Chapter 4

CONSOLIDATION TECHNIQUES AND PROCEDURES

Answers to Questions

1 Under the equity method, a parent amortizes patents from subsidiary investments by adjusting its subsidiary
investment and income accounts. Since patents and patent amortization accounts are not recorded on the parent’s
books, they are created for consolidated statement purposes through workpaper entries.

2 Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper adjusting entry in
which noncontrolling interest share is debited and noncontrolling interest is credited. The noncontrolling interest
share (debit) is carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest
for noncontrolling interest share is added to the beginning noncontrolling interest. The noncontrolling interest share
is calculated based on the subsidiary’s reported net income adjusted to reflect fair value through the amortization of
the excess of fair value over book value. This is the approach illustrated throughout this text.

3 Workpaper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity accounts are
alike in regard to the objectives of consolidation. Regardless of the configuration of the workpaper entries, the final
result of adjustments for these items is to eliminate them through workpaper entries. In other words, the investment
in subsidiary, income from subsidiary, and the capital stock, additional paid-in capital, retained earnings, and other
stockholders’ equity accounts of the subsidiary never appear in consolidated financial statements.

4 When the parent does not amortize fair value/book value differentials on its separate books, the parent’s income
from subsidiary and investment in subsidiary accounts are overstated in the year of acquisition. In subsequent years,
the income from the subsidiary, investment in subsidiary, and parent’s beginning retained earnings will be
overstated. The error may be corrected in the workpapers with the following entries:

Year of acquisition
Income from subsidiary XXX
Investment in subsidiary XXX
Subsequent year
Income from subsidiary XXX
Retained earnings — parent XXX
Investment in subsidiary XXX

By entering a correcting entry, all other workpaper entries are the same as if the parent provided for amortization on
its separate books.
If the errors are not corrected through the workpaper entries suggested above, the entry to eliminate the
income from subsidiary in the year of acquisition is prepared in the usual manner without further complications
because neither the beginning investment nor retained earnings accounts are affected by the omission. In subsequent
years the entry to eliminate income from subsidiary and dividends from subsidiary will have to be changed to
correct the beginning-of-the-period retained earnings as follows:

Income from subsidiary XXX

Retained earnings — parent XXX
Dividends (subsidiary) XXX
Investment in subsidiary XXX

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4-1
4-2 Consolidation Techniques and Procedures

5 Workpaper adjustments are not normally entered in the general ledger of the parent or any other entity. They are
used in the preparation of consolidated financial statements for a conceptual entity for which there are no formal
accounting records. An exception occurs when the adjusting entries involve the correction of an error. For example,
if a parent does not record a dividend from a subsidiary. Then the workpaper entry is recorded in the parent’s
separate books.

6 Workpapers are tools of the accountant that facilitate the consolidation of parent and subsidiary financial statements.
Given the tools available, the accountant should select those that are most convenient in the circumstances. If
financial statements are to be consolidated, the financial statement approach is the appropriate tool. The trial balance
approach is most convenient when the data are presented in the form of a trial balance. The accountant needs to be
familiar with both approaches to perform the work as efficiently as possible.

7 Workpaper adjustment and elimination entries as illustrated in this text are exactly the same when the trial balance
approach is used as when the financial statement approach is used.

8 The retained earnings of the parent will equal consolidated retained earnings if the equity method of accounting has
been correctly applied. In consolidating the financial statements of affiliated companies, the beginning retained
earnings of the parent are used as beginning consolidated retained earnings. If the equity method has not been
correctly applied, parent beginning retained earnings will not equal beginning consolidated retained earnings. In this
case, retained earnings of the parent are adjusted to a correct equity basis in order to establish the correct amount of
beginning consolidated retained earnings. Thus, workpaper adjustments to beginning retained earnings of the parent
are needed whenever the beginning retained earnings of the parent do not correctly reflect the equity method.

9 The noncontroling interest that appears in the consolidated balance sheet can be checked by first adjusting the equity
of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for any unamortized excess of
fair value over book value) and then multiplying by the noncontrolling interest percentage. Consolidated retained
earnings at a balance sheet date can be checked by comparing the amount with the parent’s retained earnings on the
same date. If consolidated retained earnings and parent retained earnings are not equal, either consolidated retained
earnings have been computed incorrectly, or parent retained earnings do not reflect a correct equity method of
accounting.

10 Consolidated assets and liabilities are reported for all equity holders—noncontrolling as well as controlling.
Therefore, the change in net cash from operations for a period results from noncontrolling interest share and
controlling interest share.

11 No. It relates to all interests in the consolidated entity. This difference is one of many inconsistencies in the concepts
underlying consolidated financial statements. Consider, for example, the error that could result from dividing cash
provided by operations by outstanding parent shares to compute cash flow per share.

12 The method used by a parent company in accounting for its subsidiary can be determined by examining the separate
financial statements of the parent company and the subsidiary. If the cost method is used, the parent company will
report dividend income from the subsidiary and the investment account will be stated at original cost (fair value). If
the equity method is used, the parent company will report investment income from the subsidiary, and the
investment account will reflect subsidiary income since acquisition. When the equity method is used but the
difference between investment fair value and book value has not been amortized on the parent company’s books, the
difference between the investment balance and underlying book value at any statement date will reflect the
difference between the investment fair value and underlying book value at the time of acquisition.

13 When the cost method is used, reciprocity between the investment account balance and the underlying subsidiary
equity is established by adjusting the parent company’s investment and retained earnings accounts for the parent’s
share of the change in subsidiary retained earnings between the dates the subsidiary was acquired and the beginning
of the current year.
SOLUTIONS TO EXERCISES

Solution E4-1

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Chapter 4 4-3
1 d 6 d
2 c 7 b
3 a 8 b
4 d 9 a
5 b 10 b

Solution E4-2
Preliminary computations (in thousands)
Investment cost January 2 $1,200
Implied total fair value of Son ($1,200 / 80%) $1,500
Less: Book value (1,000)
Excess fair value over book value $ 500
Excess allocated to:
Inventory $ 50
Remainder to goodwill 450
Excess fair value over book value $500

1 Income from Son

Son’s reported net income $280
Less: Excess allocated to inventory (sold in 2016) (50)
Son’s adjusted income $230
Pop’s 80% share $184

2 Noncontrolling interest share

Son’s adjusted income $230 ´ 20% noncontrolling interest $ 46

3 Noncontrolling interest December 31

Son’s equity book value $1,040
Add: Unamortized excess (Goodwill) 450
Son’s equity fair value $1,490
20% noncontrolling interest $ 298

4 Investment in Son December 31

Investment cost January 2 $1,200
Add: Income from Son (given)* 200
Less: Dividends ($120 ´ 80%) (192)
Investment in Son December 31 $1,208
* Assumes this is based on Son’s adjusted income

5 Noncontrolling interest share $ 50

Controlling interest share equals Parent NI under equity
method. 720.8
Consolidated net income $770.8
Investment income is given as $200,000 = $250,000 x 80%
Noncontrolling interest share is $250,000 x 20% = $50,000

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4-4 Consolidation Techniques and Procedures
Solution E4-3
1 $2,800,000 ($1,200,000 + $1,760,000 - $160,000 intercompany)

Preliminary computations for 2 and 3

Investment cost on January 1, 2016 $112,000
Implied total fair value of Sun ($112,000 / 70%) $160,000
Book value of Sun 120,000
Excess allocated entirely to Goodwill $ 40,000

2 Pam’s separate income for 2018 $96,000

Loss from investment in Sun ($4,000 ´ 70%) (2,800)
Controlling share of consolidated net income $93,200
Add: Noncontrolling share of consolidated net income
($4,000 Loss x 30%) (1,200)
Consolidated net income $92,000

3 Investment cost January 1, 2016 $112,000

Add: Share of income less dividends 2016 — 2018
($5,600 income - $4,000 dividends) ´ 70% 1,120
Investment balance December 31, 2018 $113,120

Solution E4-4

Preliminary computations
Investment cost $580,000
Implied total fair value of Son ($580,000 / 80%) $725,000
Book value 600,000
Total excess fair value over book value $125,000

Excess allocated to:

Equipment (5-year life) $ 50,000
Patents (10-year amortization period) 75,000
Total excess fair value over book value $125,000

Income from Son 2016   2017  

Son’s reported net income $120,000 $150,000
Less: Depreciation of excess allocated to equipment (10,000) (10,000)
Less: Amortization of patents ( 7,500) ( 7,500)
Son’s adjusted income $102,500 $132,500
Income from Son (80%) $ 82,000 $106,000

1 Consolidated net income for 2016

Pop’s net income = controlling share of consolidated net
income under equity method $340,000
Add: Noncontrolling interest share($102,500 x 20%) 20,500
Consolidated net income $360,500

