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Chapter 10 - Additional Consolidation Reporting Issues
E10-6 Direct Method Cash Flow Statement
Consolidated Enterprises Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the Year Ended December 31, 20X3
Cash Flows from Operating Activities:
Cash Received from Customers
$ 923,000
(a)
Cash Payments to Suppliers
(378,000)
(b)
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
(a) $923,000 = $900,000 + $23,000
(b) $378,000 = $368,000 - $5,000 + $15,000
Consolidated Net Income
$464,000
Adjustments for noncash items:
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 Inventory
(15,000)
Increase in Accounts Payable
5,000
Total Adjustments
81,000
Net Cash Provided by Operating Activities
$545,000
E10-7 Analysis of Consolidated Cash Flow Statement
a.
Dividends paid to noncontrolling interest
$ 6,000
Proportion of stock held by noncontrolling interest
÷ .40
Total dividends paid by Jones Delivery
$15,000
b.
When bonds are sold at a premium the annual cash payment is greater than
reported interest expense. The amount of premium amortized must therefore be
deducted from net income in determining the cash flow from operations.
c.
An increase in accounts receivable means that cash collections have been less
than sales for the period. The amount of the increase must be deducted from
operating income to determine the amount of cash actually made available from
current period operations.
d.
Dividends paid to noncontrolling shareholders are reported as a cash outflow in
the cash flow statement because they represent funds that have been distributed
during the period and are no longer available to the consolidated entity. On the
other hand, these same dividends are omitted from the retained earnings
statement. Only the income to the parent company shareholders is included in the
consolidated retained earnings statement and only dividends to the parent
company shareholders are deducted in deriving the ending consolidated retained
earnings balance.
e.
The loss occurred on a sale to a nonaffiliate. All profits and losses on sales to
affiliates are eliminated in the period of intercompany sale and are considered
realized as the equipment is depreciated by the purchasing affiliate.
E10-8 Midyear Acquisition
a.
The retained earnings balance reported for the consolidated entity as of January 1,
20X1, would be $400,000.
b.
Separate earnings of Yarn Manufacturing
$140,000
Net income reported by Spencer Corporation
$60,000
Portion of year ownership was held by Yarn
x 4/12
Income earned following acquisition
20,000
Consolidated net income
$160,000
Income to noncontrolling interest ($20,000 x .05)
(1,000)
Income to controlling interest
$159,000
c.
Consolidated retained earnings, January 1, 20X1
$400,000
Income to controlling interest
159,000
Dividends paid by Yarn Manufacturing
(80,000)
Consolidated retained earnings, December 31, 20X1
$479,000
d.
Purchase price on August 30, 20X1
$503,500
Equity method income
19,000
Dividends received from Spencer ($25,000 x .95)
(23,750)
Balance in investment account December 31, 20X1
$498,750
E10-9 Purchase of Shares at Midyear
a.
Journal entries recorded by Highbeam in 20X2:
Investment in Copper Co.
319,500
Cash
319,500
Record purchase of Copper Company Stock.
Investment in Copper Co.
27,000
Income from Copper Co.
27,000
Record equity-method income.
Cash
13,500
Investment in Copper Co.
13,500
Record dividends from Copper Company.
b.
