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Chapter 8 Test Bank

CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS

Multiple Choice Questions

LO11. Which of the following is correct? The direct sale of

additional shares to the parent company from a subsidiary

a. decreases the parent’s interest and decreases the noncontrolling shareholders’ interest.

b. decreases the parent’s interest and increases the noncontrolling shareholders’ interest.

c. increases the parent’s interest and increases the noncontrolling shareholders’ interest.

d. increases the parent’s interest and decreases the noncontrolling shareholders’ interest.

Use the following information in answering questions 2 and 3.

On December 31, 2006, Giant-Petrel Corporation’s Investment in Penguin Corporation account had a balance of $525,000. The balance consisted of 80% of Penguin’s $600,000 stockholders’ equity on that date and $45,000 of goodwill. On January 2, 2007, Penguin increased its outstanding common stock from 15,000 to 18,000 shares.

LO12. Assume that Penguin sold the additional 3,000 shares directly

to Giant-Petrel for $150,000 on January 2, 2007. Giant-Petrel’s percentage ownership in Penguin immediately after the purchase of the additional stock is

a. 66-2/3%.b. 80%.c. 83-1/3%.d. 86-2/3%

©2009 Pearson Education, Inc. publishing as Prentice Hall8-1

LO13. Assume that Penguin sold the additional 3,000 shares to outside

interests for $150,000 on January 2, 2007. Giant-Petrel’s percentage ownership immediately after the sale of stock would be

a. 66-2/3%.b. 75%.c. 80%.d. 83-1/3%.

Use the following information in answering questions 4 and 5.

Bristlebird Corporation purchased an 80% interest in Underbrush Corporation on July 1, 2005 at its book value, and on January 1, 2006 its Investment in Underbrush account was $300,000, equal to its book value. Underbrush’s net income for 2006 was $99,000; no dividends were declared. On March 1, 2006, Bristlebird reduced its interest in Underbrush by selling a 20% interest, one-fourth of its investment, for $84,000.

LO14. If Bristlebird uses a “beginning-of-the-year” sale assumption,

its gain on sale and income from Underbrush for 2006 will be

Gain on Sale Income from Underbrusha. $5,700 $59,400.b. $5,700 $62,700.c. $9,000 $59,400.d. $9,000 $62,700.

LO15. If Bristlebird uses the “actual-sale-date” sales assumption,

its gain on the sale and income from Underbrush for 2006 will be:

Gain on Sale Income from Underbrusha. $21,360 $59,400b. $21,360 $62,700c. $26,640 $59,400d. $26,640 $62,700


LO16. On January 1, 2006, Finch Corporation owned a 90% interest in

Nest Corporation at which time the Investment in Nest account had a balance of $350,000, which was 90% of Nest’s $370,000 in stockholders’ equity and $17,000 of goodwill. During 2006, Nest had income of $35,000 and paid dividends of $3,000 on June 1 and another $3,000 on November 1. On May 1, 2006, Finch sold one-fifth of its interest in Nest for $92,000. If the “beginning-of-the-period” sales assumption is used, the balance in the Investment in Nest account on December 31, 2006 is

a. $300,300.b. $300,880.c. $304,480.d. $306,100.

LO17. On January 1, 2006, Finch Corporation owned a 90% interest in

Nest Corporation at which time the Investment in Nest account had a balance of $350,000, which was 90% of Nest’s $370,000 in stockholders’ equity and $17,000 of goodwill. During 2006, Nest had income of $35,000 and paid dividends of $3,000 on June 1 and another $3,000 on November 1. What would be the balance in the Investment in Nest account on December 31, 2006 if Finch sold one-ninth of its interest in Nest on May 1, 2006 for $47,000 and the “beginning-of-the-period” sales assumption is used?

a. $333,333.b. $334,311.c. $336,333.d. $336,711.

Use the following information for questions 8 and 9.

Button-quail Corporation owned a 70% interest in Savannah Corporation on December 31, 2006, and Button-quail’s Investment in Savannah account had a balance of $3,900,000. Savannah’s stockholders’ equity on this date was as follows:

Capital stock, $10 par value $ 3,000,000Retained Earnings 2,400,000Total Stockholders’ Equity $ 5,400,000

On January 1, 2007, Savannah issues 80,000 new shares of common stock to Button-quail for $16 each.


