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CHAPTER 7
UNDERSTANDING THE ISSUES
1. Equity prior to sale of new shares .................................................................................
Equity gained by sale ....................................................................................................
Total equity after sale....................................................................................................
Parent interest ...............................................................................................................
Parent equity .................................................................................................................
Price paid ......................................................................................................................
Excess of cost over book value ....................................................................................
Excess will likely be attributed to goodwill.

×

$200,000
600,000
$800,000
60%
$480,000
600,000
$120,000

2.
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$625,000
Less book value of interest acquired:

Total equity
450,000
Interest acquired
Book value
Excess of fair value over book value
$175,000

Parent
Price
(80%)
$500,000

NCI
Value
(20%)
$125,000

$450,000
80%
$360,000
$140,000

$450,000
20%
$ 90,000
$ 35,000

Amortization
per Year


Life

Adjustment of identifiable accounts:
Adjustment
Equipment

$175,000

$ 17,500

Worksheet
Key
10

20X6:
Parent income ...........................................................
Subsidiary income .....................................................
Equipment depreciation ............................................
Total income..............................................................
Income purchased [1/2 year × 0.10 × ($50,000 –
$17,500 amortization)] ........................................
Consolidated net income ..........................................
NCI [10% × ($50,000 – $17,500 amortization)] ........
Controlling:
Internally generated ............................................
80% × 1 × ($50,000 – $17,500)..........................
10% × 1/2 × ($50,000 – $17,500).......................
Total controlling interest ............................................

369


$120,000
50,000
(17,500)
$152,500
(1,625)
$150,875
$
3,250
$120,000
$26,000
1,625

27,625
$147,625

debit D


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3.
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$1,000,000
Less book value of interest acquired:
900,000

Total equity
Interest acquired
Book value
Excess of fair value over book value
$ 100,000

Parent
Price
(80%)
$800,000

NCI
Value
(20%)
$200,000

$900,000
80%
$720,000
$ 80,000

$900,000
20%
$180,000
$ 20,000

Amortization
per Year

Life


Adjustment of identifiable accounts:
Adjustment
Equipment

$100,000

$ 10,000

Worksheet
Key
10

debit D

20X5:
Cost of investment ....................................................
Equity increase:
Equity at July 1, 20X5, with 1/2 year income .........
Equity at January 1, 20X1......................................
Increase ....................................................................
Interest ......................................................................
Equipment depreciation ($10,000 × 4.5 × 80%) .......
Adjusted cost.............................................................

$

$
×


Sale of 8,000 shares
a. Gain on sale of investment (could be discontinued operation):
Sale price ($150 × 8,000) ................................... $
1,200,000
Adjusted cost ......................................................
(1,084,000)
Gain .................................................................... $
116,000
b. There will be no consolidated statements.
c. The parent will report investment income
(perhaps gain on discontinued operations):
Income for 6 months ........................................... $
100,000
Equipment depreciation (1/2 × 80% × $10,000).
(4,000)
Income ................................................................ $
96,000

370

800,000

$1,300,000
900,000
400,000
80%
320,000
(36,000)
$1,084,000



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Sale of 2,000 shares
a. Increase in paid-in equity on sale of investment:
Sale price ($150 × 2,000) ......................................................
Adjusted cost (1/4 × $1,084,000) ...........................................
Equity increase.......................................................................
b. Consolidated statements are prepared as follows:
Parent income ........................................................................
Subsidiary income ($200,000 – $10,000 depreciation) .........
Consolidated net income .......................................................
NCI:
(20% × 1 × $190,000) ......................................................
(20% × 1/2 × $190,000) ...................................................
Total NCI interest ...................................................................
Controlling:
Internally generated .........................................................
Subsidiary:
(60% × 1 × $190,000) ......................................................
(20% × 1/2 × $190,000) ...................................................
Total controlling interest .........................................................
c.

$
$

$150,000
190,000
$340,000

$
$

Not applicable

Sale of 6,000 shares
a. Gain on sale of investment (would not be discontinued operation):
Sale price ($150 × 6,000) ..............................
$
900,000
Adjusted cost (3/4 × $1,084,000) ..................
(813,000)
Gain ...............................................................
$
87,000
b. There will be no consolidated statements.
c. The parent will report investment income under the equity method.
Amount
Period
Interest
Income
$190,000
×
1/2
×
60%
$57,000
190,000
×
1

×
20%
38,000
Total
$95,000

371

300,000
(271,000)
29,000

38,000
19,000
57,000
$150,000
114,000
19,000
$283,000


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4.
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$1,750,000

Less book value of interest acquired:
Common stock ($1 par)
$ 100,000
Paid-in capital in excess of par
900,000
Retained earnings
500,000
Preferred dividends in arrears
(12,000)
Total equity
$1,488,000
Interest acquired
Book value
Excess of fair value over book value
$ 262,000

