5–57 Ch. 5—Problems
Problem 5-15, Concluded
(CL1a) Eliminate the intercompany interest expense and revenue on factory lease:
Original balance ………………………………………………………………… $103,770
First lease payment ……………………………………………………………. (25,000)
(CL2a) Eliminate obligation under capital lease plus accrued interest payable against mini-
mum lease payments receivable and unearned interest income:
Obligations balance, January 1, 2017:
Original balance ………………………………………………………………… $103,770
Principal, January 1, 2016 …………………………………………………… (25,000)
(CL3a) Reclassify asset under capital lease and related accumulated depreciation for two
years. Depreciation is $103,770 ÷ 10, or $10,377 per year.
(CL1b) Eliminate the intercompany interest expense and revenue on equipment lease. Inter-
est is 12% × ($52,298 original balance – $15,000 first payment), or $4,476.
(CL2b) Eliminate obligation under capital lease ($52,298 – $15,000, or $37,298) and accrued
interest payable, $4,476, against minimum lease payments receivable (3 × $15,000 +
$2,000 purchase option, or $47,000) and unearned interest income:
(CL3b) Reclassify the asset and related accumulated depreciation. Depreciation is $52,298 ÷
8, or $6,537 per year.
(F2) Reduce the depreciation to depreciation based on cost of equipment to consolidated
entity:
PROBLEM 5-16
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $600,000 $480,000 $120,000
Less book value of interest acquired:
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Goodwill …………………………………….. $100,000 debit D
Subsidiary Swing Company Income Distribution
Internally generated net
income …………………………….. $17,440
Realized gain on machine ……….. 509
5–59 Ch. 5—Problems
Problem 5-16, Continued
Patter, Inc., and Subsidiary Swing Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 2015
Eliminations Consolidated Controlling Consolidated
Trial Balance
and Adjustments Income Retained Balance
Patter Swing Dr. Cr. Statement NCI Earnings Sheet
Cash ………………………………………………. 91,013 26,050 ………. ………. ……… ………. ………. 117,063
………. ………. (F2) 509 (CL3a) 5,017 ……… ………. ………. ……….
………. ………. ………. (CL3b) 5,779 ……… ………. ………. (117,778)
Assets Under Capital Lease ………………. 40,676 ………. ………. (CL3a) 17,560 ……… ………. ………. ……….
………. ………. ………. (CL2b) 23,116 ……… ………. ………. ……….
Accumulated Depreciation—Assets
………. ………. ………. (D) 80,000 ……… ………. ………. ……….
Accounts Payable ……………………………. (130,000) (180,000) ………. ………. ……… ………. .……… (310,000)
Obligations Under Capital Lease ………… (24,560) ………. (CL2a) 9,444 ………. ……… ………. ………. ……….
………. ………. (CL2b) 15,116 ………. ……… ………. ………. ……….
Problem 5-16, Continued
Patter, Inc. and Subsidiary Swing Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 2015
(Concluded)
Eliminations Consolidated Controlling Consolidated
Trial Balance
and Adjustments Income Retained Balance
Patter Swing Dr. Cr. Statement NCI Earnings Sheet
Common Stock ($10 par)—Swing ………. ………. (100,000) (EL) 80,000 ………. ……… (20,000) ………. …..…..
Paid-In Capital in Excess of Par—Swing ………. (300,000) (EL) 240,000 ………. ……… (60,000) ………. …..…..
Depreciation Expense ………………………. 41,000 23,000 ………. (F2) 509 ……… ………. ………. ..……..
………. ………. ………. ………. 63,491 ………. ………. ……….
Interest Expense ……………………………… 4,440 ………. ………. (CL1a) 1,417 ……… ………. .……… ……….
Problem 5-16, Continued
Eliminations and Adjustments:
(CV) Conversion to equity at the beginning of the year [80% × ($226,610 – $100,000)].
(EL) Eliminate the 80% ownership portion of the subsidiary equity accounts against the in-
vestment.
(D)/(NCI) Distribute the excess cost to goodwill.
Original balance ………………………………………………………………… $17,560
First lease payment ……………………………………………………………. (5,000)
First-year interest (15% × $12,560) ………………………………………. 1,884
(CL2a) Eliminate the obligation under capital lease plus accrued interest payable against min-
imum lease payments receivable and unearned interest income:
Obligations balance, January 1, 2015:
Original balance …………………………………………………………. $17,560
Principal, January 1, 2014 ……………………………………………. (5,000)
Principal, January 1, 2015 ($5,000 – $1,884)………………….. (3,116)
Balance ………………………………………………………………… $ 9,444
Minimum lease payments, January 1, 2015:
*($5,000 × 4) + $2,000
(CL3a) Reclassify the machine under the capital lease and related depreciation. Cost,
$17,560; accumulated depreciation, [($17,560 ÷ 7) × 2] = $5,017.
