Problem 7-15 Part A

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The document discusses the process of consolidating financial statements for a parent company and its subsidiary. It provides examples of consolidation workpapers and explains various consolidation entries and adjustments.

The steps to consolidate financial statements include combining similar accounts, eliminating intercompany transactions and balances, calculating noncontrolling interest, and preparing consolidated financial statements.

Adjustments are made to eliminate unrealized profit from intercompany transactions, such as the sale of equipment from one company to another. Excess depreciation on the equipment is also reversed as intercompany profit is realized over time.

Problem 7-15 PROUT COMPANY AND SUBSIDIARY

Part A Consolidated Statements Workpaper


For the Year Ended December 31, 2008

Prout Sexton Eliminations Noncontrolling Consolidated


Company Company Debit Credit Interest Balances
Income Statement
Sales 1,475,000 1,110,000 2,585,000
Equity in Subsidiary Income 116,000 (1) 116,000
Total Revenue 1,591,000 1,110,000 2,585,000
Cost of Goods Sold 942,000 795,000 1,737,000
Income Tax Expense 187,200 90,000 277,200
Other Expenses 145,000 90,000 (3) 8,000 227,000
Total Cost & Expenses 1,274,200 975,000 2,241,200
Net /Consolidated Income 316,800 135,000 343,800
Noncontrolling Interest in Income 27,000 * (27,000)
Net Income to Retained Earnings 316,800 135,000 116,000 8,000 27,000 316,800

Statement of Retained Earnings


1/1 Retained Earnings
Prout Company 1,380,000 1,380,000
Sexton Company 1,040,000 (4) 1,040,000
Net Income from above 316,800 135,000 116,000 8,000 27,000 316,800
Dividends Declared
Prout Company (120,000 ) (120,000)
Sexton Company (100,000 ) (1) 80,000 (20,000)
12/31 Retained Earnings
to Balance Sheet 1,576,800 1,075,000 1,156,000 88,000 7,000 1,576,800

7-1
Problem 7-15 (continued)

Prout Sexton Eliminations Noncontrolling Consolidated


Company Company Debit Credit Interest Balances
Balance Sheet
Current Assets 568,000 271,000 839,000
Investment in Sexton Company 1,716,000 (2) 120,000 (1) 36,000
(3) 8,000
(4) 1,792,000
Plant and Equipment 1,972,000 830,000 (2) 40,000 2,842,000
Accumulated Depreciation (375,000) (290,000) (3) 16,000 (2) 160,000 (809,000)
Other Assets 1,000,800 1,600,000 2,600,800
Total Assets 4,881,800 2,411,000 5,472,800

Other Liabilities 305,000 136,000 441,000


Capital stock
Prout Company 3,000,000 3,000,000
Sexton Company 1,200,000 (4) 1,200,000
Retained Earnings from above 1,576,800 1,075,000 1,156,000 88,000 7,000 1,576,800
Noncontrolling Interest in Net Assets (4) 448,000 448,000
455,000 455,000
Total Liabilities & Equity 4,881,800 2,411,000 2,532,000 2,532,000 5,472,800

* Noncontrolling interest in consolidated income = .20 × $135,000 = $27,000


Explanations of workpaper entries are on separate page.

7-2
Problem 7-15 (continued)

Schedule to calculate intercompany profit


Selling Price of Fixed Assets $360,000
Book Value of Assets [$400,000 × (15/25)] 240,000
Gain recognized on intercompany sale $120,000

Excess Annual Depreciation ($120,000/15) $8,000

Intercompany Sale of Equipment


Accumulated Remaining
Cost Depreciation Carrying Value Life Depreciation
Original Cost $ 400,000 $ 160,000 $ 240,000 15 yr $ 16,000
Intercompany Selling Price 360,000 _______ 360,000 15 yr 24,000
Difference $ 40,000 $ 160,000 $ 120,000 $ 8,000

Explanation of workpaper entries (not required)

(1) Equity in Subsidiary Income 116,000


Dividends Declared (.80)($100,000) 80,000
Investment in Sexton Company 36,000
To reverse the effect of parent company
entries during the year for subsidiary dividends and income

(2) Property and Equipment ($400,000 - $360,000) 40,000


Investment in Sexton Company 120,000
Accumulated Depreciation 160,000
To reduce beginning consolidated retained earnings by amount of
unrealized profit at the beginning of the year, and to restore the equipment
to its book value on the date of intercompany sale

(3) Accumulated Depreciation 16,000


Depreciation Expense 8,000
Investment in Sexton Company 8,000
To reverse amount of excess depreciation recorded during current year and
recognize an equivalent amount of intercompany profit as realized

(4) Beginning Retained Earnings – Sexton 1,040,000


Common Stocks – Sexton 1,200,000
Investment in Sexton Company ($1,716,000 - $36,000 + $120,000 - $8,000) 1,792,000
Noncontrolling Interest [$400,000 + ($1,040,000 - $800,000) x .2] 448,000
To eliminate investment account and create noncontrolling interest account

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Part B

(1) Cash 300,000


Accumulated Depreciation - Fixed Assets
($360,000/15 yrs. × 2 yrs.) 48,000
Loss on Sale of Equipment 12,000
Plant and Equipment 360,000

(2) Investment in Sexton Company 104,000


Loss on Sale of Equipment 12,000
Gain on Sale of Equipment 92,000

Cost to the affiliated companies $ 400,000


Accumulated depreciation based on original cost
(12/25 × $400,000) 192,000
Book value to the affiliated companies on 1/1/09 208,000
Proceeds from sale to non-affiliate (300,000)
Gain to affiliated companies on sale $ 92,000

(3) No workpaper entries are necessary for 2010 and later years. As of December 31, 2009, the
amount of profit recorded by the affiliates on their books [$120,000 - $12,000 = $108,000] is equal
to the amount of profit considered realized in the consolidated financial statements
[$8,000 + $8,000 + $92,000 = $108,000].

