33.(15 Minutes) (The effect that various events have on a consolidated statement of
cash flows.)
Sale of building. The $44,000 in cash received from the sale is listed as a
cash inflow within the company’s investing activities. If the company is
using the direct method in presenting cash flows from operating activities,
the $12,000 gain is not presented. However, if the indirect method is used,
the gain (a positive) must be eliminated from net income by a subtraction.
Decrease in accounts payable. Cash payments have reduced this liability
balance during the period. If the direct method is used to present cash flows
from operating activities, the change is added to cost of goods sold as one
step in deriving the cash paid during the period for inventory (an outflow). If
the indirect method is applied, the decrease is subtracted from net income in
34.(20 Minutes) (Determine cash flows from operations for a consolidated entity.)
DIRECT METHOD
Cash revenues (add book values, eliminate intra-entity transfers,
and add decrease in accounts receivable) ……………………………… $648,000
Cash inventory purchases (add book values, eliminate
intra-entity transfers, eliminate unrealized gains, add increase in
INDIRECT METHOD
Consolidated net income (computed below) ……………………………….. $216,000
Adjustments:
Depreciation and amortization …………….……………………..…..… 61,000
Gain on sale of equipment …………….………………………………….. (30,000)
Consolidated Net Income = $206,200 + 9,800 = $216,000 or computation below:
Revenues (add book values and subtract intra-entity transfers) $640,000
Cost of goods sold (add book values, less intra-entity
transfers and beginning unrealized gain, plus ending
unrealized gain) ………………………………………….….…..…..…..…... (353,000)
Depreciation and amortization (add book values plus
35. (30 Minutes) (Compute basic and diluted earnings per share for a parent and its
100 percent owned subsidiary, both with convertible bonds.)
Basic EPS—Porter Company:
Porter’s reported net income ………………..…..…..…... $150,000
Street’s reported net income …………………………….... 130,000
Diluted EPS—Street Company
Street earnings after amortization…………..…………... $120,000
Shares outstanding …………..…………………………..…... 30,000
Basic earnings per share (120,000 ÷ 30,000) ……..… $4.00
Street’s earnings assuming conversion of its bonds
Porter’s share of Street’s diluted earnings:
Total shares assuming Street bond conversion ..... 40,000
Shares owned by Porter…………..……………….…..….... 30,000
Porter’s earnings and shares for diluted EPS:
Porter’s separate net income …………..…………..…..… $150,000
Street’s income applicable to Porter (above).….…... 108,000
Interest saved (net of tax) on assumed
………..…………………………….…..…..….…..…...conversion of Porter’s
bonds …………………………………….…..…..…..…..…... 32,000
Diluted earnings to Porter…………………….…..…..….... $290,000
36. (15 Minutes) (Compute diluted EPS. Subsidiary has stock warrants outstanding)
Figures For Sonston’s Diluted EPS
Net Income ………..…………………………….…..…..….…..…... $200,000
Shares outstanding …………..……………………..….…..…..… 40,000
Assumed conversion of stock warrants .…..…..…..….... 10,000
Repurchase of treasury stock with proceeds of stock
Warrants (10,000 × $10 = $100,000 ÷ $20) …….…........... (5 ,000) 5,000
Shares for diluted earnings per share computation..... 45,000
PARENT’S DILUTED EARNINGS PER SHARE = $782,000 ÷ 100,000 = $7.82
37. (15 Minutes) (Compute diluted EPS. Subsidiary has convertible bonds.)
Figures for Simon’s diluted EPS:
Net income ………..……………………………………………………………………. $290,000
Interest (net of tax) saved from assumed conversion ………..…..…. 56,000
Shares outstanding …………..…………………………………..…..…..….….... 80,000
Assumed conversion of bonds ……………….…………………..…..…..….. 30,000
Subsidiary shares for parent’s share of diluted earnings…….…..… 110,000
Shares controlled by Garfun = 80,000 ÷ 110,000 = 73% (rounded)
Income to be included in parent’s diluted EPS = $346,000 × 73% = $252,580
Earnings for parent’s diluted earnings per share:
PARENT’S DILUTED EARNINGS PER SHARE = $717,580 ÷ 80,000 = $8.97 (rounded)
38. (35 Minutes) (Compute basic and diluted earnings per share for parent
company. Subsidiary has stock warrants and convertible bonds.)
Basic EPS—Parent Company ( Burks ):
Reported net income (separate)—Burks ..…..….…..…...... $150,000
Foreman net income: 80% × ($120,000 – $40,000 amort.)……… 64,000
Diluted EPS—Parent Company ( Burks )
Subsidiary income for Burks’ EPS:
Net income after amortization ($120,000 – 40,000)…………. $80,000
Interest (net of tax) saved assuming bond conversion.. 45 ,000
Income applicable to diluted EPS …..…..…..…..…..…... $125 ,000
Shares applicable to diluted EPS …………………….….... 55 ,000
Shares controlled by parent:
(40,000 × 80%) plus (10% × 10,000) ……………..….…..… 33 ,000
Income used in diluted EPS computation …..…..….......... $125,000
Earnings applicable to Burks’ diluted EPS:
Because of assumed conversion, preferred stock
dividends would not be paid ……………………………….... -0 –
Earnings applicable to diluted EPS ………………...…..….…. $220 ,500
Burks’ outstanding shares …………….………..…..…..…..…... 65,000
38. (continued)
Alternative derivation of Burks’ diluted EPS:
Consolidated net income $150,000 + ($120,000 – $40,000) $(230,000)
Consolidated interest saved (net of 10% intra-entity interest) (40 ,500)
Consolidated net income assuming bond conversion (270,500)
Subsidiary net income $(120,000)
Excess fair value amortization 40,000
Subsidiary interest saved (100%) (45 ,000)
39. (8 Minutes) (Effect of subsidiary stock issuance to public at a price above
reported value per share)
Equity method investment prior to Ricardo share issue $490,000
Parent’s ownership percentage………….…..…..…..….…... 100%
Fair value ownership equivalency…………..…..…..….…... $490,000
Adjusted subsidiary fair value after new share issue
40. (20 Minutes) (Effects of two different stock issuances by subsidiary.)
