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CHAPTER 7

CONSOLIDATED FINANCIAL STATEMENTS:


SUBSEQUENT TO DATE OF BUSINESS COMBINATION

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 7–1 Prem Corporation (15 minutes, easy)


Preparation of three-column ledger account for parent company’s investment in wholly owned
subsidiary. Working paper elimination for first year following business combination. Goodwill
is involved, but is unimpaired.
Pr. 7–2 Pro Corporation (20 minutes, easy)
Parent company’s equity-method entries for operations of partially owned subsidiary. Goodwill
is involved, but is unimpaired.
Pr. 7–3 Promo Corporation (30 minutes, easy)
Parent company’s journal entries for operating results of wholly owned subsidiary under equity
method of accounting. Three-column ledger accounts for parent company's investment and
Intercompany Investment Income accounts. Preparation of working paper elimination involving
unimpaired goodwill.
Pr. 7–4 Penn Corporation (30 minutes, medium)
Given parent company’s journal entries under equity method of accounting for operating
results of partially owned subsidiary and other information for first year following date of
business combination, prepare working paper eliminations for parent company and subsidiary.
Goodwill is involved, but is unimpaired.
Pr. 7–5 Pewter Corporation (30 minutes, medium)
Parent company’s journal entries under equity method of accounting for two partially owned
subsidiaries; computation of minority interest in subsidiaries’ net assets; computation of
consolidated retained earnings. No goodwill or negative goodwill is involved.
Pr. 7–6 Parks Corporation (40 minutes, medium)
Given analyses of parent company’s ledger account for investment in partially owned
subsidiary, minority interest in net assets of subsidiary, and current fair value differences,
reconstruct parent company’s equity-method journal entries for operating results of subsidiary
for first year subsequent to date of business combination. Also, prepare working paper
eliminations. Goodwill is involved, but is unimpaired.
Pr. 7–7 Paseo Corporation (55 minutes, medium)
Journal entries for parent company to record partially owned subsidiary’s operating results
under equity method of accounting for first year following date of business combination.
Preparation of working paper eliminations for parent company and subsidiary. Goodwill is
involved, but is unimpaired.
Pr. 7–8 Pavich Corporation (60 minutes, strong)
Preparation of parent company’s equity-method journal entries for operating results of partially
owned subsidiary for first two years following date of business combination. Preparation of
working paper eliminations at end of each of first two years following combination, and a
three-column Retained Earnings of Subsidiary ledger account of parent company. Goodwill is
involved, but is unimpaired.

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Solutions Manual, Chapter 7 231
Pr. 7–9 Plumm Corporation (60 minutes, medium)
Reconstruct journal entries for parent company under equity method of accounting for first-
year operating results of wholly owned subsidiary; preparation of working paper for
consolidated financial statements and working paper elimination. Goodwill is involved, but is
unimpaired.
Pr. 7–10 Ping Corporation (65 minutes, strong)
Parent company adjusting entries to change accounting for four-year operating results of
partially owned subsidiary to equity method of accounting from cost method. Working paper
for consolidated financial statements and related working paper eliminations. No goodwill is
involved.
Pr. 7–11 Petal Corporation (50 minutes, strong)
Preparation of consolidated balance sheet of parent company and wholly owned subsidiary
without the use of working paper for consolidated financial statements or working paper
eliminations. Goodwill is involved, but is unimpaired.

ANSWERS TO REVIEW QUESTIONS


1. The statement is true because working paper eliminations under the equity method of accounting
differ from those under the cost method of accounting for a subsidiary’s operations. Consolidated
balances should not be, and are not, affected by the choice of an accounting method by the parent
company.
2. Consolidated financial statements are superior to separate financial statements of the parent
company under the equity method of accounting because the consolidated statements include all
revenue, expense, asset, and liability components of the affiliated companies’ income statements
and balance sheets. Parent company unconsolidated financial statements include only a single item
for the parent company’s share of the subsidiary's net income or losses and a single item for the
parent company's equity in the subsidiary’s net assets.
3. In addition to the usual debits and credits to revenue and expense ledger accounts, the closing
entries for a parent company that uses the equity method of accounting include a credit to the
Retained Earnings of Subsidiary account. The amount of the credit is the difference between the
parent company’s share of the subsidiary's adjusted net income for the accounting period and its
share of the subsidiary’s dividends for the period. Use of a Retained Earnings of Subsidiary
account identifies the portion of the parent company’s retained earnings not available for dividends
to the parent’s stockholders.
4. The difference between $5,000 (10% of the subsidiary’s reported net income) and $3,500 (the
amount of the working paper elimination for the minority interest in the subsidiary’s net income)
most likely results from depreciation and amortization of differences between current fair values
and carrying amounts of the subsidiary's identifiable net assets on the date of the business
combination.
5. Advantages that result from the use of the equity method, rather than the cost method, of
accounting for a subsidiary’s operating results include the following:
(1) The equity method emphasizes the economic substance of the parent company–subsidiary
relationship, consonant with financial accounting theory.
(2) The equity method permits use of parent company journal entries to reflect many items that
must be included in working paper eliminations in the cost method. Formal journal entries
provide a better record than do working paper notations.
(3) The equity method facilitates issuance of parent company unconsolidated financial statements,
if required by the SEC.
(4) Except where there are intercompany profits (gains) or losses in assets and liabilities to be
consolidated, parent company net income and retained earnings under the equity method are

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232 Modern Advanced Accounting, 10/e
identical to the related consolidated amounts. The equity method thus provides a useful self-
checking technique.
6. No, Parnell Corporation and Plankton Company do not use the same method of accounting for
their subsidiaries’ operating results. The Intercompany Dividends Revenue ledger account indicates
that Parnell uses the cost method of accounting, while the Intercompany Investment Income
account evidences use of the equity method of accounting by Plankton.
7. a. Intercompany Dividends Receivable 138,000
Investment in Subsidiary Company Common Stock 138,000
To record declaration of dividend by subsidiary
(46,000 shares x $3 a share = $138,000).
b. Intercompany Dividends Receivable 138,000
Intercompany Dividends Revenue 138,000
To record declaration of dividend by subsidiary
(46,000 shares x $3 a share = $138,000).
8. A Retained Earnings of Subsidiary ledger account is required for a parent company that uses the equity
method of accounting for the subsidiary’s operations. In the equity method of accounting, the parent’s
share of net income of the subsidiary is recognized as income by the parent company; thus, the entire
income from the subsidiary recognized by the parent company is not available for dividends to parent
company stockholders. A Retained Earnings of Subsidiary ledger account thus is required for a parent
company that uses the equity method of accounting for a subsidiary’s operations.

SOLUTIONS TO EXERCISES
Ex. 7–1 1. d 9. a
2. d 10. d
3. d 11. c ($80,000 x 0.80 = $64,000)
4. b 12. b ($1,600,000 + $80,000 = $1,680,000)
5. c 13. c
6. c 14. a
7. c 15. a
8. b 16. a
Ex. 7–2 Journal entries for Pence Corporation, year ended Sept. 30, 2006:
2006
Sept. 1 Intercompany Dividends Receivable 80,000
Investment in Spence Company Common Stock 80,000
18 Cash 80,000
Intercompany Dividends Receivable 80,000
30 Investment in Spence Company Common Stock 980,000
Intercompany Investment Income 980,000

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Solutions Manual, Chapter 7 233
30 Intercompany Investment Income
($20,000 + $12,000 + $8,000) 40,000
Investment in Spence Company Common Stock 40,000

