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CHAPTER 6
VARIABLE INTEREST ENTITIES, INTRA-ENTITY DEBT,
CONSOLIDATED CASH FLOWS, AND OTHER ISSUES
Chapter Outline
I.
6-1
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
1. Because the acquisition price will usually differ from the book value of
the liability, a gain or loss has been created which is not recorded within
the individual records of either company.
2. Because of the amortization of any associated discounts and/or
premiums, the interest income reported by the buyer will not equal the
interest expense of the debtor.
C. In the year of acquisition, the consolidation process eliminates intra-entity
accounts (the liability, the receivable, interest income, and interest expense)
while the gain or loss (which produced all of the discrepancies because of the
initial difference) is recognized.
1. Although several alternatives exist, this textbook assigns all income
effects resulting from the retirement to the parent company, the party
ultimately responsible for the decision to reacquire the debt.
2. Any noncontrolling interest is, therefore, not affected by the adjustments
utilized to consolidate intra-entity debt.
D. Even after the year of retirement, all intra-entity accounts must be
eliminated again in each subsequent consolidation; however, the beginning
retained earnings of the parent company is adjusted rather than a gain or loss
account.
1. The change in retained earnings is needed because a gain or loss was
created in a prior year by the retirement of the debt, but only interest
income and interest expense were recognized by the two parties.
2. The adjustment to retained earnings at any point in time is the original
gain or loss adjusted for the subsequent amortization of discounts or
premiums.
III. Subsidiary preferred stock
A. Subsidiary preferred shares not owned by the parent are a part of
noncontrolling interest.
B. The fair value of any subsidiary preferred shares not acquired by the
parent is added to the consideration transferred along with the fair value
of the noncontrolling interest in common shares to compute the
acquisition-date fair value of the subsidiary.
IV. Consolidated statement of cash flows
A. Statement is produced from consolidated balance sheet and income statement and not from
the separate cash flow statements of the component companies.
B. Intra-entity cash transfers are omitted from this statement because they do not occur with an
outside, unrelated party.
C. The "Noncontrolling Interest's Share of the Subsidiary's Income'' is not included as a cash
flow. Dividends paid to these outside owners are reported as a financing activity.
V. Consolidated earnings per share
A. This computation normally follows the pattern described in intermediate accounting
textbooks. For basic EPS, consolidated net income is divided by the
weighted-average number of parent shares outstanding. If convertibles (such as
bonds or warrants) exist for the parent shares, their weight must be included in
computing diluted EPS but only if earnings per share is reduced.
6-2
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
1. The subsidiary's diluted earnings per share are computed first to arrive at (1) an earnings
figure and (2) a shares figure.
6-3
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
2.
The portion of the shares figure belonging to the parent is computed. That percentage of the
subsidiary's diluted earnings is then added to the parent's income in order to
complete the earnings per share computation.
VI. Subsidiary stock transactions
A. If the subsidiary issues new shares of stock or reacquires its own shares as treasury stock, a
change is created in the book value underlying the parent's investment account.
The increase or decrease should be reflected by the parent as an adjustment to this
balance.
B. The book value of the subsidiary that corresponds to the parent's ownership is measured
before and after the transaction with any alteration recorded directly to the
investment account. The parent's additional paid-in capital (or retained earnings)
account is normally adjusted although the recognition of a gain or loss is an
alternate accounting treatment.
C. Treasury stock acquired by the subsidiary may also necessitate a similar adjustment to the
parent's investment account. In addition, any subsidiary treasury stock is eliminated
within the consolidation process.
6-4
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Both parties were involved in the transaction so that some allocation of the loss is required.
If, at the time of repurchase, a discount existed within the subsidiary's accounts, this
figure
6-5
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
would have been amortized to interest expense (if the debt had not been retired). Thus, the
$300,000 loss was accepted now in place of the later amortization. This reasoning then
assigns this portion of the loss to the subsidiary. Because the parent was forced to pay
more than face value, that remaining portion is assigned to the buyer.
