sales
20,000
$
Income of Hollow
$15,000
3,680
(
(
Cost of Sales
Other Expenses
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Accounts
Receivable-net
NonCntl.
(
$
Inventories
9,200) (
2,300) (
4,700)
4,000)
12,180
6,300
11,000
3,000
12,180
6,300
3,000) (
2,000)
20,180
$ 7,300
2,000
1,900
12,000
5,500
14,000
8,000
27,000
42,000
60,000
43,000
Patent
Land
Equipment and
Buildings-net
Investment in
Hollow Co.
TOTAL ASSETS
LIAB. & EQUITY
Accounts payable
Capital
Stock
Retained
Earnings
1/1 Noncontrol.
Interest
26,080
$ 141,080 $100,400
90,900
83,100
30,000
10,000
20,180
7,300
12/31 Noncontrol.
Interest
TOTAL LIAB. &
EQUITY
$
141,080 $100,400
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Consolidated
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LO2
Exercise 2
Cuckoo Company acquired all the voting stock of Perch Corporation on
January 1, 2004 for $70,000 when Perch had Capital Stock of $50,000
and Retained Earnings of $8,000. The excess of cost over book value
was allocated $3,000 to inventories that were sold in 2004, $4,000 to
equipment with a 4-year remaining useful life under the straight-line
method, and the remainder to goodwill.
Financial statements for Cuckoo and Perch at the end of the fiscal
year ended December 31, 2005 (two years after acquisition), appear in
the first two columns of the partially completed consolidation
working papers. Cuckoo has accounted for its investment in Slim using
an incomplete equity method of accounting.
Required:
Complete the
Subsidiary.
consolidation
working
papers
for
Cuckoo
Company
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Cuckoo Company and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Cuckoo
Perch
Debit
Credit
INCOME STATEMENT
Sales
$ 206,000
Income from
Perch
12,000
$ 60,000
Cost of Sales
(150,000) ( 30,000)
Other expenses
( 38,000) ( 18,000)
Net income
Cuckoo Retained
Earnings 1/1
Perch Retained
Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Other current
assets
30,000
12,000
24,000
10,000
$
30,000
( 20,000) (
$
34,000
$ 12,000
4,000)
$ 18,000
14,000
7,000
Inventories
21,000
15,000
Land
Equipment and
Buildings-net
Investment in
Perch Corp.
11,000
6,000
64,000
55,000
TOTAL ASSETS
LIAB. & EQUITY
Liabilities
Capital Stock
Retained
Earnings
TOTAL LIAB. &
EQUITY
NonCntl
80,000
$
190,000
$ 83,000
56,000
15,000
100,000
50,000
34,000
18,000
190,000
83,000
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Consolidated
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LO2
Exercise 3
Owl Corporation acquired 90% of the voting stock of Hunt Corporation
on January 1, 2004 for $7,000 when Hunt had Capital Stock of $5,000
and Retained Earnings of $1,500. The excess of cost over book value
was allocated $150 to inventories that were sold in 2004, $200 to
undervalued land, $400 to undervalued equipment with a remaining
useful life of 5 years under the straight-line method, and the
remainder to goodwill.
Financial statements for Owl and Hunt Corporations at the end of the
fiscal year ended December 31, 2005 appear in the first two columns
of the partially completed consolidation working papers. Owl has
accounted for its investment in Hunt using the equity method of
accounting. Owl Corporation owed Hunt Corporation $100 on open
account at the end of the year. Dividends receivable in the amount
of $450 payable from Hunt to Owl is included in Owl’s net
receivables.
Required:
Complete the consolidation working papers for Owl Corporation and
Subsidiary.
