CHAPTER 9

CONSOLIDATION OWNERSHIP ISSUES

ANSWERS TO QUESTIONS

Q9-1 Preferred stock of the subsidiary is eliminated in the consolidation process in a manner comparable to that used in eliminating the common stock of the subsidiary. For those preferred shares held by the parent company, a proportionate share of subsidiary income and net assets assigned to the preferred shares is eliminated against the balance in the parent's investment account. Subsidiary income and net assets assigned to preferred shares not held by the parent are included as a part of the noncontrolling interest along with the balances assigned to noncontrolling interest for common stock not held by the parent. The claim of the preferred shareholders normally is computed before the common stock is eliminated so that any priority claim associated with the preferred stock can be properly recognized and assigned to the correct shareholder group. Q9-2 All preferred shares held by the parent are eliminated against the balance in the investment account. Those held by unrelated parties are included in the total assigned to the noncontrolling interest.

Q9-3 Preferred dividends normally are deducted in arriving at income available to common shareholders. When preferred dividends are paid by the subsidiary to shareholders other than the parent, the income accruing to the common shares held by the parent company is reduced. Therefore, they must be deducted to arrive at income available to the parent company shareholders. No preferred dividends are deducted if the parent company owns all the shares or if no dividends are declared and the preferred stock is noncumulative.

Q9-4 In the event the preferred shares are redeemed, the subsidiary must pay the call premium and the net assets of the subsidiary will be reduced by the amount of the premium. Because it is more conservative to assume the call premium will be paid, the amount of the premium normally is added to the claim of the preferred shareholders and deducted from the equity assigned to the common shareholders whenever consolidated statements are prepared.

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Q9-5 The fair value of the net assets of the subsidiary is computed by deducting the fair value of the subsidiary's liabilities from the fair value of its assets. When the subsidiary has preferred stock outstanding, the claims of the preferred shareholders, including dividends in arrears and participation rights held by preferred shareholders, must be taken into consideration in determining the fair value of net assets available to common shareholders. These items, when deducted from the fair value of the identifiable assets of the acquired company, will reduce the amount of net assets assigned to common stock. In those cases where the purchase price of the common stock is not reduced proportionately, the amount assigned to goodwill will increase when the common stock is eliminated.

Q9-6 Under normal circumstances the parent will record a gain or loss on the difference between the carrying value of the shares sold and the sale price. For consolidation purposes the most appropriate treatment is to consider the point of sale to a nonaffiliate as the date of issue of the subsidiary shares. Any gain or loss recorded by the parent should be eliminated in the consolidation process and treated as a part of additional paid-in capital of the consolidated entity.

Q9-7 All common shareholders should share equally in the net assets of a company. When a subsidiary sells additional shares to a nonaffiliate at a price in excess of existing book value, the effect will be to increase the net book value of all shareholders. Because it is a capital transaction, no gain or loss is recognized on the sale.

Q9-8 Each purchase of additional shares should be examined to determine the difference between the price paid and underlying book value. When $10 over book value is paid for the shares, the parent will need to allocate that amount to either identifiable net assets or goodwill at the time the investment balance is eliminated and consolidated statements are prepared.

Q9-9 All the shares of the subsidiary are eliminated in preparing the consolidated statements. Thus, treasury shares reported by the subsidiary are eliminated in the consolidation workpaper. The effect of the retirement on the consolidated statements depends on the price paid and whether the shares were purchased from the parent or from a nonaffiliate.

Q9-10 Indirect ownership is a general term used whenever one company owns shares of another company and that company holds ownership in a third company. Indirect control occurs when a majority of the shares of a particular company are held by one or more companies that are, in turn, under the control of another company. By exercising its control over those companies the parent can exercise control of the company indirectly owned.

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Q9-11 A reciprocal relationship exists if Subsidiary A and Subsidiary B hold ownership in each other. If Subsidiary A records investment income based on the reported net income of Subsidiary B and Subsidiary B records investment income based on the reported net income of Subsidiary A, the sum of the reported net income totals for the two companies may be substantially greater than the sum of the reported operating income totals for the two companies. Parent company net income will be overstated if the impact of the reciprocal relationship is ignored when the parent company records investment income on its ownership in the two subsidiaries.

Q9-12 Under the treasury stock method the parent company shares that have been purchased by a subsidiary are reported as treasury stock in the consolidated balance sheet. The carrying value of the shares is the amount paid by the subsidiary when they were purchased.

Q9-13 The entity method focuses on the reciprocal nature of the ownership between the two companies. Income attributed to each company is computed by solving a set of simultaneous equations. Consolidated net income is then computed by multiplying the income computed for the parent by the percentage of ownership held by nonaffiliates. The treasury stock method is more simply applied, computing consolidated net income by deducting income assigned to noncontrolling shareholders from the combined operating incomes of the two companies in the normal manner. However, in this case, income assigned to the noncontrolling shareholders is based on the operating income of the subsidiary plus dividends received from the parent.

Q9-14 Consolidated net income will be reduced by $72,000 ($100,000 x .90 x .80) when the unrealized profit of Tiny Corporation is eliminated. A total of $10,000 is treated as a reduction to the income assigned to noncontrolling shareholders of Tiny Corporation ($100,000 x .10) and $18,000 is a reduction of the income assigned to noncontrolling shareholders of Subsidiary Company ($100,000 x .90 x .20).

Q9-15 All three companies should be included in the consolidated financial statements. Slide Company should be consolidated with Bit Company because Bit holds majority ownership of Slide. Bit Company, in turn, should be consolidated with Snapper Corporation because Snapper holds majority ownership of Bit.

Q9-16 A subsidiary's stock dividend results in the capitalization of some portion of its retained earnings. Such an action will have no effect on the consolidated financial statements since the entire stockholders' equity section of the subsidiary is eliminated in preparing the consolidation workpaper.

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Q9-17 A 15 percent stock dividend is a small stock dividend and must be recorded by capitalizing retained earnings equal to the market price per share of the stock times the number of shares actually issued. As a result, retained earnings will decrease and the par value of stock outstanding and additional paid-in capital will increase on the subsidiary's books. There should be no change in the investment account balance reported by the parent. Thus, the only change in the eliminating entries is the relative amount debited to each of the three individual stockholders' equity accounts of the subsidiary.

Q9-18 When the parent or other affiliates own all the shares of all companies included in the consolidation, the order in which the consolidation is completed may not be particularly critical. On the other hand, when less than 100 percent ownership is held there is a much greater chance of error in apportioning unrealized profits or other adjustments between noncontrolling ownership and consolidated net income when some other sequence is used. By starting the consolidation with the company furthest away from the parent, the computation of income assigned to noncontrolling interest at each level can be most easily accomplished.

