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Chapter 04 - Consolidation of Wholly Owned Subsidiaries

CHAPTER 4
CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
ANSWERS TO Q...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

Q4-9 The investment account in the financial statements of the pa...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

Q4-18 An additional eliminating entry normally must be entered in...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

SOLUTIONS TO CASES
C4-1 Need for Consolidation Process
After the ...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

C4-2 Account Presentation
MEMO
To:
From:
Re:

Chief Accountant
Pr...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

C4-2 (continued)
balances of other affiliates, and (d) assets ple...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

C4-3 Consolidating an Unprofitable Subsidiary
MEMO
TO:

Chief Acc...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

C4-4 Assigning an Acquisition Differential
It may be difficult to...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

C4-5 Negative Retained Earnings
Net assets of the subsidiary incr...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

C4-6 Balance Sheet Reporting Issues
a. Under the first two altern...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

1C4-7 Subsidiary Ownership: AMR Corporation and International Lea...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

SOLUTIONS TO EXERCISES
E4-1 Multiple-Choice Questions on Consolid...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-4 Eliminating Entries with Differential
a. Eliminating entries...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-5 Balance Sheet Consolidation
Eliminating entries:
E(1) Common...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-6 Acquisition with Differential
a. Goodwill is $60,000, comput...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-7 Balance Sheet Workpaper
a. Eliminating entry:
E(1) Common St...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-8 Balance Sheet Workpaper with Differential
a. Eliminating ent...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-9 Workpaper for Wholly Owned Subsidiary
a.

Eliminating entry:...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-10 Computation of Consolidated Balances
a. Inventory

$ 140,00...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-11 Multiple-Choice Questions on Balance Sheet Consolidation
1....
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-12 Consolidation Entries for Wholly Owned Subsidiary
a. Journa...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-13 Basic Consolidation Entries for Fully Owned Subsidiary
a.

...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-14 Wholly Owned Subsidiary with Differential
a.

Journal entri...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-15 Basic Consolidation Workpaper
a.

Eliminating entries:
E(1)...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-15 (continued)
b.

Blake Corporation and Shaw Corporation
Cons...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-16 Basic Consolidation Workpaper for Second Year
a.

Eliminati...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-16 (continued)
b.

Blake Corporation and Shaw Corporation
Cons...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-17 Consolidation Workpaper with Differential
a.

Eliminating e...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-17 (continued)
b.

Kennelly Corporation and Short Company
Cons...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-18 Consolidation Workpaper for Subsidiary
a.

Eliminating entr...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-18 (continued)
b.

Land Corporation and Growth Company
Consoli...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

E4-19 Push-Down Accounting
a. Entry to record acquisition of Loui...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

SOLUTIONS TO PROBLEMS
P4-20 Assignment of Differential in Workpap...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-21 Computation of Consolidated Balances
a.

Inventories ($110,...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-22 Balance Sheet Consolidation [AICPA Adapted]
Case Inc. and F...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-23 Consolidated Balance Sheet
a. Eliminating entries:
E(1)

E(...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-24 Comprehensive Problem: Consolidation in Subsequent Period
a...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-24 (continued)
c.

Thompson Company and Lake Corporation
Conso...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-25 Acquisition at Other than Fair Value of Net Assets
a. Owner...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-26 Intercorporate Receivables and Payables
a. Eliminating entr...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-26 (continued)
b.

Kim Corporation and Normal Company
Consolid...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-27 Balance Sheet Consolidation
a.

Entry on Primary's books to...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-27 (continued)
c.

Primary Corporation and Street Company
Cons...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-27 (continued)
d.

Primary Corporation and Subsidiary
Consolid...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-28 Consolidation Workpaper at End of First Year of Ownership
a...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-28 (continued)
b.

Mill Corporation and Roller Company
Consoli...
Chapter 04 - Consolidation of Wholly Owned Subsidiaries

P4-28 (continued)
Item
Accum. Depreciation
Accounts Payable
Wages...
P4-29 Consolidation Workpaper at End of Second Year of Ownership
a. Eliminating entries:
E(1)

Income from Subsidiary
Divi...
P4-29 (continued)
b.

Mill Corporation and Roller Company
Consolidation Workpaper
December 31, 20X9
Item

Sales
Income fro...
P4-29 (continued)
Item

Mill
Corp.

Roller
Co.

Accum. Depreciation

170,000

50,000

Accounts Payable
Wages Payable
Notes...
P4-29 (continued)
c.

Mill Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 20X9

Cash
Accounts Receivab...
P4-30 Comprehensive Problem: Wholly Owned Subsidiary
a.

Journal entries recorded by Power Corporation:
(1)

10,000

(2)

...
P4-30 (continued)
c.

Power Corporation and Upland Products Company
Consolidation Workpaper
December 31, 20X5
Item

Power
...
P4-31 Comprehensive Problem: Differential Apportionment
a.

Journal entries recorded by Jersey Corporation:
(1)

Investmen...
P4-31 (continued)
b.

Eliminating entries:
E(1)

Income from Subsidiary
Dividends Declared
Investment in Lime Company Stoc...
P4-31 (continued)
c.

Jersey Corporation and Lime Company
Consolidation Workpaper
December 31, 20X7
Item

Sales
Income fro...
P4-32A Push-Down Accounting
a.

Entry to record acquisition of Lindy stock on books of Greenly:
Investment in Lindy Compan...
P4-32A (continued)
e.