Ex. 7–3 The most logical explanation for each of the transactions or events follows:
(1) The September 1, 2005, $630,000 debit to Investment in Subsidiary Common Stock is the
cost of the parent company’s investment in the subsidiary, acquired in a business
combination.
(2) The August 16, 2006, debit to Intercompany Dividends Receivable and credit to
Investment in Subsidiary Common Stock in the amount of $36,000 is the parent
company’s share of dividends declared by the subsidiary on that date.
(3) The August 27, 2006, credit to Intercompany Dividends Receivable in the amount of
$36,000 shows the collection of the dividend paid by the subsidiary.
(4) The August 31, 2006, debit to Investment in Subsidiary Common Stock and credit to
Intercompany Investment Income in the amount of $72,000 is the parent company's share
of the subsidiary’s reported net income for the year ended on that date.
(5) The August 31, 2006, debit to Intercompany Investment Income and credit to Investment
in Subsidiary Common Stock in the amount of $5,000 is the parent company’s share of the
depreciation and amortization of the differences between current fair values and carrying
amounts of the subsidiary’s identifiable net assets on the date of the business combination.
Ex. 7–4 PRISTINE CORPORATION AND SUBSIDIARY
Working Paper Elimination
May 31, 2006

Common StockSuperb 100,000


Additional Paid-in CapitalSuperb 200,000
Retained EarningsSuperb 450,000
Intercompany Investment IncomePristine
($80,000 – $65,000) 15,000
LandSuperb 40,000
Building (net) Superb ($50,000 – $5,000) 45,000
GoodwillSuperb 50,000
Cost of Goods SoldSuperb ($60,000 + $5,000) 65,000
Investment in Superb Company Common StockPristine
($950,000 + $80,000 – $65,000 – $30,000) 935,000
Dividends DeclaredSuperb 30,000

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234 Modern Advanced Accounting, 10/e
Ex. 7–5 POLAR CORPORATION AND SUBSIDIARY
Working Paper Elimination
July 31, 2006

(a) Common Stock, no parSolar 50,000


Retained EarningsSolar 250,000
Intercompany Investment IncomePolar
($50,000 – $30,000 – $12,000) 8,000
Plant Assets (net)Solar 108,000
GoodwillSolar 20,000
Cost of Goods SoldSolar ($30,000 + $12,000) 42,000
Investment in Solar Company Common Stock
Polar ($470,000 + $8,000 – $20,000) 458,000
Dividends DeclaredSolar 20,000

Ex. 7–6 PARO CORPORATION AND SUBSIDIARY


Working Paper Elimination
February 28, 2006

Common Stock Savo 50,000


Retained EarningsSavo 80,000
Intercompany Investment IncomeParo ($60,000 – $16,000) 44,000
Plant Assets (net)Savo ($60,000 – $6,000) 54,000
GoodwillSavo 10,000
Cost of Goods SoldSavo ($10,000 + $6,000) 16,000
Investment in Savo Company Common Stock
Paro ($210,000 + $60,000 – $20,000 – $16,000) 234,000
Dividends DeclaredSavo 20,000
Ex. 7–7 a. Journal entries (explanations omitted) for Parry Corporation, Oct. 31, 2006:
Investment in Samuel Company Common Stock 50,000
Intercompany Investment Income 50,000
Intercompany Investment Income 25,000
Investment in Samuel Company Common Stock 25,000
Intercompany Dividends Receivable 20,000
Investment in Samuel Company Common Stock 20,000
b. Working paper elimination (explanation omitted) for Parry Corporation and subsidiary,
Oct. 31, 2006:
Common StockSamuel 100,000
Additional Paid-in CapitalSamuel 150,000
Retained EarningsSamuel 200,000
Plant Assets (net)Samuel ($250,000 – $25,000) 225,000
GoodwillSamuel 60,000
Intercompany Investment IncomeParry ($50,000 – $25,000) 25,000
Cost of Goods SoldSamuel 25,000
Investment in Samuel Company Common StockParry
($760,000 + $50,000 – $25,000 – $20,000) 765,000
Dividends DeclaredSamuel 20,000

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Solutions Manual, Chapter 7 235
Ex. 7–8 a. Journal entries for Pulp Corporation, Jan. 31, 2006:
Investment in Stump Company Common Stock 240,000
Intercompany Investment Income 240,000
Cash 120,000
Investment in Stump Company Common Stock 120,000
Intercompany Investment Income ($20,000 + $20,000) 40,000
Investment in Stump Company Common Stock 40,000

b. PULP CORPORATION AND SUBSIDIARY


Working Paper Elimination
January 31, 2006

Common Stock, no par or stated valueStump 100,000


Retained EarningsStump 180,000
Intercompany Investment IncomePulp ($240,000 – $40,000) 200,000
Plant AssetsStump ($100,000 – $20,000) 80,000
GoodwillStump 40,000
Cost of Goods SoldStump ($20,000 + $20,000) 40,000
Investment in Stump Company Common StockPulp
($440,000 + $240,000 – $120,000 – $40,000) 520,000
Dividends DeclaredStump 120,000
Ex. 7–9 Retained Earnings of Subsidiary
Date Explanation Debit Credit Balance
2006
Dec. 31 Close net income not available for
dividends ($45,500 – $20,000) 25,500 25,500 cr
2007
Dec. 31 Close net income not available for
dividends ($85,500 – $50,000) 35,500 61,000 cr
Ex. 7–10 Computation of balance of Pitt Corporation’s Intercompany Investment Income ledger account,
Mar. 31, 2006:
Pitt’s share of Scow’s net loss for Year 2006 ($130,000 x 0.90) $117,000
Adjustments -0-*
Pitt’s debit balance of the Intercompany Investment Income account $117,000
*Impairment of goodwill attributable to a business combination with a partially owned
subsidiary is debited to the parent company’s Impairment Loss ledger account.
Ex. 7–11 Balance of Ply Corporation’s Investment in Spade Company Common Stock ledger account,
Dec. 31, 2006:
Cost of investment, Jan. 2, 2006 $345,000
Add: Ply’s share of Spade’s net income (Intercompany Investment Income
account balance) ($160,000 x 0.75) 120,000
Less: Dividends declared by subsidiary (60,000)
Balance, Dec. 31, 2006 $405,000

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236 Modern Advanced Accounting, 10/e
Ex. 7–12 Consolidated retained earnings of Plain Corporation and subsidiary, Dec. 31, 2006:
Plain Corporation’s Retained Earnings ledger account balance, Jan. 2, 2006 $500,000
Add: Plain’s net income, year ended Dec. 31, 2006 200,000*
Subtotal $700,000
Less: Plain’s dividends, year ended Dec. 31, 2006 50,000
Total of Plain’s Retained Earnings and Retained Earnings of Subsidiary post-
closing ledger account balances, Dec. 31, 2006 (equal to consolidated retained
earnings) $650,000
*Includes Plain’s share of Sano’s Year 2006 net income under the equity
method of accounting.
Ex. 7–13 Consolidated net income of Pinson Corporation and subsidiary for Year 2006:
Net income of Pinson Corporation, exclusive of intercompany investment
income $145,000
Add: Pinson’s share of net income of Solomon ($120,000 x 0.90) 108,000
Consolidated net income $253,000
Ex. 7–14 a. Journal entries for Pallid Corporation, Jan. 31, 2006:
Investment in Sallow Company Common Stock ($120,000 x
0.85) 102,000
Intercompany Investment Income 102,000
Intercompany Dividends Receivable ($60,000 x 0.85) 51,000
Investment in Sallow Company Common Stock 51,000
Intercompany Investment Income [($10,000 + $5,000) x 0.85] 12,750
Investment in Sallow Company Common Stock 12,750
b. PALLID CORPORATION AND SUBSIDIARY
Working Paper Eliminations
January 31, 2006
(a) Common Stock, no par or stated valueSallow 50,000
Retained EarningsSallow 90,000
Intercompany Investment IncomePallid
($102,000 – $12,750) 89,250
Plant AssetsSallow ($50,000 – $5,000) 45,000
GoodwillPallid 20,000
Cost of Goods SoldSallow ($10,000 + $5,000) 15,000
Investment in Sallow Company Common
StockPallid ($190,000 + $102,000 – $51,000
– $12,750) 228,250
Dividends DeclaredSallow 60,000
Minority Interest in Net Assets of Subsidiary
[$30,000 – ($60,000 x 0.15)] 21,000

