Chap 004

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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
CHAPTER 4
CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
ANSWERS TO QUESTIONS
Q4-1 An adjusting entry is recorded on the company's books and causes the balances
reported by the company to change. Eliminating entries, on the other hand, are not
recorded on the books of the companies. Instead, they are entered in the consolidation
workpaper so that when the amounts included in the eliminating entries are added to, or
deducted from, the balances reported by the individual companies, the appropriate
balances for the consolidated entity are reported.
Q4-2 The differential represents the difference between the acquisition-date fair value
of the acquiree and its book value.
Q4-3 A company must acquire a subsidiary at a price equal to the subsidiary’s fair
value, and that subsidiary must have a total acquisition-date fair value less than its book
value.
Q4-4 Each of the stockholders' equity accounts of the subsidiary is eliminated in the
consolidation process. Thus, none of the balances is included in the stockholders' equity
accounts of the consolidated entity. That portion of the stockholders' equity claim
assigned to the noncontrolling shareholders is reported indirectly in the balance
assigned to the noncontrolling shareholders.
Q4-5 Current consolidation standards require recognition of the fair value of the
subsidiary's individual assets and liabilities at the date of acquisition. At least some
portion of the book value would not be included if the fair value of a particular asset or
liability was less than book value.
Q4-6 One hundred percent of the fair value of the subsidiary’s assets and liabilities at
the date of acquisition should be included. The type of asset or liability will determine
whether a change in its value will be recognized following the date of acquisition.
Q4-7 Using a clearing account can reduce the chance of error in preparing
consolidated statements. The number of accounts requiring adjustment for the difference
between book value and fair value at the date of acquisition may be very large. Rather
than including all such adjustments along with other eliminations in a single eliminating
entry, it is often easier to place the unamortized balance in a differential clearing account
and then use one or more subsequent entries to assign the clearing account balance to
the appropriate individual accounts or account groups.
Q4-8 The differential account is a clearing account. Each time consolidated statements
are prepared, the balance in the investment account is eliminated and the unamortized
portion of the differential is entered in the clearing account. It then is assigned to the
appropriate asset and liability accounts. This same process is followed each time
consolidated statements are prepared. The eliminating entries do not actually remove
the balance in the investment account from the parent's books; thus, the differential
continues to be a part of the investment account balance until fully amortized.
4-1
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Q4-9 The investment account in the financial statements of the parent company shows
its investment in the subsidiary as a single total and therefore does not provide
information on the individual assets and liabilities held by the subsidiary, nor their
relative values. The existence of a large differential indicates the parent paid well over
book value to acquire ownership of the subsidiary. When the differential is assigned to
identifiable assets or liabilities of the subsidiary, both the consolidated balance sheet and
consolidated income statement are likely to provide information not available in the
financial statements of the individual companies. The consolidated statements are likely
to provide a better picture of the assets actually being used and the resulting income
statement charges that should be reported.
Q4-10 Additional entries are needed to eliminate all income statement and retained
earnings statement effects of intercorporate ownership and any transfers of goods and
services between related companies.
Q4-11 Separate parts of the consolidation workpaper are used to develop the
consolidated income statement, retained earnings statement, and balance sheet. All
eliminating entries needed to complete the entire workpaper normally are entered before
any of the three statements are prepared. The income statement portion of the
workpaper is completed first so that net income can be carried forward to the retained
earnings statement portion of the workpaper. When the retained earnings portion is
completed, the ending balances are carried forward and entered in the consolidated
balance sheet portion of the workpaper.
Q4-12 None of the dividends declared by the subsidiary are included in the
consolidated retained earnings statement. Those which are paid to the parent have not
gone outside the consolidated entity and therefore must be eliminated in preparing the
consolidated statements. Those paid to noncontrolling shareholders are treated as a
reduction in the net assets assigned to noncontrolling interest and also must be
eliminated.
Q4-13 Consolidated net income is equal to the parent’s income from its own
operations, excluding any investment income from consolidated subsidiaries, plus the
income of each of the consolidated subsidiaries, adjusted for any differential write-off.
Q4-14 Consolidated net income includes 100 percent of the revenues and expenses of
the individual consolidating companies arising from transactions with unaffiliated
companies.
Q4-15 Consolidated retained earnings is defined in current accounting practice as that

portion of the undistributed earnings of the consolidated entity accruing to the parent
company shareholders.
Q4-16 Consolidated retained earnings at the end of the period is equal to the beginning
consolidated retained earnings balance plus consolidated net income attributable to the
controlling interest, less consolidated dividends.
Q4-17 The retained earnings statement shows the increase or decrease in retained
earnings during the period. Thus, income for the period is added to the beginning
balance and dividends are deducted in deriving the ending balance in retained earnings.
Because the consolidation workpaper includes the retained earnings statement, the
beginning retained earnings balance must be entered in the workpaper.
4-2
Q4-18 An additional eliminating entry normally must be entered in the workpaper to

expense an appropriate portion of the amount assigned to buildings and equipment.
Normally, depreciation expense is debited and accumulated depreciation is credited.
Q4-19 The differential is simply a clearing account used in the consolidation process. If
the differential arises because the fair value of land held by the subsidiary is greater than
book value, the amount assigned to the differential will remain constant so long as the
subsidiary continues to hold the land. When the differential arises because the fair value
of depreciable or amortizable assets is greater than book value, the amount debited to
the differential account each period will decrease as the parent amortizes an appropriate
portion of the differential against investment income.
Q4-20 Push-down accounting occurs when the assets and liabilities of the subsidiary
are revalued on the subsidiary's books as a result of the purchase of shares by the
parent company. The basis of accountability that the parent company would use in
accounting for its investment in the various assets and liabilities is used to revalue the
subsidiary's assets and liabilities; thereby pushing down the parent's basis of
accountability onto the books of the subsidiary.
Q4-21 Push-down accounting is considered appropriate when a subsidiary is

substantially wholly owned by the parent.
Q4-22 When the assets and liabilities of the subsidiary are revalued at the date of
acquisition there will no longer be a differential. The parent's portion of the revised
carrying value of the net assets on the books of the subsidiary will agree with the
balance in the investment account reported by the parent.
4-3
SOLUTIONS TO CASES
C4-1 Need for Consolidation Process
After the financial statements of each of the individual companies are prepared in
accordance with generally accepted accounting principles, consolidated financial
statements must be prepared for the economic entity as a whole. The individual
companies generally record transactions with other subsidiaries on the same basis as
transactions with unrelated enterprises. In preparing consolidated financial statements,
the effects of all transactions with related companies must be removed, just as all
transactions within a single company must be removed in preparing financial statements
for that individual company. It therefore is necessary to prepare a consolidation
workpaper and to enter a number of special journal entries in the workpaper to remove
the effects of the intercorporate transactions. The parent company also reports an
investment in each of the subsidiary companies and investment income or loss in its
financial statements. Each of these accounts must be eliminated as well as the
stockholders' equity accounts of the subsidiaries. The latter must be eliminated because
only the parent's ownership is held by parties outside the consolidated entity.
4-4
C4-2 Account Presentation
MEMO
To: Chief Accountant