Eliminating entries in consolidation workpaper prepared December 31, 20X7
(no other entries needed)...
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  1. 1. 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
  2. 2. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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
  3. 3. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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
  4. 4. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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
  5. 5. Chapter 04 - Consolidation of Wholly Owned Subsidiaries C4-2 Account Presentation MEMO To: From: Re: Chief Accountant Prime Company , Accounting Staff 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
  6. 6. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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
  7. 7. Chapter 04 - Consolidation of Wholly Owned Subsidiaries C4-3 Consolidating an Unprofitable Subsidiary MEMO TO: Chief Accountant Amazing Chemical Corporation FROM: Re: , Accounting Staff 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
  8. 8. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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
  9. 9. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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
  10. 10. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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
  11. 11. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 1C4-7 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
  12. 12. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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 Additional Paid-In Capital Retained Earnings Investment in Broadway Common Stock 4-12 200,000 300,000 100,000 600,000
  13. 13. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-4 Eliminating Entries with Differential a. Eliminating entries: E(1) Common Stock – Brown Company Retained Earnings Differential Investment in Brown Company Stock Computation of differential Fair value of consideration given Book value of Brown's assets Book value of Brown's liabilities Net book value Differential $85,000 (28,000) E(2) Inventory Buildings and Equipment (net) Goodwill Differential b. 20,000 37,000 43,000 5,000 20,000 18,000 100,000 $100,000 (57,000) $ 43,000 43,000 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
  14. 14. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-5 Balance Sheet Consolidation Eliminating entries: E(1) Common Stock – Thorne Corporation Retained Earnings Differential Investment in Thorne Corporation Stock Eliminate investment balance. 120,000 240,000 35,000 395,000 Computation of differential Fair value of consideration given Book value of Thorne's assets Book value of Thorne's liabilities Net book value Differential $640,000 (280,000) E(2) Inventory Goodwill Buildings (net) Differential Assign differential. 36,000 19,000 4-14 $395,000 (360,000) $ 35,000 20,000 35,000
  15. 15. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-6 Acquisition with Differential a. Goodwill is $60,000, computed as follows: Book value of Conger's net assets: Common stock outstanding Retained earnings Fair value increment: Land ($100,000 - $80,000 Buildings ($400,000 - $220,000) Fair value of net assets Fair value of consideration given Goodwill $ 80,000 130,000 $ 20,000 180,000 $210,000 200,000 $410,000 (470,000) $ 60,000 b. Eliminating entries needed: E(1) Common Stock – Conger Corporation Retained Earnings Differential Investment in Conger Corporation Stock Eliminate investment balance: $260,000 = $470,000 - $80,000 - $130,000 80,000 130,000 260,000 E(2) Land Buildings Goodwill Differential Assign differential. 20,000 180,000 60,000 4-15 470,000 260,000
  16. 16. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-7 Balance Sheet Workpaper a. Eliminating entry: E(1) Common Stock – Faith Corporation Retained Earnings Investment in Faith Corporation Stock Eliminate investment balance. b. 60,000 90,000 150,000 Blank Corporation and Faith Corporation Consolidated Balance Sheet Workpaper December 31, 20X2 Item Blank Corp. Faith Corp. Eliminations Debit _ Credit ConsolIdated Cash Accounts Receivable Inventory Buildings and Equipment (net) Investment in Faith Corporation Stock Total Debits 65,000 87,000 110,000 18,000 37,000 60,000 83,000 124,000 170,000 220,000 150,000 370,000 150,000 632,000 265,000 Accounts Payable Notes Payable Common Stock Blank Corporation Faith Corporation Retained Earnings Total Credits 92,000 150,000 35,000 80,000 100,000 290,000 632,000 60,000 90,000 265,000 4-16 (1)150,000 _ 747,000 127,000 230,000 (1) 60,000 (1) 90,000 150,000 100,000 150,000 290,000 747,000
  17. 17. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-8 Balance Sheet Workpaper with Differential a. Eliminating entries: E(1) Common Stock – Faith Corporation Retained Earnings Differential Investment in Faith Corporation Stock Eliminate investment balance. 60,000 90,000 39,000 E(2) Inventory Buildings and Equipment (net) Differential Assign Differential. 24,000 15,000 b. 189,000 39,000 Blank Corporation and Faith Corporation Consolidated Balance Sheet Workpaper December 31, 20X2 Blank Corp. Faith Corp. Cash Accounts Receivable Inventory Buildings and Equipment (net) Investment in Faith Corporation Stock Differential Total Debits 26,000 87,000 110,000 18,000 37,000 60,000 (2) 24,000 44,000 124,000 194,000 220,000 150,000 (2) 15,000 385,000 632,000 265,000 Accounts Payable Notes Payable Common Stock Blank Corporation Faith Corporation Retained Earnings Total Credits 92,000 150,000 35,000 80,000 Item 189,000 100,000 290,000 632,000 60,000 90,000 265,000 4-17 Eliminations Debit Credit (1) 39,000 (1)189,000 (2) 39,000 Consolidated 747,000 127,000 230,000 (1) 60,000 (1) 90,000 228,000 100,000 228,000 290,000 747,000