(b) Minority Interest in Net Income of Subsidiary [($120,000


– $15,000) x 0.15] 15,750
Minority Interest in Net Assets of Subsidiary 15,750

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Solutions Manual, Chapter 7 237
Ex. 7–15 Statement of retained earnings section of working paper for consolidated financial statements
of Putter Corporation and subsidiary, year ended May 31, 2007:
Eliminations
Putter Simmer increase
Corporation Company (decrease) Consolidated
Retained earnings,
beginning of year 692,000 150,000 (a) (122,000) 720,000
Net income to parent 180,000 120,000 (120,000) 180,000
Subtotal 872,000 270,000 (242,000) 900,000
Dividends declared 90,000 50,000 (a) (50,000) 90,000
Retained earnings,
end of year 782,000 220,000 (192,000) 810,000
Ex. 7–16 Closing entries for Parton Corporation, May 31, 2006:
Sales 840,000
Intercompany Investment Income 95,000
Income Summary 935,000
Income Summary 590,000
Cost of Goods Sold 378,000
Operating Expenses and Income Taxes Expense 212,000
Income Summary ($935,000 – $590,000) 345,000
Retained Earnings of Subsidiary ($95,000 – $60,000) 35,000
Retained Earnings ($345,000 – $35,000) 310,000
Retained Earnings 50,000
Dividends Declared 50,000
Ex. 7–17 a. Balance of Investment in Salisbury Company Common Stock
ledger account, Sept. 30, 2006 $265,000
Add: Putnam’s share of Salisbury’s net income ($50,000 x
0.80) 40,000
Subtotal $305,000
Less: Putnam’s share of amortization of current fair value
difference ($4,500 x 0.80) $ 3,600
Putnam’s share of dividends declared by Salisbury
($18,750 x 0.80) 15,000 18,600
Balance of Investment in Salisbury Company Common Stock
account, Sept. 30, 2007 $286,400
b. Balance of Intercompany Investment Income ledger account,
Sept. 30, 2007 ($40,000 – $3,600) $ 36,400
c. Amount of closing entry to Retained Earnings of Subsidiary
ledger account, Sept. 30, 2007 ($36,400 – $15,000) $ 21,400
d. Minority interest in net income of subsidiary, year ended Sept.
30, 2007 [($50,000 – $4,500) x 0.20] $ 9,100
e. Minority interest in net assets of subsidiary, Sept. 30, 2007
[($60,0000 + $9,100 – ($18,750 x 0.20)] $ 65,350

CASES
Case 7–1 Rebuttals to each of the chief accountant's arguments are as follows:

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238 Modern Advanced Accounting, 10/e
(1) Because consolidated financial statements disregard legal form of the affiliated
corporations in favor of economic substance of the parent company–subsidiary
relationship, there is no reason for the parent company to use a method of accounting for
the subsidiary’s operations that emphasizes legal form.
(2) The economic unit concept of consolidated financial statements treats the minority interest
in a subsidiary’s net assets as a part of stockholders’ equity; thus, there is no need to use a
method of accounting that emphasizes legal separateness of parent company and
subsidiary. The presence of a minority interest does not preclude the preparation of
consolidated financial statements.
(3) Although the Intercompany Investment Income ledger account theoretically does not meet
the definition of realized revenue, it is consistent with the accrual basis of accounting in
that it permits the parent company to recognize the subsidiary’s operating results in the
parent company’s income statement. Rigid adherence to the revenue realization principle
should not preclude accounting for economic substance of events.
(4) Use of a Retained Earnings of Subsidiary ledger account to segregate net income of a
subsidiary not paid to the parent company as dividends safeguards against illegal dividend
payments by the parent company.
(5) The fact that journal entries in ledger accounts are used in the equity method of accounting
to record amortization of differences between current fair values and carrying amounts of
the subsidiary’s net assets is an argument in favor of the equity method of accounting.
Formal accounting records provide a better history than do working paper notations.
Adherence to the historical-cost valuation principle should not bar the use of a preferable
accounting method.
Case 7–2 The literature researched by Nancy Wade is as follows:
FAS 142, ¶ 11. The accounting for a recognized intangible asset is based on its useful life to
the reporting entity. An intangible asset with a finite useful life is amortized; an intangible asset
with an indefinite useful life is not amortized. The useful life of an intangible asset to an entity
is the period over which the asset is expected to contribute directly or indirectly to the future
cash flows of that entity. The estimate of the useful life of an intangible asset to an entity shall
be based on an analysis of all pertinent factors, in particular:
a. The expected use of the asset by entity.
b. The expected useful life of another asset or a group of assets to which the useful life of the
intangible asset may relate (such as mineral rights to depleting assets).
c. Any legal, regulatory, or contractual provisions that may limit the useful life.
d. Any legal, regulatory, or contractual provisions that enable renewal or extension of the
asset’s legal or contractual life without substantial cost (provide there is evidence to
support renewal or extension and renewal or extension can be accomplished without
material modifications of the existing terms and conditions).
e. The effects of obsolescence, demand, competition, and other economic factors (such as the
stability of the industry, known technological advances, legislative action that results in an
uncertain or changing regulatory environment, and expected changes in distribution
channels).
f. The level of maintenance expenditures required to obtain the expected future cash flows
from the asset (for example, a material level of required maintenance in relation to the
carrying amount of the asset may suggest a very limited useful life).
If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life
of an intangible asset to the reporting entity, the useful life of the asset shall be considered to
be indefinite. The term indefinite does not mean infinite.
APB 20, ¶ 10. Changes in estimates used in accounting are necessary consequences of
periodic presentations of financial statements. Preparing financial statements requires
estimating the effects of future events. Examples of items for which estimates are necessary are
uncollectible receivables, inventory obsolescence, service lives and salvage values of
depreciable assets, warranty costs, periods benefited by a deferred cost, and recoverable
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Solutions Manual, Chapter 7 239
mineral reserves. Future events and their effects cannot be perceived with certainty; estimating,
therefore, requires the exercise of judgment. Thus accounting estimates change as new events
occur, as more experience is acquired, or as additional information is obtained.
APB 20, ¶ 31. The [Accounting Principles] Board concludes that the effect of a change in
accounting estimate should be accounted for in (a) the period of change if the change affects
that period only or (b) the period of change and future periods if the change affects both. A
change in an estimate should not be accounted for by restating amounts reported in financial
statements of prior periods or by reporting pro forma amounts for prior periods.
APB 20, ¶ 33. Disclosure. The effect on income before extraordinary items, net income and
related per share amounts of the current period should be disclosed for a change in estimate
that affects several future periods, such as a change in service lives of depreciable assets or
actuarial assumptions affecting pension costs. Disclosure of the effect on those income
statement amounts is not necessary for estimates made each period in the ordinary course of
accounting for items such as uncollectible accounts or inventory obsolescence; however,
disclosure is recommended if the effect of a change in the estimate is material.
AU 342.05 Management is responsible for establishing a process for preparing accounting
estimates. Although the process may not be documented or formally applied, it normally
consists of
a. Identifying situations for which accounting estimates are required.
b. Identifying the relevant factors that may affect the accounting estimate.
c. Accumulating relevant, sufficient, and reliable data on which to base the estimate.
d. Developing assumptions that represent management's judgment of the most likely
circumstances and events with respect to the relevant factors.
e. Determining the estimated amount based on the assumptions and other relevant factors.
f. Determining that the accounting estimate is presented in conformity with applicable
accounting principles and that disclosure is adequate.
The risk of material misstatement of accounting estimates normally varies with the complexity
and subjectivity associated with the process, the availability and reliability of relevant data, the
number and significance of assumptions that are made, and the degree of uncertainty
associated with the assumptions.
AU 420.14 Accounting estimates (such as service lives and salvage values of depreciable
assets and provisions for warranty costs, uncollectible receivables, and inventory obsolescence)
are necessary in the preparation of financial statements. Accounting estimates change as new
events occur and as additional experience and information are acquired. This type of
accounting change is required by altered conditions that affect comparability but do not involve
the consistency standard. The independent auditor, in addition to satisfying himself with
respect to the conditions giving rise to the change in accounting estimate, should satisfy himself
that the change does not include the effect of a change in accounting principle. Provided he is
so satisfied, he need not comment on the change in his report. However, an accounting change
of this type having a material effect on the financial statements may require disclosure in a note
to the financial statements.
A review of the foregoing literature may lead Nancy Wade to respond to John Raymond’s
request as follows:
(1) Unless, per APB 20, paragraph 10, new events have occurred, more experience has been
acquired, or additional information has been obtained that would support an extension of
the composite economic life of Selvidge Company’s depreciable plant assets to ten years
from five years, the change should not be made. This is especially true if the five-year
economic life was used in the pro forma data for the business combination reported in
Punjab Corporation’s consolidated financial statements for the year ended December 31,
2005 (see Chapter 5 of the text). The requirements for accounting estimates set forth in AU
342.05 leave no room for arbitrary extensions of economic lives of plant assets.

