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152 CHAPTER 4

Cash paid for other operating items 25

R E Q u I R E D : Prepare the Cash Flows from Operating Activities section of Pierre’s consolidated statement of
cash flows under the direct method.

E 4-8
(APPENDIX B) Journal entries and computations (cost and equity methods)
Son Corporation’s outstanding capital stock (and paid in capital) has been $200,000 since the company was orga-
nized in 2016. Son’s retained earnings account since 2016 is summarized as follows:

RETAINED EARNINGS
Dividends December 1, 2016 $20,000 Net income 2016 $50,000
Dividends December 1, 2017 20,000 Net income 2017 70,000
Dividends December 1, 2018 30,000 Net income 2018 10,000
Dividends December 1, 2019 40,000 Net income 2019 60,000

Pop Corporation purchased 75% of Son’s outstanding stock on January 1, 2018, for $300,000. During 2019. Pop’s
income, excluding the investment income from Son, was $90,000.

REQuIRED
1. Prepare the journal entries, other than closing entries, on Pop’s books to account for its investment in Son
during 2019 under the cost method.
2. Determine the balance of Pop’s Investment in Son account at December 31, 2019, under the cost method.
3. Prepare the journal entries, other than closing entries, on Pop’s books to account for its investment in Son
for 2019 under the equity method.
4. Determine the balance of Pop’s Investment in Son account at December 31, 2019, under the equity method.
5. Compute consolidated net income for Pop Corporation and subsidiary for 2019.

pROBLEMS
P4-1
Calculations five years after acquisition
Pam Corporation purchased 75 percent of the outstanding voting stock of Sun Corporation for $4,800,000
on January 1, 2016. Sun’s stockholders’ equity on this date consisted of the following (in thousands):
Capital stock, $10 par $2,000
Additional paid-in capital 1,200
Retained earnings December 31, 2015 1,600
Total stockholders’ equity $4,800

The excess fair value of the net assets acquired was assigned 10 percent to undervalued inven-
tory (sold in 2016), 40 percent to undervalued plant assets with a remaining useful life of eight years,
and 50 percent to goodwill.
Comparative trial balances of Pam Corporation and Sun at December 31, 2020, are as follows
(in thousands):
Pam Sun
Other assets—net $7,530 $5,200
Investment in Sun—75% 4,680 —
Expenses (including cost of sales) 6,370 1,200
Dividends 1,000 400
$19,580 $6,800
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Consolidation Techniques and Procedures 153

Pam Sun
Capital stock, $10 par $6,000 $2,000
Additional paid-in capital 1,700 1,200
Retained earnings 3,340 1,600
Sales 8,000 2,000
Income from Sun 540 —
$19,580 $6,800

R E Q u I R E D : Determine the amounts that would appear in the consolidated financial statements of Pam
Corporation and Subsidiary for each of the following items:
1. Goodwill at December 31, 2020
2. Noncontrolling interest share for 2020
3. Consolidated retained earnings at December 31, 2019
4. Consolidated retained earnings at December 31, 2020
5. Consolidated net income for 2020
6. Noncontrolling interest at December 31, 2019
7. Noncontrolling interest at December 31, 2020

P4-2
Workpaper in year of acquisition
Liam AB acquired an 80 percent ownership in Theo AB on January 1, 2014, for $10mn, when Theo
AB’s stockholders’ equity consisted of $2,000,000 capital stock and $8,000,000 retained earnings.
Theo AB’s assets and liabilities were at book value equal to the fair value at the time. Separate financial
statements of Liam AB and Theo AB at December 31, 2014, are as follows (in thousands):
Liam AB Theo AB
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $67,000 $30,500
Income from Theo AB 1,200 —
Cost of sales (42,000) (25,000)
Expenses (21,900) (4,000)
Net income 4,300 1,500
Add: Beginning retained January 1 11,600 8,000
Deduct: Dividends (3,000) (500)
Retained earnings December 31 $12,900 $ 9,000
Balance Sheet at December 31
Cash $ 800 $ 600
Accounts receivable-net 1,300 800
Dividends receivable 400 —
Inventories 2,600 400
Other current assets 1,200 1,800
Land 3,000 4,200
Buildings-net 3,200 3,600
Equipment-net 2,200 2,400
Investment in Theo AB 10,800 —
Total Assets $25,500 $13,800
Accounts payable $ 1,000 $ 400
Dividends payable 2,500 500
Notes payable 4,100 1,900
Capital Stock, $10 par 5,000 2,000
Retained earnings 12,900 9,000
Total liabilities and equities $25,500 $13,800

No dividends declared by Theo AB during the year were paid.