Answers to Questions
1. A variable interest entity (VIE) is a business structure that is designed to accomplish a
specific purpose. A VIE can take the form of a trust, partnership, joint venture, or
corporation although typically it has neither independent management nor
employees. The entity is frequently sponsored by another firm to achieve favorable
financing rates.
2. Variable interests are contractual, ownership, or other pecuniary interests in an entity that
change with changes in the entity's net asset value. Variable interests will absorb
portions of a variable interest entity's expected losses if they occur or receive
portions of the entity's expected residual returns if they occur. Variable interests
typically are accompanied by contractual arrangements that provide decision making
power to the owner of the variable interests. Examples of variable interests include
debt guarantees, lease residual value guarantees, participation rights, and other
financial interests.
3. The following characteristics are indicative of an enterprise qualifying as a primary
beneficiary with a controlling financial interest in a VIE.
The power, through voting rights or similar rights, to direct the activities of an entity that most
significantly impact the entitys economic performance.
The obligation to absorb the expected losses of the entity if they occur, or
The right to receive the expected residual returns of the entity if they occur
4. Because the bonds were purchased from an outside party, the acquisition price is likely
to differ from the book value of the debt in the subsidiary's records. This difference
creates accounting problems in handling the intra-entity transaction. From a
consolidated perspective, the debt is retired; a gain or loss is reported with no further
interest being recorded. In reality, each company continues to maintain these bonds
on their individual financial records. Also, because discounts and/or premiums are
likely to be present, these account balances as well as the interest income/expense
will change from period to period because of amortization. For reporting purposes,
all individual accounts must be eliminated with the gain or loss being reported so
that the events are shown from the vantage point of the consolidated entity.
5. If the bonds are acquired directly from the affiliate company, all reciprocal accounts will be
equal in amount. The debt and the receivable will be in agreement so that no gain or loss is
created. Interest income and interest expense should also reflect identical amounts.
Therefore, the consolidation process for this type of intra-entity debt requires no more than
the offsetting of the various reciprocal balances.
6. The gain or loss to be reported is the difference between the price paid and the book value
of the debt on the date of acquisition. For consolidation purposes, this gain or loss should be
recognized immediately on the date of acquisition.
6-6
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
7. Because the bonds are still legally outstanding, they will continue to be found on both sets of
financial records. Thus, each account (Bonds Payable, Investment in Bonds, Interest
Expense, and Interest Income) must be eliminated within the consolidation process. Any gain
or loss on the retirement as well as later effects on interest caused by amortization are also
included to arrive at an adjustment to the beginning retained earnings of the parent
company.
8. The original gain is never recognized within the financial records of either company. Thus,
within the consolidation process for the year of acquisition, the gain is directly recorded
whereas (for each subsequent year) it is entered as an adjustment to beginning retained
earnings. In addition, because the book value of the debt and the investment are not in
agreement, the interest expense and interest income balances being recorded by the two
companies will differ each year because of the amortization process. This amortization
effectively reduces the difference between the individual retained earnings balances and the
total that is appropriate for the consolidated entity. Consequently, a smaller change is
needed each period to arrive at the balance to be reported. For this reason, the annual
adjustment to beginning retained earnings gradually decreases over the life of the bond.
9. No set rule exists for assigning the income effects from intra-entity debt transactions
although several different theories exist and include: (1) assignment of the entire amount to
the debtor, (2) assignment of the entire amount to the buyer, and (3) allocation of the gain or
loss between the two parties in some manner. This textbook attributes the entire income
effect (the $45,000 gain in this case) to the parent company. Assignment to the parent is
justified because that party is ultimately responsible for the decision to retire the debt. The
answer to the discussion question included in this chapter analyzes this question in more
detail.
10. Subsidiary outstanding preferred shares are part of the noncontrolling interest and are
included in the consolidated financial statements at acquisition-date fair value and
subsequently adjusted for their share of subsidiary income and dividends.