Parent
Price
(80%)
$1,400,000

NCI
Value
(20%)
$350,000

$1,488,000
80%
$1,190,400
$ 209,600


$1,488,000
20%
$ 297,600
$ 52,400

Adjustment of identifiable accounts:

Goodwill

Worksheet
Key
debit D

Adjustment
$ 262,000

Parent income ...........................................................
Subsidiary income .....................................................
Consolidated net income ..........................................
NCI (20% × $68,000) ................................................
NCI preferred (6% × $200,000) ................................
Controlling {$120,000 + [0.80 × ($80,000 – $12,000)]}

$
$
$13,600
12,000 $
$


120,000
80,000
200,000
25,600
174,400

Income would be as follows if Company P owns 1/2 of preferred stock:
Parent income ...........................................................
Subsidiary income .....................................................
Consolidated net income ..........................................
NCI [20% × ($80,000 – $12,000)] .............................
NCI preferred (6% × $100,000) ................................
Controlling {$120,000 + [0.80 × ($80,000 – $12,000)]
+ (6% × $100,000)}.............................................

372

$
$
$13,600
6,000 $
$

120,000
80,000
200,000
19,600
180,400



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Ch. 7—Exercises

EXERCISES
EXERCISE 7-1
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$2,000,000
Less book value of interest acquired:
Common stock ($5 par)
$ 100,000
Retained earnings
360,000
New proceeds
1,200,000
Total equity
$1,660,000
Interest acquired
Book value
Excess of fair value over book value
$ 340,000

Parent
Price
(60%)
$1,200,000


NCI
Value
(40%)
$ 800,000

$1,660,000
60%
$ 996,000
$ 204,000

$1,660,000
40%
$ 664,000
$ 136,000

Adjustment of identifiable accounts:

Building
Goodwill

Adjustment
$200,000
140,000
Total
$340,000

Amortization
per Year
10,000


Life
20

Worksheet
Key
debit D1
debit D2

People Corporation and Subsidiary Sample Corporation
Consolidated Balance Sheet
January 2, 20X4
Assets
Current assets ($600,000 + $100,000 + $1,200,000) ......................
Goodwill ...........................................................................................
Long-lived assets:
Land ...........................................................................................
Property, plant, and equipment (add $200,000).........................
Total assets......................................................................................

$1,900,000
140,000
$

210,000
1,300,000

1,510,0
$3,550,000


Liabilities and Stockholders’ Equity
Current liabilities ..............................................................................
Bonds payable .................................................................................
Stockholders’ equity:
NCI [(40% × $1,660,000) + $136,000] .......................................
Common stock ($5 par)..............................................................
Retained earnings ......................................................................
Total liabilities and stockholders’ equity ...........................................

373

$

350,000
1,200,000
800,000

$

400,000
800,000

1,200,0
$3,550,000


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Ch. 7—Exercises


EXERCISE 7-2
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$250,000
Less book value of interest acquired:
Common stock ($10 par)
$100,000
Retained earnings
20,000
Total equity
$120,000
Interest acquired
Book value
Excess of fair value over book value
$130,000

Parent
Price
(60%)
$150,000

NCI
Value
(40%)
$100,000

$120,000

60%
$ 72,000
$ 78,000

$120,000
40%
$ 48,000
$ 52,000

Adjustment of identifiable accounts:

Equipment

Adjustment
$130,000

Amortization
per Year
$ 13,000

Life
10

Worksheet
Key
debit D

Analysis of 20% Interest, January 1, 20X3
Price paid for additional investment in Hardwood ............................
Less interest acquired:

Common stock ($10 par)............................................................
Retained earnings ......................................................................
Total stockholders’ equity .....................................................
Interest acquired ........................................................................
Excess .............................................................................................
Equipment adjustment (8 remaining years × $13,000 × 20%) .........
Parent paid-in capital in excess of par from stock retirement ..........

374

$

×

$100,000
50,000
$150,000
20%
$
$

40,000

30,000
10,000
(20,800)
10,800


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Ch. 7—Exercises

Exercise 7-2, Concluded
Barker Corporation and Subsidiary Hardwood Company
Consolidated Balance Sheet
December 31, 20X5
Assets
Current assets..................................................................................
Long-lived assets:
Property, plant, and equipmenta .................................................
Total assets......................................................................................
a
$740,000 + $240,000 + $130,000 – (5 × $13,000 amortization)
Liabilities and Stockholders’ Equity
Current liabilities ..............................................................................
Stockholders’ equity:
NCIb ............................................................................................
Common stock ($10 par)...........................................................
Paid-in capital in excess of par from stock retirement................
Retained earningsc .....................................................................
Total liabilities and stockholders’ equity ...........................................
b
20% × $220,000
$
44,000
+ 40% interest [40% × ($50,000 – $20,000)]
12,000
+ 20% interest [20% × ($120,000 – $50,000)]
14,000

