chapter 10, modern advanced accounting-review q & exr

CHAPTER 10CONSOLIDATED FINANCIAL STATEMENTS: SPECIAL

PROBLEMS

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

Pr. 10–1 Pinch Corporation (30 minutes, medium)

Working paper eliminations for parent company and partially owned subsidiary at end of year following parent’s acquisition of part of minority stockholders’ common stock.

Pr. 10–2 Prime Corporation (40 minutes, medium)

Journal entries under equity method of accounting for wholly owned subsidiary’s operations, and working paper eliminations, for subsidiary having treasury stock on date of business combination.

Pr. 10–3 Pumble Corporation (40 minutes, medium)

Journal entries under equity method of accounting for partially owned subsidiary’s operations, and working paper eliminations, for subsidiary that issued additional shares of common stock to the parent company.

Pr. 10–4 Pronto Corporation (35 minutes, medium)

Journal entry for partially owned subsidiary’s issuance of additional common stock to parent company, computation of balance of parent company’s Investment ledger account, and working paper elimination.

Pr. 10–5 Pun Corporation (30 minutes, medium)

Working paper eliminations following partially owned subsidiary’s acquisition of treasury stock.

Pr. 10–6 Peterson Corporation (40 minutes, medium)

Reconstruction of working paper eliminations from separate and consolidated financial statements of parent company and wholly owned subsidiary. Income taxes are disregarded.

Pr. 10–7 Pomerania Corporation (90 minutes, strong)

Adjusting entries to account for parent company’s investment in a partially owned subsidiary’s preferred and common stock by the equity method. Working paper for consolidated financial statements and working paper eliminations for parent company and two partially owned subsidiaries, one of which was acquired in installments. Income taxes are disregarded.

Pr. 10–8 Plover Corporation (90 minutes, strong)

Reconstruction of intercompany receivables (payables) that do not offset. Adjusting entries derived from reconstruction. Working paper for consolidated financial statements and working paper eliminations for parent and wholly owned subsidiary having a minority interest in its preferred stock. Income taxes are disregarded.

Pr. 10–9 Pullard Corporation (90 minutes, strong)

Working paper for consolidated financial statements and working paper eliminations for parent company and wholly owned subsidiary having a minority interest in its preferred stock. Income taxes are disregarded.

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 10 327

ANSWERS TO REVIEW QUESTIONS

1. Given that purchase accounting is required for all business combinations, it stands to reason that purchase accounting is appropriate for a parent company or a subsidiary’s acquisition of minority interests, for such an action may be construed as “completing” the business combination.

2. If a parent company acquires the minority interest in net assets of a subsidiary at less than carrying amount, the difference (assuming it is not material) may be offset against previously recognized goodwill of the subsidiary. Although this procedure may have theoretical shortcomings, it is appropriate from a practical and cost-benefit point of view.

3. A parent company recognizes a nonoperating gain when a subsidiary issues common stock to the public at a price per share larger than the carrying amount per share of the parent company’s investment in the subsidiary’s common stock, for the following reason. Although the parent company’s percentage interest in the subsidiary has decreased, the net assets (book value) per share of the subsidiary’s outstanding common stock is larger than before the additional common stock was issued to the public. Because the parent company did not disburse any assets or incur any liabilities for its increased per-share interest in the subsidiary, the parent company has realized a nonoperating gain. The converse reasoning supports the parent company’s recognition of a nonoperating loss when the subsidiary issues common stock to the public at a price less than the per-share carrying amount of the parent’s investment in the subsidiary prior to the stock issuance.

4. A gain or loss recognized by a parent company on the disposal of part of its investment in common stock of a subsidiary is not eliminated in the preparation of consolidated financial statements because the gain or loss was realized in a transaction with an outsider.

5. When a parent company acquires less than 100% of a subsidiary’s preferred stock, together with all or a majority of the subsidiary’s common stock, the preferences associated with the preferred stock must be considered in determining the claims to the subsidiary’s net assets assignable to both preferred and common minority stockholders. For cumulative, fully participating preferred stock, any cumulative preferred dividends in arrears must be included in the minority interest of the preferred stockholders in net assets of the subsidiary. In addition, the retained earnings remaining after provision for the preferred dividend arrearage must be prorated to preferred and common stockholders based on the participation preference of the preferred stock.

6. The declaration of a stock dividend by a subsidiary does not necessitate any special treatment in working paper eliminations if the parent company uses the equity method of accounting for the subsidiary’s operations. The balances of the subsidiary’s stockholders’ equity ledger accounts after the stock dividend is recorded are reflected in the working paper elimination prepared subsequent to the declaration and distribution of the stock dividend.

7. When a subsidiary acquires for its treasury all or part of its outstanding common stock owned by minority stockholders of the subsidiary, the subsidiary debits the Treasury Stock ledger account for the current fair value of the stock acquired. Any amount in excess of current fair value, such as is paid in greenmail, is debited to a loss account.

8. The quotation is acceptable only if one adopts a liquidation approach, rather than a going-concern approach, to consolidated financial statements. The treasury stock treatment of parent company common stock owned by a subsidiary emphasizes economic substance over legal formthe subsidiary has acquired common stock for the consolidated group’s treasury as agent for the parent company. This approach does not involve allocation of a portion of the parent company’s net income to minority stockholders of the subsidiary. On a going-concern basis, such an allocation is unnecessary.

9. There is no inconsistency in the treatment of parent company stock owned by the subsidiary as treasury stock of the consolidated entity. The dividends declared and paid by the parent company to the subsidiary are eliminated in the preparation of consolidated financial statements; thus, dividends displayed in the consolidated statement of retained earnings are those declared and paid to the parent company’s outside stockholders only.

The McGraw-Hill Companies, Inc., 2006328 Modern Advanced Accounting, 10/e

SOLUTIONS TO EXERCISES

Ex. 10–1 1. b 8. b2. d 9. e3. b 10. d4. b 11. b5. a 12. c6. a 13. d7. b 14. b

Ex. 10–2 Computation of goodwill and minority interest in net assets of subsidiary, Apr. l, 2006:

Goodwill: $65,400 + $10,000 – = $67,800

Minority interest: $22,800 x = $15,200

*Parent company’s 85% interest indicates minority interest of 15%, or 1,500 shares (10,000 x 0.15 = 1,500).

Ex. 10–3 Computation of nonoperating gain to Prester Company, Jan. 3, 2005:

TotalPrester’s

share

Minority interest share

Carrying amount of Shire Company’s identifiable net assets after common stock issuance to public $51,000

$42,500

$8,500

Less: Carrying amount of Shire Company’s identifiable net assets before common stock issuance to public 40,000

40,000

Difference ($2,500 nonoperating gain to Prester) $11,000 $ 2,500 $8,500


Ex. 10–4 a. Computation of nonoperating loss to Pinto Corporation, Oct. 31, 2006:

Total Pinto’s share

Minority interest share

Carrying amount of Sorrell Company’s identifiable net assets after common stock issuance to Pinto $819,000

$682,500 $136,500

Less: Carrying amount of Sorrell Company’s identifiable net assets before common stock issuance to Pinto 675,000

540,000

135,000

Difference ($1,500 nonoperating loss to Pinto) $144,000 $142,500 $ 1,500

b. Journal entry for Pinto Corporation, Oct. 31, 2006:

Investment in Sorrell Company Common Stock 142,500Loss from Subsidiary’s Issuance of Common Stock 1,500

Cash 144,000To record acquisition of 2,000 shares of Sorrell Company’s common stock at $72 a share, and to recognize nonoperating loss on the transaction.

