6–1
CHAPTER 6
UNDERSTANDING THE ISSUES
1. (a) Investing activities—Purchase of Sub Company ($900,000 – $50,000) ……………. $(850,000)
(b) Investing activities—Purchase of Sub Company ($500,000 – $50,000) ……………. $(450,000)
2. Any amortizations of the $200,000 excess of cost over book value will need to be included in cash–
3. Determination and Distribution of Excess Schedule, Investment in Company S
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $800,000 $640,000 $160,000
Less book value of interest acquired:
Total equity …………………………… 600,000 $600,000 $600,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Goodwill …………………………………….. $200,000 debit D3
(a) Investing activities—Purchase of S Company ($640,000 – $50,000) ……………….. $(590,000)
Noncash financing activities—Noncontrolling interest ……………………………………. 160,000
(b) Investing activities—Purchase of S Company ($400,000 – $50,000) ……………….. $(350,000)
Noncash financing activities—Issuance of notes payable ………………………………. 240,000
6–2
6. (a) Consolidated net income = ($100,000 + $40,000) × 70% = $98,000
Distribution to NCI = ($40,000 × 20%) × 70% = $5,600
7. (a) Taxes would not be paid on this intercompany profit. Taxes are based on consolidated income
after the elimination of the profit.
(b) Taxes will have been paid on this intercompany profit. The taxes paid become a deferred tax
6–3 Ch. 6—Exercises
EXERCISES
EXERCISE 6-1
Determination and Distribution of Excess Schedule, Investment in Roland Company
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $825,000 $660,000 $165,000
Less book value of interest acquired:
Common stock ………………………. $200,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Goodwill ($825,000 fair –
Exercise 6-1, Concluded
Born Company and Subsidiary Roland Company
Consolidated Statement of Cash Flows
For Year Ended December 31, 2017
Cash flows from operating activities:
Consolidated net income ($150,000 + $10,000 NCI share) ……. $ 160,000
Adjustments to reconcile net income to net cash:
Cash flows from investing activities:
Payment for purchase of Roland Company,
net of cash acquired ……………………………………………………. (640,000)
Cash flows from financing activities:
Sale of stock (5,000 shares × $70) …………………………………….. $350,000
Dividend payments to controlling interests …………………………… (10,000)
Dividend payments to NCI ($5,000 × 20%) ………………………….. (1,000)
Schedule of noncash investing activity:
Born Company purchased 80% of the capital stock of Roland Company for $660,000. In con-
junction with the acquisition, liabilities were assumed and a noncontrolling interest created as
follows:
Adjusted value of assets acquired ($710,000 book
value + $325,000 excess) …………………………………………………. $1,035,000
Cash paid …………………………………………………………………………….. 660,000
Balance ……………………………………………………………………………….. $ 375,000
6–5 Ch. 6—Exercises
EXERCISE 6-2
Determination and Distribution of Excess Schedule, Investment in Panda Corporation
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $306,250 $245,000* $ 61,250
Less book value of interest acquired:
Common stock ($10 par) …………. $150,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Equipment ………………………………….. $ 20,000 debit D1 4 $5,000
Exercise 6-2, Concluded
Duckworth Corporation and Subsidiary Panda Corporation
Consolidated Statement of Cash Flows
For Year Ended December 31, 2017
Cash flows from operating activities:
Consolidated net income …………………………………………………… $ 103,200
Adjustments to reconcile net income to net cash:
Depreciation ($92,000 + $28,000 + $5,000 of
Cash flows from investing activities:
Cash payment for purchase of Panda Corporation,
net of cash acquired ($155,000 – $30,000) ……………………. $(125,000)
Purchase of production equipment ………………………………………….. (76,000)
Net cash used in investing activities ………………………………………… $(201,000)
Cash flows from financing activities:
Decrease in long-term debt ……………………………………………….. $ (10,000)
terest was created as follows:
Adjusted value of assets acquired ($270,000
book value + $106,250 excess) …………………………………………. $376,250
Cash payment ………………………………………………………………………. 155,000
Balance ……………………………………………………………………………….. $221,250
EXERCISE 6-3
(1) None, goodwill is not amortized.