11. The consolidated cash flow statement is developed from consolidated balance sheet and
income statement figures. Thus, the cash flows generated by operating, investing, and
financing activities are identified only after the consolidation of these other statements.
12. The noncontrolling interest share of the subsidiarys income is a component of consolidated
net income. Consolidated net income then is adjusted for noncash and other items to arrive
at consolidated cash flows from operations. Any dividends paid by the subsidiary to these
outside owners are listed as a financing activity because an actual cash outflow occurs.
13. An alternative to the normal diluted earnings per share calculation is required whenever the
subsidiary has dilutive convertible securities such as bonds or warrants. In this case, the
potential impact of the conversion of subsidiary shares must be factored into the overall
diluted earnings per share computation.
14. Basic Earnings per Share. The existence of subsidiary convertible securities does not affect
basic EPS. The parents basic earnings per share is computed by dividing the parents share
of consolidated net income by the weighted average number of parent shares outstanding.
6-7
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Diluted Earnings per Share. The subsidiary's diluted earnings per share is computed by
including both convertible items. The portion of the parent's controlled shares to the total
shares used in this calculation is then determined. Only this percentage (of the income figure
used in the subsidiary's computation) is added to the parent's income in arriving at the parent
companys diluted earnings per share.
15. Several reasons could exist for a subsidiary to issue new shares of stock to outside parties.
First, additional financing is brought into the company by any such sale. Also, stock issuance
may be used to entice new individuals to join the organization. Additional management
personnel, as an example, might be attracted to the company in this manner. The company
could also be forced to sell shares because of government regulation. Many countries
require some degree of local ownership as a prerequisite for operating within that country.
16. Because the new stock was issued at a price above the subsidiarys assigned consolidation
value, the overall valuation for Metcalf's stock has been increased. Consequently, the
Washburn's investment is increased to reflect this change. To measure the effect, the value
of Washburn's investment is calculated both before and after the new issue. Because the
increment is the result of a stock transaction, an increase is made to additional paid-in
capital. Although the subsidiary's shares (both new and old) are eliminated in the
consolidation process, the increase in the parent's APIC (or gain or loss) carries into the
consolidated figures. Also, the noncontrolling interest percentage of the subsidiary increases.
17. A stock dividend does not alter the assigned consolidated subsidiary value and, thus, creates
no effect on Washburn's investment account or on the consolidated figures. Hence, no entry
is recorded by the parent company in connection with the subsidiary's stock dividend.
Answers to Problems
1. C
2. D
3. A
4. D
5. A
6. D Cash flow from operations:
Net income...................................................................
Depreciation.................................................................
Trademark amortization.............................................
Increase in accounts receivable................................
Increase in inventory..................................................
Increase in accounts payable....................................
Cash flow from operations.........................................
6-8
$45,000
10,000
15,000
(17,000)
(40,000)
12,000
(20,000)
$25,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
7. C
($12,000)
(1,000)
(25,000)
($38,000)
8. C
9. C Post-issue subsidiary valuation ($800,000 + $250,000)
Arcolas new ownership percentage (40,000 50,000)
Arcolas share of post-issue subsidiary valuation
Arcolas pre-issue equity balance
Increase to Arcolas investment account
$1,050,000
80%
$ 840,000
800,000
$ 40,000
$200,000
80,000
21,000
(22,000)
13,000
$292,000
$465,000
100,000
$4.65
$400,000
(7,000) $393,000
100,000
1,700
4,830
(5,592)
$493,938
13. D 30% of Byrd's net income of $100,000; the intra-entity debt transaction is
attributed solely to the parent company.
14. A For 2011, the adjustment to beginning retained earnings should recognize
the gain on the retirement of the debt, the elimination of the 2010 interest
expense, and the elimination of the 2010 interest income.