  18. 18. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-9 Workpaper for Wholly Owned Subsidiary a. Eliminating entry: E(1) Common Stock – Premium Builders Retained Earnings Inventory Buildings and Equipment (net) Cash and Receivables Investment in Premium Builders Stock Eliminate investment balance. b. 140,000 10,000 7,000 12,000 2,000 167,000 Gold Enterprises and Premium Builders Consolidated Balance Sheet Workpaper January 1, 20X5 Item Gold Enterprises Premium Builders Cash and Receivables Inventory Buildings and Equipment (net) Investment in Premium Stock Total Debits 80,000 150,000 30,000 350,000 430,000 80,000 167,000 827,000 460,000 Current Liabilities Long-Term Debt Common Stock Gold Premium Retained Earnings Total Credits 100,000 400,000 Eliminations Debit Credit 110,000 200,000 c. 200,000 127,000 827,000 140,000 10,000 460,000 (1) 7,000 (1) Consolidated 2,000 (1) 12,000 108,000 507,000 522,000 (1)167,000 1,137,000 210,000 600,000 (1)140,000 (1) 10,000 169,000 200,000 ________ 169,000 127,000 1,137,000 Gold Enterprises and Subsidiary Consolidated Balance Sheet January 1, 20X5 Cash and Receivables Inventory Buildings and Equipment (net) $ 108,000 507,000 Total Assets $1,137,000 522,000 Current Liabilities Long-Term Debt Common Stock Retained Earnings Total Liabilities & Stockholders' Equity 4-18 $200,000 127,000 $ 210,000 600,000 327,000 $1,137,000
  19. 19. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-10 Computation of Consolidated Balances a. Inventory $ 140,000 b. Land $ 60,000 c. $ 550,000 Buildings and Equipment d. Goodwill: Fair value of consideration given Book value of net assets at acquisition Fair value increment for: Inventory Land Buildings and equipment Fair value of net assets at acquisition Balance assigned to goodwill $ 576,000 $450,000 20,000 (10,000) 70,000 (530,000) $ 46,000 e. Investment in Astor Corporation: Nothing would be reported; the balance in the investment account is eliminated. 4-19
  20. 20. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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. Less: Investment in Sun Corp. Book value of assets of Top Corp. Book value of assets of Sun Corp. Total book value Payment in excess of book value ($198,000 - $140,000) Total assets reported $ 844,000 (198,000) $ 646,000 405,000 $1,051,000 58,000 $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
  21. 21. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-12 Consolidation Entries for Wholly Owned Subsidiary a. Journal entries recorded by Trim Corporation: (1) (2) Cash Investment in Round Corporation Stock Record dividends from Round Corporation. 25,000 (3) b. Investment in Round Corporation Stock Cash Record investment. 400,000 Investment in Round Corporation Stock Income from Subsidiary Record equity-method income. 80,000 400,000 25,000 80,000 Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Round Corporation Stock Eliminate income from subsidiary. 80,000 E(2) Common Stock — Round Corporation Retained Earnings, January 1 Investment in Round Corporation Stock Eliminate beginning investment balance. 120,000 280,000 4-21 25,000 55,000 400,000
  22. 22. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-13 Basic Consolidation Entries for Fully Owned Subsidiary a. Journal entries recorded by Purple Company: (1) Investment in Amber Corporation Stock Cash Record investment. 500,000 (2) Cash Investment in Amber Corporation Stock Record dividends from Amber Corporation. 20,000 (3) Investment in Amber Corporation Stock Income from Subsidiary Record equity-method income. 50,000 500,000 20,000 50,000 b. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Amber Corporation Stock Eliminate income from subsidiary. 50,000 E(2) Common Stock — Amber Corporation Retained Earnings, January 1 Investment in Amber Corporation Stock Eliminate beginning investment balance. 300,000 200,000 4-22 20,000 30,000 500,000
  23. 23. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-14 Wholly Owned Subsidiary with Differential a. Journal entries recorded by Winston Corporation: (1) Investment in Canton Corporation Stock Cash Record investment. 178,000 (2) Cash Investment in Canton Corporation Stock Record dividends from Canton Corporation. 12,000 (3) Investment in Canton Corporation Stock Income from Subsidiary Record equity-method income. 30,000 (4) Income from Subsidiary Investment in Canton Corporation Stock Amortize differential assigned to equipment: $4,000 = $28,000 / 7 years b. 4,000 178,000 12,000 30,000 4,000 Eliminating entries December 31, 20X3: E(1) Income from Subsidiary Dividends Declared Investment in Canton Corporation Stock Eliminate income from subsidiary. 26,000 E(2) Common Stock — Canton Corporation Retained Earnings, January 1 Differential Investment in Canton Corporation Stock Eliminate beginning investment balance. 60,000 90,000 28,000 E(3) Equipment Differential Assign beginning differential. 28,000 E(4) Depreciation Expense Accumulated Depreciation Amortize differential related to equipment. 4-23 4,000 12,000 14,000 178,000 28,000 4,000
  24. 24. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-15 Basic Consolidation Workpaper a. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Shaw Corporation Stock Eliminate income from subsidiary. 30,000 E(2) Common Stock — Shaw Corporation Retained Earnings, January 1 Investment in Shaw Corporation Stock Eliminate beginning investment balance. 100,000 50,000 4-24 10,000 20,000 150,000
  25. 25. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-15 (continued) b. Blake Corporation and Shaw Corporation Consolidation Workpaper December 31, 20X3 Item Sales Income from Subsidiary Credits Depreciation Expense Other Expenses Debits Income, carry forward Ret. Earnings, Jan. 1 Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Blake Corp. Shaw Corp. Eliminations Debit Credit 200,000 120,000 30,000 (1) 30,000 230,000 120,000 25,000 15,000 105,000 75,000 (130,000) (90,000) 100,000 30,000 30,000 230,000 50,000 100,000 30,000 330,000 80,000 (40,000) (10,000) 290,000 70,000 Current Assets Depreciable Assets Investment in Shaw Corporation Stock 145,000 325,000 640,000 50,000 100,000 320,000 40,000 180,000 (220,000) 100,000 (2) 50,000 30,000 (1) 10,000 330,000 Current Liabilities Long-Term Debt Common Stock Blake Corporation Shaw Corporation Retained Earnings, from above Credits 320,000 80,000 230,000 100,000 330,000 (40,000) 10,000 290,000 105,000 225,000 Debits 40,000 120,000 250,000 550,000 170,000 200,000 290,000 640,000 (1) 20,000 (2)150,000 800,000 90,000 220,000 100,000 70,000 330,000 80,000 180,000 200,000 (2)100,000 4-25 Consolidated 10,000 180,000 290,000 800,000