– (20% × 5 years × $13,000 amortization)
(13,000)
Total NCI balance
$
57,000
c

Conversion:
60% interest [60% × ($120,000 – $20,000)] =
20% interest [20% × ($120,000 – $50,000)] =
Share of retained earnings
Amortizations:
2 years × 60% × $13,000
3 years × 80% × $13,000
Net adjustment
Parent retained earnings balance,
December 31, 20X5
Total

375

$
$

60,000
14,000
74,000

$


(15,600)
(31,200)
27,200
300,000
$327,200

$

350,000
1,045,000
$1,395,000

$

500,000
57,000

$500,000
10,800
327,200

838,000
$1,395,000


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Ch. 7—Exercises

EXERCISE 7-3

Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$465,000
Less book value of interest acquired:
Common stock ($10 par)
$100,000
Retained earnings
250,000
Total equity
$350,000
Interest acquired
Book value
Excess of fair value over book value
$115,000

Parent
Price
(90%)
$418,500

NCI
Value
(10%)
$ 46,500

$350,000
90%

$315,000
$103,500

$350,000
10%
$ 35,000
$ 11,500

Adjustment of identifiable accounts:

Equipment

Adjustment
$115,000

Amortization
per Year
$ 5,750

Life
20

Worksheet
Key
debit D

Entries
Investment in Venus Company ........................................................
Retained Earnings* ....................................................................
Investment Income** ..................................................................

To convert the investment to the equity method. This includes
10% interest that is to be adjusted to sophisticated equity balance.

195,300

Cash.................................................................................................
Investment in Venus Company [8/9 × ($418,500 cost +
$195,300 adjustment)] ...........................................................
Gain on Sale of Investment ........................................................
To record the sale of the 8,000 shares of Venus stock.

700,000

137,475
57,825

545,600
154,400

Adjustments to the investment account:
*Retained earnings account = 90% × $170,000 change in retained earnings – 3 years of
equipment depreciation (3 × 90% × $5,750) = $137,475.
**Investment income = 90% × ($70,000 – $5,750 equipment depreciation) = $57,825.

376


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Ch. 7—Exercises


EXERCISE 7-4
Entries on Carpenter’s books, January 1, 20X6:
Investment in Hinckley Company .....................................................
Retained Earnings—Carpenter ..................................................
To adjust investment to equity for shares sold.
Remaining shares may remain at cost, because
they will be consolidated.

2,960

Cash.................................................................................................
Investment in Hinckley Company ...............................................
Paid-In Capital in Excess of Par—Carpenter .............................
To record sale of shares. Investment eliminated =
[(2,000 ÷ 40,000) × $160,000 original cost] plus
$2,960 equity adjustment.

40,000

Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$200,000
Less book value of interest acquired:
Total equity
150,000
Interest acquired

Book value
Excess of fair value over book value
$ 50,000

2,960

10,960
29,040

Parent
Price
(80%)
$160,000

NCI
Value
(20%)
$ 40,000

$150,000
80%
$120,000
$ 40,000

$150,000
20%
$ 30,000
$ 10,000

Adjustment of identifiable accounts:


Machine
Goodwill

Adjustment
$ 20,000
30,000
Total
$ 50,000

Amortization
per Year
$ 4,000

Equity adjustment:
Income .......................................................................................
Amortization of excess (4 years × $4,000) .................................
Dividends ...................................................................................
Interest sold (2,000 ÷ 50,000)

377

Life
5

Worksheet
Key
debit D1
debit D2


$110,000
(16,000)
(20,000)
$ 74,000
×
4%
$ 2,960


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Ch. 7—Exercises

EXERCISE 7-5
(1) Retained Earnings (3 × 80% × $5,000) ......................................
Investment in Brown Corporation ..........................................
To adjust for building depreciation to December 31, 20X7.

12,000
12,000

Investment in Brown Corporation ...............................................
Investment Income ................................................................
To adjust current year’s share of income and investment
account for one-half of the year’s building depreciation
[(80% × $35,000) – (1/2 × 80% × $5,000)].

26,000

Cash ...........................................................................................

Investment in Brown Corporation* .........................................
Gain on Sale of Subsidiary ....................................................
To record the sale and the gain on the 24,000 shares
of Brown stock.

850,000

26,000

828,000
22,000

*($814,000 – $12,000 + $26,000).
(2) Retained Earnings (3 × 80% × $5,000) ......................................
Investment in Brown Corporation ..........................................
To adjust for building depreciation to December 31, 20X7.
Investment in Brown Corporation ...............................................
Investment Income ................................................................
To adjust one-half of current year’s share of income for
the first half of the year and one-half of the year’s building
depreciation, {1/2 × [(80% × $35,000) – (1/2 × 80% × $5,000)]}.