Gain on Retirement of Bond:
6-9
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$10,600,000
(90,000)
$10,510,000
40%
$4,204,000
3,864,000
$ 340,000
$360,000
(12,000)
$348,000
$360,000
8,000
$368,000
$340,000
348,000
(368,000)
$320,000
$ 424,000
3,960,000
1,696,000
440,000
6,520,000
(6,000,000)
$ 520,000
6-10
$300,000
200,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
(40,000)
$460,000
(30,000)
$430,000
$588,000
100%
$588,000
$738,000
80%
$590,400
$592,000
148,000
80,000
150,000
970,000
64%
$620,800
656,000
$(35,200)
$628,000
100%
$628,000
656,000
$(28,000)
6-11
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Because (1) HCO Medias losses are limited by contract, and (2)
Hillsborough has the right to receive the residual benefits of the sales
generated on the HCO Media internet site above $500,000, Hillsborough
should consolidate HCO Media.
23.
The total equity at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties. In most cases, if equity at risk is less than 10% of total assets,
the risk is deemed insufficient.
The equity investors in the VIE lack any one of the following three
characteristics of a controlling financial interest.
1. The power, through voting rights or similar rights, to direct the
activities of an entity that most significantly impact the entitys
economic performance.
2. The obligation to absorb the expected losses of the entity if they
occur (e.g., another firm may guarantee a return to the equity
investors)
3. The right to receive the expected residual returns of the entity (e.g.,
the investors' return may be capped by the entity's governing
documents or other arrangements with variable interest holders).
6-12
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
c. Risks of the construction project that has TecPC has effectively shifted to
the owners of the VIE:
At the end of the 1st five-year lease term, if the parent opts to sell the
facility, and the proceeds are insufficient to repay the VIE investors, TecPC
may be required to pay up to 85% of the project's cost. Thus, a potential
15% risk.
Risks that remain with TecPC
If lease is not renewed, TecPC must either purchase the facility or sell it
on behalf of the VIE with a guarantee of Investors' (debt and equity)
balances representing a risk of decline in market value of asset
Debt guarantees
(23. continued)
d. TecPC possesses the following characteristics of a primary beneficiary:
Direct decision-making ability (end of five-year lease term).
Absorb a majority of the entity's expected losses if they occur (via debt
guarantees and guaranteed lease payments and residual value).
6-13
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
PanTech recognizes the $20,000 excess net asset fair value as a bargain purchase
and records all of SoftPlus assets and liabilities at their individual fair values.
Cash
$20,000
Marketing software
160,000
Computer equipment
40,000
Long-term debt
(120,000)
Noncontrolling interest
(60,000)
Pantech equity interest
(20,000)
Gain on bargain purchase
(20,000)
-0b. Implied valuation and excess valuation for Softplus.
Noncontrolling interest fair value
60,000
Consideration transferred by Pantech
20,000
Total business fair value
80,000
Fair value of VIE net identifiable assets
60,000
Goodwill
$20,000
When the fair value of a VIE (that is a business) is greater than assessed
asset values, all identifiable assets and liabilities are reported at fair values
(unless a previously held interest) and the difference is treated as goodwill.
Cash
Marketing software
Computer equipment
Goodwill (excess business fair value)
Long-term debt
Noncontrolling interest
Pantech equity interest
$20,000
120,000
40,000
20,000
(120,000)
(60,000)
(20,000)
-025. (25 Minutes) (Consolidation entry for three consecutive years to report effects
of intra-entity bond acquisition. Straight-line method used.)
a. Book Value of Bonds Payable, January 1, 2010
Book value, January 1, 2008 ................................................... $1,050,000
Amortization20082009 ($5,000 per year
[$50,000 premium 10 years] for two years) ..................
10,000
Book value of bonds payable, January 1, 2010.................... $1,040,000
Book value of 40% of bonds payable
(intra-entity portion), January 1, 2010 ..............................
$416,000
Gain on Retirement of Bonds, January 1, 2010
Purchase price ($400,000 96%) ...........................................