(2) The cash from shares sold to the NCI shareholders, $90,000 (1,000 shares × $90), would
(3) The bonds were held by parties outside the consolidated company. They are now retired by
(4) This is a transaction within the consolidated company, and it would have no impact on the
consolidated statement of cash flows.
EXERCISE 6-4
Marco Company:
Provision for Income Tax ………………………………………………….. 33,000
Tole Company:
Optional entry to record tax effect of subsidiary tax:
Subsidiary Investment Income …………………………………………… 26,400
Investment in Marco Company …………………………………….. 26,400
80% × $33,000 tax.
EXERCISE 6-5
Deko Company and Subsidiary Farwell Company
Consolidated Income Statement
For Year Ended December 31, 2019
Sales (less $50,000 intercompany sales) …………………………………………………. $ 370,000
Cost of goods sold ($290,000 – $50,000 intercompany sales – $8,000
beginning inventory profit + $2,400 ending inventory profit) …………………… $ (234,400)
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $1,062,500 $850,000 $212,500
Less book value of interest acquired:
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Patent ………………………………………… $93,750 debit D1 10 $9,375
Consolidated
Deko
Farwell Dr. Cr. Income
Sales ……………………. $(300,000) $(120,000) (IS) $50,000 $(370,000)
Cost of goods sold …. 200,000 90,000 (IS) $50,000
(EI) 2,400 (BI) 8,000 234,400
Gain on machine ……. (5,000) (F1) 5,000 0
Exercise 6-5, Concluded
Tax provision:
Consolidated income before tax ………………………………. $67,225
Add nondeductible patent amortization on NCI
($9,375 × 20%) ………………………………………………… 1,875
Subsidiary Farwell Company Income Distribution
Ending inventory ……………………. $2,400 Internally generated income …… $10,000
Patent amortization ………………… 9,375 Beginning inventory ………………. 8,000
Subsidiary tax schedule: Controlling NCI Total
(1) Total adjusted income …………………………….. $4,980 $ 1,245 $6,225*
(3) Taxable income …………………………………….. $4,980 $ 3,120 $8,100
(5) Net of tax share of income (line 1 – line 4) … $3,486 $ 309 $3,795
*From subsidiary’s IDS.
Parent Deko Company Income Distribution
Machine gain …………………………. $5,000 Internally generated income …… $ 65,000
Gain realized ……………………….. 1,000
Adjusted income…………………… $ 61,000
EXERCISE 6-6
Dunker Company and Subsidiary Fennig Company
Consolidated Income Statement
For Year Ended December 31, 2019
Sales (less $50,000 intercompany sales) …………………………………………………. $ 370,000
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $1,062,500 $850,000 $212,500
Less book value of interest acquired:
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Patent ………………………………………… $93,750 debit D1 10 $9,375
Consolidated
Dunker
Fennig Dr. Cr. Income
Sales ……………………. $(300,000) $(120,000) (IS) $50,000 $(370,000)
Cost of goods sold …. 200,000 90,000 (IS) $50,000
(EI) 2,400 (BI) 8,000 234,400
6–11 Ch. 6—Exercises
Exercise 6-6, Concluded
Tax provision:
Consolidated income before tax ………………………………. $67,225
Add nondeductible patent amortization on NCI ………….. 1,875
Subsidiary Fennig Company Income Distribution
Ending inventory ……………………. $2,400 Internally generated income …….. $10,000
Patent amortization ………………… 9,375 Beginning inventory ………………… 8,000
Subsidiary tax schedule: Controlling NCI Total
(2) NCI share of asset adjustments ……………….. 1,875 1,875
(4) Tax (30% of taxable income) …………………… $1,494 $ 936 $2,430
(5) Net of tax share of income (line 1 – line 4) … $3,486 $ 309 $3,795
*From subsidiary’s IDS
Parent Dunker Company Income Distribution
