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400,000 (230,000) 100,000 (60,000) 100,000 (36,000) (30,000) (62,470) (7,496) (10,000) (190,000) (260,804) (450,000) 290,000 10,000 28,000 92,000 Prepare the worksheet necessary to produce the consolidated financial statements for Press M M M M M Required Company and its subsidiary Sabre Company for the year ended December 31, 20X3. Include the determination and distribution of excess and income distribution schedules. Problem 5-13 (LO 5,6) 80 , equity, sales-type lease, merchandise. Refer to...

Accounting for Discontinued Operations

The accounting effects of a discontinued operation should be reflected in an income statement as two distinct components (a) income or loss from operations of the discontinued operation prior to the measurement date and (b) income or loss on disposal of the discontinued operation. Both of these items should be presented net of tax. When interim statements are prepared, a problem arises in that income or loss from operations of the discontinued operation, recognized in the interim period(s)...

Enterprise Funds

Enterprise funds account for goods or services provided by a governmental unit to the general public. The user is charged for these goods or services, based on consumption. For example, the operations of utilities, public housing, public parking, municipal solid waste landfills, economic development corporations, cultural activities, and airports would be covered by enterprise funds. These funds continue indefinitely and are self-supporting, depending upon the amounts charged to cover part or...

Reflection

If the foreign entity's functional currency is not its books of record (local) or reporting currency, the remeasurement method, also called the historical rate or temporal method, is applied. This method is based on the premise that changes in the exchange rate affect the cash flows and economic well-being of the foreign entity and parent investor. The remeasurement process follows the temporal method that remeasures foreign financial statements from their reporting currency into the...

Exercise 8 LO 2 Enterprise fund Prepare journal entries to record the following events in the city of Rosewoods Water

From its general fund revenues, the city transferred 300,000, which is restricted for the drilling of additional wells. b. Billings for water consumption for the month totaled 287,000, including 67,000 billed to other funds within the city. c. The Water Commission collected 42,000 from other funds and 190,000 from other users on billings in item (b). d. To raise additional funds, the utility issued 700,000 of 5 , 10-year revenue bonds at face value. Proceeds are restricted to the development...

Exercises

Exercise 1 (LO 1) Partnership versus corporate balance sheets and income statements. In 20X1, a new partnership purchased land on the edge of the town of Otisville. The partners erected a building and opened a furniture and appliance store under the name of Otisville Furniture Fair. The partnership agreement specified that profits or losses should be shared equally after the allocation of partners' salary allowances and interest on average capital balances. Otisville has grown considerably, and...

Problem 152 LO 1 2 3 Measurement focus and basis of accounting Select the best answer for each of the following

Lacking sufficient cash for operations, a city borrows money from a bank, using as collateral the expected receipts from levied property taxes. Upon receipt of cash from the bank, the general fund would credit b. Other Financing Sources (control). c. Tax Anticipation Notes Payable. d. Taxes Receivable Delinquent. 2. The recorded amount for uncollectible taxes was overstated. To revise the estimate during the same fiscal period, the journal entry would credit c. Allowance for Uncollectible...

Other Financial Reporting Issues

The GASB continues to be very active in setting standards for state and local governments. As the new GASB Statement No. 34 reporting model is adopted by government entities over the next few years, the Board continues to work on projects such as (a) conceptual framework topics focused on alternative communication media and definition of the elements of the basic financial statements, (b) additional required note disclosures, (c) accounting for affiliated organizations, and (d) postemployment...

Organization and Processes of the FASB and the GASB

The GASB is a sister board to the Financial Accounting Standards Board (FASB). The Financial Accounting Foundation (FAF), which appoints both boards, is responsible for their funding and the determination of their respective jurisdictions, as well as the resolution of any disputes which may arise between the boards. Both the FASB and the GASB subscribe to a due process of standard setting to ensure that preparers, attestors, and users of financial statements affected by standards have a voice...

No Intercompany Goods in Purchasing Companys Inventories

In the simplest case, which is illustrated in Worksheet 4-1, pages 4-24 and 4-25, all goods sold between the affiliates have been sold, in turn, to outside parties by the end of the accounting period. Worksheet 4-1 is based on the following assumptions 1. Company S is an 80 -owned subsidiary of Company P. On January 1, 20X1, Company P purchased its interest in Company S at a price equal to its pro rata share of Company S's book value. Company P uses the equity method to record the investment....

Revaluation of Long Term Liabilities

Liabilities that are assumed by the buyer in a purchase transaction must always be recorded at their current fair value. When interest rates have increased since the original issue of the debt, the fair value of the debt will be less than the book value, and a discount will be recorded. If interest rates have decreased since issuance of the debt, the debt will have a value in excess of book value and a premium will be recorded. For large corporations with publicly traded debt securities, the...

Asic Translation Process Functional Currency to Reporting Currency

Before beginning the translation process, the financial statements of the foreign entity must be adjusted to conform with generally accepted accounting principles. Although this is a very important step in the accounting process, the specifics are not covered in this text. It is assumed that all of the adjustments to GAAP have already been made. The next step in the translation process is to identify the functional currency. If the functional currency is determined to be the foreign entity's...

Appendix problems

Problem 18A-1 (LO 10, 11) Funds, journal entries. Listed are five independent transactions or events that relate to a local government and to a VHWO a. 30,000 was disbursed from the general fund (or its equivalent) for the cash purchase of new equipment. b. An unrestricted cash gift of 100,000 was received from a donor. c. A cash gift of 40,000 was received. The use of the funds was restricted to purchase life-saving equipment. To purchase qualifying equipment, 15,000 was used. d. Listed common...