Ex. 10–5 a. Aggregate call price of preferred stock (100,000 x $1.10) $110,000Add: Cumulative preferred dividends in arrears ($8,000 x 2) 16,000Total callable value of preferred stock $126,000Portion acquired by Panay Corporation equals amount of total cost

assignable to preferred stock ($126,000 x 0.50) $ 63,000

b. Minority interest of preferred stockholders ($126,000 x 0.50) $ 63,000

c. Total cost of Panay Corporation investment in Stegg Company $1,030,500Less: Cost assignable to preferred stock (see a) 63,000Cost assignable to common stock $ 967,500Panay Corporation’s share of current fair value of Stegg Company’s

identifiable net assets attributable to common stock [($1,200,000 – $126,000) x 0.75] 805,500

Goodwill acquired by Panay Corporation $ 162,000

d. Current fair value of Stegg Company’s identifiable net assets (common stock) ($1,200,000 – $126,000) $1,074,000

Minority common stockholders' interest ($1,074,000 x 0.25) $ 268,500

Ex. 10–6 Allocation of Simplex Company’s net income, year ended May 31, 2006:

TotalNet income to

parentMinority interest

To preferred stockholders:10,000 shares x $12, in ratio of 70% and 30% $120,000 $ 84,000 $36,000To common stockholders: in ratio of 75% (6/8) and 25% (2/8) 222,800 167,100 55,700

Net income of Simplex Company $342,800 $251,100 $91,700


Ex. 10–7 a. Revised working paper elimination for Placard Corporation and subsidiary, Sept. 30, 2006:(a) Common Stock, $2 parSabro [$80,000 + (6,000 x $2)] 92,000

Additional Paid-in CapitalSabro [$40,000 + (6,000 x $3)] 58,000Retained EarningsSabro ($130,000 – $10,000) 120,000Retained Earnings of SubsidiaryPlacard 10,000Intercompany Investment IncomePlacard 70,000GoodwillSabro 20,000

Investment in Sabro Company Common StockPlacard 340,000

Dividends DeclaredSabro (6,000 x $5) 30,000

b. Closing entry for Placard Corporation, Sept. 30, 2006:

Net Sales 840,200Intercompany Investment Income 70,000

Costs and Expenses 668,500Retained Earnings of Subsidiary ($70,000 – $30,000) 40,000Retained Earnings ($241,700 – $40,000) 201,700

Ex. 10–8 Working paper elimination for Portland Corporation and subsidiary, Dec. 31, 2005:

(a) Common StockSalem (500 x $5) 2,500Additional Paid-in CapitalSalem [500 x ($8 – $5)] 1,500Retained EarningsSalem [500 x ($11 – $8)] 1,500

Treasury StockSalem 5,500To account for subsidiary’s treasury stock as though it had been retired.

Ex. 10–9 Working paper eliminations for Priam Corporation and subsidiary, Feb. 28, 2005:

(a) Common StockStocker (2,000 x $5) 10,000Retained EarningsStocker (2,000 x $3) 6,000

Treasury StockStocker 16,000

(b) Common StockStocker ($250,000 – $10,000) 240,000Retained EarningsStocker ($600,000 – $6,000) 594,000GoodwillStocker ($900,000 – $834,000) 66,000

Investment in Stocker Company Common StockPriam 900,000

Ex. 10–10 Working paper eliminations for Private Corporation and subsidiary, May 31, 2005:

Common StockSergeant (500 x $10) 5,000Additional Paid-in CapitalSergeant (500 x $5) 2,500

Treasury StockSergeant 7,500

Common StockSergeant ($100,000 – $5,000) 95,000Additional Paid-in CapitalSergeant ($50,000 – $2,500) 47,500Retained Earnings of SubsidiaryPrivate 150,000

Investment in Sergeant Company Common StockPrivate 292,500


Ex. 10–11 Working paper eliminations for Parson Corporation and subsidiary, Feb. 28, 2005:

Common StockSibley (5,000 x $2) 10,000Retained EarningsSibley (5,000 x $8) 40,000GoodwillSibley ($60,000 – $50,000) 10,000

Treasury StockSibley 60,000

Common StockSibley ($160,000 – $10,000) 150,000Retained EarningsSibley ($640,000 – $40,000) 600,000GoodwillSibley ($790,000 – $750,000) 40,000

Investment in Sibley Company Common StockParsons 790,000

Ex. 10–12 a. Journal entries for Prince Corporation for Year 2005:

Investment in Sabine Company Common Stock (80,000 x 0.40) 32,000Intercompany Investment Income 32,000

Intercompany Dividends Receivable (4,000 x $2) 8,000Investment in Sabine Company Common Stock 8,000

b. Journal entries for Samnite Company for Year 2005:

Investment in Sabine Company Common Stock ($80,000 x 0.60) 48,000Intercompany Investment Income 48,000

Intercompany Dividends Receivable (6,000 x $2) 12,000Investment in Sabine Company Common Stock 12,000

Ex. 10–13 Working paper eliminations for Peaches Corporation and subsidiary, May 31, 2007:

(b) Treasury StockPeaches 100,000Investment in Peaches Corporation Common StockSugar 100,000

(c) Intercompany Dividends RevenueSugar 5,000Dividends DeclaredPeaches 5,000

Ex. 10–14 Working paper elimination for Pressman Corporation and subsidiary, July 31, 2006:

Treasury StockPressman 15,000Investment in Pressman Corporation Common

StockSycamore 15,000To transfer subsidiary’s investment in parent company’s common stock to treasury stock category.

Note to Instructor: A working paper elimination is not required for the subsidiary’s stock dividend under the equity method of accounting because the parent company’s accounting records include the growth in the subsidiary’s retained earnings subsequent to the date of the business combination, in both the Investment ledger account and the Retained Earnings of Subsidiary account.

CASES

Case 10–1 The belief of Wayne Cartwright that SEC pronouncements should prevail over preferences of the FASB tentatively appears contrary to the evidence derived from the references cited in the case. For example, Section l0l of the SEC’s Codification of Financial Reporting Policies includes the following:

Various Acts of Congress administered by the Securities and Exchange Commission clearly state the authority of the Commission to prescribe the methods to be followed in the preparation of accounts and the form and content of financial statements to be filed under the


Acts . . . the Commission has historically looked to the standard-setting bodies designated by the profession to provide leadership in establishing and improving the accounting principles.