2 Investment in Son December 31, 2016

Cost January 1 $580,000
Add: Income from Son — 2016 82,000
Less: Dividends from Son — 2016 ($80,000 ´ 80%) ( 64,000)
Investment in Son December 31 $598,000

3 Noncontrolling interest share — 2016

($102,500 adjusted income ´ 20%) $ 20,500

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Chapter 4 4-5

4 Noncontrolling interest December 31, 2017

Son’s equity book value at acquisition date $600,000
Add: Income less dividends for 2016 and 2017 (see note) 100,000
Son’s equity book value at December 31, 2017 700,000
Unamortized excess at December 31, 2017 90,000
Son’s equity fair value at December 31, 2017 $790,000
Noncontrolling interest percentage 20%
Noncontrolling interest December 31, 2017 $158,000

Note: Son’s income less dividends:

2016 Net Income $120,000

2016 Dividends ( 80,000)
2017 Net Income 150,000
2017 Dividends ( 90,000)
Total $100,000

Solution E4-5

1 c
2 a
3 b
4 c
5 d

Solution E4-6

Pam Corporation and Subsidiary

Partial Consolidated Cash Flows Statement
for the year ended December 31,

Cash Flows from Operating Activities

Controlling interest share of consolidated net income $100,000
Adjustments to reconcile controlling interest
share of consolidated net income to net cash
provided by operating activities:
Noncontrolling interest share $ 50,000
Undistributed income of equity investees (5,000)
Loss on sale of land 100,000
Depreciation expense 120,000
Patents amortization 16,000
Increase in accounts receivable (105,000)
Increase in inventories (45,000)
Decrease in accounts payable (20,000)
111,000
Net cash flows from operating activities $211,000

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4-6 Consolidation Techniques and Procedures
Solution E4-7
Pop Corporation and Subsidiary
Partial Consolidated Cash Flows Statement
for the year ended December 31,

Cash Flows from Operating Activities

Cash received from customers $1,290,000
Dividends received from equity investees 28,000
Less: Cash paid to suppliers $730,000
Cash paid to employees 108,000
Cash paid for other operating items 94,000
Cash paid for interest expense 48,000 980,000
Net cash flows from operating activities $ 338,000

Solution E4-8

1 Cost method
Cash 30,000
Dividend income 30,000
To record receipt of dividends ($40,000 ´ 75%).

2 Cost method
Investment cost January 1, 2018 $300,000
Less: Dividends in excess of earnings (15,000)
($30,000 - $10,000) ´ 75%
Investment account balance — cost method $285,000

3 Equity method
Investment in Son 45,000
Income from Son 45,000
To record share of Son’s net income ($60,000 ´ 75%).

Cash 30,000
Investment in Son 30,000
To record receipt of dividends ($40,000 ´ 75%).

4 Investment balance under equity method

Investment cost $300,000
Add: Share of income for 2018 and 2019 ($70,000 ´ 75%) 52,500
Less: Share of dividends for 2018 and 2019 ($70,000 ´ 75%) (52,500)
Investment in Son balance December 31, 2019 $300,000

5 Consolidated net income

Pop’s separate income $ 90,000
Add: Investment income 45,000
Controlling share of consolidated net income $135,000

Controlling share of consolidated net income $ 135,000

Add: Noncontrolling interest share ($60,000 x 25%) 15,000
Consolidated net income $150,000

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Chapter 4 4-7
Solutions to Problems

Solution P4-1 (in thousands of $)

Preliminary computations
Investment in Sun (75%) January 1, 2016 $4,800
Implied fair value of Sun ($4,800 / 75%) $6,400
Book value of Sun (4,800)
Total excess of fair value over book value $1,600
Excess allocated:
10% to inventories (sold in 2016) $ 160
40% to plant assets (use life 8 years) 640
50% to goodwill 800
Total excess of fair value over book value $1,600

1 Goodwill at December 31, 2020 (not amortized) $ 800

2 Noncontrolling interest share for 2020

Net income ($2,000 sales - $1,200 expenses) $ 800
Less: Amortization of excess
Plant assets ($640 / 8 yrs.) (80)
Adjusted Sun income $ 720
25% Share $ 180

3 Consolidated retained earnings December 31, 2019

Equal to Pam’s December 31, 2019 retained earnings
Since this a trial balance, reported retained earnings
equals beginning of 2020 retained earnings. $3,340

4 Consolidated retained earnings December 31, 2020

Pam’s retained earnings December 31, 2019 $3,340
Add: Pam’s net income for 2020 2,170
Less: Pam’s dividends for 2020 (1,000)
Consolidated retained earnings December 31 $4,510

5 Consolidated net income for 2020

Consolidated sales $10,000
Less: Consolidated expenses ($7,570 + $80 depreciation) (7,650)
Total consolidated income 2,350
Less: Noncontrolling interest share (180)
Controlling share of consolidated net income for 2020 $ 2,170

6 Noncontrolling interest December 31, 2019

Sun’s stockholders’ equity at book value $4,800
Unamortized excess after four years:
Inventory 0
Plant assets ($640 - $320) 320
Goodwill 800
Sun’s stockholders’ equity at fair value $5,920
25% Sun’s stockholders’ equity at fair value $1,480

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4-8 Consolidation Techniques and Procedures
Solution P4-1 (continued)

7 Noncontrolling interest December 31, 2020

Sun’s stockholders’ equity at book value $5,200
Unamortized excess after five years:
Inventory 0
Plant assets ($640 - $400) 240
Goodwill 800
Sun’s stockholders’ equity at fair value $6,240
25% Sun’s stockholders’ equity at fair value $1,560

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Chapter 4 4-9
Solution P4-2
1 Pop Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2016
(in thousands)
80% Adjustments and Consolidated
Pop Son Eliminations Statements
Income Statement
Sales $1,240 $ 400 $1,640
Income from Son 42 a 42
Cost of goods sold 800* 260* 1,060*
Operating expenses 308* 80* 388*
Consolidated NI $ 192
Noncontrol. share
($60,000´ 30%) c 18 18*
Controlling share $ 174 $ 60 $ 174
Retained Earnings
Retained earnings — Pop $ 260 $ 260
Retained earnings — Son $ 44 b 44
Controlling Share of net 174 60 174
income
Dividends 120* 40* a 28
c 12 120*
Retained earnings
December 31 $ 314 $ 64 $ 314
Balance Sheet
Cash $ 182 $ 60 $ 242
Receiv. — net 240 120 360
Inventories 96 80 176
PP&E — net 480 140 620
Investment in Son 196 a 14
______ _____ b 182
$1,194 $ 400 $1,398
Accounts payable $ 120 $ 72 $ 192
Other liabilities 80 48 128
Capital stock 600 200 b 200 600
Other paid-in capital 80 16 b 16 80
Retained earnings 314 64 314
$1,194 $ 400
Noncontrolling interest January 1 b 78
Noncontrolling interest December 31 __________ c 6 84
320 320 $1,398
*Deduct
Workpaper entries
a To eliminate income from Son and dividends received from Son and adjust the
investment in Son account to its beginning of the period balance.
b To eliminate reciprocal investment in Son and equity amounts of Son and to enter
beginning noncontrolling interest.
c To enter noncontrolling interest share of subsidiary income and dividends.

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4-10 Consolidation Techniques and Procedures
Solution P4-2 (continued)

2 Pop Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2016
(in thousands)
Sales $1,640
Less: Cost of goods sold 1,060
Gross profit 580
Operating expenses 388
Total consolidated net income 192
Less: Noncontrolling interest share 18
Controlling share of consolidated net income $ 174

Pop Corporation and Subsidiary

Consolidated Retained Earnings Statement
for the year ended December 31, 2016
Consolidated retained earnings January 1 $260
Add: Controlling share of onsolidated net income 174
Less: Dividends of Pop (120)
Consolidated retained earnings December 31 $314

Pop Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2016
Assets
Current assets:
Cash $242
Receivables — net 360
Inventories 176 $ 778
Plant assets — net 620
Total assets $1,398

Liabilities and Stockholders’ Equity

Liabilities:
Accounts payable $192
Other liabilities 128 $ 320

Stockholders’ equity:
Capital stock, $10 par $600
Other paid-in capital 80
Consolidated retained earnings 314
994
Add: Noncontrolling interest 84 1,078
Total liabilities and stockholders’ equity $1,398

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Chapter 4 4-11
Solution P4-3

Pam Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2016
(in thousands)
Adjustments and Consolidated
Pam Sun 75% Eliminations Statements
Income Statement
Sales $1,600 $400 $2,000
Income from Sun 55.2 a 55.2
Cost of sales 1,000* 200* 1,200*
Other expenses 388* 104* c 22.4 514.4*
Consolidated Net Income $ 285.6
Noncontrolling share ______ ____ f 18.4 18.4*
Controlling share of NI $267.2 $ 96 $ 267.2

Retained Earnings
Retained earnings — Pam $720 $ 720
Retained earnings — Sun $136 b 136
Controlling share of NI 267.2 96 267.2
Dividends 200* 64* a 48
f 16* 200*
Retained earnings
December 31 $787.2 $168 $ 787.2