Private Purpose Trust Funds

GASB Statement No. 34 significantly changes the accounting for trusts. As shown in the previous sections, accounting for these assets and the operation of the trust fund depend on the document that created the fund. Public-purpose trusts are accounted for as special revenue funds if both the assets contributed (the principal) and the earnings may be expended (these were formally called expendable trust funds). Other public-purpose trusts where only the earnings are spent are accounted for as...

Closing the General Fund

The simplest closing process is, first, to reverse the budgetary entries and then to close the actual revenue and expenditure accounts, including the other financing sources and uses accounts, into the fund balance unreserved, undesignated account. The outstanding balance in the encumbrances account is also temporarily closed. Budgetary closing entries for Middletown would appear as follows B2. Appropriations Estimated Other Financing Uses Budgetary Fund Balance Unreserved 29,000 Estimated...

Understanding the issues

Why are fixed assets, acquired with proceeds from general obligation bond issues, not permanently accounted for in a capital projects fund 2. If a capital projects fund has authority to continue operations over several fiscal periods, why is it desirable to close its records at the end of each period 3. Explain the necessity to introduce a deferred revenues account in the levy of capital special assessments. 4. The debt service fund does not use budgetary accounts. What is the logic for not...

Problem 1511 LO 4 5 7 Journal entries general fund Prepare the necessary journal Mmmmm Required

Entries to record the following transaction for the city of Maineville during 20X7 in the general fund and account groups, and specify the account group used. Entries in the Debt Service Fund and Capital Projects Fund should be ignored. a. General obligation term bonds with a face value of 2,700,000 were sold for 2,705,000. The proceeds from the bond issue were to be used to construct a new library and were received by the capital projects fund. b. 200,000 was transferred from the general fund...

Problem 158 LO 5 7 Journal entries general fund The general fund trial balance of the city of Oakwood at December 31

Taxes Receivable Delinquent Allowance for Uncollectible Delinquent Taxes Fund Balance Reserved for Stores Fund Balance Reserved for Encumbrances . Fund Balance Unreserved, Undesignated . The following data pertain to 20X4 general fund operations a. Budget adopted Revenues and other financing sources Expenditures and other financing uses Program operations General administration Capital Transfer to debt service fund Encumbrances from 20X3 are included in the budget. b. Taxes were assessed at an...

Problem 156 LO 4 7 9 Journal entries Budgetary Comparison Schedule A summary of the general fund transactions for the

A budget was approved, showing estimated revenues of 900,000, appropriations of 875,000, transfers-in of 27,000 from other funds, and required transfers of 20,000 to other funds. b. The reserve for encumbrance at the end of 20X6 was 15,000. Amounts encumbered in the prior period are included in appropriations for 20X7. c. Property taxes for 650,000 were levied. In past years, 1 of the property taxes levied proved uncollectible. d. Encumbrances for 25,000 had not been liquidated by the end of...

Ecording a Purchase with Goodwill

When the purchase of an existing company is being considered, a thorough appraisal should be made to determine the fair value of the company's assets and liabilities. A complete appraisal will usually precede negotiations over the price to be paid. Generally, the prospective purchaser will seek the seller's permission to conduct a preacquisition audit. The audit will determine whether all assets and liabilities are properly recorded. The purchaser knows that, while book values may be indicative...

Exercise 2 LO 3 4 Trust funds various funds and account groups Select the best answer for each of the following

Accounting for permanent funds closely resembles the accounting for 2. In which of the following fund types of a city government are revenues and expenditures recognized on the same basis of accounting as the general fund 3. On June 28, 20X1, Gold City's debt service fund received funds for the future repayment of bond principal. As a consequence, the general long-term debt account group reported a. an increase in the amount available in debt service funds and an increase in the fund balance....

Problems

Problem 17-1 (LO 1, 3) Reporting under GASB Statement No. 34. Select the best answer to the following multiple-choice questions. 1. Which of the following is not part of the basic financial statements a. Government-wide statement of net assets b. Proprietary funds statement of revenues, expenses, and changes in fund net assets c. Combining balance sheet nonmajor governmental funds d. Notes to the financial statements 2. Which of the following is true regarding the government-wide financial...

Translation of Foreign Financial Statements

When you have completed this chapter, you should be able to 1. Define the functional currency, and identify factors suggesting the functional currency. 2. Explain the objectives of the translation process. 3. Apply the functional currency translation process to a trial balance, and calculate the translation adjustment. 4. Explain how the translation adjustment is accounted for and how a hedge may be employed. 5. Describe the consolidation process and the sophisticated equity method, giving...

Admission of a New Partner

The admission of a new partner requires the approval of the existing partners, although a partner's interest may be assigned to someone outside the partnership without the consent of the other partners. However, assigning an interest does not dissolve the partnership, and it does not allow the assignee to participate in the management of the partnership or to review transactions and records of the partnership. The assignee receives only the agreed-upon portion of the assigning partner's profit...

Entry to Record the Purchase

Assume that Acquisitions Inc. has agreed to pay 350,000 to Johnson Company for its net assets. Payment could be made in cash or by issuing bonds or stocks to Johnson's shareholders. For our initial analysis, we will assume that 350,000 cash is paid to Johnson Company and that another 10,000 is paid to independent attorneys and accountants for direct acquisition costs. The journal entry to record the purchase would be as follows Accounts Receivable Land Building Brand-Name Copyright Goodwill...

