Chapter CONSOLIDATION TECHNIQUES AND PROCEDURES Answers to Questions Consolidated financial statements are not affected by the method used by the parent company in accounting for its subsidiary investments Such statements are the same regardless of whether the parent company uses the cost method, the equity method, or an incomplete equity method in accounting for its subsidiary The working paper adjustments will differ, however, depending on how the parent accounts for its subsidiary The standard method of accounting for equity investments of 20 percent or more is the equity method But if the parent issues only consolidated financial statements as the statements of the primary reporting entity, and the consolidated financial statements are correct, it makes no difference how the records of the parent company are maintained The Financial Accounting Standards Board (and its predecessor organization) established standards for external reporting but not for maintenance of internal accounting records Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its subsidiary investment and income accounts Since patents and patent amortization accounts are not recorded on the parent’s books, they are created for consolidated statement purposes through working paper entries Noncontrolling interest share is entered in the consolidation working papers by preparing a working paper adjusting entry in which noncontrolling interest share is debited and noncontrolling interest is credited The noncontrolling interest share (debit) is carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest for noncontrolling interest share is added to the beginning noncontrolling interest The noncontrolling interest share is calculated based on the subsidiary’s reported net income adjusted to reflect fair value through the amortization of the excess of fair value over book value This is the approach illustrated throughout this text Working paper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity accounts are alike in regard to the objectives of consolidation Regardless of the configuration of the working paper entries, the final result of adjustments for these items is to eliminate them through working paper entries In other words, the investment in subsidiary, income from subsidiary, and the capital stock, additional paid-in capital, retained earnings, and other stockholders’ equity accounts of the subsidiary never appear in consolidated financial statements When the parent company does not amortize fair value/book value differentials on its separate books, the parent company’s income from subsidiary and investment in subsidiary accounts are overstated in the year of acquisition In subsequent years, the income from the subsidiary, investment in subsidiary, and parent’s beginning retained earnings will be overstated The error may be corrected in the working papers with the following entries: Year of acquisition Income from subsidiary Investment in subsidiary Subsequent year Income from subsidiary Retained earnings — parent Investment in subsidiary XXX XXX XXX XXX XXX ©2009 Pearson Education, Inc publishing as Prentice Hall 4-1 4-2 Consolidation Techniques and Procedures By entering a correcting entry, all other working paper entries are the same as if the parent provided for amortization on its separate books If the errors are not corrected through the working paper entries suggested above, the entry to eliminate the income from subsidiary in the year of acquisition is prepared in the usual manner without further complications because neither the beginning investment nor retained earnings accounts are affected by the omission In subsequent years the entry to eliminate income from subsidiary and dividends from subsidiary will have to be changed to correct the beginning-of-the-period retained earnings as follows: Income from subsidiary Retained earnings — parent Dividends (subsidiary) Investment in subsidiary XXX XXX XXX XXX No Working paper adjustments are not entered in the general ledger of the parent company or any other entity They are used in the preparation of consolidated financial statements for a conceptual entity for which there are no formal accounting records Working papers are tools of the accountant that facilitate the consolidation of parent and subsidiary financial statements Given the