R E Q u I R E D : Prepare consolidation workpapers for Liam AB and Subsidiary for the year ended
December 31, 2014.
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154 CHAPTER 4

P4-3
Workpapers in year of acquisition (goodwill and intercompany transactions)
Pam Corporation acquired a 75 percent interest in Sun Corporation on January 1, 2016. Financial state-
ments of Pam and Sun Corporations for the year 2016 are as follows (in thousands):
Pam Sun
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $1,600 $400
Income from Sun 55.2 —
Cost of sales (1,000) (200)
Other expenses (388) (104)
Net income 267.2 96
Add: Retained earnings January 1 720 136
Deduct: Dividends (200) (64)
Retained earnings December 31 $ 787.2 $168
Balance Sheet at December 31
Cash $ 212 $ 60
Accounts receivable—net 344 80
Dividends receivable from Sun 24 —
Inventories 380 40
Note receivable from Pam — 20
Land 260 120
Buildings—net 680 320
Equipment—net 520 200
Investment in Sun 727.2 —
Total assets $3,147.2 $840
Accounts payable $ 340 $ 40
Note payable to Sun 20 —
Dividends payable — 32
Capital stock, $10 par 2,000 600
Retained earnings 787.2 168
Total equities $3,147.2 $840

R E Q u I R E D : Prepare consolidation workpapers for Pam Corporation and Subsidiary for the year ended
December 31, 2016. Only the information provided in the financial statements is available; accordingly, your
solution will require some standard assumptions. Sun owned unrecorded patents having a fair value of $224,000,
and a useful life of 10 years.

P4-4
Consolidation workpapers from separate financial statements
Pop Corporation acquired a 75 percent interest in Son Corporation on January 1, 2016, for $720,000 in
cash. Financial statements of Pop and Son Corporations for 2016 are as follows (in thousands):
Pop Son
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $1,600 $400
Income from Son 72 —
Cost of sales (1,000) (200)
Other expenses (388) (104)
Net income 284 96
Add: Retained earnings January 1 720 136
Deduct: Dividends (200) (64)
Retained earnings December 31 $ 804 $168
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Consolidation Techniques and Procedures 155

Pop Son
Balance Sheet at December 31
Cash $ 236 $ 60
Accounts receivable—net 320 80
Dividends receivable from Son 24 —
Inventories 380 40
Note receivable from Pop — 20
Land 260 120
Buildings—net 680 320
Equipment—net 520 200
Investment in Son 744 —
Total assets $3,164 $840
Accounts payable $ 340 $ 40
Note payable to Son 20 —
Dividends payable — 32
Capital stock, $10 par 2,000 600
Retained earnings 804 168
Total equities $3,164 $840

R E Q u I R E D : Prepare consolidation workpapers for Pop Corporation and Subsidiary for the year ended
December 31, 2016. Only the information provided in the financial statements is available; accordingly, your
solution will require some standard assumptions.

P4-5
Excess identifiable to net assets
Nick NV acquired a 90 percent interest in Kim NV on January 1, 2014, by paying $9,000,000 cash. At
the time, Kim NV’s net assets were $9,000,000. It was also learned that some of Kim NV’s net assets’
book values were different from their fair values. Inventory was overvalued by $100,000, and building
with remaining useful life of 6 years was undervalued by $600,000. Separate financial statements of Nick
NV and Kim NV at December 31, 2014, are as follows (in thousands):
Nick NV Kim NV
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $ 9,800 $ 4,700
Income from Kim NV 450 —
Cost of sales (6,100) (3,000)
Depreciation expenses (1,000) (500)
Other expenses (150) (700)
Net income 3,000 500
Add: Beginning retained January 1 11,200 4,000
Deduct: Dividends (600) (100)
Retained earnings December 31 $13,600 $ 4,400
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156 CHAPTER 4

Nick NV Kim NV
Balance Sheet at December 31
Cash $ 1,800 $ 100
Accounts receivable–net 1,400 600
Inventories 2,000 1,600
Other current assets 1,000 900
Land 3,300 2,800
Buildings–net 4,000 3,400
Equipment–net 2,100 1,900
Investment in Kim NV 9,360 —
Total assets $24,960 $11,300
Accounts payable $4,100 $ 1,300
Other liabilities 3,860 600
Capital stock, $10 par 3,400 5,000
Retained earnings 13,600 4,400
Total liabilities and equities $24,960 $11,300

Kim NV’s accounts payable include $200,000 to Nick NV.