Problem 162 LO 4 Various funds and account groups Numbers 57 are AICPA adapted

The following revenues were among those reported by Ariba Township in 20X4 Net rental revenue after depreciation from a parking garage owned by Ariba . . . 40,000 Interest earned on investments held for employees' retirement benefits 100,000 What amount of the foregoing revenues should be accounted for in Ariba's governmental funds Items 2 and 3 are based on the following information The events relating to the city of Albury's debt service funds that occurred during the year ended December...

Problem 161 LO 4 Various funds and account groups Select the best response for each of the following multiplechoice

Maple Township issued the following bonds during the year ended June 30, 20X7 Bonds issued for the Garbage Collection Enterprise Fund that will Revenue bonds to be repaid from admission fees collected by the Township Zoo Enterprise Fund 350,000 What amount of these bonds should be accounted for in Maple's general long-term debt account group 2. On December 31, 20X9, Elm Village paid a contractor 4,500,000 for the total cost of a new Village Hall built in 20X9 on Elm-owned land. Financing for...

Exercise 3 LO 1 General obligation bonds fixed asset construction Select the best response for each of the following

On March 2, 20X1, Finch City issued 10-year general obligation bonds at face amount, with interest payable on March 1 and September 1. The proceeds were to be used to finance the construction of a civic center over the period of April 1, 20X1, to March 31, 20X2. During the fiscal year ended June 30, 20X1, no resources had been provided to the debt service fund for the payment of principal and interest. 1. On June 30, 20X1, Finch's debt service fund should include interest payable on the general...

Eureka City Should Issue A Statement Of Cash Flows

Exercise 1 LO 2 Determining a major fund. Based on the information presented in the 1999 city of Milwaukee, Wisconsin, financial statements in the student companion book, what amounts of which statement items should be used to determine whether a specific governmental fund is a major fund Likewise, what minimum amounts of which statement items should be used to determine whether a specific enterprise fund is a major fund Assume the following facts a. All fiduciary funds will still be fiduciary...

On September 1 20X2

The drawing accounts of the partners have the following debit balances at the end of 20X2 d. Partnership income for the year is 21,100. 1. Discuss the advantages and disadvantages of using the weighted-average capital balance as the base for determining interest on capital contributed. 2. Determine the interest on weighted-average capital balances that partners Xavier, Yates, and Zale should receive for the year 20X2. Assume that the partners' withdrawals are not to influence the capital...

Ending balance 17000030000100000 20000

Assuming net income for 20X5 of 132,000, determine how much profit should be allocated to each partner. Exercise 8 LO 3, 4 Interest calculation determination of capital account balances. Xavier, Yates, and Zale are partners in a dry-cleaning business. Their partnership agreement provides that the partners shall receive interest on their respective average yearly capital balances at the rate of 8 . Any residual profits or losses shall be divided equally among the partners. The following...

Accounting for the General FundAn Expanded Example

To visualize the accounting process of the general fund and the flow of information that produces the financial reports, the activities of the city of Middletown are examined for the fiscal year ended September 30, 20X7. The general fund trial balance on September 30, 20X6, appears in Illustration 15-2. Illustration 15-2 City of Middletown General Fund Trial Balance September 30, 20X6 Cash Investments Taxes Allowance for Uncollectible Delinquent Taxes Tax Liens Receivable Allowance for...

Appendix Exercises

Exercise B-1 LO 9 D amp D for nontaxable exchange. Rainman Corporation is considering the acquisition of Lamb Company through the purchase of Lamb's common stock. Rain-man Corporation will issue 20,000 shares of its 5 par common stock, with a fair value of 25 per share, in exchange for all 10,000 outstanding shares of Lamb Company's voting common stock. The acquisition meets the criteria for a tax-free exchange as to the seller. Because of this, Rain-man Corporation will be limited for future...

Problem 145 LO 2 3 6 Entries new partner old partner alternative methods

Buckner and Pressey are partners in a dry-cleaning business in which profits and losses are shared equally. Buckner and Pressey have capital balances of 40,000 and 60,000, respectively. Required For each of the six situations presented, prepare the necessary journal entries for the partner Exiting partner Buckner Buckner Buckner Selling price 48,000 25,000 39,000 Interest in capital sold 40 20 30 Paid by Partnership Partnership Partnership Method used Bonus Goodwill Goodwill Problem 14-6 LO 10...

Problem 141 LO 12 3 5 New partner asset and capital balance determination bonus goodwill A partnership had the

25,000 Noncash assets 185,000 Total Liabilities 95,000 A, capital 50 70,000 B, capital 30 30,000 C, capital 20 15,000 Total liabilities and capital 210,000 The percentages in parentheses after the partners' capital balances represent their respective interests in profits and losses. Given the above information, respond to each of the following independent fact situations 4 4 4 4 4 Required 1. Assuming new Partner D acquires 30 of Partner B's interest from B for consideration of 15,000, what is...

Treetop Corporation Is A Manufacturer Of Specialty Equipment Used In The Film Editing.

For Case C, calculate the year-to-date tax expense or benefit associated with, in addition to the continuing income, a 50,000 extraordinary loss and a 20,000 loss due to a change in accounting principle. Problem 12-6 LO 3, 4 Interim income statement, expense recognition, nonordi-nary income items. The Treetop Corporation is a manufacturer of specialty equipment used in the film editing industry. The company needs an income statement for the second quarter of its fiscal year and has requested...

Problem 121 LO 2 Interim income statement accounting for various items

Mikelson Company, a California corporation listed on the Pacific Coast Stock Exchange, budgeted activities for 20X5 as follows Gross profit Selling, general, and administrative Operating income Nonoperating revenue and Income before income Estimated income taxes current and deferred Earnings per share of common stock Mikelson has operated profitably for many years and has experienced a season pattern of sales volume and production. For 20X5, sales volume is expected to follow a quarterly...