  26. 26. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-16 Basic Consolidation Workpaper for Second Year a. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Shaw Corporation Stock Eliminate income from subsidiary. 35,000 E(2) Common Stock — Shaw Corporation Retained Earnings, January 1 Investment in Shaw Corporation Stock Eliminate beginning investment balance. 100,000 70,000 4-26 15,000 20,000 170,000
  27. 27. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-16 (continued) b. Blake Corporation and Shaw Corporation Consolidation Workpaper December 31, 20X4 Item Sales Income from Subsidiary Credits Depreciation Expense Other Expenses Debits Income, carry forward Ret. Earnings, Jan. 1 Income, from above Dividends Declared Ret. Earnings, Dec. 31, Carry forward Blake Corp. Shaw Corp. Eliminations Debit Credit 230,000 140,000 35,000 (1) 35,000 265,000 140,000 25,000 15,000 150,000 90,000 (175,000) (105,000) 90,000 35,000 35,000 290,000 90,000 380,000 (50,000) 70,000 (2) 70,000 35,000 35,000 105,000 (15,000) 330,000 90,000 Current Assets Depreciable Assets Investment in Shaw Corporation Stock 210,000 300,000 700,000 360,000 Current Liabilities Long-Term Debt Common Stock Blake Corporation Shaw Corporation Retained Earnings, from above Credits 70,000 100,000 370,000 370,000 40,000 240,000 (280,000) 90,000 (1) 15,000 290,000 90,000 380,000 (50,000) 15,000 330,000 150,000 210,000 Debits 105,000 50,000 120,000 360,000 510,000 190,000 200,000 330,000 700,000 (1) 20,000 (2)170,000 870,000 120,000 220,000 100,000 90,000 360,000 105,000 205,000 200,000 (2)100,000 4-27 Consolidated 15,000 205,000 330,000 870,000
  28. 28. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-17 Consolidation Workpaper with Differential a. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Short Company Stock Eliminate income from subsidiary. E(2) Common Stock — Short Company Retained Earnings, January 1 Differential Investment in Short Company Stock Eliminate beginning investment balance. E(3) Depreciable Assets (net) Differential Assign beginning differential. E(4) Depreciation Expense Depreciable Assets (net) Amortize differential. 25,000 100,000 50,000 30,000 30,000 5,000 4-28 10,000 15,000 180,000 30,000 5,000
  29. 29. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-17 (continued) b. Kennelly Corporation and Short Company Consolidation Workpaper December 31, 20X5 Item Sales Income from Subsidiary Credits Depreciation Expense Other Expenses Debits Income, carry forward Ret. Earnings, Jan. 1 Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash Accounts Receivable Inventory Depreciable Assets (net) Investment in Short Company Stock Differential Debits Accounts Payable Notes Payable Common Stock Kennelly Corporation Short Company Retained Earnings, from above Credits Kennelly Corp. Short Co. 200,000 25,000 225,000 25,000 105,000 (130,000) 95,000 120,000 230,000 95,000 325,000 (40,000) Eliminations Debit Credit 320,000 (1) 25,000 120,000 15,000 (4) 5,000 75,000 (90,000) 30,000 30,000 320,000 45,000 180,000 (225,000) 95,000 50,000 (2) 50,000 30,000 30,000 80,000 (10,000) (1) 10,000 285,000 70,000 15,000 30,000 70,000 325,000 5,000 40,000 60,000 225,000 195,000 635,000 330,000 50,000 100,000 80,000 (3) 30,000 (4) 285,000 635,000 285,000 5,000 20,000 70,000 130,000 575,000 (1) 15,000 (2) 180,000 (2) 30,000 (3) 30,000 795,000 90,000 220,000 100,000 70,000 330,000 80,000 240,000 200,000 (2)100,000 4-29 230,000 95,000 325,000 (40,000) 10,000 40,000 120,000 200,000 Consolidated 10,000 240,000 285,000 795,000
  30. 30. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-18 Consolidation Workpaper for Subsidiary a. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Growth Company Stock Eliminate income from subsidiary. 35,000 E(2) Common Stock — Growth Company Retained Earnings, January 1 Investment in Growth Company Stock Eliminate beginning investment balance. 100,000 70,000 4-30 15,000 20,000 170,000
  31. 31. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-18 (continued) b. Land Corporation and Growth Company Consolidation Workpaper December 31, 20X4 Item Sales Income from Subsidiary Credits Depreciation Expense Other Expenses Debits Income, carry forward Ret. Earnings, Jan. 1 Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Land Corp. Growth Co. Eliminations Debit Credit 230,000 140,000 35,000 (1) 35,000 265,000 140,000 25,000 15,000 150,000 90,000 (175,000) (105,000) _________ 90,000 35,000 35,000 318,000 90,000 408,000 (50,000) 70,000 (2) 70,000 35,000 35,000 105,000 (15,000) _________ 358,000 90,000 Current Assets Depreciable Assets Investment in Growth Company Stock 238,000 500,000 928,000 450,000 Accum. Depreciation Current Liabilities Long-Term Debt Common Stock Land Corporation Growth Company Retained Earnings, from above Credits 200,000 70,000 100,000 90,000 50,000 120,000 370,000 ________ (1) 15,000 15,000 358,000 388,000 800,000 190,000 200,000 358,000 928,000 (1) 20,000 (2)170,000 1,188,000 290,000 120,000 220,000 100,000 (2)100,000 90,000 450,000 105,000 205,000 4-31 370,000 40,000 240,000 (280,000) 90,000 318,000 90,000 408,000 (50,000) 150,000 300,000 Debits 105,000 Consolidated 200,000 15,000 358,000 205,000 1,188,000
  32. 32. Chapter 04 - Consolidation of Wholly Owned Subsidiaries E4-19 Push-Down Accounting a. Entry to record acquisition of Louis stock on books of Jefferson: Investment in Louis Corporation Stock Cash 789,000 789,000 b. Entry to record revaluation of assets on books of Louis Corporation: Land Buildings Equipment Revaluation Capital 15,000 50,000 20,000 85,000 c. Investment elimination entry in consolidation workpaper (no other entries needed): Common Stock – Louis Corporation Additional Paid-In Capital Retained Earnings Revaluation Capital Investment in Louis Corporation Stock 4-32 200,000 425,000 79,000 85,000 789,000