LO18. What is Button-quail’s percentage ownership in Savannah after

Savannah issues its stock to Button-quail?

a. 76.32%.b. 80.43%.c. 82.57%.d. 83.43%.

LO1 9. Assuming that Savannah has no fixed assets, what is the amount

of goodwill associated with the issuance of shares to Button-quail?

a. $38,176.b. $40,232.c. $41,302.d. $41,732.

Use the following information for questions 10, and 11.

Great Frigatebird Corporation acquired a 90% interest in Slipstream Corporation at its $810,000 book value on December 31, 2005. A summary of the stockholders’ equity for Slipstream at the end of 2005 and 2006 is as follows:

12/31/05 12/31/06Capital stock, $10 par $ 600,000 $ 600,000Additional paid-in capital 30,000 30,000Retained Earnings 270,000 420,000Total stockholders’ equity $ 900,000 $ 1,050,000

On January 1, 2007, Slipstream sold 10,000 new shares of its $10 par value common stock for $45 per share.

LO110. If Slipstream sold the additional shares to the general public,

Great Frigatebird’s Investment in Slipstream account after the sale would be

a. $945,000.b. $1,157,100.c. $1,225,000.d. $1,245,000.


LO111. If Slipstream sold the additional shares directly to Great

Frigatebird, Great Frigatebird’s Investment in Slipstream account after the sale would be

a. $1,350,000.b. $1,395,000.c. $1,425,000.d. $1,500,000.

LO212. Which of the following is correct about the treatment of

preacquisition earnings on consolidated financial statements?

I. Exclude the subsidiary sales and expenses prior to acquisition from consolidated sales and expenses.

II. Include the subsidiary sales and expenses prior to acquisition and deduct preacquisition income as a separate item.

a. I only.b. II only.c. I or II.d. Neither I nor II.

LO113. If a parent company and outside investors purchase shares of a

subsidiary in relation to existing stock ownership (ratably)

a. there will be no adjustment to additional paid-in capital regardless whether the stock is sold above or below book value.

b. the transaction will requirement an investment account adjustment.

c. the transaction will require the elimination of a gain if it was conducted at economic arm's length.

d. the transaction will require the elimination of a loss if it was conducted at economic arm's length.


LO214. Heron Corporation acquired 40% of WatersEdge Inc.’s common

stock for $400,000 book value on January 1, 2006 when WatersEdge equity consisted of $500,000 capital stock and $500,000 retained earnings. On September 1, 2006 Heron bought an additional 30% interest in WatersEdge for $210,000. In both cases, Watersedge book value equaled the fair value.

WatersEdge had income of $120,000 earned evenly through 2006 and paid dividends quarterly of $25,000.

The consolidated income statement of Heron Corporation and Subsidiary for the year 2006 should show pre-acquisition income of:

a. $ 5,333.b. $ 8,000.c. $32,000.d. $56,000.

Use the following information to answer questions 15 through 18.

Bowerbird Corporation purchased a 70% interest in Stage Corporation on June 1, 2006 at a purchase price of $390,400. On this date, Stage’s book values were equal to its fair values except for an unrecorded copyright, and its stockholders’ equity consisted of $290,000 of Common Stock and $210,000 of Retained Earnings. All cost-book differentials were attributed to the copyright, which had an estimated economic life of ten years.

During 2006, Stage earned $120,000 of net income earned uniformly throughout the year and paid $6,000 of dividends on March 1 and another $6,000 on September 1.

LO215. Minority interest income for 2006 is

a. $36,000.b. $32,400.c. $61,200.d. $50,000.


LO216. Preacquisition income for 2006 is

a. $50,000.b. $35,000.c. $44,000.d. $36,000.

LO217. The value of the copyright that is included in Bowerbird’

Investment in Stage account on June 1, 2006 is

a. $ 2,600.b. $ 5,400.c. $ 9,600.d. $10,400.

LO218. The amortization expense recorded for the copyright in 2006 is:

a. $315.b. $560.c. $815.

d. $960.


LO319. The acquisition of treasury stock by a subsidiary above book

value

a. decreases the parent’s share of subsidiary book value and decreases the parent’s ownership percentage.

b. decreases the parent’s share of subsidiary book value and increases the parent’s ownership percentage.

c. increases the parent’s share of subsidiary book value and decreases the parent’s ownership percentage.

d. increases the parent’s share of subsidiary book value and increases the parent’s ownership percentage.