Quity Method for Unconsolidated Investments

Prior to the 1971 issuance of APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, investors could freely choose between the equity and cost methods to recognize income on their investments. When the equity method was used, it tended to be a simple equity method that recognized only a pro rata share of the investee's income without any attempt to amortize an excess of cost or book value on the investment or to defer intercompany gains and losses. The choice...

The Function of Consolidated Statements

Consolidated financial statements are designed to present the results of operations, cash flow, and the balance sheet of both the parent and its subsidiaries as if they were a single company. Generally, consolidated statements are the most informative to the stockholders of the controlling company. Yet, consolidated statements do have their shortcomings. The rights of the noncontrolling shareholders are limited to only the company they own, and, therefore, they get little value from...

Ubsidiary Sale of Its Own Common Stock

In virtually all cases where the subsidiary issues additional shares of stock, the transaction impacts the parent's investment in the subsidiary account. Even though the parent purchases none of the newly issued shares, its share of subsidiary equity has changed and consolidation procedures must acknowledge the change. When the parent purchases some of the newly issued shares, the adjustment needed depends on whether the ownership interest after the purchase is equal to, less than, or greater...

Techniques of Consolidation

This chapter builds an understanding of the techniques used to consolidate the separate balance sheets of a parent and its subsidiary immediately subsequent to the acquisition. The consolidated balance sheet as of the acquisition date is discussed first. The impact of consolidations on operations after the acquisition date is discussed in Chapters 3 through 8. Chapter 1 emphasized that there are two means of achieving control over the assets of another company. A company may directly acquire...

Required

Calculate the value for items A through K above. Problem 12-3 LO 3, 4 Tax expense benefit, nonordinary items of gain loss. During 20X8, Midway Corporation reported first six months' pretax income of 120,000 from continuing operations and a year-to-date tax expense of 37,668. The tax expense reflects projected pretax income for the balance of the year of 100,000 and the following statutory tax rates Tax on first 50,000 15 Tax on next 25,000 25 Tax on next 25,000 34 Tax on next 235,000 39 Tax on...

Consolidated Earnings Per Share

The computation of consolidated earnings per share EPS remains virtually the same as that for single entities. For the purpose of this discussion, all calculations will be made only on an annual basis. Basic earnings per share BEPS is calculated by dividing only the controlling interest in consolidated net income by parent company outstanding stock. The calculation of diluted earnings per share DEPS is not complicated when applied to the consolidated company, provided that the subsidiary...

Subsidiary Stock Dividends

A subsidiary may issue stock dividends to convert retained earnings into paid-in capital. The minimum amount to be removed from retained earnings is the par value or stated value of the shares distributed. However, according to accounting principles, when the distribution does not exceed 20 to 25 of the previously outstanding shares, an amount equal to the fair value of the shares should be removed from retained earnings and transferred to paid-in capital. The recording of stock dividends at...

Preparation of Consolidated Statement of Cash Flows

A complete example of the process of preparing a consolidated statement of cash flows is presented in this section. Assume Company P originally purchased an 80 interest in Company S on January 1, 20X1. In addition, Company P purchased a 20 interest in Company E on January 2, 20X2, and accounted for the investment under the sophisticated equity method. The following determination and distribution of excess schedules were prepared for each investment Price paid for investment in Company S . . ....

Poolingof Interests Accounting

A pooling of interests was viewed as a fusion of existing accounting entities there had been no purchase or sale. Thus, there was no cause to record fair values. Assets, liabilities, and equities were recorded at their existing book values. Adjustments to the accounts of the combiner were allowed only if they would be appropriate in the course of normal operations. An example of this would be the write-down of inventory from cost to fair value or the write-down of a fixed asset that has...

An Analysis Of The Merger Agreement Revealed That The Purchase Price Exceeded The Fair Value Of All Assets By 40 000.

An analysis of the merger agreement revealed that the purchase price exceeded the fair value of all assets by 40,000. The book and fair values of Ann's Tool Company are given in the table below along with an estimate of the useful lives of each of these asset categories.

A. Sell The Equipment To Jodetar For 125 000

Total Total As the year ended, Pannier was planning to transfer a major piece of equipment to Jodestar. The equipment was just purchased by Pannier and is included in its inventory account. The equipment cost Pannier 100,000 and would be transferred to Jodestar for 1. Sell the equipment to Jodestar for 125,000 and finance it with a 5-year, 10 interest installment note. 2. Lease the equipment to Jodestar on a 5-year lease requiring payments of 29,977 in advance. 1. Make the journal entries for...

Calculation of Equity Income

In its basic form, the equity method requires the investor to recognize its pro rata share of investee reported income. Dividends, when received, do not constitute income, but are viewed instead as a partial liquidation of the investment. In reality, however, the price paid for the investment usually will not agree with the underlying book value of the investee, which requires that any amortization of an excess of cost or book value be treated as an adjustment of the investor's pro rata share...

Buildings1200000400000

Accumulated Depreciation Accumulated Depreciation Patent net Current Liabilities Mortgage Payable Common Paid-In Capital in Excess of Par 1,500,000 200,000 Retained Earnings, Jan. 1, 20X2 Sales Cost of Goods Sold Depreciation Expense Buildings Depreciation Expense Equipment Other Expenses Interest Expense Subsidiary Income Dividends Totals 1. Prepare a zone analysis and a determination and distribution of excess schedule for the in- M M M M M Required vestment in HD Air. 2. Complete a...