Further, in Section 103 of the Codification, the SEC explains the limited role of Staff Accounting Bulletins as follows:

The statements in the Bulletin[s] are not rules or interpretations of the Commission nor are they published as bearing the Commission’s official approval . . .

Further evidence contrary to Cartwright’s belief is found in the following excerpt from paragraph 25 of FASB Statement No. 111, “Rescission of FASB Statement No. 32 and Technical Corrections”:

The chart below summarizes the [generally accepted accounting principles] for financial statements of nongovernmental agencies . . .

Established Accounting PrinciplesCategory (a )FASB Statements and Interpretations, APB Opinions, and AICPA Accounting Research Bulletins . . .

An appended footnote reads in part as follows:Rules and interpretive releases of the Securities and Exchange Commission (SEC) have an authority similar to category (a) pronouncements for SEC registrants. In addition, the SEC staff issues Staff Accounting Bulletins that represent practices followed by the staff in administering SEC disclosure requirements. (Emphasis added.)

However, although Rule 203, “Accounting Principles,” and Appendix A of the AICPA Code of Professional Conduct (Chapter l of the textbook) obligate AICPA member Wilma Reynolds to comply with FASB pronouncements in Category (a) above, the FASB has not yet issued a statement on consolidation procedures. Thus, the $150,000 increase in Premium Corporation’s investment in Service Company may be accounted for as a nonoperating gain by Premium, in accordance with standards established by the SEC.

Case 10–2 The $700,000 difference between the $1,800,000 carrying amount and the $2,500,000 offering price for the minority interest of Mary Phillips in Bank of Provence is extraordinarily large, given that most assets of banks are monetary assets with carrying amounts equal to or approximating current fair values. Accordingly, before opining on the need for Banking Enterprises, Inc. to recognize a greenmail-type loss for all or part of the $700,000 difference, the partner of Crandall & Lowe, CPAs, should seek answers to the following:(l) What was the basis for Banking’s board of directors to make the $2,500,000 offer? Was it

based on an appraisal of the current fair value of a 40% interest in the net assets of Bank of Provence, or was it an inducement to get rid of Phillips because of irreconcilable differences?

(2) Has approval been obtained from federal banking regulators for the significant outlay?(3) Have legal counsel for Banking and Bank of Provence reviewed and approved the offer?Above all, the Crandall & Lowe partner should exercise professional skepticism in judging the need for recognition of a loss, rather than goodwill, for all or part of the $700,000 amount.

Case 10–3 Student Ross may be overly “picky” in his distinction between the “noncontrollership” of a subsidiary’s preferred stockholders, who seldom have voting rights, and that of its common stockholders other than the parent company. Although those common stockholders do have the right to vote at stockholders’ meetings, they generally will be outvoted on controversial issues by the parent companythe controlling stockholder. Accordingly, student Kerry’s position is the supportable one, especially because the so-called “mezzanine” area of a consolidated balance sheet, between liabilities and stockholders’ equity, has no official standing under generally accepted accounting principles.


30 minutes, MediumPinch Corporation Pr. 10–1

Pinch Corporation and Subsidiary

Working Paper Eliminations

March 31, 2006

(a) Common Stock—Scrip (10,000 x $5) 5 0 0 0 0

Additional Paid-in Capital—Scrip [($300,000 x ½) –

$50,000] 1 0 0 0 0 0

Retained Earnings—Scrip ($300,000 x ½) 1 5 0 0 0 0

Intercompany Investment Income—Pinch ($90,000 x

0.90) 8 1 0 0 0

Goodwill—Pinch [$40,000 + $44,000 –

($60,000 x ½) ] 5 4 0 0 0

Investment in Scrip Company Common

Stock—Pinch [$280,000 + $44,000 +

$81,000 – (9,000 x $3)] 3 7 8 0 0 0

Dividends Declared—Scrip (10,000 x $3) 3 0 0 0 0

Minority Interest in Net Assets of Subsidiary

[$60,000 – $30,000 – (1,000 x $3)] 2 7 0 0 0

To eliminate intercompany investment and equity

accounts of subsidiary at beginning of year; to

allocate excess of cost over current fair values (equal

to carrying amounts) of identifiable net assets acquired to unimpaired goodwill; and to establish minority interest in net assets of subsidiary at beginning

of year ($60,000), less minority interest acquired

($30,000) and minority interest in dividends. (Income

tax effects are disregarded.)

(b) Minority Interest in Net Income of Subsidiary

($90,000 x 0.10) 9 0 0 0

Minority Interest in Net Assets of Subsidiary 9 0 0 0

To establish minority interest in net income of

subsidiary for year ended Mar. 31, 2006.


40 Minutes, MediumPrime Corporation Pr. 10–2

a. Prime Corporation

Journal Entries

20 05

Dec 29 Intercompany Dividends Receivable [(400,000 –

20,000) x $0.10] 3 8 0 0 0

Investment in Showboat Company Common

Stock 3 8 0 0 0

To record dividend declared by Showboat Company,

payable in Year 2006.

31 Investment in Showboat Company Common Stock 9 0 0 0 0

Intercompany Investment Income 9 0 0 0 0

To record 100% of Showboat Company’s net income

for the year ended Dec. 31, 2005. (Income tax effects

are disregarded.)

b. Prime Corporation and Subsidiary


December 31, 2005

(a) Common Stock—Showboat (20,000 x $1) 2 0 0 0 0

Additional Paid-in Capital—Showboat (20,000 x $0.75) 1 5 0 0 0

Retained Earnings—Showboat (20,000 x $0.75) 1 5 0 0 0

Treasury Stock—Showboat 5 0 0 0 0

To account for subsidiary’s treasury stock as though

it had been retired.

(b) Common Stock—Showboat ($400,000 – $20,000) 3 8 0 0 0 0

Additional Paid-in Capital—Showboat ($300,000 –

$15,000) 2 8 5 0 0 0

Retained Earnings—Showboat ($250,000 – $15,000) 2 3 5 0 0 0

Intercompany Investment Income—Prime 9 0 0 0 0

Investment in Showboat Company Common

Stock—Prime ($900,000 – $38,000 +

$90,000) 9 5 2 0 0 0

Dividends Declared—Showboat 3 8 0 0 0

To eliminate intercompany investment, related

accounts for stockholders’ equity of subsidiary, and

investment income from subsidiary.


40 Minutes, MediumPumble Corporation Pr. 10–3

a. Pumble CorporationJournal Entries

20 07

Oct 31 Intercompany Dividends Receivable [(9,800 + 1,000) x

$2] 2 1 6 0 0

Investment in Salton Company Common

Stock 2 1 6 0 0

To record dividend declared by Salton Company.