LO320. A stock dividend by a subsidiary causes

a. the parent company investment account to decrease.b. the parent company investment account to remain the same.c. the parent company investment account to decrease.d. any noncontrolling interest equity to increase.


LO1Exercise 1

At December 31, 2004, the stockholders’ equity of Goshawk Corporation and its 80%-owned subsidiary, Treetop Corporation, are as follows:

Goshawk TreetopCommon stock, $10 par value $ 20,000 $ 12,000Retained earnings 8,000 6,000Totals $ 28,000 $ 18,000

Goshawk’s investment in Treetop’s account balance is equal to the Treetop book value. Treetop Corporation issued 225 additional shares of common stock directly to Goshawk on January 1, 2005 at $18 per share.

Required: Compute the following:

1. Compute the balance in Goshawk’s Investment in Treetop account on January 1, 2005 after the new investment is recorded.

2. Determine the goodwill (if any) from Goshawk’s new investment in the 225 Treetop shares.

LO1Exercise 2

At the beginning of 2006, Starling Corporation held an 80% interest in Twig Corporation. The investment account balance was $900,000, consisting of 80% of Twig’s $1,095,000 of net assets and $24,000 of goodwill.

During 2006, Twig uniformly earned $234,000 and paid dividends of $37,500 on April 1 and again on October 1. On August 1, 2006, Starling sold 30% of its investment in Twig for $262,500, thereby reducing its interest in Twig to 56%.

Required: Compute the following using the actual sales date assumption:

1. Gain or loss on sale.

2. Income from Twig for 2006.

3. Noncontrolling interest for 2006.

LO1©2009 Pearson Education, Inc. publishing as Prentice Hall

8-9

Exercise 3

At the beginning of 2006, Flycatcher Corporation held a 60% interest in Lichen Corporation. The investment account balance was $2,100,000, consisting of 60% of Lichen’s $3,226,666 of net assets and $164,000 of goodwill.

During 2006, Lichen earned $300,000 and paid dividends of $110,000 on November 1. On October 1, 2006, Flycatcher sold 10% of its investment in Lichen for $364,000, thereby reducing its interest in Lichen to 54%.

Required: Compute the following using the actual sales date assumption:

1. Gain or loss on sale.

2. Income from Lichen for 2006.

3. Noncontrolling interest expense for 2006.

LO1Exercise 4

At December 31, 2005 year-end, Lapwing Corporation’s investment in Openground Inc. was 200,000 consisting of 80% of Openground’s $250,000 stockholders’ equity on that date. On April 1, 2006, Lapwing sold 20% interest (one-fourth of its holdings) in Openground for $65,000. During 2006, Openground had net income of $75,000 and on July 1, 2006, Openground paid dividends of $40,000.

Required:

1. Record the journal entries before year-end 2006 assuming the equity method.


LO1Exercise 5

On April 1, 2006, Gouldian Corporation paid $120,000 for a 25% interest in Termite Mound Corporation. On July 1, 2006, Gouldian acquired an additional 45% (based on the January 1, 2006 number of Termite Mound shares outstanding) for $236,400. Termite Mound’s stockholders’ equity on January 1, 2006 consisted of $300,000 of $10 par value Common Stock and $100,000 of Retained Earnings. Termite Mound’s net income for 2006 was $144,000 earned uniformly throughout the year.

Required: Calculate each of the following amounts:

1. Gouldian’s income from Termite Mound for 2006.

2. The amount of minority interest income that will appear on the consolidated income statement of Gouldian and Subsidiary for 2006.

LO2Exercise 6

Catbird Corporation paid $240,000 on April 1, 2006 for all of the common stock of Bug Corporation in a business acquisition. Bug’s stockholders’ equity at April 1 consisted of the $195,000 January 1, 2006 stockholders’ equity of Bug plus first quarter income less dividends. Dividends are paid quarterly. Any excess cost over book value acquired is goodwill with a 10-year amortization period.

Additional information:

1. Catbird sold equipment with a 5-year remaining useful life to Bug on July 1, 2006 for a gain of $10,000.

2. Bug’s accounts payable balance at December 31 includes $5,000 due to Catbird from the sale of equipment.

3. Catbird accounts for its investment in Bug using the equity method as a one-line consolidation.

Required:

Complete the working papers to consolidate the financial statements of Catbird and Bug Corporations for the year 2006.