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240 Modern Advanced Accounting, 10/e
(2) FAS 142, paragraph 11c, makes it clear that legal life is an outer limit on the amortization
period for intangible assets, not a conventional limit. Unless favorable changes have
occurred in forecasts of obsolescence, demand, competition, or other economic factors
(FAS 142, paragraph 11e), there is no basis for an arbitrary extension of the economic life
of Selvidge’s patent.
Overall, Nancy Wade should resist John Raymond’s efforts to enhance the consolidated
operating results of Punjab Corporation and Selvidge Company by unwarranted changes to or
adoptions of excessive economic lives for depreciable and amortizable assets.
Case 7–3 The view of student Carl is supportable; that of student Rachel is not. Once the board of
directors of the partially owned subsidiary has declared a dividend, liabilities to the parent
company and to minority stockholders must be recognized. The liabilities for declared but
unpaid dividends clearly meet the provisions of Statement of Financial Accounting Concepts
No. 6, “Elements of Financial Statements,” paragraph 35 of which defines liabilities as
“probable future sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in the future as a result
of past transactions or events.” Taking student Rachel’s view to the extreme, dividends payable
to the parent company of a partially owned subsidiary also should be displayed with
consolidated stockholders’ equity.

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Solutions Manual, Chapter 7 241
15 Minutes, Easy
Prem Corporation Pr. 7–1
a. Investment in Supp Company Stock
Date Explanation Debit Credit Balance
20 05
Dec. 31 Balance 1 9 2 0 0 0 dr
20 06
Dec. 8 Dividend declared by Supp 6 0 0 0 1 8 6 0 0 0 dr
31 Net income of Supp 3 0 0 0 0 2 1 6 0 0 0 dr
31 Amortization ($20,000 + $6,000) 2 6 0 0 0 1 9 0 0 0 0 dr

b. Prem Corporation and Subsidiary


Working Paper Elimination
December 31, 2006
(a) Common Stock—Supp 1 0 0 0 0
Additional Paid-in Capital—Supp 4 0 0 0 0
Retained Earnings—Supp 5 0 0 0 0
Intercompany Investment Income—Prem
($30,000 – $26,000) 4 0 0 0
Plant Assets (net)—Supp ($60,000 – $6,000) 5 4 0 0 0
Goodwill—Supp 1 2 0 0 0
Cost of Goods Sold—Supp ($20,000 + $6,000) 2 6 0 0 0
Investment in Supp Company Common
Stock—Prem 1 9 0 0 0 0
Dividends Declared—Supp 6 0 0 0
To carry out the following:
(1) Eliminate intercompany investment and equity
accounts of subsidiary at beginning of year, and
subsidiary dividend.
(2) Provide for Year 2006 depreciation and
amortization on differences between combination
date current fair values and carrying amounts of
Supp’s net assets.
(3) Allocate unamortized differences between
combination date current fair values and carrying
amounts of Supp’s net assets to appropriate
assets.
(Income tax effects are disregarded.)

The McGraw-Hill Companies, Inc., 2006


242 Modern Advanced Accounting, 10/e
20 Minutes, Easy
Pro Corporation Pr. 7–2
Pro Corporation
Journal Entries

20 06
Sept 5 Intercompany Dividends Receivable [(100,000 x $1)
x 0.80] 8 0 0 0 0
Investment in Soy Company Common Stock 8 0 0 0 0
To record dividend declared by Soy Company, payable
September 26, 2006.

26 Cash 8 0 0 0 0
Intercompany Dividends Receivable 8 0 0 0 0
To record receipt of dividend from Soy Company.

30 Investment in Soy, Company Common Stock


($300,000 x 0.80) 2 4 0 0 0 0
Intercompany Investment Income 2 4 0 0 0 0
To record 80% of net income of Soy Company for the
year ended September 30, 2006. (Income tax effects
are disregarded.)

30 Intercompany Investment Income [($60,000 + $8,000


+ $4,000) x 0.80] 5 7 6 0 0
Investment in Soy Company Common Stock 5 7 6 0 0
To amortize differences between current fair values
and carrying amounts of Soy Company’s identifiable
net assets on Sept. 30, 2005. (Income tax effects are
disregarded.)

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 243
30 Minutes, Easy
Promo Corporation Pr. 7–3
a. Promo Corporation
Journal Entries

20 06
Mar 1 Intercompany Dividends Receivable (50,000 x $0.40) 2 0 0 0 0
Investment in Sanz Company Common Stock 2 0 0 0 0
To record dividend declared by Sanz Company,
payable Mar. 15, 2006.

15 Cash 2 0 0 0 0
Intercompany Dividends Receivable 2 0 0 0 0
To record receipt of dividend from Sanz Company.

31 Investment in Sanz Company Common Stock 6 0 0 0 0


Intercompany Investment Income 6 0 0 0 0
To record 100% of Sanz Company’s net income for
the year ended Mar. 31, 2006. (Income tax effects are
disregarded.)

31 Intercompany Investment Income 2 8 0 0 0


Investment in Sanz Company Common Stock 2 8 0 0 0
To amortize differences between current fair values
and carrying amounts of Sanz Company’s identifiable
net assets on Mar. 31, 2006, as follows:
Inventories—to cost of goods sold $20,000
Other plant assets—depreciation
($80,000 ÷ 10) 8,000
Total amortization applicable to
Year 2006 $28,000
(Income tax effects are disregarded.)

b. Investment in Sanz Company Common Stock


Date Explanation Debit Credit Balance
20 05
Mar 31 Balance 4 9 0 0 0 0 dr
20 06
Mar 1 Dividend declared by Sanz 2 0 0 0 0 4 7 0 0 0 0 dr
31 Net income of Sanz 6 0 0 0 0 5 3 0 0 0 0 dr
31 Amortization of differences between
current fair values and carrying
amounts of Sanz’s identifiable
net assets 2 8 0 0 0 5 0 2 0 0 0 dr

Intercompany Investment Income


Date Explanation Debit Credit Balance
20 06
Mar 31 Net income of Sanz 6 0 0 0 0 6 0 0 0 0 cr
31 Amortization of differences between
current fair values and carrying
amounts of Sanz’s identifiable
net assets 2 8 0 0 0 3 2 0 0 0 cr

The McGraw-Hill Companies, Inc., 2006


244 Modern Advanced Accounting, 10/e
Promo Corporation Pr. 7–3
c. Promo Corporation
Working Paper Elimination
March 31, 2006
(a) Common Stock, $1 par—Sanz 5 0 0 0 0
Additional Paid-In Capital—Sanz 1 0 0 0 0 0
Retained Earnings—Sanz 1 5 0 0 0 0
Intercompany Investment Income—Promo 3 2 0 0 0
Land—Sanz 5 0 0 0 0
Other Plant Assets—Sanz ($80,000 – $8,000) 7 2 0 0 0
Goodwill—Sanz 4 0 0 0 0
Cost of Goods Sold—Sanz 2 0 0 0 0
Operating Expenses—Sanz 8 0 0 0
Investment in Sanz Company Common
Stock—Promo 5 0 2 0 0 0
Dividends Declared—Sanz 2 0 0 0 0
To carry out the following:
(1) Eliminate intercompany investment and equity
accounts of subsidiary at beginning of year, and
subsidiary dividend.
(2) Provide for Year 2006 depreciation and
amortization of differences between combination
date current fair values and carrying amounts of
Sanz’s identifiable net assets to appropriate
assets.
(Income tax effects are disregarded.)