  33. 33. Chapter 04 - Consolidation of Wholly Owned Subsidiaries SOLUTIONS TO PROBLEMS P4-20 Assignment of Differential in Workpaper a. Teresa Corporation and Sally Enterprises Consolidated Balance Sheet Workpaper January 1, 20X4 Teresa Corp. Sally Enterprises Cash and Receivables Inventory Land Buildings and Equipment Investment in Sally Enterprises Stock Differential Goodwill Total Debits 40,000 95,000 80,000 400,000 20,000 40,000 90,000 230,000 905,000 380,000 Accumulated Depreciation Accounts Payable Notes Payable Common Stock Teresa Corporation Sally Enterprises Retained Earnings Total Credits 175,000 60,000 100,000 65,000 15,000 50,000 Item b. 290,000 300,000 270,000 905,000 100,000 150,000 380,000 Eliminations Debit Credit Consolidated 60,000 135,000 170,000 640,000 (2) 10,000 (1) 40,000 (2) 30,000 (1)290,000 (2) 40,000 30,000 1,035,000 240,000 75,000 150,000 (1)100,000 (1)150,000 330,000 300,000 330,000 270,000 1,035,000 Teresa Corporation and Subsidiary Consolidated Balance Sheet January 1, 20X4 Cash and Receivables Inventory Land Buildings and Equipment Less: Accumulated Depreciation Goodwill Total Assets $640,000 (240,000) Accounts Payable Notes Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity $300,000 270,000 $ 60,000 135,000 170,000 400,000 30,000 $795,000 $ 75,000 150,000 570,000 $795,000 4-33
  34. 34. Chapter 04 - Consolidation of Wholly Owned Subsidiaries 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 Fair value of Decibel's net assets: Cash and receivables Inventory Buildings and equipment (net) Accounts payable Notes payable Fair value of net identifiable assets Goodwill to be reported $280,000 $ 40,000 170,000 375,000 (90,000) (250,000) (245,000) $ 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
  35. 35. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-22 Balance Sheet Consolidation [AICPA Adapted] Case Inc. and Frey Inc. Consolidated Balance Sheet Workpaper December 31, 20X4 Item Cash Accounts and Other Receivables Inventory Land Deprec. Assets (net) Investment in Frey Inc. Stock Long-Term Investments and Other Assets Differential Total Debits Accounts Payable and Other Current Liabilities Long-Term Debt Common Stock, $25 Par Additional Paid-In Capital Retained Earnings Total Credits Case Inc. Frey Inc. 825,000 330,000 2,140,000 2,310,000 650,000 4,575,000 Eliminations Debit Credit Consolidated 1,155,000 835,000 1,045,000 300,000 (2) 1,980,000 2,975,000 3,355,000 1,200,000 6,555,000 250,000 2,680,000 (1)2,680,000 865,000 385,000 14,045,000 4,875,000 (1) 250,000 (2) 250,000 1,250,000 16,490,000 2,465,000 1,900,000 3,200,000 1,145,000 1,300,000 1,000,000 (1) 1,000,000 3,610,000 3,200,000 3,200,000 2,100,000 4,380,000 14,045,000 190,000 (1) 190,000 1,240,000 (1) 1,240,000 4,875,000 2,930,000 2,100,000 _________ 4,380,000 2,930,000 16,490,000 4-35
  36. 36. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-23 Consolidated Balance Sheet a. Eliminating entries: E(1) E(2) Common Stock — Lake Corporation Retained Earnings Differential Investment in Lake Corporation Stock Eliminate investment balance. Buildings and Equipment Accumulated Depreciation Differential Assign differential. b. 100,000 120,000 32,000 40,000 252,000 8,000 32,000 Thompson Company and Lake Corporation Consolidated Balance Sheet Workpaper December 31, 20X3 Item Thompson Co. Lake Corp. Cash Accounts Receivable Land Buildings and Equipment Investment in Lake Corporation Stock Differential Total Debits 30,000 100,000 60,000 500,000 20,000 40,000 50,000 350,000 942,000 460,000 Accum. Depreciation Accounts Payable Taxes Payable Notes Payable Common Stock Retained Earnings Total Credits 230,000 80,000 40,000 100,000 200,000 292,000 942,000 75,000 10,000 70,000 85,000 100,000 120,000 460,000 252,000 4-36 Eliminations Debit Credit 50,000 140,000 110,000 890,000 (2) 40,000 (1) 32,000 (1)252,000 (2) 32,000 (2) (1)100,000 (1)120,000 292,000 Consolidated 8,000 292,000 1,190,000 313,000 90,000 110,000 185,000 200,000 292,000 1,190,000
  37. 37. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-24 Comprehensive Problem: Consolidation in Subsequent Period a. Journal entries recorded by Thompson Company: (1) 12,000 (2) Investment in Lake Corporation Stock Income from Subsidiary Record equity-method income. 32,000 (3) b. Cash Investment in Lake Corporation Stock Record dividends from subsidiary. Income from Subsidiary Investment in Lake Corporation Stock Amortize differential: $40,000 / 10 years 4,000 12,000 32,000 4,000 Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Lake Corporation Stock Eliminate income from subsidiary. 28,000 E(2) Common Stock — Lake Corporation Retained Earnings, January 1 Differential Investment in Lake Corporation Stock Eliminate beginning investment balance. 100,000 120,000 32,000 E(3) Buildings and Equipment Accumulated Depreciation Differential Assign differential. 40,000 E(4) Depreciation Expense Accumulated Depreciation Amortize differential. 4,000 E(5) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable. 2,500 4-37 12,000 16,000 252,000 8,000 32,000 4,000 2,500
  38. 38. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-24 (continued) c. Thompson Company and Lake Corporation Consolidation Workpaper December 31, 20X4 Item Service Revenue Income from Subsidiary Credits Cost of Services Provided Depreciation Expense Other Expenses Debits Income, carry forward Ret. Earnings, Jan. 1 Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash Accounts Receivables Land Buildings and Equipment Investment in Lake Corporation Stock Differential Debits Thompson Co. Lake Corp. Eliminations Debit Credit 610,000 28,000 638,000 240,000 470,000 35,000 57,000 (562,000) 76,000 130,000 18,000 60,000 (208,000) 32,000 292,000 76,000 368,000 (30,000) 120,000 32,000 152,000 (12,000) (2) 120,000 32,000 338,000 140,000 152,000 74,000 130,000 60,000 500,000 42,000 53,000 50,000 350,000 240,000 495,000 Accum. Depreciation 265,000 71,000 58,000 100,000 17,000 60,000 85,000 200,000 338,000 1,032,000 4-38 600,000 57,000 117,000 (774,000) 76,000 32,000 (1) 12,000 292,000 76,000 368,000 (30,000) 12,000 338,000 (5) 2,500 (3) 40,000 (2) 32,000 93,000 Accounts Payable Taxes Payable Notes Payable Common Stock Thompson Company Lake Corporation Retained Earnings, from above Credits 850,000 4,000 268,000 1,032,000 850,000 (1) 28,000 (4) Consolidated (5) 2,500 100,000 (2)100,000 140,000 495,000 152,000 326,500 (1) 16,000 (2)252,000 (3) 32,000 (3) (4) 8,000 4,000 116,000 180,500 110,000 890,000 1,296,500 370,000 85,500 118,000 185,000 200,000 12,000 338,000 326,500 1,296,500
