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43.(45 Minutes) (Prepare consolidation entries after intra-entity bond acquisition.)
a. Allocation of Acquisition-date Excess Fair Value
Consideration transferred $312,000
Noncontrolling interest fair value 208,000
Acquisition-date fair value $520,000
Total $20,500
CONSOLIDATION ENTRIES
Entry *TL
Investment in Herman ................................................ 7,000
Land ...................................................................... 7,000
Entry *G
Retained Earnings 1/1/14 (Herman) .......................... 8,000
Cost of Goods Sold .............................................. 8,000
(To remove unrealized inventory gain from prior year so that it can be
properly realized in current year. Amount is computed as shown below.)
43. a. (continued)
Entry A
Patents ...................................................................... 75,000
Customer List.............................................................. 104,000
Investment in Herman .......................................... 107,400
Entry I
Equity income of Herman........................................... 3,000
Investment in Herman...................................... 3,000
(To eliminate intra-entity equity income accrual)
Herman’s income.............................................................. $25,000
Excess amortizations....................................................... (20,500)
Entry D
Investment in Herman ................................................ 2,400
Dividends Declared ............................................... 2,400
(To eliminate intra-entity dividend declaration.)
Entry E
43.a. (continued)
Entry B
Bonds Payable ............................................................ 20,000
Premium on Bonds Payable ...................................... 1,069
Interest Income ........................................................... 1,873
Investment in Parent Bonds ................................ 19,005
Book Cash Year-End
Value Effective Interest Excess Book
(given) Interest (8%) Amortizations Value
Investment $18,732 $1,873 (10%) $1,600 $273 $19,005
Liability 21,386 1,283 (6%) 1,600 317 21,069
Entry Tl
Sales ............................................................................ 120,000
Cost of Goods Sold (or purchases) .................... 120,000
(To eliminate intra-entity transfers made during current year.)
Entry G
Cost of Goods Sold .................................................... 7,500
Inventory................................................................. 7,500
(To defer intra-entity inventory profits until 2014 as calculated below):
Intra-entity profit ......................................................................... $30,000
Unrealized gain in ending inventory ($30,000 × 25%) ............. $7,500
b. Herman's reported net income for 2014 ................................... $25,000
Excess fair value amortization .................................................. (20,500)
2013 unrealized gain recognized in 2014 (Entry *G) ............... 8,000
Noncontrolling interest, 1/1/14 (Entries S and A) .................... $228,400
NCI’s share of Herman's net income (above) .......................... 2,000
43. (continued)
c. The balances in the individual records as of December 31, 2015 pertaining to
the Intra-entity bonds are as follows:
Beginning
Book Cash Year-End
Value Effective Interest Excess Book
(see part a.) Interest (8%) Amortizations Value
The adjustment to recognize the original gain by the parent can be computed as
follows:
Original gain on retirement (see part a) ........................ $2,654
Interest income recorded on investment in 2014
(see part a) .................................................................. $1,873
Interest expense recorded on liability in 2014
(see part a) ................................................................. 1,283 590
Required increase as of January 1, 2015 ...................... $2,064
Entry *B (as of December 31, 2015)
Bonds Payable............................................................. 20,000
Premium on Bonds Payable ...................................... 733
Interest Income ........................................................... 1,901
44. (50 Minutes) (Prepare consolidation entries for intra-entity preferred stock and
bonds. Determine specified account balances. Preferred stock is a debt
instrument.)
a. Consideration transferred for common stock................... $552,800
Consideration transferred for preferred stock.................. 65,000
Noncontrolling interest in common stock......................... 138,200
CONSOLIDATION ENTRIES 1/1/13
Entry S and A combined:
Preferred Stock (Lisa) ................................................ 100,000
Common Stock (Lisa) ................................................ 200,000
Retained Earnings, 1/1/13 (Lisa) ............................... 450,000
Franchises ................................................................... 40,000
(To eliminate subsidiary stockholders’ equity, record excess acquisition-date
fair values, and record outside ownership of subsidiary's preferred and
common stock at acquisition-date fair values.)
b. Acquisition price of bonds, 1/2/13 ............................ $53,310
Book value of bonds payable (one-half acquired) .. (44 ,175)
Loss on extinguishment of debt ......................... $9,135
Interest income—Mona ($53,310 × 8%) .................... (rounded) $4,265
Interest expense—Lisa ($44,175 × 14%) .................. (rounded) $6,185
Investment in bonds of Lisa (book value):
44. b. (continued)
Bonds payable (book value)
Book value—date of acquisition, 1/2/13 ............. $44,175
Cash interest ($50,000 × 10%) ............................. $5,000
Effective interest (above) ..................................... 6,185 1,185
Bonds payable (book value as of 12/31/13)... $45,360
CONSOLIDATION ENTRY B—December 31, 2013
(all figures computed above)
Investment in Bonds of Lisa ................................ 52,575
c. December 31, 2013 book values based on historical cost figures:
Cost of fixed assets ................................................... $100,000
Depreciation expense ($40,000 book value over
a 10-year life) ......................................................... 4,000
Accumulated depreciation (including current
expense) ................................................................. 64,000
December 31, 2013 book values based on transfer price:
Cost of fixed assets ................................................... $120,000
Depreciation expense (10-year life) .......................... 12,000
CONSOLIDATION ENTRY TA—December 31, 2013
Gain on Transfer of Fixed Assets (to remove) ........ 80,000
Accumulated Depreciation ($64,000 – $12,000).. 52,000
44. (continued)
d. Original allocation to franchises (given) ....................... $40,000
Fixed assets (book values):
Mona, Inc. .................................................................... $1,100,000
Lisa Co. ...................................................................... 800,000
Accumulated depreciation (book values):
Mona, Inc...................................................................... $300,000
Lisa Co. ...................................................................... 200,000
Increase needed to eliminate intra-entity
Expenses (book values):
Mona, Inc................................................................. $220,000
Lisa Co. .................................................................. 120,000
45.(35 Minutes) (Prepare statement of cash flows for a business combination.)
(Note: before working this problem, students may wish to review the statement
of cash flows in an intermediate accounting textbook.)
BOLERO COMPANY AND CONSOLIDATED SUBSIDIARY RIVERA
Consolidated Statement of Cash Flows
Year Ending December 31, 2015
CASH FROM OPERATING ACTIVTIES
Consolidated net income............................................ $250,000
Adjustment from accrual to cash:
Depreciation and amortization ............................ 120,000
Gain on sale of building ....................................... (30,000)
Decrease in accounts receivable ........................ 20,000
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of building ........................................................... $70,000
Purchase of equipment (given).................................. (205 ,000)
Net cash flow from investing activities............... (135,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in cash during 2015 ................................... 90,000
Cash, January 1, 2015 ..................................................... 90,000
Cash, December 31, 2015 ................................................ $180,000
The above statement uses the indirect method for computing cash flows from
operations.
45. (continued)
Development of Cash Flow Balances via Direct Method
OPERATING ACTIVITIES
Cash collected from customers (consolidated revenues
plus the decrease in accounts receivable) .................................... $1,050,000
Cash Purchases (consolidated COGS plus
increase in inventory plus
decrease in accounts payable) ....................................................... (850,000)
Interest expense (the consolidated balance) ..................................... (40 ,000)
Cash flows from operating activities.................................................... $ 160 ,000
INVESTING ACTIVITIES
Issuance of bonds ................................................................................. 110,000
Issuance of common stock by the parent (increase in
common stock and additional paid-in capital) .............................. 67 ,000
Cash flows from financing activities.................................................... $ 65 ,000