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SOLUTIONS TO CASES

C9-1 Effect of Subsidiary Preferred Stock

When a parent company owns all the outstanding preferred and common shares of its subsidiary, the contribution of the subsidiary to consolidated net income can be calculated on the basis of the reported net income of the subsidiary. In most cases the parent does not own all the shares of the subsidiary and income assigned to the noncontrolling interest includes (1) a portion of subsidiary preferred dividends and (2) a portion of earnings available to common shareholders.

To determine the amount of income to assign to preferred and common shareholders of the subsidiary, the controller needs to have the following information about the preferred stock:

1. The number of preferred shares outstanding and the number owned by the parent and other affiliates.

2. The annual preferred dividend rate per share and whether the dividends are cumulative or noncumulative.

3. If the dividends are noncumulative, the amount of preferred dividends declared during the period, if any.

In this particular case the parent does not appear to own any of the subsidiary's preferred shares. Once the controller determines the portion of subsidiary income assignable to common shareholders, consolidated net income is computed by adding the parent's pro rata share of this amount to the parent's income from its own operations.

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C9-2 Sale of Subsidiary Shares

A gain of $60 per share will be recorded by Hardcore Mining on the sale to Basic Manufacturing regardless of whether the purchaser is an affiliate or a nonaffiliate. In both cases the gain must be eliminated in preparing the consolidated statements.

(a) On a sale of shares to a nonaffiliate, net resources have been brought into the consolidated entity and there is an additional claim by the noncontrolling shareholders. It is considered appropriate to treat the gain recorded by the parent as an addition to consolidated additional paid-in capital in such cases. A sale of subsidiary shares to a nonaffiliate will also change the amount of income assigned to the noncontrolling interest in the consolidated income statement and the amount of net assets assigned to noncontrolling interest in the consolidated balance sheet.

(b) When a parent sells shares of one subsidiary to another subsidiary there is no increase in net resources to the consolidated entity, and the gain recorded by the parent must be eliminated when the investment balance reported by the subsidiary is eliminated. A change in the claim of the noncontrolling interest is likely to occur if the subsidiary that purchases the shares is not wholly-owned. As a result, there may be some change in consolidated income and the balance sheet totals assigned to noncontrolling interest.

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C9-3 Reciprocal Ownership

A great many factors beyond the immediate impact on reported earnings may be important in deciding on the use of the funds. Items such as the following should be considered:

1. Are the excess funds held by Thorson available only temporarily or not likely to be needed in the foreseeable future?

2. Will there be any regulatory or taxation problems associated with one or more of the alternatives?

3. Can shares of the companies be purchased in the desired quantities and at existing market prices or are there potential difficulties associated with one or more alternatives?

4. Is it desirable to acquire more shares of either subsidiary since controlling ownership already is in the hands of Strong Manufacturing?

5. Have the noncontrolling shareholders of either subsidiary been troublesome or caused the parent to refrain from actions that it might otherwise have taken?

With the information given, it is difficult to determine which action will have the most favorable impact on consolidated net income. The earnings of each company, the number of shares outstanding, and the relative market prices of the shares each will have an effect. In general, reported income is maximized by purchasing the shares with the lowest price-earnings ratio.

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SOLUTIONS TO EXERCISES

E9-1 Multiple-Choice Questions on Preferred Stock Ownership

1. d .20($40,000 + $60,000) + 1.00($30,000) = $50,000

2. c .20($40,000 + $60,000) + .30($30,000) = $29,000

3. b Only the retained earnings of the acquiring company is included.

4. a The portion held by the parent is eliminated when the preferred investment is eliminated, and the portion held by nonaffiliates is eliminated and included with the balance reported as noncontrolling interest in the consolidated balance sheet.

E9-2 Multiple-Choice Questions on Multilevel Ownership

1. b $100,000 + .80[$80,000 + .60($50,000)] = $188,000

2. b .40($50,000) = $20,000

3. c .20[$80,000 + .60($50,000)] = $22,000

4. c .40($50,000) + .20[$80,000 + .60($50,000)] = $42,000

5. c .80[($160,000 - $120,000) / 10 years] = $3,200

E9-3 Acquisition of Preferred Shares

Eliminating entries:

E(1) Common Stock__Separate Company 50,000 Retained Earnings 150,000 Investment in Separate Company Common Stock 140,000 Noncontrolling Interest 60,000 Eliminate investment in common stock.

E(2) Preferred Stock__Separate Company 100,000 Investment in Separate Company Preferred Stock 60,000 Noncontrolling Interest 40,000 Eliminate subsidiary preferred stock.

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E9-4 Reciprocal Ownership [AICPA Adapted]

a. None of Simba's dividends are reported in the consolidated statements. All of Simba's dividends are eliminated in the consolidation process.

b. Only 90 percent of Pride's dividends are included in the consolidated retained earnings statement. The dividend payment on the 10 percent owned by Simba is an intercorporate payment to an affiliate and must be eliminated in the consolidation process.

E9-5 Subsidiary with Preferred Stock Outstanding

Eliminating entries:

E(1) Common Stock__Topple Company 150,000 Retained Earnings 210,000 Investment in Topple Common Stock 270,000 Noncontrolling Interest 90,000 Eliminate investment in common stock.

E(2) Preferred Stock__Topple Company 200,000 Investment in Topple Preferred Stock 80,000 Noncontrolling Interest 120,000 Eliminate subsidiary preferred stock.

E9-6 Subsidiary with Preferred Stock Outstanding

a. Entries recorded by Clayton Corporation:

(1) Investment in Topple Common Stock 270,000 Investment in Topple Preferred Stock 80,000 Cash 350,000 Record purchase of Topple stock.

(2) Investment in Topple Common Stock 40,500 Income from Subsidiary 40,500 Record equity-method income: $40,500 = ($70,000 - $16,000) x .75

(3) Cash 25,500 Investment in Topple Common Stock 25,500 Record dividends from Topple: $25,500 = ($50,000 - $16,000) x .75

(4) Cash 6,400 Dividend Income 6,400 Record dividends on preferred stock from Topple: $16,000 x .40

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E9-6 (continued)

b. Eliminating entries:

E(1) Income from Subsidiary 40,500 Dividends Declared__Common Stock 25,500 Investment in Topple Common Stock 15,000 Eliminate income from subsidiary.

E(2) Dividend Income__Preferred 6,400 Dividends Declared__Preferred 6,400 Eliminate dividend income from subsidiary preferred.

E(3) Income to Noncontrolling Interest 23,100 Dividends Declared__Preferred Stock 9,600 Dividends Declared__Common Stock 8,500 Noncontrolling Interest 5,000 Assign income to noncontrolling interest: $23,100 = [($70,000 - $16,000) x .25] + ($16,000 x .60) $9,600 = $16,000 x .60 $8,500 = ($50,000 - $16,000) x .25 $5,000 = $13,500 - $8,500

E(4) Common Stock__Topple Company 150,000 Retained Earnings, January 1 210,000 Investment in Topple Common Stock 270,000 Noncontrolling Interest 90,000 Eliminate beginning investment balance.