Priority Accounts

Priority accounts are recorded at full fair value, no matter how low the price paid for the company is. These accounts include all current assets and all liabilities plus the following assets that would not otherwise qualify as current assets All investments, except for influential investments accounted for under the equity method. Assets to be disposed of by sale excess assets included in the purchase . Deferred tax assets as well as deferred tax liabilities . Prepaid assets relating to...

Lease Agreements

Special analysis of the purchase price in a business combination is necessary when the company acquired in a purchase transaction is bound contractually by existing leases as either a lessee or lessor. Sometimes, the terms of the lease may be modified as a result of the combination. These modifications would require the consent of the third party lessee or lessor . When the terms of the lease are modified to the extent that a new lease is created, the new lease is classified and recorded...

Foreign Currency Transactions

When you have completed this chapter, you should be able to 1. Explain the floating international monetary system, and identify factors that influence rates of exchange between currencies. 2. Define the various terms associated with exchange rates, including spot rates, forward rates, premiums, and discounts. 3. Account for a foreign currency transaction, including the measurement of exchange gain or loss. 4. Identify the contexts in which a company may be exposed to foreign currency exchange...

Case 1Methods of Eliminating Subsidiary Debt

Power Pro Inc. is a large manufacturer of marine engines. In recent years, Power Pro, like other engine manufacturers, has purchased independent boat builders. The intent of the acquisitions is to control the engine choice of the boat builder. By including the outboard engine in the boat package, it is not necessary to sell to and finance many small dealers. Power Pro purchased Swift-Craft during the last year. Swift-Crafts are built in California and are sold only in western states. Power Pro...

Tax Effects of Equity Method

The investor not meeting the requirements of affiliation as defined by tax law pays income taxes on dividends received. In the case of a domestic corporation, 20 of the dividends are includable in taxable income. However, a temporary difference is created through the use of the equity method for financial reporting.7 As a result, the provision for tax must be based on the equity income, and a deferred tax liability must be created for undistributed investment income. The provision may be based...

Effect of Lowerof CostorMarket Method on Inventory Profit

Intercompany inventory in the hands of the purchaser may have been written down by the purchaser to a market value below its intercompany transfer cost. Assume that, for 50,000, Company S purchased goods that cost its parent company 40,000. Assume further that Company S has all the goods in its ending inventory but has written them down to 42,000, the lower market value at the end of the period. As a result of this markdown, the inventory needs to be reduced by only another 2,000 to reflect its...

Ubsidiary Preferred Stock

The existence of preferred stock in the capital structure of a subsidiary complicates the calculation of a parent's claim on subsidiary retained earnings, both at the time of acquisition and in the preparation of subsequent consolidated statements. In previous examples, the subsidiary had only common stock outstanding, so that all retained earnings were associated with common stock, and the parent had a claim on subsidiary retained earnings in proportion to its ownership interest. When a...

IR ecording a Bargain Purchase

A bargain purchase occurs when the price paid for the company is less than the total estimated fair value of the net assets purchased. In the preceding example for the purchase of Johnson Company, a price below 297,000 323,000 assets 26,000 liabilities assumed would be a bargain. Obviously, no goodwill is recorded in a bargain purchase. Certain priority accounts are always recorded at fair value, no matter what the price. The remaining nonpriority accounts are discounted below their fair values...

Ubsidiary Purchase of Its Own Common Stock

When a subsidiary acquires some of its own shares from the noncontrolling interest, the resulting reduction of shares outstanding effectively increases the parent's ownership percentage. Thus, such an acquisition is considered to be an indirect purchase of an additional interest in the subsidiary by its parent company.3 From a consolidated viewpoint, the subsidiary is acting as an agent of the parent which desires the additional interest in the subsidiary. This means that another block of stock...

Ccounting for the Investment in a Subsidiary

A parent may choose one of two basic methods when accounting for its investment in a subsidiary the equity method or the cost method. The equity method records as income an ownership percentage of the reported income of the subsidiary, whether or not it was received by the parent. The cost method treats the investment in the subsidiary like a passive investment by recording income only when dividends are declared by the subsidiary. The equity method views the earning of income by a controlled...

X1 20x2 20x3 20x4 20x5

Billings' investment account balances for its interests in Chassel Company were calculated as follows on December 31, 20X5 Plus dividends in arrears for 20X4 January 1, 20X3 20X3 Chassel income, 30,000 X 60 20X3 Chassel dividends, 5,000 X 20X4 Chassel income, 25,000 X 60 January 1, 20X5 20X5 Chassel income, 20,000 X 80 December 31, 20X5 sale Balance, December 31, Assume the investment accounts are to be properly maintained under the simple equity method. M M M M M Required Prepare all necessary...

Adjustments Resulting from Business Combinations

A business combination will have ramifications on the statements of cash flows prepared in subsequent periods. A purchase may create amortizations of excess deductions noncash items which need to be adjusted. In addition, there may be impact resulting from additional purchases of subsidiary shares and or dividend payments by the subsidiary. Intercompany bonds and nonconsoli-dated investments also need to be considered for their impact. Amortization of Excesses. Income statements prepared for...

Intercompany Goods in Purchasing Companys Ending Inventory

Let us now change the example in Worksheet 4-1 to assume that Company P did not resell 40,000 of the total of 100,000 of goods it purchased from Company S. This means that 40,000 of goods purchased from Company S remain in Company P's ending inventory. As shown below, Company S the intercompany seller will have the same entries as presented on page 4-4, and Company P will have the following revised entries Accounts Receivable from Company Sales to Company Cost of Goods Sold to Company Accounts...