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Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Owl
Hunt
Debit
Credit
INCOME STATEMENT
Sales
$
10,000
Income from Hunt
$ 6,500
1,270
Cost of Sales
Depreciation
expense
(
4,000) (
3,300)
(
1,000) (
1,000)
Other expenses
(
1,800) (
700)
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
(
$
4,470
1,500
2,510
2,000
4,470
1,500
2,000) (
1,000)
4,980
$ 2,500
1,440
1,900
Receivables-net
1,550
600
Inventories
1,500
1,200
Land
Equipment and
Buildings-net
Investment in
Hunt Corporation
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Dividends
payable
1,000
600
7,500
5,700
7,590
20,580
$10,000
3,000
2,000
1,000
500
11,600
5,000
4,980
20,580
2,500
$10,000
Capital Stock
Retained
Earnings
LIAB. & EQUITY
NonCntl
$
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Consolidated
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LO3
Exercise 4
Koel Corporation acquired all the voting stock of Rain Company for
$500,000 on January 1, 2005 when Rain had Capital Stock of $300,000
and Retained Earnings of $150,000. Rain’s assets and liabilities were
fairly valued except for the plant assets. The entire cost-book
differential is allocated to plant assets and is fully depreciated on
a straight-line basis over a 10-year period.
During 2005, Koel borrowed $25,000 on a short-term non-interestbearing note from Rain, and on December 31, 2005, Koel mailed a check
to Rain to settle the note. Rain deposited the check on January 5,
2006, but receipt of payment of the note was not reflected in Rain’s
December 31, 2005 balance sheet.
Required:
Complete the consolidation working papers.
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Koel Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Koel
Rain
Debit
Credit
INCOME STATEMENT
Sales
$ 500,000
Income from
Rain
135,000
$400,000
Cost of Sales
(350,000) (200,000)
Other expenses
(100,000) (60,000)
Net income
185,000
Koel Retained
Earnings 1/1
Rain Retained
Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
150,000
$ 185,000
$140,000
(70,000)
$ 485,000
$220,000
25,000
210,000
300,000
200,000
425,000
565,000
$
Capital Stock
Retained
Earnings
TOTAL EQUITIES
140,000
300,000
BALANCE SHEET
Note Receivable
from Koel
Other current
assets
Plant assetsnet
Investment in
Rain Company
TOTAL ASSETS
EQUITIES
Liabilities
NonCntl
$
975,000
$750,000
290,000
230,000
200,000
300,000
485,000
220,000
975,000
$750,000
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4-15
Balance
Sheet
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LO4
Exercise 5
Owl Corporation acquired 90% of Barn Corporation on January 1, 2005
for $72,000 cash when Barn’s stockholders’ equity consisted of
$30,000 of Common Stock and $30,000 of Retained Earnings. The
difference between the price paid by Owl and the underlying equity
acquired in Barn was allocated to a plant asset with a remaining 10year straight-line life that was overvalued by $5,000. The remainder
was attributable to goodwill.
The separate company statements for
Owl and Barn appear in the first two columns of the partially
completed consolidation working papers.
Required:
Complete the consolidation working papers for Owl and Barn for the
year 2005.
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Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Owl
Barn
Debit
Credit
INCOME STATEMENT
Sales
$
60,000
Income of Barn
3,510
Cost of Sales
Depreciation
Expense
Other
Expenses
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Accounts
Receivable-net
$22,000
( 13,000) (
9,500)
(
2,000) (
3,000)
( 23,000) (
6,100)
25,510
3,400
25,000
30,000
25,510
3,400
( 15,000) (
3,000)
35,510
$30,400
26,520
7,000
22,000
10,000
Inventories
20,000
14,000
Land
Equipment and
Buildings-net
Investment in
Barn Corporation
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Capital
Stock
Retained
Earnings
Noncontrolling
Interest
$
TOTAL LIAB. &
EQUITY
27,000
42,000
70,000
38,000
72,810
238,330
$111,000
32,820
50,600
170,000
30,000
35,510
30,400
238,330
$111,000
$
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4-17
Min
Int
Consolidated
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LO4
Exercise 6
Lorikeet Company has the following information collected in order to
do make a cash flow statement and uses the direct format for Cash
Flow from Operations.
The annual report year end is December 31,
2005.
Noncontrolling Interest Dividends
Dividends Received from Equity Investees
Cash Paid to Employees
Cash Paid for Other Operating Activities
Cash Paid for Interest Expense
Cash Proceeds from the Sale of Equipment
Cash Paid to Suppliers
Cash Received from Customers
$20,000
17,000
37,000
34,000
22,300
70,000
192,700
412,600
Required:
1. Prepare the Cash Flow for Operations part of the cash flow
statement for Lorikeet.
LO4
Exercise 7
Bronzewing Company has the following information collected in order
to do make a cash flow statement and uses the indirect format for
Cash Flow from Operations.
