Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
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45. a. (continued)
Entry B
Bonds Payable …………………………………………………. 20,000
Premium on Bonds Payable ……………………………… 1,069
Interest Income …………………………..……………………. 1,873
Carrying Cash Year-End
Amount Effective Interest Excess Carrying
(given) Interest (8%) Amortizations Amount
Investment $18,732 $1,873 (10%) $1,600 $273 $19,005
Liability 21,386 1,283 (6%) 1,600 317 21,069
Cost of Goods Sold ………………………………………….. 7,500
Inventory ……………………………………………………… 7,500
(To defer intra-entity profits in ending inventory as calculated below):
Intra-entity profit …………………………………………………………….. $ 30,000
Transfer price 2018 …………………………………………………………. $120,000
Markup ($30,000 ÷ $120,000) ……………………………………………. 25%
Intra-entity gross profit in ending inventory ($30,000 × 25%) $7,500
b. Herman’s reported net income for 2018 ………………………….... $25,000
Excess fair value amortization …………………………..…………….. (20,500)
2017 intra-entity gross profit recognized in 2018 (Entry *G) . 8,000
2018 deferred intra-entity gross profit (Entry G) ……………….. (7,500)
Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
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45. (continued)
c. The balances in the individual records as of December 31, 2019 pertaining to
the Intra-entity bonds are as follows:
Beginning
Carrying Cash Year-End
follows:
Original gain on retirement (see part a) ………………….. $2,654
Interest income recorded on investment in 2018
(see part a) …………………………..………………………….. $1,873
Interest expense recorded on liability in 2018
Interest Income …………………………..……………………. 1,901
Investment in Herman ………………………………….. 2,064
Investment in Fred’s bonds ………………………….. 19,306
Interest Expense …………………………………………. 1,264
(To remove accounts pertaining to intra-entity bonds. “Investment in
Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
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46. (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
CONSOLIDATION ENTRIES 1/1/17
Entry S and A combined:
Preferred Stock (Lisa) ………………………………………. 100,000
Common Stock (Lisa) ……………………………………….. 200,000
Retained Earnings, 1/1/17 (Lisa) ………………………… 450,000
fair values, and record outside ownership of subsidiary’s preferred and
common stock at acquisition-date fair values.)
b. Acquisition price of bonds, 1/2/17 …………………….. $53,310
Carrying amount of ½ bonds payable acquired) …. (44,175)
Loss on extinguishment of debt …………………… $9,135
Effective interest (above) ……………………………… 4,265 735
Investment in Bonds of Lisa
(carrying amount as of 12/31/17) ……………… $52,575
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Education.
46. b. (continued)
Bonds payable (carrying amount)
Carrying amount—date of acquisition, 1/2/17 .. $44,175
CONSOLIDATION ENTRY B—December 31, 2017
(all figures computed above)
Bonds Payable …………………………………………………. 50,000
Interest Income (or other revenues) ………………….. 4,265
Loss on Retirement of Bonds ……………………………. 9,135
Discount on Bonds Payable ($50,000 – $45,360) 4,640
Interest Expense ………………………………………….. 6,185
Investment in Bonds of Lisa ………………………… 52,575
c. December 31, 2017 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
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46. (continued)
d. Original allocation to franchises (given) …………………. $40,000
Amortization at $1,000/year (2017–2018) ……………. (2,000)
Consolidated franchises—12/31/18 …………………… $38,000
Fixed assets (book values):
Mona, Inc. ………………………………………………………… $1,100,000
Lisa Co. …………………………..……………………………… 800,000
Reduction necessitated by intra-entity sale
($120,000 transfer price reduced to $100,000
original cost) (see part c) ……………………………… (20,000)
Expenses (book values):
Mona, Inc……………………………………………………… $220,000
Lisa Co. ………………………………………………………. 120,000
Recognition of amortization on franchises ………… 1,000
Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
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Education.
47. (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, 2018
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)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid …………………………..…………………….. $(112,000)
Issuance of bonds ……………………………………………. 110,000
Issuance of common stock ……………………………….. 67,000
Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
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47. (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)
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Education.
49. (50 Minutes) (Determine consolidated totals. Subsidiary has preferred shares
outstanding that are equity instruments.)
Consideration transferred for common and preferred stock $560,000
Skyler’s book value 450,000
Excess fair value assigned to intangible asset (10-year life) $110,000
Annual amortization $11,000
Ending Intra-entity Gross Profit
Ending inventory (at transfer price) ……………………….. $18,000
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49. (continued)
Paisley, Inc. and Skyler Corp.