Losses on Intercompany Sales

Assume a parent sells goods to a subsidiary for 5,000 and the goods cost the parent 6,000. If the market value of the goods is 5,000 or less, the loss may be recognized in the consolidated income statement, even if the goods remain in the subsidiary's ending inventory. Such a loss can be recognized under the lower-of-cost-or-market principle that applies to inventory. However, if the intercompany sales price is below market value, the part of the loss that results from the price being below...

Expenditures to Accomplish Business Combination

Three categories of expenditures may be involved in negotiating and consummating the purchase of another company. These categories and their recording are as follows Direct costs Paid to outside parties such as lawyers, consultants, brokers, and CPAs. Could include preaudit, broker's fees, and legal fees. Indirect costs Allocation of existing expenses of the acquiring firm connected to negotiating and consummating the purchase. Could include salaries for employees who worked on the acquisition...

UshDown Accounting

Thus far, it has been assumed that the subsidiary's statements are unaffected by the parent's purchase of a controlling interest in the subsidiary. None of the subsidiary's accounts is adjusted on the subsidiary's books. In all preceding examples, adjustments to reflect fair value are made only on the consolidated worksheet. This is the most common but not the only accepted method. Some accountants object to the inconsistency of using book values in the subsidiary's separate statements while...

Utual Holdings

A mutual holding structure exists when the subsidiary owns shares of the parent company common stock. The subsidiary's investment in the parent must be eliminated in the consolidation process. When the subsidiary acquires shares of the parent for consideration other than its own common stock shares, the shares are usually viewed as either retired or as treasury stock if there is an intent to resell the shares. In the past, another method called the reciprocal method was used. The reciprocal...

Sale of Parents Investment in Common Stock

A parent may sell all of its subsidiary interest or enough shares to fall below the 50 interest generally required for consolidated reporting. When control is lost, a gain or loss on the transaction is recorded. There may be other stock sales where the parent reduces its percentage interest but still has control after the sale. Current procedures record a gain or loss on such a sale, even though the sale is an intercompany sale of shares to noncontrolling interest stockholders. The sale of the...

Tax Loss Carryovers

Tax law provides that an existing company with a tax loss may first carry the loss back to the previous two years to offset income and thus receive a refund of taxes paid in the preceding years. If the loss exceeds income available in the prior 2-year period, the loss can be carried forward up to 20 years to offset future income and therefore reduce the taxes which otherwise would be paid. The acquired company may have unused tax loss carryovers that it has not been able to utilize due to an...

Ppendix Worksheet for a Consolidated Balance Sheet

Previous chapters displayed procedures applicable to worksheets that produced a consolidated income statement, retained earnings statement, and balance sheet. However, there may be occasions when only consolidated balance sheets are required, and the separate balance sheets of the affiliates form the starting point for consolidation procedures. Such occasions are rare in practice but are of concern to students desiring to take the CPA Exam. Past examinations have used balance-sheet-only...

Special Issues in Accounting for an Investment in a Subsidiary

When you have completed this chapter, you should be able to 1. Consolidate a subsidiary when a parent purchases stock directly from the subsidiary. 2. Account for purchases of multiple interests in the subsidiary at different points in time. 3. Demonstrate the accounting procedures for a complete or partial sale of the investment in a subsidiary. 4. Explain the issues surrounding preferred stock in the equity structure of the subsidiary, and follow the procedures used when the parent owns...

Piecemeal Acquisition of Interest in Subsidiary

Past examples of combinations in this text have involved an acquisition of a controlling interest in a subsidiary through its single purchase of stock. A parent also may acquire a controlling interest as a result of a series of purchases of subsidiary stock. Current practice follows the parent company concept, which views each block as a separate ownership interest with a different excess of cost or book value for each block. Each block is seen as having separate causal factors for the...

Common Stock 200 000 Retained Earnings 190 000

Prepare the worksheet necessary to produce the consolidated income statement and balance sheet of Paratec Corporation and its subsidiary for the year ended December 31, 20X8. Use the following information for Problems 5-11 through 5-14 On January 1, 20X1, Press Company acquired 80 of Sabre Company's common stock for 450,000. On the date of the acquisition, Sabre had the following balance sheet Sabre Company Balance Sheet January 1, 20X1 40,000 Accounts payable 80,000 60,000 Common stock 10,000...

Problem 5-8 Lo2 Cpa Objective

Required Prepare the worksheet necessary to produce the consolidated financial statements for Postman Company and its subsidiary Sparkle Company for the year ended December 31, 20X6. Include the determination and distribution of excess and income distribution schedules. Problem 5-8 LO 2 CPA Objective, equipment, merchandise, bonds. The problem below is an example of a question of the CPA Other Objective Format type as it was applied to the consolidations area. A mark-sensing answer sheet was...

Intercompany Long Term Construction Contracts

One member of an affiliated group of companies may construct a plant asset for another affiliate over an extended period of time. The company constructing the asset will record progress under the completed-contract method or the percentage-of-completion method. During construction, special adjustments may be necessary when consolidating, depending on which of the two methods is used to record the contract by the constructing affiliate. From a consolidated viewpoint, such activity amounts to the...

Paridon Motores Purchases At 102

Exercise 1 LO 1 Cash flow, cash payment, year of purchase. Batton Company purchased an 80 interest in Ricky Company for 500,000 cash on January 1, 20X3. Any excess of cost over book value was attributed to goodwill. To help pay for the acquisition, Batton Company issued 5,000 shares of its common stock with a fair value of 60 per share. Ricky's balance sheet on the date of the purchase was as follows Cash 20,000 Inventory and equipment net 550,000 Total assets Current liabilities 110,000 Bonds...