  39. 39. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-25 Acquisition at Other than Fair Value of Net Assets a. Ownership acquired for $280,000: E(1) Common Stock — Best Company Retained Earnings Differential Investment in Best Company Stock Eliminate investment balance. 80,000 175,000 25,000 E(2) Land Goodwill Inventory Differential Assign differential. b. 20,000 12,000 280,000 7,000 25,000 Ownership acquired for $251,000: E(1) Common Stock — Best Company Retained Earnings Differential Investment in Best Company Stock Eliminate investment balance. 80,000 175,000 E(2) Land Differential Inventory Retained Earnings Assign differential. 20,000 4,000 4-39 4,000 251,000 7,000 17,000
  40. 40. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-26 Intercorporate Receivables and Payables a. Eliminating entries: E(1) Common Stock — Normal Company Capital in Excess of Par Differential Retained Earnings Investment in Normal Company Stock Eliminate investment balance. 150,000 140,000 20,000 E(2) Goodwill Differential Assign differential. 20,000 E(3) Bonds Payable Investment in Normal Company Bonds Eliminate intercompany bonds. 50,000 E(4) Accounts Payable Accounts Receivable Eliminate intercompany receivable/payable. 10,000 4-40 5,000 305,000 20,000 50,000 10,000
  41. 41. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-26 (continued) b. Kim Corporation and Normal Company Consolidated Balance Sheet Workpaper January 1, 20X7 Item Kim Corp. Normal Company Eliminations Debit Credit Cash Accounts Receivable Inventory Buildings and Equipment Investment in: Normal Company Stock Normal Company Bonds Differential Goodwill Total Debits 70,000 90,000 84,000 400,000 999,000 480,000 Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Kim Corporation Normal Company Capital in Excess of Par Retained Earnings Total Credits 160,000 50,000 200,000 75,000 20,000 100,000 (4) 10,000 (3) 50,000 150,000 140,000 (5,000) 480,000 (1)150,000 (1)140,000 _________ (1) 5,000 390,000 390,000 c. 35,000 65,000 80,000 300,000 305,000 50,000 300,000 289,000 999,000 (4) 10,000 (1) 20,000 (2) 20,000 (1)305,000 (3) 50,000 (2) 20,000 Consolidated 105,000 145,000 164,000 700,000 20,000 1,134,000 235,000 60,000 250,000 300,000 289,000 1,134,000 Kim Corporation and Subsidiary Consolidated Balance Sheet January 1, 20X7 Cash Accounts Receivable Inventory Buildings and Equipment Less: Accumulated Depreciation Goodwill Total Assets $700,000 (235,000) Accounts Payable Bonds Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity 4-41 $300,000 289,000 $105,000 145,000 164,000 465,000 20,000 $899,000 $ 60,000 250,000 589,000 $899,000
  42. 42. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-27 Balance Sheet Consolidation a. Entry on Primary's books to record acquisition of Street stock: Investment in Street Stock Bonds Payable 650,000 650,000 Note: The bonds go directly to the stockholders of Street and are not recorded on the books of Street. b. Eliminating entries: E(1) Common Stock – Street Company Additional Paid-In Capital Retained Earnings Differential Investment in Street Stock 200,000 130,000 148,000 172,000 E(2) Inventory Land Buildings and Equipment Patent Discount on Bonds Payable Goodwill Differential 4,000 20,000 50,000 40,000 10,000 48,000 E(3) Current Payables Receivables 6,500 650,000 172,000 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 shortlived 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 Receivables 1,000 4-42 1,000
  43. 43. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-27 (continued) c. Primary Corporation and Street Company Consolidated Balance Sheet Workpaper January 2, 20X8 Item Cash Receivables Inventory Investment in Street Stock Land Buildings and Equipment Patent Goodwill Discount on Bonds Payable Differential Total Assets Allowance for Bad Debts Accumulated Depreciation Current Payables Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities and Equity Primary Corp. Street Company 12,000 41,000 86,000 9,000 31,000 68,000 650,000 55,000 960,000 50,000 670,000 1,804,000 828,000 2,000 220,000 29,000 100,000 200,000 100,000 103,000 130,000 148,000 1,804,000 828,000 (2) 4,000 (2) (2) (2) (2) 20,000 50,000 40,000 48,000 (3) 6,500 (1)650,000 (2) 10,000 (1)172,000 (2)172,000 1,000 411,000 38,000 850,000 300,000 Eliminations Debit Credit 4-43 Consolidated 21,000 65,500 158,000 125,000 1,680,000 40,000 48,000 10,000 2,147,500 3,000 (1)200,000 631,000 60,500 950,000 300,000 (1)130,000 (1)148,000 _________ 100,000 103,000 (3) 6,500 828,500 828,500 2,147,500
  44. 44. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-27 (continued) d. Primary Corporation and Subsidiary Consolidated Balance Sheet January 2, 20X8 Cash Receivables Less: Allowance for Bad Debts Inventory Land Buildings and Equipment Less: Accumulated Depreciation Patent Goodwill Total Assets $ 65,500 (3,000) $1,680,000 (631,000) Current Payables Bonds Payable Less: Discount on Bonds Payable Stockholders’ Equity Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities and Stockholders' Equity $ 950,000 (10,000) $ 300,000 100,000 103,000 $ 21,000 62,500 158,000 125,000 1,049,000 40,000 48,000 $1,503,500 $ 60,500 940,000 503,000 $1,503,500 4-44
  45. 45. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-28 Consolidation Workpaper at End of First Year of Ownership a. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Roller Company Stock Eliminate income from subsidiary. 22,000 E(2) Common Stock — Roller Company Retained Earnings, January 1 Differential Investment in Roller Company Stock Eliminate beginning investment balance. 60,000 40,000 28,000 Buildings and Equipment Goodwill Differential Assign beginning differential. 20,000 8,000 E(4) Depreciation Expense Accumulated Depreciation Amortize differential: $2,000 = $20,000 / 10 years 2,000 E(5) Goodwill Impairment Loss Goodwill Write down goodwill for impairment. 5,500 E(3) 4-45 16,000 6,000 128,000 28,000 2,000 5,500