Consolidation Worksheet
Year Ending December 31
Consolidation Entries Consolidated
Accounts Paisley, Inc. Skyler Corp. Debit Credit Totals
Sales ……………………………………….. (800,000) (400,000) (TI) 90,000 (1,110,000)
Cost of goods sold……………………. 528,000 260,000 (G) 6,000 (TI) 90,000 704,000
Expenses …………………………………. 180,000 130,000 (E) 11,000 (ED) 2,000 319,000
Gain on sale of equipment ………… (8,000) -0- (TA) 8,000 -0-
Net income…………………………….. (100,000) (10,000) (87,000)
Retained earnings, 1/1 ………………. (400,000) (150,000) (S) 150,000 (400,000)
Net income ………………………………. (100,000) (10,000) (87,000)
Dividends declared …………………… 60,000 -0- 60,000
Retained earnings, 12/31 ………… (440,000) (160,000) (427,000)
Cash ………………………………………… 30,000 40,000 70,000
Accounts receivable …………………. 300,000 100,000 (P) 28,000 372,000
Inventory ………………………………….. 260,000 180,000 (G) 6,000 434,000
Investment in Skyler Corp. ………… 560,000 -0- (S) 450,000 -0-
(A) 110,000
Land, buildings, and equipment … 680,000 500,000 (TA) 10,000 1,190,000
Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
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49. (continued)
CONSOLIDATED TOTALS
▪ Sales = $1,110,000 (add book values and eliminate intra-entity transfers)
▪ Cost of Goods Sold = $704,000 (add book values, eliminate intra-entity
transfers, and eliminate ending intra-entity gain [computed above])
subsidiary was not acquired until current year)
▪ Dividends Declared = $60,000 (parent balance only)
▪ Retained Earnings, 12/31 = $427,000 (consolidated beginning retained
earnings plus net income less dividends declared)
▪ Cash = $70,000 (add book values)
because individual asset and liability accounts of subsidiary are included)
▪ Land, Buildings, and Equipment = $1,190,000 (add book values and increase
transferred asset from transfer price to historical cost [see above])
▪ Accumulated Depreciation = $286,000 (add book values and adjust balance
for transferred asset from transfer price figure to historical cost (see above])
▪ Preferred Stock = $0 (subsidiary outstanding shares are eliminated)
▪ Common Stock = $620,000 (parent balance only)
Schaefer, Doupnik, 13e
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Education.
49. (continued): Consolidation entries and explanations:
Entry S
Preferred Stock (Skyler) …………………………………………… 100,000
Common Stock (Skyler) …………………………………………… 200,000
Retained Earnings, 1/1 …………………………………………….. 150,000
(To recognize excess fair value attributed to intangible asset.)
Entry E
Amortization Expense ……………………………………………… 11,000
Intangible Asset …………………………………………………. 11,000
(To record current year’s amortization of intangible asset.)
Equipment ……………………………………………………….……… 10,000
Gain on Sale of Equipment ………………………………………. 8,000
Accumulated Depreciation ………………………………….. 18,000
(To eliminate effects as of 1/1 created by intra-entity transfer of equipment.)
Entry TI
Inventory …………………………………………………………… 6,000
(To defer intra-entity gain in inventory remaining at the end of the current year.
Markup is 33⅓% [30,000 gross profit ÷ 90,000 transfer price] indicating that the
ending inventory of 18,000 contains an intra-entity profit of 6,000 [18,000 × 33⅓%].)
Entry ED
Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
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50. (30 minutes) (Consolidated Cash Flow Statement with current year business
combination)
Plaster Inc. and Subsidiary Stucco Company
Consolidated Statement of Cash Flows
For the year ended 12/31/18
CASH FLOW FROM OPERATING ACTIVITIES
Consolidated net income $274,000
Depreciation expense 187,500
CASH FLOW FROM FINANCING ACTIVITIES
Issue long-term debt 800,000
Dividends (108,000)
Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
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Education.
Excel Case–Intra-entity Bonds
Bonds with a stated rate of 11% sold to yield 12%
Eff. Yield
12% 1,000,000.00 0.32197 321,973.24
110,000.00 5.65022 621,524.53
943,497.77 56,502.23
2016 943,497.77 113,219.73 110,000.00 3,219.73
2017 946,717.50 113,606.10 110,000.00 3,606.10
2018 950,323.60 114,038.83 110,000.00 4,038.83
Consolidated Worksheet Entry 12/31/18
Bonds Payable 954,362.43
Interest Income 117,523.20
Loss on Retirement 0.00
Gain on Retirement 46,299.01
2018 904,024.59 117,523.20 110,000.00 7,523.20
2019 911,547.79 118,501.21 110,000.00 8,501.21
2020 920,049.00 119,606.37 110,000.00 9,606.37
Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
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Education.
RESEARCH CASE: STATEMENT OF CASH FLOWS
Pfizer, Inc. shows the following in its 2015 Consolidated Statement of Cash
Flows:
• Pfizer employs the indirect method of accounting for operating cash flows
starting with net income and then reconciling through adjustments to “Net
cash flows provided by operating activities.”
• Pfizer includes in its determination of net cash provided by operating
activites other changes in assets and liabilities, net of acquisitions and
divestitures. These other changes are included “net” so as not to distort
Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – Hoyle,
Schaefer, Doupnik, 13e
Financial Reporting Research and Analysis Case
The number of potential solutions is large. Searches in Lexis–Nexis, Edgar, etc. will
produce numerous examples of consolidations of VIEs. For example, Walt Disney
Company prepares a before and after disclosure of its consolidated VIEs Euro
Disney, Hong Kong Disneyland, and Shanghai Disney Resort as follows (10-3-15):
Before International International
Theme Parks Theme Parks
Consolidation and Adjustments Total
Cash and cash equivalents $3,488 $781 $ 4,269
Other current assets 12,237 252 12,489
Total current assets 15,725 1033 16,758
Investments/Advances 7,505 (4,862) 2,643