Book value of liability (computed above) .............................
Gain on retirement of bonds ..................................................
6-14
$384,000
416,000
$ 32,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
2,000
$386,000
$36,000
2,000
$34,000
$36,000
2,000
$38,000
25. (continued)
CONSOLIDATION ENTRY B (2010)
Bonds Payable ............................................................ 400,000
Premium on Bonds Payable ...................................... 14,000
Interest Income ........................................................... 38,000
Investment in Bonds ..............................................
386,000
Interest Expense ....................................................
34,000
Extraordinary Gain on Retirement of Bonds ......
32,000
(To eliminate accounts stemming from intra-entity bonds [balances
computed above] and to recognize gain on the retirement of this debt.)
b. In 2011, because straight-line amortization is used, the interest accounts
remain unchanged at $38,000 and $34,000. However, the premium
associated with the bond payable as well as the discount on the
investment are affected by the $2,000 per year amortization. In addition,
the gain now has to be included as a component of beginning retained
earnings. Concurrently, the two interest balances recorded by the
6-15
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
400,000
10,000
38,000
390,000
34,000
24,000
6-16
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Revenues and Interest Income = $1,051,360 (add the two book values and
eliminate interest income on intra-entity bond)
Operating and Interest Expense = $751,760 (add the two book values and
eliminate interest expense on intra-entity bond)
Other Gains and Losses = $152,000 (add the two book values)
27.
(30 Minutes) (Consolidation entry for two years to report effects of intraentity bond acquisition. Effective rate method applied.)
a. Loss on Repurchase of Bond
Cost of acquisition ..........................................
Book value ($668,778 1/8) ...........................
Loss on repurchase ........................................
$121,655
83,597
$ 38,058
$7,299
Interest expense:
$83,597 (book value [above]) 10% ........
$8,360
6-17
$121,655
$8,000
7,299
701
$120,954
$83,597
$8,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
8,360
360
$83,957
Entry B12/31/10
Bonds Payable .................................................
83,957
Interest Income ................................................
7,299
Loss on Retirement of Debt ...........................
38,058
Investment in Bonds .................................
120,954
Interest Expense ........................................
8,360
(To eliminate intra-entity debt holdings and recognize loss on
retirement.)
b. Interest Balances for 2011
Interest income: $120,954 (investment
balance for the year) 6% .........................................
$7,257
$8,396
27. (continued)
Investment Balance, December 31, 2011
Book value, January 1, 2011 (part a) .......................
Amortization of premium:
Cash interest ($100,000 8%) .............................
Effective interest income (above) .......................
Investment balance, December 31, 2011.......
Bonds Payable Balance, December 31, 2011
Book value, January 1, 2011 (part a) .......................
Amortization of discount:
Cash interest ($100,000 8%) .............................
Effective interest expense (above) .....................
Bonds payable balance,
December 31, 2011 ..........................................
Interest Balances for 2012
Interest income: $120,211 (investment.....................
balance for the year [above]) 6%
Interest expense: $84,353 (liability balance
for the year [above]) 10% ..................................
Investment Balance, December 31, 2012
6-18
$120,954
$8,000
7,257
743
$120,211
$83,957
$8,000
8,396
396
$84,353
$7,213
$8,435
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$120,211
$8,000
7,213
787
$119,424
$84,353
$8,000
8,435
435
$84,788
27. (continued)
Adjustment Needed to Retained Earnings, January 1, 2012
Loss on retirement of debt (part a) ..........................
Balances currently in retained earnings:
Interest income:
2010
($7,299)
2011
(7,257)
($14,556)
Interest expense: 2010
$8,360
2011
8,396
16,756
Reduction needed to beginning retained
earnings to arrive at consolidated total ..........................
$38,058
2,200
$35,858
Entry *B12/31/12
Bonds Payable ............................................................
Interest Income ...........................................................
Retained earnings, 1/1/12 (Parent) ...........................