a. Prior to the issuance of the new shares, Albuquerque owns an 80% interest in
Marmon (16,000 shares out of 20,000 shares). The adjusted acquisition-date fair
value is $840,000 ($600,000 + $150,000 + $90,000). After the stock issue, the
Investment in Marmon ………………………….….…..….... 16,000
Additional Paid-In Capital ……………..….…..…..….. 16,000
40.(continued)
b. Albuquerque’s adjusted acquisition-date fair value is $840,000 (see above) prior
to the issuance of the new shares. The 4,000 additional shares increase
subsidiary’s total value by $132,000 (the price of the stock) to $972,000.
41.(55 Minutes) (Prepare consolidation entries following a subsidiary stock issue to
outside parties.)
Initially, Aronsen owns 18,000 shares (or 90%) of Siedel’s outstanding shares
(the total number of shares can be determined by dividing the subsidiary’s
common stock account by the $10 per share par value). After issuing 4,000
Excess Acquisition-Date Fair Value Allocation and Amortization
Fair value (consideration transferred plus NCI fair value) .......... $649,000
Acquisition-date book value……………..…………………….…..…..…..… (480 ,000)
Fair value in excess of book value ……………….………………….…..… $169,000
Annual amortization ………….…………………………………………………… $ 5 ,000
Adjustment for Stock Transaction
Adjusted acquisition-date fair value of subsidiary
on new issue date ($649,000 + $90,000 + $152,000) ……………. $891,000
Adjusted parent ownership (18,000 shares ÷ 24,000 shares) …… 75%
Parent’s post-issue equity method value at 1/1/14 .…..…........ $668,250
Equity method balance before new subsidiary stock issue
41. (continued)
Consolidation worksheet entries:
Entry *C
Investment in Siedel …………..………………………………. 81,000
Retained Earnings, 1/1/14 (Aronsen) ..….…..….... 81,000
(To record adjustment for subsidiary stock
transaction; computation shown above.)
Entry S
Common Stock (Siedel) …………….………………..…..…. 240,000
Additional Paid-In Capital (Siedel) ……………….……… 112,000
(To eliminate subsidiary stockholders’ equity accounts
against Investment account and to recognize noncontrolling
interest. Stockholders’equity balances have been adjusted
for increase in book value during 2012–2013 and the issuance
by the subsidiary of 4,000 shares of stock on 1/1/14.)
Entry A
Land ………..……………………………………………………….. 89,000
2012–2013 amortization to arrive at 1/1/14 balance.
NCI now reflects 25% of the unamortized 1/1/14 balance.)
Entry I
Dividend Income ………….…………………………………….. 15,000
Dividends Declared ……………………………………….. 15,000
42. (50 Minutes) (Prepare consolidation worksheet for business combination. Intra-
entity bond acquisition is made during the current year.)
Acquisition-date fair-value allocation and amortization:
Equipment $30,000 10-year life $3,000 annual amortization
Trademarks $40,000 20-year life $2,000 annual amortization
As indicated in the problem, the parent is applying the partial equity method.
Hence an Entry *C must be recorded on the worksheet to convert the recorded
figures (amortization is needed for the three years prior to 2015) to equity
balances:
Amortization expense ($5,000 × 3 years) = ………….. $15,000 (Entry *C)
Unrealized gain in ending inventory (downstream):
Equivalent book value …………….…………………………….… $141,000
Amount paid ………………………………………………..…..…. 145,500
Loss on extinguishment of bonds ………………….…..…... $ 4,500 (Entry B)
Amortization during 2015 changed the carrying value of the bond payable from
$282,000 to $288,000 (found in the balance sheet) and the investment from
$145,500 to $147,000. This amortization also affects interest income and
expense accounts.
42.(continued) Pavin and Stabler
Consolidation Worksheet
Year Ending December 31, 2015
Consolidation Entries Consolidated
Accounts Pavin Stabler Debit Credit Totals
Expenses…………….…………....…....…..… 125,000 158,500
(E) 5,000…………………………..………… 288,500
Interest expense—bonds …....…..…..... 36,000 -0- (B) 18,000 18,000
Interest income—bond investment..... -0- (16,500)
(B) 16,500………………………………..….. -0-
Retained earnings, 1/1/15…………..….... (361,000)
(S) 361,000…………………………….…….. -0-
Net income (above)………..……….…..….. (247,000) (123,000)
……………………………………………………. (237,000)
Dividends declared………….…...…....….. 155 ,000 61 ,000
……………………………………………………. (P) 33,000
219,000
Inventory………………………………………... 175,000 87,000
……………………………………………………. (G) 2,000
260,000
……………………………………………………. (B) 147,000
-0-
Land, buildings, and equipment (net). 245,000 541,000
(A) 21,000………………………………..….. (E) 3,000
804,000
Trademarks…………………………………….. -0 – -0- (A) 34,000 (E) 2,000 32 ,000
(B) 150,000……………………………….….. (250,000)
Discount on bonds…......…..…..…....….. 12,000 -0- (B) 6,000 6,000
Common stock……………………..…..….... (300,000) (120,000)
(S) 120,000…………..………………..…..… (300,000)
Retained earnings (above)…..…....….... (437 ,000) (423 ,000) (412 ,000)