31 Investment in Salton Company Common Stock

($35,000 x 0.9818) 3 4 3 6 3


To record 98.18% of Salton Company’s net income for

year ended Oct. 31, 2007. (Income tax effects are

disregarded.)

b. Pumble Corporation


October 31, 2007

(a) Common Stock—Salton ($10,000 + $1,000) 1 1 0 0 0

Additional Paid-in Capital—Salton ($60,000 + $19,000) 7 9 0 0 0

Retained Earnings—Salton [($80,000 + $40,000 –

$10,000) x 0.02] 2 2 0 0

Retained Earnings of Subsidiary—Pumble ($78,400 +

$39,200 – $9,800) 1 0 7 8 0 0

Intercompany Investment Income—Pumble ($35,000 x

0.9818) 3 4 3 6 3

Investment in Salton Company Common

Stock—Pumble ($176,400 + $19,960* +

$34,363 – $21,600) 2 0 9 1 2 3

Dividends Declared—Salton (11,000 x $2) 2 2 0 0 0


[$2,800 + $800 + $40 – (200 x $2)] 3 2 4 0

To eliminate intercompany investment and related

accounts for stockholders’ equity of subsidiary at

beginning of year, and investment income from

subsidiary; and to establish minority interest in net

assets of subsidiary at beginning of year, less minority

interest in dividends.

(b) Minority Interest in Net Income of Subsidiary

($35,000 x 0.0182) 6 3 7

Minority Interest in Net Assets of Subsidiary 6 3 7

To establish minority interest in net income of

subsidiary for year ended Oct. 31, 2007.

*($200,000 x 0.9818) – ($180,000 x 0.98) = $19,960


35 Minutes, MediumPronto Corporation Pr. 10–4

a. Speedy Company

Journal Entry

20 06

Mar 1 Cash 3 2 0 0 0

Common Stock (2,000 x $1) 2 0 0 0

Paid-in Capital in Excess of Par 3 0 0 0 0

To record issuance of 2,000 shares of common stock

to Pronto Corporation.

b. Pronto Corporation

Computation of Balance of Investment in Speedy Company Common Stock

Ledger Account

March 1, 2006

Balance, Feb. 28, 2006 $ 7 5 0 0 0

Add: Acquisition of 2,000 shares, Mar. 1, 2006 3 2 0 0 0

Subtotal $ 1 0 7 0 0 0

Less: Nonoperating loss on acquisition of 2,000 shares

[$32,000 – [($132,000 x 0.66 2/3) – ($100,000 x

0.60)]} 4 0 0 0

Balance. Mar 1, 2006 $ 1 0 3 0 0 0

c. Pronto Corporation and Subsidiary

Working Paper Elimination

March 1, 2006

(a) Common Stock, $1 par—Speedy ($10,000 + $2,000) 1 2 0 0 0

Additional Paid-in Capital—Speedy ($30,000 +

$30,000) 6 0 0 0 0

Retained Earnings—Speedy ($60,000 – $9,000) 5 1 0 0 0

Retained Earnings of Subsidiary—Pronto 9 0 0 0

Goodwill—Pronto 1 5 0 0 0

Investment in Speedy Company Common

Stock—Pronto 1 0 3 0 0 0


($40,000 + $4,000) 4 4 0 0 0


equity accounts of subsidiary; to record unimpaired

goodwill; and to provide for minority interest in net

assets of subsidiary.


30 Minutes, MediumPun Corporation Pr. 10–5

Pun Corporation and SubsidiaryWorking Paper Eliminations

November 1, 2006(a) Common Stock—Sim [1,000 x ($500,000 ÷ 10,000)] 5 0 0 0 0

Retained Earnings—Sim [1,000 x ($660,000 ÷ 10,000)] 6 6 0 0 0

Goodwill—Sim (1,000 x $54) 5 4 0 0 0

Treasury Stock—Sim 1 7 0 0 0 0

To account for subsidiary’s treasury stock as though

it had been retired.

(b) Common Stock—Sim ($500,000 – $50,000) 4 5 0 0 0 0

Retained Earnings—Sim ($660,000 – $66,000 –

$48,000) 5 4 6 0 0 0

Retained Earnings of Subsidiary—Pun 4 8 0 0 0

Goodwill—Pun 8 0 0 0 0

Investment in Sim Company Common

Stock—Pun 1 0 0 8 0 0 0


[($1,100,000 + $60,000) x 0.10], or

($232,000 – $116,000) 1 1 6 0 0 0

To eliminate intercompany investment and equity

accounts of subsidiary; to allocate excess of cost over

current fair value of identifiable net assets to

unimpaired goodwill; and to establish minority interest

in net assets of subsidiary (1,000 of 10,000

issued shares = 10%).


40 Minutes, MediumPeterson Corporation Pr. 10–6

Peterson Corporation and SubsidiaryWorking Paper Eliminations

May 31, 2007(a) Common Stock, $10 par—Swanson 1 5 0 0 0 0

Retained Earnings—Swanson ($825,000 – $122,500)

(beginning) 7 0 2 5 0 0

Retained Earnings of Subsidiary—Peterson 1 2 2 5 0 0

Other Revenue—Peterson 2 5 0 0 0 0

Goodwill—Swanson 5 0 0 0 0

Investment in Swanson Company Common

Stock—Peterson 1 1 0 0 0 0 0

Dividends Declared—Swanson 1 7 5 0 0 0

(b) Treasury Stock—Peterson 2 0 0 0 0

Other Revenue—Swanson (1,000 x $3) 3 0 0 0

Short-Term Investments—Swanson 2 0 0 0 0

Dividends Declared—Peterson ($300,000 x

0.01) 3 0 0 0

(c) Net Sales—Peterson 1 7 0 0 0 0 0

Retained Earnings—Peterson (beginning) 1 3 2 0 0

Cost of Good Sold—Peterson ($1,700,000 x

0.67) 1 1 3 9 0 0 0

Cost of Goods Sold—Swanson 5 5 7 7 0 0

Inventories—Swanson 1 6 5 0 0


90 Minutes, StrongPomerania Corporation Pr. 10–7

a. Pomerania Corporation

Adjusting Entries

December 31, 2005

Investment in Sylvania Company Perferred Stock 4 0 0

Investment in Sylvania Company Common Stock 1 1 2 0 0


To record share of net income of Sylvania Company,

as follows:Preferred stock:

$ 400

Common stock: 11,200

Total investment income $11,600

(Income tax effects are disregarded.)