Prime Company
From: , Accounting Staff
Re: Combining Broadly Diversified Balance Sheet Accounts
Many manufacturing and merchandising enterprises excluded finance, insurance, real

estate, leasing, and perhaps other types of subsidiaries from consolidation prior to 1987
on the basis of ―nonhomogeneous‖ operations. Companies generally argued that the
accounts of these companies were dissimilar in nature and combining them in the
consolidated financial statements would mislead investors. FASB 94 specifically
eliminated the exception for nonhomogeneous operations. [FASB 94, Par. 9] FASB 160
affirms the requirement for consolidating entities in which a controlling financial interest
is held.
Prime Company controls companies in very different industries and combining the
accounts of its subsidiaries may lead to confusion by some investors; however, it may be
equally confusing to provide detailed listings of assets and liabilities by industry or other
breakdowns in the consolidated balance sheet. The actual number of assets and
liabilities presented in the consolidated balance sheet must be carefully considered, but
is the decision of Prime’s management.
It is important to recognize that the notes to the consolidated financial statements are
regarded as an integral part of the financial statements and Prime Company is required
to include in its notes to the financial statements certain information on its reportable
segments [FASB 131]. Because of the diversity of its ownership, Prime may wish to
provide more than the minimum disclosures specified in FASB 131. Segment
information appears to be used quite broadly by investors and permits the company to
provide sufficient detail to assist the financial statement user in gaining a better
understanding of the various operating divisions of the company.
You have requested information on those situations in which it may not be appropriate to
combine similar appearing accounts of two or more subsidiaries. The following is a
partial listing of such situations: (a) the accounts of a subsidiary should not be included
along with other subsidiaries if control of the assets and liabilities does not rest with
Prime Company, as when a subsidiary is in receivership; (b) while the assets and liability
accounts of the subsidiary should be combined with the parent, the equity account
balances should not; (c) negative account balances in cash or accounts receivable
should be reclassified as liabilities rather than being added to the positive
4-5
C4-2 (continued)
balances of other affiliates, and (d) assets pledged for a specific purpose and not
available for other use by the consolidated entity generally should be separately
reported.
Primary citations:
FASB 94
FASB 131
FASB 160
Secondary sources:
ARB 51
FASB 14
4-6
C4-3 Consolidating an Unprofitable Subsidiary
MEMO
TO: Chief Accountant

Amazing Chemical Corporation
FROM: , Accounting Staff
Re: Consolidation of Unprofitable Boatyard
This memo is intended to provide recommendations on the presentation of the boatyard

in Amazing Chemical’s consolidated financial statements. Amazing Chemical
Corporation currently has full ownership of the boatyard and should fully consolidate the
boatyard in its financial statements. Consolidated statements should be prepared when
a company directly or indirectly has a controlling financial interest in one or more other
companies. [ARB 51, Par. 1] This requirement has been reaffirmed by FASB 160.
Prior to the issuance of FASB 94, Amazing Chemical may have justified excluding the
boatyard from consolidation based on the differences in operating characteristics
between the subsidiary and the parent company; however, FASB 94 specifically deleted
the nonhomogeneity exclusion [FASB 94, Par. 9]. Thus, Amazing Chemical appears to
be following generally accepted accounting procedures in fully consolidating the
boatyard in its financial statements and should continue to do so.
The operations of the boatyard appear to be distinct from the other operations of the
parent company and its losses appear to be sufficient to establish it as a reportable
segment [FASB 131, Par. 10 and 18]. While the operating losses of the boatyard may
not be evident in analyzing the consolidated income statement, a review of the notes to
the consolidated statements should provide adequate disclosure of its operations as a
reportable segment. The financial statements for the current period should contain these
disclosures and if prior period statements have not included the boatyard as a reportable
segment it may be necessary to restate those statements.
Failure of the president of Amazing Chemical to receive approval by the board of

directors for the purchase of the boatyard and his subsequent actions to keep
information about its operations from the board members appears to be a serious breach
of ethics. These actions by the president should immediately be brought to the attention
of the board of directors for appropriate action by the board.
Primary citations:
ARB 51, Par. 1
FASB 94, Par. 9
FASB 131, Par. 10 and 18
FASB 160
4-7
C4-4 Assigning an Acquisition Differential
It may be difficult to determine the amount of the differential to be assigned to the

manufacturing facilities of Ball Corporation. The equipment is relatively old and may be
in varying states of repair or operating condition. Some units may be technologically
obsolete or of little value because production needs have changed. The $600,000
estimated fair value of net assets therefore may be difficult to document and even more
difficult to assign to specific assets and liabilities.
Inventories should be compared to sales to determine if Ball has excess balances on

hand. Factors such as the degree of salability, physical condition, and expected sales
prices should be examined as well in determining the portion of the differential to be
assigned to inventory. The LIFO inventory balances are likely to be below fair value
while the FIFO balances may be relatively close to fair value. The amount of differential
assigned to inventory will be significantly affected by the rate of change in inventory
costs since the LIFO inventory method was adopted and the relative magnitude of
inventory on hand under each method.
No mention is made of patents or other intangible assets developed by Ball Corporation.

While Ball Corporation could not record as assets its expenditures on research and
development, the buyer should recognize all tangible and intangible assets at fair value
before goodwill is computed. Goodwill normally is measured as the excess of the sum of
the consideration given in the acquisition and the fair value of the noncontrolling interest
over the fair value of the identifiable net assets of the acquired company. Timber must
evaluate the fair value of Ball as a whole and consider the fair value of the equity interest
in Ball that it is not acquiring.
4-8
C4-5 Negative Retained Earnings
Net assets of the subsidiary increase when positive earnings results occur and decrease
when negative results occur. A negative retained earnings balance indicates that the
other stockholders' equity balances of the subsidiary exceed the reported net assets of
the subsidiary.
a. The negative retained earnings balance of the subsidiary is eliminated in the

consolidation process and does not affect the dollar amounts reported in the
consolidated stockholders' equity accounts.
b. The consolidation process does not change in any substantive manner. Rather than
debiting retained earnings in the entry to eliminate the stockholders' equity balances of
the subsidiary in the consolidation workpaper, the account must be credited.
c. Goodwill is recorded whenever the fair value of the acquired company as a whole, as
evidenced by the fair value of the consideration given in the acquisition and the fair value
of the noncontrolling interest, exceeds the fair value of the net identifiable assets
acquired. In this case it is not known whether the fair value is above or below book
value. Sloan Company recorded losses in prior periods and may have written down all
assets that had decreased in value. On the other hand, management may have been
reluctant to recognize such losses in order to avoid reducing earnings even further. In
the extreme, it may even have sold all assets that had appreciated in value. Many
factors, including the future earning power of the company, will affect the purchase price
and it is therefore difficult to determine whether goodwill will be recorded in a situation
such as this.
4-9
C4-6 Balance Sheet Reporting Issues
a. Under the first two alternatives, the cars and associated debt would appear on
Crumple's consolidated balance sheet. In the first case the debt is recorded directly by
Crumple. In the second case, the leasing subsidiary should be fully consolidated.
Although in economic substance there may be little difference between creating a
leasing subsidiary and creating a trust to accomplish the same goals, consolidation of a
trust generally has not been required under generally accepted accounting procedures.
However, the recent issuance of FASB 160 changes the definition of a subsidiary to
include trusts. Although the FASB is still grappling with specifically what entities to
include in consolidation, it now seems unlikely that a trust in which another company has
a controlling financial interest can escape being included in the consolidated financial
statements. If Crumple has the capability to name the directors of the trust and to
administer its activities, the activities of the trust may be carried out to benefit Crumple in
virtually the same manner as an operating corporate affiliate. The situation presented
provides an opportunity to think about the concept of control and the use of
nontraditional organization structures in carrying out the business activities of a
company.
b. Crumple apparently has not considered selling additional common or preferred