Bonds Eliminations Straight Line

Exercise 1 LO 1 Options to lower interest cost. Marcus Engineering is a large corporation with the ability to obtain financing by selling its bonds at favorable rates. Currently, it pays 7 interest on its 10-year bond issues. In the past year, Marcus purchased an 80 interest in a subsidiary, Patel Industries. Patel Industries has 1,000,000 of bonds outstanding that mature in 6 years. Interest is paid annually at a stated rate of 10 . The bonds were issued at face value. Interest rates have come...

Case 11Why Was Fort Howard Paper Pooled Rather than Purchased

Joe Hartwig manages a large investment portfolio. During 1996 and early 1997, he purchased large blocks of Fort Howard Paper Corporation common stock. The price had been increasing steadily, but it took a major jump in early May 1997 when it was announced that James River Paper Corporation was acquiring control of Fort Howard. The news of the acquisition is conveyed in The Wall Street Journal article included in Exhibit A. Joe immediately called up the 1996 financial statements of Fort Howard...

Worksheet 3-5 Simple Equity Method Paulos Company And Subsidiary Carlo Company

There are several features of the consolidated statements that you should notice Consolidated net income is the total income earned by the consolidated entity. The consolidated net income is then distributed to the noncontrolling interest NCI and the controlling interest. This is consistent with the FASB Exposure Draft on liabilities and equity.1 In the past, it was common to find the NCI portion of consolidated net income treated as an expense. The controlling share of income was then...

Intraperiod Purchase under the Simple Equity Method

The accountant will be required to apply special procedures when consolidating a controlling investment in common stock that is acquired during the fiscal year. The D amp D schedule must be based on the subsidiary stockholders' equity on the interim purchase date, including the subsidiary retained earnings balance on that date. Also, the consolidated income of the consolidated com Demonstrate the worksheet procedures used for investments purchased during the financial reporting period. pany, as...

Grande Machinery Company Purchased For Cash A 60 000 Custom

Exercise 5 LO 2 Bond eliminations, partial purchase. Carlton Company is an 80 -owned subsidiary of Mirage Company. On January 1, 20X1, Carlton sold 100,000 of 10-year, 7 bonds for 101,000. Interest is paid annually on January 1. The market rate for this type of bond was 9 on January 2, 20X3, when Mirage purchased 60 of the Carlton bonds for 53,600. Discounts may be amortized on a straight-line basis. 1. Prepare the eliminations and adjustments required for this bond purchase on the December 31,...

Problem 3-2 Simple Equity Method

Problem 3-1 LO 1 Alternative investment account methods, effect on eliminations. On January 1, 20X1, Peter Company purchased an 80 interest in Saul Company by issuing 10,000 of its common stock shares with a par value of 10 per share and a fair value of 72 per share. The direct acquisition costs were 20,000. At the time of the purchase, Saul had the following balance sheet Current assets 100,000 Land Building net 350,000 Equipment net 160,000 Total assets 880,000 Current liabilities 80,000...

Structured Example of Goodwill Impairment

Modern Company purchased the net assets of the Frontier Company for 1,300,000 on January 1, 20X1. A business valuation consultant arrived at the price and deemed it to be a good value. Part 1. The following list of fair values was provided to you by the consultant 1. Using the information in the table above, confirm the accuracy of the present value calculations made for the building, patent, and mortgage payable. Part 2. Frontier did not have publicly traded stock. You made an estimate of the...

Goodwill Impairment

Goodwill is not amortized but is subject to separate and distinct impairment procedures. Five specific concerns need to be addressed 1. Goodwill must be allocated to reporting units if the purchased company contains more than one reporting unit. 2. A reporting unit valuation plan must be established within one year of a purchase. This sets forth the procedures that will be used to measure the fair value of reporting units in future periods. 3. Impairment testing is normally done on an annual...

Intercompany Transactions Prior to Business Combination

It is possible that the companies involved in a business combination may have had dealings with each other prior to the acquisition of one company by another. Under purchase accounting procedures, profits made prior to the purchase are allowed to stand and require no adjustment. However, debt and lease instruments between the parties change their nature on the purchase date. Amounts that were due between separate entities now become intercompany debt or leases, and they must be eliminated....

Plant Assets and Notes

When you have completed this chapter, you should be able to 1. Explain why transactions between members of a consolidated firm should not be reflected in the consolidated financial statements. 2. Defer intercompany profits on merchandise sales when appropriate and eliminate the double counting of sales between affiliates. 3. Defer profits on intercompany sales of long-term assets and realize the profits over the period of use and or at the time of sale to a firm outside the consolidated group....

Gross Profit Exercises

Exercise 1 LO1 Gross profit separate firms versus consolidated. Solvent is an 80 owned subsidiary of the Painter Company. The two affiliates had the following separate income statements for 20X1 and 20X2 Solvent Company Painter Company Sales revenue . . . Cost of goods sold Solvent sells at the same gross profit percentage to all customers. During 20X1, Solvent sold goods to Painter for the first time in the amount of 100,000. 20,000 of these sales remained in Painter's ending inventory. During...

Intercompany Sale of a Depreciable Asset

Turning to the case where a depreciable plant asset is sold between affiliates, the following example illustrates the worksheet procedures necessary for the deferment of a gain on the sale over the asset's useful life. Assume that the parent, Company P, sells a machine to a subsidiary, Company S, for 30,000 on January 1, 20X1. Originally, the machine cost 32,000. Accumulated depreciation as of January 1, 20X1, is 12,000. Therefore, the book value of the machine is 20,000, and the reported gain...