The annual report year end is December
31, 2005.
Noncontrolling Interest Dividends
Undistributed Income of Equity Investees
Depreciation Expense
Consolidated Net Income
Increase in Accounts Payable
Amortization of Patent
Decrease in Accounts Receivable
Increase in Inventories
Gain on sale of equipment
Noncontrolling Interest Expense
$17,000
7,500
65,000
175,000
15,000
13,000
48,000
27,500
45,000
17,000
Required:
1. Prepare the Cash Flow for Operations part of the cash flow
statement for Bronzewing.
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4-18
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LO6
Exercise 8
Swift Corporation paid $88,500 for a 70% interest in Cave Corporation
on January 1, 2005, when Cave’s Capital Stock was $70,000 and its
Retained Earnings $30,000. The fair values of Cave's identifiable
assets and liabilities were the same as the recorded book values on
the acquisition date. Trial balances at the end of the year on
December 31, 2005 are given below:
Cash
Accounts Receivable
Inventory
Investment in Cave
Cost of Goods Sold
Operating Expenses
Dividends
$
$
Liabilities
Capital stock, $10 par value
Additional Paid-in Capital
Retained Earnings
Sales Revenue
Dividend Income
$
$
Swift
Inc.
4,500 $
25,000
100,000
88,500
60,000
22,000
15,000
315,000 $
47,000 $
100,000
10,000
31,000
120,000
7,000
315,000 $
Cave
Inc.
20,000
30,000
80,000
40,000
37,000
10,000
217,000
27,000
70,000
30,000
90,000
217,000
During 2005, Swift made only two journal entries with respect to its
investment in Cave. On January 1, 2005, it debited the Investment in
Cave account for $88,500 and on November 1, 2005, it credited
Dividend Income for $7,000.
Required:
1. Prepare a consolidated income statement and a statement of
retained earnings for Swift and Subsidiary for the year ended
December 31, 2005.
2. Prepare a consolidated balance sheet for Swift and Subsidiary as
of December 31, 2005.
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LO6
Exercise 9
Emu Corporation paid $77,000 for a 60% interest in Chick Inc. on
January 1, 2005, when Chick’s Capital Stock was $80,000 and its
Retained Earnings $20,000. The fair values of Chick's identifiable
assets and liabilities were the same as the recorded book values on
the acquisition date. Trial balances at the end of the year on
December 31, 2005 are given below:
Cash
Accounts Receivable
Inventory
Investment in Cave
Cost of Goods Sold
Operating Expenses
Dividends
$
$
Liabilities
Capital stock, $10 par value
Additional Paid-in Capital
Retained Earnings
Sales Revenue
Dividend Income
$
$
Emu
Inc.
4,500 $
25,000
100,000
77,000
71,500
22,000
15,000
315,000 $
Chick
Inc.
20,000
30,000
70,000
47,000 $
100,000
11,000
31,000
120,000
6,000
315,000 $
27,000
80,000
50,000
37,000
10,000
217,000
20,000
90,000
217,000
During 2005, Emu made only two journal entries with respect to its
investment in Chick. On January 1, 2005, it debited the Investment in
Chick account for $77,000 and on November 1, 2005, it credited
Dividend Income for $6,000.
Required:
1. Prepare a consolidated income statement and a statement of
retained earnings for Emu and Subsidiary for the year ended
December 31, 2005.
2. Prepare a consolidated balance sheet for Emu and Subsidiary as
of December 31, 2005.
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SOLUTIONS
Multiple Choice Questions
1
b
2
d
3
c
4
c
Parent’s inventory of $132,000 plus subsidiary’s
book value of inventory of $38,000 plus 75% of
the excess of the fair value over the book value
= $132,000+$38,000+(75%)x($22,000) = $186,500
5
d
Purchase price minus 75% of Grass’s underlying
book value - $16,500 of excess cost over book
value allocated to inventory (see 9) =
$392,000 – (75%)x(400,000) - $16,500 = $75,500
6
d
Just add the liability amounts together
7
b
(25%)x($400,000) = $100,000
8
a
The parent’s Retained Earnings is the amount of
consolidated Retained Earnings
9
c
Cash
Accounts Receivable
Inventory
$132,000+$38,000+$16,500=
Land
Plant assets-net
Goodwill
Total assets
10
b
11
d
12
c
13
b
$230,000
170,000
186,500
100,000
700,000
75,500
$1,472,000
Intercompany receivables and
payables from unconsolidated
subsidiaries would not be
eliminated.