Balance Sheet
Cash $ 212 $ 60 $ 272
Accounts receivable 344 80 424
Dividends receivable
from Sun 24 e 24
Inventories 380 40 420
Note receivable from Pam 20 d 20
Land 260 120 380
Buildings — net 680 320 1,000
Equipment — net 520 200 720
Investment in Sun 727.2 a 7.2
b 720
Patents ________ ____ b 224 c 22.4 201.6
$3,147.2 $840 $3,417.6

Accounts payable $ 340 $ 40 $ 380

Note payable to Sun 20 d 20
Dividends payable 32 e 24 8
Capital stock, $10 par 2,000 600 b 600 2,000
Retained earnings 787.2 168 787.2
$3,147.2 $840
Noncontrolling interest January 1 b 240
Noncontrolling interest December 31 _____ f 2.4= 242.4
1,100 1,100 $3,417.6
*Deduct

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4-12 Consolidation Techniques and Procedures
Solution P4-3 (continued)

Supporting Calculations

Sun’s value at acquisition

Book value at December 31, 2016 $768
Less: 2016 Net income (96)
Add: 2016 Dividends 64
Book value on January 1, 2016 $736
Fair value of patents 224
Sun’s fair value on January 1, 2016 $960

Purchase price (fair value) of Pam’s 75% share $720

Noncontrolling interest (25%) $240

Patents have a ten-year life, so amortization is $22,400 per year.

Sun’s Adjusted Income

Sun’s net income $ 96
Less: Amortization of Patents (22.4)
Sun’s adjusted income $ 73.6
Pam’s 75% share $ 55.2
Noncontrolling interest 25% share $ 18.4

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Chapter 4 4-13
Solution P4-4

Pop Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2016
(in thousands)
Adjustments and Consolidated
Pop Son 75% Eliminations Statements
Income Statement
Sales $1,600 $400 $2,000
Income from Son 72 a 72
Cost of sales 1,000* 200* 1,200*
Other expenses 388* 104* 492*
Consolidated NI $ 308
Noncontrolling share c 24 24*
Controlling share of NI $ 284 $ 96 $ 284

Retained Earnings
Retained earnings — Pop $ 720 $720
Retained earnings — Son $136 b 136
Controlling share of NI 284 96 284
Dividends 200* 64* a 48
c 16 200*
Retained earnings – Dec 31 $ 804 $168 $804

Balance Sheet
Cash $ 236 $ 60 $ 296
Accounts receivable 320 80 400
Dividends receivable
from Son 24 e 24
Inventories 380 40 420
Note receivable from Pop 20 d 20
Land 260 120 380
Buildings — net 680 320 1,000
Equipment — net 520 200 720
Investment in Son 744 a 24
b 720
Goodwill ______ ____ b 224 224
$3,164 $840 $3,440

Accounts payable $ 340 $ 40 $ 380

Note payable to Son 20 d 20
Dividends payable 32 e 24 8
Capital stock, $10 par 2,000 600 b 600 2,000
Retained earnings 804 168 804
$3,164 $840
Noncontrolling interest January 1 b 240
Noncontrolling interest December 31 __________ c 8 248
1,100 1,100 $3,440
*Deduct

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4-14 Consolidation Techniques and Procedures
Solution P4-4(continued)

Supporting Calculations
Son’s value at acquisition:
Book value at December 31, 2016 $768
Less: 2016 Net income (96)
Add: 2016 Dividends 64
Book value on January 1, 2016 $736

Purchase price of Pop’s 75% share $720

Implied fair value of Son ($720 / 75%) $960
Son’s book value 736
Excess allocated to Goodwill $224
Noncontrolling interest (25% x $960) $240

Son’s Adjusted Income

Son’s net income $96
Less: Amortization of Goodwill (0)
Son’s adjusted income $96
Pop’s 75% share $72
Noncontrolling interest 25% share $24

Solution P4-5

Preliminary computations

Allocation of excess fair value over book value

Cost of 70% interest January 1 $ 980,000
Implied fair value of Sun ($980,000 / 70%) $1,400,000
Book value of Sun (1,200,000)
Excess fair value over book value $ 200,000
Noncontrolling interest – 30% of fair value at acquisition $ 420,000

Excess allocated
Undervalued inventory items sold in 2016 $ 10,000
Undervalued buildings (7 year life) 28,000
Undervalued equipment (3 year life) 42,000
Trademark 80,000
Remainder to Goodwill 40,000
Excess fair value over book value $200,000

Calculation of income from Sun

Sun’s net income $200,000
Less: Undervalued inventories sold in 2016 (10,000)
Less: Additional Depreciation on building ($28,000/7 years) (4,000)
Less: Additional Depreciation on equipment ($42,000/3 years) (14,000)
Less: Trademark amortization ($80,000/40 years) (2,000)
Sun’s adjusted income $170,000
Pam’s 70% controlling interest share $119,000
Noncontrolling interest’s 30% share $ 51,000

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Chapter 4 4-15
Solution P4-5 (continued)

Workpaper entries for 2016

a Income from Sun 119,000

Dividends (Sun) 70,000
Investment in Sun 49,000

b Capital stock (Sun) 1,000,000

Retained earnings (Sun) January 1 200,000
Unamortized excess 200,000
Investment in Sun 980,000
Noncontrolling interest January 1 420,000

c Cost of sales (for inventory items) 10,000

Buildings — net 28,000
Equipment — net 42,000
Trademarks 80,000
Goodwill 40,000
Unamortized excess 200,000

d Depreciation expense 4,000

Buildings — net 4,000

e Depreciation expense 14,000

Equipment — net 14,000

f Other expenses 2,000

Trademarks 2,000

g Accounts payable 20,000

Accounts receivable 20,000

h Dividends payable 28,000

Dividends receivable 28,000

i Noncontrolling Interest Share 51,000

Dividends — Sun 30,000
Noncontrolling Interest 21,000

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4-16 Consolidation Techniques and Procedures
Solution P4-5 (continued)
Pam Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2016
(in thousands)
Adjustments and Consolidated
Pam Sun 70% Eliminations Statements
Income Statement
Sales $ 1,600 $1,400 $3,000
Income from Sun 119 a 119
Cost of sales 600* 800* c 10 1,410*
Depreciation expense 308* 120* d 4 446*
e 14
Other expenses 320* 280* f 2 602*
Consolidated NI $ 542
Noncontrolling share i 51 51*

Controlling share of NI $ 491 $ 200 $ 491

Retained Earnings
Retained earnings — Pam $ 600 $ 600
Retained earnings — Sun $ 200 b 200
Net income 491 200 491
Dividends 400* 100* a 70
i 30 400*
Retained earnings – Dec 31 $ 691 $ 300 $ 691
Balance Sheet
Cash $ 172 $ 120 $ 292
Accounts receivable 200 140 g 20 320
Dividends receivable 28 h 28
Inventories 300 200 500
Other current assets 140 60 200
Land 100 200 300
Buildings — net 280 320 c 28 d 4 624
Equipment — net 1,140 660 c 42 e 14 1,828
Investment in Sun 1,029 a 49
b 980
Trademarks c 80 f 2 78
Goodwill c 40 40
Unamortized excess _______ ______ b 200 c 200 ______
$ 3,389 $1,700 $4,182
Accounts payable $ 400 $ 170 g 20 $ 550
Dividends payable 200 40 h 28 212
Other liabilities 98 190 288
Capital stock, $10 par 2,000 1,000 b 1,000 2,000
Retained earnings 691 300 691
$ 3,389 $1,700
Noncontrolling interest January 1 b 420
Noncontrolling interest December 31 _________ i 21 441
1,838 1,838 $4,182
*Deduct

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Chapter 4 4-17
Solution P4-6

Supporting computations

Ownership percentage 13,500/15,000 shares = 90%

Investment cost (13,500 shares ´ $60) $810,000

Implied fair value of Son ($810,000 / 90%) $900,000
Book value of Son 660,000
Excess fair value over book value $240,000

Excess allocated to
Land $ 80,000
Remainder to patents 160,000
Excess fair value over book value $240,000

Income from Son

Son’s reported net income $ 96,000
Less: Patent amortization (16,000)
Son’s adjusted income $ 80,000

Pop’s share of Son’s income (90%) $ 72,000

Noncontrolling interest share (10%) $ 8,000

Investment in Son December 31, 2017

Cost January 1, 2016 $810,000
Pop’s share of the change in Son’s retained earnings
($168,000 - i$60,000) ´ 90% 97,200
Less: Pop’s share (90%) of Patent amortization for 2 years (28,800)
Investment in Son December 31 $878,400

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4-18 Consolidation Techniques and Procedures
Solution P4-6 (continued)