shares. The sale of additional shares or use of convertible securities would be one set of
options to consider. If Crumple is willing to lease the automobiles, other leasing
companies or automobile manufacturers may be interested in participating. If the
availability of rental cars is considered important in the economic development of the
states into which Crumple intends to expand, the company may be able to negotiate low
cost loans or partially forgivable loans in acquiring the facilities and automobiles needed
for expansion.
c. Some individuals may focus on the fact that Crumple will not get any residual
amounts if the trust is dissolved. However, through management charges and selection
of lease rates, Crumple is likely to be able to leave as large or small a balance in the
trust as it wishes. Students may wish to look at the financial statements of one or more
leasing companies in arriving at their recommendation(s).
From a financial reporting perspective, all three alternatives now should be reported in
essentially the same manner in the consolidated financial statements. Thus, the financial
reporting aspects of the three alternatives have become irrelevant. However, even when
different alternatives lead to different reporting treatments, the choice of an alternative
should be based on economic considerations rather than on the financial reporting
effects. Even though the three financing alternatives Crumple is considering are reported
in the same manner, they each may have different legal, tax, and economic aspects that
should be considered by Crumple’s management.
4-10
C4-7 Subsidiary Ownership: AMR Corporation and International Lease
a. (1) Airline service

(2) American Airlines, Inc.
(3) Fort Worth, Texas
(4) Delaware
(5) Delaware
(6) The New York Stock Exchange
(7) 20
(8) All of AMR’s subsidiaries are wholly owned except several subsidiaries of
American Airlines.
b. (1) International Lease Finance Corporation leases aircraft to airlines.

(2) AIG Capital Corporation and National Union Fire Insurance Company of
Pittsburgh, Pennsylvania are the direct owners of International Lease.
(3) Los Angeles, California
(4) California
(5) International Lease’s common stock is not publicly traded because the company
is an indirect wholly owned subsidiary of American International Group.
(6) American International Group, Inc., is the parent of the consolidated group.
American International is a holding company with businesses that include
insurance, and related products, financial services, and asset management.
4-11
SOLUTIONS TO EXERCISES
E4-1 Multiple-Choice Questions on Consolidation Process
1. c
2. d [AICPA Adapted]
3. d
4. b
5. a
E4-2 Multiple-Choice Questions on Consolidation [AICPA Adapted]
1. c
2. a
3. d
4. c $400,000 = $1,700,000 - $1,300,000
E4-3 Basic Elimination Entry
Common Stock – Broadway Corporation 200,000

Additional Paid-In Capital 300,000
Retained Earnings 100,000
Investment in Broadway Common Stock 600,000
4-12
E4-4 Eliminating Entries with Differential
a. Eliminating entries:
E(1) Common Stock – Brown Company 20,000

Differential 43,000
Investment in Brown Company Stock 100,000
Computation of differential
Fair value of consideration given $100,000
Book value of Brown's assets $85,000
Book value of Brown's liabilities (28,000)
Net book value (57,000)
Differential $ 43,000
E(2) Inventory 5,000

Buildings and Equipment (net) 20,000
Goodwill 18,000
Differential 43,000
b. Journal entries used to record transactions, adjust account balances, and close
income and revenue accounts at the end of the period are recorded in the
company's books and change the reported balances. On the other hand,
eliminating entries are entered only in the consolidation workpaper to facilitate the
preparation of consolidated financial statements. As a result, they do not change
the balances recorded in the company's accounts and must be reentered each time
a consolidation workpaper is prepared.
4-13
E4-5 Balance Sheet Consolidation
Eliminating entries:
E(1) Common Stock – Thorne Corporation 120,000

Differential 35,000
Investment in Thorne Corporation Stock 395,000
Eliminate investment balance.
Computation of differential
Fair value of consideration given $395,000

Book value of Thorne's assets $640,000
Book value of Thorne's liabilities (280,000)
Net book value (360,000)
Differential $ 35,000

Goodwill 19,000
Buildings (net) 20,000
Differential 35,000
Assign differential.
4-14
E4-6 Acquisition with Differential
a. Goodwill is $60,000, computed as follows:
Book value of Conger's net assets:

Common stock outstanding $ 80,000
Retained earnings 130,000 $210,000
Fair value increment:
Land ($100,000 - $80,000 $ 20,000
Buildings ($400,000 - $220,000) 180,000 200,000
Fair value of net assets $410,000
Fair value of consideration given (470,000)
Goodwill $ 60,000
b. Eliminating entries needed:
E(1) Common Stock – Conger Corporation 80,000

Differential 260,000
Investment in Conger Corporation Stock 470,000
Eliminate investment balance:
$260,000 = $470,000 - $80,000 - $130,000
E(2) Land 20,000

Buildings 180,000
Goodwill 60,000
4-15
E4-7 Balance Sheet Workpaper
a. Eliminating entry:
E(1) Common Stock – Faith Corporation 60,000

Investment in Faith Corporation Stock 150,000
b. Blank Corporation and Faith Corporation

Consolidated Balance Sheet Workpaper
December 31, 20X2
Blank Faith Eliminations Consol-

Item Corp. Corp. Debit _ Credit Idated
Cash 65,000 18,000 83,000

Accounts Receivable 87,000 37,000 124,000
Inventory 110,000 60,000 170,000
Buildings and Equipment
(net) 220,000 150,000 370,000
Investment in Faith
Corporation Stock 150,000 (1)150,000 _
Total Debits 632,000 265,000 747,000
Accounts Payable 92,000 35,000 127,000

Notes Payable 150,000 80,000 230,000
Common Stock
Blank Corporation 100,000 100,000
Faith Corporation 60,000 (1) 60,000
Retained Earnings 290,000 90,000 (1) 90,000 290,000
Total Credits 632,000 265,000 150,000 150,000 747,000
4-16
E4-8 Balance Sheet Workpaper with Differential
E(1) Common Stock – Faith Corporation 60,000

Differential 39,000
Investment in Faith Corporation Stock 189,000

Differential 39,000
Assign Differential.
b. Blank Corporation and Faith Corporation

December 31, 20X2
Blank Faith Eliminations Consol-

Item Corp. Corp. Debit Credit idated
Cash 26,000 18,000 44,000

Inventory 110,000 60,000 (2) 24,000 194,000
Buildings and Equipment
(net) 220,000 150,000 (2) 15,000 385,000
Investment in Faith
Corporation Stock 189,000 (1)189,000
Differential (1) 39,000 (2) 39,000
Total Debits 632,000 265,000 747,000