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 245
30 Minutes, Medium
Penn Corporation Pr. 7–4
Penn Corporation and Subsidiary
Working Paper Eliminations
October 31, 2006
(a) Common Stock—Soper 2 0 0 0 0 (1)
Additional Paid-in Capital—Soper 6 0 0 0 0 (2)
Retained Earnings—Soper 7 0 0 0 0 (3)
Intercompany Investment Income—Penn ($40,000 –
$22,400) 1 7 6 0 0
Plant Assets (net)—Soper ($80,000 – $8,000) 7 2 0 0 0
Goodwill (net)—Penn 4 0 0 0 0
Cost of Goods Sold—Soper
[$20,000 + ($8,000 x 0.75)] 2 6 0 0 0
Operating Expenses—Soper ($8,000 x 0.25) 2 0 0 0
Investment in Soper Company Common
Stock—Penn ($240,000 – $16,000 +
$40,000 – $22,400) 2 4 1 6 0 0
Dividends Declared—Soper ($16,000 ÷ 0.80) 2 0 0 0 0
Minority Interest in Net Assets of Subsidiary
[($250,000 x 0.20) – ($20,000 x 0.20)] 4 6 0 0 0
To carry out the following:
(1) Eliminate intercompany investment and equity
accounts of subsidiary at beginning of year, and
subsidiary dividends.
(2) Provide for Year 2006 depreciation and
amortization on differences between combination
date current fair values and carrying amounts of
Soper’s identifiable net assets.
(3) Allocate unamortized differences between
combination date current fair values and carrying
amounts of Soper’s net assets to appropriate
assets.
(4) Establish minority interest in net assets of
subsidiary at beginning of year, less minority
interest share of dividends declared by subsidiary
during year.
(Income tax effects are disregarded.)

(b) Minority Interest in Net Income of Subsidiary


($17,600 x 20%/80%) 4 4 0 0
Minority Interest in Net Assets of Subsidiary 4 4 0 0
To establish minority interest in subsidiary’s adjusted
net income for Year 2006.

Computations:
(1) $50,000 ÷ 0.20 = $250,000; $250,000 – ($20,000 + $80,000) = $150,000 stockholders’ equity on
Oct. 31, 2005; $150,000 + $50,000 – $20,000 = $180,000 stockholders’ equity on Oct. 31, 2006;
$180,000 x 1/9 = $20,000
(2) $180,000 x 3/9 = $60,000
(3) $180,000 x 5/9 = $100,000; $100,000 – $50,000 + $20,000 = $70,000

The McGraw-Hill Companies, Inc., 2006


246 Modern Advanced Accounting, 10/e
30 Minutes, Easy
Pewter Corporation Pr. 7–5
a. Pewter Corporation
Journal Entries
(1)
20 06
Jan 2 Investment in Stewart Company Common Stock
(800 x $70) 5 6 0 0 0
Cash 5 6 0 0 0
To record payment of cash for 80% of the outstanding
common stock of Stewart Company in a business
combination.

2 Investment in Skate Company Common Stock (2,100


x $40) 8 4 0 0 0
Cash 8 4 0 0 0
To record payment of cash for 70% of the outstanding
common stock of Skate Company in a business
combination.

(2)
Dec 31 Investment in Stewart Company Common Stock
($36,000 x 0.80) 2 8 8 0 0
Investment in Skate Company Common
Stock ($12,000 x 0.70) 8 4 0 0
Intercompany Investment Income 2 0 4 0 0
To record share of subsidiaries’ net income or net loss
for Year 2006.

(3)
31 Intercompany Dividends Receivable 1 9 1 0 0
Investment in Stewart Company Common
Stock ($16,000 x 0.80) 1 2 8 0 0
Investment in Skate Company Common
Stock ($9,000 x 0.70) 6 3 0 0
To record declaration of dividends by subsidiaries
during Year 2006.

b. Pewter Corporation
Computation of Minority Interest in Net Assets of Subsidiaries
December 31, 2006
Stewart Skate
Company Company
Stockholders’ equity of subsidiaries, Dec. 31, 2006:
Common stock $ 5 0 0 0 0 $ 6 0 0 0 0
Additional paid-in capital 2 0 0 0 0
Retained earnings 4 0 0 0 0 1 9 0 0 0
Total stockholders’ equity $ 9 0 0 0 0 $ 9 9 0 0 0
Minority interest percentage .0 2 0 .0 3 0
Minority interest in net assets of subsidiaries $ 1 8 0 0 0 $ 2 9 7 0 0

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 247
Pewter Corporation (concluded) Pr. 7–5
c. Pewter Corporation
Computation of Consolidated Retained Earnings
December 31, 2006
Retained earnings of Pewter Corporation, before giving
effect to journal entry in a (2) on page 247. $ 3 0 4 6 0 0
Add: Effect of journal entry in a (2) 2 0 4 0 0
Retained earnings of Pewter Corporation, reflecting
equity method of accounting for subsidiaries’
operations (equal to consolidated retained earnings) $ 3 2 5 0 0 0

The McGraw-Hill Companies, Inc., 2006


248 Modern Advanced Accounting, 10/e
40 Minutes, Medium
Parks Corporation Pr. 7–6
a. Parks Corporation
Journal Entries

20 06
May 31 Intercompany Dividends Receivable 3 0 0 0 0
Investment in State Company Common Stock 3 0 0 0 0
To record dividends declared by State Company.

31 Investment in State Company Common Stock 8 0 0 0 0


Intercompany Investment Income 8 0 0 0 0
To record 80% of State Company’s net income for the
year ended May 31, 2006. (Income tax effects are
disregarded.)

31 Intercompany Investment Income 7 2 0 0


Investment in State Company Common Stock 7 2 0 0
To amortize difference between current fair values and
carrying amounts of State Company’s identifiable net
assets on May 31, 2005 ($9,000 x 0.80 = $7,200).
(Income tax effects are disregarded.)

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 249
Parks Corporation (concluded) Pr. 7–6
b. Parks Corporation and Subsidiary
Working Paper Eliminations
May 31, 2006
(a) Common Stock—State (10,000 x $1) 1 0 0 0 0
Additional Paid-in Capital—State (10,000 x $4) 4 0 0 0 0
Retained Earnings—State ($500,000 – $50,000) 4 5 0 0 0 0
Intercompany Investment Income—Parks 7 2 8 0 0
Land—State 3 9 0 0 0
Buildings—State 3 2 0 0 0
Machinery—State 2 0 0 0 0
Goodwill—Parks 5 0 0 0 0
Cost of Goods Sold—State 9 0 0 0
Investment in State Company Common
Stock—Parks 5 7 2 8 0 0
Dividends Declared—State ($30,000 +
$7,500) 3 7 5 0 0
Minority Interest in Net Assets of Subsidiary
($120,000 – $7,500) 1 1 2 5 0 0
To carry out the following:
(1) Eliminate intercompany investment and equity
accounts of subsidiary at beginning of year, and
subsidiary dividend.
(2) Provide for Year 2006 depreciation on differences
between combination date current fair values and
carrying amounts of State’s identifiable net assets.
(3) Allocate unamortized differences between
combination date current fair values and carrying
amounts of State’s net assets to appropriate
accounts.
(4) Establish minority interest in net assets of
subsidiary at beginning of year, less minority
interest share of dividends declared by subsidiary
during year.
(Income tax effects are disregarded.)

(b) Minority Interest in Net Income of Subsidiary 1 8 2 0 0


Minority Interest in Net Assets of Subsidiary 1 8 2 0 0
To establish minority interest in subsidiary’s adjusted
net income for Year 2006. (20,000 – 1,800)

The McGraw-Hill Companies, Inc., 2006


250 Modern Advanced Accounting, 10/e
55 Minutes, Medium
Paseo Corporation Pr. 7–7
a. Paseo Corporation
Journal Entries

20 06
Mar 31 Investment in Steppe Company Common Stock
[(25,000 x $1.20) x 0.82] 2 4 6 0 0
Intercompany Investment Income 2 4 6 0 0
To record 82% of Steppe Company’s net income for
the year ended Mar. 31, 2006. (Income tax effects
are disregarded.)

