Chapter 04 - Consolidation of Wholly Owned Subsidiaries CHAPTER 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 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 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 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 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 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 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 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 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 FASB 94, Par FASB 131, Par 10 and 18 FASB 160 4-7 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 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 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 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 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 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 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 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 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 (2) 60,000 48,000 223,000 69,500 185,500 4-47 Consolidated 187,000 61,000 26,000 200,000 200,000 16,000 185,500 131,000 805,000 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 Differential Investment in Roller Company Stock Eliminate beginning investment balance 60,000 48,000 26,000 Buildings and Equipment Goodwill Retained Earnings, January 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 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 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 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 15,000 6,000 50,000 200,000 190,500 775,500 Eliminations Debit Credit (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 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 P4-30 Comprehensive Problem: Wholly Owned Subsidiary a b Journal entries recorded by Power Corporation: (1) Cash Investment in Upland Products Stock Record dividends from Upland Products 10,000 (2) Investment in Upland Products Stock Income from Subsidiary Record equity-method income 30,000 (3) 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 Differential Investment in Upland Products Stock Eliminate beginning investment balance: $30,000 = $50,000 – [($50,000 / 10) x 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 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 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 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 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 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 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 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 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 P4-32A (continued) e f Eliminating entries in consolidation workpaper prepared December 31, 20X7 (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 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 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 ... investment account reported by the parent 4-3 Chapter 04 - Consolidation of Wholly Owned Subsidiaries SOLUTIONS TO CASES C4-1 Need for Consolidation Process After the financial statements of each... 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... 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