  46. 46. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-28 (continued) b. Mill Corporation and Roller Company Consolidation Workpaper December 31, 20X8 Item Sales Income from Subsidiary Credits Cost of Goods Sold Wage Expense Depreciation Expense Interest Expense Other Expenses Goodwill Impairment Loss Debits Income, carry forward Ret. Earnings, Jan. 1 Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash Accounts Receivable Inventory Land Buildings and Equipment Investment in Roller Company Stock Differential Goodwill Debits Mill Corp. Roller Co. 260,000 22,000 282,000 125,000 42,000 25,000 12,000 13,500 180,000 180,000 110,000 27,000 10,000 4,000 5,000 (217,500) (156,000) 64,500 24,000 Eliminations Debit Credit 440,000 (1) 22,000 (4) 2,000 (5) 5,500 ________ 29,500 Consolidated ________ 440,000 235,000 69,000 37,000 16,000 18,500 5,500 (381,000) 59,000 102,000 64,500 166,500 (30,000) 40,000 24,000 64,000 (16,000) (2) 40,000 29,500 ________ (1) 16,000 102,000 59,000 161,000 (30,000) 136,500 48,000 69,500 16,000 131,000 19,500 70,000 90,000 30,000 350,000 21,000 12,000 25,000 15,000 150,000 (3) 20,000 134,000 693,500 223,000 4-46 40,500 82,000 115,000 45,000 520,000 (2) 28,000 (3) 8,000 (1) 6,000 (2)128,000 (3) 28,000 (5) 5,500 2,500 805,000
  47. 47. Chapter 04 - Consolidation of Wholly Owned Subsidiaries P4-28 (continued) Item Accum. Depreciation Accounts Payable Wages Payable Notes Payable Common Stock Mill Corporation Roller Company Retained Earnings, from above Credits Mill Corp. 145,000 45,000 17,000 150,000 200,000 136,500 693,500 Roller Co. Eliminations Debit Credit 40,000 16,000 9,000 50,000 (4) 2,000 60,000 69,500 185,500 4-47 187,000 61,000 26,000 200,000 200,000 (2) 60,000 48,000 223,000 Consolidated 16,000 185,500 131,000 805,000
  48. 48. P4-29 Consolidation Workpaper at End of Second Year of Ownership a. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Roller Company Stock Eliminate income from subsidiary. 34,000 E(2) Common Stock — Roller Company Retained Earnings, January 1 Differential Investment in Roller Company Stock Eliminate beginning investment balance. 60,000 48,000 26,000 Buildings and Equipment Goodwill Retained Earnings, January 1 Differential Accumulated Depreciation Assign beginning differential. 20,000 2,500 5,500 Depreciation Expense Accumulated Depreciation Amortize differential: $2,000 = $20,000 / 10 years 2,000 E(3) E(4) 4-48 20,000 14,000 134,000 26,000 2,000 2,000
  49. 49. P4-29 (continued) b. Mill Corporation and Roller Company Consolidation Workpaper December 31, 20X9 Item Sales Income from Subsidiary Credits Cost of Goods Sold Wage Expense Depreciation Expense Interest Expense Other Expenses Debits Income, carry forward Mill Corp. Roller Co. 290,000 200,000 34,000 _______ 324,000 200,000 145,000 114,000 35,000 20,000 25,000 10,000 12,000 4,000 23,000 16,000 (240,000) (164,000) 84,000 36,000 Ret. Earnings, Jan. 1 136,500 48,000 Income, from above 84,000 220,500 (30,000) 36,000 84,000 (20,000) 190,500 64,000 45,500 85,000 97,000 50,000 350,000 32,000 14,000 24,000 25,000 150,000 Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash Accounts Receivable Inventory Land Buildings and Equipment Investment in Roller Company Stock Differential Goodwill Debits Eliminations Debit Credit (4) 2,000 245,000 4-49 ________ (2) 48,000 (3) 5,500 36,000 490,000 259,000 55,000 37,000 16,000 39,000 (406,000) 84.000 131,000 ________ (1) 20,000 84,000 215,000 (30,000) 89,500 20,000 185,000 77,500 99,000 121,000 75,000 520,000 (3) 20,000 148,000 775,500 490,000 (1)34,000 ________ 36,000 Consolidated (2) 26,000 (3) 2,500 (1) 14,000 (2)134,000 (3) 26,000 2,500 895,000
  50. 50. P4-29 (continued) Item Mill Corp. Roller Co. Accum. Depreciation 170,000 50,000 Accounts Payable Wages Payable Notes Payable Common Stock Mill Corporation Roller Company Retained Earnings, from above Credits 51,000 14,000 150,000 Eliminations Debit Credit 15,000 6,000 50,000 200,000 190,500 775,500 (3) 2,000 (4) 2,000 4-50 89,500 198,000 224,000 66,000 20,000 200,000 200,000 60,000 (2) 60,000 64,000 245,000 Consolidated 20,000 198,000 185,000 895,000
  51. 51. P4-29 (continued) c. Mill Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X9 Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Goodwill Total Assets $ 77,500 99,000 121,000 75,000 $520,000 (224,000) Accounts Payable Wages Payable Notes Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity 296,000 2,500 $671,000 $ 66,000 20,000 200,000 $200,000 185,000 385,000 $671,000 Mill Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X9 Sales Cost of Goods Sold Wage Expense Depreciation Expense Interest Expense Other Expenses Total Expenses Consolidated Net Income $490,000 $259,000 55,000 37,000 16,000 39,000 (406,000) $ 84,000 Mill Corporation and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X9 Retained Earnings, January 1, 20X9 20X9 Net Income $131,000 84,000 $215,000 (30,000) $185,000 Dividends Declared, 20X9 Retained Earnings, December 31, 20X9 4-51
  52. 52. P4-30 Comprehensive Problem: Wholly Owned Subsidiary a. Journal entries recorded by Power Corporation: (1) 10,000 (2) Investment in Upland Products Stock Income from Subsidiary Record equity-method income. 30,000 (3) b. Cash Investment in Upland Products Stock Record dividends from Upland Products. Income from Subsidiary Investment in Upland Products Stock Amortize differential: $50,000 / 10 years 5,000 10,000 30,000 5,000 Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Upland Products Stock Eliminate income from subsidiary. E(2) Common Stock — Upland Products Retained Earnings, January 1 Differential Investment in Upland Products Stock Eliminate beginning investment balance: $30,000 = $50,000 – [($50,000 / 10) x 4 years] 25,000 100,000 90,000 30,000 E(3) Buildings and Equipment Accumulated Depreciation Differential Assign beginning differential. 50,000 E(4) Depreciation Expense Accumulated Depreciation Amortize differential. 5,000 E(5) Accounts Payable Cash and Receivables Eliminate intercorporate receivable/payable. 4-52 10,000 10,000 15,000 220,000 20,000 30,000 5,000 10,000