Note to Instructor: There is no goodwill or other asset amortization associated with Pomerania

Corporation’s Investment in Sylvania Company because the investments were equal to the carrying

amount of the stock acquired, computed as follows:

Carrying amount

and cost

Preferred stock:

$ 7,000

Common stock:

$196,000


Pomerania Corporation (continued) Pr. 10–7

b. Pomerania Corporation and Subsidiaries

Working Paper for Consolidated Financial Statements

For Year Ended December 31, 2005

Eliminations

Pomerania Slovakia Sylvania increase

Corporation Company Company (decrease) Consolidated

Income Statement

Revenue:

Net sales 1 1 2 0 0 0 0 9 0 0 0 0 0 7 0 0 0 0 0 2 7 2 0 0 0 0

Intercompany sales 1 4 0 0 0 0 (c)( 1 4 0 0 0 0 )Intercompany investment income 5 5 6 0 0 (a) ( 4 4 0 0 0 )

(b) ( 1 1 6 0 0 )

Gain on extinguishment of bonds (d) 2 2 0 0 2 2 0 0

Total revenue 1 3 1 5 6 0 0 9 0 0 0 0 0 7 0 0 0 0 0 ( 1 9 3 4 0 0 ) 2 7 2 2 2 0 0

Costs and expenses and minority interest:

Cost of goods sold 8 0 0 0 0 0 6 5 0 0 0 0 5 5 0 0 0 0 (c) ( 3 3 6 0 0 ) 1 9 6 6 4 0 0Intercompany cost of goods sold 1 0 0 0 0 0 (c)( 1 0 0 0 0 0 )Operating expenses and income taxes expense 3 0 0 0 0 0 1 5 0 0 0 0 1 3 0 0 0 0 5 8 0 0 0 0Minority interest in net income of subsidiaries (e) 6 4 8 4 0 6 4 8 4 0

Total costs and expenses and minority interest 1 2 0 0 0 0 0 8 0 0 0 0 0 6 8 0 0 0 0 ( 6 8 7 6 0 )* 2 6 1 1 2 4 0

Net income 1 1 5 6 0 0 1 0 0 0 0 0 2 0 0 0 0 ( 1 2 4 6 4 0 ) 1 1 0 9 6 0

Statement of Retained EarningsRetained earnings, beginning of year 1 2 6 2 0 0 1 0 7 0 0 0 1 0 0 0 0 0 (a)( 1 0 7 0 0 0 ) 1 2 6 2 0 0

(b)( 1 0 0 0 0 0 )

Net income 1 1 5 6 0 0 1 0 0 0 0 0 2 0 0 0 0 ( 1 2 4 6 4 0 ) 1 1 0 9 6 0

Subtotal 2 4 1 8 0 0 2 0 7 0 0 0 1 2 0 0 0 0 ( 3 3 1 6 4 0 ) 2 3 7 1 6 0

Dividends declared 2 2 0 0 0 7 5 0 0 0 (a) ( 7 5 0 0 0 )† 2 2 0 0 0

Retained earnings, end of year 2 1 9 8 0 0 1 3 2 0 0 0 1 2 0 0 0 0 ( 2 5 6 6 4 0 ) 2 1 5 1 6 0

* A decrease in costs and expenses and an increase in net income.

† A decrease in dividends and an increase in retained earnings. (Continued on page 342.)



b. Pomerania Corporation and Subsidiaries

Working Paper for Consolidated Financial Statements (concluded)


Eliminations

Pomerania Slovakia Sylvania increase

Corporation Company Company (decrease) Consolidated

Balance Sheet

Assets

Intercompany receivables (payables) 6 3 4 0 0 ( 4 1 0 0 0 ) ( 2 2 4 0 0 )

Inventories 2 9 0 0 0 0 9 0 0 0 0 1 1 5 0 0 0 (c) ( 6 4 0 0 ) 4 8 8 6 0 0

Investment in Slovakia Company common stock 3 0 5 6 0 0 (a)( 3 0 5 6 0 0 )

Investment in Slovakia Company bonds 2 0 8 0 0 (d) ( 2 0 8 0 0 )

Investment in Sylvania Company preferred stock 7 4 0 0 (b) ( 7 4 0 0 )

Investment in Sylvania Company common stock 2 0 7 2 0 0 (b)( 2 0 7 2 0 0 )

Other assets 8 3 6 4 0 0 5 5 5 0 0 0 5 1 0 0 0 0 1 9 0 1 4 0 0

Total assets 1 7 3 0 8 0 0 6 0 4 0 0 0 6 0 2 6 0 0 ( 5 4 7 4 0 0 ) 2 3 9 0 0 0 0

Liabilities & Stockholders’ Equity

Dividends payable 2 2 0 0 0 6 0 0 0 2 8 0 0 0

Bonds payable 2 8 5 0 0 0 1 2 5 0 0 0 1 2 5 0 0 0 5 3 5 0 0 0

Intercompany bonds payable 2 5 0 0 0 (d) ( 2 5 0 0 0 )

Discount on bonds payable ( 8 0 0 0 ) ( 1 0 0 0 0 ) ( 1 8 0 0 0 )

Discount on intercompany bonds payable ( 2 0 0 0 ) (d) ( 2 0 0 0 )*

Other liabilities 2 1 2 0 0 0 7 8 0 0 0 1 0 7 6 0 0 3 9 7 6 0 0

Preferred stock, $20 par 4 0 0 0 0 0 5 0 0 0 0 (b) ( 5 0 0 0 0 ) 4 0 0 0 0 0Common stock, $10 par 6 0 0 0 0 0 2 5 0 0 0 0 2 0 0 0 0 0 (a)( 2 5 0 0 0 0 ) 6 0 0 0 0 0

(b)( 2 0 0 0 0 0 )

(a) 2 0 4 0 0

Minority interest in net assets of subsidiaries (b) 1 4 7 0 0 0 2 3 2 2 4 0

(e) 6 4 8 4 0

Retained earnings 2 1 9 8 0 0 1 3 2 0 0 0 1 2 0 0 0 0 ( 2 5 6 6 4 0 ) 2 1 5 1 6 0

Total liabilities & stockholders’ equity 1 7 3 0 8 0 0 6 0 4 0 0 0 6 0 2 6 0 0 ( 5 4 7 4 0 0 ) 2 3 9 0 0 0 0

* A decrease in discount and an increase in total liabilities & stockholders’ equity.



Pomerania Corporation and SubsidiaryWorking Paper Eliminations

December 31, 2005(a) Common Stock—Slovakia 2 5 0 0 0 0

Retained Earnings—Slovakia 1 0 7 0 0 0

Intercompany Investment Income—Pomerania 4 4 0 0 0

Investment in Slovakia Company Common

Stock—Pomerania 3 0 5 6 0 0

Dividends Declared—Slovakia 7 5 0 0 0

Minority Interest in Net Assets of

Subsidiaries 2 0 4 0 0


equity accounts of Slovakia at beginning of year; to

eliminate intercompany investment income and

dividends of Slovakia, and to establish minority interest

in net assets of Slovakia less minority interest in

dividends, computed as follows:

Minority interest, Jan. 2, 2005

($357,000 x 0.80) $285,600

Minority interest share of June 30, 2005

dividend ($45,000 x 0.80) (36,000)

Minority interest acquired by Pomerania

July 1, 1999 {[$285,600 – $36,000 +

($60,000 x 0.80)] x 60/80] (223,200)

Minority interest share of Dec. 31, 2005

dividend ($30,000 x 0.20) (6,000 )

Net minority interest $ 20,400

(b) Preferred Stock—Sylvania 5 0 0 0 0

Common Stock—Sylvania 2 0 0 0 0 0

Retained Earnings—Sylvania 1 0 0 0 0 0

Intercompany Investment Income—Pomerania 1 1 6 0 0

Investment in Sylvania Company Preferred

Stock—Pomerania 7 4 0 0

Investment in Sylvania Company Common

Stock—Pomerania 2 0 7 2 0 0

Minority Interest in Net Assets of Subsidiaries 1 4 7 0 0 0


equity accounts of Sylvania at beginning of year; to

eliminate intercompany investment income; and to

establish minority interest in net assets of Sylvania at

beginning of year, computed as follows:

Minority interest in preferred stock:

Total minority interest $147,000

(Continued on page 344.)


