Chapter 4 CONSOLIDATION TECHNIQUES AND PROCEDURES Ans w e r s to Que s ti o n s 1 Consolidat e d financial stat e m e n t s are not affect e d !

t"e met"o d #sed ! t"e $arent com$ a n ! in acco#ntin% for its s# sidiar! in&est m e n t s ' S#c" stat e m e n t s are t"e sam e re%ardles s of ("et" e r t"e $aren t com$ a n ! #ses t"e cost met"o d) t"e e*#it! met"o d) or an incom$let e e*#it! met"o d in acco#ntin% for its s# sidiar! in&est m e n t s ' T"e (or+in% $a$er ad,#st m e n t s (ill e different) "o(e& er) de$e n din % on "o( t"e $arent com$ a n ! acco#nts for its s# sidiar! in&est m e n t s ' 2 T"e stand a r d met"o d of acco#ntin% for e*#it! in&est m e n t s of -. $erce nt or more is t"e e*#it! met"o d' /#t if t"e $arent com$ a n ! iss#es onl! consolidat e d financial stat e m e n t s as t"e stat e m e n t s of t"e $rimar! re$ortin% entit!) and t"e consolidat e d financial state m e n t s are correct) it ma+e s no differenc e "o( t"e records of t"e $arent com$ a n ! are maintain e d' T"e 0inancial Acco#ntin% Stand ar d s /oard 1and its $redec e s s o r or%ani2ation3 esta lis"e d stand ar d s for e4tern al re$ortin% #t not for mainte n a n c e of intern al acco#ntin% records' 3 Under t"e e*#it! met"o d) a $aren t com$ a n ! amorti2es $ate n t s from its s# sidiar! in&est m e n t s ! ad,#stin% its s# sidiar! in&est m e n t and s# sidiar! income acco#nt s' Since $ate n t s and $ate n t amorti2ation acco#nt s are not recorde d on t"e $aren t com$ a n !5 s oo+s) t"e! are creat e d for consolidat e d stat e m e n t $#r$os e s t"ro#% " (or+in% $a$ er entries' 4 6inorit! interes t e4$en s e is enter e d in t"e consolidation (or+in% $a$ ers ! $re$ arin% a (or+in% $a$er ad,#stin% entr! in ("ic" minorit! interes t e4$e n s e is de ited and minorit! interes t is credite d' T"e minorit! interes t e4$en s e 1de it3 is carried to t"e consolidat e d incom e state m e n t as a ded#ction) and t"e credit to minorit! interes t for minorit! interes t incom e is adde d to t"e e%innin% minorit! interes t' T"is is t"e a$$ro ac " ill#strat e d t"ro#% "o # t t"is te4t' An altern a ti&e a$$ro ac " for enterin% minorit! interes t income in t"e consolidation (or+in% $a$ers is to com$#t e minorit! intere s t incom e 1or loss3 inde$ e n d e n tl!) and to enter t"e amo#n t as an addition 1ded#ction for loss3 to in t"e minorit! interes t col#mn and as a ded#ction 1an addition3 to consolidat e d net income'

85

Consolidation Techniqu e s and Procedure s 87 5 8or+in% $a$ er $roced #r e s for t"e in&est m e n t in s# sidiar!) incom e from s# sidiar!) and s# sidiar! e*#it! acco#nt s are ali+e in re%ard to t"e o ,ecti&es of consolidation' Re%ardles s of t"e confi%#ration of t"e (or+in% $a$er entries) t"e final res#lt of ad,#st m e n t s for t"es e items is to eliminat e t"e m t"ro#%" (or+in% $a$er entries' In ot"er (ords) t"e in&est m e n t in s# sidiar!) income from s# sidiar!) and t"e ca$ital stoc+) additional $aid9 in ca$ital) retain e d earnin%s) and ot"er stoc+"olders5 e*#it! acco#nts of t"e s# sidiar! ne&er a$$e a r in consolidat e d financial state m e n t s '

6 8"en t"e $aren t com$ a n ! does not amorti2e cost9 oo+ &al#e differentials on its se$ar a t e oo+s) t"e $arent com$ a n !5 s incom e from s# sidiar! and in&est m e n t in s# sidiar! acco#nt s are o&erst a t e d in t"e !ear of ac*#isition' In s# s e * # e n t !ears) t"e incom e from t"e s# sidiar!) in&est m e n t in s# sidiar!) and $aren t5 s e%innin% retaine d earnin%s (ill e o&erst a t e d ' T"e error ma! e correct e d in t"e (or+in% $a$ers (it" t"e follo(in% entries: Year of acquisition Income from s# sidiar! In&est m e n t in s# sidiar! Subs e q u e n t year Income from s# sidiar! Retaine d earnin%s9 $arent In&est m e n t in s# sidiar! ;;; ;;; ;;; ;;; ;;;

/! enterin% a correctin% entr!) all ot"er (or+in% $a$ er entries are t"e sam e as if t"e $arent $ro&ided for amorti2ation on its se$ar a t e oo+s' If t"e errors are not correct e d t"ro#% " t"e (or+in% $a$ er entries s#%%e s t e d a o&e) t"e entr! to eliminat e t"e incom e from s# sidiar! in t"e !ear of ac*#isition is $re$ ar e d in t"e #s#al mann e r (it"o#t f#rt"er com$lications eca# s e neit"er t"e e%innin% in&est m e n t nor retain e d earnin%s acco#nts are affect e d ! t"e omission' In s# s e * # e n t !ears t"e entr! to eliminat e incom e from s# sidiar! and di&idends from s# sidiar! (ill "a&e to e c"an% e d to correct t"e e%innin%9 of9t"e9 $eriod retain e d earnin%s as follo(s: Income from s# sidiar! Retaine d earnin%s9 $arent Di&idends 1s# sidiar!3 In&est m e n t in s# sidiar! ;;; ;;; ;;; ;;;

7 No' 8or+in% $a$er ad,#st m e n t s are not enter e d in t"e %ener al led%er of t"e $aren t com$ a n ! or an! ot"er entit!' T"e! are #sed in t"e $re$ ar a tion of consolidat e d financial stat e m e n t s for a conce$ t # al entit! for ("ic" t"ere are no formal acco#ntin% records' 8 8or+in% $a$ers are tools of t"e acco#nt a n t t"at facilitate t"e consolidation of $arent and s# sidiar! financial state m e n t s ' <i&en t"e tools a&aila le) t"e

8= acco#nt a n t s"o#ld select t"os e t"at are most con&enien t in t"e circ#ms t a n c e s ' If financial stat e m e n t s are to e consolidat e d) t"e financial stat e m e n t a$$roac " is t"e a$$ro$riat e tool' T"e trial alanc e a$$ro ac " is most con&enie n t ("en t"e data are $res e n t e d in t"e form of a trial alanc e' T"e acco#nt a n t need s to e familiar (it" ot" a$$roac " e s to $erform t"e (or+ as efficientl! as $ossi le'
Chapt er 4

9 8or+in% $a$ er ad,#st m e n t and elimination are e4actl! t"e sam e ("en t"e trial alanc e financial stat e m e n t a$$roac " is #sed' T"is s!ste m t"at n#llifies t"e closin% $roces s a$$roac " is #sed'

entries as ill#strat e d in t"is te4t a$$ro ac " is #sed as ("en t"e is $ossi le t"ro#% " a c"ec+9 off ("en t"e financial stat e m e n t

10 T"e retaine d earnin%s of t"e $arent com$ a n ! (ill e*# al consolidat e d retaine d earnin%s if t"e e*#it! met"o d of acco#ntin% "as een correctl! a$$lied' In consolidatin% t"e financial state m e n t s of affiliated com$ a nie s ) t"e e%innin% retain e d earnin%s of t"e $aren t com$ a n ! are #sed as e%innin% consolidat e d retaine d earnin%s' If t"e e*#it! met"o d of acco#ntin% "as not een correctl! a$$lied) $arent com$ a n ! e%innin% retain e d earnin%s (ill not e*#al e%innin% consolidat e d retain e d earnin%s' In t"is cas e) t"e retaine d earnin%s of t"e $aren t com$ a n ! are ad,#ste d to a correct e*#it! asis in order to esta lis" t"e correct amo# n t of e%innin% consolidat e d retain e d earnin%s' T"#s) (or+in% $a$ er ad,#st m e n t s to e%innin% retain e d earnin%s of t"e $aren t are need e d ("en e & e r t"e e%innin% retaine d earnin%s of t"e $arent com$ a n ! do not correctl! reflect t"e e*#it! met" o d' 11 T"e minorit! intere s t t"at a$$ e a r s in t"e consolidat e d alanc e s"e et can e c"ec+ed ! m#lti$l!in% t"e e*#it! of t"e s# sidiar! on t"e consolidat e d alanc e s"e et date ! t"e minorit! interes t $ercen t a % e ' Consolidat e d retaine d earnin%s at a alanc e s"e et date can e c"ec+e d ! com$ arin% t"e amo# n t (it" t"e $aren t com$ a n !5 s retaine d earnin%s on t"e sam e date' If consolidat e d retain e d earnin%s and $aren t com$ a n ! retain e d earnin%s are not e*#al) eit"er consolidat e d retaine d earnin%s "a&e een com$#t e d incorrectl!) or $aren t com$ a n ! retaine d earnin%s do not reflect a correct e*#it! met" o d of acco#ntin%' 12 Consolidat e d ass e ts and lia ilities are re$ort e d for all e*#it! "olders 99 minorit! as (ell as ma,orit!' T"erefore) t"e c"an% e in net ass ets from o$era tions for a $eriod res#lts from minorit! interes t e4$e n s e and consolidat e d net income' 13 No' It relates to all intere s t s in t"e consolidat e d entit!' T"is differenc e is one of man! inconsiste n cies in t"e conce$ t s #nderl!in% consolidat e d financial stat e m e n t s ' Consider) for e4a m $le) t"e error t"at co#ld res#lt from di&idin% cas" $ro&ided ! o$erations ! o#tst a n din % $arent com$ a n ! s"are s to %et a com$#t a tion of cas" flo( $er s"are'

88
SOLUTIONS TO EXERCISES Solution E4-1 1 2 3 4 5 d a a d b 6 7 8 9 10

Consolidation Techniqu e s and Procedure s

d b b a b

Solution E4-2 Preliminary computations: Investment cost January 2, 2005 Less: Book value ac uired !$250,000 net assets " #0$% &"cess cost over book value ac uired &"cess allocated to: Inventory !$'2,500 " #0$% (emainder to )ood*ill &"cess cost over book value ac uired 1 Income ,rom -ally .ort/ $ 52,000 !'0,000% $ 32,000 $300,000 !200,000% $'00,000 $ '0,000 +0,000 $'00,000

Ponder0s s/are o, -ally .ort/0s reported income !$10,000 " #0$% Less: &"cess allocated to inventory Income ,rom -ally .ort/ ,or 2003 2 4inority interest e"pense

-ally .ort/0s net income $10,000 " 20$ minority interest percenta)e 5$ '3,000 3 4inority interest 6ecember 3', 2003 $ 52,000

-ally .ort/0s e uity $220,000 " 20$ minority interest percenta)e 5 4 Investment in -ally .ort/ 6ecember 3', 2003