Pop Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2017
(in thousands)
Adjustments and Consolidated
Pop 90% Son Eliminations Statements
Income Statement
Sales $1,600 $ 400 $2,000
Income from Son 72 a 72
Cost of sales 1,000* 200* 1,200*
Other expenses 402.4* 104* c 16 522.4*
Consolidated NI $ 277.6
Noncontrolling share g 8 8 *
Controlling share of NI $ 269.6 $ 96 $ 269.6

Retained Earnings
Retained earnings — Pop $ 708 $ 708
Retained earnings — Son $ 136 b 136
Net income 269.6 96 269.6
Dividends 200* 64* a 57.6
g 6.4 200*
Retained earnings – Dec 31 $ 777.6 $ 168 $ 777.6

Balance Sheet
Cash $ 72 $ 60 $ 132
Accounts receivable 320 80 f 20 380
Dividends receivable 28.8 d 28.8
Inventories 380 40 420
Note receivable — Pop 20 e 20
Investment in Son 878.4 a 14.4
b 864
Land 260 120 b 80 460
Buildings — net 680 320 1,000
Equipment — net 520 200 720
Patents ________ _____ b 144 c 16 128
$3,139.2 $ 840 $3,240
Accounts payable $ 341.6 $ 40 f 20 $ 361.6
Note payable to Son 20 e 20
Dividends payable 32 d 28.8 3.2
Capital stock 2,000 600 b 600 2,000
Retained earnings 777.6 168 777.6
$3,139.2 $ 840
Noncontrolling interest January 1 b 96
Noncontrolling interest December 31 _________ g 1.6 97.6
1,124.8 1,124.8 $3,240
*Deduct

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-19
Solution P4-7
Preliminary computations
Allocation of excess fair value over book value
Cost of 70% interest January 1 $490,000
Implied fair value of Sun ($490,000 / 70%) $700,000
Book value of Sun (600,000)
Excess fair value over book value $100,000

Excess allocated
Undervalued inventory items sold in 2016 $ 5,000
Undervalued buildings (7 year life) 14,000
Undervalued equipment (3 year life) 21,000
Remainder to goodwill 60,000
Excess fair value over book value $100,000

Calculation of income from Sun

Sun’s reported net income $100,000
Less: Undervalued inventories sold in 2016 (5,000)
Less: Depreciation on building ($14,000/7 years) (2,000)
Less: Depreciation on equipment ($21,000/3 years) (7,000)
Adjusted income from Sun $ 86,000
Pam’s 70% controlling share $ 60,200
30% Noncontrolling interest share $ 25,800

Workpaper entries for 2016

a Income from Sun 60,200
Dividends (Sun) 35,000
Investment in Sun 25,200

b Capital stock (Sun) 500,000

Retained earnings (Sun) - January 1 100,000
Unamortized excess 100,000
Investment in Sun 490,000
Noncontrolling interest - January 1 210,000

c Cost of sales (for inventory items) 5,000

Buildings — net 14,000
Equipment — net 21,000
Goodwill 60,000
Unamortized excess 100,000

d Depreciation expense 2,000

Buildings — net 2,000

e Depreciation expense 7,000

Equipment — net 7,000

f Noncontrolling Interest Share 25,800

Dividends — Sun 15,000
Noncontrolling Interest 10,800

g Accounts payable 10,000

Accounts receivable 10,000

h Dividends payable 14,000

Dividends receivable 14,000
Copyright © 2018 Pearson Education, Inc.
4-20 Consolidation Techniques and Procedures
Solution P4-7 (continued)
Pam Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2016
(in thousands)
Adjustments and Consolidated
Pam Sun 70% Eliminations Statements
Income Statement
Sales $ 800 $ 700 $1,500
Income from Sun 60.2 a 60.2
Gain on equipment 10 10
Cost of sales 300* 400* c 5 705*
Depreciation expense 155* 60* d 2 224*
e 7
Other expenses 160* 140* 300*
Consolidated NI $ 281
Noncontrolling share ________ _____ f 25.8 25.8*
Controlling share of NI $ 255.2 $ 100 $ 255.2
Retained Earnings
Retained earnings — Pam $ 300 $ 300
Retained earnings — Sun $ 100 b 100
Controlling share of NI 255.2 100 255.2
Dividends 200* 50* a 35
f 15 200*
Retained earnings – Dec 31 $ 355.2 $ 150 $ 355.2
Balance Sheet
Cash $ 96 $ 60 $ 156
Accounts receivable 100 70 g 10 160
Dividends receivable 14 h 14
Inventories 150 100 250
Other current assets 70 30 100
Land 50 100 150
Buildings — net 140 160 c 14 d 2 312
Equipment — net 570 330 c 21 e 7 914
Investment in Sun 515.2 a 25.2
b 490
Goodwill c 60 60
Unamortized excess ________ _____ b 100 c 100 ______
$1,705.2 $ 850 $2,102
Accounts payable $ 200 $ 85 g 10 $ 275
Dividends payable 100 20 h 14 106
Other liabilities 50 95 145
Capital stock, $10 par 1,000 500 b 500 1,000
Retained earnings 355.2 150 355.2
$1,705.2 $ 850
Noncontrolling interest January 1 b 210
Noncontrolling interest December 31 _________ f 10.8 220.8
919 919 $2,102
*Deduct

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-21
Solution P4-8

Supporting computations

Ownership percentage 13,500/15,000 shares = 90%

Investment cost (13,500 shares ´ $15) $202,500

Implied fair value of Son ($202,500 / 90%) $225,000
Book value of Son 165,000
Excess fair value over book value $ 60,000

Excess allocated to
Land $ 20,000
Remainder to goodwill 40,000
Excess fair value over book value $ 60,000

Income from Son

Pop’s controlling share of Son’s income ($24,000 ´ 90%) $ 21,600

Investment in Son December 31, 2017

Cost January 1, 2016 $202,500
Pop’s share of the change in Son’s retained earnings
($42,000 - $15,000) ´ 90% 24,300
Investment in Son December 31, 2017 $226,800

Noncontrolling interest at December 31, 2017 (10% of fair value) $ 25,200

(($225,000 + $42,000 - $15,000) x 10%)

Copyright © 2018 Pearson Education, Inc.

4-22 Consolidation Techniques and Procedures
Solution P4-8 (continued)

Pop Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2017
(in thousands)
Adjustments and Consolidated
Pop 90% Son Eliminations Statements
Income Statement
Sales $ 400 $ 100 $ 500
Income from Son 21.6 a 21.6
Cost of sales 250* 50* 300*
Expenses 100.6* 26* 126.6*
Consolidated NI $ 73.4
Noncontrolling share c 2.4 2.4*
Controlling share of NI $ 71 $ 24 $ 71

Retained Earnings
Retained earnings — Pop $ 181 $ 181
Retained earnings — Son $ 34 b 34
Controlling share of NI 71 24 71
Dividends 50* 16* a 14.4
c 1.6 50*
Retained earnings – Dec 31 $ 202 $ 42 $ 202

Balance Sheet
Cash $ 18 $ 15 $ 33
Accounts receivable 80 20 f 5 95
Dividends receivable 7.2 d 7.2
Inventories 95 10 105
Note receivable — Pop 5 e 5
Investment in Son 226.8 a 7.2
b 219.6
Land 65 30 b 20 115
Buildings — net 170 80 250
Equipment — net 130 50 180
Goodwill _____ _____ b 40 40
$ 792 $ 210 $ 818

Accounts payable $ 85 $ 10 f 5 $ 90
Note payable to Son 5 e 5
Dividends payable 8 d 7.2 .8
Capital stock 500 150 b 150 500
Retained earnings 202 42 202
$ 792 $ 210
Noncontrolling interest January 1 b 24.4
Noncontrolling interest December 31 _________ c .8 25.2
285.2 285.2 $ 818
*Deduct

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-23
Solution P4-9

Pam Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2016
(in thousands)
Adjustments and Consolidated
Pam 80% Sun Eliminations Statements
Income Statement
Sales $ 800 $ 440 $1,240
Income from Sun 68 a 68
Cost of sales 320* 160* b 50 530*
Depreciation expense 160* 80* d 20 260*
Other expenses 102* 40* g 5 147*
Consolidated NI $ 303
Noncontrolling share c 17 17*
Controlling share of NI $ 286 $ 160 $ 286

Retained Earnings
Retained earnings — Pam $ 300 $ 300
Retained earnings — Sun $ 200 b 200
Controlling share of NI 286 160 286
Dividends 160* 80* a 64
c 16 160*
Retained earnings – Dec 31 $ 426 $ 280 $ 426

Balance Sheet
Cash $ 118 $ 120 $ 238
Trade receivables — net 112 160 e 16 256
Dividends receivable 32 f 32
Inventories 160 120 280
Land 60 120 180
Buildings — net 260 280 540
Equipment — net 800 400 b 100 d 20 1,280
Investment in Sun 844 a 4
b 840
Patents ______ _____ b 100 g 5.0 95
$2,386 $1,200 $2,869

Accounts payable $ 160 $ 200 e 16 $ 344

Dividends payable 400 40 f 32 408
Other liabilities 200 80 280
Capital stock 1,200 600 b 600 1,200
Retained earnings 426 280 426
$2,386 $1,200
Noncontrolling interest January 1 b 210
Noncontrolling interest December 31 _________ c 1 211
1,208 1,208 $2,869
*Deduct

Copyright © 2018 Pearson Education, Inc.