31 Intercompany Investment Income 6 1 5 0


Investment in Steppe Company Common
Stock 6 1 5 0
To amortize differences between Steppe Company’s
identifiable assets’ current fair value and carrying
amounts on Mar. 31, 2005, as follows:
Building—depreciation ($50,000 ÷ 10) $5,000
Patent—amortization ($20,000 ÷ 8) 2,500
Total differences applicable to year 2006 $7,500
Amortization for Year 2006 ($7,500 x 0.82) $6,150
(Income tax effects are disregarded.)

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 251
Paseo Corporation (concluded) Pr. 7–7
b. Paseo Corporation and Subsidiary
Working Paper Eliminations
March 31, 2006
(a) Common Stock—Steppe 5 0 0 0 0
Additional Paid-in Capital—Steppe 7 5 0 0 0
Retained Earnings—Steppe 1 3 5 0 0 0
Intercompany Investment Income—Paseo ($24,600 –
$6,150) 1 8 4 5 0
Land—Steppe 2 0 0 0 0
Building (net)—Steppe ($50,000 – $5,000) 4 5 0 0 0
Patent (net)—Steppe ($20,000 – $2,500) 1 7 5 0 0
Goodwill (net)—Paseo [$328,000 – ($350,000 x 0.82)] 4 1 0 0 0
Cost of Goods Sold—Steppe 5 0 0 0
Operating Expenses—Steppe 2 5 0 0
Investment in Steppe Company Common
Stock—Paseo 3 4 6 4 5 0
Minority Interest in Net Assets of Subsidiary
($350,000 x 0.18) 6 3 0 0 0
To carry out the following:
(1) Eliminate intercompany investment and equity
accounts of subsidiary at beginning of year.
(2) Provide for Year 2006 depreciation and
amortization on differences between combination
date current fair values and carrying amounts
of Steppe Company’s identifiable assets.
(3) Allocate unamortized differences between
combination date current fair values and carrying
amounts of Steppe’s net assets to appropriate
assets.
(4) Establish minority interest in net assets of
subsidiary at beginning of year.
(Income tax effects are disregarded.)

(b) Minority Interest in Net Income of Subsidiary 4 0 5 0


Minority Interest in Net Assets of Subsidiary 4 0 5 0
To establish minority interest in subsidiary’s adjusted
net income for Year 2006 as follows:
Net income of subsidiary $30,000
Less: Net reduction in elimination
(a) above 7,500
Adjusted net income of subsidiary $22,500
Minority interest share: $22,500 x 0.18 $ 4,050

The McGraw-Hill Companies, Inc., 2006


252 Modern Advanced Accounting, 10/e
60 Minutes, Strong
Pavich Corporation Pr. 7–8
a. Pavich Corporation
Journal Entries

20 06
Sept 30 Cash ($10,000 x 0.75) 7 5 0 0
Investment in Sisler Company Common Stock 7 5 0 0
To record dividend received from Sisler Company.

30 Investment in Sisler Company Common Stock


($80,000 x 0.75) 6 0 0 0 0
Intercompany Investment Income 6 0 0 0 0
To record 75% of Sisler Company’s net income for the
year ended Sept. 30, 2006. (Income tax effects are
disregarded.)

30 Intercompany Investment Income [($30,000 + $5,000


+ $4,000) x 0.75] 2 9 2 5 0
Investment in Sisler Company Common Stock 2 9 2 5 0
To amortize differences between current fair values
and carrying amounts of Sisler Company’s identifiable
net assets on Oct. 1, 2005. (Income tax effects are
disregarded.)

20 07
Sept 30 Cash ($75,000 x 0.75) 5 6 2 5 0
Investment in Sisler Company Common Stock 5 6 2 5 0
To record dividend received from Sisler Company.

30 Investment in Sisler Company Common Stock


($120,000 x 0.75) 9 0 0 0 0
Intercompany Investment Income 9 0 0 0 0
To record 75% of Sisler Company’s net income for the
year ended Sept. 30, 2007. (Income tax effects are
disregarded.)

30 Intercompany Investment Income [($5,000 + $4,000)


x 0.75] 6 7 5 0
Investment in Sisler Company Common Stock 6 7 5 0
To amortize differences between current fair values
and carrying amounts of Sisler Company’s identifiable
net assets on Oct. 1, 2005. (Income tax effects are
disregarded.)

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 253
Pavich Corporation (continued) Pr. 7–8
b. Pavich Corporation and Subsidiary
Working Paper Eliminations
September 30, 2006
(a) Common Stock—Sisler 2 5 0 0 0 0
Additional Paid-in Capital—Sisler 1 0 0 0 0 0
Retained Earnings—Sisler 2 0 0 0 0 0
Intercompany Investment Income—Pavich
($60,000 – $29,250) 3 0 7 5 0
Plant Assets (net)—Sisler ($50,000 – $5,000) 4 5 0 0 0
Patents (net)—Sisler ($20,000 – $4,000) 1 6 0 0 0
Goodwill—Pavich [$547,500 – ($650,000 x 0.75)] 6 0 0 0 0
Cost of Goods Sold—Sisler ($30,000 + $5,000) 3 5 0 0 0
Operating Expenses—Sisler 4 0 0 0
Investment in Sisler Company Common Stock—
Pavich ($547,500 – $7,500 + $60,000 –
$29,250) 5 7 0 7 5 0
Dividends Declared—Sisler 1 0 0 0 0
Minority Interest in Net Assets of Subsidiary
[($650,000 x 0.25) – ($10,000 x 0.25)] 1 6 0 0 0 0
To carry out the following:
(1) Eliminate intercompany investment and equity
accounts of subsidiary at beginning of year,
and subsidiary dividend.
(2) Provide for Year 2006 depreciation and amortiza-
tion on differences between combination date
current fair values and carrying amounts of Sisler’s
identifiable net assets.
(3) Allocate unamortized differences between
combination date current fair values and carrying
amounts of Sisler’s net assets to appropriate
accounts.
(4) Establish minority interest in net assets of
subsidiary at beginning of year, less minority
interest share of dividends declared by subsidiary
during year.
(Income tax effects are disregarded.)

(b) Minority Interest in Net Income of Subsidiary


[($80,000 – $39,000) x 0.25] 1 0 2 5 0
Minority Interest in Net Assets of Subsidiary 1 0 2 5 0
To establish minority interest in subsidiary’s adjusted
net income for Year 2006.

The McGraw-Hill Companies, Inc., 2006


254 Modern Advanced Accounting, 10/e
Pavich Corporation (continued) Pr. 7–8
Pavich Corporation and Subsidiary
Working Paper Eliminations
September 30, 2007
(a) Common Stock—Sisler 2 5 0 0 0 0
Additional Paid-in Capital—Sisler 1 0 0 0 0 0
Retained Earnings—Sisler ($200,000 + $80,000 –
$10,000 – $23,250) 2 4 6 7 5 0
Retained Earnings of Subsidiary—Pavich ($30,750 –
$7,500) 2 3 2 5 0
Intercompany Investment Income—Pavich ($90,000 –
$6,750) 8 3 2 5 0
Plant Assets (net)—Sisler ($45,000 – $5,000) 4 0 0 0 0
Patents (net)—Sisler ($16,000 – $4,000) 1 2 0 0 0
Goodwill—Pavich 6 0 0 0 0
Cost of Goods Sold—Sisler 5 0 0 0
Operating Expenses—Sisler 4 0 0 0
Investment in Sisler Company Common Stock—
Pavich ($570,750 – $56,250 + $90,000 –
$6,750) 5 9 7 7 5 0
Dividends Declared—Sisler 7 5 0 0 0
Minority Interest in Net Assets of Subsidiary
[($160,000 + $10,250) – ($75,000 x 0.25)] 1 5 1 5 0 0
To carry out the following:
(1) Eliminate intercompany investment and equity
accounts of subsidiary at beginning of year and
subsidiary dividend.
(2) Provide for Year 2007 depreciation and amortiza-
tion on differences between combination date
current fair values and carrying amounts of Sisler’s
identifiable net assets.
(3) Allocate unamortized differences between
combination date current fair values and carrying
amounts of Sisler’s net assets to appropriate
accounts.
(4) Establish minority interest in net assets of
subsidiary at beginning of year, less minority
interest share of dividends declared by subsidiary
during year.
(Income tax effects are disregarded.)