Consolidation Entries:
E10-10 Deferred Tax Assets and Liabilities Arising in Acquisition
Fair Value
$28,000
Tax Basis
30,000
Book-Tax Difference (future deductible difference)
Deferred Tax Asset
2,000
x 0.40
800
Land:
Fair Value
$40,000
Tax Basis
10,000
Book-Tax Difference (future taxable difference)
Deferred Tax Liability
30,000
x 0.40
12,000
Fair Value
$15,000
Tax Basis
5,000
Book-Tax Difference (future taxable difference)
Deferred Tax Liability
10,000
x 0.40
4,000
Bond Payable:
Fair Value
$115,000
Tax Basis
120,000
Book-Tax Difference (future taxable difference)
Deferred Tax Liability
5,000
x 0.40
2,000
E10-11 Tax Deferral on Gains and Losses
Consolidation entries, December 31, 20X7:
Total
=
Re-sold
+
Ending
Inventory
Sales
90,000
30,000
60,000
COGS
60,000
20,000
40,000
Gross Profit
30,000
10,000
20,000
Gross Profit %
33.33%
Eliminate Inventory Purchases:
Sales
90,000
Cost of Goods Sold
70,000
Inventory
20,000
Eliminate Tax Expense on Unrealized Profit on Inventory transfer:
Deferred Tax Asset
8,000
Deferred Tax Expense
8,000
Eliminate Gain on Sale of Land:
Gain on Sale of Land
100,000
Land
100,000
Eliminate Tax Expense on Unrealized Profit on Land Transfer:
Deferred Tax Asset
40,000
Deferred Tax Expense
40,000
E10-12 Unrealized Profits in Prior Year
Consolidation entries, December 31, 20X8:
Eliminate Beginning InventoryPprofit:
Investment in Holiday Services
12,000
Income Tax Expense
8,000
Cost of Goods Sold
20,000
Eliminate Unrealized Gain on Sale of Land:
Deferred Tax Asset
40,000
Investment in Holiday Services
45,000
NCI in NA of Holiday Services
15,000
Land
100,000
E10-13 Allocation of Income Tax Expense
a.
Allocation of tax expense incurred in 20X5:
Winter
Ray Guard
Block
Item
Corporation
Corporation
Company
Reported operating income
$100,000
$50,000
$30,000
20X4 profits realized in 20X5
40,000
20,000
Unrealized profits in 20X5
sales
(10,000)
(20,000)
(10,000)
Realized income before tax
$130,000
$30,000
$40,000
Income tax assigned:
($130,000 / $200,000) x $80,000
$ 52,000
($30,000 / $200,000) x $80,000
$12,000
($40,000 / $200,000) x $80,000
$16,000
b.
Computation of consolidated net income and income to controlling interest:
Realized income before tax:
Winter Corporation
$130,000
Ray Guard Corporation
30,000
Block Company
40,000
Consolidated income before tax
$200,000
Income tax expense
(80,000)
Consolidated net income
$120,000
Income to noncontrolling interests:
Ray Guard Corporation ($30,000 - $12,000) x 0.20
$ 3,600
Block Company ($40,000 - $16,000) x 0.10
2,400
(6,000)
Income to controlling interest
$114,000
E10-14 Effect of Preferred Stock on Earnings per Share
Because both companies paid preferred dividends in 20X1 and neither issue is convertible, only
one basic consolidated earnings per share number will be reported for 20X1:
Operating income of Amber Corporation
$ 59,000
Net income of Newtop Company
$45,000
Less: Preferred dividends
(5,000)
Earnings available to Newtop common shareholders
40,000
Consolidated net income
$99,000
Less: Income to noncontrolling interest ($40,000 x .30)
(12,000)
Income to common shareholders of Amber Corporation
$87,000
Less: Preferred dividends of Amber Corporation
(9,000)
Earnings available to common shareholders
$78,000
Consolidated earnings per share for 20X1
($78,000 / 12,000 shares)
$6.50
E10-15 Effect of Convertible Bonds on Earnings per Share
Basic earnings per share:
Operating income of Crystal Corporation
$45,000
Contribution to consolidated EPS from Evans Company
($30,000 / 10,000) x 6,000 shares
18,000
Earnings available to common shareholders
$63,000
Consolidated earnings per share for 20X2
($63,000 / 30,000 shares)
$2.10
Diluted earnings per share:
Operating income of Crystal Corporation
$45,000
Contribution to consolidated EPS from Evans Company:
$30,000 + $12,000 (a)
x 6,000 shares
10,000 shares + 10,000 shares
12,600
Earnings available to common shareholders
$57,600
Consolidated earnings per share for 20X2
($57,600 / 30,000 shares)
$1.92
(a) $12,000 = ($200,000 x 0.10) x (1 - 0.40)
E10-16 Effect of Convertible Preferred Stock on Earnings per Share
Basic earnings per share:
Operating income of Eagle Corporation
$60,000
Contribution to consolidated EPS from Standard Company:
$45,000 - $12,000
x 8,000 shares
10,000 shares
26,400
Earnings available to shareholders
$86,400
Preferred dividends of Eagle Corporation
(16,000)
Earnings available to common shareholders
$70,400
Consolidated earnings per share for 20X1
($70,400 / 10,000 shares)
$7.04
Diluted earnings per share:
Operating income of Eagle Corporation
$60,000
Contribution to consolidated EPS from Standard Company:
$45,000
x 8,000 shares
10,000 shares + 15,000 shares
14,400
Earnings available to shareholders
$74,400
Preferred dividends of Eagle Corporation
(16,000)
Earnings available to common shareholders
$58,400
Consolidated earnings per share for 20X1
($58,400 / 10,000 shares)
$5.84
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P10-17 Direct Method Computation of Cash Flows
Car Corporation and Subsidiary
Operating Cash Flows
For the Year Ended December 31, 20X1
Cash Flows from Operating Activities:
Cash Received from Customers
$533,000
Cash Payments to Suppliers
(268,000)
Net Cash Provided by Operating Activities
$265,000
Computation of payments received from customers
Sales of Car Corporation
$400,000
Sales to outside parties by Bus Company ($240,000 - $100,000)
140,000
Increase in Car Corporation accounts receivable
(9,000)
Decrease in Bus Company’s accounts receivable
2,000
Payments received from customers
$533,000
Computation of payments to suppliers
Cost of goods sold by Car Corporation excluding sale of
inventory purchased from Bus Company ($235,000 - $40,000)
$195,000
Cost of goods sold on sales by Bus Company
to outside parties ($105,000 - $70,000)
35,000
Cost of goods sold on intercompany sales
resold in period ($70,000 x 0.40)
28,000
Decrease in Car Corporation inventory
(22,000)
Increase in Bus Company inventory
16,000
Decrease in accounts payable of Car Corporation
31,000
Increase in accounts payable of Bus Company
(15,000)
Payment made to suppliers
$268,000
P10-18 Preparing a Statement of Cash Flows
a.
Metal Corporation and Ocean Company
Consolidated Cash Flow Worksheet
Year Ended December 31, 20X3
Balance
Balance
Item
1/1/X3
Debit
Credit
12/31/X3
Cash
68,500
(a) 32,000
100,500
Accounts Receivable
82,000
(b) 15,000
97,000
Inventory
115,000
(c) 8,000
123,000
Land
45,000
(d) 10,000
55,000
Buildings and Equipment
515,000
(e) 35,000
550,000
Patents
5,000
(f) 1,000
4,000
830,500
929,500
Accumulated Depreciation
186,500
(g)
36,500
223,000
Accounts Payable
61,000
(h)
5,000
66,000
Wages Payable
26,000
(i)
6,000
20,000
Notes Payable
250,000
(j) 15,000
265,000
Common Stock
150,000
150,000
Retained Earnings
130,000
(k) 30,000
(l) 74,500
174,500
Noncontrolling Interest
27,000
(m)
5,000
(l)
9,000
31,000
830,500
141,000
141,000
929,500
Cash Flows from Operating Activities:
Consolidated Net Income
(l) 83,500
Depreciation Expense
(g) 36,500
Amortization of Patent
(f)
1,000
Changes in Operating Assets and Liabilities:
Increase in Accounts Receivable
(b) 15,000
Increase in Inventory
(c) 8,000
Increase in Accounts Payable
(h) 5,000
Decrease in Wages Payable
(i)
6,000
Cash Flows from Investing Activities:
Purchase of Land
(d) 10,000
Purchase of Buildings and Equipment
(e) 35,000
Cash Flows from Financing Activities:
Increase in Notes Payable
(j)
15,000
Dividends Paid:
To Metal Corporation Shareholders
(k) 30,000
To Ocean Company Shareholders
(m)
5,000
Increase in Cash
(a) 32,000
141,000
141,000