Catbird Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2006

Catbird BugEliminations Non-

cntlConsol-idatedDebit Credit

INCOME STATEMENTNet Sales $ 500,000 $170,000Income fromBug 21,000Gain on sale ofEquipment 10,000Cost of sales (230,000) ( 90,000)Depreciation (113,000) ( 30,000)Other expenses ( 30,000) ( 10,000)PreacquisitionIncomeNet income 158,000 40,000RetainedEarnings 1/1 75,000 50,000Add: Net income 158,000 40,000Dividends ( 30,000) ( 20,000)RetainedEarnings 12/31 $ 203,000 $70,000BALANCE SHEETCash 47,000 30,000Receivables 80,000 50,000Inventories 120,000 90,000Equipment-net 80,000 80,000Investment inBug

246,000

GoodwillTOTAL ASSETS $ 573,000 $250,000LIAB. & EQUITYAccounts and notes payable 140,000 35,000Capital stock 200,000 100,000Paid-in capital 30,000 45,000RetainedEarnings 203,000 70,000NoncontrollingInterestTOTAL LIAB. & EQUITY

$ 573,000 $250,000


LO2Exercise 7

Swallow Corporation paid $62,000 to acquire 100% of Gully Corporation’s outstanding voting common stock at book value on May 1, 2006. The stockholders’ equity of Gully on January 1, 2006 consisted of $40,000 Capital Stock and $20,000 Retained Earnings. Gully’s total dividends for 2006 were $6,000, paid equally on April 1 and October 1. Gully’s net income was earned uniformly throughout 2006.

During 2006, Swallow made sales of $10,000 to Gully at a gross profit of $3,000. One-half of this merchandise was inventoried by Gully at year-end, and one-half of the 2006 intercompany sales were unpaid at year-end 2006.

Swallow sold equipment with a ten-year remaining useful life to Gully at a $2,000 gain on December 31, 2006. The straight-line depreciation method is used.

Financial statements of Swallow and Gully Corporations for 2006 appear in the first two columns of the partially completed consolidation working papers.

Required:

Complete the working papers for Swallow Corporation and Subsidiary for the year 2006.


Swallow Corporation and SubsidiaryConsolidation Working Papers


Swallow GullyEliminations Non-

contlConsol-idatedDebit Credit

INCOME STATEMENTNet Sales $ 80,000 $40,000Income from Gully 6,500Gain on sale ofEquipment 2,000Cost of sales ( 40,000) ( 15,000)Depreciation ( 11,000) ( 4,000)Other expenses ( 12,500) ( 6,000)PreacquisitionIncomeNet income 25,000 15,000RetainedEarnings 60,000 20,000Add: Net income 25,000 15,000Dividends ( 10,000) ( 6,000)RetainedEarnings 12/31 $ 75,000 $29,000BALANCE SHEETReceivables-net 19,000 16,000Inventories 10,000 8,000Other assets 10,500 14,000Land 5,000 5,000Buildings-net 20,000 15,000Investment inGully 65,500

Equipment-net 40,000 22,000TOTAL ASSETS $ 170,000 $80,000LIAB & EQUITYAccounts payable 16,000 10,000Other debt 19,000 1,000Common stock 60,000 40,000RetainedEarnings

75,000 29,000

NoncontrollingInterestTOTAL LIAB. & EQUITY

$ 170,000 $80,000


LO2

Exercise 8

Swift Corporation paid $40,000 cash for an 80% interest in the voting common stock of Weather Front Corporation on July 1, 2005, when Weather Front’s stockholders’ equity consisted of $30,000 of $10 par common stock and $15,000 retained earnings. The excess cost over the book value of the investment was assigned $2,000 to undervalued inventory items that were sold in 2005, with the remaining excess being assigned to goodwill. During the last half of 2005, Weather Front reported $4,000 net income and declared dividends of $2,000, and Swift reported income from Weather Front of $1,100.

There were no intercompany sales during the last half of 2005, but during 2006 Swift sold inventory items that cost $8,000 to Weather Front for $12,000. Half of these inventory items were included in Weather Front Corporation’s Inventory at December 31, 2006, with $1,000 unpaid by Weather Front at December 31, 2006.

On January 5, 2006, Swift sold a plant asset with a book value of $2,500 and a remaining useful life of 5 years to Weather Front for $4,000. Weather Front Corporation owned the plant asset at year-end.