tools available, the accountant should select those that are most convenient in the circumstances If financial statements are to be consolidated, the financial statement approach is the appropriate tool The trial balance approach is most convenient when the data are presented in the form of a trial balance The accountant needs to be familiar with both approaches to perform the work as efficiently as possible Working paper adjustment and elimination entries as illustrated in this text are exactly the same when the trial balance approach is used as when the financial statement approach is used This is possible through a check-off system that nullifies the closing process when the financial statement approach is used 10 The retained earnings of the parent company will equal consolidated retained earnings if the equity method of accounting has been correctly applied In consolidating the financial statements of affiliated companies, the beginning retained earnings of the parent are used as beginning consolidated retained earnings If the equity method has not been correctly applied, parent beginning retained earnings will not equal beginning consolidated retained earnings In this case, retained earnings of the parent are adjusted to a correct equity basis in order to establish the correct amount of beginning consolidated retained earnings Thus, working paper adjustments to beginning retained earnings of the parent are needed whenever the beginning retained earnings of the parent not correctly reflect the equity method 11 The noncontroling interest that appears in the consolidated balance sheet can be checked first adjusting the the equity of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for any unamortized excess of fair value over book value) and then multiplying by the noncontrolling interest percentage Consolidated retained earnings at a balance sheet date can be checked by comparing the amount with the parent’s retained earnings on the same date If consolidated retained earnings and parent retained earnings are not equal, either consolidated retained earnings have been computed incorrectly, or parent retained earnings not reflect a correct equity method of accounting 12 Consolidated assets and liabilities are reported for all equity holders—noncontrolling as well as controlling Therefore, the change in net assets from operations for a period results from noncontrolling interest share and consolidated net income 13 No It relates to all interests in the consolidated entity This difference is one of many inconsistencies in the concepts underlying consolidated financial statements Consider, for example, the error that could result from dividing cash provided by operations by outstanding parent company shares to get a computation of cash flow per share SOLUTIONS TO EXERCISES ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-3 Solution E4-1 d a a d b 10 d b b a b Solution E4-2 Preliminary computations Investment cost January Implied total fair value of Sally Forth ($300,000 / 80%) Less: Book value Excess fair value over book value Excess allocated to: Inventory Remainder to goodwill Excess fair value over book value $300,000 $375,000 (250,000) $125,000 $ 12,500 112,500 $125,000 Income from Sally Forth Sally Forth’s reported net income Less: Excess allocated to inventory (sold in 2009) Sally Forth adjusted income Ponder’s 80% share $ 70,000 (12,500) $ 57,500 $ 46,000 Noncontrolling interest share Sally Forth’s adjusted income $57,500 × 20% noncontrolling interest $ 11,500 Noncontrolling interest December 31 Sally Forth’s equity book value Add: Unamortized excess (Goodwill) Sally Forth’s equity fair value 20% noncontrolling interest $260,000 112,500 $372,500 $ 74,500 Investment in Sally Forth December 31 Investment cost January Add: Income from Sally Forth (given)* Less: Dividends ($60,000 × 80%) Investment in Sally Forth December 31 * Assumes this is based on Sally Forth’s adjusted income Consolidated net income Noncontrolling interest share Controlling interest share equals Parent NI under equity method $300,000 50,000 (48,000) $302,000 $191,700 $ 11,500 $180,200 ©2009 Pearson Education, Inc publishing as Prentice Hall 4-4 Consolidation Techniques and Procedures Solution E4-3 $350,000 ($150,000 + $220,000 - $20,000 intercompany) Preliminary computations for and Investment