Pomerania Corporation (concluded) Pr. 10–7

Pomerania Corporation and Subsidiary

Working Paper Eliminations (concluded)

December 31, 2005

(c) Intercompany Sales—Pomerania 1 4 0 0 0 0

Intercompany Cost of Goods Sold—Pomerania 1 0 0 0 0 0

Cost of Goods Sold—Sylvania ($117,600 x 2/7) 3 3 6 0 0

Inventories—Sylvania ($22,400 x 2/7) 6 4 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized profits in inventories. (Income tax

effects are disregarded.)

(d) Intercompany Bonds Payable—Slovakia 2 5 0 0 0

Discount on Intercompany Bonds Payable—

Slovakia 2 0 0 0

Investment in Slovakia Company Bonds—

Pomerania 2 0 8 0 0

Gain on Extinguishment of Bonds—Slovakia 2 2 0 0

To eliminate intercompany investment in bonds and to

provide for realized gain on extinguishment of bonds.


(e) Minority Interest in Net Income of Subsidiaries 6 4 8 4 0

Minority Interest in Net Assets of Subsidiaries 6 4 8 4 0

To provide for minority interest in net income of

subsidiaries, computed as follows:

Slovakia Company [($60,000 x 0.80) +

($42,200 x 0.20)] $56,440

Sylvania Company:

Preferred stock ($20,000 x 1/5 x 0.90) 3,600

Common stock ($20,000 x 4/5 x 0.30) 4,800

Total minority interest $64,840


90 Minutes, StrongPlover Corporation Pr. 10–8

a. Plover Corporation and Starling Company

Analysis of Intercompany Receivables (Payables) Accounts

December 31, 2006

Plover Starling

Corporation Company

Mortgage note receivable (payable) [$12,000 –

($2,270 x 2) + $851] $ 8 3 1 1 $ ( 8 3 1 1 )

Cost and estimated earnings in excess of billings on

uncompleted contract [$45,000 + ($20,000 x 0.60)] 5 7 0 0 0

Dividend receivable (payable) ($2,500 x 0.20) 5 0 0 ( 5 0 0 )

Accounts receivable (payable) for merchandise

($238,000 – $211,000) 2 7 0 0 0 ( 2 7 0 0 0 )

Balance of intercompany accounts, Dec. 31, 2006 $ 3 5 8 1 1 $ 2 1 1 8 9

b. Plover Corporation

Adjusting Entry

December 31, 2006

Other Plant Assets 5 7 0 0 0

Intercompany Payables 5 7 0 0 0

To record liability to subsidiary for costs and earnings

on contract for construction in progress on Dec. 31, 2006

computed as follows:

Cost $45,000

Add: Earnings[($95,000 – $75,000) x 45/75] 12,000

Total costs and earnings $57,000


Plover Corporation (continued) Pr. 10–8

c. Plover Corporation and SubsidiaryWorking Paper for Consolidated Financial Statements

For Year Ended December 31, 2006Eliminations

Plover Starling increase

Corporation Company (decrease) Consolidated

Income Statement

Revenue:

Net sales 1 5 6 2 0 0 0 1 5 6 2 0 0 0

Intercompany sales 2 3 8 0 0 0 (e)( 2 3 8 0 0 0 )

Contract revenue 1 2 1 0 0 0 0 1 2 1 0 0 0 0Intercompany contract revenue 7 9 0 0 0 (c) ( 2 2 0 0 0 )

(d) ( 5 7 0 0 0 )

Interest revenue 1 9 1 4 9 1 9 1 4 9

Intercompany investment

income 4 2 5 0 0 (a) ( 4 2 5 0 0 )

Intercompany dividend revenue 5 0 0 (a) ( 5 0 0 )

Intercompany gain on sale of

land 4 0 0 0 (a) ( 4 0 0 0 )

Intercompany interest revenue

(expense) 8 5 1 ( 8 5 1 )

Total revenue 1 8 6 7 0 0 0 1 2 8 8 1 4 9 ( 3 6 4 0 0 0 ) 2 7 9 1 1 4 9

Costs and expenses and minority

interest:

Cost of goods sold 9 4 2 5 0 0 9 4 2 5 0 0

Intercompany cost of goods

sold 2 1 2 5 0 0 (e)( 2 1 2 5 0 0 )Cost of contract revenue 7 8 9 5 0 0 (e) ( 2 4 3 0 0 ) 7 6 5 2 0 0

Intercompany cost of contract (c) ( 1 7 5 0 0 )

revenue 6 2 5 0 0 (d) ( 4 5 0 0 0 )

Operating expenses and

income taxes expense 4 9 7 0 0 0 3 6 0 0 0 0 (c) ( 2 2 5 ) 8 5 6 7 7 5

Interest expense 4 9 0 0 0 3 1 1 4 9 8 0 1 4 9

Minority interest in net income

of subsidiary (f) 2 0 0 0 2 0 0 0

Total costs and expenses

and minority interest 1 7 0 1 0 0 0 1 2 4 3 1 4 9 ( 2 9 7 5 2 5 )* 2 6 4 6 6 2 4

Net income 1 6 6 0 0 0 4 5 0 0 0 ( 6 6 4 7 5 ) 1 4 4 5 2 5

Statement of Retained Earnings

Retained earnings, beginning of

year 1 3 9 3 1 1 4 9 5 0 0 (a) ( 4 1 0 0 0 ) 1 4 7 8 1 1

Net income 1 6 6 0 0 0 4 5 0 0 0 ( 6 6 4 7 5 ) 1 4 4 5 2 5

Subtotal 3 0 5 3 1 1 9 4 5 0 0 ( 1 0 7 4 7 5 ) 2 9 2 3 3 6

Dividends declared 2 5 0 0 (a) ( 2 5 0 0 )†

Retained earnings, end of year 3 0 5 3 1 1 9 2 0 0 0 ( 1 0 4 9 7 5 ) 2 9 2 3 3 6


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




Plover Corporation and SubsidiaryWorking Paper for Consolidated Financial Statements (concluded)


Eliminations

Plover Starling increase


Balance Sheet

Assets

Intercompany receivables

(payables) ( 2 1 1 8 9 ) 2 1 1 8 9

Costs and estimated earnings

in excess of billings on

uncompleted contracts 3 0 1 0 0 3 0 1 0 0

Inventories 2 1 7 0 0 0 1 1 7 5 0 0 (e) ( 1 2 0 0 ) 3 3 3 3 0 0

Investment in Starling Company

common stock 2 0 2 0 0 0 (a)( 2 0 2 0 0 0 )Land 3 4 0 0 0 4 2 0 0 0 (b) ( 4 0 0 0 ) 7 2 0 0 0