Swift Corporation uses the equity method to account for its investment in Weather Front, and the changes in Swift’s Investment in Weather Front account fromAcquisition until year-end 2006 are as follows:

Investment in Weather Front, July 1, 2005 $ 40,000Income from Weather Front July 1 – December 31, 2005 1,200Less: Share of dividends received ( 1,600 )Investment in Weather Front at December 31, 2005 39,600Add: Income from Weather Front for 2006 4,800Less: Dividends received ( 3,200 )Investment in Weather Front at December 31, 2006 $ 41,200

Required:Complete the working papers at the end of the year December 31, 2006 that are given below.


Swift Corporation and SubsidiaryConsolidation Working Papers


SwiftWeather Front

Eliminations Non-cntl

Consol-idatedDebit Credit

INCOME STATEMENTNet Sales $

60,000

$34,000

Income from Weather Front

4,800

Gain on sale ofEquipment 1,500Cost of sales ( 27,000) ( 16,000)Depreciation ( 5,000) ( 3,000)Other expenses ( 12,100) ( 5,000)Noncntl. expenseNet income 22,200 10,000Retained Earnings 10,100 17,000Add: Net income 22,200 10,000Dividends ( 12,000) ( 4,000)RetainedEarnings 12/31 $ 20,300 $23,000BALANCE SHEETCash 2,300 7,000Net Receivables 7,000 5,000Dividends Rec 800Inventories 7,000 5,000Plant assets-net 22,000 43,000Investment inWeather Front 41,200

TOTAL ASSETS $ 80,300 $60,000LIAB. & EQUITYAccounts payable 17,000 6,000DividendsPayable 3,000 1,000Common stock 40,000 30,000RetainedEarnings 20,300

23,000

NoncontrollingInterestTOTAL LIAB. & EQUITIES

$ 80,300 $60,000


LO2Exercise 9

On September 1, 2006, Warbler Corporation acquired an 80% interest in Reed Corporation for $700,000. Reed’s stockholders’ equity at January 1, 2006 consisted of $200,000 of Common Stock and $600,000 of Retained Earnings. The book values of its assets and liabilities were equal to their respective fair values on this date. All excess purchase cost was attributed to goodwill.

During 2006, Reed uniformly earned $78,000 and paid dividends of $9,000 on each of four dates: February 1, June 1, August 1, and December 1.


1. Warbler’s income from Reed for 2006.

2. Preacquisition income that will appear on the consolidated income statement of Warbler Corporation and Subsidiary for 2006.

3. Minority interest income for 2006.

LO3Exercise 10

At January 1, 2005, the stockholders’ equity of Raven Corporation and its 60%-owned subsidiary, Trunk Corporation, are as follows:

Raven TrunkCommon stock, $10 par value $ 700,000 $ 400,000Retained earnings 800,000 50,000Totals $ 1,500,000 $ 450,000

Trunk’s net income for 2005 was $40,000. Raven’s Investment in Trunk account balance on December 31, 2005 was equal to its underlying equity on December 31, 2005. Trunk Corporation issued 10,000 additional shares of common stock directly to Raven on January 1, 2006 at $12 per share.


1. Compute the balance in Raven’s Investment in Trunk account on January 1, 2006 after its purchase of the additional Trunk shares.

2. Calculate any positive or negative goodwill stemming from Raven’s investment in the 10,000 Trunk shares.


Solutions

Multiple Choice Questions

1 d

2 c (15,000 shares/18,000 shares) = 83.33%

3 a (12,000 shares/18,000 shares) = 66.67%

4 c Selling price $ 84,000Book value of interest sold$300,000 x (20%/80%) = 75,000Gain on sale $ 9,000

Income from Underbrush $99,000 x (80% - 20%) = $ 59,400

5 b Selling price $ 84,000Book value of interest sold:Beginning balance $ 300,000Income for 2 months$99,000 x 1/6 x 80% = 13,200Adjusted book value 313,200Percentage of interest sold 20%Book value applied 62,640 62,640Gain on sale $ 21,360

Income from Underbrush:Jan 1 – Mar 1 $16,500 x 80% = $ 13,200Mar 1 – Dec 31 $82,500 x 60% = 49,500Income from Underbrush $ 62,700

6 b Selling price $ 92,000Book value of interest sold:($350,000 x 20%) 70,000Gain on sale $ 22,000

Finch’s share of Nest’sIncome: $35,000 x (90%-18%) = $ 25,200

Finch’s Investment account balance at December 31, 2006:Jan 1, 2006 balance $ 350,000