REQuIRED: Prepare consolidation workpapers for Kim NV and Subsidiary for the year ended
December 31, 2014.

P4-6
Workpapers (determine ownership interest, year after acquisition, excess assigned to
land and patents)
Separate company financial statements for Pop Corporation and its subsidiary, Son Company, at and for
the year ended December 31, 2017, are summarized as follows (in thousands):
Pop Son
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $ 1,600 $400
Income from Son 72 —
Cost of sales (1,000) (200)
Other Expenses (402.4) (104)
Net income 269.6 96
Add: Retained earnings January 1 708 136
Deduct: Dividends (200) (64)
Retained earnings December 31 $ 777.6 $16 8
Balance Sheet at December 31
Cash $ 72 $ 60
Accounts receivable—net 320 80
Dividends receivable from Son 28.8 —
Note receivable from Pop — 20
Inventory 380 40
Investment in Son 878.4 —
Land 260 120
Buildings—net 680 320
Equipment—net 520 200
Total assets $3,139.2 $840
Accounts payable $ 341.6 $ 40
Note payable to Son 20 —
Dividends payable — 32
Capital stock, $40 par 2,000 600
Retained earnings 777.6 168
Total equities $3,139.2 $840
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Consolidation Techniques and Procedures 157

A D D I T I O N A L I N F O R M AT I O N
1. Pop Corporation acquired 13,500 shares of Son Company stock for $60 per share on January 1, 2016, when
Son’s stockholders’ equity consisted of $600,000 capital stock and $60,000 retained earnings.
2. Son Company’s land was undervalued when Pop acquired its interest, and accordingly, $80,000 of the fair
value/book value differential was assigned to land. Any remaining differential is assigned to unrecorded
patents with a 10-year remaining life.
3. Son Company owes Pop $20,000 on account, and Pop owes Son $20,000 on a note payable.

R E Q u I R E D : Prepare consolidated workpapers for Pop Corporation and Subsidiary for the year ended Decem-
ber 31, 2017.

P4-7
Workpapers (year of acquisition, excess recorded for inventory, building equipment,
and goodwill, intercompany balances)
Pam Corporation acquired a 70 percent interest in Sun Corporation’s outstanding voting common stock
on January 1, 2016, for $490,000 cash. The stockholders’ equity of Sun on this date consisted of $500,000
capital stock and $100,000 retained earnings. The difference between the fair value of Sun and the under-
lying equity acquired in Sun was assigned $5,000 to Sun’s undervalued inventory, $14,000 to undervalued
buildings, $21,000 to undervalued equipment, and $60,000 to goodwill.
The undervalued inventory items were sold during 2016, and the undervalued buildings and
equipment had remaining useful lives of seven years and three years, respectively. Depreciation is
straight line.
At December 31, 2016, Sun’s accounts payable include $10,000 owed to Pam. This $10,000
account payable is due on January 15, 2017. Pam sold equipment with a book value of $15,000 for
$25,000 on June 1, 2016. This is not an intercompany sale transaction. Separate financial statements
for Pam and Sun for 2016 are summarized as follows (in thousands):

Pam Sun
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $ 800 $700
Income from Sun 60.2 —
Gain on equipment 10 —
Cost of sales (300) (400)
Depreciation expense (155) (60)
Other expenses (160) (140)
Net income 255.2 100
Add: Retained earnings January 1 300 100
Deduct: Dividends (200) (50)
Retained earnings December 31 $ 355.2 $150
Balance Sheet at December 31
Cash $ 96 $ 60
Accounts receivable—net 100 70
Dividends receivable 14 —
Inventories 150 100
Other current assets 70 30
Land 50 100
Buildings—net 140 160
Equipment—net 570 330
Investment in Sun 515.2 —
Total assets $1,705.2 $850
Accounts payable $ 200 $ 85
Dividends payable 100 20
Other liabilities 50 95
Capital stock, $10 par 1,000 500
Retained earnings 355.2 150
Total equities $1,705.2 $850
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158 CHAPTER 4

R E Q u I R E D : Prepare consolidation workpapers for Pam Corporation and Sun for the year ended December
31, 2016. Use an unamortized excess account.