E(5) Preferred Stock__Topple Company 200,000 Investment in Topple Preferred Stock 80,000 Noncontrolling Interest 120,000 Eliminate subsidiary preferred stock.

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E9-7 Preferred Dividends and Call Premium

a. Culbertson Company's contribution to 20X2 consolidated net income:

Reported net income for 20X2 $70,000 Income assigned to noncontrolling interest: Preferred shares [.40($100,000 x .12)] $4,800 Common shares {.10[$70,000 - ($100,000 x .12)]} 5,800 (10,600) Contribution to consolidated net income $59,400

b. Income assigned to the noncontrolling interest in 20X2, as computed in part (a), is $10,600.

c. Retained earnings assignable to preferred shareholders:

Dividends in arrears [5 years x ($100,000 x .12)] $60,000 Call feature ($2 x 10,000 shares) 20,000 Total retained earnings assigned to preferred stock $80,000

d. Book value of common shares:

Par value of common shares outstanding $300,000 Retained earnings balance $380,000 Less: Balance assigned to preferred shares (80,000) 300,000 Book value of common shares $600,000

e. Total noncontrolling interest:

Preferred stock [.40($100,000 + $80,000)] $ 72,000 Common stock (.10 x $600,000) 60,000 Total noncontrolling interest $132,000

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E9-8 Multilevel Ownership

a. Consolidated net income for 20X6 is $153,200:

Operating income of Grasper $ 90,000 Equity-method income from: Dally ($40,000 x .25) 10,000 Latent [($60,000 + $16,000) x .70] 53,200 Consolidated net income $153,200

b. Income of $36,800 is assigned to noncontrolling interest:

Income from Dally ($40,000 x .35) $14,000 Income from Latent [($60,000 + $16,000) x .30] 22,800 Total income assigned $36,800

c. Only the $45,000 of dividends paid by Grasper Corporation to its shareholders will be reported as dividends declared in Grasper's 20X6 consolidated retained earnings statement.

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E9-9 Eliminating entries for Multilevel Ownership

a. Journal entries recorded by Brown Corporation on its investment in Tann Company:

(1) Investment in Tann Company Stock 120,000 Cash 120,000 Record purchase of Tann Company stock.

(2) Investment in Tann Company Stock 24,000 Income from Tann Company 24,000 Record equity-method income: $40,000 x .60

(3) Cash 9,000 Investment in Tann Company Stock 9,000 Record dividends from Tann Company: $15,000 x .60

b. Journal entries recorded by Promise Enterprises on its investment in Brown Corporation:

(1) Investment in Brown Corporation Stock 315,000 Cash 315,000 Record purchase of Brown Corporation stock.

(2) Investment in Brown Corporation Stock 129,600 Income from Brown Corporation 129,600 Record equity-method income: ($120,000 + $24,000) x .90

(3) Cash 45,000 Investment in Brown Corporation Stock 45,000 Record dividends from Brown Corporation: $50,000 x .90

c. Eliminating entries:

E(1) Income from Tann Company 24,000 Dividends Declared 9,000 Investment in Tann Company Stock 15,000 Eliminate income from Tann Company.

E(2) Income to Noncontrolling Interest 16,000 Dividends Declared 6,000 Noncontrolling Interest 10,000 Assign income to noncontrolling interest: $16,000 = $40,000 x .40 $6,000 = $15,000 x .40

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E9-9 (continued)

E(3) Common Stock__Tann Company 100,000 Additional Paid-In Capital 60,000 Retained Earnings, January 1 40,000 Investment in Tann Company Stock 120,000 Noncontrolling Interest 80,000 Eliminate investment in Tann Company stock: $120,000 = $200,000 x .60 $80,000 = $200,000 x .40

E(4) Income from Brown Corporation 129,600 Dividends Declared 45,000 Investment in Brown Corporation Stock 84,600 Eliminate income from Brown Corporation.

E(5) Income to Noncontrolling Interest 14,400 Dividends Declared 5,000 Noncontrolling Interest 9,400 Assign income to noncontrolling shareholders of Brown Corporation: $14,400 = ($120,000 + $24,000) x .10 $5,000 = $50,000 x .10 $9,400 = $14,400 - $5,000

E(6) Common Stock__Brown Corporation 150,000 Additional Paid-In Capital 60,000 Retained Earnings, January 1 140,000 Investment in Brown Corporation Stock 315,000 Noncontrolling Interest 35,000 Eliminate investment in Brown Corporation stock: $315,000 = $350,000 x .90 $35,000 = $350,000 x .10

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E9-10 Reciprocal Ownership

a. Treasury stock method: Operating income of Grower Supply Corporation $112,000 Operating income of Schultz Company 50,000 $162,000 Less: Income assigned to noncontrolling interest .15[$50,000 + .30($70,000)] (10,650) Consolidated net income $151,350

b. Entity approach: [GS = Grower Supply net income and SC = Schultz net income] Basic equations GS = $112,000 + .85 SC SC = $50,000 + .30 GS

Solution by GS = $112,000 + .85($50,000 + .30 GS) substitution GS = $112,000 + $42,500 + .255 GS GS = $154,500 + .255 GS .745 GS = $154,500 GS = $207,383

and SC = $50,000 + .30($207,383) SC = $50,000 + $62,215 SC = $112,215

Consolidated net income = $207,383 x .70 = $145,168

Income to noncontrolling interest = $112,215 x .15

= $16,832

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E9-11 Consolidated Balance Sheet with Reciprocal Ownership

Talbott Company and Short Company Consolidated Balance Sheet Workpaper December 31, 20X9

Talbott Short Eliminations Consol- Item Company Company Debit Credit idated

Cash 78,000 39,000 117,000Accounts Receivable 120,000 80,000 200,000Inventory 150,000 120,000 270,000Buildings and Equipment (net) 400,000 300,000 700,000Investment in Short Co. Common Stock 352,000 (1)352,000Investment in Talbott Co. Common Stock 61,000 (2) 61,000Treasury Stock (3) 61,000 61,000Debits 1,100,000 600,000 1,348,000

Accounts Payable 90,000 60,000 150,000Bonds Payable 400,000 100,000 500,000Common Stock 300,000 200,000 (1)200,000 300,000Retained Earnings 310,000 240,000 (1)240,000 310,000Noncontrolling Interest (1) 88,000 88,000Credits 1,100,000 600,000 501,000 501,000 1,348,000