Machine gain …………………………. $5,000 Internally generated income …….. $ 65,000
Gain realized …………………………. 1,000
Adjusted income…………………….. $ 61,000
Tax provision ($61,000 × 30%) … (18,300)
EXERCISE 6-7
Adjustment to January 1, 2017, retained earnings:
Machine depreciation:
Retained Earnings—Coors (1½ yrs. × $5,000 × 60%) ……… 4,500
Retained Earnings—Vespa (1½ yrs. × $5,000 × 40%) …….. 3,000
Accumulated Depreciation—Equipment ………………………. 7,500
*Increase in Deferred Tax Assets:
Total
Controlling NCI
Gain on machine (net) ($4,000 × 30%) ………………………………. $1,200 $ 720 $480
Secondary tax ($4,000 × 70% × 60% × 30% × 20%)** …………. 101 101
Equipment depreciation ($4,500 parent share × 30%) ………….. 1,350 1,350
Total …………………………………………………………………………. $2,651 $2,171 $480
**100% – 80% dividend exclusion
Adjustments to income:
Sales ……………………………………………………………………………… 15,000
Cost of Goods Sold …………………………………………………….. 15,000
Tax:
Deferred Tax Asset** ……………………………………………………….. 725
Provision for Tax ………………………………………………………… 725
**Increase in Deferred Tax Assets:
Total
Controlling NCI
Machine gain realized (30% × $1,000) …………………………….. $(300) $(180) $(120)
6–13 Ch. 6—Problems
PROBLEMS
PROBLEM 6-1
Determination and Distribution of Excess Schedule, Investment in Marion Company
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $850,000 $680,000 $170,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Equipment ………………………………….. $ 50,000 debit D1 5 $10,000
Problem 6-1, Concluded
Lange Company and Subsidiary Marion Company
Consolidated Statement of Cash Flows
For Year Ended December 31, 2016
Cash flows from operating activities:
Consolidated net income ($262,000 + $15,000) …………………… $ 277,000
Adjustments to reconcile net income to net cash:
Depreciation expense ($1,292,000 – $1,086,000) …………… $ 206,000
Increase in inventory …………………………………………………… (40,000)
Net cash provided by operating activities ……………………….. $ 411,500
Cash flows from investing activities:
Purchase of building …………………………………………………………. $(350,000)
Purchase of equipment …………………………………………………….. (70,000)
Investment in Charles ………………………………………………………. (230,000)
Net cash used in investing activities ……………………………… (650,000)
mining funds provided by net income.
30% of reported Charles income (30% × $80,000) …………………… $24,000
Less amortization of excess {[$230,000 –
($700,000 × 30%)]/10 years} …………………………………………….. 2,000
Equity income ……………………………………………………………………… $22,000
6–15 Ch. 6—Problems
PROBLEM 6-2
Determination and Distribution of Excess Schedule, Investment in Rush Corporation
Company Parent NCI
Implied Price Value
Fair Value (90%) (10%)
Fair value of subsidiary ………………… $550,000 $495,000 $ 55,000
Less book value of interest acquired:
Common stock ($10 par) …………. $150,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Equipment ………………………………….. $ 20,000 debit D1 5 $4,000
Problem 6-2, Concluded
Billing Enterprises and Subsidiary Rush Corporation
Consolidated Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities:
Consolidated net income …………………………………………………… $ 92,300
Adjustments to reconcile net income to net cash:
Depreciation expense (includes amortization
of excess on equipment) ………………………………………… $ 72,400*
Cash flows from investing activities:
Payment for purchase of Rush Corporation, $95,000 cash net
of $60,000 cash acquired …………………………………………….. (35,000)
Cash flows from financing activities:
Sale of bonds ($500,000 increase – $400,000
issued to Rush) ………………………………………………………….. $ 100,000