cost on January 1, 2009 Implied total fair value of Starman ($14,000 / 70%) Book value of Starman Excess allocated entirely to Goodwill $14,000 $20,000 15,000 $ 5,000 Primrose’s separate income for 2011 Loss from investment in Starman ($500 × 70%) Controlling share of consolidated net income $12,000 (350) $11,650 Investment cost January 1, 2009 Add: Share of income less dividends 2009 — 2011 ($700 income - $500 dividends) × 70% Investment balance December 31, 2011 $14,000 140 $14,140 Solution E4-4 Preliminary computations Investment cost Implied total fair value of Stine ($580,000 / 80%) Book value Total excess fair value over book value $580,000 $725,000 600,000 $125,000 Excess allocated to: Equipment (5-year life) Patents (10-year amortization period) Total excess fair value over book value $ 50,000 75,000 $125,000 Income from Stine Stine’s reported net income Less: Depreciation of excess allocated to equipment Less: Amortization of patents Stine’s adjusted income Income from Stine (80%) 2010 $120,000 (10,000) (7,500) $102,500 $82,000 2011 $150,000 (10,000) (7,500) $132,500 $106,000 1a Consolidated net income for 2010 Penair’s net income = controlling share of consolidated net income under equity method $340,000 1b Investment in Stine December 31, 2010 Cost January Add: Income from Stine — 2010 Less: Dividends from Stine — 2010 ($80,000 × 80%) Investment in Stine December 31 $580,000 82,000 (64,000) $598,000 Noncontrolling interest share — 2010 ($102,500 adjusted income × 20%) $ 20,500 Noncontrolling interest December 31, 2011 Stine’s equity book value at acquisition date Add: Income less dividends for 2010 and 2011 (see note) Stine’s equity book value at December 31, 2011 $600,000 100,000 700,000 1c 1d ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-5 Unamortized excess at December 31, 2011 Stine’s equity fair value at December 31, 2011 Noncontrolling interest percentage Noncontrolling interest December 31, 2011 Solution E4-4 (continued) 90,000 $790,000 20% $158,000 Note: Stine’s income less dividends: 2010 Net Income 2010 Dividends 2011 Net Income 2011 Dividends Total $ 120 (80) 150 (90) $ 100 Solution E4-5 c a b c d Solution E4-6 Party Corporation and Subsidiary Partial Consolidated Cash Flows Statement for the year ended December 31, Cash Flows from Operating Activities Controlling interest share of consolidated net income Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Undistributed income of equity investees Loss on sale of land Depreciation expense Patents amortization Increase in accounts receivable Increase in inventories Decrease in accounts payable Net cash flows from operating activities $75,000 $25,000 (2,500) 5,000 60,000 8,000 (52,500) (22,500) (10,000) 10,500 $85,500 Solution E4-7 Prolax Corporation and Subsidiary Partial Consolidated Cash Flows Statement for the year ended December 31, Cash Flows from Operating Activities Cash received from customers Dividends received from equity investees Less: Cash paid to suppliers Cash paid to employees Cash paid for other operating items $322,500 7,000 $182,500 27,000 23,500 ©2009 Pearson Education, Inc publishing as Prentice Hall 4-6 Consolidation Techniques and Procedures Cash paid for interest expense Net cash flows from operating activities 12,000 245,000 $ 84,500 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-7 SOLUTIONS TO PROBLEMS Solution P4-1 (in thousands of $) Preliminary computations Investment in Seine (75%) January 1, 2009 Implied fair value of Seine ($2,400 / 75%) Book value of Seine Total excess of fair value over book value Excess allocated: 10% to inventories (sold in 2009) 40% to plant assets (use life years) 50% to goodwill Total excess of fair value over book value Goodwill at December 31, 2013 (not amortized) Noncontrolling interest share for 2013 Net income ($1,000 sales - $600 expenses) Less: Amortization of excess Plant assets ($320 / yrs.) Adjusted Seine income 25% Share $2,400 $3,200 (2,400) $ 800 $ $ 80 320 400 800 $ 400 $ 400 $ $ (40) 360 90 Consolidated retained earnings December 31, 2012 Equal to Pearl’s December 31, 2012 retained earnings Since this a trial balance, reported retained earnings equals beginning of 2013 retained earnings $1,670 Consolidated retained earnings December 31, 2013 Pearl’s retained earnings December 31, 2012 Add: Pearl’s net income for 