Eliminating entries: E(1) Common Stock__Short Company 200,000 Retained Earnings 240,000 Investment in Short Company Common Stock 352,000 Noncontrolling Interest 88,000

E(2) Treasury Stock 61,000 Investment in Talbott Company Common Stock 61,000

Talbott Company and Subsidiary Consolidated Balance Sheet December 31, 20X9

Cash $ 117,000 Accounts Payable $ 150,000Accounts Receivable 200,000 Bonds Payable 500,000Inventory 270,000 Noncontrolling Interest 88,000Buildings and Common Stock $300,000 Equipment (net) 700,000 Retained Earnings 310,000 $610,000 Treasury Shares (61,000) 549,000

$1,287,000 $1,287,000

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E9-12 Subsidiary Stock Dividend

a. Lake Company: Stock Dividends Declared 40,000 Common Stock 40,000

Lindale Company: No entry required.

b. Eliminating entries, December 31, 20X3:

E(1) Income from Subsidiary 17,500 Dividends Declared 7,000 Investment in Lake Company Stock 10,500

E(2) Income to Noncontrolling Interest 7,500 Dividends Declared 3,000 Noncontrolling Interest 4,500

E(3) Common Stock__Lake Company 140,000 Retained Earnings, January 1 200,000 Investment in Lake Company Stock 210,000 Noncontrolling Interest 90,000 Stock Dividends Declared 40,000

c. Eliminating entry, January 1, 20X4:

E(1) Common Stock__Lake Company 140,000 Retained Earnings 175,000 Investment in Lake Company Stock 220,500 Noncontrolling Interest 94,500

Lake Company retained earnings, December 31, 20X3:

Balance, December 31, 20X2 $200,000 Add: Net income for 20X3 25,000 Less: Stock dividend in 20X3 (40,000) Cash dividend paid in 20X3 (10,000) Balance, December 31, 20X3 $175,000

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E9-13 Sale of Subsidiary Shares by Parent

a. Investment in Acme Concrete, January 1, 20X5: Purchase price $360,000 Acme net income in 20X3 and 20X4 $100,000 Dividends paid by Acme in 20X3 and 20X4 (40,000) $ 60,000 Proportion of stock held by Stable x .80 48,000 Balance prior to sale of shares $408,000

b. Journal entry recorded by Stable Home Builders for sale of shares:

Cash 120,000 Investment in Acme Stock 102,000 Gain on Sale of Acme Stock 18,000

c. Eliminating entries:

E(1) Income from Subsidiary 30,000 Dividends Declared 12,000 Investment in Acme Stock 18,000

E(2) Income to Noncontrolling Interest 20,000 Dividends Declared 8,000 Noncontrolling Interest 12,000

E(3) Common Stock__Acme Concrete 200,000 Retained Earnings, January 1 310,000 Investment in Acme Stock 306,000 Noncontrolling interest 204,000

E(4) Gain on sale of Acme Stock 18,000 Additional Paid-In Capital 18,000

E9-14 Purchase of Additional Shares from Nonaffiliate

a. Purchase price, December 31, 20X7 $240,000 Modern Products Company net income for 20X8 ($230,000 + $20,000 - $200,000) $50,000 Proportion of stock held by Weal x .60 $30,000 Amortization of differential ($30,000 / 10 years) (3,000) Income from subsidiary 27,000 Dividends received from Modern Products Company ($20,000 x .60) (12,000) Balance in investment account, December 31, 20X8 $255,000

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E9-14 (continued)

b. Balance in investment account, December 31, 20X8 $255,000 Purchase of additional shares on January l, 20X9 96,000 Modern Products Company net income for 20X9 ($280,000 + $20,000 - $230,000) $70,000 Proportion of stock held by Weal x .80 $56,000 Less: Amortization of differential on stock purchased: December 31, 20X7 ($30,000 / 10 years) (3,000) January 1, 20X9 ($20,000 / 10 years) (2,000) Income from subsidiary 51,000 Dividends received from Modern Products Company($20,000 x .80) (16,000) Balance in investment account, December 31, 20X9 $386,000

c. Eliminating entries:

E(1) Income from Modern Products Company 51,000 Dividends Declared 16,000 Investment in Modern Products Company Stock 35,000

E(2) Income to Noncontrolling Interest 14,000 Dividends Declared 4,000 Noncontrolling Interest 10,000 $14,000 = $70,000 x .20

E(3) Common Stock__Modern Products Company 150,000 Retained Earnings, January 1 230,000 Differential 47,000 Investment in Modern Products Company Stock 351,000 Noncontrolling Interest 76,000

$30,000 Differential on shares purchased, December 31, 20X7 (3,000 ) Amortized in 20X8 $27,000 Unamortized balance Differential on shares purchased, 20,000 January 1, 20X9 Unamortized purchase differential, $47,000 January 1, 20X9

E(4) Patents 42,000 Amortization Expense 5,000 Differential 47,000 $42,000 = ($47,000 - $3,000 - $2,000)

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E9-15 Purchase of Shares by Subsidiary from Nonaffiliate

a. Book value of Quinn stock outstanding $500,000 Cost of treasury shares repurchased (84,000) Book value of remaining shares outstanding $416,000 Proportion of remaining shares held by Blatant (6,000 / 8,000) x .75 Adjusted book value of shares held by Blatant $312,000 Book value of shares held by Blatant before treasury stock repurchase by Quinn ($500,000 x .60) (300,000) Increase in carrying value of shares held by Blatant $ 12,000

b. Investment in Quinn Manufacturing Stock 12,000 Additional Paid-In Capital 12,000

c. Common Stock__Quinn Manufacturing 100,000 Additional Paid-In Capital 150,000 Retained Earnings, January 1 250,000 Investment in Quinn Stock 312,000 Noncontrolling Interest 104,000 Treasury Shares 84,000 $312,000 = .75($500,000 - $84,000) $104,000 = .25($500,000 - $84,000)

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E9-16 Sale of Shares by Subsidiary to Nonaffiliate

a. Computation of change in book value of Schroeder Corporation sharesheld by Browne Corporation: Before After Sale Sale

Common stock, $10 par value $150,000 $ 200,000 Additional paid-in capital 50,000 400,000 Retained earnings 400,000 400,000 Total stockholders' equity of Schroeder $600,000 $l,000,000 Proportion of stock held by Browne Corporation: 11,000 / 15,000 x .733 11,000 / (15,000 + 5,000) x .550 Book value of shares $440,000 $ 550,000

Increase in book value of shares held by Browne Corporation $ 110,000

b. Investment in Schroeder Stock 110,000 Additional Paid-In Capital 110,000

c. Common Stock__Schroeder Corporation 200,000 Additional Paid-In Capital 400,000 Retained Earnings 400,000 Investment in Schroeder Stock 550,000 Noncontrolling Interest 450,000 $450,000 = $1,000,000 x .45

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SOLUTIONS TO PROBLEMS

P9-17 Multiple-Choice Questions on Preferred Stock Ownership

1. d Book value of shares held by noncontrolling interest: Preferred stock ($100,000 x .30) $30,000 Common stock [($200,000 + $50,000) x .20] 50,000 Total book value $80,000

2. b Income to noncontrolling preferred shareholders [($100,000 x .10) x .30] $3,000 Income to noncontrolling common shareholders: Reported net income of Upland Company $30,000 Income to preferred shareholders (10,000) Income to common shareholders $20,000 Proportion of common stock owned by noncontrolling interest x .20 4,000 Total income to noncontrolling interest $7,000

3. b Reported net income of Upland Company $ 30,000 Operating income of Stacey Company 100,000 $130,000 Less: Income to noncontrolling interest (7,000) Consolidated net income $123,000

4. a Parent company balance at date of acquisition.