4-24 Consolidation Techniques and Procedures
Solution P4-9 (continued)

Supporting computations
Investment cost January 1, 2016 $ 840,000
Implied fair value of Sun ($840,000 / 80%) $1,050,000
Book value of Sun 800,000
Excess fair value over book value $ 250,000
Excess allocated:
Undervalued inventory $ 50,000
Undervalued equipment 100,000
Remainder to patents 100,000
Excess fair value over book value $250,000

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-25
Solution P4-10

Pop Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2016
(in thousands)
80% Adjustments and Consolidated
Pop Son Eliminations Statements
Income Statement
Sales $ 400 $ 220 $ 620
Income from Son 36 a 36
Cost of sales 160* 80* b 25 265*
Depreciation expense 80* 40* d 10 130*
Other expenses 51* 20* 71*
Consolidated NI $ 154
Noncontrolling share _____ _____ c 9 9*
Controlling share of NI $ 145 $ 80 $ 145

Retained Earnings
Retained earnings — Pop $ 150 $ 150
Retained earnings — Son $ 100 b 100
Controlling share of NI 145 80 145
Dividends 80* 40* a 32
c 8 80*
Retained earnings – Dec 31 $ 215 $ 140 $ 215

Balance Sheet
Cash $ 59 $ 60 $ 119
Trade receivables — net 56 80 e 8 128
Dividends receivable 16 f 16
Inventories 80 60 140
Land 30 60 90
Buildings — net 130 140 270
Equipment — net 400 200 b 50 d 10 640
Investment in Son 424 a 4
b 420
Goodwill ______ _____ b 50 50
$1,195 $ 600 $1,437

Accounts payable $ 80 $ 100 e 8 $ 172

Dividends payable 200 20 f 16 204
Other liabilities 100 40 140
Capital stock 600 300 b 300 600
Retained earnings 215 140 215
$1,195 $ 600

Noncontrolling interest January 1 b 105

Noncontrolling interest December 31 ________ c 1 106
604 604 $1,437
*Deduct

Copyright © 2018 Pearson Education, Inc.

4-26 Consolidation Techniques and Procedures
Solution P4-10 (continued)

Supporting computations
Investment cost January 1, 2016 $420,000
Implied fair value of Son ($420,000 / 80%) $525,000
Book value of Son 400,000
Excess fair value over book value $125,000
Excess allocated:
Undervalued inventory $ 25,000
Undervalued equipment 50,000
Remainder to goodwill 50,000
Excess fair value over book value $125,000

Income from Son

Son’s reported net income $ 80,000
Less amortization of excess fair value:
Inventory (25,000)
Depreciation ($50,000 / 5 years) (10,000)
Son’s adjusted income $ 45,000

Pop’s 80% controlling share $ 36,000

20% Noncontrolling interest share $ 9,000

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-27
Solution P4-11

Supporting computations
Investment cost December 31, 2016 $170,000
Implied fair value of Sun($170,000 / 80%) $212,500
Book value of Sun 150,000
Excess fair value over book value $ 62,500

Unamortized
Allocation Amortization Excess
of Excess 2017 — 2020 December 31, 2020
Inventories $ 8,750 $ 8,750 $ ---
Plant assets — net 22,500 10,000 12,500
Patents 31,250 25,000 6,250
$62,500 $43,750 $18,750

Pam Corporation and Subsidiary

Consolidated Balance Sheet Workpapers
on December 31, 2020

Adjustments and Consolidated

Pam Sun 80% Eliminations Balance Sheet
Assets
Cash $ 41,000 $ 35,000 $ 76,000
Trade receivables 60,000 55,000 c 5,000 110,000
Dividends receivable 8,000 d 8,000
Advance to Sun 25,000 e 25,000
Inventories 125,000 35,000 160,000
Plant assets — net 300,000 175,000 b 12,500 487,500
Investment in Sun 191,000 a 191,000
Patents b 6,250 6,250
Unamortized excess ________ ________ a 18,750 b 18,750 ________
Total assets $750,000 $300,000 $839,750

Equities
Accounts payable $ 50,000 $ 45,000 c 5,000 $ 90,000
Dividends payable 10,000 d 8,000 2,000
Advance from Pam 25,000 e 25,000
Capital stock 400,000 100,000 a 100,000 400,000
Retained earnings 300,000 120,000 a 120,000 300,000
Noncontrolling interest ________ ________ _________ a 47,750 47,750
Total equities $750,000 $300,000 295,500 295,500 $839,750

Copyright © 2018 Pearson Education, Inc.

4-28 Consolidation Techniques and Procedures
Solution P4-12

Preliminary computations
Investment cost $240,000
Implied fair value Son ($240,000 / 80%) $300,000
Book value of Son 225,000
Excess fair value over book value $ 75,000

Allocation of differential
Plant assets $ 50,000
Goodwill 25,000
Excess fair value over book value $ 75,000

Amortization
Plant assets $50,000/4 years = $12,500 per year

Investment account balance at December 31, 2017

Underlying book value $290,000
Add: Unamortized excess allocated to plant assets
($50,000 - $25,000 depreciation) 25,000
Add: Unamortized goodwill 25,000
Fair value of Son at December 31 $340,000
Investment account balance at December 31 (80%) $272,000
Noncontrolling interest at December 31 (20%) $ 68,000

The investment account balance is overstated at $280,000 for

the $8,000 dividend receivable.

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-29
Solution P4-12 (continued)

Pop Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2017
(in thousands)
Adjustments and Consolidated
Pop Son 80% Eliminations Statements
Income Statement
Sales $900 $ 300 $1,200
Income from Son 38 c 38
Cost of sales 600* 150* 750*
Operating expense 190* 90* e 12.5 292.5*
Consolidated NI $ 157.5
Noncontrolling share ____ _____ f 9.5 9.5*
Controlling share of NI $148 $ 60 $ 148

Retained Earnings
Retained earnings — Pop $122 $ 122
Retained earnings — Son $ 50 d 50
Controlling share of NI 148 60 148
Dividends 100* 20* c 16
f 4 100*
Retained earnings – Dec 31 $170 $ 90 $ 170

Balance Sheet
Cash $ 6 $ 15 a 20 $ 41
Accounts receivable 26 20 h 5 41
Inventories 82 60 142
Advance to Son 20 a 20
Other current assets 80 5 85
Land 160 30 190
Plant assets — net 340 230 d 37.5 e 12.5 595
Investment in Son 280 b 8
c 22
d 250
Dividends receivable b 8 g 8
Goodwill ______ _____ d 25 25
$994 $ 360 $1,119

Accounts payable $ 24 $ 15 h 5 $ 34
Dividends payable 10 g 8 2
Other liabilities 100 45 145
Capital stock 700 200 d 200 700
Retained earnings 170 90 170
$994 $ 360
Noncontrolling interest January 1 d 62.5
Noncontrolling interest December 31 _______ f 5.5 68
413.5 413.5 $1,119
*Deduct

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4-30 Consolidation Techniques and Procedures
Solution P4-13

Supporting computations
Investment cost January 1, 2016 $ 80,000
Implied fair value of Sun ($80,000 / 80%) $100,000
Book value of Sun 90,000
Excess fair value over book value $ 10,000

Excess allocated to
Inventory (sold in 2016) $ 1,000
Equipment (4-year remaining use life) 4,000
Intangible assets (40-year amortization period) 5,000
Excess fair value over book value $10,000

Income from Sun for 2016

Sun’s net income $ 15,000
Less: Excess allocated to inventories (1,000)
Less: Amortization of excess allocated to equipment
($4,000/4 years) (1,000)
Less: Amortization of intangibles ($5,000/40 years) (125)
Sun’s adjusted income for 2016 $ 12,875

Pam’s 80% controlling interest share $ 10,300

Noncontrolling interest share for 2016 (20%) $ 2,575

Income from Sun for 2017

Sun’s net income $ 20,000
Less: Amortization of excess allocated to equipment
($4,000/4 years) (1,000)
Less: Amortization of intangibles ($5,000/40 years) (125)
Sun’s adjusted income for 2017 $ 18,875

Pam’s 80% controlling interest share $ 15,100

Noncontrolling interest share for 2017 (20%) $ 3,775

Note: Since the prior year’s income is not affected by the current year’s error of
omission, the workpapers for 2017 are easier to prepare without an additional
conversion-to-equity entry.