2013 Less: Pearl’s dividends for 2013 Consolidated retained earnings December 31 $1,670 1,085 (500) $2,255 Consolidated net income for 2013 Consolidated sales Less: Consolidated expenses ($3,785 + $40 depreciation) Total consolidated income Less: Noncontrolling interest share Controlling share of consolidated net income for 2013 $5,000 (3,825) 1,175 (90) $1,085 Noncontrolling interest December 31, 2012 Seine’s stockholders’ equity at book value Unamortized excess after four years: Inventory Plant assets ($320 - $160) Goodwill Seine’s stockholders’ equity at fair value 25% Seine’s stockholders’ equity at fair value Noncontrolling interest December 31, 2013 Seine’s stockholders’ equity at book value Unamortized excess after five years: Inventory $2,400 160 400 $2,960 $ 740 $2,600 ©2009 Pearson Education, Inc publishing as Prentice Hall 4-8 Consolidation Techniques and Procedures Plant assets ($320 - $200) Goodwill Seine’s stockholders’ equity at fair value 25% Seine’s stockholders’ equity at fair value 120 400 $3,120 $ 780 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-9 Solution P4-2 Palm Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 80% Sail Palm Income Statement Sales Income from Sail Cost of goods sold Operating expenses Consolidated NI Noncontrol share $ 310,000 10,500 200,000 * 77,000 * ($15,000 × 30%) Net income – Control share $ 43,500 Retained Earnings Retained earnings — Palm $ 65,000 265,000 * 97,000 * $ 48,000 $ 4,500 * 4,500 15,000 11,000 b 11,000 15,000 10,000 * 43,500 $ 65,000 43,500 a c 7,000 3,000 30,000 * 78,500 $ 16,000 $ 78,500 $ 45,500 60,000 24,000 120,000 49,000 $ 15,000 30,000 20,000 35,000 $ 60,500 90,000 44,000 155,000 a 3,500 b 45,500 $ 298,500 $ 100,000 $ 349,500 $ $ $ 30,000 20,000 150,000 18,000 12,000 50,000 20,000 4,000 b 78,500 16,000 $ 298,500 $ 100,000 48,000 32,000 150,000 b 50,000 4,000 20,000 78,500 Noncontrolling interest January b 19,500 Noncontrolling interest December 31 c * $ $ Investment in Sail Other liabilities Capital stock Other paid-in capital Retained earnings $ 410,000 65,000 * 20,000 * 43,500 30,000 * Inventories PP&E — net Accounts payable Consolidated Statements a 10,500 $ Net income Dividends Balance Sheet Cash Acc Receiv — net $ 100,000 c Retained earnings — Sail Retained earnings December 31 Adjustments and Eliminations 1,500 21,000 $ 349,500 Deduct Working paper entries a To eliminate income from Sail and dividends received from Sail and adjust the investment in Sail account to its beginning of the period balance b To eliminate reciprocal investment in Sail and equity amounts of Sail and to enter beginning noncontrolling interest ©2009 Pearson Education, Inc publishing as Prentice Hall 4-10 Consolidation Techniques and Procedures c To enter noncontrolling interest share of subsidiary income and dividends ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-39 Solution P4-14 Preliminary computations Investment cost Implied fair value of Simple ($99,000 / 90%) Book value of Simple Excess fair value over book value $ 99,000 $110,000 80,000 $ 30,000 Excess allocated to: Inventories (sold in 2009) Patents (10-year remaining useful life) Excess fair value over book value $ 10,000 20,000 $ 30,000 Analysis of investment in Simple account Fair value of Simple January 5, 2009 Add: 90% of change in retained earnings from January 5, 2009 to December 31, 2011 Less: Amortization of excess Allocated to inventories and amortized in 2009 Allocated to patents and amortized over 10 years ($20,000/10 years) × years Fair value at December 31, 2011 Add: Income from Simple for 2012 Less: Dividends in 2012 Fair value at December 31, 2012 $110,000 Investment in Simple on Investment in Simple on Noncontrolling interest Noncontrolling interest $129,600 $136,800 $ 14,400 $ 15,200 December 31, 2011 (90% fair value) December 31, 2012 (90% fair value) on Dec 31, 2011 (10% fair value) on Dec 31, 2012 (10% fair value) 50,000 (10,000) (6,000) 144,000 18,000 (10,000) $152,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 4-40 Consolidation Techniques and Procedures Solution P4-14 (continued) Pepper Company and Subsidiary Consolidation Working Papers for the year ended December 31, 2012 Pepper Simple Adjustments and Eliminations Debits Cash $ 11,000 $ 15,000 Accounts 15,000 25,000 receivable Plant assets 220,000 180,000 Investment