Investment cost January 2, 2003 7dd: Income ,rom -ally .ort/ !)iven% Less: 6ividends !$20,000 " #0$% Investment in -ally .ort/ 6ecember 3', 2003 5 8onsolidated net income 2003

$300,000 50,000 !3#,000% $302,000 $'#0,200

Chapt er 4

8>
$350,000 !$'50,000 9 $220,000 : $20,000 intercompany% $'5,000,000 '0,500,000 $ 3,500,000 $'2,000,000 !350,000% $'',250,000

Solution E4-3 1 c

Preliminary computations for 2 and 3 Investment cost on January ', 2003 Book value o, interest ac uired !$'5,000,000 " 10$% ;ood*ill 2 d Primrose0s separate income ,or 2005 Loss ,rom investment in -tarman !$500,000 " 10$% 8onsolidated net income ,or 2005 3 Investment cost January ', 2003 7dd: -/are o, income less dividends 2003:2005 !$100,000 income : $500,000 dividends% " 10$ Investment balance 6ecember 3', 2005

$'5,000,000 '30,000 $'5,'30,000

>.
Solution E4-4 Preliminary computations Investment cost Book value ac uired !$200,000 " #0$% <otal e"cess cost over book value ac uired &"cess allocated to: & uipment !5 year li,e% !$50,000 " #0$% Patents !'0 year amorti=ation period% <otal e"cess cost over book value ac uired

Consolidation Techniqu e s and Procedure s

$5#0,000 3#0,000 $'00,000 $ 30,000 20,000 $'00,000 2003 $ +2,000 !#,000% !2,000% $ #2,000 2005 $'20,000 !#,000% !2,000% $'02,000

Income ,rom -tine #0$ o, -tine0s reported income Less: 6epreciation o, e"cess allocated to e uipment Less: 7morti=ation o, patents Income ,rom -tine 1a 8onsolidated net income ,or 2003

Penair0s net income 5 consolidated net income under e uity met/od 1b Investment in -tine 6ecember 3', 2003

$330,000

8ost January ', 2003 7dd: Income ,rom -tine : 2003 Less: 6ividends ,rom -tine : 2003 !$#0,000 " #0$% Investment in -tine 6ecember 3', 2003 1 1! 4inority interest e"pense : 2003 !$'20,000 " 20$%

$5#0,000 #2,000 !23,000% $5+#,000 $ 23,000

4inority interest 6ecember 3', 2005 $200,000 '00,000 100,000 20$ $'30,000

-tine0s e uity 6ecember 3', 2003 7dd: Income less dividends ,or 2003 and 2005 -tine0s e uity 6ecember 3', 2005 4inority interest percenta)e 4inority interest 6ecember 3', 2005 2 8onsolidated net income ,or 2003 !incomplete e uity met/od%

>et income o, Penair : 2003 Less: -/are o, -tine0s income !$'20,000 " #0$% -eparate income o, Penair 7dd: Income ,rom -tine : 2003 !e uity met/od% 8onsolidated net income ,or 2003

$330,000 !+2,000% 233,000 #2,000 $322,000

Chapt er 4

>?

Solution E4-5 '? 2? 3? 3? 5? c a b c d

Solution E4-6 Party 8orporation and -ubsidiary Partial 8onsolidated 8as/ .lo*s -tatement ,or t/e year ended 6ecember 3', 2003 8as/ .lo*s ,rom @peratin) 7ctivities 8onsolidated net income 7dAustments to reconcile net income to cas/ provided by operatin) activities: 4inority interest e"pense Bndistributed income o, e uity investees Loss on sale o, land 6epreciation e"pense Patents amorti=ation Increase in accounts receivable Increase in inventories 6ecrease in accounts payable >et cas/ ,lo*s ,rom operatin) activities $ 25,000 !2,500% 5,000 20,000 #,000 !52,500% !22,500% !'0,000% $15,000

'0,500 $#5,500

Solution E4-7 Prola" 8orporation and -ubsidiary Partial 8onsolidated 8as/ .lo*s -tatement ,or t/e year ended 6ecember 3', 2003 8as/ .lo*s ,rom @peratin) 7ctivities 8as/ received ,rom customers 6ividends received ,rom e uity investees Less: 8as/ paid 8as/ paid 8as/ paid 8as/ paid to suppliers to employees ,or ot/er operatin) items ,or interest e"pense $'#2,500 21,000 23,500 '2,000 $322,500 1,000

235,000 $ #3,500

>et cas/ ,lo*s ,rom operatin) activities

>SOLUTIONS TO "RO#LE$S Solution "4-1 Preliminary computations Investment in -eine !15$% January ', 2003 Book value ac uired !$2,300,000 " 15$%

Consolidation Techniqu e s and Procedure s

$2,500,000 !',#00,000% $ 100,000 $ 10,000 2#0,000 350,000 $100,000 $ 350,000

<otal e"cess o, cost over book value ac uired &"cess '0$ to 30$ to 50$ to allocated: inventories !sold in 2003% plant assets !use li,e # years% )ood*ill

<otal e"cess o, cost over book value ac uired 1 2 ;ood*ill at 6ecember 3', 2001 4inority interest e"pense ,or 2001 !$',000,000 sales : $200,000 e"penses% " 25$ interest 8onsolidated retained earnin)s 6ecember 3', 2002 & ual to Pearl0s 6ecember 3', 2002 retained earnin)s 8onsolidated retained earnin)s 6ecember 3', 2001 Pearl0s retained earnin)s 6ecember 3', 2002 7dd: Pearl0s net income ,or 2001 Less: Pearl0s dividends ,or 2001 8onsolidated retained earnin)s 6ecember 3', 2001 8onsolidated net income ,or 2001 8onsolidated sales Less: 8onsolidated e"penses !$3,1#0,000 9 $35,000 depre: ciation% <otal consolidated income Less: 4inority interest e"pense 8onsolidated net income ,or 20C2 4inority interest 6ecember 3', 2002 -eine0s stock/olders0 e uity $2,300,000 " 25$ 4inority interest 6ecember 3', 2001 -eine0s stock/olders0 e uity $2,200,000 " 25$ 6ividends payable 6ecember 3', 2001

'00,000

$',210,000

$',210,000 ',0#5,000 !500,000% $2,255,000

$5,000,000 !3,#'5,000% ','#5,000 !'00,000% $',0#5,000

200,000

250,000 none

Chapt er 4

>@

Solution "4-2 1 "al% Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003

E E #0$ E 7dAustments and E8onsolidated E Palm E -ail E &liminations E -tatements Income Statement E E E E E -ales E$3'0,000 E$'00,000 E E E $3'0,000 Income ,rom -ail E '0,500 E Ea '0,500E E 8ost o, )oods sold E 200,000FE 25,000FE E E 225,000F @peratin) e"penses E 11,000FE 20,000FE E E +1,000F 4inority e"pense E E E E E !$'5,000 " 30$% E E Ec 3,500E E 3,500F >et income E$ 33,500 E$ '5,000 E E E $ 33,500 E E E E E Retained Earnings E E E E E (etained earnin)s:Palm E$ 25,000 E E E E $ 25,000 (etained earnin)s:-ail E E$ '',000 Eb '',000E E >et income E 33,500E '5,000E E E 33,500 6ividends E 30,000FE '0,000FE Ea 1,000E Ec 3,000E 30,000F (etained earnin)s E E E E E 6ecember 3', 2003 E$ 1#,500 E$ '2,000 E E E $ 1#,500 E E E E E Balance Sheet E E E E E 8as/ E$ 35,500 E$ '5,000 E E E $ 20,500 7ccounts receivable :netE 20,000 E 30,000 E E E +0,000 Inventories E 23,000 E 20,000 E E E 33,000 Plant and e uipment:netE '20,000 E 35,000 E E E '55,000 Investment in -ail E 3+,000 E E Ea 3,500E E E E Eb 35,500E E$2+#,500 E$'00,000 E E E $33+,500 E E E E E 7ccounts payable E$ 30,000 E$ '#,000 E E E $ 3#,000 @t/er liabilities E 20,000 E '2,000 E E E 32,000 8apital stock E '50,000 E 50,000 Eb 50,000E E '50,000 @t/er paid:in capital E 20,000 E 3,000 Eb 3,000E E 20,000 (etained earnin)s E 1#,500E '2,000E E E 1#,500 E$2+#,500 E$'00,000 E E E 4inority interest January ', 2003 E Eb '+,500E 4inority interest 6ecember 3', 2003 E Ec ',500E 2',000 E E E $33+,500 E E E F6educt

Working paper entries a <o eliminate income ,rom -ail and dividends received ,rom -ail and adAust t/e investment in -ail account to its be)innin) o, t/e period balance? b <o eliminate reciprocal investment in -ail and e uity amounts o, -ail and to enter be)innin) minority interest? 8 <o enter minority interest s/are o, subsidiary income and dividends?

>A
Solution "4-2 2 !continued%

Consolidation Techniqu e s and Procedure s

"al% Co&'o&ation an! Sub(i!ia&) 8onsolidated Income -tatement ,or t/e year ended 6ecember 3', 2003 -ales Less: 8ost o, )oods sold $3'0,000 225,000 '35,000 +1,000 3#,000 3,500 $ 33,500

;ross pro,it @peratin) e"penses <otal consolidated income Less: 4inority interest e"pense 8onsolidated net income

"al% Co&'o&ation an! Sub(i!ia&) 8onsolidated (etained &arnin)s -tatement ,or t/e year ended 6ecember 3', 2003 8onsolidated retained earnin)s January ', 2003 7dd: 8onsolidated net income Less: 6ividends o, Palm 8onsolidated retained earnin)s 6ecember 3', 2003 $ 25,000 33,500 !30,000% $ 1#,500

"al% Co&'o&ation an! Sub(i!ia&) 8onsolidated Balance -/eet at 6ecember 3', 2003 Assets 8urrent assets: 8as/ (eceivables:net Inventories Plant assets:net <otal assets Lia ilities and Stockholders! E"uity Liabilities: 7ccounts payable @t/er liabilities -tock/olders0 e uity: 8apital stock, $'0 par @t/er paid:in capital 8onsolidated retained earnin)s 7dd: 4inority interest