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14
c
15
c
16
b
17
d
18
c
19
d
20
b
Pigeon’s separate income
Less: 60% of Home’s $10,000 loss
=
Less: Equipment depreciation
$10,000/ 10 years =
Consolidated net income
$
150,000
(
6,000 )
(
$
1,000 )
143,000
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4-22
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Exercise 1
Parrot Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Parrot
Hollow
Debit
Credit
INCOME STATEMENT
Sales
20,000
$
Cost of Sales
Other
Expenses
$ 35,000
$ 15,000
3,680
Income of Hollow
a
(
9,200) (
4,700)
(
2,300) (
4,000) c
$ 3,680
(
$
Inventories
12,180
6,300
11,000
3,000
12,180
6,300
3,000) (
b
(
7,660)
$1,260 (
1,260)
11,000
3,000
12,180
a
$ 1,600 (
400)
3,000
$ 20,180
20,180
$ 7,300
2,000
1,900
12,000
5,500
17,500
14,000
8,000
22,000
$
b
TOTAL ASSETS
$
LIB. & EQUITY
Accounts payable
Capital
Stock
Retained
Earnings
1/1 Noncontrol.
Interest
12/31 Noncontrol.
Interest
TOTAL LIAB. &
EQUITY
$
13,900)
$ 12,180
2,000)
Patent
Land
Equipment and
Buildings-net
Investment in
Hollow Co.
(
1,360
Minority Income
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Accounts
Receivable-net
Consolidated
NonCntl.
27,000
42,000
60,000
43,000
13,600
c
3,900
12,240
1,360
69,000
103,000
a
b
26,080
2,080
24,000
141,080
$100,400
$227,640
90,900
83,100
$174,000
30,000
10,000
20,180
7,300
b
30,000
10,000
20,180
b
2,600
2,600
3,460
141,080
$100,400
©2009 Pearson Education, Inc. publishing as Prentice Hall
4-23
3,460
$227,640
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Exercise 2
Cuckoo Company and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
INCOME STATEMENT
Sales
Income from
Perch
Cuckoo
Perch
$ 206,000
$60,000
12,000
Cost of Sales
(150,000)
( 38,000)
( 18,000)
Net income
Cuckoo Retained
Earnings 1/1
Perch Retained
Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
30,000
12,000
24,000
10,000
30,000
( 20,000)
$
Debit
Credit
$266,000
a
b
$ 1,000
11,000
d
1,000
( 30,000)
Other expenses
$
Balance
Sheet
( 180,000)
(
29,000
a
4,000
c
10,000
20,000
$12,000
(
57,000)
29,000
4,000)
b $( 4,000)
(
20,000)
34,000
$18,000
$ 29,000
14,000
7,000
21,000
Inventories
21,000
15,000
36,000
Land
Equipment and
Buildings-net
Investment in
Perch Corporation
11,000
6,000
17,000
64,000
55,000
Capital Stock
Retained
Earnings
TOTAL LIAB. &
EQUITY
3,000
c
5,000
80,000
Goodwill
TOTAL ASSETS
LIAB. & EQUITY
Liabilities
c
$
$
d
a
b
c
1,000
5,000
7,000
68,000
121,000
5,000
190,000
$83,000
$200,000
56,000
15,000
71,000
100,000
50,000
34,000
18,000
29,000
190,000
$83,000
$200,000
c
50,000
100,000
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4-24
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Exercise 3
INCOME STATEMENT
Sales
$
Income from Hunt
Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Owl
Hunt
Debit
Credit
Balance
Sheet
10,000
$16,500
$6,500
1,270
a $1,270
Cost of Sales
Depreciation
expense
(
4,000)
(
3,300)
(
1,000)
(
1,000)
Other expenses
(
1,800)
(
700)
c
4,470
1,500
Retained Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
2,510
2,000
4,470
2,500
(
$
2,000)
(
$ 2,500
1,440
1,900
Receivables-net
1,550
600
Inventories
Goodwill
1,500
1,200
Land
Equipment and
Buildings-net
Investment in
Hunt Corporation
TOTAL ASSETS
1,000
$
(
2,080)
(
2,500)
$(150) (
150)
4,470
b
2,510
2,000
4,470
1,000)
4,980
7,300)
80
Minority income
Net income
(
a
$ 900
(100) (
2,000)
$4,980
$3,340
d
e
100
450
1,600