Other plant assets (net) 7 7 4 0 0 0 4 0 8 0 0 0 (c) ( 4 2 7 5 ) 1 1 6 5 7 2 5

(d) ( 1 2 0 0 0 )

Other assets 1 5 3 0 0 0 8 4 2 1 1 2 3 7 2 1 1

Total assets 1 3 5 8 8 1 1 7 0 3 0 0 0 ( 2 2 3 4 7 5 ) 1 8 3 8 3 3 6


Dividends payable 2 0 0 0 2 0 0 0

Mortgage notes payable 5 9 2 0 0 0 3 8 9 0 0 0 9 8 1 0 0 0

Other liabilities 2 0 3 0 0 0 7 0 0 0 0 2 7 3 0 0 0

5% noncumulative,

nonparticipating preferred

stock, $1 par 5 0 0 0 0 (a) ( 5 0 0 0 0 )

Common stock, no par 2 5 0 0 0 0 1 0 0 0 0 0 (a)( 1 0 0 0 0 0 ) 2 5 0 0 0 0

Minority interest in net assets (a) 3 8 0 0 0 4 0 0 0 0

of subsidiary (f) 2 0 0 0

Retained earnings 3 0 5 3 1 1 9 2 0 0 0 ( 1 0 4 9 7 5 ) 2 9 2 3 3 6

Retained earnings of subsidiary 8 5 0 0 (a) ( 8 5 0 0 )

Total liabilities &

stockholders’ equity 1 3 5 8 8 1 1 7 0 3 0 0 0 ( 2 2 3 4 7 5 ) 1 8 3 8 3 3 6



Plover Corporation and SubsidiaryWorking Paper Eliminations

December 31, 2006(a) 5% Noncumulative, Nonparticipating Preferred Stock—

Starling 5 0 0 0 0

Common Stock—Starling 1 0 0 0 0 0

Retained Earnings—Starling ($49,500 – $8,500) 4 1 0 0 0

Retained Earnings of Subsidiary—Plover 8 5 0 0

Intercompany Investment Income—Plover 4 2 5 0 0

Intercompany Dividend Revenue—Plover 5 0 0

Investment in Starling Company Preferred

and Common Stock—Plover 2 0 2 0 0 0

Dividends Declared—Starling 2 5 0 0

Minority Interest in Net Assets of Subsidiary 3 8 0 0 0


equity accounts of subsidiary at beginning of year;

to eliminate intercompany investment income and

dividends of subsidiary; and to establish minority

interest in preferred stock as follows:

Minority interest, Jan. 1, 2006

($50,000 x 0.80) $40,000

Less: Minority interest in preferred dividend

($2,500 x 0.80) 2,000

Net minority interest $38,000

(b) Intercompany Gain on Sale of Land—Plover ($15,000

– $11,000) 4 0 0 0

Land—Starling 4 0 0 0

To eliminate unrealized intercompany gain in land.


(c) Intercompany Contract Revenue—Starling 2 2 0 0 0

Intercompany Cost of Contract Revenue—

Starling 1 7 5 0 0

Operating Expenses—Plover ($4,500 x 0.10

x ½) 2 2 5

Other Plant Assets (net)—Plover ($4,500 –

$225) 4 2 7 5

To eliminate unrealized intercompany gain in office

equipment and related depreciation, and applicable

intercompany revenue and expense. (Income tax


(d) Intercompany Contract Revenue—Starling 5 7 0 0 0

Intercompany Cost of Contract Revenue—

Starling 4 5 0 0 0

Other Plant Assets (net)—Plover 1 2 0 0 0

To eliminate unrealized intercompany gain in

equipment under construction on Dec. 31, 2006, and

applicable intercompany revenue and expense.

(Income tax effects are disregarded.)(Continued on page 349.)


Plover Corporation (concluded) Pr. 10–8

Plover Corporation and Subsidiary

Working Paper Eliminations (concluded)

December 31, 2006

(e) Intercompany Sales—Plover 2 3 8 0 0 0

Intercompany Cost of Goods Sold—Plover 2 1 2 5 0 0

Cost of Contract Revenue—Starling

($226,800 x 12/112) 2 4 3 0 0

Inventories—Starling ($11,200 x 12/112) 1 2 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized profits in inventories. (Income tax


(f) Minority Interest in Net Income of Subsidiary 2 0 0 0

Minority Interest in Net Assets of Subsidiary 2 0 0 0

To provide for minority interest of preferred

stockholders, represented by dividend to preferred

stockholders ($2,500 x 0.80 = $2,000).


90 Minutes, StrongPullard Corporation Pr. 10–9

Pullard Corporation and Subsidiary

Working Paper for Consolidated Financial Statements

For Period Ended October 31, 2005

Eliminations

Pullard Staley increase


Income Statement

Revenue:Net sales 18 0 4 2 0 0 0 5 5 3 0 0 0 0 23 5 7 2 0 0 0

Intercompany sales 1 5 8 0 0 0 2 3 0 0 0 0 (c)( 1 5 8 0 0 0 )

(d)( 2 3 0 0 0 0 )

Intercompany investment

income 5 0 5 1 5 0 (a)( 5 0 5 1 5 0 )

Interest revenue 2 6 2 5 0 1 7 0 0 2 7 9 5 0

Intercompany interest

revenue (expense) 7 8 7 5 0 ( 7 8 7 5 0 )

Total revenue 18 8 1 0 1 5 0 5 6 8 2 9 5 0 ( 8 9 3 1 5 0 ) 23 5 9 9 9 5 0

Costs and expenses:

Cost of good sold 10 4 4 2 0 0 0 3 0 1 0 5 0 0 (a)( 1 2 8 0 0 0 ) 13 2 4 8 2 0 0

(d) ( 7 6 3 0 0 )Intercompany cost of goods

sold 1 5 8 0 0 0 1 4 9 5 0 0 (c)( 1 5 8 0 0 0 )

(d)( 1 4 9 5 0 0 )

Depreciation expense 1 1 0 3 0 0 0 5 8 8 7 5 0 (a) 2 5 0 0 0 0 1 9 4 1 7 5 0

Operating expenses and

income taxes expense 3 4 4 8 5 0 0 1 0 6 3 9 0 0 (a) 5 2 5 0 0 4 5 6 4 9 0 0

Interest expense 8 0 6 0 0 0 1 9 0 6 5 0 9 9 6 6 5 0

Total costs and expenses 15 9 5 7 5 0 0 5 0 0 3 3 0 0 ( 2 0 9 3 0 0 )* 20 7 5 1 5 0 0