in Simple 136,800 Patents b 14,000 Cost of goods sold 50,000 30,000 Operating expenses 25,000 40,000 c 2,000 Dividends 20,000 10,000 Income Retained Statement Earnings $ 26,000 40,000 400,000 a 7,200 b 129,600 c 2,000 12,000 $ 80,000 * 67,000 * a d 9,000 1,000 $ 20,000 * $477,800 $300,000 $478,000 Credits Accumulated depreciation $ 90,000 $ 50,000 Liabilities 80,000 30,000 Capital stock 100,000 60,000 b 60,000 Paid-in-excess 20,000 Retained earnings 71,600 70,000 b 70,000 Sales 100,000 90,000 Income from Simple 16,200 a 16,200 $477,800 $300,000 Noncontrolling interest Dec 31, 2011 Noncontrolling interest share ($18,000 adj inc x 10%) d Controlling share of NI 140,000 110,000 100,000 20,000 71,600 190,000 b 14,400 1,800 1,800 * $ 41,200 Consolidated retained earnings Noncontrolling interest Dec 31, 2012 Balance Sheet 41,200 $ 92,800 d 800 92,800 15,200 $478,000 * Deduct a To eliminate income from subsidiary and dividends received and reduce the investment account to its beginning-of-the-period balance To eliminate reciprocal investment and subsidiary equity amounts, establish beginning noncontrolling interest, and adjust patents for the unamortized excess as of the beginning of the period To amortize excess allocated to patents for 2012 To enter noncontrolling interest share of subsidiary income and dividends b c d ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-41 Solution P4-15 Journal entries on Peggy’s books January 1, 2009 Investment in Super (90%) 18,000 Cash 18,000 To record purchase of 90% of Super’s stock for cash July 1, 2009 Investment in Ellen (25%) 7,000 Cash 7,000 To record purchase of 25% of Ellen’s stock for cash November 2009 Cash 2,700 Investment in Super (90%) 2,700 To record receipt of 90% of Super’s $3,000 dividends November 2009 Cash 1,250 Investment in Ellen (25%) 1,250 To record receipt of 25% of Ellen’s $5,000 dividends December 31, 2009 Investment in Super (90%) 4,500 Income from Super To record Share of Super’s reported income ($28,000 - $23,000) × 90% December 31, 2009 Investment in Ellen (25%) 700 Income from Ellen To record investment income from Ellen for 2009 computed as: Share of Ellen’s reported income $ 750 ($30,000-$24,000)×1/2 year × 25% Less: Amortization of excess [$7,000 ($24,000 ì 25%)] (50) ữ 10 years ì 1/2 year $ 700 ©2009 Pearson Education, Inc publishing as Prentice Hall 4,500 700 4-42 Consolidation Techniques and Procedures Solution P4-15 (continued) Peggy’s separate company financial statements Peggy Corporation Income Statement for the year ended December 31, 2009 Revenues Sales Income from Super Income from Ellen Total revenue Costs and expenses Cost of sales Other expenses Total costs and expenses Net income $100,000 4,500 700 $105,200 $ 60,000 25,000 85,000 $ 20,200 Peggy Corporation Retained Earnings Statement for the year ended December 31, 2009 Retained earnings January Add: Net income Deduct: Dividends Retained earnings December 31 $ 20,000 20,200 (10,000) $ 30,200 Peggy Corporation Balance Sheet at December 31, 2009 Assets Current assets: Cash Other current assets Plant assets — net Investments: Investment in Super (90%) Investment in Ellen (25%) $ 18,950 40,000 $ 58,950 120,000 $ 19,800 6,450 Total assets 26,250 Liabilities and stockholders’ equity Current liabilities Stockholders’ equity: Capital stock Retained earnings December 31 $205,200 $ 25,000 Total liabilities and stockholders’ equity $150,000 30,200 180,200 $205,200 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-43 Solution P4-15 (continued) Consolidation working papers — trial balance format Peggy Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 Peggy 90% Super Adjustments and Eliminations Income Retained Statement Earnings Debits Cash $ 18,950 $ 4,000 Other current assets 40,000 11,000 120,000 14,000 Plant assets — net Investment in Super Investment in Ellen Cost of sales Other expenses Dividends 19,800 6,450 60,000 25,000 10,000 Balance Sheet $ 22,950 51,000 134,000 a 1,800 b 18,000 6,450 16,000 7,000 3,000 $ 76,000* 32,000* a 2,700 $ 10,000* d 300* Total debits $300,200 $55,000 $214,400 Credits Current liabilities Capital stock Retained earnings Sales Income from Super Income from Ellen Total credits $ 25,000 $ 7,000 150,000 18,000 b 18,000 20,000 2,000 b 2,000 100,000 28,000 4,500 a 4,500 700 $300,200 $55,000 $ 32,000 150,000 Noncontrolling