$ 20,500 +0,000 33,000

$'+3,500 '55,000 $33+,500

$ 3#,000 32,000 $'50,000 20,000 1#,500 23#,500 2',000

$ #0,000

22+,500 $33+,500

<otal liabilities and stock/olders0 e uity

Chapt er 4

>5

Solution "4-3 "an Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003
E E E 7dAustments and E8onsolidated E Pan E -a, 15$ E &liminations E-tatements E E E E E Income Statement E E E E E -ales E$300,000 E$'00,000 E E E $500,000 Income ,rom -a, E '1,000 E Ea '1,000E E 8ost o, sales E 250,000FE 50,000FE E E 300,000F @t/er e"penses E +1,000FE 22,000FEc ',000E E '23,000F 4inority e"pense E E E, 2,000E E 2,000F >et income E$ 10,000 E$ 23,000 E E E $ 10,000 E E E E E Retained Earnings E E E E E (etained earnin)s:Pan E$'#0,000 E E E E $'#0,000 (etained earnin)s :-a, E E$ 33,000 Eb 33,000E E >et income E 10,000 E 23,000 E E E 10,000 6ividends E 50,000FE '2,000FE Ea '2,000E E, 3,000FE 50,000F (etained earnin)s: E E E E E 6ecember 3', 2003 E $200,000 E$ 32,000 E E E $200,000 E E E E E Balance Sheet E E E E E 8as/ E$ 2',000 E$ '5,000 E E E $ 12,000 7ccounts receivable E #0,000 E 20,000 E E E '00,000 6ividends receivable E E E E E ,rom -a, E 2,000 E E Ee 2,000E Inventories E +5,000 E '0,000 E E E '05,000 >ote receivable E E E E E ,rom Pan E E 5,000 E Ed 5,000E Land E 25,000 E 30,000 E E E +5,000 Buildin)s :net E '10,000 E #0,000 E E E 250,000 & uipment :net E '30,000 E 50,000 E E E '#0,000 Investment in -a, E '#3,000 E E Ea 5,000E E E E Eb '1#,000E Patents E E Eb 30,000Ec ',000E 3+,000 E$1+0,000 E$2'0,000 E E E $#35,000 E E E E E 7ccounts payable E$ #5,000 E$ '0,000 E E E $ +5,000 >ote payable to -a, E 5,000 E Ed 5,000E E 6ividends payable E E #,000 Ee 2,000E E 2,000 8apital stock, $'0 parE 500,000 E '50,000 Eb '50,000E E 500,000 (etained earnin)s E 200,000 E 32,000 E E E 200,000 E$1+0,000 E$2'0,000 E E E 4inority interest January ', 2003 E Eb 32,000E 4inority interest 6ecember 3',2003 E E, 2,000E 3#,000 E E E $#35,000 E E E F6educt

>7
Solution "4-4

Consolidation Techniqu e s and Procedure s

"al Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003
E E E 7dAustments and E8onsolidated E Pal E -un 15$ E &liminations E -tatements E E E E E Income Statement E E E E E -ales E$300,000 E$'00,000 E E E $500,000 Income ,rom -un E '#,000 E Ea '#,000E E 8ost o, sales E 250,000FE 50,000FE E E 300,000F @t/er e"penses E +1,000FE 22,000FE E E '23,000F 4inority income E E Ec 2,000E E 2,000F >et income E$ 1',000 E$ 23,000 E E E $ 1',000 E E E E E Retained Earnings E E E E E (etained earnin)s:Pal E$'#0,000 E E E E $'#0,000 (etained earnin)s :-un E E$ 33,000 Eb 33,000E E >et income E 1',000 E 23,000 E E E 1',000 6ividends E 50,000FE '2,000FE Ea '2,000E Ec 3,000E 50,000F (etained earnin)s: E E E E E 6ecember 3', 2003 E $20',000 E$ 32,000 E E E $20',000 E E E E E Balance Sheet E E E E E 8as/ E$ 2',000 E$ '5,000 E E E $ 12,000 7ccounts receivable E #0,000 E 20,000 E E E '00,000 6ividends receivable E E E E E ,rom -un E 2,000 E E Ee 2,000E Inventories E +5,000 E '0,000 E E E '05,000 >ote receivable E E E E E ,rom Pal E E 5,000 E Ed 5,000E Land E 25,000 E 30,000 E E E +5,000 Buildin)s :net E '10,000 E #0,000 E E E 250,000 & uipment :net E '30,000 E 50,000 E E E '#0,000 Investment in -un E '#3,000 E E Ea 2,000E E E E Eb '1#,000E ;ood*ill E E Eb 30,000E E 30,000 E$1+',000 E$2'0,000 E E E $#32,000 E E E E E 7ccounts payable E$ #5,000 E$ '0,000 E E E $ +5,000 >ote payable to -un E 5,000 E Ed 5,000E E 6ividends payable E E #,000 Ee 2,000E E 2,000 8apital stock, $'0 parE 500,000 E '50,000 Eb '50,000E E 500,000 (etained earnin)s E 20',000 E 32,000 E E E 20',000 E$1+',000 E$2'0,000 E E E 4inority interest January ', 2003 E Eb 32,000E 4inority interest 6ecember 3',2003 E Ec 2,000E 3#,000 E E E $#32,000 E E E F6educt

Chapt er 4

>=

Solution "4-5 Preliminary computations 7llocation o, e"cess cost over book value ac uired: 8ost o, 10$ interest January ' Book value ac uired !$200,000 " 10$% &"cess cost over book value ac uired &"cess allocated: Bndervalued inventory Bndervalued buildin)s Bndervalued e uipment (emainder to patents &"cess cost over book items sold in 2003 !1 year li,e% !3 year li,e% value ac uired $500,000 !320,000% $ #0,000 $ 5,000 '3,000 2',000 30,000 $ #0,000

8alculation o, income ,rom -oul: & uity in -oul0s income !$'00,000 " 10$% Less: Bndervalued inventories sold in 2003 Less: 6epreciation on buildin) !$'3,000G1 years% Less: 6epreciation on e uipment !$2',000G3 years% Less: Patents amorti=ation !$30,000G30 years% Income ,rom -oul $ 10,000 !5,000% !2,000% !1,000% !',000% $ 55,000

>8
Solution "4-5 !continued%

Consolidation Techniqu e s and Procedure s

Dorkin) paper entries ,or 2003: a Income ,rom -oul 6ividends !-oul% Investment in -oul 8apital stock !-oul% (etained earnin)s !-oul% January ' Bnamorti=ed e"cess Investment in -oul 4inority interest January ' 8ost o, sales !,or inventory items% Buildin)s:net & uipment:net Patents Bnamorti=ed e"cess 6epreciation e"pense Buildin)s:net 6epreciation e"pense & uipment:net @t/er e"penses Patents 7ccounts payable 7ccounts receivable 6ividends payable 6ividends receivable 4inority Interest &"pense 6ividends:-oul 4inority Interest $ 55,000 $ 35,000 20,000 $500,000 '00,000 #0,000 $500,000 '#0,000 $ 5,000 '3,000 2',000 30,000 $ #0,000 $ $ $ 2,000 $ 1,000 $ ',000 $ $ '0,000 $ '0,000 $ '3,000 $ '3,000 $ 30,000 $ '5,000 '5,000 ',000 1,000 2,000

d e , ) / i

Chapt er 4

>>
!continued% "a&i Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003

Solution "4-5

E E E Income Statement E -ales E$ Income ,rom -oul E ;ain on e uipment E 8ost o, sales E 6epreciation e"pense E E @t/er e"penses E 4inority e"pense E >et income E$ E Retained Earnings E (etained earnin)s:PariE$ (etained earnin)s :-oulE >et income E 6ividends E

E E 7dAustments and E8onsolidated E-oul 10$ E &liminations E -tatements E E E E E E E E #00,000 E$100,000 E E E $',500,000 55,000 E Ea 55,000E E '0,000 E E E E '0,000 300,000FE 300,000FEc 5,000E E 105,000 F '55,000FE 20,000FEd 2,000E E 223,000F E Ee 1,000E E '20,000FE '30,000FE, ',000E E 30',000 F E Ei 30,000E E 30,000 F 250,000 E$'00,000 E E E $ 250,000 E E E E E E E E 300,000 E E E E $ 300,000 E$'00,000 Eb '00,000E E 250,000 E '00,000 E E E 250,000 200,000FE 50,000FE Ea 35,000E Ei '5,000E 200,000 F (etained earnin)s: E E E E E 6ecember 3', 2003 E $ 350,000 E$'50,000 E E E $ 350,000 E E E E E Balance Sheet E E E E E 8as/ E$ #2,000 E$ 20,000 E E E $ '32,000 7ccounts receivable E '00,000 E 10,000 E E) '0,000E '20,000 6ividends receivable E '3,000 E E E/ '3,000E Inventories E '50,000 E '00,000 E E E 250,000 @t/er current assets E 10,000 E 30,000 E E E '00,000 Land E 50,000 E '00,000 E E E '50,000 Buildin)s :net E '30,000 E '20,000 Ec '3,000Ed 2,000E 3'2,000 & uipment :net E 510,000 E 330,000 Ec 2',000Ee 1,000E +'3,000 Investment in -oul E 520,000 E E Ea 20,000E E E E Eb 500,000E Patents E E Ec 30,000E, ',000E 3+,000 Bnamorti=ed e"cess E E Eb #0,000Ec #0,000E E$',100,000 E$#50,000 E E E $2,01',000 E E E E E 7ccounts payable E$ 200,000 E$ #5,000 E) '0,000E E $ 215,000 6ividends payable E '00,000 E 20,000 E/ '3,000E E '02,000 @t/er liabilities E 50,000 E +5,000 E E E '35,000 8apital stock, $'0 parE ',000,000 E 500,000 Eb 500,000E E ',000,000 (etained earnin)s E 350,000 E '50,000 E E E 350,000 E$',100,000 E$#50,000 E E E 4inority interest January ', 2003 E Eb '#0,000E 4inority interest 6ecember 3',2003 E Ei '5,000E '+5,000 E E E $2,01',000 E E E F6educt Pari

?..
Solution "4-6 Supporting computations @*ners/ip percenta)e

Consolidation Techniqu e s and Procedure s

'3,500G'5,000 s/ares 5

+0$ $202,500 '3#,500 $ 53,000 $ '3,000 30,000 $ 53,000

Investment cost !'3,500 s/ares " $'5% Book value ac uired !$'25,000 " +0$% &"cess cost over book value ac uired &"cess allocated to Land (emainder to patents &"cess cost over book value ac uired

Income ,rom -yn: Pen0s s/are o, -yn0s income !$23,000 " +0$% Less: Patents amorti=ation Income ,rom -yn $ 2',200 3,000 $ '1,200

Investment in -yn 6ecember 3', 2003: 8ost January ', 2003 Pen0s s/are o, t/e c/an)e in -yn0s retained earnin)s !$32,000 : $'5,000% " +0$ Less: Patents amorti=ation ,or 2 years Investment in -yn 6ecember 3', 2003 $202,500 23,300 !#,000% $2'#,#00

Chapt er 4

?.?
!continued% "*n Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003

Solution "4-6

HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH E E E 7dAustments and E8onsolidated E Pen E +0$ -yn E &liminations E -tatements E E E E E Income Statement E E E E E -ales E$300,000 E$'00,000 E E E $500,000 Income ,rom -yn E '1,200 E Ea '1,200E E 8ost o, sales E 250,000FE 50,000FE E E 300,000F @t/er e"penses E '00,200FE 22,000FEc 3,000E E '30,200F 4inority e"pense E E E) 2,300E E 2,300F >et income E$ 21,000 E$ 23,000 E E E $ 21,000 E E E E E Retained Earnings E E E E E (etained earnin)s:PenE$'11,000 E E E E $'11,000 (etained earnin)s:-ynE E$ 33,000 Eb 33,000E E >et income E 21,000 E 23,000 E E E 21,000 6ividends E 50,000FE '2,000FE Ea '3,300E E) ',200 E 50,000F (etained earnin)s: E E E E E 6ecember 3', 2003 E $'+3,000 E$ 32,000 E E E $'+3,000 E E E E E Balance Sheet E E E E E 8as/ E$ '#,000 E$ '5,000 E E E $ 33,000 7ccounts receivable E #0,000 E 20,000 E E, 5,000E +5,000 6ividends receivable E 1,200 E E Ed 1,200E Inventories E +5,000 E '0,000 E E E '05,000 >ote receivable :Pen E E 5,000 E Ee 5,000E Investment in -yn E 2'#,#00 E E Ea 3,200E E E E Eb 2'5,200E Land E 25,000 E 30,000 Eb '3,000E E '0+,000 Buildin)s :net E '10,000 E #0,000 E E E 250,000 & uipment :net E '30,000 E 50,000 E E E '#0,000 Patents E E Eb 32,000Ec 3,000E 32,000 E$1#3,000 E$2'0,000 E E E $#03,000 E E E E E 7ccounts payable E$ #5,000 E$ '0,000 E, 5,000E E $ +0,000 >ote payable to -yn E 5,000 E Ee 5,000E E 6ividends payable E E #,000 Ed 1,200E E #00 8apital stock E 500,000 E '50,000 Eb '50,000E E 500,000 (etained earnin)s E '+3,000 E 32,000 E E E '+3,000 E$1#3,000 E$2'0,000 E E E 4inority interest January ', 2003 E Eb '#,300E 4inority interest 6ecember 3', 2003 E E) #00E '+,200 E E E $#03,000 E E E F6educt

