Chapter 10 – Additional Consolidation Reporting Issues
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
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CHAPTER 10
ADDITIONAL CONSOLIDATION REPORTING ISSUES
ANSWERS TO QUESTIONS
Q10-1 The balance sheet, income statement, and statement of changes in retained earnings
are an integrated set and generally need to be completed as a unit. Once completed, these
Q10-2 Consolidated retained earnings do not include the earnings assigned to noncontrolling
shareholders. As a result, dividends paid to noncontrolling shareholders are not included in the
Q10-3 The indirect method focuses on reconciling between net income and cash flows from
operations and does not attempt to report payments to suppliers or other specific uses of cash.
Q10-4 Changes in inventory balances are used in computing the amount reported as
Q10-5 Sales must be included in the consolidated cash flows worksheet when the direct
Q10-6 (a) When the indirect method is used, the changes in inventory are reported as a
Q10-7 Only sales subsequent to the date of acquisition are included. The acquired company
Q10-8 Dividends paid by the acquired company to the noncontrolling shareholders following
the date of acquisition are included as a cash outflow in the consolidated statement of cash
Q10-9 The revenues and expenses of the subsidiary for the full year are included in the
consolidated income statement when the acquisition occurs at the beginning of the year. When
Q10-10 When there is a difference between the fair market value and the tax basis of an asset
acquired or liability assumed in an acquisition, a deferred tax asset or liability must be
Q10-11 The only book-tax difference that arises in acquisition that does not require the
Q10-12 An accurate measure of the overall profit contribution from each segment of business
operations is often considered desirable in evaluating past operations and in planning future
Q10-13 When a consolidated tax return is filed, all intercompany transfers are eliminated in
computing taxable income and there should be no need to adjust recorded tax expense in
Q10-14 Assuming an unrealized profit has been reported, an additional consolidation entry is
Q10-15 When one of the companies in the consolidated entity has recorded tax expense on
unrealized profit in a preceding period, its retained earnings balance at the start of the period
will be overstated by the amount of unrealized profit less the tax expense recorded thereon. In
Q10-16 When taxes are not considered, income assigned to noncontrolling shareholders is
Q10-17 Perhaps the most important reason is that the earnings per share data reported by the
Chapter 10 – Additional Consolidation Reporting Issues
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
separate companies may include unrealized profits that must be eliminated in computing the
consolidated totals. Even without unrealized profits, simple addition could not be used when the
companies do not have an equal number of shares outstanding or when the parent does not
hold all the common or preferred shares of the subsidiary.
Q10-18 The full amount of dividends paid to unaffiliated preferred shareholders of the parent
are deducted from consolidated net income in arriving at consolidated earnings per share.
Q10-19 A subsidiary’s contribution to consolidated earnings per share may be different from its
Q10-20 The net of tax interest savings from the assumed conversion of the bond into common
stock is included in the numerator and the additional shares are added to the denominator of the
Q10-21 Those rights, warrants, and options treated as stock outstanding in the denominator of
the earnings per share computation of the subsidiary will reduce the amount of subsidiary
Q10-22 In the earnings per share computation, the amount of income assigned to
noncontrolling interest may change as it is assumed that convertible securities are converted or
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
C10-1 The Effect of Security Type on Earnings per Share
a. Until the securities are converted, the interest expense on bonds and the preferred dividends
must both be deducted in determining income available to common shareholders when basic
earnings per share is computed. Because interest expense is deductible for tax purposes and
preferred dividends are not, the increase in earnings available to common shareholders will be
Conversion of the preferred stock will increase consolidated net income because it increases
Stage’s income available to common shareholders, of which the parent is one. The increase will
be greater than the effect of the bond conversion because the preferred dividends have no tax
effect, but the amount of the increase will depend on the parent’s percentage ownership.
c. If the preferred shares are those of a parent company, they will be excluded entirely if (1) all
C10-2 Evaluating Consolidated Statements
MEMO
To: Treasurer
Cowl Corporation
From: , Accounting Staff
Re: Disclosure of Transfer of Cash from Subsidiary to Parent
separate operations to pay its bills appears to be of sufficient importance that disclosure would
be appropriate in both the Management Discussion and Analysis (MD&A) section of Cowl’s
annual report and in the notes to the financial statements. The SEC establishes the disclosure
requirements for MD&A and requires discussion of currently known trends, demands,
commitments, events, or uncertainties that are reasonably expected to have material effects on
ASC 850-10–50-4
ASC 280-10–50–10
C10-3 Income Tax Expense
a. When prior-period intercompany profits are realized through resale to a nonaffiliate in the
current period, tax expense reported by the consolidated entity will be greater than actual tax
payments made by the separate companies.