Part C The balances are the same as in Problem 7-4

7-4
Problem 7-16
Part A PRATHER COMPANY AND SUBSIDIARY
Consolidated Statements Workpaper
For the Year Ended December 31, 2009

Prather Stone Eliminations Noncontrolling Consolidated


Company Company Debit Credit Interest Balances
Income Statement
Sales 1,950,000 1,350,000 3,300,000
Equity in Subsidiary Income 252,000 (1) 252,000
Total Revenue 2,202,000 1,350,000 3,300,000
Cost of Goods Sold 1,350,000 900,000 2,250,000
Other Expenses 225,000 150,000 (3) 15,000 360,000
Total Cost & Expenses 1,575,000 1,050,000 2,610,000
Net /Consolidated Income 627,000 300,000 690,000
Noncontrolling Interest in Income 63,000 * (63,000)
Net Income to Retained Earnings 627,000 300,000 252,000 15,000 63,000 627,000

Statement of Retained Earnings


1/1 Retained Earnings
Prather Company 1,397,400 1,397,400
Stone Company 1,038,000 (5) 1,038,000

Net Income from above 627,000 300,000 252,000 15,000 63,000 627,000
Dividends Declared
Prather Company (150,000) (150,000)
Stone Company (75,000) (1) 60,000 (15,000)
12/31 Retained Earnings
to Balance Sheet 1,874,400 1,263,000 1,290,000 75,000 48,000 1,874,400

7-5
Problem 7-16 (continued)

Prather Stone Eliminations Noncontrolling Consolidated


Balance Sheet Company Company Debit Credit Interest Balances
Assets
Inventory 498,000 225,000 723,000
Investment in Stone Company 1,334,400 (2) 120,000 (1) 192,000
(3) 12,000
(4) 1,250,400
Plant and Equipment 2,168,100 2,625,000 (2) 390,000 5,183,100
Accumulated Depreciation (900,000) (612,000) (3) 30,000 (2) 540,000 (2,022,000)
Total Assets 3,100,500 2,238,000 3,884,100

Liabilities 465,600 450,000 915,600


Capital Stock
Prather Company 760,500 760,500
Stone Company 525,000 (4) 525,000
Retained Earnings from above 1,874,400 1,263,000 1,290,000 75,000 48,000 1,874,400
1/1 Noncontrolling Interest in (2) 30,000 (5) 312,600 285,600
Net Assets (3) 3,000
12/31 Noncontrolling Interest in
Net Assets 333,600 333,600
Total Liabilities and Equity 3,100,500 2,238,000 2,385,000 2,385,000 3,884,100

* Noncontrolling interest in consolidated income = .20 × ($300,000 + $15,000) = $63,000


Explanations of workpaper entries on separate page.

7-6
Intercompany Sale of Equipment
Accumulated Remaining
Cost Depreciation Carrying Value Life Depreciation
Original Cost $1,350,000 $540,000 $810,000 10 yr $81,000
Intercompany Selling Price 960,000 _______ 960,000 10 yr 96,000
Difference $ 390,000 $540,000 $150,000 $15,000

Explanations of workpaper entries (not required)

(1) Equity in Subsidiary Income 252,000


Dividends Declared (.80)($75,000) 60,000
Investment in Stone Company 192,000
To reverse the effect of parent company entries during
the year for subsidiary dividends and income

(2) Plant and Equipment 390,000


Investment in Stone Company ($150,000)(.80) 120,000
Noncontrolling Interest ($150,000)(.20) 30,000
Accumulated Depreciation 540,000
To reduce controlling and noncontrolling interests for their respective shares of
unrealized intercompany profit at beginning of year, to restore the carrying value
of equipment to its book value on the date of the intercompany sale

(3) Accumulated Depreciation 30,000


Other Expenses (Depreciation Expense) 15,000
Investment in Stone Company ($15,000)(.8) 12,000
Noncontrolling Interest ($15,000)(.2) 3,000
To reverse amount of excess depreciation recorded during year and to recognize
an equivalent amount of intercompany profit as realized

(4) Beginning Retained Earnings –Stone 1,038,000


Common Stock – Stone 525,000
Investment in Stone Company 1,250,400
($960,000 + $290,400*)
Noncontrolling Interest [$240,000 + ($1,038,000 - $675,000) × .2] 312,600
To eliminate investment account and create noncontrolling interest account
* (($1,263,000 - $675,000) × .8) - $180,000 = $290,400

Part B. Calculation of Consolidated Retained Earnings

Prather Company's retained earnings on 12/31/09 $1,874,400

Consolidated retained earnings on 12/31/09 $1,874,400

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