?.Solution "4-7 Preliminary computations

Consolidation Techniqu e s and Procedure s

7llocation o, e"cess cost over book value ac uired: 8ost o, 10$ interest January ' Book value ac uired !$200,000 " 10$% &"cess cost over book value ac uired &"cess allocated: Bndervalued inventory Bndervalued buildin)s Bndervalued e uipment (emainder to )ood*ill &"cess cost over book items sold in 2003 !1 year li,e% !3 year li,e% value ac uired $500,000 !320,000% $ #0,000 $ 5,000 '3,000 2',000 30,000 $ #0,000

8alculation o, income ,rom -oul: & uity Less: Less: Less: Income in -ol0s income !$'00,000 " 10$% Bndervalued inventories sold in 2003 6epreciation on buildin) !$'3,000G1 years% 6epreciation on e uipment !$2',000G3 years% ,rom -oul $ 10,000 !5,000% !2,000% !1,000% $ 52,000

Chapt er 4

?.@
!continued%

Solution "4-7

Dorkin) paper entries ,or 2003: a Income ,rom -ol 6ividends !-ol% Investment in -ol 8apital stock !-ol% (etained earnin)s !-ol% January ' Bnamorti=ed e"cess Investment in -ol 4inority interest January ' 8ost o, sales !,or inventory items% Buildin)s:net & uipment:net ;ood*ill Bnamorti=ed e"cess 6epreciation e"pense Buildin)s:net 6epreciation e"pense & uipment:net 4inority Interest &"pense 6ividends:-ol 4inority Interest 7ccounts payable 7ccounts receivable 6ividends payable 6ividends receivable $ 52,000 $ 35,000 2',000 $500,000 '00,000 #0,000 $500,000 '#0,000 $ 5,000 '3,000 2',000 30,000 $ #0,000 $ $ 2,000 $ 1,000 $ $ 30,000 $ '5,000 '5,000 $ '0,000 $ '0,000 $ '3,000 $ '3,000 1,000 2,000

d e ,

) /

?.A
Solution "4-7 !continued%

Consolidation Techniqu e s and Procedure s

"a& Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003
E E E Income Statement E -ales E$ Income ,rom -ol E ;ain on e uipment E 8ost o, sales E 6epreciation e"pense E E @t/er e"penses E 4inority e"pense E >et income E$ E Retained Earnings E (etained earnin)s:Par E$ (etained earnin)s :-ol E >et income E 6ividends E E E 7dAustments and E8onsolidated E-ol 10$ E &liminations E -tatements E E E E E E E E #00,000 E$100,000 E E E $',500,000 52,000 E Ea 52,000E E '0,000 E E E E '0,000 300,000FE 300,000FEc 5,000E E 105,000 F '55,000FE 20,000FEd 2,000E E 223,000F E Ee 1,000E E '20,000FE '30,000FE E E 300,000 F E E, 30,000E E 30,000 F 25',000 E$'00,000 E E E $ 25',000 E E E E E E E E 300,000 E E E E $ 300,000 E$'00,000 Eb '00,000E E 25',000 E '00,000 E E E 25',000 200,000FE 50,000FE Ea 35,000E E, '5,000E 200,000 F (etained earnin)s: E E E E E 6ecember 3', 2003 E $ 35',000 E$'50,000 E E E $ 35',000 E E E E E Balance Sheet E E E E E 8as/ E$ #2,000 E$ 20,000 E E E $ '32,000 7ccounts receivable E '00,000 E 10,000 E E) '0,000E '20,000 6ividends receivable E '3,000 E E E/ '3,000E Inventories E '50,000 E '00,000 E E E 250,000 @t/er current assets E 10,000 E 30,000 E E E '00,000 Land E 50,000 E '00,000 E E E '50,000 Buildin)s :net E '30,000 E '20,000 Ec '3,000Ed 2,000E 3'2,000 & uipment :net E 510,000 E 330,000 Ec 2',000Ee 1,000E +'3,000 Investment in -ol E 52',000 E E Ea 2',000E E E E Eb 500,000E ;ood*ill E E Ec 30,000E E 30,000 Bnamorti=ed e"cess E E Eb #0,000Ec #0,000E E$',10',000 E$#50,000 E E E $2,012,000 E E E E E 7ccounts payable E$ 200,000 E$ #5,000 E) '0,000E E $ 215,000 6ividends payable E '00,000 E 20,000 E/ '3,000E E '02,000 @t/er liabilities E 50,000 E +5,000 E E E '35,000 8apital stock, $'0 parE ',000,000 E 500,000 Eb 500,000E E ',000,000 (etained earnin)s E 35',000 E '50,000 E E E 35',000 E$',10',000 E$#50,000 E E E 4inority interest January ', 2003 E Eb '#0,000E 4inority interest 6ecember 3',2003 E E, '5,000E '+5,000 E E E $2,012,000 E E E F6educt Par

Chapt er 4

?.5

Solution "4-8 Supporting computations @*ners/ip percenta)e '3,500G'5,000 s/ares 5 +0$ $202,500 '3#,500 $ 53,000 $ '3,000 30,000 $ 53,000

Investment cost !'3,500 s/ares " $'5% Book value ac uired !$'25,000 " +0$% &"cess cost over book value ac uired &"cess allocated to Land (emainder to )ood*ill &"cess cost over book value ac uired

Income ,rom -on: Pun0s s/are o, -on0s income !$23,000 " +0$% Investment in -on 6ecember 3', 2003: 8ost January ', 2003 Pun0s s/are o, t/e c/an)e in -on0s retained earnin)s !$32,000 : $'5,000% " +0$ Investment in -on 6ecember 3', 2003 $202,500 23,300 $222,#00 $ 2',200

?.7
Solution "4-8 !continued%

Consolidation Techniqu e s and Procedure s

"un Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003
HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH E E E 7dAustments and E8onsolidated E Pun E +0$ -on E &liminations E -tatements E E E E E Income Statement E E E E E -ales E$300,000 E$'00,000 E E E $500,000 Income ,rom -on E 2',200 E Ea 2',200E E 8ost o, sales E 250,000FE 50,000FE E E 300,000F @t/er e"penses E '00,200FE 22,000FE E E '22,200F 4inority e"pense E E Ec 2,300E E 2,300F >et income E$ 1',000 E$ 23,000 E E E $ 1',000 E E E E E Retained Earnings E E E E E (etained earnin)s:PunE$'#',000 E E E E $'#',000 (etained earnin)s:-onE E$ 33,000 Eb 33,000E E >et income E 1',000 E 23,000 E E E 1',000 6ividends E 50,000FE '2,000FE Ea '3,300E Ec ',200E 50,000F (etained earnin)s: E E E E E 6ecember 3', 2003 E $202,000 E$ 32,000 E E E $202,000 E E E E E Balance Sheet E E E E E 8as/ E$ '#,000 E$ '5,000 E E E $ 33,000 7ccounts receivable E #0,000 E 20,000 E E, 5,000E +5,000 6ividends receivable E 1,200 E E Ed 1,200E Inventories E +5,000 E '0,000 E E E '05,000 >ote receivable :Pun E E 5,000 E Ee 5,000E Investment in -on E 222,#00 E E Ea 1,200E E E E Eb 2'+,200E Land E 25,000 E 30,000 Eb '3,000E E '0+,000 Buildin)s :net E '10,000 E #0,000 E E E 250,000 & uipment :net E '30,000 E 50,000 E E E '#0,000 ;ood*ill E E Eb 30,000E E 30,000 E$1+2,000 E$2'0,000 E E E $#'2,000 E E E E E 7ccounts payable E$ #5,000 E$ '0,000 E, 5,000E E $ +0,000 >ote payable to -on E 5,000 E Ee 5,000E E 6ividends payable E E #,000 Ed 1,200E E #00 8apital stock E 500,000 E '50,000 Eb '50,000E E 500,000 (etained earnin)s E 202,000 E 32,000 E E E 202,000 E$1+2,000 E$2'0,000 E E E 4inority interest January ', 2003 E Eb '#,300E 4inority interest 6ecember 3', 2003 E Ec #00E '+,200 E E E $#'2,000 E E E F6educt

Chapt er 4

?.=
"a( Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003

Solution "4-9

E E #0$ E 7dAustments and E8onsolidated E Pas E -el E &liminations E -tatements Income Statement E E E E E -ales E$200,000 E$''0,000 E E E $3'0,000 Income ,rom -el E '1,000 E Ea '1,000E E 8ost o, sales E #0,000FE 30,000FEb '0,000E E '30,000F 6epreciation e"pense E 30,000FE 20,000FEd 3,000E E 23,000F @t/er e"penses E 25,500FE '0,000FE) ',000E E 32,500F 4inority e"pense E E Ec #,000E E #,000F >et income E$ 1',500 E$ 30,000 E E E $ 1',500 Retained Earnings E E E E E (etained earnin)s E E E E E :Pas E$ 15,000 E E E E $ 15,000 :-el E E$ 50,000 Eb 50,000E E >et income E 1',500 E 30,000 E E E 1',500 6ividends E 30,000FE 20,000FE Ea '2,000E Ec 3,000E 30,000F (etained earnin)s E E E E E 6ecember 3', 2003 E $'02,500 E$ 10,000 E E E $'02,500 Balance Sheet E E E E E 8as/ E$ 2+,500 E$ 30,000 E E E $ 5+,500 <rade receivables:netE 2#,000 E 30,000 E Ee 3,000E 23,000 6ividends receivable E #,000 E E E, #,000E Inventories E 30,000 E 30,000 E E E 10,000 Land E '5,000 E 30,000 E E E 35,000 Buildin)s :net E 25,000 E 10,000 E E E '35,000 & uipment :net E 200,000 E '00,000 Eb 20,000Ed 3,000E 3'2,000 Investment in -el E 2'',000 E E Ea ',000E E E E Eb 2'0,000E Patents E E Eb 20,000E) ',000E '+,000 E$5+2,500 E$300,000 E E E $10#,500 E E E E E 7ccounts payable E$ 30,000 E$ 50,000 Ee 3,000E E $ #2,000 6ividends payable E '00,000 E '0,000 E, #,000E E '02,000 @t/er liabilities E 50,000 E 20,000 E E E 10,000 8apital stock E 300,000 E '50,000 Eb '50,000E E 300,000 (etained earnin)s E '02,500 E 10,000 E E E '02,500 E$5+2,500 E$300,000 E E E E E E 4inority interest January ', 2003 E Eb 30,000E 4inority interest 6ecember 3', 2003 E Ec 3,000E 33,000 E E E $10#,500 F6educt