5. a All preferred shares of the subsidiary are eliminated in preparing the consolidated financial statements.

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P9-18 Multilevel Ownership with Purchase Differential

a. Journal entries recorded by Corn Corporation on its investment in Bark Company:

(1) Investment in Bark Company Stock 405,000 Cash 405,000 Record purchase of Bark Company stock.

(2) Investment in Bark Company Stock 21,000 Income from Bark Company 21,000 Record equity-method income: $30,000 x .70

(3) Cash 14,000 Investment in Bark Company Stock 14,000 Record dividends from Bark Company: $20,000 x .70

(4) Income from Bark Company 2,000 Investment in Bark Company Stock 2,000 Amortize differential related to buildings and equipment: $20,000 / 10 years

b. Journal entries recorded by Purple Corporation on its investment in Corn Corporation:

(1) Investment in Corn Corporation Stock 63,200 Income from Corn Corporation 63,200 Record equity-method income: ($60,000 + $19,000) x .80

(2) Cash 20,000 Investment in Corn Corporation Stock 20,000 Record dividends from Corn Corporation: $25,000 x .80

(3) Income from Corn Corporation 8,000 Investment in Corn Corporation Stock 8,000 Amortize differential related to trademark: $40,000 / 5 years

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P9-18 (continued)

c. Eliminating entries:

E(1) Income from Bark Company 19,000 Dividends Declared 14,000 Investment in Bark Company Stock 5,000 Eliminate income from Bark Company.

E(2) Income to Noncontrolling Interest 9,000 Dividends Declared 6,000 Noncontrolling Interest 3,000 Assign income to noncontrolling shareholders of Bark Company: $9,000 = $30,000 x .30 $6,000 = $20,000 x .30 $3,000 = $9,000 - $6,000

E(3) Common Stock__Bark Company 250,000 Retained Earnings, January 1 300,000 Differential 20,000 Investment in Bark Company Stock 405,000 Noncontrolling Interest 165,000 Eliminate investment in Bark Company stock: $20,000 = $405,000 - ($550,000 x .70) $405,000 = Purchase price $165,000 = $550,000 x .30

E(4) Buildings and Equipment 20,000 Differential 20,000 Assign beginning differential.

E(5) Depreciation Expense 2,000 Accumulated Depreciation 2,000 Amortize differential related to buildings and equipment: $20,000 / 10 years

E(6) Income from Corn Corporation 55,200 Dividends Declared 20,000 Investment in Corn Corporation Stock 35,200 Eliminate income from Corn Corporation.

E(7) Income to Noncontrolling Interest 15,800 Dividends Declared 5,000 Noncontrolling Interest 10,800 Assign income to noncontrolling shareholders of Corn Corporation: $15,800 = ($60,000 + $19,000) x .20 $5,000 = $25,000 x .20 $10,800 = $15,800 - $5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-18 (continued)

E(8) Common Stock__Corn Corporation 400,000 Retained Earnings, January 1 270,000 Differential 24,000 Investment in Corn Corporation Stock 560,000 Noncontrolling Interest 134,000 Eliminate investment in Corn Corporation stock: $270,000 = $200,000 + $35,000 + $35,000 $24,000 = $40,000 - $8,000 - $8,000 $560,000 = $520,000 + [($60,000 - $25,000) x .80 - $8,000] x 2 years $134,000 = ($400,000 + $270,000) x .20

E(9) Trademark 24,000 Differential 24,000 Assign beginning differential: $40,000 - ($8,000 x 2 years)

E(10) Amortization Expense 8,000 Trademark 8,000 Amortize differential related to trademark: $40,000 / 5 years

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-19 Multiple-Choice Questions on Reciprocal Ownership [AICPA Adapted]

1. b The basic equations are as follows: A = $190,000 + .80B + .70C B = $170,000 + .15C C = $230,000 + .25A

2. b

3. d The noncontrolling interest of Cashin is = .15($230,000 + .25A)

4. d Income to noncontrolling interest requires that the income of Benson be computed:

A = $190,000 + .80[$170,000 + .15($230,000 + .25A)] + .70($230,000 + .25A) A = $190,000 + .80($170,000 + $34,500 + .0375A) + $161,000 + .175A A = $190,000 + $136,000 + $27,600 + .03A + $161,000 + .175A .795A = $514,600 A = $647,296

C = $230,000 + .25($647,296) C = $230,000 + $161,824 C = $391,824

B = $170,000 + .15($391,824) B = $170,000 + $58,774 B = $228,774

Noncontrolling interest of B = .20($228,774) = $45,755

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-20 Subsidiary Stock Dividend

Investment elimination entry, January 1, 20X8:

Alternative 1: Pound Manufacturing stock is split 2:1.

E(1) Common Stock__Pound Manufacturing 100,000 Additional Paid-In Capital 70,000 Retained Earnings 280,000 Investment in Pound Mfg. Stock 306,000 Noncontrolling Interest 144,000

Alternative 2: A stock dividend of 4,000 shares is issued.

E(1) Common Stock__Pound Manufacturing 140,000 Additional Paid-In Capital 70,000 Retained Earnings 240,000 Investment in Pound Mfg. Stock 306,000 Noncontrolling Interest 144,000

Alternative 3: A stock dividend of 1,500 shares is issued.