Less: Book value of interest sold ( 70,000 )Plus: Income from Nest 25,200Less: Dividends $6,000 x 72% ( 4,320 )Investment account balance at12/31/2006 $ 300,880

7 b Selling price $ 47,000Book value of interest sold:($350,000 x 1/9) 38,889Gain on sale $ 8,111

Finch’s share of Nest’sIncome: $35,000 x (90%-10%) = $ 28,000

Finch’s Investment account balance at December 31, 2006:Jan 1, 2006 balance $ 350,000Less: Book value of interest sold ( 38,889 )Plus: Income from Nest 28,000Less: Dividends $6,000 x 80% ( 4,800 )Investment account balance at12/31/2006 $ 334,311

8 a (210,000 shares + 80,000 shares)/380,000 shares = 76.32%

9 a Savannah’s equity after the issuance of the new shares($5,400,000 + $1,280,000) $ 6,680,000Button-quail’s ownership percentage

76.32%

Button-quail’s share of Savannah’s equity now $ 5,098,176Button-quail’s previous share of Savannah’s equity ($5,400,000 x 70%) 3,780,000Savannah’s equity acquired in the purchase $ 1,318,176Amount spent to acquire stock 1,280,000Goodwill purchased $ 38,176


10 b Slipstream’s stockholders’ equity prior to the stock issuance $ 1,050,000Plus: Capital received from new stock issued 450,000New stockholders’ equity $ 1,500,000Great Frigatebird’s ownership percentage

77.14%

Great Frigatebird’s adjusted investment in Slipstream $ 1,157,100

11 b Investment balance at 12/31/2006($1,050,000 x 90%) $ 945,000Additional investment (10,000Shares x $45) 450,000Investment account balance $ 1,395,000

12 b

13 a

14 c $120,000 net income x 2/3 year x 40%

$ 32,000

15 a $120,000 x 30% = $ 36,000

16 b ($120,000/12 months) x 5 months x 70% $ 35,000

17 c Cost of 70% interest $ 390,400Book value of interestAcquired:January 1 balance $ 500,000Add: 5 months of income 50,000Less: Dividends paid before June 1

( 6,000 )Total book value at 6/1 544,000Majority percentage 70%Book value of interestAcquired 380,800Copyright value $ 9,600

18 b From Question 17:($9,600/120 months) x7 months 560


19 b

20 b

Exercise 1

Requirement 1Cost of investment ($18,000 x 80%)

$ 14,400Plus: Purchase of 225 Treetop shares at $18 on January 1, 2005 4,050Investment account balance` $ 17,450

Requirement 2Treetop’s stockholders’ equity at January 1, 2005 $ 18,000Plus: Additional capital from the shares issued 4,050Total stockholders’ equity after issuance of the new shares $ 22,050Goshawk’s percentage(960 + 225)/1425 = 83%Goshawk’s share of Treetop’s equity after issuance $ 18,302Goshawk’s share of Treetop’s equity before stock issuance 14,400Equity acquired in the purchase 4,702Cost of interest acquired 4,050Positive goodwill $ 652


Exercise 2

Preliminary computationsInvestment balance, January 1 $ 900,000Income from Twig ($234,000 x 7/12 x 80%) 109,200Less: April 1 dividends ($37,500 x 80%) ( 30,000 )

Book value at July 31, 2006 $ 979,200

Requirement 1

Proceeds from sale $ 262,500Book value of interest sold($979,200 x 30%) 293,760Loss on sale $ ( 31,260 )

Requirement 2Income from Twig from Jan 1 through July 31 (from above)$109,200 $ 109,200Income from August 1 – December 31($234,000 x 5/12 x 56%) 54,600

Income from Twig for 2006 $ 163,800

Requirement 3Noncontrolling interest expense:Jan 1 to Jul 31 ($234,000 x 7/12 x 20%) $ 27,300Aug 1 to Dec 31 ($234,000 x 5/12 x 44%) 42,900Noncontrolling interest expense $ 70,200


Exercise 3

Preliminary computationsInvestment balance, January 1 $ 2,100,000Income from Lichen ($300,000 x 9/12 x 60%) 135,000

Book value at September 30, 2006 $ 2,235,000

Requirement 1Proceeds from sale $ 364,000Book value of interest sold($1,965,000 x 10%) 223,500Gain on sale $ 140,500