Supporting computations Investment cost January ', 2003 Book value ac uired !$200,000 " #0$% &"cess cost over book value ac uired &"cess allocated: Bndervalued inventory $'2,500 " #0$ Bndervalued e uipment $25,000 " #0$ (emainder to patents &"cess cost over book value ac uired

$2'0,000 '20,000 $ 50,000 $ '0,000 20,000 20,000 $ 50,000

?.8
Solution "4-10

Consolidation Techniqu e s and Procedure s

"la(ti+ Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003
E E #0$ E 7dAustments and E8onsolidated E Plastik E -eldane E &liminations E -tatements Income Statement E E E E E -ales E$200,000 E$''0,000 E E E $3'0,000 Income ,rom -eldane E '#,000 E Ea '#,000E E 8ost o, sales E #0,000FE 30,000FEb '0,000E E '30,000F 6epreciation e"pense E 30,000FE 20,000FEd 3,000E E 23,000F @t/er e"penses E 25,500FE '0,000FE E E 35,500F 4inority e"pense E E Ec #,000E E #,000F >et income E$ 12,500 E$ 30,000 E E E $ 12,500 Retained Earnings E E E E E (etained earnin)s E E E E E :Plastik E$ 15,000 E E E E $ 15,000 :-eldane E E$ 50,000 Eb 50,000E E >et income E 12,500 E 30,000 E E E 12,500 6ividends E 30,000FE 20,000FE Ea '2,000E Ec 3,000E 30,000F (etained earnin)s E E E E E 6ecember 3', 2003 E $'01,500 E$ 10,000 E E E $'01,500 Balance Sheet E E E E E 8as/ E$ 2+,500 E$ 30,000 E E E $ 5+,500 <rade receivables:netE 2#,000 E 30,000 E Ee 3,000E 23,000 6ividends receivable E #,000 E E E, #,000E Inventories E 30,000 E 30,000 E E E 10,000 Land E '5,000 E 30,000 E E E 35,000 Buildin)s :net E 25,000 E 10,000 E E E '35,000 & uipment :net E 200,000 E '00,000 Eb 20,000Ed 3,000E 3'2,000 Investment in -eldaneE 2'2,000 E E Ea 2,000E E E E Eb 2'0,000E ;ood*ill E E Eb 20,000E E 20,000 E$5+1,500 E$300,000 E E E $10+,500 E E E E E 7ccounts payable E$ 30,000 E$ 50,000 Ee 3,000E E $ #2,000 6ividends payable E '00,000 E '0,000 E, #,000E E '02,000 @t/er liabilities E 50,000 E 20,000 E E E 10,000 8apital stock E 300,000 E '50,000 Eb '50,000E E 300,000 (etained earnin)s E '01,500 E 10,000 E E E '01,500 E$5+1,500 E$300,000 E E E E E E 4inority interest January ', 2003 E Eb 30,000E 4inority interest 6ecember 3', 2003 E Ec 3,000E 33,000 E E E $10+,500 F6educt

Supporting computations Investment cost January ', 2003 Book value ac uired !$200,000 " #0$% &"cess cost over book value ac uired &"cess allocated: Bndervalued inventory $'2,500 " #0$ Bndervalued e uipment $25,000 " #0$ (emainder to )ood*ill &"cess cost over book value ac uired

$2'0,000 '20,000 $ 50,000 $ '0,000 20,000 20,000 $ 50,000

Chapt er 4

?.>

Solution "4-11 Supporting computations Investment cost 6ecember 3', 2003 Book value ac uired !$'50,000 " #0$% &"cess cost over book value ac uired $'10,000 '20,000 $ 50,000 Bnamorti=ed &"cess 6ecember 3', 2001 $ ::: '0,000 5,000

7llocation o, &"cess Inventories Plant assets:net Patents $ 1,000 '#,000 25,000 $50,000

7morti=ation 2003:2001 $ 1,000 #,000 20,000 $35,000

$'5,000

"ill Co&'o&ation an! Sub(i!ia&) 8onsolidated Balance -/eet Dorkin) Papers on 6ecember 3', 2001 E E Pill E E E$ 3',000 E 20,000 E #,000 E 25,000 E '25,000 E 300,000 E '+',000 E E E$150,000 E E E$ 50,000 E E E 300,000 E 300,000 E E$150,000 E E E-tud #0$ E E E$ 35,000 E 55,000 E E E 35,000 E '15,000 E E E E$300,000 E E E$ 35,000 E '0,000 E 25,000 E '00,000 E '20,000 E E$300,000 E E 7dAustments and E8onsolidated E &liminations EBalance -/eet E E E E E E E E E $ 12,000 E Ec 5,000E ''0,000 E Ed #,000E E Ee 25,000E E E E '20,000 Eb '0,000E E 3#5,000 E Ea '+',000E Eb 5,000E E 5,000 Ea '5,000Eb '5,000E E E E $#32,000 E E E E E E Ec 5,000E E $ +0,000 Ed #,000E E 2,000 Ee 25,000E E Ea '00,000E E 300,000 Ea '20,000E E 300,000 E Ea 33,000E 33,000 E E E $#32,000 E E E

Assets 8as/ <rade receivables 6ividends receivable 7dvance to -tud Inventories Plant assets:net Investment in -tud Patents Bnamorti=ed e"cess <otal assets E"uities 7ccounts payable 6ividends payable 7dvance ,rom Pill 8apital stock (etained earnin)s 4inority interest <otal e uities

??.
Solution "4-12 Preliminary computations Investment cost Book value ac uired !$225,000 " #0$% &"cess cost over book value ac uired

Consolidation Techniqu e s and Procedure s

$230,000 '#0,000 $ 20,000 $ 30,000 20,000 $ 20,000

7llocation o, di,,erential: Plant assets $50,000 undervaluation " #0$ ;ood*ill &"cess cost over book value ac uired 7morti=ation: Plant assets $30,000G3 years 5 $'0,000 per year

Investment account balance at 6ecember 3', 2003 Bnderlyin) book value !$2+0,000 " #0$% 7dd: Bnamorti=ed e"cess allocated to plant assets !$30,000 : $20,000 amorti=ation% 7dd: Bnamorti=ed )ood*ill 8orrect balance o, investment account at 6ecember 3' </e investment account balance is overstated at $2#0,000 ,or t/e $#,000 dividend receivable?

$232,000 20,000 20,000 $212,000

Chapt er 4

???
!continued% "at Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2003

Solution "4-12

E E E 7dAustments and E8onsolidated E Pat E -ci #0$ E &liminations E -tatements Income Statement E E E E E -ales E$+00,000 E$300,000 E E E $',200,000 Income ,rom -ci E 3#,000 E Ec 3#,000E E 8ost o, sales E 200,000FE '50,000FE E E 150,000F @peratin) e"pense E '+0,000FE +0,000FEe '0,000E E 2+0,000F 4inority e"pense E E E, '2,000E E '2,000F >et income E$'3#,000 E$ 20,000 E E E $ '3#,000 Retained Earnings E E E E E (etained earnin)s :PatE$'22,000 E E E E $ '22,000 (etained earnin)s :-ciE E$ 50,000 Ed 50,000E E >et income E '3#,000 E 20,000 E E E '3#,000 6ividends E '00,000FE 20,000FE Ec '2,000E E, 3,000E '00,000F (etained earnin)s E E E E E 6ecember 3', 2003 E $'10,000 E$ +0,000 E E E $ '10,000 Balance Sheet E E E E E 8as/ E$ 2,000 E$ '5,000 Ea 20,000E E $ 3',000 7ccounts receivable E 22,000 E 20,000 E E/ 5,000E 3',000 Inventories E #2,000 E 20,000 E E E '32,000 7dvance to -ci E 20,000 E E Ea 20,000E @t/er current assets E #0,000 E 5,000 E E E #5,000 Land E '20,000 E 30,000 E E E '+0,000 Plant assets:net E 330,000 E 230,000 Ed 30,000Ee '0,000E 5+0,000 Investment in -ci E 2#0,000 E E Eb #,000E E E E Ec 22,000E E E E Ed 250,000E 6ividends receivable E E Eb #,000E) #,000E ;ood*ill E E Ed 20,000E E 20,000 E$++3,000 E$320,000 E E E $','0+,000 E E E E E 7ccounts payable E$ 23,000 E$ '5,000 E/ 5,000E E $ 33,000 6ividends payable E E '0,000 E) #,000E E 2,000 @t/er liabilities E '00,000 E 35,000 E E E '35,000 8apital stock E 100,000 E 200,000 Ed 200,000E E 100,000 (etained earnin)s E '10,000 E +0,000 E E E '10,000 E$++3,000 E$320,000 E E E 4inority interest January ', 2003 E Ed 50,000E 4inority interest 6ecember 3', 2003 E E, #,000E 5#,000 E E E $','0+,000 F6educt

??Solution "4-13 a Income ,rom -tarmark 6ividends Investment in -tarmark

Consolidation Techniqu e s and Procedure s

$ #0,000 $ 35,000 35,000

<o eliminate income ,rom -tarmark and dividends paid by -tarmark, and to establis/ reciprocity bet*een be)innin) investment and e uity accounts? b 8apital stock:-tarmark $'00,000 7dditional paid:in capital:-tarmark '50,000 (etained earnin)s:-tarmark '50,000 Plant assets : net 20,000 Patents 30,000 Investment in -tarmark 4inority interest 6ecember 3', 2002

$3'0,000 30,000

<o eliminate reciprocal investment and e uity accounts, to establis/ be)innin) minority interest, and to record unamorti=ed patents at 6ecember 3', 2002? c @peratin) e"penses Patents Plant assets : net *rite:up in plant assets? $ '0,000 $ $ 5,000 5,000

<o enter current amorti=ation o, patents and depreciation o, t/e

7ccounts payable 7ccounts receivable

5,000 $ 5,000

<o eliminate reciprocal receivable and payable balances? e 6ividends payable 6ividends receivable $ 21,000 $ 21,000

<o eliminate reciprocal dividends receivable and payable balances? , 4inority interest e"pense 6ividends 4inority interest $ '0,000 $ 5,000 5,000

<o reco)ni=e an income c/ar)e ,or minority interest e"pense, to eliminate dividends paid to minority stock/olders, and to update minority interest e uity ,or current year c/an)es?