Dividends paid to noncontrolling shareholders …………………….. (1,000)
Schedule of noncash investing activity:
Billing Enterprises acquired 90% of the capital stock of Rush Corporation for $495,000. In con-
junction with the acquisition, liabilities were assumed and a noncontrolling interest created as
follows:
Adjusted value of assets acquired ($615,000
book value + $100,000 excess) …………………………………………. $715,000
Cash paid …………………………………………………………………………….. 95,000
Balance ……………………………………………………………………………….. $620,000
PROBLEM 6-3
Bush, Inc., and Subsidiary Dorr Corporation
Consolidated Statement of Cash Flows
For Year Ended December 31, 2016
Cash flows from operating activities:
Consolidated net income …………………………………………………… $ 234,000
Adjustments to reconcile net income to net cash:
Gain on sale of equipment …………………………………………… $ (6,000)
Depreciation expense …………………………………………………. 82,000
Reduction of negative allowance for marketable securities . (11,000)
Cash flows from investing activities:
Purchase of equipment …………………………………………………….. $(127,000)
Sale of equipment ……………………………………………………………. 40,000
Net cash used in investing activities ……………………………… (87,000)
Cash flows from financing activities:
Sale of treasury stock ……………………………………………………….. $ 44,000
Dividend payments to controlling interests …………………………… (58,000)
Problem 6-3, Concluded
Bush, Inc. and Subsidiary Dorr Corporation
Worksheet for Analysis of Cash Flows: Indirect Method
For Year Ended December 31, 2016
Account Change
Explanations
Debit Credit Debit Credit Balance
Marketable Equity Securities ……….. 0 ………. ………. ……… 0
Liabilities ……………………………. ………. 121,000 ………. (13) 121,000 0
Note Payable, Long-Term …………… 150,000 ………. (14) 150,000 ……… 0
Deferred Income Taxes ………………. ………. 12,000 ………. (8) 12,000 0
NCI ………………………………………….. ………. 18,000 (7) 15,000 (1) 33,000 0
Increase in Deferred Tax …………….. ………. ………. (8) 12,000 ………
Decrease in Allowance—Short-Term
Marketable Securities ……………… ………. ………. ………. (9) 11,000
Decrease in Accounts Receivable … ………. ………. (10) 22,000 ………
Depreciation Expense ………………… ………. ………. (11) 82,000 ………
Pay Dividend …………………………….. ………. ………. ………. (4) 58,000
Subsidiary Dividend …………………… ………. ………. ………. (7) 15,000
Payment on Long-Term Note Payable ………. ………. ………. (14) 150,000
………. ………. ………. 223,000
Net Cash from Financing ……………. ………. ………. ……….
179,000
6–19 Ch. 6—Problems
PROBLEM 6-4
Subsidiary calculations:
BEPS = 12,000
dividends preferred $4,000 $56,000 = $4.33
DEPS = 12.4$=
1,600 + 12,000
dividends preferred $4,000 + $52,000
a
b12,000 Sunny shares × 80% interest
DEPS = d
c
245 20,000
DEPS)Sunny $4.12 (10,560 dividends preferred $500 $55,000
+
×+
= 245 20,000
$43,507 $500 $55,000
+
+
PROBLEM 6-5
Determination and Distribution of Excess Schedule, Investment in Mercer Company
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………………… $375,000 $300,000 $ 75,000
Less book value of interest acquired:
Common stock ($2 par) …………… $ 20,000
Paid-in capital in excess of par … 50,000
Adjustment of identifiable accounts:
Worksheet Amortization
Adjustment Key Life per Year
Equipment ………………………………….. $100,000 debit D1 8 $12,500
Eliminations Consolidated
and Income
Dawn
Mercer Adjustments Statement
Sales ………………………………. $(1,000,000) $(600,000) (IS) $50,000 $(1,550,000)
Less cost of goods sold …….. 800,000 375,000 (IS) (50,000)
Income before tax …………….. $ (154,495)
Less provision for tax ……….. 47,098
Consolidated net income …… $ (107,397)
Less NCI …………………………. 3,083