Net income 2 8 5 2 6 5 0 6 7 9 6 5 0 ( 6 8 3 8 5 0 ) 2 8 4 8 4 5 0

Statement of Retained Earnings

Retained earnings, beginning

of period 12 6 8 3 5 0 0 1 0 0 6 0 0 0 (a)(1 0 0 6 0 0 0 ) 12 6 8 3 5 0 0

Net income 2 8 5 2 6 5 0 6 7 9 6 5 0 ( 6 8 3 8 5 0 ) 2 8 4 8 4 5 0

Retained earnings, end of

period 15 5 3 6 1 5 0 1 6 8 5 6 5 0 (1 6 8 9 8 5 0 ) 15 5 3 1 9 5 0




Pullard Corporation (continued) Pr. 10–9


Working Paper for Consolidated Financial Statements (concluded)

For Period Ended October 31, 2005

Eliminations

Pullard Staley increase


Balance Sheet

Assets

Cash 8 2 2 0 0 0 5 3 0 0 0 0 1 3 5 2 0 0 0

Notes receivable 8 5 0 0 0 8 5 0 0 0

Trade accounts receivable (net) 2 7 2 3 7 0 0 1 3 4 6 4 0 0 4 0 7 0 1 0 0

Intercompany receivables

(payables) 1 2 3 0 0 ( 1 2 3 0 0 )

Inventories 3 2 0 4 0 0 0 1 1 8 2 0 0 0 (d) ( 4 2 0 0 ) 4 3 8 1 8 0 0

Investment in Staley Company

common stock 6 3 5 5 1 5 0 (a)(6 3 5 5 1 5 0 )


preferred stock 1 5 0 0 0 0 (a) (1 5 0 0 0 0 )


bonds 1 5 0 0 0 0 0 (b)(1 5 0 0 0 0 0 )

Land 4 0 0 0 0 0 0 1 5 6 0 0 0 0 (a) 5 4 0 0 0 0 6 1 0 0 0 0 0

Other plant assets 17 1 6 1 0 0 0 7 8 5 0 0 0 0 (a)2 7 5 0 0 0 0 27 7 6 1 0 0 0

Accumulated depreciation (6 6 7 3 0 0 0 ) (3 8 3 8 7 5 0 ) (a)1 0 0 0 0 0 0 * (11

5 1 1 7 5 0 )

Other assets 2 6 3 0 0 0 1 4 0 0 0 0 (a) ( 9 0 0 0 0 ) 3 1 3 0 0 0

Goodwill (a)1 3 4 7 5 0 0 1 3 4 7 5 0 0

Total assets 29 5 1 8 1 5 0 8 8 4 2 3 5 0 (4 4 6 1 8 5 0 ) 33 8 9 8 6 5 0


Notes payable 1 1 5 0 0 0 1 1 5 0 0 0

Trade accounts payable 1 3 4 2 0 0 0 1 6 9 7 0 0 1 5 1 1 7 0 0

7% bonds payable 3 5 0 0 0 0 0 3 5 0 0 0 0 0

Intercompany 7% bonds payable 1 5 0 0 0 0 0 (b)(1 5 0 0 0 0 0 )

Long-term debt 10 0 0 0 0 0 0 10 0 0 0 0 0 0

Preferred stock, $5 par 7 5 0 0 0 0 (a)( 7 5 0 0 0 0 )

Common stock, $10 par 2 4 0 0 0 0 0 1 0 0 0 0 0 0 (a)(1 0 0 0 0 0 0 ) 2 4 0 0 0 0 0

Additional paid-in capital 2 4 0 0 0 0 1 2 2 0 0 0 (a)( 1 2 2 0 0 0 ) 2 4 0 0 0 0

Minority interest in net assets

of subsidiary (a) 6 0 0 0 0 0 6 0 0 0 0 0

Retained earnings 15 5 3 6 1 5 0 1 6 8 5 6 5 0 (1 6 8 9 8 5 0 ) 15 5 3 1 9 5 0

Total liabilities &

stockholders’ equity 29 5 1 8 1 5 0 8 8 4 2 3 5 0 (4 4 6 1 8 5 0 ) 33 8 9 8 6 5 0

* An increase in accumulated depreciation and a decrease in total assets.


Pullard Corporation (concluded) Pr. 10–9



October 31, 2005

(a) Preferred Stock—Staley 7 5 0 0 0 0

Common Stock—Staley 1 0 0 0 0 0 0

Additional Paid-in Capital—Staley 1 2 2 0 0 0

Retained earnings—Staley 1 0 0 6 0 0 0

Intercompany Investment Income—Pullard 5 0 5 1 5 0

Land—Staley ($2,100,000 – $1,560,000) 5 4 0 0 0 0

Other Plant Assets—Staley ($10,600,000 – $7,850,000) 2 7 5 0 0 0 0

Goodwill—Staley ($1,400,000 – $52,500) 1 3 4 7 5 0 0

Depreciation Expense—Staley [($2,000,000 ÷ 6) x ¾] 2 5 0 0 0 0

Operating Expenses—Staley [($1,400,000 ÷ 20) x ¾] 5 2 5 0 0

Cost of Goods Sold—Staley ($828,000 –

$700,000) 1 2 8 0 0 0

Accumulated Depreciation—Staley

[($4,000,000 – $3,250,000) + $250,000] 1 0 0 0 0 0 0

Other Assets—Staley ($140,000 – $50,000) 9 0 0 0 0

Investment in Staley Company Common

Stock—Pullard 6 3 5 5 1 5 0

Investment in Staley Company Preferred

Stock—Pullard 1 5 0 0 0 0

Minority interest in Net Assets of Subsidiary

($750,000 – $150,000) 6 0 0 0 0 0

To eliminate intercompany investment and related equity

accounts of subsidiary on date of business combination;

to eliminate intercompany investment income and

subsidiary dividends; to provide for unamortized

differences between current fair values and carrying

amount of subsidiary’s identifiable net assets

on date of business combination, and related

amortization; to recognize unimpaired goodwill;

and to provide for minority interest in subsidiary’s

preferred stock on date of business combination.


(b) Intercompany 7% Bonds Payable—Staley 1 5 0 0 0 0 0

Investment in Staley Company Bonds—Pullard 1 5 0 0 0 0 0

To eliminate subsidiary’s bonds owned by parent

company.

(c) Intercompany Sales—Pullard 1 5 8 0 0 0

Intercompany Cost of Goods Sold—Pullard 1 5 8 0 0 0

To eliminate parent company’s sales to subsidiary.

(d) Intercompany Sales—Staley 2 3 0 0 0 0

Intercompany cost of Goods Sold—Staley 1 4 9 5 0 0

Cost of Goods Sold—Pullard ($218,000 x 0.35) 7 6 3 0 0

Inventories—Pullard ($12,000 x 0.35) 4 2 0 0

To eliminate intercompany sales, cost of good sold, and

unrealized gross profit in inventories for subsidiary’s sales

to parent company. (Income tax effects are disregarded.)


chapter 10, modern advanced accounting-review q & exr

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