E(1) Common Stock__Pound Manufacturing 115,000 Additional Paid-In Capital 130,000 Retained Earnings 205,000 Investment in Pound Mfg. Stock 306,000 Noncontrolling Interest 144,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-21 Subsidiary Preferred Stock Outstanding

a. Eliminating entries, January 1, 20X5:

Preferred Stock__Pert Company 200,000 Retained Earnings 32,000 Investment in Pert Preferred Stock 92,800 Noncontrolling Interest 139,200 Eliminate preferred stock: $32,000 = ($200,000 x .08) x 2 years

Common Stock__Pert Company 150,000 Retained Earnings 168,000 Investment in Pert Common Stock 222,600 Noncontrolling Interest 95,400 Eliminate common stock: $168,000 = $200,000 - $32,000

b. Consolidated net income: Operating income of Emerald Corporation $80,000 Income from preferred stock of Pert Company ($16,000 x .40) 6,400 Income from common stock of Pert Company [($34,000 - $16,000) x .70] 12,600 Consolidated net income $99,000

Income to noncontrolling interest: Income from preferred stock of Pert Company ($16,000 x .60) $ 9,600 Income from common stock of Pert Company [($34,000 - $16,000) x .30] 5,400 Income to noncontrolling shareholders $15,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-22 Ownership of Subsidiary Preferred Stock

a. Preferred stockholders' claim on net assets of Jacobs:

Liquidation value of preferred stock ($101 per share) $202,000 20X6 dividends in arrears ($200,000 x .10) 20,000 Total preferred stockholder claim, December 31, 20X6 $222,000

b. Book value of Jacobs common shares purchased by Presley:

Total Jacobs stockholders' equity, December 31, 20X6 $3,155,000 Claim of preferred stockholders (222,000) Book value of Jacobs common stock $2,933,000 Portion acquired by Presley x .60 Book value of common shares purchased by Presley $1,759,800

c. Goodwill associated with purchase of common shares:

Purchase price of common shares $1,800,000 Book value of common shares purchased (1,759,800) Goodwill $ 40,200

d. Income to noncontrolling interest, 20X7:

Jacobs net income $280,000 Less 20X7 preferred dividends ($200,000 x .10) (20,000) Income accruing to common shareholders $260,000 Noncontrolling common shareholders' interest x .40 Income to noncontrolling common shareholders $104,000 Preferred dividends to noncontrolling shareholders ($20,000 x .80) 16,000 Total income to noncontrolling shareholders $120,000

e. Presley's income from investment in subsidiary common stock:

Jacobs net income $280,000 Less 20X7 preferred dividends ($200,000 x .10) (20,000) Income accruing to common shareholders $260,000 Presley's proportionate share x .60 Presley's share of income to common shareholders $156,000

f. Noncontrolling interest, December 31, 20X7:

From Jacobs stockholders' equity, January 1, 20X7 $3,155,000 20X7 net income 280,000 Less preferred dividends (40,000) Less common dividends (10,000) Total Jacobs stockholders' equity, December 31, 20X7 $3,385,000 Claim of preferred stockholders (202,000) Book value of Jacobs' common stock $3,183,000 Noncontrolling stockholders' interest x .40 Noncontrolling interest__common $1,273,200

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-22 (continued)

Total Jacobs preferred stockholders' equity, January 1, 20X7 $222,000 Less dividends in arrears paid during 20X7 (20,000) Jacobs preferred stockholders' equity, December 31, 20X7 $202,000 Noncontrolling stockholders' interest x .80 Noncontrolling interest__preferred $161,600

Noncontrolling interest__common $1,273,200 Noncontrolling interest__preferred 161,600 Total noncontrolling interest $1,434,800

g. Elimination entries:

E(1) Income from Subsidiary 156,000 Dividends Declared__Common 6,000 Investment in Jacobs Common Stock 150,000 Eliminate income from subsidiary.

E(2) Dividend Income__Preferred 8,000 Dividends Declared__Preferred 8,000 Eliminate dividend income from subsidiary preferred stock: $40,000 x .20

E(3) Income to Noncontrolling Interest 120,000 Dividends Declared__Common 4,000 Dividends Declared__Preferred 32,000 Noncontrolling Interest 84,000 Assign income to noncontrolling interest: $4,000 = $10,000 x .40 $32,000 = $40,000 x .80

E(4) Common Stock__Jacobs Jacuzzi 500,000 Additional Paid-In Capital__Common 800,000 Premium on Preferred Stock 3,000* Retained Earnings, January 1 1,630,000** Goodwill 40,200 Investment in Jacobs Common Stock 1,800,000 Noncontrolling Interest 1,173,200 Eliminate beginning investment in common stock: $3,000 = $5,000 - $2,000 $1,630,000 = $1,650,000 - $20,000 $1,173,200 = ($500,000 + $800,000 + $3,000 + $1,630,000) x .40

*Portion accruing to common shareholders

**Portion accruing to common shareholders after deducting preferred dividends in arrears

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-22 (continued)

E(5) Goodwill Impairment Loss 26,000 Goodwill 26,000 Recognize goodwill impairment loss.

E(6) Preferred Stock__Jacobs Jacuzzi 200,000 Premium on Preferred Stock 2,000* Retained Earnings, January 1 20,000** Investment in Jacobs Preferred Stock 42,000 Additional Paid-In Capital__ Retirement of Preferred Stock 2,400 Noncontrolling Interest 177,600 Eliminate subsidiary preferred stock: $2,000 = $5,000 - $3,000 $20,000 = $200,000 x .10 $2,400 = ($222,000 x .20) - $42,000 $177,600 = $222,000 x .8

*Portion representing call premium

**Portion relating to preferred dividends in arrears

P9-23 Consolidation Workpaper with Subsidiary Preferred Stock

a. Eliminating entries:

E(1) Income from Subsidiary 58,500 Dividends Declared__Common Stock 9,000 Investment in White Common Stock 49,500

E(2) Dividend Income 9,000 Dividends Declared__Preferred Stock 9,000

E(3) Income to Noncontrolling Interest 12,500 Dividends Declared__Preferred Stock 6,000 Dividends Declared__Common Stock 1,000 Noncontrolling Interest 5,500

E(4) Common Stock__White Corporation 100,000 Retained Earnings, January 1 250,000 Investment in White Common Stock 315,000 Noncontrolling Interest 35,000

E(5) Preferred Stock__White Corporation 200,000 Investment in White Preferred Stock 120,000 Noncontrolling Interest 80,000

E(6) Dividends Payable 9,000 Dividends Receivable 9,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-23 (continued)

b. Brown Company and White Company Consolidation Workpaper December 31, 20X6

Brown White Eliminations Consol- Item Company Company Debit Credit idated

Sales 500,000 300,000 800,000Dividend Income 9,000 (2) 9,000Income from Subsidiary 58,500 (1) 58,500 Credits 567,500 300,000 800,000Cost of Goods Sold 280,000 170,000 450,000Deprec. and Amort. 40,000 30,000 70,000Other Expenses 131,000 20,000 151,000Debits (451,000)(220,000) (671,000)Income to Noncon- 129,000 trolling Interest (3) 12,500 (12,500)Net Income carry forward 116,500 80,000 80,000 116,500