Sophisticated Equity Method Intercompany Transactions

Chapter 3 demonstrated the use of the sophisticated equity method for the parent's recording of its investment in a subsidiary. Recall that one major difference between the simple and sophisticated equity methods was that the latter records subsidiary income net of amortizations of excess. In contrast, the simple equity method ignores amortizations and records as income for the parent the subsidiary reported income multiplied by the parent's percentage of ownership. Some companies using the...

Peanut Company Acquired 80 Of The Common Stock Of

Complete the worksheet for consolidated financial statements for the year ended December 31, 20X2. Include any necessary determination and distribution of excess schedule and income distribution schedules. Problem 4-13 LO 2, 3, 6 80 , sophisticated equity, several excess distributions, merchandise, equipment sales. This is the same as Problem 4-11 except for use of the sophisticated equity method. On January 1, 20X1, Peanut Company acquired 80 of the common stock of Sam Company for 200,000. On...

Residual Value

The intercompany lease may contain an unguaranteed residual value. This means that the original intercompany lessee will supply only a portion of the total cash flow to be received by the lessor. At the end of the original lease term, the lessor may lease the asset again or sell it. In either case, there is no obligation on the part of the lessee to renew the lease or to purchase the asset. Since the original lessee is contractually bound to provide only a portion of the payments to be received...

Intercompany Transactions Case

Henderson Window Company was a privately held corporation until January 1, 20X1. On January 1, 20X1, Cool Glass Company purchased a 70 interest in Henderson at a price well in excess of book value. There were some minor differences between book and fair values, but the bulk of the excess was attributed to goodwill. In its consolidated statements, Cool Glass is amortizing the goodwill over 10 years. Harvey Henderson did not sell his shares to Cool Glass as a part of the January 1, 20X1 Cool...

Intercompany Goods in Purchasing Companys Beginning and Ending Inventories

When intercompany goods are included in the purchaser's beginning inventory, the inventory value includes the profit made by the seller. The intercompany seller of the goods has included in the prior period such sales in its separate income statement as though the transactions were consummated. Thus, the beginning retained earnings balance of the seller also includes the profit on these goods. While this profit should be reflected on the separate books of the affiliates, it should not be...

Ntercompany Investment in Bonds

To secure long-term funds, one member of a consolidated group may sell its bonds directly to another member of the group. Clearly, such a transaction results in intercompany debt which must be eliminated from the consolidated statements. On the worksheet, the investment in bonds recorded by one company must be eliminated against the bonds payable of the other. In addition, the applicable interest expense recorded by one affiliate must be eliminated against the applicable Explain the...

Intercompany Transactions Bonds and Leases

When you have completed this chapter, you should be able to 1. Explain the alternatives a parent company has if it wishes to acquire outstanding subsidiary bonds from outside owners. 2. Follow the procedures used to retire intercompany bonds on a consolidated worksheet. 3. Explain why a parent company would lease assets to the subsidiary. 4. Show how to eliminate intercompany operating lease transactions from the consolidated statements. 5. Eliminate intercompany capital leases on the...

Need Help On Problem 4-3 70 Equity Beginning And Ending Inventory Subisidary Seller

Prepare the worksheet necessary to produce the consolidated financial statements of Baxter Corporation and its subsidiary for the year ended March 31, 20X3. Include the determination and distribution of excess schedule and the income distribution schedules. 2. Prepare the formal consolidated income statement for the fiscal year 20X2 20X3. Use the following information for Problems 4-3 and 4-4 On January 1, 20X1, Panther Corporation acquired 70 of the common stock of Spider...

Prepare A Consolidated Worksheet For Picante And Salsa As Of December 31 2011

Prepare the worksheet necessary to produce the consolidated financial statements of Silvio Corporation and its subsidiary for the year ended December 31, 20X3. Include the determination and distribution of excess schedule and the income distribution schedules. Problem 4-6 LO 3 80 , equity, fixed asset sales by subsidiary and parent. On September 1, 20X1, Parcel Corporation purchased 80 of the outstanding common stock of Sack Corporation for 152,000. On that date, Sack's net book values equaled...

Equity Method First Year Eliminations Statements

Prepare a determination and distribution of excess schedule for the investment in Shaw Company and determine the balance in the Investment in Shaw Company on Mast Company's books as of December 31, 20X5, under the following methods that could be used by the parent, Mast Company simple equity, sophisticated equity, and cost. Exercise 3 LO 2 Equity method, first year, eliminations, statements. Pepper Company purchased an 80 interest in Salt Company for 250,000 in cash on January 1, 20X1, when...

Refer To The Preceding Information For Pcrafts

Common Stock 100,000 10,000 Paid-In Capital in Excess of Par 900,000 90,000 Retained Earnings, Jan. 1, 20X3 385,000 182,000 Cost of Goods Sold 450,000 210,000 Depreciation Depreciation Other Interest Expense Subsidiary Income Dividends Declared Totals Required 1. Prepare a zone analysis and a determination and distribution of excess schedule for the investment in Sailair. 2. Complete a consolidated worksheet for Pcraft Corporation and its subsidiary Sailair Corporation as of December 31, 20X3....

Eliminations for Periodic Inventories

In Worksheets 4-1 through 4-3, the cost of goods sold was included in the trial balances, since both the parent and the subsidiary used a perpetual inventory system. However, in Worksheet 4-4 on pages 4-30 to 4-31, a periodic inventory system is used. In this illustration, which is based on the same facts as Worksheet 4-3, the following differences in worksheet procedures result from the use of a periodic inventory system 1. The 20X2 beginning inventories of 70,000 and 40,000, rather than the...