Requirement 2Income from Lichen from Jan 1 through September 30 (from above)

$ 135,000Income from October 1–December 31($300,000 x 3/12 x 54%) 40,500

Income from Lichen for 2006 $ 175,500

Requirement 3Noncontrolling interest expense:Jan 1 to Sep 30 ($300,000 x 9/12 x 40%) $ 90,000Oct 1 to Dec 31 ($300,000 x 3/12 x 46%) 34,500Noncontrolling interest $ 124,500


Exercise 4

Requirement Debit CreditApril 1Investment in Openground 18,750 Income from Openground 18,750

Cash 65,000 Investment in Openground 43,750 Gain from sale of investment in Openground

21,250

July 1Cash 24,000 Investment in Openground 24,000

December 31Investment in Openground 33,750 Income from Openground 33,750

Selling price $ 65,000Book value of interest sold:Beginning balance $ 200,000Income for 3 months$75,000 x 1/4 x 80% = 18,750Adjusted book value 218,750Percentage of interest sold 20%Book value applied 43,750 43,750Gain on sale $ 21,250


Exercise 5

Preliminary computations:Purchase 1:Purchase price $ 120,000Book value at April 1st:Stockholders’ equity at January 1 $ 400,000Plus: Income through March 36,000Total book value 436,000Interest acquired 25%Book value of interest acquired $ 109,000 109,000Goodwill $ $ 11,000

Purchase 2:Purchase price $ $ 236,400Stockholders’ equity at January 1 $ 400,000Income through June 30 72,000Total book value 472,000Interest acquired 45%Book value of interest acquired $ 212,400 212,400Goodwill $ 24,000

Requirement 1Gouldian’s income from Termite Mound:$144,000 x 9/12 x 25% $ 27,000$144,000 x 6/12 x 45% 32,400

Income from Termite Mound $ 59,400

Requirement 2Minority interest income:$144,000 x 30% = $ 43,200


Exercise 6

Catbird Corporation and SubsidiaryConsolidation Working Papers


Catbird BugEliminations Min

IntConsol-idatedDebit Credit

INCOME STATEMENTNet Sales $ 500,000 $170,000 $670,000Income fromBug 21,000 c $ 21,000Gain on sale ofequipment 10,000 a 10,000Cost of sales (230,000) ( 90,000) (320,000)Depreciation (113,000) ( 30,000) b $ 1,000 (142,000)Other expenses ( 30,000) ( 10,000) ( 40,000)Preacquisitionincome d 10,000 ( 10,000)Net income 158,000 40,000 158,000RetainedEarnings 75,000 50,000 d 50,000 75,000Add: Net income 158,000 40,000 158,000DividendsPreacquisition dividends

( 30,000) ( 20,000) c

d

15,000

5,000

( 30,000)

RetainedEarnings 12/31 $ 203,000 $70,000 $203,000BALANCE SHEETCash 47,000 30,000 77,000Receivables 80,000 50,000 e 5,000 125,000Inventories 120,000 90,000 210,000Equipment-net 80,000 80,000 b 1,000 a 10,000 151,000Investment inBug

246,000

cd

6,000240,000

Goodwill d 40,000 40,000TOTAL ASSETS $ 573,000 $250,000 $603,000LIAB. & EQUITYAccounts and notes payable 140,000 35,000 e 5,000 170,000Capital stock 200,000 100,000 d 100,000 200,000Paid-in capital 30,000 45,000 d 45,000 30,000RetainedEarnings 203,000 70,000 203,000NoncontrollinginterestTOTAL LIAB. & EQUITY

$ 573,000 $250,000

$603,000


Exercise 7

Swallow Corporation and SubsidiaryConsolidation Working Papers


Swallow GullyEliminations Min

IntConsol-idatedDebit Credit

INCOME STATEMENTNet Sales $ 80,000 $40,000 a $ 10,000 $110,000Income from Gully

6,500 d 6,500

Gain on sale ofequipment 2,000 c 2,000Cost of sales ( 40,000) ( 15,000) b 1,500 a $ 10,000 ( 46,500)Depreciation ( 11,000) ( 4,000) ( 15,000)Other expenses ( 12,500) ( 6,000) ( 18,500)Preacquisitionincome e 5,000 ( 5,000)Net income 25,000 15,000 25,000RetainedEarnings 60,000 20,000 e 20,000 60,000Add: Net income 25,000 15,000 25,000Dividends ( 10,000) ( 6,000) d

e3,0003,000 ( 10,000)