  53. 53. P4-30 (continued) c. Power Corporation and Upland Products Company Consolidation Workpaper December 31, 20X5 Item Power Corp. Upland Products Sales Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Inventory Losses Debits Income, carry forward 200,000 25,000 225,000 120,000 25,000 15,000 (160,000) 65,000 100,000 _______ 100,000 50,000 15,000 5,000 (70,000) 30,000 318,000 65,000 383,000 (30,000) 90,000 30,000 120,000 (10,000) (2) 90,000 30,000 _________ (1) 10,000 318,000 65,000 383,000 (30,000) 353,000 110,000 120,000 10,000 353,000 43,000 260,000 80,000 500,000 65,000 90,000 80,000 150,000 (5) 10,000 98,000 350,000 160,000 700,000 Ret. Earnings, Jan. 1 Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash and Receivables Inventory Land Buildings and Equipment Investment in Upland Products Stock Differential Debits Eliminations Debit Credit 5,000 _________ 30,000 (2) 30,000 1,118,000 385,000 Accum. Depreciation 205,000 105,000 Accounts Payable Notes Payable Common Stock Power Corporation Upland Products Retained Earnings, from above Credits 60,000 200,000 20,000 50,000 (5) 10,000 100,000 (2)100,000 110,000 385,000 120,000 310,000 353,000 1,118,000 4-53 _________ (3) 50,000 235,000 300,000 300,000 (1) 25,000 (4) Consolidated (1) 15,000 (2)220,000 (3) 30,000 (3) 20,000 (4) 5,000 300,000 170,000 45,000 20,000 (235,000) 65,000 1,308,000 335,000 70,000 250,000 300,000 10,000 353,000 310,000 1,308,000
  54. 54. P4-31 Comprehensive Problem: Differential Apportionment a. Journal entries recorded by Jersey Corporation: (1) Investment in Lime Company Stock Cash Acquisition of Lime Company stock. (2) Cash Investment in Lime Company Stock Record dividends from Lime Company. 20,000 (3) Investment in Lime Company Stock Income from Subsidiary Record equity-method income. 60,000 (4) Income from Subsidiary Investment in Lime Company Stock Amortize differential assigned to depreciable assets: ($33,000 / 11 years) 4-54 203,000 3,000 203,000 20,000 60,000 3,000
  55. 55. P4-31 (continued) b. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Lime Company Stock Eliminate income from subsidiary. E(2) Common Stock — Lime Company Retained Earnings, January 1 Differential Investment in Lime Company Stock Eliminate beginning investment balance. E(3) 57,000 50,000 100,000 53,000 Goodwill Buildings and Equipment Differential Assign beginning differential. 20,000 33,000 E(4) Depreciation Expense Accumulated Depreciation Amortize differential related to depreciable assets. 3,000 E(5) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable. 16,000 4-55 20,000 37,000 203,000 53,000 3,000 16,000
  56. 56. P4-31 (continued) c. Jersey Corporation and Lime Company Consolidation Workpaper December 31, 20X7 Item Sales Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Other Expenses Debits Income, carry forward Ret. Earnings, Jan. 1 Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash Accounts Receivable Inventory Land Buildings and Equipment Investment in Lime Company Stock Differential Goodwill Debits Accum. Depreciation Accounts Payable Mortgages Payable Common Stock Jersey Corporation Lime Company Retained Earnings, from above Credits Jersey Corp. Lime Co. 400,000 Eliminations Debit Credit 700,000 57,000 757,000 500,000 25,000 75,000 (600,000) 157,000 400,000 250,000 15,000 75,000 (340,000) 60,000 290,000 157,000 447,000 (50,000) 100,000 60,000 160,000 (20,000) (2) 100,000 60,000 397,000 140,000 160,000 82,000 50,000 170,000 80,000 500,000 25,000 55,000 100,000 20,000 150,000 60,000 _ 20,000 397,000 (3) 33,000 (2) 53,000 (3) 20,000 350,000 155,000 70,000 200,000 75,000 35,000 50,000 (5) 16,000 50,000 (2) 50,000 140,000 350,000 160,000 332,000 4-56 (1) 20,000 290,000 157,000 447,000 (50,000) (5) 16,000 1,122,000 397,000 1,122,000 1,100,000 750,000 43,000 150,000 (943,000) 157,000 3,000 240,000 300,000 1,100,000 (1) 57,000 (4) Consolidated (1) 37,000 (2) 203,000 (3) 53,000 (4) 3,000 107,000 89,000 270,000 100,000 683,000 20,000 1,269,000 233,000 89,000 250,000 300,000 20,000 397,000 332,000 1,269,000
  57. 57. P4-32A Push-Down Accounting a. Entry to record acquisition of Lindy stock on books of Greenly: Investment in Lindy Company Stock Cash b. 5,000 85,000 100,000 70,000 260,000 Investment elimination entry in consolidation workpaper prepared December 31, 20X6 (no other entries needed): Common Stock — Lindy Company Additional Paid-In Capital Retained Earnings Revaluation Capital Investment in Lindy Company Stock d. 935,000 Entry to record revaluation of assets on books of Lindy Company at date of combination: Inventory Land Buildings Equipment Revaluation Capital Revalue assets to reflect fair values at date of combination. c. 935,000 100,000 400,000 175,000 260,000 935,000 Equity-method entries on the books of Greenly during 20X7: Cash Investment in Lindy Company Stock Record dividend from Lindy Company. 50,000 Investment in Lindy Company Stock Income from Lindy Company Record equity-method income. 88,000 4-57 50,000 88,000
  58. 58. P4-32A (continued) e. Eliminating entries in consolidation workpaper prepared December 31, 20X7 (no other entries needed): E(1) E(2) f. Income from Lindy Company Dividends Declared Investment in Lindy Company Stock Eliminate income from subsidiary. Common Stock — Lindy Company Additional Paid-In Capital Retained Earnings, January 1 Revaluation Capital Investment in Lindy Company Stock Eliminate beginning investment balance. 88,000 100,000 400,000 175,000 260,000 50,000 38,000 935,000 Eliminating entries in consolidation workpaper prepared December 31, 20X8 (no other entries needed): E(1) Income from Lindy Company Dividends Declared Investment in Lindy Company Stock Eliminate income from subsidiary. E(2) Common Stock — Lindy Company Additional Paid-In Capital Retained Earnings, January 1 Revaluation Capital Investment in Lindy Company Stock Eliminate beginning investment balance: $213,000 = $175,000 + $88,000 - $50,000 $973,000 = $935,000 + $88,000 - $50,000 4-58 90,000 100,000 400,000 213,000 260,000 50,000 40,000 973,000

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