Notes Payable 150,000 80,000 230,000
Common Stock
Blank Corporation 100,000 100,000
Faith Corporation 60,000 (1) 60,000
Retained Earnings 290,000 90,000 (1) 90,000 290,000
Total Credits 632,000 265,000 228,000 228,000 747,000
4-17
E4-9 Workpaper for Wholly Owned Subsidiary
a. Eliminating entry:
E(1) Common Stock – Premium Builders 140,000

Inventory 7,000
Cash and Receivables 2,000
Investment in Premium Builders Stock 167,000
b. Gold Enterprises and Premium Builders

January 1, 20X5
Gold
Enter- Premium Eliminations Consol-
Item prises Builders Debit Credit idated
Cash and Receivables 80,000 30,000 (1) 2,000 108,000

Inventory 150,000 350,000 (1) 7,000 507,000
Buildings and
Equipment (net) 430,000 80,000 (1) 12,000 522,000
Investment in
Premium Stock 167,000 (1)167,000
Total Debits 827,000 460,000 1,137,000
Current Liabilities 100,000 110,000 210,000

Long-Term Debt 400,000 200,000 600,000
Common Stock
Gold 200,000 200,000
Premium 140,000 (1)140,000
Retained Earnings 127,000 10,000 (1) 10,000 ________ 127,000
Total Credits 827,000 460,000 169,000 169,000 1,137,000
c. Gold Enterprises and Subsidiary

Consolidated Balance Sheet
January 1, 20X5
Cash and Receivables $ 108,000 Current Liabilities $ 210,000

Inventory 507,000 Long-Term Debt 600,000
Buildings and Common Stock $200,000
Equipment (net) 522,000 Retained Earnings 127,000 327,000
Total Liabilities &
Total Assets $1,137,000 Stockholders' Equity $1,137,000
4-18
E4-10 Computation of Consolidated Balances
a. Inventory $ 140,000
b. Land $ 60,000
c. Buildings and Equipment $ 550,000
d. Goodwill: Fair value of consideration given $ 576,000

Book value of net assets
at acquisition $450,000
Fair value increment for:
Inventory 20,000
Land (10,000)
Buildings and equipment 70,000
Fair value of net assets
at acquisition (530,000)
Balance assigned to goodwill $ 46,000
e. Investment in Astor Corporation: Nothing would be reported; the balance in the

investment account is eliminated.
4-19
E4-11 Multiple-Choice Questions on Balance Sheet Consolidation
1. d $215,000 = $130,000 + $85,000
2. b $23,000 = $198,000 – ($405,000 - $265,000 + $15,000 + $20,000)
3. c $1,109,000 = Total Assets of Top Corp. $ 844,000

Less: Investment in Sun Corp. (198,000)
Book value of assets of Top Corp. $ 646,000
Book value of assets of Sun Corp. 405,000
Total book value $1,051,000
Payment in excess of book value
($198,000 - $140,000) 58,000
Total assets reported $1,109,000
4. c $701,500 = ($61,500 + $95,000 + $280,000) + ($28,000 + $37,000

+ $200,000)
5. d $257,500 = The amount reported by Top Corporation
6. a $407,500 = The amount reported by Top Corporation
4-20
E4-12 Consolidation Entries for Wholly Owned Subsidiary
a. Journal entries recorded by Trim Corporation:
(1) Investment in Round Corporation Stock 400,000

Cash 400,000
Record investment.
(2) Cash 25,000

Investment in Round Corporation Stock 25,000
Record dividends from Round Corporation.
(3) Investment in Round Corporation Stock 80,000

Income from Subsidiary 80,000
Record equity-method income.
b. Eliminating entries:
E(1) Income from Subsidiary 80,000

Dividends Declared 25,000
Eliminate income from subsidiary.
E(2) Common Stock — Round Corporation 120,000

Retained Earnings, January 1 280,000
Eliminate beginning investment balance.
4-21
E4-13 Basic Consolidation Entries for Fully Owned Subsidiary
a. Journal entries recorded by Purple Company:
(1) Investment in Amber Corporation Stock 500,000

Cash 500,000
Record investment.
(2) Cash 20,000

Investment in Amber Corporation Stock 20,000
Record dividends from Amber Corporation.
(3) Investment in Amber Corporation Stock 50,000


E(2) Common Stock — Amber Corporation 300,000

4-22
E4-14 Wholly Owned Subsidiary with Differential
a. Journal entries recorded by Winston Corporation:
(1) Investment in Canton Corporation Stock 178,000

Cash 178,000
Record investment.
(2) Cash 12,000

Investment in Canton Corporation Stock 12,000
Record dividends from Canton Corporation.
(3) Investment in Canton Corporation Stock 30,000

(4) Income from Subsidiary 4,000

Amortize differential assigned to equipment:
$4,000 = $28,000 / 7 years
b. Eliminating entries December 31, 20X3:

E(2) Common Stock — Canton Corporation 60,000

Differential 28,000
E(3) Equipment 28,000

Differential 28,000
Assign beginning differential.
E(4) Depreciation Expense 4,000

Accumulated Depreciation 4,000
Amortize differential related to equipment.
4-23
E4-15 Basic Consolidation Workpaper

Investment in Shaw Corporation Stock 20,000
E(2) Common Stock — Shaw Corporation 100,000

4-24
E4-15 (continued)
b. Blake Corporation and Shaw Corporation

Consolidation Workpaper
December 31, 20X3
Blake Shaw Eliminations Consol-

Sales 200,000 120,000 320,000

Income from Subsidiary 30,000 (1) 30,000
Credits 230,000 120,000 320,000
Depreciation Expense 25,000 15,000 40,000
Other Expenses 105,000 75,000 180,000
Debits (130,000) (90,000) (220,000)
Income, carry forward 100,000 30,000 30,000 100,000
Ret. Earnings, Jan. 1 230,000 50,000 (2) 50,000 230,000

Income, from above 100,000 30,000 30,000 100,000
330,000 80,000 330,000
Dividends Declared (40,000) (10,000) (1) 10,000 (40,000)
Ret. Earnings, Dec. 31,
carry forward 290,000 70,000 80,000 10,000 290,000
Current Assets 145,000 105,000 250,000

Depreciable Assets 325,000 225,000 550,000
Investment in Shaw
Corporation Stock 170,000 (1) 20,000
(2)150,000
Debits 640,000 330,000 800,000

Long-Term Debt 100,000 120,000 220,000
Common Stock
Blake Corporation 200,000 200,000
Shaw Corporation 100,000 (2)100,000
Retained Earnings,
from above 290,000 70,000 80,000 10,000 290,000
Credits 640,000 330,000 180,000 180,000 800,000
4-25
E4-16 Basic Consolidation Workpaper for Second Year

E(2) Common Stock — Shaw Corporation 100,000

4-26
E4-16 (continued)
b. Blake Corporation and Shaw Corporation

December 31, 20X4
Blake Shaw Eliminations Consol-

Sales 230,000 140,000 370,000

Credits 265,000 140,000 370,000
Other Expenses 150,000 90,000 240,000
Debits (175,000) (105,000) (280,000)
Ret. Earnings, Jan. 1 290,000 70,000 (2) 70,000 290,000