b. Report the additional amount paid as a deferred tax asset or as prepaid income tax in the
C10-4 Consolidated Cash Flows
a. The factors contributing to the increase in net income over the prior period are key in this
case. One possible explanation is that operating earnings of the combined companies actually
declined and the increase in net income resulted from a substantial one-time gain on sale of a
division or other assets in the current period. Another possibility would be a decrease in
lesser degree as accounts receivable increase.
c. An inventory write-off under lower of cost or market and other noncash charges will not
reduce cash flows from operations. The amount expensed would be added back to consolidated
net income in arriving at cash generated by operating activities.
d. Assuming an allowance account is used, this particular write-off will not appear in either the
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
E10-1 Analysis of Cash Flows
a.
The consolidated cash balance at January 1, 20X2, was $83,000, computed as
follows:
Balance at December 31, 20X2
$ 57,000
Decrease in cash balance during 20X2:
Cash flows from operations
$284,000
Cash outflow for investment activities
(80,000)
Cash outflow for financing activities
(230,000)
Net cash outflow
26,000
Cash balance at January 1, 20X2
$83,000
b.
Dividends of $48,000 were reported:
Dividends paid to Lamb shareholders
$45,000
Dividends paid to noncontrolling interest of
Mint Company ($10,000 x 0.30)
3,000
Total cash payments
$48,000
c.
Consolidated net income was $207,000, computed as follows:
Cash flow from operations
$284,000
Adjustments to reconcile consolidated net income
and cash provided by operations
(77,000)
Consolidated net income
$207,000
E10-2 Statement of Cash Flows
a. The noncontrolling interest received dividends of $6,000 ($15,000 x .40).
b. A total of $320,000 will be reported as cash provided by operations, computed as follows:
Consolidated net income
Depreciation expense
Amortization of patents
Gain on bond retirement
Loss on sale of land
Decrease in accounts receivable
Increase in inventory
Decrease in accounts payable
Increase in wages payable
Net cash provided by operating activities
c. Cash used in investing activities will be reported at $161,000, computed as follows:
Purchases of equipment
Sale of land
Net cash used in investing activities
d. Cash used in financing activities will be reported at $81,000, computed as follows:
Sale of stock
Bond retirement
Dividends paid to Becon Corporation shareholders
Dividends paid to noncontrolling interests
Net cash used in financing activities
e. The cash balance increased by $78,000 ($320,000 – $161,000 – $81,000) in 20X4.
E10-3 Computation of Operating Cash Flows
Cash received from customers was $293,000 ($310,000 – $17,000). Cash payments to
E10-4 Consolidated Operating Cash Flows
a. Cash received from customers was $482,000 ($300,000 + $200,000 – $28,000 + $10,000).
E10-5 Preparation of Statement of Cash Flows
Consolidated Enterprises Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X3
Cash Flows from Operating Activities:
Consolidated Net Income
$ 464,000
Adjustments for noncash items:
Noncash Expenses, Revenue, and Gains
Included in Income:
Depreciation Expense
73,000
Goodwill Impairment Loss
3,000
Gain on Sale of Equipment
(8,000)
Changes in operating assets and liabilities
Decrease in Accounts Receivable
23,000
Increase in Accounts Payable
5,000
Increase in Inventory
(15,000)
Net Cash Provided by Operating Activities
$545,000
Cash Flows from Investing Activities:
Equipment Purchased
$(380,000)
Sale of Equipment
45,000
Net Cash Used in Investing Activities
(335,000)
Cash Flows from Financing Activities:
Sale of Bonds
$ 120,000
Repurchase of Common Stock
(35,000)
Dividends Paid:
To Parent Company Shareholders
(60,000)
To Noncontrolling Shareholders
(6,000)
Net Cash Provided by Financing Activities
19,000
Net Increase in Cash
$229,000