Investment in Bonds ............................................
Interest Expense ...................................................
84,788
7,213
35,858
119,424
8,435
6-19
$283,550
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
(221,749)
$61,801
Date
2008
2009
2010
Book
Value
$435,763
$438,055
$440,622
Effective
Interest
(12% Rate)
$52,292
$52,567
$52,875
Cash
Interest
$50,000
$50,000
$50,000
Amortization
$2,292
$2,567
$2,875
Year- End
Book Value
$438,055
$440,622
$443,497
$283,550
$25,000
22,684
2,316
$281,234
$443,497
$50,000
53,220
3,220
$446,717
223,359
22,684
61,801
26,610
281,234
28. continued
c. Loss on Retirement of Bond
Because Bloom uses the straight-line method of amortization, the loss on
retirement must be computed again.
Original issue price1/1/08 .........................................................
6-20
$435,763
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
17,519
$453,282
$226,641
283,550
$ 56,909
$283,550
(4,194)
$279,356
Interest Income
Cash interest ($250,000 10%) ...................................................
Premium amortization (above) ....................................................
Intra-entity interest income2011 .........................................
$25,000
(4,194)
$20,806
Bonds Payable
Original issue price 1/1/08.............................................................
Discount amortization (20082011) [($64,237 11) 4 years] .
Book value 12/31/11 .................................................................
Opus ownership .......................................................................
Intra-entity portion12/31/11 ...........................................
$435,763
23,359
$459,122
50%
$229,561
Interest Expense
Cash interest ($250,000 10%) ...................................................
Discount amortization ([$64,237 11] 1/2) ..............................
Intra-entity interest expense2011 .......................................
$25,000
2,920
$27,920
229,561
20,806
56,909
27,920
279,356
29. (8 Minutes) (Determine goodwill for a purchase in which subsidiary has both
common stock and preferred stock)
Consideration transferred for common stock
Consideration transferred for preferred stock
6-21
$1,600,000
630,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
400,000
270,000
$2,900,000
2,500,000
$400,000
$14,040,000
2,000,000
16,040,000
(16,000,000)
$ 40,000
40 years
$1,000
6-22
289,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
100,000
3,100,000
7,368,000
4,912,000
(To eliminate subsidiary stockholders equity, record excess acquisitiondate fair values, and record outside ownership of subsidiary's preferred
stock at acquisition-date fair value)
31. (continued)
6-23
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Entry I1
Dividend Income ........................................................
80,000
Dividends Paid ......................................................
80,000
(To offset intra-entity preferred stock dividend payments recognized as
income by parent$1,000,000 par value 8% dividend rate.)
Entry I2
Dividend Income ........................................................
192,000
Dividends Paid ......................................................
192,000
(To eliminate intra-entity dividend payments [60% of $320,000] on common
stock. Because the $320,000 in dividends remaining after Entry I1 equals
exactly 8 percent of the common stock par value, the participation factor
does not affect the distribution.)
Entry E
Amortization Expense ...............................................
44,000
Equipment ...................................................................
10,000
Building ..................................................................
Brand name ...........................................................
(To record 2011 amortization of specific accounts
recognized within acquisition price of preferred stock.)
40,000
14,000
32. (15 Minutes) (The effect that various events have on a consolidated statement
of cash flows.)
Sale of building. The $44,000 in cash received from the sale is listed as a
cash inflow within the company's investing activities. If the company
is using the direct approach in presenting cash flows from
operations, the $12,000 gain is merely omitted. However, if the
indirect approach is in use, the gain (a positive) must be eliminated
from net income by a subtraction.
6-24
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
32. continued
33. (20 Minutes) (Determine cash flows from operations for a consolidated entity.)
DIRECT APPROACH
Cash revenues (add book values, eliminate intra-entity transfers,
and add decrease in accounts receivable) ...................................
$648,000
Cash inventory purchases (add book values, eliminate
intra-entity transfers, eliminate unrealized gains, add increase in
inventory, and add decrease in accounts payable)......................