380,000 105,000 380,000
Carry forward 330,000 90,000 105,000 15,000 330,000
Current Assets 210,000 150,000 360,000

Investment in Shaw
(2)170,000
Debits 700,000 360,000 870,000

Long-Term Debt 100,000 120,000 220,000
Common Stock
Blake Corporation 200,000 200,000
Shaw Corporation 100,000 (2)100,000
Retained Earnings,
from above 330,000 90,000 105,000 15,000 330,000
Credits 700,000 360,000 205,000 205,000 870,000
4-27
E4-17 Consolidation Workpaper with Differential

Investment in Short Company Stock 15,000
E(2) Common Stock — Short Company 100,000

Differential 30,000
Investment in Short Company Stock 180,000
E(3) Depreciable Assets (net) 30,000

Differential 30,000

Depreciable Assets (net) 5,000
Amortize differential.
4-28
E4-17 (continued)
b. Kennelly Corporation and Short Company

December 31, 20X5
Kennelly Short Eliminations Consol-

Item Corp. Co. Debit Credit idated
Sales 200,000 120,000 320,000

Credits 225,000 120,000 320,000
Depreciation Expense 25,000 15,000 (4) 5,000 45,000
Other Expenses 105,000 75,000 180,000
Debits (130,000) (90,000) (225,000)
Ret. Earnings, Jan. 1 230,000 50,000 (2) 50,000 230,000

325,000 80,000 325,000
carry forward 285,000 70,000 80,000 10,000 285,000
Cash 15,000 5,000 20,000

Inventory 70,000 60,000 130,000
Depreciable Assets (net) 325,000 225,000 (3) 30,000 (4) 5,000 575,000
Investment in Short
Company Stock 195,000 (1) 15,000
(2) 180,000
Differential (2) 30,000 (3) 30,000
Debits 635,000 330,000 795,000

Notes Payable 100,000 120,000 220,000
Common Stock
Kennelly Corporation 200,000 200,000
Short Company 100,000 (2)100,000
Retained Earnings,
from above 285,000 70,000 80,000 10,000 285,000
Credits 635,000 330,000 240,000 240,000 795,000
4-29
E4-18 Consolidation Workpaper for Subsidiary

Investment in Growth Company Stock 20,000
E(2) Common Stock — Growth Company 100,000

Investment in Growth Company Stock 170,000
4-30
E4-18 (continued)
b. Land Corporation and Growth Company

December 31, 20X4
Land Growth Eliminations Consol-

Sales 230,000 140,000 370,000

Credits 265,000 140,000 370,000
Other Expenses 150,000 90,000 240,000
Debits (175,000) (105,000) _________ ________ (280,000)
Ret. Earnings, Jan. 1 318,000 70,000 (2) 70,000 318,000

408,000 105,000 408,000
Dividends Declared (50,000) (15,000) _________ (1) 15,000 (50,000)
carry forward 358,000 90,000 105,000 15,000 358,000
Current Assets 238,000 150,000 388,000

Investment in Growth
Company Stock 190,000 (1) 20,000
(2)170,000
Debits 928,000 450,000 1,188,000
Accum. Depreciation 200,000 90,000 290,000

Long-Term Debt 100,000 120,000 220,000
Common Stock
Land Corporation 200,000 200,000
Growth Company 100,000 (2)100,000
Retained Earnings,
from above 358,000 90,000 105,000 15,000 358,000
Credits 928,000 450,000 205,000 205,000 1,188,000
4-31
E4-19 Push-Down Accounting
a. Entry to record acquisition of Louis stock on books of Jefferson:
Investment in Louis Corporation Stock 789,000

Cash 789,000
b. Entry to record revaluation of assets on books of Louis Corporation:
Land 15,000
Buildings 50,000
Equipment 20,000
Revaluation Capital 85,000
c. Investment elimination entry in consolidation workpaper (no other entries needed):
Common Stock – Louis Corporation 200,000

Investment in Louis Corporation Stock 789,000
4-32
SOLUTIONS TO PROBLEMS
P4-20 Assignment of Differential in Workpaper
a. Teresa Corporation and Sally Enterprises

January 1, 20X4
Sally
Teresa Enter- Eliminations Consol-
Item Corp. prises Debit Credit idated
Cash and Receivables 40,000 20,000 60,000

Inventory 95,000 40,000 135,000
Land 80,000 90,000 170,000
Buildings and Equipment 400,000 230,000 (2) 10,000 640,000
Investment in
Sally Enterprises Stock 290,000 (1)290,000
Differential (1) 40,000 (2) 40,000
Goodwill (2) 30,000 30,000
Total Debits 905,000 380,000 1,035,000
Accumulated Depreciation 175,000 65,000 240,000

Notes Payable 100,000 50,000 150,000
Common Stock
Teresa Corporation 300,000 300,000
Sally Enterprises 100,000 (1)100,000
Retained Earnings 270,000 150,000 (1)150,000 270,000
Total Credits 905,000 380,000 330,000 330,000 1,035,000
b. Teresa Corporation and Subsidiary

January 1, 20X4
Cash and Receivables $ 60,000

Inventory 135,000
Land 170,000
Buildings and Equipment $640,000
Less: Accumulated Depreciation (240,000) 400,000
Goodwill 30,000
Total Assets $795,000
Accounts Payable $ 75,000

Notes Payable 150,000
Common Stock $300,000
Retained Earnings 270,000 570,000
Total Liabilities and
Stockholders' Equity $795,000
4-33
P4-21 Computation of Consolidated Balances
a. Inventories ($110,000 + $170,000) $280,000
b. Buildings and Equipment (net) ($350,000 + $375,000) $725,000
c. Investment in Decibel stock will be fully eliminated and will not

appear in the consolidated balance sheet.
d. Goodwill Fair value of consideration given $280,000

Fair value of Decibel's net assets:
Cash and receivables $ 40,000
Inventory 170,000
Buildings and equipment (net) 375,000
Accounts payable (90,000)
Notes payable (250,000)
Fair value of net identifiable
assets (245,000)
Goodwill to be reported $ 35,000
Note: Goodwill on books of Decibel is not an identifiable asset and

therefore is not included in the computation of Decibel's net
identifiable assets at the date of acquisition.
e. Common Stock $400,000
f. Retained Earnings $105,000
4-34
P4-22 Balance Sheet Consolidation [AICPA Adapted]
Case Inc. and Frey Inc.