b
400
2,700
400
600
b
200
1,800
7,500
5,700
b
320
8,490
21,480
$10,000
3,000
1,000
2,000
500
d
e
100
450
11,600
5,000
b
5,000
5,880
3,500
c
a
b
13,440
80
1,270
7,220
$ 23,280
LIAB. & EQUITY
Accounts payable
Dividends payable
Capital Stock
Retained earnings
Noncntl. interest
1/1
Noncntl. interest
12/31
LIAB. & EQUITY
$
11,600
4,980
b
700
700
850
$
21,480
4,900
1,050
$10,000
©2009 Pearson Education, Inc. publishing as Prentice Hall
4-25
750
$ 23,280
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Exercise 4
Koel Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Koel
Rain
Debit
Credit
INCOME STATEMENT
Sales
Income from
Rain
$
500,000
$400,000
135,000
(350,000)
(200,000)
Other expenses
(100,000)
( 60,000)
185,000
140,000
Koel Retained
Earnings 1/1
Rain Retained
Earnings
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
$135,000
(550,000)
d
5,000
(165,000)
185,000
300,000
300,000
150,000
$
185,000
c
150,000
$140,000
185,000
( 70,000)
$
BALANCE SHEET
Note Receivable
from Koel
Other current
assets
Plant assetsnet
Investment in
Rain Company
TOTAL ASSETS
$900,000
b
Cost of Sales
Net income
Balance
Sheet
485,000
b
$220,000
$485,000
25,000
210,000
200,000
300,000
a
c
25,000
50,000
a
25,000
d
5,000
b
c
65,000
500,000
$535,000
425,000
670,000
565,000
$
$70,000
975,000
$750,000
$1,205,000
290,000
230,000
520,000
Capital Stock
Retained
Earnings
200,000
300,000
485,000
220,000
485,000
TOTAL LIAB & EQUITY $
975,000
$750,000
$1,205,000
LIAB & EQUITY
Liabilities
c
300,000
200,000
©2009 Pearson Education, Inc. publishing as Prentice Hall
4-26
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Exercise 5
Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers at December 31, 2005
Eliminations
Min
Owl
Barn
Int
Debit
Credit
INCOME STATEMENT
Sales
$
60,000
Income from Barn
$ 22,000
3,510
Cost of Sales
Depreciation
Expense
Other
Expenses
$ 82,000
a
(
13,000)
(
9,500)
(
2,000)
(
3,000)
(
23,000)
(
6,100)
$ 3,510
d
$
450
Minority Income
Net income
Retained
Earnings 1/1
Add:
Net income
Less:
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Accounts
Receivable-net
$ 340
(
$
Inventories
25,510
3,400
25,000
30,000
25,510
3,400
15,000)
(
(
22,500)
(
4,550)
(
29,100)
(
340)
25,510
b
30,000
25,000
25,510
3,000)
a
2,700
$(
300) (
15,000)
35,510
$30,400
$ 35,510
26,520
7,000
33,520
22,000
10,000
32,000
20,000
14,000
34,000
Goodwill
b
Land
Equipment and
Buildings-net
Investment in
Barn Corporation
Consolidated
27,000
42,000
70,000
38,000
22,500
22,500
69,000
c
450
b
b
4,500
72,000
a
810
103,950
72,810
TOTAL ASSETS
EQUITIES
Accounts payable
Capital
Stock
Retained
Earnings
1/1 Minority
Interest
12/31 Minority
Interest
$
TOTAL EQUITIES
$
238,330
$111,000
294,970
32,820
50,600
83,420
170,000
30,000
170,000
35,510
30,400
35,510
b
6,000
6,000
6,040
238,330
$111,000
©2009 Pearson Education, Inc. publishing as Prentice Hall
4-27
6,040
$294,970
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Preliminary computations
Investment cost on January 1, 19X4
Less: Book value acquired = (90%)x($60,000) =
Excess cost over book value acquired =
$
$
Excess allocated to:
Overvalued equipment ($5,000) x (90%)=
Remainder to goodwill
Excess cost over book value
$(
Income from Barn Corporation:
Equity in Barn’s net income (90%)x(3,400)=
Depreciation “savings” on equipment $4,500/10 yrs =
Income from Barn
Investment in Barn account:
Initial investment cost
Plus: Income from Barn