12,000
12,000
13,000
13,000

Note: A sophisticated equity adjustment for the other half of the investment will be
necessary at year-end.
Cash ...........................................................................................

Investment in Brown Corporation* .........................................
Gain on Sale of Investment ...................................................
To record the sale and the gain on the 12,000 shares
of Brown stock.
*[1/2 × ($814,000 – $12,000)] + $13,000.

378

425,000
414,000
11,000


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Ch. 7—Exercises

Exercise 7-5, Concluded
(3) Only the 20% portion sold (25% of the investment) needs adjustment; the remaining 60% of
the investment) will be adjusted at year-end when consolidated statements are prepared.
Retained Earnings [(3 × 80% × $5,000)* × 1/4] .........................
Investment in Brown Corporation ..........................................
To adjust for building depreciation to December 31, 20X7.

3,000

Investment in Brown Corporation ...............................................
Investment Income ................................................................
To adjust 25% of the current year’s share of income
for the first half of the year and 25% of the one-half

year’s building depreciation,
{1/4 × [(80% × $35,000) – (1/2 × 80% × $5,000)]}.

6,500

Cash ...........................................................................................
Investment in Brown Corporation* .........................................
Paid-In Capital in Excess of Par ............................................
To record the sale and the gain on the 6,000 shares of
Brown stock.

212,500

3,000

6,500

207,000
5,500

*[(1/4 × $814,000) – $3,000 + $6,500].

EXERCISE 7-6
(1)
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$350,000

Less book value of interest acquired:
Common stock ($10 par)
$200,000
Retained earnings
90,000
Preferred dividends in arrears
(6,000)
Total equity
$284,000
Interest acquired
Book value
Excess of fair value over book value
$ 66,000

Parent
Price
(80%)
$280,000

NCI
Value
(20%)
$ 70,000

$284,000
80%
$227,200
$ 52,800

$284,000

20%
$ 56,800
$ 13,200

Adjustment of identifiable accounts:

Goodwill

Adjustment
$ 66,000

379

Worksheet
Key
debit D


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Ch. 7—Exercises

Exercise 7-6, Concluded
(2)
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$350,000

Less book value of interest acquired:
Common stock ($10 par)
$200,000
Retained earnings
90,000
Preferred dividend share of retained
earnings
(30,000)*
Total equity
$260,000
Interest acquired
Book value
Excess of fair value over book value
$ 90,000

Parent
Price
(80%)
$280,000

NCI
Value
(20%)
$ 70,000

$260,000
80%
$208,000
$ 72,000


$260,000
20%
$ 52,000
$ 18,000

Adjustment of identifiable accounts:

Goodwill

Worksheet
Key
debit D

Adjustment
$ 90,000

* $90,000 retained earnings × 100/300 shares (preferred plus common stock)
(3)
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$350,000
Less book value of interest acquired:
Common stock ($10 par)
$200,000
Retained earnings
90,000
Preferred dividends share of RE

(22,000)*
Total equity
$268,000
Interest acquired
Book value
Excess of fair value over book value
$ 82,000

Parent
Price
(80%)
$280,000

NCI
Value
(20%)
$ 70,000

$268,000
80%
$214,400
$ 65,600

$268,000
20%
$ 53,600
$ 16,400

Adjustment of identifiable accounts:


Goodwill

Adjustment
$ 82,000

*(2 years × $6,000) + (10% × $100,000 par value)

380

Worksheet
Key
debit D


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Ch. 7—Exercises

EXERCISE 7-7
(1)
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$875,000
Less book value of interest acquired:
Common stock ($20 par)
$800,000
Retained earnings

100,000
Preferred dividends in arrears
(40,000)
Total equity
$860,000
Interest acquired
Book value
Excess of fair value over book value
$ 15,000

Parent
Price
(80%)
$700,000

NCI
Value
(20%)
$175,000

$860,000
80%
$688,000
$ 12,000

$860,000
20%
$172,000
$ 3,000


Adjustment of identifiable accounts:

Goodwill

Worksheet
Key
debit D

Adjustment
$ 15,000

(2) Investment in Ace.......................................................................
Retained Earnings .................................................................
To adjust for 80% of subsidiary income for 20X1 and 20X2
applicable to common stock, equal to 80% ×
($120,000 – $80,000 current cumulative claim of
preferred stock).
Subsidiary Loss ..........................................................................
Investment in Ace ..................................................................
To adjust for 80% of subsidiary loss of $10,000 for
20X2 and 80% of the $40,000 current cumulative
claim of preferred stock.