(F1) Defer remaining gain on asset at the beginning of the year, $3,560* less one year’s
amortization of $509** = $3,051. Because profit was recorded by the subsidiary, the
(F2) Adjust the current year’s depreciation for 1/7 of the gain, $509.
Ch. 5—Problems 5–62
Problem 5-16, Concluded
(CL1b) Eliminate intercompany interest expense/revenue on truck lease:
Original balance ……………………………………………………… $23,116
Initial payment ………………………………………………………… 8,000
5–63 Ch. 5—Problems
APPENDIX PROBLEMS
PROBLEM 5A-1
Paulz Heavy Equipment and Subsidiary Steven Truck Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 2016
Eliminations Consolidated Controlling Consolidated
Trial Balance
and Adjustments Income Retained Balance
Paulz Steven Dr. Cr. Statement NCI Earnings Sheet
Cash ………………………………………………. 90,485 123,307 ………. ………. ……… ………. ..…….. 213,792
Accounts Receivable (net) ………………… 228,000 120,000 ………. ………. ……… ………. ………. 348,000
Accumulated Depreciation—Assets
Under Capital Lease ……………………… (18,556) (13,674) (CL3s) 18,556 ………. ……… ………. ………. ………….
Obligations Under Capital Lease ………… (9,260) (79,388) (CL2s) 9,260 ………. ……… ………. ………. ………….
………. ………. (CL2p) 79,388 ………. ……… ………. ………. ………….
Common Stock ($5 par)—Paulz …………. (1,800,000) ………. ………. ………. ……… ………. ………. (1,800,000)
Retained Earnings—Paulz ………………… (864,834) ………. (CL1s) 305 (CL3s) 330 ……… ………. (864,859) ………….
Problem 5A-1, Continued
Paulz Heavy Equipment and Subsidiary Steven Truck Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 2016
(Concluded)
Eliminations Consolidated Controlling Consolidated
Trial Balance
and Adjustments Income Retained Balance
Paulz Steven Dr. Cr. Statement NCI Earnings Sheet
Rent Income ……………………………………. (2,182) ………. (CL4p) 2,182 ………. ……… …….... ………. ………….
Cost of Goods Sold ………………………….. 1,882,000 770,000 ………. ………. 2,652,000 ………. …..….. ………….
Subsidiary Income ……………………………. (124,000) ………. (CY1) 124,000 ………. ……… ………. ………. ..………..
Dividends Declared ………………………….. 144,000 35,000 ………. (CY2) 28,000 ……… 7,000 144,000 ………….
0
0 1,456,655 1,456,655 ……… ………. ………. ………….
Consolidated Net Income ………………………………………………………………………………………….…………………… (363,806) ………. ………. ………….
To NCI (see distribution schedule) ……………………………………………………………………………….……………… 19,150 (19,150) ………. ………….
Eliminations and Adjustments:
(CY1) Eliminate the current-year subsidiary income to the investment account.
(CY2) Eliminate the current-year dividends to the investment account.
(EL) Eliminate 80% of the subsidiary equity balances.
Lessee Lessor
Interest Interest Interest
Date Payment (8%) Balance Payment (8%) Balance Difference
January 1, 2015 $10,000 ………… $17,833 $10,000 ………… $22,596 ……….
5–65 Ch. 5—Problems
Problem 5A-1, Continued
(CL3s) Reclassify and adjust the depreciation on the truck, ($27,833 ÷ 3) versus ⅓ ×
($32,596 – $6,000 residual). Adjust past and current year by $413 ($9,278 – $8,865).
(CL1p) Eliminate interest revenue and expense on equipment lease, 10% × ($109,388 origi-
nal balance – $30,000 payment, January 1, 2016), or $7,939.
(CL3p) Reclassify the equipment under capital lease and related accumulated depreciation
for one year. Annual depreciation is $109,388 ÷ 8, or $13,674.