P4-8
Workpapers (excess due to undervalued land and goodwill)
Separate-company financial statements for Pop Corporation and its subsidiary, Son Company, at and for
the year ended December 31, 2017, are summarized as follows (in thousands):
Pop Son
Combined Income and Retained Earnings
Statement for the Year Ended December 31
Sales $400 $100
Income from Son 21.6 —
Cost of sales (250) (50)
Expenses (100.6) (26)
Net income 71 24
Add: Retained earnings January 1 181 34
Deduct: Dividends (50) (16)
Retained earnings December 31 $202 $ 42
Balance Sheet at December 31
Cash $ 18 $ 15
Accounts receivable—net 80 20
Dividends receivable from Son 7.2 —
Note receivable from Pop — 5
Inventory 95 10
Investment in Son 226.8 —
Land 65 30
Buildings—net 170 80
Equipment—net 130 50
Total assets $792 $210
Accounts payable $ 85 $ 10
Note payable to Son 5 —
Dividends payable — 8
Capital stock, $10 par 500 150
Retained earnings 202 42
Total equities $792 $210

A D D I T I O N A L I N F O R M AT I O N
1. Pop Corporation acquired 13,500 shares of Son Company stock for $15 per share on January 1, 2016, when
Son’s stockholders’ equity consisted of $150,000 capital stock and $15,000 retained earnings.
2. Son Company’s land was undervalued when Pop acquired its interest, and accordingly, $20,000 of the fair
value/book value differential was assigned to land. Any remaining differential is goodwill.
3. Son Company owes Pop $5,000 on account, and Pop owes Son $5,000 on a note payable.

R E Q u I R E D : Prepare consolidation workpapers for Pop Corporation and Subsidiary for the year ended
December 31, 2017.

P4-9
Workpapers (year of acquisition, excess recorded for inventory, equipment and patents,
intercompany transactions)
Pam Corporation acquired 80 percent of Sun Corporation’s common stock on January 1, 2016, for
$840,000 cash. The stockholders’ equity of Sun at this time consisted of $600,000 capital stock and
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Consolidation Techniques and Procedures 159

$200,000 retained earnings. The difference between the fair value of Sun and the underlying equity
acquired in Sun was due to a $50,000 undervaluation of Sun’s inventory, a $100,000 undervaluation of
Sun’s equipment, and unrecorded patents with a 20-year remaining life.
The undervalued inventory was sold by Sun during 2016, and the undervalued equipment had
a remaining useful life of five years. Straight-line depreciation is used.
Sun owed Pam $16,000 on accounts payable at December 31, 2016.
The separate financial statements of Pam and Sun Corporations at and for the year ended
December 31, 2016, are as follows (in thousands):

Pam Sun
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $ 800 $ 440
Income from Sun 68 —
Cost of sales (320) (160)
Depreciation expense (160) (80)
Other expenses (102) (40)
Net income 286 160
Add: Retained earnings January 1 300 200
Deduct: Dividends (160) (80)
Retained earnings December 31 $ 426 $ 280
Balance Sheet at December 31
Cash $ 118 $ 120
Trade receivables—net 112 160
Dividends receivable 32 —
Inventories 160 120
Land 60 120
Buildings—net 260 280
Equipment—net 800 400
Investment in Sun 844 —
Total assets $2,386 $1,200
Accounts payable $ 160 $200
Dividends payable 400 40
Other liabilities 200 80
Capital stock, $10 par 1,200 600
Retained earnings 426 280
Total equities $2,386 $1,200

R E Q u I R E D : Prepare consolidation workpapers for Pam Corporation and Subsidiary at and for the year ended
December 31, 2016.