381

32,000
32,000

40,000
40,000



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Ch. 7—Exercises

EXERCISE 7-8
Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$525,000
Less book value of interest acquired:
Common stock ($10 stated value)
$300,000
Retained earnings
160,000
Preferred dividends in arrears
(32,000)
Total equity
$428,000
Interest acquired
Book value
Excess of fair value over book value
$ 97,000

Parent
Price
(80%)

$420,000

NCI
Value
(20%)
$105,000

$428,000
80%
$342,400
$ 77,600

$428,000
20%
$ 85,600
$ 19,400

Adjustment of identifiable accounts:

Goodwill

Worksheet
Key
debit D

Adjustment
$ 97,000

(1) Equity claim on Kim Company retained earnings:
Retained earnings, January 1, 20X7 ..........................................

Preferred claim (4 years × $16,000) ..........................................
Common shareholders’ claim ................................................

$210,000
64,000
$146,000

(2) Cost-to-simple-equity conversion for preferred stock:
Preferred stockholders’ claim on retained earnings;
January 1, 20X5, through January 1, 20X7
(2 years × $16,000) ...............................................................
Ownership interest .....................................................................
Cost-to-simple-equity conversion ...............................................

×

$32,000
50%
$16,000

Investment in Kim Company Preferred Stock ............................
Retained Earnings—Zigler.....................................................
To adjust investment to simple equity.

16,000

Preferred Stock—Kim Company (50% × $200,000) ..................
Retained Earnings—Kim Company (50% × $64,000
applicable to preferred stock) ..................................................
Investment in Kim Company Preferred Stock

($90,000 cost + $16,000 adjusted)....................................
Paid-In Capital in Excess of Par—Retirement
of Preferred Stock .............................................................
To eliminate the investment in preferred stock.

100,000

382

16,000

32,000
106,000
26,000


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Ch. 7—Exercises

Exercise 7-8, Concluded
(3) Cost-to-simple-equity conversion for common stock:
Retained earnings, January 1, 20X7 ..........................................
Less preferred claim—4 years × 8% × $200,000 .......................
Retained earnings, December 31, 20X4................................
Less preferred claim—2 years × 8% × $200,000 ..................
Increase in retained earnings, common stock .......................
Ownership interest ............................................................
Cost-to-simple-equity conversion ......................................


$210,000
64,000 $146,000
$160,000
32,000 128,000
$ 18,000
×
80%
$ 14,400

Entries:
Investment in Kim Company Common Stock.............................
Retained Earnings—Zigler.....................................................
To adjust investment to equity.

14,400

Common Stock—Kim Company ($300,000 × 80%) ...................
Retained Earnings—Kim Company (80% × $146,000
applicable to common stock) .................................................
Goodwill .....................................................................................
Investment in Kim Company Common Stock ........................
NCI ........................................................................................
To eliminate investment, adjust NCI, and record goodwill.

240,000

383

14,400


116,800
97,000
434,400
19,400


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Ch. 7—Problems

PROBLEMS
PROBLEM 7-1
(1)
Price paid ...................................................................................
Less interest acquired:
Common stock ($10 par) ......................................................
Retained earnings ................................................................
Total stockholders’ equity ...............................................
Interest acquired ..................................................................
Excess .......................................................................................
Equipment adjustment {[$105,000 – (2 years × $10,500)]
× 20%} .................................................................................
Debit parent retained earnings ...................................................

$70,000
$

×

75,000

85,000
$160,000
20%

32,000
$38,000
16,800
$21,200

(2) See worksheet on page 389
Eliminations and Adjustments:
(CY1)
Eliminate intercompany income.
(CY2)
Eliminate intercompany dividends.
(EL)
Eliminate the controlling interest in the subsidiary equity.
(D1)/(NCI) Distribute the excess on the original 60% investment to equipment.
(D2)
Distribute the excess on the 20% investment to parent retained earnings.
(A)
Depreciate the excess for 4 years as follows:
Sharper retained earnings, 2 years at 40% and 1 year at 20% of 10,500 $10,500
Parish retained earnings, 2 years at 60% and 1 year at 80% of 410,500 21,000
Depreciation expense
10,500
Subsidiary Sharp Company Income Distribution
Depreciation ............................. (A) $10,500

Internally generated net

income ...............................

$35,000

Adjusted net income ................
NCI share ................................
NCI ..........................................

$24,500
× 20%
$ 4,900

Parent Parish Company Income Distribution
Internally generated net
income ...............................
80% × Sharp adjusted
income of $24,500 .............
Controlling interest...................

384

$100,000
19,600
$119,600


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Ch. 7—Problems


Problem 7-1, Concluded
(2)

Parish Company and Subsidiary Sharp Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X5
Eliminations
and Adjustments
Dr.

Cr.

Consolidated
Income
Statement

NCI

Controlling
Retained
Earnings

55,000 ...............

.................

.................

.................


.................