December 31, 20X4
Case Frey Eliminations Consol-
Item Inc. Inc. Debit Credit idated
Cash 825,000 330,000 1,155,000

Accounts and
Other Receivables 2,140,000 835,000 2,975,000
Inventory 2,310,000 1,045,000 3,355,000
Land 650,000 300,000 (2) 250,000 1,200,000
Deprec. Assets (net) 4,575,000 1,980,000 6,555,000
Investment in
Frey Inc. Stock 2,680,000 (1)2,680,000
Long-Term Investments
and Other Assets 865,000 385,000 1,250,000
Differential (1) 250,000 (2) 250,000
Total Debits 14,045,000 4,875,000 16,490,000
Accounts Payable
and Other Current
Liabilities 2,465,000 1,145,000 3,610,000
Long-Term Debt 1,900,000 1,300,000 3,200,000
Common Stock, $25 Par 3,200,000 1,000,000 (1) 1,000,000 3,200,000
Additional Paid-In
Capital 2,100,000 190,000 (1) 190,000 2,100,000
Retained Earnings 4,380,000 1,240,000 (1) 1,240,000 _________ 4,380,000
Total Credits 14,045,000 4,875,000 2,930,000 2,930,000 16,490,000
4-35
P4-23 Consolidated Balance Sheet
E(1) Common Stock — Lake Corporation 100,000

Differential 32,000
Investment in Lake Corporation Stock 252,000
E(2) Buildings and Equipment 40,000

Differential 32,000
b. Thompson Company and Lake Corporation

December 31, 20X3
Thompson Lake Eliminations Consol-

Item Co. Corp. Debit Credit idated
Cash 30,000 20,000 50,000

Land 60,000 50,000 110,000
Investment in Lake
Corporation Stock 252,000 (1)252,000
Differential (1) 32,000 (2) 32,000
Total Debits 942,000 460,000 1,190,000
Accum. Depreciation 230,000 75,000 (2) 8,000 313,000

Taxes Payable 40,000 70,000 110,000
Notes Payable 100,000 85,000 185,000
Common Stock 200,000 100,000 (1)100,000 200,000
Retained Earnings 292,000 120,000 (1)120,000 292,000
Total Credits 942,000 460,000 292,000 292,000 1,190,000
4-36
P4-24 Comprehensive Problem: Consolidation in Subsequent Period
a. Journal entries recorded by Thompson Company:
(1) Cash 12,000

Record dividends from subsidiary.
(2) Investment in Lake Corporation Stock 32,000


Amortize differential: $40,000 / 10 years

E(2) Common Stock — Lake Corporation 100,000

Differential 32,000

Differential 32,000

E(5) Accounts Payable 2,500

Accounts Receivable 2,500
Eliminate intercorporate receivable/payable.
4-37
P4-24 (continued)
c. Thompson Company and Lake Corporation

December 31, 20X4
Thompson Lake Eliminations Consol-

Item Co. Corp. Debit Credit idated
Service Revenue 610,000 240,000 850,000

Credits 638,000 240,000 850,000
Cost of Services
Provided 470,000 130,000 600,000
Other Expenses 57,000 60,000 117,000
Debits (562,000) (208,000) (774,000)
Ret. Earnings, Jan. 1 292,000 120,000 (2) 120,000 292,000

368,000 152,000 368,000
carry forward 338,000 140,000 152,000 12,000 338,000
Cash 74,000 42,000 116,000

Accounts Receivables 130,000 53,000 (5) 2,500 180,500
Land 60,000 50,000 110,000
Investment in Lake
(2)252,000
Differential (2) 32,000 (3) 32,000
Debits 1,032,000 495,000 1,296,500
Accum. Depreciation 265,000 93,000 (3) 8,000

(4) 4,000 370,000
Accounts Payable 71,000 17,000 (5) 2,500 85,500
Taxes Payable 58,000 60,000 118,000
Notes Payable 100,000 85,000 185,000
Common Stock
Thompson Company 200,000 200,000
Lake Corporation 100,000 (2)100,000
Retained Earnings,
from above 338,000 140,000 152,000 12,000 338,000
Credits 1,032,000 495,000 326,500 326,500 1,296,500
4-38
P4-25 Acquisition at Other than Fair Value of Net Assets
a. Ownership acquired for $280,000:
E(1) Common Stock — Best Company 80,000

Differential 25,000
Investment in Best Company Stock 280,000
E(2) Land 20,000

Goodwill 12,000
Inventory 7,000
Differential 25,000
b. Ownership acquired for $251,000:
E(1) Common Stock — Best Company 80,000

Differential 4,000
Investment in Best Company Stock 251,000
E(2) Land 20,000

Differential 4,000
Inventory 7,000
4-39
P4-26 Intercorporate Receivables and Payables
E(1) Common Stock — Normal Company 150,000

Capital in Excess of Par 140,000
Differential 20,000
Investment in Normal Company Stock 305,000
E(2) Goodwill 20,000

Differential 20,000
E(3) Bonds Payable 50,000

Investment in Normal Company Bonds 50,000
Eliminate intercompany bonds.

Eliminate intercompany receivable/payable.
4-40
P4-26 (continued)
b. Kim Corporation and Normal Company

January 1, 20X7
Kim Normal Eliminations Consol-

Item Corp. Company Debit Credit idated
Cash 70,000 35,000 105,000

Accounts Receivable 90,000 65,000 (4) 10,000 145,000
Inventory 84,000 80,000 164,000
Buildings and Equipment 400,000 300,000 700,000
Investment in:
Normal Company Stock 305,000 (1)305,000
Normal Company Bonds 50,000 (3) 50,000
Differential (1) 20,000 (2) 20,000
Goodwill (2) 20,000 20,000
Total Debits 999,000 480,000 1,134,000
Accumulated Depreciation 160,000 75,000 235,000

Bonds Payable 200,000 100,000 (3) 50,000 250,000
Common Stock
Kim Corporation 300,000 300,000
Normal Company 150,000 (1)150,000
Capital in Excess of Par 140,000 (1)140,000
Retained Earnings 289,000 (5,000) _________ (1) 5,000 289,000
Total Credits 999,000 480,000 390,000 390,000 1,134,000
c. Kim Corporation and Subsidiary

January 1, 20X7
Cash $105,000
Inventory 164,000
Goodwill 20,000

Bonds Payable 250,000
Total Liabilities and Stockholders' Equity $899,000
4-41
P4-27 Balance Sheet Consolidation
a. Entry on Primary's books to record acquisition of Street stock:
Investment in Street Stock 650,000

Bonds Payable 650,000
Note: The bonds go directly to the stockholders of Street and are not
recorded on the books of Street.
E(1) Common Stock – Street Company 200,000

Investment in Street Stock 650,000

Land 20,000
Buildings and Equipment 50,000
Patent 40,000
Discount on Bonds Payable 10,000
Goodwill 48,000
E(3) Current Payables 6,500

Receivables 6,500
The FASB now requires that no allowance accounts be carried forward from the
acquiree in a business combination. However, because of immateriality and the short-
lived nature of the carry forward subsequent to the date of combination, the allowance in
this problem has not been offset against the receivable. If such an offset is desired, the
following elimination entry would be made:
E(4) Allowance for Bad Debts 1,000

Receivables 1,000
4-42
P4-27 (continued)
c. Primary Corporation and Street Company

January 2, 20X8
Primary Street Eliminations Consol-

Item Corp. Company Debit Credit idated
Cash 12,000 9,000 21,000

Receivables 41,000 31,000 (3) 6,500 65,500
Inventory 86,000 68,000 (2) 4,000 158,000
Investment in
Street Stock 650,000 (1)650,000
Land 55,000 50,000 (2) 20,000 125,000
Buildings and Equipment 960,000 670,000 (2) 50,000 1,680,000
Patent (2) 40,000 40,000
Goodwill (2) 48,000 48,000
Discount on
Bonds Payable (2) 10,000 10,000
Differential (1)172,000 (2)172,000
Total Assets 1,804,000 828,000 2,147,500
Allowance for Bad Debts 2,000 1,000 3,000