Chapt er 4

??@

Solution "4-14 Supporting computations Investment cost January ', 2002 Book value ac uired !$+0,000 " #0$% &"cess cost over book value ac uired &"cess allocated to: Inventory !sold in 2002% $',000 " #0$ 4ac/inery !3 year remainin) use li,e% $3,000 " #0$ Intan)ibles !30 year amorti=ation period assumed% &"cess cost over book value ac uired Income ,rom -ki ,or 2002: -/are o, -ki0s net income !$'5,000 " #0$% Less: &"cess allocated to inventories Less: 7morti=ation o, e"cess allocated to mac/inery !$3,200G3 years% Less: 7morti=ation o, intan)ibles !$3,000G30 years% Income ,rom -ki ,or 2002 4inority interest e"pense ,or 2002: 20$ o, -ki0s net income !$'5,000 " 20$% 4inority interest e"pense ,or 2001: 20$ o, -ki0s net income !$20,000 " 20$% $ 3,000 $ 3,000 $'2,000 !#00% !#00% !'00% $'0,300 $#0,000 12,000 $ #,000 $ #00 3,200 3,000 $ #,000

>ote: -ince t/e prior year0s income is not a,,ected by t/e current year0s error o, omission, t/e *orkin) papers ,or 2001 are easier to prepare *it/out an additional conversion:to:e uity entry?

??A
Solution "4-14 !continued%

Consolidation Techniqu e s and Procedure s

"l) Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2002
E E E 7dAustments and E8onsolidated E Ply E -ki #0$ E &liminations E -tatements E E E E E Income Statement E E E E E -ales E$'20,000 E$ #0,000 E E E $230,000 Income ,rom -ki E '0,300 E Ea '0,300E E 8ost o, sales E '05,000FE 35,000FEb #00E E '30,#00F @peratin) e"penses E 35,000FE 30,000FEc #00E E 25,+00F E E Ed '00E E 4inority e"pense E E E, 3,000E E 3,000F >et income E$ 30,300 E$ '5,000 E E E $ 30,300 E E E E E Retained Earnings E E E E E (etained earnin)s:PlyE$ 10,000 E E E E $ 10,000 (etained earnin)s:-kiE E$ 30,000 Eb 30,000E E >et income E 30,300E '5,000E E E 30,300 6ividends E '0,000FE 5,000FE Ea 3,000E E , ',000E '0,000F (etained earnin)s E E E E E 6ecember 3', 2002 E$ +0,300 E$ 30,000 E E E $ +0,300 E E E E E Balance Sheet E E E E E 8as/ E$ 23,100 E$ '5,000 E E E $ 3+,100 <rade receivables:netE 25,000 E 20,000 E E E 35,000 6ividends receivable E 3,000 E 0 E Ee 3,000E Inventories E 30,000 E 30,000 E E E 10,000 Plant I e uipment:netE '00,000 E 55,000 Eb 3,200Ec #00E '51,300 Investment in -ki E #2,300 E E Ea 2,300E E E E Eb #0,000E Intan)ibles E E Eb 3,000Ed '00E 3,+00 E$2#0,000 E$'20,000 E E E $3'2,000 E E E E E 7ccounts payable E$ 20,100 E$ '5,000 E E E $ 35,100 6ividends payable E +,000 E 5,000 Ee 3,000E E '0,000 8apital stock E '00,000 E 30,000 Eb 30,000E E '00,000 @t/er paid:in capitalE 20,000 E 20,000 Eb 20,000E E 20,000 (etained earnin)s E +0,300E 30,000E E E +0,300 E$2#0,000 E$'20,000 E E E 4inority interest January ', 2002 E Eb '#,000E 4inority interest 6ecember 3', 2002 E E, 2,000E 20,000 E E E $3'2,000 E E E E F6educt

Chapt er 4

??5
!continued% "l) Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2001

Solution "4-14

E 7dAustments and E8onsolidated E Ply E -ki #0$ E &liminations E-tatements E E E E E Income Statement E E E E E -ales E$'10,000 E$ +0,000 E E E $220,000 Income ,rom -ki E '2,000 E Ea '2,000E E 8ost o, sales E ''0,000FE 35,000FE E E '35,000F @peratin) e"penses E 30,000FE 35,000FEc #00E E 25,+00F E E Ed '00E E 4inority e"pense E E E, 3,000E E 3,000F >et income E$ 32,000 E$ 20,000 E E E $ 35,'00 E E E E E Retained Earnings E E E E E (etained earnin)s:PlyE$ +0,300 E E E E $ +0,300 (etained earnin)s:-kiE E$ 30,000 Eb 30,000E E >et income E 32,000E 20,000E E E 35,'00 6ividends E '5,000FE '0,000FE Ea #,000E E, 2,000E '5,000F (etained earnin)s E E E E E 6ecember 3', 2001 E$'2',300 E$ 50,000 E E E $'20,300 E E E E E Balance Sheet E E E E E 8as/ E$ 22,100 E$ 20,000 E E E $ 32,100 <rade receivables:netE 35,000 E 30,000 E E E 15,000 6ividends receivable E 3,000 E E Ee 3,000E Inventories E 30,000 E 30,000 E E E 10,000 Plant I e uipment:netE +5,000 E 20,000 Eb 2,300Ec #00E '52,200 Investment in -ki E +3,300 E E Ea #,000E E E E Eb #2,300E Intan)ibles E E Eb 3,+00Ed '00E 3,#00 E$305,000 E$'30,000 E E E $352,'00 E E E E E 7ccounts payable E$ '1,100 E$ 25,000 E E E $ 32,100 6ividends payable E 2,000 E 5,000 Ee 3,000E E 1,000 8apital stock E '00,000 E 30,000 Eb 30,000E E '00,000 @t/er paid:in capitalE 20,000 E 20,000 Eb 20,000E E 20,000 (etained earnin)s E '2',300E 50,000E E E '20,300 E$305,000 E$'30,000 E E E 4inority interest January ', 2001 E Eb 20,000E 4inority interest 6ecember 3', 2001 E E, 2,000E 22,000 E E E $352,'00 E E E E F6educt

??7
Solution "4-15 Preliminary computations Investment cost Book value ac uired !$#0,000 " +0$% &"cess cost over book value ac uired &"cess allocated to: Inventories !sold in 2003% Patents !'0:year remainin) use,ul li,e% &"cess cost over book value ac uired

Consolidation Techniqu e s and Procedure s

$'00,000 12,000 $ 2#,000 $ #,000 20,000 $ 2#,000

7nalysis o, investment in -imple account $'00,000 35,000

Investment in -imple January 5, 2003 7dd: +0$ o, c/an)e in retained earnin)s ,rom January 5, 2003 to 6ecember 3', 2005 !$10,000 : $20,000% " +0$ Less: 7morti=ation o, e"cess

7llocated to inventories and amorti=ed in 2003 7llocated to patents and amorti=ed over '0 years !$20,000G'0 years% " 3 years Investment balance 6ecember 3', 2005 7dd: Less: Income ,rom -imple ,or 2002 6ividends received in 2002 !$'0,000 " +0$%

!#,000% !2,000% '3',000 '2,000 !+,000% $'3#,000

Investment in -imple 6ecember 3', 2002

Chapt er 4

??=
!continued% "*''*& Co%'an) an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2002

Solution "4-15

E E -imple E 7dAustments and E Income E(etainedE Balance E Pepper E E &liminations E-tatementE&arnin)sE -/eet E E E E E E E #e its E E E E E E E 8as/ E$ '',000E$ '5,000E E E E E$ 22,000 7ccounts receivableE '5,000E 25,000E E E E E 30,000 Plant assets E 220,000E '#0,000E E E E E 300,000 Investment E '3#,000E E Ea 1,000E E E in -imple E E E Eb '3',000E E E Patents E E Eb '3,000Ec 2,000E E E '2,000 8ost o, )oods sold E 50,000E 30,000E E E$ #0,000FE E @peratin) e"penses E 25,000E 30,000Ec 2,000E E 21,000FE E 6ividends E 20,000E '0,000E Ea +,000E E$20,000FE Ed ',000E E$31+,000E$300,000E E E E E$31#,000 E E E E E E E $redits E E E E E E E 7ccumulated E E E E E E E depreciation E$ +0,000E$ 50,000E E E E E '30,000 Liabilities E #0,000E 30,000E E E E E ''0,000 8apital stock E '00,000E 20,000Eb 20,000E E E E '00,000 Paid:in:e"cess E 20,000E E E E E E 20,000 (etained earnin)s E 13,000E 10,000Eb 10,000E E E 13,000 E -ales E '00,000E +0,000E E E '+0,000 E E Income ,rom -imple E '2,000E Ea '2,000E E E E E$31+,000E$300,000E E E E E 4inority interest 6ecember 3', 2005 E Eb '3,000E E E 4inority interest e"pense E E E E E !$20,000 " '0$% Ed 2,000E E 2,000FE E 8onsolidated net income E E E$ 3',000 E 3',000 E 8onsolidated retained earnin)s E E E E$+3,000 E +3,000 4inority interest 6ecember 3', 2002 E Ed ',000E E E '3,000 E E E E E$31#,000 E E E E E E F6educt

a <o eliminate income ,rom subsidiary and dividends received and reduce t/e investment account to its be)innin):o,:t/e:period balance? b <o eliminate reciprocal investment and subsidiary e uity amounts, establis/ be)innin) minority interest, and adAust patents ,or t/e unamorti=ed e"cess as o, t/e be)innin) o, t/e period? c d <o amorti=e e"cess allocated to patents ,or 2002? <o enter minority interest s/are o, subsidiary income and dividends?

??8
Solution "4-16 1 Journal entries on Pe))y0s books

Consolidation Techniqu e s and Procedure s

%anuary &' 2(() Investment in -uper !+0$% 8as/

$20,000 $20,000

<o record purc/ase o, +0$ o, -uper0s stock ,or cas/? %uly &' 2(() Investment in &llen !25$% 8as/ $ 1,000 $ 1,000

<o record purc/ase o, 25$ o, &llen0s stock ,or cas/? *o+em er 2(() 8as/ Investment in -uper !+0$% <o record receipt o, +0$ o, -uper0s $3,000 dividends? *o+em er 2(() 8as/ Investment in &llen !25$% <o record receipt o, 25$ o, &llen0s $5,000 dividends? #ecem er 3&' 2(() Investment in -uper !+0$% Income ,rom -uper $ 3,300 $ 3,300 $ ',250 $ ',250 $ 2,100 $ 2,100

<o record investment income ,rom -uper ,or 2005 computed as: -/are o, -uper0s reported income !$2#,000 : $23,000% " +0$ $ 3,500 Less: Patents amorti=ation J$20,000 : !$20,000 " +0$%K '0 years !200% Investment income ,rom -uper $ 3,300 #ecem er 3&' 2(() Investment in &llen !25$% Income ,rom &llen $ 100 $ 100

<o record investment income ,rom &llen ,or 2005 computed as: -/are o, &llen0s reported income !$30,000 : $23,000% " 'G2 year " 25$ $ 150 Less: 7morti=ation o, e"cess J$1,000 : !$23,000 " 25$%K '0 years " 'G2 year !50% Investment income ,rom &llen $ 100

Chapt er 4

??>
!continued%

Solution "4-16 2

Pe))y0s separate company ,inancial statements "*,,) Co&'o&ation Income -tatement ,or t/e year ended 6ecember 3', 2005

Re+enues -ales Income ,rom -uper Income ,rom &llen <otal revenue $osts and e,penses 8ost o, sales @t/er e"penses <otal costs and e"penses >et income