(CY2)
4,000
................. (EL)
................. (D1)
................. (D2)
170,000
(D1)

(CY1)

28,000 ......
.................
140,000 ...............
.................
63,000 ...............
.................
38,000 ...............
.................
105,000 (A)
............. 42,000 ...............

.................
.................
.................
.................
.................

(20,000) .............


.................

.................

.................

.................

(500,000) ............

.................

.................

.................

.................

.................

(198,000) ............

(A)

21,000 .................

.................

.................


.................

21,200
.................
60,000 .................

.................
.................

.................

(155,800) ..
............(15,000) ..............

Trial Balance
Parish
Sharp
Current Assets ...............................................
..........................................................251,000
Investment in Sharp Company .......................

Property, Plant, and Equipment (net) .............
.......................................................................
Current Liabilities ...........................................
....................................................... (130,000)
Common Stock ($10 par)—Parish .................
....................................................... (500,000)
Retained Earnings—Parish ............................
.......................................................................

Common Stock ($10 par)—Sharp ..................
.......................................................................
Retained Earnings—Sharp

Sales ..............................................................
.......................................................................
Subsidiary Income..........................................
Cost of Goods Sold ........................................
.......................................................................
Other Expenses .............................................
.......................................................................
Dividends Declared ........................................
............................................................25,000

196,000
265,000 .............
................. .................
................. .................
................. .................
450,000
683,000
(110,000)

.................
.................

................. (D2)
(75,000) (EL)

.................


.......... (100,000)

(EL)

80,000 ........ (NCI)

............. 42,000

Consolidated
Balance
Sheet

.................
.................
.................
.................

.................

.................

(34,700) ....

................. .................
................. .................
(400,000)

(A)
10,500

(D2)
16,800
(110,000) ...........

.................
.................
.................

.................
.................

.................
.................
.......... (510,000) ...............

.................
.................
.................

(28,000) ............
200,000

(CY1) 28,000
60,000 ...............

.................
.................

.................


.................
.................
........... 260,000 ................

.................
.................

100,000

15,000

10,500 ......

.................

.................

.................

.................

.................
(CY2)

125,500 ...............
............... 4,000

.................

.................

1,000 ........

.................
.................
.................
.................
(4,900)...............

.................
.................
.................

................. .................
25,000

(A)

.................
5,000 .................

0
0
357,000
Consolidated Net Income ........................................................................................................................................
To NCI .................................................................................................................................................................

385

357,000 ....
(124,500)

4,900


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Ch. 7—Problems

To Controlling Interest .........................................................................................................................................
119,600
.................
(119,600) ..............
Total NCI ........................................................................................................................................................................................
(53,600)...............
(53,600)
Retained Earnings—Controlling Interest, December 31, 20X5 .............................................................................................................................
(250,400)
(250,400)
Totals .........................................................................................................................................................................................................................................
0

386


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Ch. 7—Problems

PROBLEM 7-2

(1)

Determination and Distribution of Excess Schedule
Company
Implied
Fair Value
Fair value of subsidiary
$350,000
Less book value of interest acquired:
Common stock
$ 50,000
Other paid-in capital in excess of
par
100,000
Retained earnings
150,000
Total equity
$300,000
Interest acquired
Book value
Excess of fair value over book value
$ 50,000

Parent
Price
(70%)
$245,000

NCI
Value
(30%)
$105,000


$300,000
70%
$210,000
$ 35,000

$300,000
30%
$ 90,000
$ 15,000

Adjustment of identifiable accounts:

Equipment
Goodwill
Total

Adjustment
$ 20,000
30,000
$ 50,000

Amortization
per Year
$ 5,000

Life
4

Worksheet

Key
debit D1
debit D2

Analysis of 20% Interest:
Price paid .........................................................................................
Less interest acquired:
Common stock .....................................................................
Other paid-in capital in excess of par ...................................
Retained earnings ................................................................
Income for 4 months ............................................................
Total stockholders’ equity ...............................................
Interest acquired ..................................................................
Excess........................................................................................
Equipment adjustment {[$20,000 – (1 1/3 years × $5,000)]
× 20%} .................................................................................
Debit parent retained earnings .......................................

387

$92,000
$

×

50,000
100,000
190,000
30,000
$370,000

20%
$

74,000
18,000

(2,667)
$15,333


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Ch. 7—Problems

Problem 7-2, Continued
(2) Entries under the simple equity method:
Investment in Craft Company................
Subsidiary Income .........................
Cash ......................................................
Investment in Craft Company ........

20X2

20X1
Debit
42,000 (1)

Credit

Debit

75,000 (2)

42,000
14,000 (3)

Credit
75,000

27,000 (4)
14,000

27,000

(1) 70% of $60,000 net income
(2) 70% of $30,000 (first 4 months) net income plus 90% of $60,000 (second 8 months)
net income
(3) 70% of $20,000 dividends
(4) 90% of $30,000 dividends
(3) Balance in Investment in Craft Company:
$245,000 + $42,000 – $14,000 + $92,000 + $75,000 – $27,000 = $413,000
Balance in Subsidiary Income (20X2 only): 70% of $30,000 (January 1 thru April 30) +
90% of $60,000 (May 1 thru December 31, 20X2) = $75,000.