Accumulated
Depreciation 411,000 220,000 631,000
Current Payables 38,000 29,000 (3) 6,500 60,500
Bonds Payable 850,000 100,000 950,000
Common Stock 300,000 200,000 (1)200,000 300,000
Additional
Paid-In Capital 100,000 130,000 (1)130,000 100,000
Retained Earnings 103,000 148,000 (1)148,000 _________ 103,000
Total Liabilities
and Equity 1,804,000 828,000 828,500 828,500 2,147,500
4-43
P4-27 (continued)
d. Primary Corporation and Subsidiary

January 2, 20X8
Cash $ 21,000
Receivables $ 65,500
Less: Allowance for Bad Debts (3,000) 62,500
Inventory 158,000
Land 125,000
Buildings and Equipment $1,680,000
Less: Accumulated Depreciation (631,000) 1,049,000
Patent 40,000
Goodwill 48,000
Total Assets $1,503,500
Current Payables $ 60,500

Bonds Payable $ 950,000
Less: Discount on Bonds Payable (10,000) 940,000
Stockholders’ Equity
Common Stock $ 300,000
Total Liabilities and
Stockholders' Equity $1,503,500
4-44
P4-28 Consolidation Workpaper at End of First Year of Ownership

Investment in Roller Company Stock 6,000
E(2) Common Stock — Roller Company 60,000

Differential 28,000

Goodwill 8,000
Differential 28,000

Amortize differential:
$2,000 = $20,000 / 10 years
E(5) Goodwill Impairment Loss 5,500

Goodwill 5,500
Write down goodwill for impairment.
4-45
P4-28 (continued)
b. Mill Corporation and Roller Company

December 31, 20X8
Mill Roller Eliminations Consol-

Sales 260,000 180,000 440,000

Credits 282,000 180,000 440,000
Cost of Goods Sold 125,000 110,000 235,000
Wage Expense 42,000 27,000 69,000
Interest Expense 12,000 4,000 16,000
Other Expenses 13,500 5,000 18,500
Goodwill Impairment Loss (5) 5,500 5,500
Debits (217,500) (156,000) ________ ________ (381,000)
Ret. Earnings, Jan. 1 102,000 40,000 (2) 40,000 102,000

166,500 64,000 161,000
Dividends Declared (30,000) (16,000) ________ (1) 16,000 (30,000)
carry forward 136,500 48,000 69,500 16,000 131,000
Cash 19,500 21,000 40,500

Inventory 90,000 25,000 115,000
Land 30,000 15,000 45,000
Investment in Roller
Company Stock 134,000 (1) 6,000
(2)128,000
Differential (2) 28,000 (3) 28,000
Goodwill (3) 8,000 (5) 5,500 2,500
Debits 693,500 223,000 805,000
4-46
P4-28 (continued)


Wages Payable 17,000 9,000 26,000
Notes Payable 150,000 50,000 200,000
Common Stock
Mill Corporation 200,000 200,000
Roller Company 60,000 (2) 60,000
Retained Earnings,
from above 136,500 48,000 69,500 16,000 131,000
Credits 693,500 223,000 185,500 185,500 805,000
4-47
P4-29 Consolidation Workpaper at End of Second Year of Ownership

E(2) Common Stock — Roller Company 60,000

Differential 26,000

Goodwill 2,500
Differential 26,000

Amortize differential:
$2,000 = $20,000 / 10 years
4-48
P4-29 (continued)
b. Mill Corporation and Roller Company

December 31, 20X9

Sales 290,000 200,000 490,000

Income from Subsidiary 34,000 _______ (1)34,000
Credits 324,000 200,000 490,000
Wage Expense 35,000 20,000 55,000
Interest Expense 12,000 4,000 16,000
Other Expenses 23,000 16,000 39,000
Debits (240,000) (164,000) ________ ________ (406,000)
Income, carry forward 84,000 36,000 36,000 84.000
Ret. Earnings, Jan. 1 136,500 48,000 (2) 48,000 131,000

(3) 5,500
220,500 84,000 215,000
Dividends Declared (30,000) (20,000) ________ (1) 20,000 (30,000)
carry forward 190,500 64,000 89,500 20,000 185,000
Cash 45,500 32,000 77,500

Inventory 97,000 24,000 121,000
Land 50,000 25,000 75,000
Investment in Roller
Company Stock 148,000 (1) 14,000
(2)134,000
Differential (2) 26,000 (3) 26,000
Goodwill (3) 2,500 2,500
Debits 775,500 245,000 895,000
4-49
P4-29 (continued)


(4) 2,000 224,000
Wages Payable 14,000 6,000 20,000
Notes Payable 150,000 50,000 200,000
Common Stock
Mill Corporation 200,000 200,000
Roller Company 60,000 (2) 60,000
Retained Earnings,
from above 190,500 64,000 89,500 20,000 185,000
Credits 775,500 245,000 198,000 198,000 895,000
4-50
P4-29 (continued)
c. Mill Corporation and Subsidiary

December 31, 20X9
Cash $ 77,500
Inventory 121,000
Land 75,000
Goodwill 2,500

Wages Payable 20,000
Notes Payable 200,000
Total Liabilities and Stockholders' Equity $671,000
Mill Corporation and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X9
Sales $490,000
Cost of Goods Sold $259,000
Wage Expense 55,000
Depreciation Expense 37,000
Interest Expense 16,000
Other Expenses 39,000
Total Expenses (406,000)
Consolidated Net Income $ 84,000
Mill Corporation and Subsidiary

Consolidated Retained Earnings Statement
Year Ended December 31, 20X9
Retained Earnings, January 1, 20X9 $131,000

20X9 Net Income 84,000
$215,000
Dividends Declared, 20X9 (30,000)
Retained Earnings, December 31, 20X9 $185,000
4-51
P4-30 Comprehensive Problem: Wholly Owned Subsidiary
a. Journal entries recorded by Power Corporation:
(1) Cash 10,000

Investment in Upland Products Stock 10,000
Record dividends from Upland Products.
(2) Investment in Upland Products Stock 30,000


Amortize differential: $50,000 / 10 years

E(2) Common Stock — Upland Products 100,000

Differential 30,000
Eliminate beginning investment balance:
$30,000 = $50,000 – [($50,000 / 10) x 4 years]

Differential 30,000


Cash and Receivables 10,000
Eliminate intercorporate receivable/payable.
4-52
P4-30 (continued)
c. Power Corporation and Upland Products Company

December 31, 20X5
Power Upland Eliminations Consol-

Item Corp. Products Debit Credit idated
Sales 200,000 100,000 300,000
Income from Subsidiary 25,000 _______ (1) 25,000
Credits 225,000 100,000 300,000
Inventory Losses 15,000 5,000 20,000
Debits (160,000) (70,000) _________ _________ (235,000)
Ret. Earnings, Jan. 1 318,000 90,000 (2) 90,000 318,000