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-31
Solution P4-13 (continued)

Pam Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2016

Adjustments and Consolidated

Pam Sun 80% Eliminations Statements
Income Statement
Sales $ 160,000 $ 80,000 $ 240,000
Income from Sun 10,300 a 10,300
Cost of sales 105,000* 35,000* b 1,000 141,000*
Operating expenses 35,000* 30,000* c 1,000 66,125*
d 125
Consolidated NI $ 32,875
Noncontrolling share f 2,575 2,575*
Controlling share of NI $ 30,300 $ 15,000 $ 30,300

Retained Earnings
Retained earnings — Pam $ 70,000 $ 70,000
Retained earnings — Sun $ 30,000 b 30,000
Controlling share of NI 30,300 15,000 30,300
Dividends 10,000* 5,000* a 4,000
f 1,000 10,000*
Retained earnings – Dec 31 $ 90,300 $ 40,000 $ 90,300

Balance Sheet
Cash $ 24,700 $ 15,000 $ 39,700
Trade receivables — net 25,000 20,000 45,000
Dividends receivable 4,000 0 e 4,000
Inventories 40,000 30,000 70,000
Plant & equipment — net 100,000 55,000 b 4,000 c 1,000 158,000
Investment in Sun 86,300 _________ a 6,300
b 80,000
Intangibles b 5,000 d 125 4,875
$ 280,000 $ 120,000 $ 317,575

Accounts payable $ 20,700 $ 15,000 $ 35,700

Dividends payable 9,000 5,000 e 4,000 10,000
Capital stock 100,000 40,000 b 40,000 100,000
Other paid-in capital 60,000 20,000 b 20,000 60,000
Retained earnings 90,300 40,000 90,300
$ 280,000 $ 120,000
Noncontrolling interest January 1 b 20,000
Noncontrolling interest December 31 ________ f 1,575 21,575
118,000 118,000 $ 317,575
*Deduct

Copyright © 2018 Pearson Education, Inc.

4-32 Consolidation Techniques and Procedures
Solution P4-13 (continued)

Pam Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2017

Adjustments and Consolidated

Pam Sun 80% Eliminations Statements
Income Statement
Sales $ 170,000 $ 90,000 $ 260,000
Income from Sun 16,000 a 16,000
Cost of sales 110,000* 35,000* 145,000*
Operating expenses 30,000* 35,000* c 1,000 66,125*
d 125
Consolidated NI $ 48,875
Noncontrolling share f 3,775 3,775*
Controlling share of NI $ 46,000 $ 20,000 $ 45,100

Retained Earnings
Retained earnings — Pam $ 90,300 $ 90,300
Retained earnings — Sun $ 40,000 b 40,000
Controlling share of NI 46,000 20,000 45,100
Dividends 15,000* 10,000* a 8,000
f 2,000 15,000*
Retained earnings – Dec 31 $ 121,300 $ 50,000 $ 120,400

Balance Sheet
Cash $ 26,700 $ 20,000 $ 46,700
Trade receivables — net 45,000 30,000 75,000
Dividends receivable 4,000 e 4,000
Inventories 40,000 30,000 70,000
Plant & equipment — net 95,000 60,000 b 3,000 c 1,000 157,000
Investment in Sun 94,300 a 8,000
b 86,300
Intangible assets _________ _________ b 4,875 d 125 4,750
$ 305,000 $ 140,000 $ 353,450
Accounts payable $ 17,700 $ 25,000 $ 42,700
Dividends payable 6,000 5,000 e 4,000 7,000
Capital stock 100,000 40,000 b 40,000 100,000
Other paid-in capital 60,000 20,000 b 20,000 60,000
Retained earnings 121,300 50,000 120,400
$ 305,000 $ 140,000
Noncontrolling interest January 1 b 21,575
Noncontrolling interest December 31 _________ f 1,775 23,350
132,775 132,775 $ 353,450
*Deduct

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-33
Solution P4-14

Preliminary computations
Investment cost $198,000
Implied fair value of Son ($198,000 / 90%) $220,000
Book value of Son 160,000
Excess fair value over book value $ 60,000

Excess allocated to:

Inventories (sold in 2016) $ 20,000
Patents (10-year remaining useful life) 40,000
Excess fair value over book value $ 60,000

1 Analysis of investment in Son account

Fair value of Son January 5, 2016 $220,000

Add: Change in retained earnings from
January 5, 2016 to December 31, 2018 100,000
Less: Amortization of excess
Allocated to inventories and amortized in 2016 (20,000)
Allocated to patents and amortized over 10 years
($40,000/10 years) ´ 3 years (12,000)
Fair value at December 31, 2018 288,000
Add: Income from Son for 2019 36,000
Less: Dividends in 2019 (20,000)
Fair value at December 31, 2019 $304,000

Investment in Son on December 31, 2018 (90% fair value) $259,200

Investment in Son on December 31, 2019 (90% fair value) $273,600
Noncontrolling interest on Dec. 31, 2018 (10% fair value) $ 28,800
Noncontrolling interest on Dec. 31, 2019 (10% fair value) $ 30,400

Copyright © 2018 Pearson Education, Inc.

4-34 Consolidation Techniques and Procedures
Solution P4-14 (continued)

Pop Company and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2019

Adjustments and Income Retained Balance

Pop Son Eliminations Statement Earnings Sheet
Debits
Cash $ 22,000 $ 30,000 $ 52,000
Accounts receivable 30,000 50,000 80,000
Plant assets 440,000 360,000 800,000
Investment a 14,400
in Son 273,600 b 259,200
Patents b 28,000 c 4,000 24,000
Cost of goods sold 100,000 60,000 $160,000*
Operating expenses 50,000 80,000 c 4,000 134,000*
Dividends 40,000 20,000 a 18,000 $ 40,000*
d 2,000 ________
$955,600 $600,000 $956,000

Credits
Accumulated
depreciation $180,000 $100,000 280,000
Liabilities 160,000 60,000 220,000
Capital stock 200,000 120,000 b 120,000 200,000
Paid-in-excess 40,000 40,000
Retained earnings 143,200 140,000 b 140,000 143,200
Sales 200,000 180,000 380,000
Income from Son 32,400 ________ a 32,400
$955,600 $600,000
Noncontrolling interest Dec 31, 2018 b 28,800
Noncontrolling interest share
($36,000 adj. inc. x 10%) d 3,600 3,600*
Controlling share of NI $ 82,400 82,400
Consolidated retained earnings $185,600 185,600
Noncontrolling interest Dec 31, 2019 ________ d 1,600 30,400
328,000 $956,000
328,000
*Deduct

a To eliminate income from subsidiary and dividends received and reduce the investment
account to its beginning-of-the-period balance.
b To eliminate reciprocal investment and subsidiary equity amounts, establish beginning
noncontrolling interest, and adjust patents for the unamortized excess as of the
beginning of the period.
c To amortize excess allocated to patents for 2019.
d To enter noncontrolling interest share of subsidiary income and dividends.

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-35
Solution P4-15

1 Journal entries on Pam’s books

January 1, 2016
Investment in Sun (90%) 36,000
Cash 36,000
To record purchase of 90% of Sun’s stock for cash.

July 1, 2016
Investment in Ell (25%) 14,000
Cash 14,000
To record purchase of 25% of Ell’s stock for cash.

November 2016
Cash 5,400
Investment in Sun (90%) 5,400
To record receipt of 90% of Sun’s $6,000 dividends.

November 2016
Cash 2,500
Investment in Ell (25%) 2,500
To record receipt of 25% of Ell’s $10,000 dividends.

December 31, 2016

Investment in Sun (90%) 9,000
Income from Sun 9,000
To record Share of Sun’s reported income
($56,000 - $46,000) ´ 90%

December 31, 2016

Investment in Ell (25%) 1,400
Income from Ell 1,400
To record investment income from Ell for
2016 computed as:
Share of Ell’s reported income $ 1,500
($60,000-$48,000)´1/2 year ´ 25%
Less: Amortization of excess
[$14,000 – ($48,000 ´ 25%)]
¸ 10 years ´ 1/2 year (100)
$ 1,400

Copyright © 2018 Pearson Education, Inc.