388


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Ch. 7—Problems


Problem 7-2, Continued
(4)

James Company and Subsidiary Craft Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 20X2
Trial Balance
James
Craft

Eliminations
and Adjustments
Dr.

Cr.

Consolidated
Income
Statement

NCI

Inventory, December 31.................................
100,000
50,000 ...............
(EI)
............... 3,000 ................
....................................................................... 147,000
Other Current Assets .....................................
126,000

180,000 .............
.................
.................
.................
.......................................................... 306,000
Investment in Craft Company ........................
413,000 ..............
(CY2) 27,000
(CY1)
75,000......
.................
................. .................
................. (EL)
312,000 ...............
.................
................. .................
................. (D1)
35,000 ...............
.................
................. .................
................. (D2)
18,000 ...............
.................
Land ...............................................................
50,000
50,000 ...............
.................
.................
.................
.......................................................... 100,000

Buildings and Equipment ...............................
350,000
320,000
(D1)
20,000 ......
.................
.................
.......................................................... 690,000
Accumulated Depreciation .............................
(100,000)
(60,000) ............
(A)
............. 10,000 ................
....................................................................... (170,000)
Goodwill ......................................................... ................. ................. (D1 )
30,000
.................
.................
.................
Other Intangibles ...........................................
20,000 ..............
.................
.................
.................
.................
Current Liabilities ...........................................
(120,000)
(40,000) ............
.................
.................

.................
........................................................(160,000)
Bonds Payable ............................................... .................
(100,000) .................
.................
.................
.................
........................................................(100,000)
Other Long-Term Liabilities............................
(200,000) .............
.................
.................
.................
.................
........................................................(200,000)
Common Stock—James ................................
(200,000) .............
.................
.................
.................
.................
........................................................(200,000)
Other Paid-In Capital in Excess of Par
—James .....................................................
(100,000) .............
.................
.................
.................
.................
(100,000)

Retained Earnings—James ...........................
(214,000) .............
(A)
3,500 .................
.................
.................
................. ................. (D2)
15,333
.................
.................
.................
Common Stock—Craft ................................... .................
(50,000) (EL)
45,000.................
.................
.......................................................................
Other Paid-In Capital in Excess of Par
—Craft ........................................................ .................
(100,000) (EL)
90,000.................
.................
...................................................................
Retained Earnings—Craft .............................. .................
(190,000) (EL)
171,000
(NCI)
............. 15,000
.......................................................................
................. ................. (A)
1,500

.................
.................
.................
................. ................. (D2)
2,667
.................
.................
.................

389

Controlling
Retained
Earnings

Consol.
Balance
Sheet

.................
.................
.................
.................
.................
.................
.................

.................
.................
.................

.................

.................
.................
.................
.................
.................

30,000
20,000

.................
.................
.................

.................
(195,167)..
.................
.................
.............. (5,000) ..............

............ (10,000) ..............
.................

(29,833)....

.................
.................

.................

.................


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Ch. 7—Problems
Net Sales .......................................................
(520,000)
(450,000)
(IS)
50,000 ......
......... (920,000) ..............
.................
.......................................................................
Cost of Goods Sold ........................................
300,000
260,000
(EI)
3,000 (IS)
50,000 ................
513,000 ....
.................
.......................................................................
Operating Expenses ......................................
120,000
100,000
(A)
5,000 ........
...........225,000................
.................

.......................................................................
Subsidiary Income .........................................
(75,000) .............
(CY1) 75,000
.................
.................
.................
.................
.................
Dividends Declared ........................................
50,000
30,000 ...............
(CY2) ............. 27,000
3,000 ........ 50,000
.......................................................................
Purchased Income ......................................... ................. ................. (EL)
6,000
.................
6,000 ........
.................
.................
0
545,000
545,000 ....
.................
.................
.................
Total ...............................................................
0
Consolidated Net Income........................................................................................................................................

(176,000) ..............
.................
.................
(8,200) ......
.................
To NCI (see distribution schedule) ......................................................................................................................
8,200
To Controlling Interest (see distribution schedule) ..............................................................................................
167,800 ................
(167,800)..
Total NCI........................................................................................................................................................................................
(50,033) ..............
(50,033)
Retained Earnings—Controlling Interest, December 31, 20X2 ..............................................................................................................................
(312,967)
(312,967)
Totals ........................................................................................................................................................................................................................................
0

390


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Ch. 7—Problems

Problem 7-2, Concluded
Eliminations and Adjustments:
(CY1)
Eliminate the current-year entries for subsidiary income.