RetainedEarnings 12/31 $ 75,000 $29,000 $75,000BALANCE SHEETReceivables-net 19,000 16,000 f 5,000 30,000Inventories 10,000 8,000 b 1,500 16,500Other assets 10,500 14,000 24,500Land 5,000 5,000 10,000Buildings-net 20,000 15,000 35,000Investment inGully 65,500

de

3,50062,000

Equipment-net 40,000 22,000 c 2,000 60,000TOTAL ASSETS $ 170,000 $80,000 $176,000EQUITIESAccounts payable 16,000 10,000 f 5,000 21,000Other debt 19,000 1,000 20,000Common stock 60,000 40,000 e 40,000 60,000RetainedEarnings

75,000 29,000 75,000

MinorityinterestTOTAL EQUITIES $ 170,000 $80,000 $176,000


Exercise 8Swift Corporation and Subsidiary

Consolidation Working Papersfor the year ended December 31, 2006

Swift Weather Front

Eliminations Non-cntl.

Consol-idatedDebit Credit

INCOME STATEMENTNet Sales $

60,000

$34,000 a $ 12,000 $82,000

Income from Weather Front

4,800 e 4,800

Gain on sale ofEquipment 1,500 c 1,500Cost of sales ( 27,000) ( 16,000) b 2,000 a $ 12,000 ( 33,000)Depreciation ( 5,000) ( 3,000) d 300 ( 7,700)Other expenses ( 12,100) ( 5,000) ( 17,100)Noncntl. expense $ 2,000( 2,000)Net income 22,200 10,000 22,200RetainedEarnings 10,100 17,000 f 17,000 10,100Add: Net income 22,200 10,000 22,200Dividends ( 12,000) ( 4,000) e 3,200( 800) ( 12,000)RetainedEarnings 12/31 $ 20,300 $23,000 $20,300BALANCE SHEETCash 2,300 7,000 9,300Net Receivables 7,000 5,000 h 1,000 11,000Dividends Rec 800 g 800Inventories 7,000 5,000 b 2,000 10,000Plant assets-net 22,000 43,000 d 300 c 1,500 63,800Investment inWeather Front 41,200

ef

1,60039,600

Goodwill f 2,000 2,000TOTAL ASSETS $ 80,300 $60,000 $96,100LIAB & EQUITYAccounts payable 17,000 6,000 h 1,000 22,000DividendsPayable 3,000 1,000 g 800 3,200Common stock 40,000 30,000 f 30,000 40,000RetainedEarnings 20,300

23,000 20,300

Noncntl InterestJanuary 1 f 9,400 9,400Noncntl InterestDecember 31 10,600 10,600TOTAL LIAB. & EQUITY

$ 80,300 $60,000

$96,100


Exercise 9

Cost of investment $ 700,000Book value acquired:Stockholders’ equity, Jan 1 $ 800,000Income Jan 1 – Aug 31($78,000/12 months x 8 months) 52,000Preacquisition dividends ( 27,000 )Book value at September 1 825,000Interest acquired 80% 660,000Goodwill $ 40,000

Requirement 1Income from ReedShare of Reeds’s net income($78,000 x 1/3 x 80%) $ 20,800

Requirement 2Preacquisition income ($78,000 x 80% x 2/3) or ($6,500 x 8 months x 80%) $ 41,600

Requirement 3Minority interest income($78,000 x 20%) $ 15,600


Exercise 10

Requirement 1Cost of investment ($450,000 x 60%) $ 270,000Share of Trunk’s income for 2005($40,000 x 60%) 24,000Investment in Trunk balance at December 31, 2005 294,000Plus: Purchase of 10,000 Trunk shares at $12 on January 1, 2006 120,000Investment account balance` $ 414,000

Requirement 2Trunk’s stockholders’ equity at January 1, 2006 ($450,000 + $40,000 of 2005 net income) $ 490,000Plus: Additional capital from the shares issued 120,000Total stockholders’ equity after issuance of the new shares $ 610,000Raven’s percentage(24,000 + 10,000)/50,000 = 68%Raven’s share of Trunk’s equity after issuance $ 414,800Raven’s share of Trunk’s equity before stock issuance 294,000Equity acquired in the purchase 120,800Cost of interest acquired 120,000Goodwill $ 800


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