4-36 Consolidation Techniques and Procedures
Solution P4-15 (continued)

2 Pam’s separate company financial statements

Pam Corporation
Income Statement
for the year ended December 31, 2016

Revenues
Sales $200,000
Income from Sun 9,000
Income from Ell 1,400
Total revenue $210,400
Costs and expenses
Cost of sales $120,000
Other expenses 50,000
Total costs and expenses 170,000
Net income $ 40,400

Pam Corporation
Retained Earnings Statement
for the year ended December 31, 2016

Retained earnings January 1 $ 40,000

Add: Net income 40,400
Deduct: Dividends (20,000)
Retained earnings December 31 $ 60,400

Pam Corporation
Balance Sheet
at December 31, 2016

Assets
Current assets:
Cash $ 37,900
Other current assets 80,000 $117,900
Plant assets — net 240,000
Investments:
Investment in Sun (90%) $ 39,600
Investment in Ell (25%) 12,900 52,500

Total assets $410,400

Liabilities and stockholders’ equity

Current liabilities $ 50,000
Stockholders’ equity:
Capital stock $300,000
Retained earnings December 31 60,400 360,400

Total liabilities and stockholders’ equity $410,400

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-37
Solution P4-15 (continued)

3 Consolidation workpapers — trial balance format

Pam Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2016

90% Adjustments and Income Retained Balance

Pam Sun Eliminations Statement Earnings Sheet
Debits
Cash $ 37,900 $ 8,000 $ 45,900
Other current assets 80,000 22,000 102,000
Plant assets — net 240,000 28,000 268,000
Investment in a 3,600
Sun 39,600 b 36,000
Investment in Ell 12,900 12,900
Cost of sales 120,000 32,000 $152,000*
Other expenses 50,000 14,000 64,000*
Dividends 20,000 6,000 a 5,400 $ 20,000*
d 600* ________
Total debits $600,400 $110,000 $428,800

Credits
Current liabilities $ 50,000 $ 14,000 $ 64,000
Capital stock 300,000 36,000 b 36,000 300,000
Retained earnings 40,000 4,000 b 4,000 40,000
Sales 200,000 56,000 256,000
Income from Sun 9,000 a 9,000
Income from Ell 1,400 ________ 1,400
Total credits $600,400 $110,000
Noncontrolling
interest - January 1 b 4,000
Noncontrolling interest share
$10,000 ´ 10% d 1,000 1,000*
Controlling share of NI $ 40,400 40,400
Consolidated retained earnings $ 60,400 60,400
Noncontrolling interest
December 31 ________ d 400 4,400
50,000 50,000 $428,800

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4-38 Consolidation Techniques and Procedures
Solution P4-15 (continued)

4 Consolidated financial statements

Pam Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2016
Revenues
Sales $256,000
Income from Ell (equity method) 1,400
Total revenues $257,400
Costs and expenses
Cost of sales $152,000
Other expenses 64,000
Total costs and expenses 216,000
Total consolidated income 41,400
Less: Noncontrolling interest share 1,000
Controlling share of NI $ 40,400

Pam Corporation and Subsidiary

Consolidated Retained Earnings Statement
for the year ended December 31, 2016
Consolidated retained earnings January 1 $ 40,000
Add: Controlling share of NI 40,400
Deduct: Dividends (20,000)
Consolidated retained earnings December 31 $ 60,400

Pam Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2016
Assets
Current assets:
Cash $ 45,900
Other current assets 102,000 $147,900
Plant assets — net 268,000
Investments and other assets:
Investment in Ell 12,900
Total assets $428,800

Liabilities and stockholders’ equity

Current liabilities $ 64,000
Stockholders’ equity:
Capital stock $300,000
Consolidated retained earnings 60,400
Noncontrolling interest 4,400 364,800
Total liabilities and stockholders’ equity $428,800

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-39
Solution P4-16

Partial consolidated statement of cash flows using the direct method

Pop Corporation and Subsidiaries
Partial Consolidated Statement of Cash Flows
for the current year
Cash Flows from Operating Activities
Cash received from customers $6,400,000
Dividends from equity investees 160,000
Interest received from short-term loan 20,000
Cash paid for other expenses (1,800,000)
Cash paid to suppliers (2,520,000)
Net cash flow from operating activities $2,260,000

Copyright © 2018 Pearson Education, Inc.

4-40 Consolidation Techniques and Procedures
Solution P4-17

Direct Method

Pam Corporation and Subsidiary

Consolidated Statement of Cash Flows
for the year ended December 31, 2016

Cash Flows from Operating Activities

Cash received from customers $1,340,000
Cash paid to suppliers $696,000
Cash paid for operating expenses 315,000 (1,011,000)
Net cash flows from operating activities 329,000
Cash Flows from Investing Activities
Purchase of equipment (250,000)
Net cash flows from investing activities (250,000)
Cash Flows from Financing Activities
Payment of cash dividends — controlling (72,000)
Payment of cash dividends — noncontrolling (4,000)
Payment of long-term liabilities (22,000)
Net cash flows from financing activities (98,000)
Decrease in cash for the year (19,000)
Cash on January 1 130,000
Cash on December 31 $ 111,000

Reconciliation of controlling share of consolidated net income to net cash provided

by operating activities

Controlling share of NI $260,000

Adjustments to reconcile controlling share of
consolidated net income to net cash
provided by operating activities:
Noncontrolling interest share $ 10,000
Depreciation expense 102,000
Patents amortization 1,000
Increase in accounts payable 44,000
Increase in accounts receivable (10,000)
Increase in inventories (40,000)
Increase in other current assets (38,000) 69,000
Net cash flows from operating activities $329,000

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-41
Solution P4-17 (continued)

Indirect Method

Pam Corporation and Subsidiary

Consolidated Statement of Cash Flows
for the year ended December 31, 2016

Cash Flows from Operating Activities

Controlling share of NI $260,000
Adjustments to reconcile controlling share of
consolidated net income to net cash provided by
operating activities:

Noncontrolling interest share 10,000

Depreciation $102,000
Patents amortization 1,000
Increase in accounts receivable (10,000)
Increase in inventories (40,000)
Increase in other current assets (38,000)
Increase in accounts payable 44,000
69,000
Net cash flows from operating activities 329,000
Cash Flows from Investing Activities
Purchase of equipment (250,000)
Net cash flows from investing activities (250,000)
Cash Flows from Financing Activities
Payment of cash dividends — controlling (72,000)
Payment of cash dividends — noncontrolling (4,000)
Payment of long-term liabilities (22,000)
Net cash flows from financing activities (98,000)
Decrease in cash for the year (19,000)
Cash on January 1 130,000
Cash on December 31 $111,000

Note: The cash flows from investing activities and cash flows from financing
activities sections of the statement of cash flows are the same under the direct
and indirect method.

Copyright © 2018 Pearson Education, Inc.

4-42 Consolidation Techniques and Procedures
Solution P4-18 [AICPA]

Indirect Method

Pop, Inc. and Subsidiary

Statement of Cash Flows (Indirect Method)
for the year ended December 31, 2016

Cash Flows from Operating Activities

Controlling share of NI $ 198,000
Adjustments to reconcile controlling share of
consolidated net income to net cash
provided by operating activities:
Noncontrolling interest share $ 33,000
Depreciation expense 82,000
Patents amortization 3,000
Decrease in accounts receivable 22,000
Increase in accounts and accrued payables 121,000
Increase in deferred income taxes 12,000
Increase in inventories (70,000)
Gain on marketable equity securities (11,000)
Gain on sale of equipment (6,000) 186,000
Net cash flows from operating activities 384,000
Cash Flows from Investing Activities
Purchase of equipment $(127,000)
Proceeds from sale of equipment 40,000
Net cash flows from investing activities (87,000)
Cash Flows from Financing Activities
Cash received from sale of treasury stock 44,000
Payment of cash dividends — controlling (58,000)
Payment of cash dividends — noncontrolling (15,000)
Payment on long-term note (150,000)
Net cash flows from financing activities (179,000)
Increase in cash for the year 118,000
Cash on January 1 195,000
Cash on December 31 $ 313,000

Listing of non-cash investing and financing activities:

Issued common stock in exchange for land with a fair value of $215,000.

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-43
Solution P4-18 (continued)

Indirect Method

Pop, Inc. and Subsidiary

Workpapers for the Statement of Cash Flows (Indirect Method)
for the year ended December 31, 2016
Cash Flow Cash Flow Cash Flow
Year’s Reconciling Items From Investing Financing
Change Debit Credit Operations Activities Activities
Asset Changes
Cash 118,000
Allowance to reduce MES 11,000 e 11,000
Accounts receivable — net (22,000) f 22,000
Inventories 70,000 g 70,000
Land* 215,000 h 215,000
Plant and equipment 65,000 k 62,000 j 127,000
Accumulated depreciation (54,000) l 82,000 k 28,000
Patents — net (3,000) m 3,000
Total asset changes 400,000

Changes in Equities
Accounts & accrued payable 121,000 n 121,000
Note payable long-term (150,000) o 150,000
Deferred income taxes 12,000 p 12,000
Noncontrolling interest in 18,000 b 33,000 d 15,000
Son
Common stock, $10 par* 100,000 h 100,000
Additional paid-in capital 123,000 h 115,000
i 8,000
Retained earnings 140,000 a 198,000 c 58,000
Treasury stock at cost 36,000 i 36,000
Total changes in
equities 400,000

Controlling share of NI a 198,000 198,000

Noncontrolling interest share b 33,000 33,000
Gain on MES e 11,000 (11,000)
Purchase of plant and equipment j 127,000 (127,000)
Sale of equipment k 40,000 40,000
Gain on equipment k 6,000 (6,000)
Depreciation expense l 82,000 82,000
Payment on long-term note o 150,000 (150,000)
Amortization of patents m 3,000 3,000
Decrease in receivables f 22,000 22,000
Increase in inventories g 70,000 (70,000)
Increase in accounts and accrued n 121,000 121,000
payables
Increase in deferred income taxes p 12,000 12,000
Proceeds from treasury stock i 44,000 44,000
Payment of dividends — controlling c 58,000 (58,000)
Payment of dividends — noncontrolling d 15,000                             (15,000)
1,229,000 1,229,000
384,000 (87,000) (179,000)

Cash increase for the year = $384,000 – $87,000 – $179,000 = $118,000.