interest - January 20,000 128,000 700 b 2,000 Noncontrolling interest share $4,500 × 10% Controlling share of NI d 450 450* $ 20,250 Consolidated retained earnings Noncontrolling interest December 31 20,250 $ 30,250 d 150 ©2009 Pearson Education, Inc publishing as Prentice Hall 30,250 2,150 $214,400 4-44 Consolidation Techniques and Procedures Solution P4-15 (continued) Consolidated financial statements Peggy Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2009 Revenues Sales $128,000 Income from Ellen (equity basis) 700 Total revenues Costs and expenses Cost of sales $ 76,000 Other expenses 32,000 Total costs and expenses Total consolidated income Less: Noncontrolling interest share Controlling share of NI Peggy Corporation and Subsidiary Consolidated Retained Earnings Statement for the year ended December 31, 2009 Consolidated retained earnings January Add: Controlling share of NI Deduct: Dividends Consolidated retained earnings December 31 $128,700 108,000 20,700 450 $ 20,250 $ 20,000 20,250 (10,000) $ 30,250 Peggy Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2009 Assets Current assets: Cash $ 22,950 Other current assets 51,000 Plant assets — net Investments and other assets: Investment in Ellen Total assets Liabilities and stockholders’ equity Current liabilities Stockholders’ equity: Capital stock $150,000 Consolidated retained earnings 30,250 Noncontrolling interest 2,150 Total liabilities and stockholders’ equity $ 73,950 134,000 6,450 $214,400 $ 32,000 182,400 $214,400 Solution P4-16 Partial consolidated statement of cash flows using the direct method Pillory Corporation and Subsidiaries Partial Consolidated Statement of Cash Flows for the current year Cash Flows from Operating Activities Cash received from customers $1,600,000 Dividends from equity investees 40,000 Interest received from short-term loan 5,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-45 Cash paid for other expenses Cash paid to suppliers Cash flow from operating activities (450,000) (630,000) $ 565,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 4-46 Consolidation Techniques and Procedures Solution P4-17 Direct Method Pesek Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 Cash Flows from Operating Activities Cash received from customers Cash paid to suppliers Cash paid for operating expenses Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment of long-term liabilities Net cash flows from financing activities Decrease in cash for the year Cash on January Cash on December 31 $670,000 $348,000 157,500 (505,500) 164,500 (125,000) (125,000) (36,000) (2,000) (11,000) (49,000) (9,500) 65,000 $ 55,500 Reconciliation of net income to cash provided by operating activities $130,000 Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Increase in accounts payable Increase in accounts receivable Increase in inventories Increase in other current assets Net cash flows from operating activities $ 5,000 51,000 500 22,000 (5,000) (20,000) (19,000) 34,500 $164,500 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-47 Solution P4-17 (continued) Indirect Method Pesek Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2011 Cash Flows from Operating Activities Controlling share of NI Noncontrolling interest share Noncash expenses, revenue, gains and losses included in income: Depreciation Patents amortization Increase in accounts receivable Increase in inventories Increase in other current assets Increase in accounts payable Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment of long-term liabilities Net cash flows from financing activities Decrease in cash for the year Cash on January Cash on December 31 $130,000 5,000 $ 51,000 500 (5,000) (20,000) (19,000) 22,000 $135,000 29,500 164,500 (125,000) (125,000) (36,000) (2,000) (11,000) (49,000) (9,500) 65,000 $ 55,500 Note: The cash flows from investing activities and cash flows from financing activities sections of the statement of cash flows are the same under the direct and indirect method ©2009 Pearson Education, Inc publishing as Prentice Hall 4-48 Consolidation Techniques and Procedures Solution P4-18 [AICPA] Indirect Method Push, Inc and Subsidiary Statement of Cash Flows (Indirect Method) for the year ended December 31, 2009 Cash Flows from Operating Activities $ 198,000 Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Decrease