$'00,000 3,300 100 $'05,000 $ 20,000 25,000 #5,000 $ 20,000 "*,,) Co&'o&ation (etained &arnin)s -tatement ,or t/e year ended 6ecember 3', 2005

(etained earnin)s January ', 2005 7dd: >et income 6educt: 6ividends (etained earnin)s 6ecember 3', 2005 "*,,) Co&'o&ation Balance -/eet at 6ecember 3', 2005 Assets 8urrent assets: 8as/ @t/er current assets Plant assets:net Investments: Investment in -uper !+0$% Investment in &llen !25$% <otal assets Lia ilities and stockholders! e"uity 8urrent liabilities -tock/olders0 e uity: 8apital stock (etained earnin)s 6ecember 3', 2005 <otal liabilities and stock/olders0 e uity

$ 20,000 20,000 !'0,000% $ 30,000

$ '2,+50 30,000 $ 2',200 2,350

$ 52,+50 '20,000 2#,050 $205,000 $ 25,000

$'50,000 30,000

'#0,000 $205,000

?-.
Solution "4-16 3 !continued%

Consolidation Techniqu e s and Procedure s

8onsolidation *orkin) papers : trial balance ,ormat "*,,) Co&'o&ation an! Sub(i!ia&) 8onsolidation Dorkin) Papers ,or t/e year ended 6ecember 3', 2005

E E +0$ E 7dAustments and E Income E(etainedEBalance E Pe))y E -uper E &liminations E-tatementE&arnin)sE -/eet E E E E E E E #e its E E E E E E E 8as/ E$ '2,+50E$ 3,000E E E E E$ 20,+50 @t/er current E E E E E E E assets E 30,000E '',000E E E E E 5',000 Plant assets:net E '20,000E '3,000E E E E E '33,000 Investment in E E E Ea ',200E E E -uper E 2',200E E Eb 20,000E E E Investment in E E E E E E E &llen E 2,350E E E E E E 2,350 8ost o, sales E 20,000E '2,000E E E$ 12,000FE E @t/er e"penses E 25,000E 1,000Ec 200E E 32,200FE E 6ividends E '0,000E 3,000E Ea 2,100E E$'0,000FE Ed 300FE Patents E E Eb 2,000Ec 200E E E ',#00 <otal debits E$300,000E$55,000E E E E E$2'3,200 E E E E E E E $redits E E E E E E E 8urrent E E E E E E E liabilities E$ 25,000E$ 1,000E E E E E$ 32,000 8apital stock E '50,000E '#,000Eb '#,000E E E E '50,000 (etained earnin)sE 20,000E 2,000Eb 2,000E E E 20,000 E -ales E '00,000E 2#,000E E E '2#,000 E E Income ,rom -uperE 3,300E Ea 3,300E E E E Income ,rom &llenE 100E E E E 100 E E <otal credits E$300,000E$55,000E E E E E 4inority interest E E E E E January ', 2005 E Eb 2,000E E E 4inority interest e"pense E E E E E $5,000 " '0$ Ed 500E E 500FE E 8onsolidated net income E E E$ 20,000 E 20,000 E 8onsolidated retained earnin)s E E E E$30,000 E 30,000 4inority interest E E E E E 6ecember 3', 2005 E Ed 200E E E 2,200 E E E E E$2'3,200 E E E E E

Chapt er 4

?-?
!continued%

Solution "4-16 4

8onsolidated ,inancial statements "*,,) Co&'o&ation an! Sub(i!ia&) 8onsolidated Income -tatement ,or t/e year ended 6ecember 3', 2005

Re+enues -ales Income ,rom &llen !e uity basis% <otal revenues $osts and e,penses 8ost o, sales @t/er e"penses <otal costs and e"penses <otal consolidated income Less: 4inority interest e"pense 8onsolidated net income

$'2#,000 100 $'2#,100 $ 12,000 32,200 '0#,200 20,500 500 $ 20,000

"*,,) Co&'o&ation an! Sub(i!ia&) 8onsolidated (etained &arnin)s -tatement ,or t/e year ended 6ecember 3', 2005 8onsolidated retained earnin)s January ', 2005 7dd: >et income 6educt: 6ividends 8onsolidated retained earnin)s 6ecember 3', 2005 "*,,) Co&'o&ation an! Sub(i!ia&) 8onsolidated Balance -/eet at 6ecember 3', 2005 Assets 8urrent assets: 8as/ @t/er current assets Plant assets:net Investments and ot/er assets: Investment in &llen Patents <otal assets Lia ilities and stockholders! e"uity 8urrent liabilities -tock/olders0 e uity: 8apital stock 8onsolidated retained earnin)s 4inority interest <otal liabilities and stock/olders0 e uity $ 20,+50 5',000 $ 2,350 ',#00 $ 20,000 20,000 !'0,000% $ 30,000

$ 1',+50 '33,000 #,250 $2'3,200 $ 32,000

$'50,000 30,000 2,200

'#2,200 $2'3,200

?-Solution "4-17

Consolidation Techniqu e s and Procedure s

Partial consolidated statement o, cas/ ,lo*s usin) t/e direct met/od: "illo&) Co&'o&ation an! Sub(i!ia&i*( Partial 8onsolidated -tatement o, 8as/ .lo*s ,or t/e current year $ash -lo.s from /perating Acti+ities 8as/ received ,rom customers 6ividends ,rom e uity investees Interest received ,rom s/ort:term loan 8as/ paid ,or ot/er e"penses 8as/ paid to suppliers 8as/ ,lo* ,rom operatin) activities $ $',200,000 30,000 5,000 !350,000% !230,000% 525,000

Chapt er 4

?-@

Solution "4-18 -i&* t $*t.o! "*(*+ Co&'o&ation an! Sub(i!ia&) 8onsolidated -tatement o, 8as/ .lo*s ,or t/e year ended 6ecember 3', 200# 8as/ .lo*s ,rom @peratin) 7ctivities 8as/ received ,rom customers 8as/ paid to suppliers 8as/ paid ,or operatin) e"penses >et cas/ ,lo*s ,rom operatin) activities 8as/ .lo*s ,rom Investin) 7ctivities Purc/ase o, e uipment >et cas/ ,lo*s ,rom investin) activities 8as/ .lo*s ,rom .inancin) 7ctivities Payment o, cas/ dividends : maAority Payment o, cas/ dividends : minority Payment o, lon):term liabilities >et cas/ ,lo*s ,rom ,inancin) activities 6ecrease in cas/ ,or 200# 8as/ on January ', 200# 8as/ on 6ecember 3', 200# !32,000% !2,000% !'',000% !3+,000% !+,500% 25,000 $ 55,500 !'25,000% !'25,000% $210,000 $33#,000 '51,500 !505,500% '23,500

(econciliation o, net income to cas/ provided by operatin) activities: 8onsolidated net income 7dAustments to reconcile net income to cas/ provided by operatin) activities: 4inority interest e"pense 6epreciation e"pense Patents amorti=ation Increase in accounts payable Increase in accounts receivable Increase in inventories Increase in ot/er current assets >et cas/ ,lo*s ,rom operatin) activities $'30,000

5,000 5',000 500 22,000 !5,000% !20,000% !'+,000%

33,500 $'23,500

?-A
Solution "4-18 In!i&* t $*t.o! !continued%

Consolidation Techniqu e s and Procedure s

"*(*+ Co&'o&ation an! Sub(i!ia&) 8onsolidated -tatement o, 8as/ .lo*s ,or t/e year ended 6ecember 3', 200# 8as/ .lo*s ,rom @peratin) 7ctivities 8onsolidated net income 4inority interest e"pense >oncas/ e"penses, revenue, )ains and losses included in income: 6epreciation Patents amorti=ation Increase in accounts receivable Increase in inventories Increase in ot/er current assets Increase in accounts payable >et cas/ ,lo*s ,rom operatin) activities 8as/ .lo*s ,rom Investin) 7ctivities Purc/ase o, e uipment >et cas/ ,lo*s ,rom investin) activities 8as/ .lo*s ,rom .inancin) 7ctivities Payment o, cas/ dividends : maAority Payment o, cas/ dividends : minority Payment o, lon):term liabilities >et cas/ ,lo*s ,rom ,inancin) activities 6ecrease in cas/ ,or 200# 8as/ on January ', 200# 8as/ on 6ecember 3', 200# !32,000% !2,000% !'',000% !3+,000% !+,500% 25,000 $ 55,500 !'25,000% !'25,000% $'30,000 5,000 $ 5',000 500 !5,000% !20,000% !'+,000% 22,000

$'35,000

2+,500 '23,500

*ote0 1he cash flo.s from in+esting acti+ities and cash flo.s from financing acti+ities sections of the statement of cash flo.s are the same under the direct and indirect method2

Chapt er 4

?-5

Solution "4-19 J7I8P7K In!i&* t $*t.o! "u(./ In 0 an! Sub(i!ia&) -tatement o, 8as/ .lo*s 3Indirect 4ethod5 ,or t/e year ended 6ecember 3', 2002 8as/ .lo*s ,rom @peratin) 7ctivities 8onsolidated net income 7dAustments to reconcile net income to cas/ provided by operatin) activities: 4inority interest e"pense 6epreciation e"pense Patents amorti=ation 6ecrease in accounts receivable Increase in accounts payable Increase in de,erred income ta"es Increase in inventories ;ain on marketable e uity securities ;ain on sale o, e uipment >et cas/ ,lo*s ,rom operatin) activities 8as/ .lo*s ,rom Investin) 7ctivities Purc/ase o, e uipment Proceeds ,rom sale o, e uipment >et cas/ ,lo*s ,rom investin) activities 8as/ .lo*s ,rom .inancin) 7ctivities 8as/ received ,rom sale o, treasury stock Payment o, cas/ dividends : maAority Payment o, cas/ dividends : minority Payment on lon):term note >et cas/ ,lo*s ,rom ,inancin) activities Increase in cas/ ,or 2002 8as/ on January ', 2002 8as/ on 6ecember 3', 2002 33,000 !5#,000% !'5,000% !'50,000% !'1+,000% ''#,000 '+5,000 $3'3,000 $!'21,000% 30,000 !#1,000% $ 33,000 #2,000 3,000 22,000 '2',000 '2,000 !10,000% !'',000% !2,000% $'+#,000

'#2,000 3#3,000

Listin) o, non:cas/ investin) and ,inancin) activities: Issued common stock in e"c/an)e ,or land *it/ a ,air value o, $2'5,000?