383,000 120,000 383,000
Dividends Declared (30,000) (10,000) _________ (1) 10,000 (30,000)
carry forward 353,000 110,000 120,000 10,000 353,000
Cash and Receivables 43,000 65,000 (5) 10,000 98,000

Inventory 260,000 90,000 350,000
Land 80,000 80,000 160,000
Investment in Upland
Products Stock 235,000 (1) 15,000
(2)220,000
Differential (2) 30,000 (3) 30,000
Debits 1,118,000 385,000 1,308,000

(4) 5,000 335,000
Notes Payable 200,000 50,000 250,000
Common Stock
Power Corporation 300,000 300,000
Upland Products 100,000 (2)100,000
Retained Earnings,
from above 353,000 110,000 120,000 10,000 353,000
Credits 1,118,000 385,000 310,000 310,000 1,308,000
4-53
P4-31 Comprehensive Problem: Differential Apportionment
a. Journal entries recorded by Jersey Corporation:
(1) Investment in Lime Company Stock 203,000

Cash 203,000
Acquisition of Lime Company stock.
(2) Cash 20,000

Investment in Lime Company Stock 20,000
Record dividends from Lime Company.
(3) Investment in Lime Company Stock 60,000


Amortize differential assigned to
depreciable assets: ($33,000 / 11 years)
4-54
P4-31 (continued)

E(2) Common Stock — Lime Company 50,000

Differential 53,000
E(3) Goodwill 20,000

Buildings and Equipment 33,000
Differential 53,000

Amortize differential related to
depreciable assets.

Eliminate intercorporate
receivable/payable.
4-55
P4-31 (continued)
c. Jersey Corporation and Lime Company

December 31, 20X7
Jersey Lime Eliminations Consol-

Sales 700,000 400,000 1,100,000
Credits 757,000 400,000 1,100,000
Other Expenses 75,000 75,000 150,000
Debits (600,000) (340,000) (943,000)
Ret. Earnings, Jan. 1 290,000 100,000 (2) 100,000 290,000

447,000 160,000 447,000
Dividends Declared (50,000) (20,000) _ (1) 20,000 (50,000)
carry forward 397,000 140,000 160,000 20,000 397,000
Cash 82,000 25,000 107,000

Accounts Receivable 50,000 55,000 (5) 16,000 89,000
Inventory 170,000 100,000 270,000
Land 80,000 20,000 100,000
Investment in Lime
Company Stock 240,000 (1) 37,000
(2) 203,000
Differential (2) 53,000 (3) 53,000
Goodwill (3) 20,000 20,000
Debits 1,122,000 350,000 1,269,000

Mortgages Payable 200,000 50,000 250,000
Common Stock
Jersey Corporation 300,000 300,000
Lime Company 50,000 (2) 50,000
Retained Earnings,
from above 397,000 140,000 160,000 20,000 397,000
Credits 1,122,000 350,000 332,000 332,000 1,269,000
4-56
P4-32A Push-Down Accounting
a. Entry to record acquisition of Lindy stock on books of Greenly:
Investment in Lindy Company Stock 935,000

Cash 935,000
b. Entry to record revaluation of assets on books of Lindy Company at date of

combination:
Inventory 5,000
Land 85,000
Buildings 100,000
Equipment 70,000
Revalue assets to reflect fair
values at date of combination.
c. Investment elimination entry in consolidation workpaper prepared December 31,

20X6 (no other entries needed):
Common Stock — Lindy Company 100,000

d. Equity-method entries on the books of Greenly during 20X7:
Cash 50,000
Record dividend from Lindy Company.

Income from Lindy Company 88,000
4-57
P4-32A (continued)
e. Eliminating entries in consolidation workpaper prepared December 31, 20X7

(no other entries needed):
E(1) Income from Lindy Company 88,000

E(2) Common Stock — Lindy Company 100,000

f. Eliminating entries in consolidation workpaper prepared December 31, 20X8 (no

other entries needed):
E(1) Income from Lindy Company 90,000

E(2) Common Stock — Lindy Company 100,000

Eliminate beginning investment balance:
$213,000 = $175,000 + $88,000 - $50,000
$973,000 = $935,000 + $88,000 - $50,000
4-58

Chap 004

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Chap 004

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CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES

Q4-15 Consolidated retained earnings is defined in current accounting practice as that

Q4-18 An additional eliminating entry normally must be entered in the workpaper to

Q4-21 Push-down accounting is considered appropriate when a subsidiary is

C4-1 Need for Consolidation Process

C4-2 Account Presentation

To: Chief Accountant

From: , Accounting Staff

Re: Combining Broadly Diversified Balance Sheet Accounts

Many manufacturing and merchandising enterprises excluded finance, insurance, real

C4-3 Consolidating an Unprofitable Subsidiary

TO: Chief Accountant

FROM: , Accounting Staff

Re: Consolidation of Unprofitable Boatyard

This memo is intended to provide recommendations on the presentation of the boatyard

Failure of the president of Amazing Chemical to receive approval by the board of

C4-4 Assigning an Acquisition Differential

It may be difficult to determine the amount of the differential to be assigned to the

Inventories should be compared to sales to determine if Ball has excess balances on

No mention is made of patents or other intangible assets developed by Ball Corporation.

C4-5 Negative Retained Earnings

a. The negative retained earnings balance of the subsidiary is eliminated in the

C4-6 Balance Sheet Reporting Issues

b. Crumple apparently has not considered selling additional common or preferred

C4-7 Subsidiary Ownership: AMR Corporation and International Lease

a. (1) Airline service

b. (1) International Lease Finance Corporation leases aircraft to airlines.

E4-1 Multiple-Choice Questions on Consolidation Process

E4-2 Multiple-Choice Questions on Consolidation [AICPA Adapted]

4. c $400,000 = $1,700,000 - $1,300,000

E4-3 Basic Elimination Entry

Common Stock – Broadway Corporation 200,000

E4-4 Eliminating Entries with Differential

E(1) Common Stock – Brown Company 20,000

E(2) Inventory 5,000

E4-5 Balance Sheet Consolidation

E(1) Common Stock – Thorne Corporation 120,000

Fair value of consideration given $395,000

E(2) Inventory 36,000

E4-6 Acquisition with Differential

a. Goodwill is $60,000, computed as follows:

Book value of Conger's net assets:

b. Eliminating entries needed:

E(1) Common Stock – Conger Corporation 80,000

E(2) Land 20,000

E4-7 Balance Sheet Workpaper

E(1) Common Stock – Faith Corporation 60,000

b. Blank Corporation and Faith Corporation

Blank Faith Eliminations Consol-

Cash 65,000 18,000 83,000

Accounts Payable 92,000 35,000 127,000

E4-8 Balance Sheet Workpaper with Differential

E(1) Common Stock – Faith Corporation 60,000

E(2) Inventory 24,000

b. Blank Corporation and Faith Corporation

Blank Faith Eliminations Consol-

Cash 26,000 18,000 44,000

Accounts Payable 92,000 35,000 127,000

E4-9 Workpaper for Wholly Owned Subsidiary

E(1) Common Stock – Premium Builders 140,000

b. Gold Enterprises and Premium Builders

Cash and Receivables 80,000 30,000 (1) 2,000 108,000

Current Liabilities 100,000 110,000 210,000