in accounts receivable Increase in accounts payable Increase in deferred income taxes Increase in inventories Gain on marketable equity securities Gain on sale of equipment Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Proceeds from sale of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from sale of treasury stock Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Payment on long-term note Net cash flows from financing activities Increase in cash for the year Cash on January Cash on December 31 $ 33,000 82,000 3,000 22,000 121,000 12,000 (70,000) (11,000) (6,000) 186,000 384,000 $(127,000) 40,000 (87,000) 44,000 (58,000) (15,000) (150,000) (179,000) 118,000 195,000 $ 313,000 Listing of non-cash investing and financing activities: Issued common stock in exchange for land with a fair value of $215,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-49 Solution P4-18 (continued) Indirect Method Push, Inc and Subsidiary Working Papers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2009 Year’s Change Asset Changes Cash Allowance to reduce MES Accounts receivable — net Inventories Land* Plant and equipment Accumulated depreciation Patents — net Total asset changes Changes in Equities Accounts & accrued payable Note payable long-term Deferred income taxes Noncontrolling interest in Storr Common stock, $10 par* Additional paid-in capital Retained earnings Treasury stock at cost Total changes in equities 118,000 11,000 (22,000) 70,000 215,000 65,000 (54,000) (3,000) — — e f k l m Cash Flow From Operations Cash Flow Investing Activities Cash Flow Financing Activities 11,000 22,000 62,000 82,000 3,000 g 70,000 h 215,000 j 127,000 k 28,000 400,000 121,000 (150,000) 12,000 18,000 n 121,000 100,000 123,000 h 100,000 h 115,000 i 8,000 a 198,000 i 36,000 140,000 36,000 o 150,000 p b 12,000 33,000 d 15,000 c 58,000 400,000 Controlling share of NI Noncontrolling interest share Gain on MES Purchase of plant and equipment Sale of equipment Gain on equipment Depreciation expense Payment on long-term note Amortization of patents Decrease in receivables Increase in inventories Increase in accounts payable Increase in deferred income taxes Proceeds from treasury stock Payment of dividends Payment of dividends Reconciling Items Debit Credit controlling noncontrolling a 198,000 b 33,000 e 11,000 j 127,000 k k 40,000 l 82,000 m f 3,000 22,000 6,000 198,000 33,000 (11,000) (127,000) 40,000 (6,000) 82,000 o 150,000 g (150,000) 70,000 n 121,000 p 12,000 i 44,000 c 58,000 d 15,000 1,229,000 3,000 22,000 (70,000) 121,000 12,000 44,000 (58,000) (15,000) 1,229,000 384,000 (87,000) Cash increase for the year = $384,000 – $87,000 – $179,000 = $118,000 * Non-cash item: Purchased $215,000 land through common stock issuance ©2009 Pearson Education, Inc publishing as Prentice Hall (179,000) 4-50 Consolidation Techniques and Procedures Solution P4-19 Indirect Method Pilgrim Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2010 Cash Flows from Operating Activities Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Depreciation expense Patents amortization Increase in accounts payable Income less dividends — equity investee Increase in accounts receivable Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January Cash on December 31 $ 500,000 $ 40,000 200,000 10,000 17,000 (30,000) (210,000) 27,000 527,000 $(500,000) (500,000) $ 200,000 (137,000) (20,000) 43,000 70,000 360,000 $ 430,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-51 Solution P4-19 (continued) Indirect Method Pilgrim Corporation and Subsidiary Working Papers for the Statement of Cash Flows (Indirect Method) for the year ended December 31, 2010 Year’s Change Asset Changes Cash $ Accounts receivable — net Inventories Plant & equipment — net Equity investments Patents Total asset changes 70,000 210,000 300,000 30,000 (10,000) Reconciling Items Debit Credit Cash Flows From Operations Cash Flows Investing Activities Cash Flows Financing Activities e 210,000 f 200,000 l 30,000 h 10,000 g 500,000 m 60,000 $ 600,000 Changes in Equities Accounts payable $ 17,000 Dividends payable 13,000 Long-term note payable 200,000 Common stock Other paid-in capital Retained earnings 350,000 Noncontrol interest 20% 20,000 Changes in equities $ 600,000 Controlling share of NI Noncontrolling interest share Purchase of plant & equipment Depreciation — plant & equipment Amortization of patents Increase in accounts receivable Income less dividends from investees Increase in accounts payable Received cash from long-term note i 17,000 k 13,000 j 200,000 a 500,000 b 40,000 c 150,000 d 20,000 a 500,000 b 40,000 $ 500,000 40,000 g 500,000 $(500,000) f 200,000 h 10,000 200,000 10,000 (210,000) l 30,000 i 17,000 j 200,000 k 13,000 (30,000) 17,000 e 210,000 m 60,000 c 150,000 Payment of dividends — controlling Payment of dividends — noncontrolling d 20,000 1,950,000 1,950,000 $ 527,000 $(500,000) Cash increase for the year = $527,000 – $500,000 + $43,000 = $70,000 ©2009 Pearson Education, Inc publishing as Prentice Hall $ 200,000 (137,000) (20,000) $ 43,000 4-52 Consolidation Techniques and Procedures Solution P4-19 (continued) Direct Method Pilgrim Corporation and Subsidiary Consolidated Statement of Cash Flows for the year ended December 31, 2010 Cash Flows from Operating Activities Cash received from customers Cash received from equity investees Cash paid to suppliers Cash paid for operating expenses Net cash flows from operating activities Cash Flows from Investing Activities Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Cash received from long-term note Payment of cash dividends — controlling Payment of cash dividends — noncontrolling Net cash flows from financing activities Increase in cash for the year Cash on January Cash on December 31 Reconciliation of net income to cash provided by operating activities Controlling share of NI Adjustments to reconcile net income to cash provided by operating activities: Noncontrolling interest share Income less dividends — equity investee Depreciation expense Patents amortization Increase in accounts payable Increase in accounts receivable Net cash flows from operating activities $2,390,000 30,000 $1,433,000 460,000 (1,893,000) 527,000 $ (500,000) (500,000) $ $ 200,000 (137,000) (20,000) $ 43,000 70,000 360,000 430,000 $ 500,000 $ 27,000 527,000 40,000 (30,000) 200,000 10,000 17,000 (210,000) ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-53 Solution P4-19 (continued) Direct Method Pilgrim Corporation and Subsidiary Working Papers for the Statement of Cash Flows (Direct Method) for the year ended December 31, 2010 Year’s Change Asset Changes Cash Accounts receivable — net Inventories Plant & equipment — net Equity investments Patents Total asset changes Changes in Equities Accounts payable Dividends payable Long-term note payable Retained earnings* Noncontrol.interest 20% Changes in equities Ret earnings change* Sales Income from equity investees Cost of goods sold Depreciation expense Other operating expenses Noncontrolling interest share Dividends declared — Pilgrim $ $ $ 70,000 210,000 300,000 30,000 (10,000) 600,000 b 200,000 e Cash Flow Cash Flow Investing Financing Activities Activities $2,600,000 a 210,000 60,000 (1,450,000) (200,000) (470,000) d i c 500,000 d 30,000 10,000 f 17,000 g 13,000 h 200,000 $ Cash Flow From Operations a 210,000 17,000 13,000 200,000 350,000 20,000 600,000 40,000 j 20,000 $2,390,000 30,000 f 17,000 b 200,000 e 10,000 (40,000) i (150,000) Retained earnings change $ 350,000 Received cash from long-term note Payment of dividends — controlling Payment of dividends — noncontrolling Purchase of equipment * Reconciling Items Debit Credit 30,000 (1,433,000) (460,000) 40,000 g 13,000 k 137,000 h 200,000 k 137,000 j 20,000 c 500,000 1,377,000 1,377,000 $ 200,000 (137,000) (20,000) $ 527,000 $(500,000) $(500,000) Retained earnings changes replace the retained earnings account for reconciling purposes Cash increase for the year = $527,000 - $500,000 + $43,000 = $70,000 ©2009 Pearson Education, Inc publishing as Prentice Hall $ 43,000 ... provided by operations by outstanding parent company shares to get a computation of cash flow per share SOLUTIONS TO EXERCISES ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 4-3 Solution. .. value over book value) and then multiplying by the noncontrolling interest percentage Consolidated retained earnings at a balance sheet date can be checked by comparing the amount with the parent’s... 2011 Solution E4-4 (continued) 90,000 $790,000 20% $158,000 Note: Stine’s income less dividends: 2010 Net Income 2010 Dividends 2011 Net Income 2011 Dividends Total $ 120 (80) 150 (90) $ 100 Solution