Less: Dividends (3,000)x(90%)=
Investment in Barn at December 31
$
4,500)
22,500
18,000
$
3,060
$
450
1,260
$
(
$
Exercise 6
Lorikeet
Company
and
Subsidiary
Consolidated
Cash Flows for the Year Ended December 31,2005
Cash Flows from Operating Activities
Cash Received from Customers
Dividends Received from Equity Investees
Less
Cash Paid to Suppliers
Cash Paid to Employees
Cash Paid for Other Operating Activities
Cash Paid for Interest Expense
Net cash flows from operating activities
72,000
54,000
18,000
72,000
3,510
2,700)
72,810
Statement
of
$412,600
17,000
$192,700
37,000
34,000
22,300
©2009 Pearson Education, Inc. publishing as Prentice Hall
4-28
(286,000)
$143,600
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Exercise 7
Bronzewing
Company
and
Subsidiary
Consolidated
Cash Flows for the Year Ended December 31,2005
Statement
Cash Flows from Operating Activities
Consolidated Net Income
Adjustments to reconcile net income to cash
Noncontrolling Interest Expense
Undistributed Income of Equity Investees
Depreciation Expense
Increase in Accounts Payable
Amortization of Patent
Decrease in Accounts Receivable
Increase in Inventories
Gain on sale of equipment
Net cash flows from operating activities
of
$175,000
(
(
(
$17,000
7,500 )
65,000
15,000
13,000
48,000
27,500 )
45,000 )
78,000
253,000
Exercise 8
Requirement 1
Swift and Subsidiary Corporation
Consolidated Income Statement
for the year ended December 31, 2005
Sales Revenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Minority Interest Income
Total Expenses and Minority Income
Consolidated Net Income
Retained Earnings, January 1, 2005
Dividends
Retained Earnings, December 31, 2005
$
$
210,000
100,000
110,000
59,000
3,900
$
©2009 Pearson Education, Inc. publishing as Prentice Hall
4-29
62,900
47,100
31,000
( 15,000)
63,100
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Requirement 2
Swift and Subsidiary Corporation
Consolidated Balance Sheet
December 31, 2005
Assets
Cash
Accounts Receivable
Inventory
Goodwill
Total Assets
Equities
Liabilities
Capital Stock
Additional Paid-in Capital
Retained Earnings
Minority Interest
Total Liabilities and Equities
$
$
$
$
24,500
55,000
180,000
18,500
278,000
74,000
100,000
10,000
63,100
30,900
278,000
Minority Interest Calculation:
$30,000 Beginning equity + $3,900 Net income - $3,000 Dividends = $30,900
Exercise 9
Requirement 1
Emu and Subsidiary Corporation
Consolidated Income Statement
for the year ended December 31, 2005
Sales Revenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Minority Interest Income
Total Expenses and Minority Income
Consolidated Net Income
Retained Earnings, January 1, 2005
Dividends
Retained Earnings, December 31, 2005
$
210,000
121,500
88,500
$ 59,000
1,200
$
60,200
28,300
31,000
( 15,000)
44,300
©2009 Pearson Education, Inc. publishing as Prentice Hall
4-30
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Requirement 2
Emu and Subsidiary Corporation
Consolidated Balance Sheet
December 31, 2005
Assets
Cash
Accounts Receivable
Inventory
Goodwill
Total Assets
Equities
Liabilities
Capital Stock
Additional Paid-in Capital
Retained Earnings
Minority Interest
Total Liabilities and Equities
$
$
$
$
24,500
55,000
170,000
17,000
266,500
74,000
100,000
11,000
44,300
37,200
266,500
Minority Interest Calculation:
$40,000 Beginning equity + $1,200 Net income - $4,000 Dividends = $37,200
©2009 Pearson Education, Inc. publishing as Prentice Hall
4-31