*Non-cash item: Purchased $215,000 land through common stock issuance.

Copyright © 2018 Pearson Education, Inc.

4-44 Consolidation Techniques and Procedures

Solution P4-19

Indirect Method

Pam Corporation and Subsidiary

Consolidated Statement of Cash Flows
for the year ended December 31, 2016

Cash Flows from Operating Activities

Controlling share of NI $1,000,000
Adjustments to reconcile controlling share of
consolidated net income to net cash
provided by operating activities:
Noncontrolling interest share $ 80,000
Depreciation expense 400,000
Patents amortization 20,000
Increase in accounts payable 34,000
Income less dividends — equity investee (60,000)
Increase in accounts receivable (420,000) 54,000
Net cash flows from operating activities 1,054,000
Cash Flows from Investing Activities
Purchase of equipment $(1,000,000)
Net cash flows from investing activities (1,000,000)
Cash Flows from Financing Activities
Cash received from long-term note $ 400,000
Payment of cash dividends — controlling (274,000)
Payment of cash dividends — noncontrolling (40,000)
Net cash flows from financing activities 86,000
Increase in cash for the year 140,000
Cash on January 1 720,000
Cash on December 31 $ 860,000

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-45

Solution P4-19 (continued)

Indirect Method
Pam Corporation and Subsidiary
Workpapers for the Statement of Cash Flows (Indirect Method)
for the year ended December 31, 2016

Cash Flows Cash Flows Cash Flows

Year’s Reconciling Items From Investing Financing
Change Debit Credit Operations Activities Activities
Asset Changes
Cash $ 140,000
Accounts receivable — net 420,000 e 420,000
Inventories 0
Plant & equipment — net 600,000 F 400,000 g 1,000,000
Equity investments 60,000 l 60,000 m 120,000
Patents (20,000) h 20,000

Total asset changes $1,200,000

Changes in Equities
Accounts payable $ 34,000 i 34,000
Dividends payable 26,000 k 26,000
Long-term note payable 400,000 j 400,000
Common stock 0
Other paid-in capital 0
Retained earnings 700,000 a 1,000,000 c 300,000
Noncontrol. interest 20% 40,000 b 80,000 d 40,000
Changes in
equities $1,200,000
Controlling share of NI a 1,000,000 $1,000,000
Noncontrolling interest share b 80,000 80,000
Purchase of plant & equipment g 1,000,000 $(1,000,000)
Depreciation — plant & equipment f 400,000 400,000
Amortization of patents h 20,000 20,000
Increase in accounts receivable e 420,000 (420,000)
Income less dividends from
Investees m 120,000 l 60,000 (60,000)
Increase in accounts payable i 34,000 34,000
Received cash from long-term note J 400,000 0 $ 400,000
Payment of dividends — controlling c 300,000 k 26,000 (274,000)
Payment of dividends — noncontrolling d 40,000        __            _             (40,000)
3,900,000 3,900,000 $1,054,000 $(1,000,000) $ 86,000

Cash increase for the year = $1,054,000 - $1,000,000 + $86,000 = $140,000

Copyright © 2018 Pearson Education, Inc.

4-46 Consolidation Techniques and Procedures

Solution P4-19 (continued)

Direct Method

Pam Corporation and Subsidiary

Consolidated Statement of Cash Flows
for the year ended December 31, 2016
(in thousands)

Cash Flows from Operating Activities

Cash received from customers $4,780
Cash received from equity investees 60
Cash paid to suppliers $ 2,866
Cash paid for other operating expenses 920 (3,786)
Net cash flows from operating activities 1,054
Cash Flows from Investing Activities
Purchase of equipment $(1,000)
Net cash flows from investing activities (1,000)
Cash Flows from Financing Activities
Cash received from long-term note $ 400
Payment of cash dividends — controlling (274)
Payment of cash dividends — noncontrolling (40)
Net cash flows from financing activities 86
Increase in cash for the year 140
Cash on January 1 720
Cash on December 31 $ 860

Reconciliation of controlling share of consolidated

net income to net cash provided by operating
activities
Controlling share of NI $1,000
Adjustments to reconcile controlling share of
consolidated net income to net cash
provided by operating activities:
Noncontrolling interest share $ 80
Income less dividends — equity investee (60)
Depreciation expense 400
Patents amortization 20
Increase in accounts payable 34
Increase in accounts receivable (420) 54
Net cash flows from operating activities $1,054

Copyright © 2018 Pearson Education, Inc.

Chapter 4 4-47

Solution P4-19 (continued)

Direct Method

Pam Corporation and Subsidiary

Workpapers for the Statement of Cash Flows (Direct Method)
for the year ended December 31, 2016
(in thousands)

Cash Flow Cash Flow Cash Flow

Year’s Reconciling Items From Investing Financing
Change Debit Credit Operations Activities Activities
Asset Changes
Cash $ 140
Accounts receivable — net 420 a 420
Inventories 0
Plant & equipment — net 600 b 400 c 1,000
Equity investments 60 d 60
Patents (20) e 20
Total asset changes $1,200
Changes in Equities
Accounts payable $ 34 f 34
Dividends payable 26 g 26
Long-term note payable 400 h 400
Retained earnings* 700
Noncontrol.interest 20% 40 i 80 j 40
Changes in equities $1,200
Ret. earnings change*
Sales $5,200 a 420 $4,780
Income from equity
investees 120 d 60 60
Cost of goods sold (2,900) f 34 (2,866)
Depreciation expense (400) b 400 0
Other operating expenses (940) e 20 (920)
Noncontrolling interest
share (80) i 80 0
Dividends declared —
Pam (300) g 26
k 274
Retained earnings ______
change $ 700
Received cash from long-term note h 400 $ 400
Payment of dividends — controlling k 274 (274)
Payment of dividends — noncontrolling j 40 (40)
Purchase of equipment c 1,000               $(1,000) ______    
2,754 2,754 $1,054 $(1,000) $ 86

*Retained earnings change replaces the retained earnings account for reconciling purposes.

Cash increase for the year = $1,054 - $1,000 + $86 = $140.

Copyright © 2018 Pearson Education, Inc.

4-48 Consolidation Techniques and Procedures
Solution P 4-20
1 Pop Company
Balance Sheet
at December 31, 2016

Assets Liabilities and Stockholders’ Equity

Cash $ 2,500 Liabilities $ 80,000
Accounts receivable 15,000 Stockholders’ equity:
Other assets 120,000 Capital stock $100,000
Investment in Son 88,000 Paid-in excess 10,000
         Retained earnings 35,500 145,500
Total assets $225,500 Total equities $225,500

2 Pop Company and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2016

Sales $190,000
Cost of goods sold 80,000
Gross profit 110,000
Operating expenses 65,000
Total consolidated net income 45,000
Less: Noncontrolling interest shareb 4,000
Controlling share of consolidated net income $ 41,000
b
Noncontrolling interest share is 20% of Son’s $20,000 income.

3 Pop Company and Subsidiary

Consolidated Balance Sheet
at December 31, 2016

Assets Liabilities and Stockholders’ Equity

Cash $ 17,500 Liabilities $110,000
Accounts receivable 40,000 Stockholders’ equity:
Other assets 220,000 Capital stock $100,000
Goodwilla 10,000 Paid-in excess 10,000
Retained earnings b 43,500
         Noncontrolling interestc 24,000 177,500
Total assets $287,500 Total equities $287,500

a(Cost $88,000 – implies total fair value = $110,000. Book value equals $100,000. Therefore,
goodwill equals $10,000.)
bRetained earnings — Pop January 1 of $22,500 plus controlling share of consolidated net income of
$41,000 less dividends of Pop of $20,000.
cNoncontrolling interest January 1 of $22,000 (at fair value) plus noncontrolling interest share
of income of $4,000 less noncontrolling interest dividends of $2,000.

PR 4-1 Solution
GAAP does not permit disclosure of cash flow per share. (ASC 230-10-45-3).

PR 4-1 Solution
Yes, a reconciliation is required when the direct method is used. It may be provided
either in the statement of cash flows or in a separate schedule. (ASC 230-10-45-30).

Copyright © 2018 Pearson Education, Inc.