(b) Minority Interest in Net Income of Subsidiary


[($120,000 – $9,000) x 0.25] 2 7 7 5 0
Minority Interest in Net Assets of Subsidiary 2 7 7 5 0
To establish minority interest in subsidiary’s net
income for Year 2007.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 255
Pavich Corporation (concluded) Pr. 7–8
c. Retained Earnings of Subsidiary
Date Explanation Debit Credit Balance
20 06
Sept 30 Close net income not available
for dividends ($30,750 – $7,500) 2 3 2 5 0 2 3 2 5 0 cr

20 07
Sept 30 Close net income not available
for dividends ($83,250 – $56,250) 2 7 0 0 0 5 0 2 5 0 cr

The McGraw-Hill Companies, Inc., 2006


256 Modern Advanced Accounting, 10/e
60 Minutes, Medium
Plumm Corporation Pr. 7–9
a. Plumm Corporation
Journal Entries

20 06
Nov 30 Investment in Stamm Company Common Stock 9 0 0 0 0
Intercompany Investment Income 9 0 0 0 0
To record 100% of Stamm Company’s net income for
the year ended Nov. 30, 2006.

30 Intercompany Investment Income 2 0 0 0 0


Investment in Stamm Company Common Stock 2 0 0 0 0
To amortize differences between Stamm Company’s
assets’ current fair values and carrying amounts on
Nov. 30, 2005 as follows:
Inventories—to cost of goods sold $20,000
(Income tax effects are disregarded.)

30 Cash 3 0 0 0 0
Investment in Stamm Company Common Stock 3 0 0 0 0
To record receipt of dividends from Stamm Company
during Year 2006.

b. Plumm Corporation and Subsidiary


Working Paper Eliminations
November 30, 2006
(a) Common Stock—Stamm 8 0 0 0 0
Additional Paid-in Capital—Stamm 2 0 0 0 0 0
Retained Earnings—Stamm 2 2 0 0 0 0
Intercompany Investment Income—Plumm 7 0 0 0 0
Cost of Goods Sold—Stamm 2 0 0 0 0
Goodwill—Stamm 4 0 0 0 0
Investment in Stamm Company Common
Stock—Plumm 6 0 0 0 0 0
Dividends Declared—Stamm 3 0 0 0 0
To carry out the following:
(1) Eliminate intercompany investment and equtiy
accounts of subsidiary at beginning of Year 2006
and subsidiary dividends.
(2) Provide for Year 2006 amortization of differences
between combination date current fair values and
carrying amounts of Stamm’s identifiable net
assets.
(3) Allocate unamortized differences between
combination date current fiar values and carrying
amounts of Stamm’s net identifiable assets to
appropriate assets.
(Income tax effects are disregarded.)

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 257
Plumm Corporation (concluded) Pr. 7–9
Plumm Corporation and Subsidiary
Working Paper for Consolidated Financial Statements
November 30, 2006
Eliminations
Plumm Stamm increase
Corporation Company (decrease) Consolidated
Income Statement
Revenue:
Sales 8 0 0 0 0 0 4 1 5 0 0 0 1 2 1 5 0 0 0
Intercompany investment
income 7 0 0 0 0 (a) ( 7 0 0 0 0 )
Total revenue 8 7 0 0 0 0 4 1 5 0 0 0 ( 7 0 0 0 0 ) 1 2 1 5 0 0 0
Costs and expenses:
Cost of goods sold 5 0 0 0 0 0 1 1 0 0 0 0 (a) 2 0 0 0 0 6 3 0 0 0 0
Operating expenses 2 3 3 3 3 3 1 5 5 0 0 0 3 8 8 3 3 3
Income taxes expense 2 6 6 6 7 6 0 0 0 0 8 6 6 6 7
Total costs and expenses 7 6 0 0 0 0 3 2 5 0 0 0 2 0 0 0 0 * 1 1 0 5 0 0 0
Net income 1 1 0 0 0 0 9 0 0 0 0 ( 9 0 0 0 0 ) 1 1 0 0 0 0

Statement of Retained
Earnings
Retained earnings, beginning
of year 6 4 0 0 0 0 2 2 0 0 0 0 (a) 2 2 0 0 0 0 ) 6 4 0 0 0 0
Net income 1 1 0 0 0 0 9 0 0 0 0 ( 9 0 0 0 0 ) 1 1 0 0 0 0
Subtotals 7 5 0 0 0 0 3 1 0 0 0 0 ( 3 1 0 0 0 0 ) 7 5 0 0 0 0
Dividends declared 6 0 0 0 0 3 0 0 0 0 (a) ( 3 0 0 0 0 )† 6 0 0 0 0
Retained earnings, end of year 6 9 0 0 0 0 2 8 0 0 0 0 ( 2 8 0 0 0 0 ) 6 9 0 0 0 0

Balance Sheet
Assets
Investment in Stamm Company
common stock 6 0 0 0 0 0 (a)( 6 0 0 0 0 0 )
Other 1 8 4 0 0 0 0 9 6 0 0 0 0 2 8 0 0 0 0 0
Goodwill (a) 4 0 0 0 0 4 0 0 0 0
Total assets 2 4 4 0 0 0 0 9 6 0 0 0 0 ( 5 6 0 0 0 0 ) 2 8 4 0 0 0 0

Liabilities & Stockholders’ Equity


Liabilities 6 5 0 0 0 0 4 0 0 0 0 0 1 0 5 0 0 0 0
0
Common stock, $1 par 5 0 0 0 0 0 8 0 0 0 0 (a) ( 8 0 0 0 0 ) 5 0 0 0 0 0
Additonal paid-in capital 6 0 0 0 0 0 2 0 0 0 0 0 (a)( 2 0 0 0 0 0 ) 6 0 0 0 0 0
Retained earnings 6 9 0 0 0 0 2 8 0 0 0 0 ( 2 8 0 0 0 0 ) 6 9 0 0 0 0
Total liabilities &
stockholders’ equity 2 4 4 0 0 0 0 9 6 0 0 0 0 ( 5 6 0 0 0 0 ) 2 8 4 0 0 0 0

* An increase in total costs and expenses and a decrease in net income.


† A decrease in dividends and an increase in retained earnings.

65 Minutes, Strong
The McGraw-Hill Companies, Inc., 2006
258 Modern Advanced Accounting, 10/e
Ping Corporation Pr. 7–10
a. Ping Corporation and Subsidiary
Adjusting Entries
December 31, 2006
(1)
Investment in Stang Company Common Stock
[($75,000 – $30,000) x 0.80] 3 6 0 0 0
Intercompany Dividends Receivable ($9,000 x 0.80) 7 2 0 0
Retained Earnings of Subsidiary
[($59,000 – $30,000) x 0.80] 2 3 2 0 0
Intercompany Investment Income ($25,000 x
0.80) 2 0 0 0 0
To convert accounting for investment in subsidiary to
equity method from cost method of accounting.
(Income tax effects are disregarded.)
(2)
Intercompany Investment Income 3 2 0 0
Retained Earnings of Subsidiary 9 6 0 0
Investment in Stang Company Common
Stock 1 2 8 0 0
To amortize combination date excess of current fair
value over carrying amount of signboard leases as
follows:
Year 2006: ($20,000 x 1/5 x 0.80 = $3,200)
Years 2003 through 2005: ($20,000 x 3/5 x
0.80 = $9,600)
(Income tax effects are disregarded.)