(CL4p) Eliminate the intercompany rent revenue and expense, $2,182, which is $1,500 ex-
ecutory costs plus $682 contingent payment, computed as follows:
Previous growth rate of net income ………………………………………………… 8%
(2015 net income, $81,650 ÷ 2014 net income of $75,600, or 1.08;
2014 net income, $75,600 ÷ 2013 net income of $70,000, or 1.08)
2016 net income, excluding gain on asset sale ………………………………… $95,000
Less 1.08 × $81,650, 2015 net income …………………………………………… 88,182
(F1) Eliminate the gain on the intercompany sale of warehouse and reduce the asset to its
cost to the consolidated entity.
(F2) Adjust current year’s depreciation for one-quarter year, or $750 ($60,000 gain ÷
Problem 5A-1, Concluded
Subsidiary Steven Truck Company Income Distribution
Unrealized gain on sale Internally generated net
of warehouse……………………. $60,000 income …………………………… $155,000
Unearned interest on Gain realized through use
residual……………………………. 412 of warehouse ………………….. 750
Adjustment of depreciation
on lease …………………………. 413
PROBLEM 5A-2
(1) Eliminations and Adjustments at December 31, 2015:
Interest Income ……………………………………………………………………. 5,136
Interest Expense ……………………………………………………………… 4,623
Unearned Interest Income …………………………………………………. 513
To eliminate intercompany interest revenue and expense.
Property, Plant, and Equipment (original cost to lessor) …………….. 50,098
Obligations Under Capital Lease ……………………………………………. 28,894
Interest Payable …………………………………………………………………… 4,623
Problem 5A-2, Concluded
(2) Eliminations and Adjustments at December 31, 2016:
Interest Income ……………………………………………………………………. 3,077
Interest Expense ……………………………………………………………… 2,483
Unearned Interest Income …………………………………………………. 594
To eliminate intercompany interest revenue and expense.
Retained Earnings—Penn …………………………………………………….. 513
Unearned Interest Income …………………………………………………. 513
To adjust for interest income recorded on residual
value in 2015.
CASE 5-1
First, let’s consider the existing outstanding bonds. There is a major difference in interest rates
between those available to Power Pro and Swift-Craft. To the extent possible, the debt should
be directly or indirectly retired. Direct retirement would be accomplished by Power Pro lending
funds to Swift-Craft, which Swift-Craft would in turn use to retire the bonds. The other alternative
is for Power Pro to purchase the existing bonds that it could and then hold them as an invest-
It would appear that Power Pro will build and equip the new plant. It can add a reasonable profit.
The higher the price, the greater the shift of income from the subsidiary to the parent. When
consolidating, the profit is removed from the gain account and the asset accounts. It is deferred
over the period of use as a decrease in depreciation expense.
Power Pro could sell the assets to Swift-Craft in return for a long-term mortgage. Again, any rate
under 11% is a bonus to the NCI shareholders. Again, the intercompany debt and interest
revenue/expense are eliminated in the consolidation process.
CASE 5-2
(1) Option (a):
Consolidated Income Statement
Sales ……………………………………………………………………………………….. $ 320,000
Cost of goods sold …………………………………………………………………….. (220,000)
Gross profit …………………………………………………………………………. $ 100,000
Consolidated Balance Sheet
Assets Liabilities and Equity
Cash ……………………………… $ 173,000 Current liabilities …………….. $ 45,000
Other current assets ………… 250,000 NCI ………………………………. 82,000*
(2) Option (b):
There would be no difference. The bonds would still be retired from a consolidated view-
point with the parent paying $185,000 to retire the bonds. The gain would still be credited to
CASE 5-3
(1) Entries:
Pannier:
Notes Receivable…………………………………………………………………. 125,000
(2) Consolidated statements:
Consolidated Income Statement
Sales ……………………………………………………………………………………….. $ 320,000
Cost of goods sold …………………………………………………………………….. (220,000)
Gross profit …………………………………………………………………………. $ 100,000
Consolidated Balance Sheet
Assets Liabilities and Equity
Cash ……………………………… $ 358,000 Current liabilities …………….. $ 45,000
Inventory ………………………… 90,000 Long-term debt ………………. 200,000
Other current assets ………… 210,000 NCI ………………………………. 79,000*
5–71 Ch. 5—Cases
Case 5-3, Concluded
(3) Entries:
Pannier:
Minimum Lease Payments Receivable (4 × $29,977) ……………….. 119,908
Cash ………………………………………………………………………………….. 29,977
Inventory ………………………………………………………………………… 100,000
Unearned Interest Income …………………………………………………. 24,885
(4) There would be no difference in the consolidated statements.