Ret. Earnings, Jan. 1 435,000 250,000 (4) 250,000 435,000Net Income, from above 116,500 80,000 80,000 116,500 551,500 330,000 551,500Dividends Declared: Preferred Stock (15,000) (2) 9,000 (3) 6,000 Common Stock (60,000) (10,000) (1) 9,000 (3) 1,000 (60,000)Ret. Earnings, Dec. 31, carry forward 491,500 305,000 330,000 25,000 491,500

Cash 58,000 100,000 158,000Accounts Receivable 80,000 120,000 200,000Dividends Receivable 9,000 (6) 9,000Inventory 100,000 200,000 300,000Bldgs. and Equip. (net) 360,000 270,000 630,000Investment in White Co.: Preferred Stock 120,000 (5) 120,000 Common Stock 364,500 (1) 49,500 (4) 315,000 Debits 1,091,500 690,000 1,288,000

Accounts Payable 100,000 70,000 170,000Dividends Payable 15,000 (6) 9,000 6,000Bonds Payable 300,000 300,000Preferred Stock 200,000 (5) 200,000Common Stock 200,000 100,000 (4) 100,000 200,000Ret. Earnings, from above 491,500 305,000 330,000 25,000 491,500Noncontrolling Interest (3) 5,500 (4) 35,000 (5) 80,000 120,500

Credits 1,091,500 690,000 639,000 639,000 1,288,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-24 Subsidiary Stock Transactions

a. (1) Book value of Beta Company stock outstanding $500,000 Cost of treasury shares repurchased (68,000) Book value of remaining shares outstanding $432,000 Proportion of remaining shares held by Apex (7,500 / 9,000) x .833 Adjusted book value of shares held by Apex $360,000 Book value of shares held by Apex before treasury stock repurchase by Beta Company ($500,000 x .75) 375,000 Decrease in carrying value of shares held by Apex $(15,000)

(2) Journal entry recorded by Apex Corporation:

Retained Earnings 15,000 Investment in Beta Company Stock 15,000

(3) Eliminating entries: E(1) Income from Subsidiary 37,500 Investment in Beta Company Stock 37,500 $45,000 x .833

E(2) Income to Noncontrolling Interest 7,500 Noncontrolling Interest 7,500 $45,000 x .167

E(3) Common Stock__Beta Company 100,000 Additional Paid-In Capital 80,000 Retained Earnings 320,000 Treasury Stock 68,000 Investment in Beta Company Stock 360,000 Noncontrolling Interest 72,000

b. (1) Book value of Beta Company stock outstanding $500,000 Cost of treasury shares repurchased (68,000) Book value of remaining shares outstanding $432,000 Proportion of remaining shares held by Apex (6,500 / 9,000) x .722 Adjusted book value of shares held by Apex $312,000 Book value of shares held by Apex before treasury stock repurchase by Beta Company ($500,000 x .75) 375,000 Decrease in carrying value of shares held by Apex $ 63,000

(2) Journal entry recorded by Apex Corporation: Cash 68,000 Investment in Beta Company Stock 63,000 Gain on Sale of Investment 5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-24 (continued)

(3) Eliminating entries:

E(1) Gain on Sale of Investment 5,000 Additional Paid-In Capital 5,000

E(2) Income from Subsidiary 32,500 Investment in Beta Company Stock 32,500 $45,000 x .722

E(3) Income to Noncontrolling Interest 12,500 Noncontrolling Interest 12,500 $45,000 x .278

E(4) Common Stock__Beta Company 100,000 Additional Paid-In Capital 80,000 Retained Earnings 320,000 Treasury Stock 68,000 Investment in Beta Company Stock 312,000 Noncontrolling Interest 120,000

P9-25 Sale of Subsidiary Shares

a. Eliminating entries: E(1) Gain on Sale of ENC Company Stock 10,000 Additional Paid-In Capital 10,000 Eliminate gain on sale of ENC shares: $60,000 - ($250,000 x .20)

E(2) Income from Subsidiary 18,000 Dividends Declared 6,000 Investment in ENC Company Stock 12,000 Eliminate income from subsidiary: $18,000 = .60($170,000 - $140,000)

E(3) Income to Noncontrolling Interest 12,000 Dividends Declared 4,000 Noncontrolling Interest 8,000 Assign income to noncontrolling interest: $12,000 = .40($170,000 - $140,000)

E(4) Common Stock__ENC Company 100,000 Additional Paid-In Capital 20,000 Retained Earnings, January 1 130,000 Investment in ENC Company Stock 150,000 Noncontrolling Interest 100,000 Eliminate investment in common stock.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-25 (continued)

b. Penn Corporation and ENC Company Consolidation Workpaper December 31, 20X4

Penn ENC Eliminations Consol- Item Corp. Company Debit Credit idated

Sales 280,000 170,000 450,000Gain on Sale of ENC Company Stock 10,000 (1) 10,000Income from Subsidiary 18,000 (2) 18,000 Credits 308,000 170,000 450,000Cost of Goods Sold 210,000 100,000 310,000Depreciation Expense 20,000 15,000 35,000Other Expenses 21,000 25,000 46,000Debits (251,000)(140,000) (391,000) 59,000Income to Noncon- trolling Interest (3) 12,000 (12,000)Net Income, carry forward 57,000 30,000 40,000 47,000

Retained Earnings, January 1 320,000 130,000 (4)130,000 320,000Net Income, from above 57,000 30,000 40,000 47,000 377,000 160,000 367,000Dividends Declared (15,000) (10,000) (2) 6,000 (3) 4,000 (15,000)Ret. Earnings, Dec. 31, carry forward 362,000 150,000 170,000 10,000 352,000

Cash 30,000 35,000 65,000Accounts Receivable 70,000 50,000 120,000Inventory 120,000 100,000 220,000Buildings and Equipment 650,000 230,000 880,000Investment in ENC Company Stock 162,000 (2) 12,000 (4)150,000 Debits 1,032,000 415,000 1,285,000

Accum. Depreciation 170,000 95,000 265,000Accounts Payable 50,000 20,000 70,000Bonds Payable 200,000 30,000 230,000Common Stock 200,000 100,000 (4)100,000 200,000Additional Paid-In Capital 50,000 20,000 (4) 20,000 (1) 10,000 60,000Retained Earnings, from above 362,000 150,000 170,000 10,000 352,000Noncontrolling Interest (3) 8,000 (4)100,000 108,000Credits 1,032,000 415,000 290,000 290,000 1,285,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-26 Sale of Shares by Subsidiary to Nonaffiliate

a. E(1) Common Stock__Delta Corporation 240,000 Additional Paid-In Capital 190,000 Retained Earnings 350,000 Investment in Delta Corporation Stock 520,000 Noncontrolling Interest 260,000 Eliminate investment in common stock: $240,000 = $200,000 + ($10 x 4,000 shares) $190,000 = $50,000 + [($45 - $10) x 4,000 shares] $520,000 = $780,000 x (16,000 shares / 24,000 shares) $260,000 = $780,000 x (8,000 shares / 24,000 shares)