(CY2)
Eliminate current-year entries for subsidiary dividends.
(EL)
Eliminate 90% of Craft Company equity balances at the beginning of the year
against the investment account. Also eliminate 20% of the January through April
20X2 income ($30,000) with a debit of $6,000 to Purchased Income.
(D1)/(NCI) Distribute the $35,000 excess cost and $15,000 NCI adjustment as required by
the determination and distribution of excess schedules to Equipment and
Goodwill.
(A)
Depreciate the write-up to equipment over 2 years. Charge the 20X1
depreciation against January 1, 20X2, Retained Earnings of James Company
and Craft Company and the 20X2 adjustment against Operating Expenses.
(D2)
Distribute excess on 20% investment. Eliminate NCI of $2,667 and debit James
Retained Earnings for $15,333.
(IS)
Eliminate the intercompany sale and purchase.
(EI)
Eliminate the $3,000 of gross profit in the ending inventory.

Subsidiary Craft Company Income Distribution
Ending inventory profit ............. (EI) $3,000 Internally generated net
Equipment depreciation ........... (A)
5,000
income ...............................

$90,000

Adjusted net income ................

NCI share ................................
NCI ..........................................

$82,000
× 10%
$ 8,200

Parent James Company Income Distribution
Internally generated net
income ...............................
90% of Craft income ................
Less purchased income...........

$100,000
73,800
(EL) (6,000)

Controlling interest...................

$167,800

391


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Ch. 7—Problems

PROBLEM 7-3
Determination and Distribution of Excess Schedule

Company
Implied
Fair Value
Price paid for investment
$475,500
Less book value of interest acquired:
Common stock
$100,000
Retained earnings
400,000
Total equity
$500,000
Interest acquired
Book value
Excess of fair value over book value
$ (24,500)

Parent
Price
(70%)
$325,500

NCI
Value
(30%)
$150,000*

$500,000
70%
$350,000

$ (24,500)

$500,000
30%
$150,000

Adjustment of identifiable accounts:
Worksheet
Key
credit D

Adjustment
$ (24,500)

Gain on acquisition

* NCI value cannot be less than fair (equal to book) value of interest in net assets.
Analysis of September 30, 20X7, purchase:
Price paid .......................................................................................
Less interest acquired:
Common stock .......................................................................
Retained earnings, January 1 ................................................
Income, January–September .................................................
Total stockholders’ equity ...............................................
Interest acquired ....................................................................
Excess ...........................................................................................

$105,000
$100,000
400,000

25,000
$525,000
×
20%

105,000
$
0

Eliminations and Adjustments:
(CY1) Eliminate the subsidiary income.
(CY2) Eliminate the intercompany dividends.
(EL)
Eliminate 90% of Stallward’s equity against the investment.
(D)
Distribute excess to gain on acquisition.
(PI)
Eliminate purchased income from the investment, $25,000 × 20% = $5,000.
(LN)
Eliminate the intercompany accounts resulting from the 12% note:
(1) Payment of installment and interest on December 31 was made by Stallward but
not received by Away.
(2) Balance on note.
(3) Interest income and expense.
(S)
(1) Eliminate intercompany services.
(2) Eliminate profit in deferred charges, $16,500 × 1/3 = $5,500.
(IS)
Eliminate intercompany sales of $60,000.
(EI)

Eliminate the intercompany profit in ending inventory:
Away’s Percent Profit: =

Sales

Cost of Goods Sold
$450,000
= 25%
=
Sales
$1,800,000

25% × $10,000 = $2,500

392


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Ch. 7—Problems

Problem 7-3, Continued
(F1)
(F2)

Eliminate the gain on the sale of tools.
Adjust the depreciation on tools:
Depreciation taken [($25,000 ÷ 5) × ½] ......................................................
Less correct depreciation [($15,000 ÷ 5) × ½] ............................................
Depreciation adjustment.............................................................................


$2,500
1,500
$1,000

Subsidiary Stallward, Inc. Income Distribution
Unrealized profit on
Internally generated net
engineering services .......... (S2) $5,500
income ...............................

$ 48,000

Adjusted income ......................
NCI share ................................
NCI ..........................................

$ 42,500
×10%
$ 4,250

Parent Away Company Income Distribution
Unrealized gain on sale
Internally generated net
of tools ................................ (F1) $10,000
income ...............................
$202,000
Unrealized profit in ending
70% interest in income of
inventory ............................. (EI) 2,500

Stallward for full year
(70% × $42,500) ................
29,750
20% interest in income for
one-quarter year [($42,500 –
$25,000) × 20%] ................
3,500
Gain on acquisition ..................
24,500
Depreciation adjustment
on tools .............................. (F2) 1,000
Controlling interest ...................

393

$248,250