?-7
Solution "4-19 In!i&* t $*t.o! !continued%

Consolidation Techniqu e s and Procedure s

HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH E E E8as/ .lo* E8as/ .lo*:E8as/ .lo*:E E Lear0s E (econcilin) Items E ,rom EInvestin) E.inancin) E E 8/an)e E 6ebit 8redit E@perationsE7ctivitiesE7ctivitiesE E E E E E E E Asset $hanges E E E E E E E 8as/ E ''#,000 E E E E E E 7llo*ance to reduce 4&E '',000 E Ee '',000 E E E E 7ccounts receivable:net E !22,000%E, 22,000 E E E E E Inventories E 10,000 E E) 10,000 E E E E LandF E 2'5,000 E E/ 2'5,000 E E E E Plant and e uipment E 25,000 Ek 22,000 EA '21,000 E E E E 7ccumulated depreciation E !53,000%El #2,000 Ek 2#,000 E E E E Patents :net E !3,000%Em 3,000 E E E E E <otal asset c/an)es E 300,000 E E E E E E E E E E E E E $hanges in E"uities E E E E E E E 7ccounts I accrued payableE '2',000 En '2',000 E E E E E >ote payable lon):term E!'50,000%E Eo '50,000 E E E E 6e,erred income ta"es E '2,000 Ep '2,000 E E E E E 4inority interest in -torrE '#,000 Eb 33,000 Ed '5,000 E E E E 8ommon stock, $'0 parF E '00,000 E/ '00,000 E E E E E 7dditional paid:in capitalE '23,000 E/ ''5,000 E E E E E E Ei #,000 E E E E E (etained earnin)s E '30,000 Ea '+#,000 Ec 5#,000 E E E E <reasury stock at cost E 32,000 Ei 32,000 E E E E E <otal c/an)es in e uitiesE 300,000 E E E E E E E E E E E E 8onsolidated net income E Ea '+#,000 E '+#,000 E E E 4inority interest e"pense E Eb 33,000 E 33,000 E E E ;ain on 4&Ee '',000 E E !'',000%E E E Purc/ase o, plant and e uipment EA '21,000 E E E !'21,000%E E -ale o, e uipment E Ek 30,000 E E 30,000 E E ;ain on e uipment Ek 2,000 E E !2,000%E E E 6epreciation e"pense E El #2,000 E #2,000 E E E Payment on lon):term note Eo '50,000 E E E E !'50,000%E 7morti=ation o, patents E Em 3,000 E 3,000 E E E 6ecrease in receivables E E, 22,000 E 22,000 E E E Increase in inventories E) 10,000 E E !10,000%E E E Increase in accounts payable E En '2',000 E '2',000 E E E Increase in de,erred income ta"es E Ep '2,000 E '2,000 E E E Proceeds ,rom treasury stock E Ei 33,000 E E E 33,000 E Payment o, dividends:maAority Ec 5#,000 E E E E !5#,000%E Payment o, dividends:minority Ed '5,000 E E E E !'5,000%E E ',22+,000 E ',22+,000 E E E E E 3#3,000 E !#1,000%E !'1+,000%E 8as/ increase ,or 2002 5 $3#3,000 : $#1,000 : $'1+,000 5 $''#,000? F>on:cas/ item: Purc/ased $2'5,000 land t/rou)/ common stock issuance?

"u(./ In 0 an! Sub(i!ia&) Dorkin) Papers ,or t/e -tatement o, 8as/ .lo*s 3Indirect 4ethod5 ,or t/e year ended 6ecember 3', 2002

Chapt er 4

?-=

Solution "4-20 Indirect 4ethod "il,&a% Co&'o&ation an! Sub(i!ia&) 8onsolidated -tatement o, 8as/ .lo*s ,or t/e year ended 6ecember 3', 2001 8as/ .lo*s ,rom @peratin) 7ctivities 8onsolidated net income 7dAustments to reconcile net income to cas/ provided by operatin) activities: 4inority interest e"pense 6epreciation e"pense Patents amorti=ation Increase in accounts payable Income less dividends:e uity investee Increase in accounts receivable >et cas/ ,lo*s ,rom operatin) activities 8as/ .lo*s ,rom Investin) 7ctivities Purc/ase o, e uipment >et cas/ ,lo*s ,rom investin) activities 8as/ .lo*s ,rom .inancin) 7ctivities 8as/ received ,rom lon):term note Payment o, cas/ dividends : maAority Payment o, cas/ dividends : minority >et cas/ ,lo*s ,rom ,inancin) activities Increase in cas/ ,or 2001 8as/ on January ', 2001 8as/ on 6ecember 3', 2001 $ 200,000 !'31,000% !20,000% 33,000 10,000 320,000 $330,000 $!500,000% !500,000% $ 30,000 200,000 '0,000 '1,000 !30,000% !2'0,000% $500,000

21,000 521,000

?-8
Solution "4-20 Indirect 4ethod !continued%

Consolidation Techniqu e s and Procedure s

"il,&a% Co&'o&ation an! Sub(i!ia&) Dorkin) Papers ,or t/e -tatement o, 8as/ .lo*s !Indirect 4et/od% ,or t/e year ended 6ecember 3', 2001
E E (econcilin) Items E8as/ .lo*sE8as/ .lo*sE8as/ .lo*s E Lear0s E E ,rom EInvestin) E.inancin) E 8/an)e E 6ebit 8redit E@perationsE7ctivitiesE7ctivities E E E E E E Asset $hanges E E E E E E 8as/ E$ 10,000 E E E E E 7ccounts receivable:net E 2'0,000 E Ee 2'0,000E E E Inventories E 0 E E E E E Plant I e uipment:net E 300,000 E, 200,000E) 500,000E E E & uity investments E 30,000 El 30,000Em 20,000E E E Patents E !'0,000%E/ '0,000E E E E E:::::::::E E E E E <otal asset c/an)es E$ 200,000 E E E E E E5555555555E E E E E $hanges in E"uities E E E E E E 7ccounts payable E$ '1,000 Ei '1,000E E E E 6ividends payable E '3,000 Ek '3,000E E E E Lon):term note payable E 200,000 EA 200,000E E E E 8ommon stock E 0 E E E E E @t/er paid:in capital E 0 E E E E E (etained earnin)s E 350,000 Ea 500,000Ec '50,000E E E 4inority interest 20$ E 20,000 Eb 30,000Ed 20,000E E E E:::::::::E E E E E 8/an)es in e uities E$ 200,000 E E E E E E5555555555E E E E E 8onsolidated net income E Ea 500,000E$ 500,000 E E 4inority interest e"pense E Eb 30,000E 30,000 E E Purc/ase o, plant I e uipment E) 500,000E E E$!500,000%E 6epreciation:plant I e uipment E E, 200,000E 200,000 E E 7morti=ation o, patents E E/ '0,000E '0,000 E E Increase in accounts receivable Ee 2'0,000E E !2'0,000%E E Income less dividends ,rom investeesEm 20,000El 30,000E !30,000%E E Increase in accounts payable E Ei '1,000E '1,000 E E (eceived cas/ ,rom lon):term note E EA 200,000E 0 E E$ 200,000 Payment o, dividends:maAority Ec '50,000Ek '3,000E E E !'31,000% Payment o, dividends:minority Ed 20,000E E E E !20,000% E:::::::::E:::::::::E:::::::::E:::::::::E::::::::::: E ',+50,000E ',+50,000E$ 521,000 E$!500,000%E$ 33,000 E E E E E

8as/ increase ,or 2001 5 $521,000 : $500,000 9 $33,000 5 $10,000?

Chapt er 4

?->
!continued% "il,&a% Co&'o&ation an! Sub(i!ia&) 8onsolidated -tatement o, 8as/ .lo*s ,or t/e year ended 6ecember 3', 2001

Solution "4-20 #irect 4ethod

8as/ .lo*s ,rom @peratin) 7ctivities 8as/ received ,rom customers 8as/ received ,rom e uity investees 8as/ paid to suppliers 8as/ paid ,or operatin) e"penses >et cas/ ,lo*s ,rom operatin) activities 8as/ .lo*s ,rom Investin) 7ctivities Purc/ase o, e uipment >et cas/ ,lo*s ,rom investin) activities 8as/ .lo*s ,rom .inancin) 7ctivities 8as/ received ,rom lon):term note Payment o, cas/ dividends : maAority Payment o, cas/ dividends : minority >et cas/ ,lo*s ,rom ,inancin) activities Increase in cas/ ,or 2001 8as/ on January ', 2001 8as/ on 6ecember 3', 2001

$2,3+0,000 30,000 $',333,000 320,000 !',#+3,000% 521,000 $ !500,000% !500,000% $ 200,000 !'31,000% !20,000% 33,000 10,000 320,000 $ 330,000

(econciliation o, net income to cas/ provided by operatin) activities: 8onsolidated net income 7dAustments to reconcile net income to cas/ provided by operatin) activities: 4inority interest e"pense Income less dividends:e uity investee 6epreciation e"pense Patents amorti=ation Increase in accounts payable Increase in accounts receivable >et cas/ ,lo*s ,rom operatin) activities $ 30,000 !30,000% 200,000 '0,000 '1,000 !2'0,000% $ $ 500,000

21,000 521,000

?@.
Solution "4-20 #irect 4ethod !continued%

Consolidation Techniqu e s and Procedure s

"il,&a% Co&'o&ation an! Sub(i!ia&) Dorkin) Papers ,or t/e -tatement o, 8as/ .lo*s !6irect 4et/od% ,or t/e year ended 6ecember 3', 2001
E E (econcilin) Items E 8as/ .lo* E8as/ .lo*:E8as/ .lo*: E Lear0s E E ,rom EInvestin) E.inancin) E 8/an)e E 6ebit 8redit E@perations E7ctivitiesE7ctivities E E E E E E Asset $hanges E E E E E E 8as/ E$ 10,000 E E E E E 7ccounts receivable:net E 2'0,000 E Ea 2'0,000E E E Inventories E 0 E E E E E Plant I e uipment:net E 300,000 Eb 200,000Ec 500,000E E E & uity investments E 30,000 E Ed 30,000E E E Patents E !'0,000%Ee '0,000E E E E E::::::::::E E E E E <otal asset c/an)es E$ 200,000 E E E E E E55555555555E E E E E 8/an)es in & uities E E E E E E 7ccounts payable E$ '1,000 E, '1,000E E E E 6ividends payable E '3,000 E) '3,000E E E E Lon):term note payable E 200,000 E/ 200,000E E E E (etained earnin)sF E 350,000 E E E E E 4inority interest 20$ E 20,000 Ei 30,000EA 20,000E E E E::::::::::E E E E E 8/an)es in e uities E$ 200,000 E E E E E E55555555555E E E E E (etained earnin)s c/an)eF E E E E E E -ales E$2,200,000 Ea 2'0,000E E$2,3+0,000 E E Income ,rom e uity investeesE 20,000 Ed 30,000E E 30,000 E E 8ost o, )oods sold E!',350,000%E E, '1,000E!',333,000%E E 6epreciation e"pense E !200,000%E Eb 200,000E 0 E E @t/er operatin) e"penses E !310,000%E Ee '0,000E !320,000%E E 4inority interest e"pense E !30,000%E Ei 30,000E 0 E E 6ividends declared:Pil)ram E !'50,000%E E) '3,000E E E E E Ek '31,000E E E E::::::::::E E E E E (etained earnin)s c/an)e E$ 350,000 E E E E E E::::::::::E E E E E (eceived cas/ ,rom lon):term note E E/ 200,000E E E$ 200,000 Payment o, dividends:maAority Ek '31,000E E E E !'31,000% Payment o, dividends:minority EA 20,000E E E E !20,000% Purc/ase o, e uipment Ec 500,000E E E$!500,000%E E::::::::E:::::::::E:::::::::E::::::::::E::::::::::: E',311,000E',311,000E$ 521,000 E$!500,000%E$ 33,000 E E E E E F(etained earnin)s c/an)es replace t/e retained earnin)s account ,or reconcilin) purposes?

8as/ increase ,or 2001 5 $521,000 : $500,000 9 $33,000 5

$10,000?