Ping Corporation (continued) Pr. 7–10

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 259
b. Ping Corporation and Subsidiary
Working Paper for Consolidated Financial Statements
December 31, 2006
Eliminations
Ping Stang increase
Corporation Corporation (decrease) Consolidated
Income Statements
Revenue:
Net sales 4 2 0 0 0 0 3 0 0 0 0 0 7 2 0 0 0 0
Intercompany investment
income 1 6 8 0 0 (a) ( 1 6 8 0 0 )
Total revenue 4 3 6 8 0 0 3 0 0 0 0 0 ( 1 6 8 0 0 ) 7 2 0 0 0 0
Cost and expenses:
Cost of goods sold 3 1 5 0 0 0 2 4 0 0 0 0 5 5 5 0 0 0
Other expenses 6 5 0 0 0 3 5 0 0 0 (a) 4 0 0 0 1 0 4 0 0 0
Minority interest in net
income of subsidiary (b) 4 2 0 0 4 2 0 0
Total costs and expenses 3 8 0 0 0 0 2 7 5 0 0 0 8 2 0 0 * 6 6 3 2 0 0
Net income 5 6 8 0 0 2 5 0 0 0 ( 2 5 0 0 0 ) 5 6 8 0 0

Statement of Retained Earnings


Retained earnings, beginning
of year 1 5 0 0 0 5 9 0 0 0 (a) ( 4 5 4 0 0 ) 2 8 6 0 0
Net income 5 6 8 0 0 2 5 0 0 0 ( 2 5 0 0 0 ) 5 6 8 0 0
Subtotals 7 1 8 0 0 8 4 0 0 0 ( 7 0 4 0 0 ) 8 5 4 0 0
Dividends declared 9 0 0 0 (a) ( 9 0 0 0 )†
Retained earnings, end of year 7 1 8 0 0 7 5 0 0 0 ( 6 1 4 0 0 ) 8 5 4 0 0

Balance Sheet
Assets
Current assets 1 7 2 0 0 0 1 9 9 1 0 0 3 7 1 1 0 0
Intercompany dividends
receivable (payable) 7 2 0 0 ( 7 2 0 0 )
Investment in Stang Company
common stock 1 4 3 2 0 0 (a)( 1 4 3 2 0 0 )
Land 2 5 0 0 0 1 0 5 0 0 3 5 5 0 0
Building and equipment 2 0 0 0 0 0 4 0 0 0 0 2 4 0 0 0 0
Accumulated depreciation ( 1 0 2 0 0 0 ) ( 7 0 0 0 ) ( 1 0 9 0 0 0 )
Signboard leases (net) 8 4 0 0 (a) 4 0 0 0 1 2 4 0 0
Total assets 4 4 5 4 0 0 2 4 3 8 0 0 ( 1 3 9 2 0 0 ) 5 5 0 0 0 0

Liabilities & Stockholders’ Equity


Dividends payable 1 8 0 0 1 8 0 0
Other current liabilities 6 0 0 0 0 6 7 0 0 0 1 2 7 0 0 0
Common stock, no par 3 0 0 0 0 0 1 0 0 0 0 0 (a)( 1 0 0 0 0 0 ) 3 0 0 0 0 0
Retained earnings 7 1 8 0 0 7 5 0 0 0 ( 6 1 4 0 0 ) 8 5 4 0 0
Minority interest in net assets
of subsidiary (a) 3 1 6 0 0 3 5 8 0 0
(b) 4 2 0 0
Retained earnings of subsidiary 1 3 6 0 0 (a) ( 1 3 6 0 0 )
Total liabilities &
stockholders’ equity 4 4 5 4 0 0 2 4 3 8 0 0 ( 1 3 9 2 0 0 ) 5 5 0 0 0 0

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

Ping Corporation (concluded) Pr. 7–10

The McGraw-Hill Companies, Inc., 2006


260 Modern Advanced Accounting, 10/e
Ping Corporation and Subsidiary
Working Paper Eliminations
December 31, 2006
(a) Common Stock—Stang 1 0 0 0 0 0
Retained Earnings—Stang ($59,000 – $13,600) 4 5 4 0 0
Retained Earnings of Subsidiary—Ping ($23,200 –
$9,600) 1 3 6 0 0
Intercompany Investment Income—Ping ($20,000 –
$3,200) 1 6 8 0 0
Signboard Leases (net)—Stang ($20,000 – $16,000) 4 0 0 0
Other Expenses—Stang ($20,000 x 1/5) 4 0 0 0
Investment in Stang Company Common Stock—
Ping 1 4 3 2 0 0
Dividends Declared—Stang 9 0 0 0
Minority Interest in Net Assets of Subsidiary
($33,400 – $1,800) 3 1 6 0 0
To carry out the following:
(1) To eliminate intercompany investment and equity
accounts of subsidiary at beginning of year, and
subsidiary dividend. (Subsidiary’s beginning
retained earnings, $59,000, is reduced by amount
recorded in parent company’s account, $13,600.)
(2) To establish cost and amortization attributable
to excess of current fair value over carrying
amount of subsidiary’s signboard leases on date
of business combination.
(3) To provide for Year 2006 amortization expense on
excess of combination date current fair value over
carrying amount of Stang’s signboard leases.
(4) To establish minority interest in net assets of
subsidiary at beginning of Year 2006 [($100,000 +
$59,000 + $8,000) x 0.20 = $33,400], less minority
interest share of dividend declared by subsidiary
during Year 2006 ($9,000 x 0.20 = $1,800).
(Income tax effects are disregarded.)

(b) Minority Interest in Net Income of Subsidiary 4 2 0 0


Minority Interest in Net Assets of Subsidiary 4 2 0 0
To establish minority interest in subsidiary’s adjusted
net income for Year 2006 [($25,000 – $4,000) x 0.20 =
$4,200].

50 Minutes, Strong
Petal Corporation Pr. 7–11

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 7 261
Petal Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 2006
Assets
Cash ($3,500,000 + $625,000) $ 4 1 2 5 0 0 0
Trade accounts receivable (net) ($1,400,000 + $1,500,000) 2 9 0 0 0 0 0
Inventories ($1,000,000 + $2,500,000) 3 5 0 0 0 0 0
Plant assets (net) ($2,000,000 + $3,100,000 + $13,100,000 – $500,000) 17 7 0 0 0 0 0
Other assets ($100,000 + $475,000 – $300,000 + $10,000) 2 8 5 0 0 0
Goodwill* 2 8 0 0 0 0 0
Total assets $31 3 1 0 0 0 0

Liabilities & Stockholders’ Equity


Trade accounts payable and other current liabilities ($1,500,000 + $1,100,000) $ 2 6 0 0 0 0 0
Long-term debt ($4,000,000 + $2,600,000 – $400,000 + $5,000) 6 2 0 5 0 0 0
Other liabilities ($750,000 + $250,000) 1 0 0 0 0 0 0
Common stock, $1 par 10 0 0 0 0 0 0
Additional paid-in capital 5 0 0 0 0 0 0
Retained earnings 6 5 0 5 0 0 0
Total liabilities & stockholders’ equity $31 3 1 0 0 0 0

*Computation of goodwill
Cost of Petal Corporation’s investment (1,000,000 shares x $19) $19 0 0 0 0 0 0
Less: Current fair value of Sepal Corporation’s identifiable net assets on date
of business comination:
Carrying amount of net assets ($1,000,000 + $400,000 + $1,600,000) $3 0 0 0 0 0 0
Differences between current fair values and carrying amounts of
identifiable net assets:
Plant assets (net) ($16,400,000 – $3,300,000) 13 1 0 0 0 0 0
Other assets ($200,000 – $500,000) ( 3 0 0 0 0 0 )
Long-term debt ($2,200,000 – $2,600,000) 4 0 0 0 0 0 16 2 0 0 0 0 0
Goodwill $ 2 8 0 0 0 0 0

The McGraw-Hill Companies, Inc., 2006


262 Modern Advanced Accounting, 10/e