P4-10
Workpapers (year of acquisition, fair value/book value differentials, intercompany
balances)
Pop Corporation acquired 80 percent of Son Corporation’s common stock on January 1, 2016, for
$420,000 cash. The stockholders’ equity of Son at this time consisted of $300,000 capital stock and
$100,000 retained earnings. The difference between the fair value of Son and the underlying equity
acquired in Son was due to a $25,000 undervaluation of Son’s inventory, a $50,000 undervaluation of
Son’s equipment, and goodwill.
The undervalued inventory was sold by Son during 2016, and the undervalued equipment had
a remaining useful life of five years. Straight-line depreciation is used.
Son owed Pop $8,000 on accounts payable at December 31, 2016.
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160 CHAPTER 4

The separate financial statements of Pop and Son Corporations at and for the year ended Decem-
ber 31, 2016, are as follows (in thousands):
Pop Son
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $ 400 $220
Income from Son 36 —
Cost of sales (160) (80)
Depreciation expense (80) (40)
Other expenses (51) (20)
Net income 145 80
Add: Retained earnings January 1 150 100
Deduct: Dividends (80) (40)
Retained earnings December 31 $ 215 $140
Balance Sheet at December 31
Cash $ 59 $ 60
Trade receivables—net 56 80
Dividends receivable 16 —
Inventories 80 60
Land 30 60
Buildings—net 130 140
Equipment—net 400 200
Investment in Son 424 —
Total assets $1,195 $600
Accounts payable $ 80 $100
Dividends payable 200 20
Other liabilities 100 40
Capital stock, $10 par 600 300
Retained earnings 215 140
Total equities $1,195 $600

R E Q u I R E D : Prepare consolidation workpapers for Pop Corporation and Son at and for the year ended
December 31, 2016.

P4-11
Balance sheet (four years after acquisition, fair value/book value differentials)
Pam Corporation paid $170,000 for an 80 percent interest in Sun Corporation on December 31, 2016,
when Sun’s stockholders’ equity consisted of $100,000 capital stock and $50,000 retained earnings.
A summary of the changes in Pam’s Investment in Sun account from December 31, 2016, to December
31, 2020, follows (in thousands):
Investment cost December 31, 2016 $170
Increases
80% of Sun’s net income 2017 through 2020 112
282
Decreases
80% of Sun’s dividends 2017 through 2020 $56
80% of Amortization of excess fair value over book value:
Assigned to inventories, $8,750 (sold in 2017) 7
Assigned to plant assets, $22,500 (depreciated 8
over a nine-year period) 2017 through 2020
Assigned to patents, $31,250 (amortized over
a five-year period) 2017 through 2020 20 91
Investment balance December 31, 2020 $191
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Consolidation Techniques and Procedures 161

Financial statements for Pam and Sun at and for the year ended December 31, 2020, are sum-
marized as follows (in thousands):
Pam Sun
Combined Income and Retained Earnings
Statements for the Year Ended December 31
Sales $300 $200
Income from Sun 25 —
Cost of sales (180) (140)
Other expenses (50) (20)
Net income 95 40
Add: Retained earnings January 1 255 100
Deduct: Dividends (50) (20)
Retained earnings December 31 $300 $120
Balance Sheet at December 31
Cash $ 41 $ 35
Trade receivables—net 60 55
Dividends receivable 8 —
Advance to Sun 25 —
Inventories 125 35
Plant assets—net 300 175
Investment in Sun 191 —
Total assets $750 $300
Accounts payable $ 50 $ 45
Dividends payable — 10
Advance from Pam — 25
Capital stock 400 100
Retained earnings 300 120
Total equities $750 $300

A D D I T I O N A L I N F O R M AT I O N
1. The accounts payable of Sun at December 31, 2020, include $5,000 owed to Pam.
2. Pam advanced $25,000 to Sun during 2018. This advance is still outstanding.
3. Half of Sun’s 2020 dividends will be paid in January 2021.

R E Q u I R E D : Prepare workpapers to consolidate the balance sheets only of Pam and Sun Corporations at
December 31, 2020.

P4-12
Workpapers (two years after acquisition, fair value/book differentials, adjustments)
Pop Corporation acquired an 80 percent interest in Son Corporation for $240,000 on January 1, 2016,
when Son’s stockholders’ equity consisted of $200,000 capital stock and $25,000 retained earnings. The
excess fair value over book value acquired was assigned to plant assets that were undervalued by $50,000
and to goodwill. The undervalued plant assets had a four-year useful life.

A D D I T I O N A L I N F O R M AT I O N
1. Pop’s account receivable includes $5,000 owed by Son.
2. Son mailed its check for $20,000 to Pop on December 30, 2017, in settlement of the advance.
3. A $10,000 dividend was declared by Son on December 30, 2017, but was not recorded by Pop.
4. Financial statements for Pop and Son Corporations for 2017 follow (in thousands):