Journal entry recorded by Craft Corporation:

Investment in Delta Corporation Stock 40,000 Additional Paid-In Capital 40,000 Book value of shares held by Craft: After sale $780,000 x (16,000 / 24,000) $520,000 Before sale $600,000 x (16,000 / 20,000) (480,000) Increase in book value $ 40,000

b. Craft Corporation and Delta Corporation Consolidated Balance Sheet Workpaper January 1, 20X3

Craft Delta Eliminations Consol- Item Corp. Corp. Debit Credit idated

Cash 50,000 230,000 280,000Accounts Receivable 90,000 120,000 210,000Inventory 180,000 200,000 380,000Buildings & Equipment 700,000 600,000 1,300,000Investment in Delta Corporation 520,000 (1)520,000 Total Debits 1,540,000 1,150,000 2,170,000

Accumulated Depreciation 200,000 220,000 420,000Accounts Payable 70,000 70,000 140,000Taxes Payable 80,000 80,000Mortgages Payable 250,000 250,000Common Stock 300,000 240,000 (1)240,000 300,000Additional Paid-In Capital 220,000 190,000 (1)190,000 220,000Retained Earnings 500,000 350,000 (1)350,000 500,000Noncontrolling Interest (1)260,000 260,000Total Credits 1,540,000 1,150,000 780,000 780,000 2,170,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-26 (continued)

c. Craft Corporation and Subsidiary Consolidated Balance Sheet January 1, 20X3

Current Assets: Cash $280,000 Accounts Receivable 210,000 Inventory 380,000 $ 870,000Noncurrent Assets: Buildings and Equipment $1,300,000 Less: Accumulated Depreciation (420,000) 880,000Total Assets $1,750,000

Current Liabilities: Accounts Payable $140,000 Taxes Payable 80,000 $ 220,000Mortgages Payable 250,000Noncontrolling Interest 260,000Stockholders' Equity: Common Stock $300,000 Additional Paid-In Capital 220,000 Retained Earnings 500,000 1,020,000Total Liabilities and Stockholders' Equity $1,750,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-27 Sale of Additional Shares to Parent

a. Eliminating entry:

E(1) Common Stock__Tin Products Corporation 125,000 Additional Paid-In Capital 175,000 Retained Earnings 200,000 Buildings and Equipment 12,500 Investment in Tin Products Corporation 412,500 Noncontrolling Interest 100,000

Journal entry recorded by Tin Products:

Cash 150,000 Common Stock 25,000 Additional Paid-In Capital 125,000

Journal entry recorded by Shady Lane:

Investment in Tin Products Stock 150,000 Cash 150,000

b. Shady Lane Manufacturing Company and Tin Products Corporation Consolidation Workpaper January 2, 20X1

Shady Tin Eliminations Consol- Item Lane Products Debit Credit idated

Cash 77,500 210,000 287,500Accounts Receivable 60,000 100,000 160,000Inventory 100,000 180,000 280,000Buildings and Equipment 600,000 600,000 (1) 12,500 1,212,500Investment in Tin Products Stock 412,500 (1)412,500 Debits 1,250,000 1,090,000 1,940,000

Accum. Depreciation 150,000 240,000 390,000Accounts Payable 50,000 50,000 100,000Bonds Payable 400,000 300,000 700,000Common Stock 200,000 125,000 (1)125,000 200,000Additional Paid-In Capital 50,000 175,000 (1)175,000 50,000Retained Earnings 400,000 200,000 (1)200,000 400,000Noncontrolling Interest (1)100,000 100,000Credits 1,250,000 1,090,000 512,500 512,500 1,940,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-28 Complex Ownership Structure

The overall ownership structure can be diagrammed as follows:

First Boston

.80 .10

Gulfside Paddock .60

a. Entity approach:

Basic equations assume FB = net income of First Boston GS = net income of Gulfside PD = net income of Paddock

Simple equations: FB = $44,000 + .80GS GS = $34,000 + .60PD PD = $50,000 + .10FB

Using substitution: FB = $44,000 + .80[$34,000 + .60($50,000 + .10FB)] FB = $44,000 + .80($34,000 + $30,000 + .06FB) FB = $44,000 + $27,200 + $24,000 + .048FB .952FB = $95,200 FB = $100,000

PD = $50,000 + .10($100,000) PD = $50,000 + $10,000 PD = $60,000

GS = $34,000 + .60($60,000) GS = $34,000 + $36,000 GS = $70,000

Consolidated net income = $100,000 x .90 = $90,000

Noncontrolling interest:

Gulfside $70,000 x .20 = $14,000 Paddock $60,000 x .40 = 24,000 Total noncontrolling interest $38,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-28 (continued)

b. Treasury stock method:

Operating income of First Boston $ 44,000 Operating income of Gulfside 34,000 Operating income of Paddock 50,000 Total earnings available $128,000 Income to noncontrolling interests Paddock .40[$50,000 + .10($30,000)] $21,200 Gulfside .20[$34,000 + .60($10,000)] 8,000 (29,200) Consolidated net income $ 98,800

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

P9-29 Reciprocal Ownership

The overall ownership structure can be diagrammed as follows:

Black

.80

Red .30

.20

.50

Green

a. Entity approach:

Basic equations assume B = net income of Black Corporation R = net income of Red Corporation G = net income of Green Company

Simple equations: B = $66,000 + .80R + .30G R = $35,000 + .50G G = $50,000 + .20B

Using substitution: B = $66,000 + .80[$35,000 + .50($50,000 + .20B)] + .30($50,000 + .20B) B = $66,000 + .80($35,000 + $25,000 + .10B) + $15,000 + .06B B = $66,000 + $28,000 + $20,000 + .08B + $15,000 + .06B .86B = $129,000 B = $150,000

G = $50,000 + .20($150,000) G = $50,000 + $30,000 G = $80,000

R = $35,000 + .50($80,000) R = $35,000 + $40,000 R = $75,000

Consolidated net income: $150,000 x .80 = $120,000

Noncontrolling interest: R = $75,000 x .20 = $15,000 G = $80,000 x .20 = 16,000 $31,000

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P9-29 (continued)

b. Treasury stock method:

Operating income of Black Corporation $ 66,000 Operating income of Red Corporation 35,000 Operating income of Green Company 50,000 Total earnings available $151,000 Income to noncontrolling interest: Green Company {.20[$50,000 + .20($40,000)]} $11,600 Red Corporation {.20[$35,000 + .50($20,000)]} 9,000 (20,600)

Consolidated net income $130,400

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002