(370,000)
Depreciation and amortization (omit as noncash expenses)...........
-0Other expenses (add book values) .....................................................
(40,000)
Gain on sale of equipment (omit because this is an investing activity)
-0Equity in earnings of Knight (intra-entity so not included) .............
-0Cash generated from operations ..............................................
$238,000
INDIRECT APPROACH
Consolidated net income (computed below) .....................................
Adjustments:
Depreciation and amortization ..................................................
Gain on sale of equipment ........................................................
Increase in inventory .................................................................
Decrease in accounts receivable ..............................................
Decrease in accounts payable ..................................................
Cash generated from operations ........................................
$216,000
61,000
(30,000)
(11,000)
8,000
(6,000)
$238,000
6-25
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
34. (30 Minutes) (Compute basic and diluted earnings per share for a parent and its
100 percent owned subsidiary, both with convertible bonds.)
Basic EPSPorter Company:
Porter's reported income ..........................................
Street's reported income ...........................................
Amortization expense ................................................
Consolidated net income (all to Porter)..............
Porter shares outstanding ...................................
Basic earnings per share ($270,000 60,000) ........
Diluted EPSStreet Company
Street earnings after amortization............................
Shares outstanding ....................................................
Basic earnings per share (120,000 30,000) ..........
Street's earnings assuming conversion of its bonds
($120,000 + $24,000 interest saved net of tax) . .
Street's shares assuming conversion of its bonds
(30,000 + 10,000) ...................................................
Diluted earnings per share (144,000 40,000) ........
$150,000
130,000
(10,000)
$270,000
60,000
$4.50
$120,000
30,000
$4.00
$144,000
40,000
$3.60
Because diluted earnings per share is less than basic earnings per share, the
convertible bonds are dilutive and should be included.
Porters share of Streets diluted earnings:
Total shares assuming Street bond conversion ....
Shares owned by Porter.............................................
Porter's ownership percentage (30,000 40,000) . .
Street's earnings for diluted EPS (above) ...............
Porter's ownership percentage.................................
Earnings attributed to Porter company ...................
Porters earnings and shares for diluted EPS:
Porter's separate income ..........................................
Streets income applicable to Porter (above)..........
Interest saved (net of tax) on assumed
conversion of Porter's bonds ..............................
Diluted earnings to Porter..........................................
Porter shares outstanding ........................................
Additional shares from assumed bond conversion
Diluted shares .............................................................
40,000
30,000
75%
$144,000
75%
$108,000
$150,000
108,000
32,000
$290,000
60,000
8,000
68,000
6-26
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$200,000
40,000
10,000
(5,000)
5,000
45,000
$600,000
182,000
$782,000
100,000
$290,000
56,000
$346,000
80,000
30,000
110,000
6-27
$480,000
(15,000)
252,580
$717,580
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$110,000
52,000
(20,000)
$142,000
50,000
$2.84
6-28
30,000
10,000
(8,000)
20,000
52,000
27,000
$95,000
52%
$49,400
$110,000
(4,500)
$105,500
$ 49,400
-0$154,900
50,000
20,000
70,000
(rounded)
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$2.21
(rounded)
37. (continued)
Alternative derivation of Masons diluted EPS:
Consolidated net income
Consolidated interest saved (net of intra-entity interest)
Consolidated net income assuming bond conversion
Subsidiary net income
$(90,000)
Excess fair value amortization
25,000
Subsidiary interest saved
(30,000)
Income applicable to diluted EPS
$(95,000)
Noncontrolling interest share
0.48
Parent's net income applicable to diluted EPS
$(175,000)
(25,500)
(200,500)
(45,600)
$(154,900)
70,000
$2.21
$490,000
100%
$490,000
$647,500
80%
$518,000
6-29
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
16,000
16,000
39. continued
b. Albuquerque's adjusted acquisition-date fair value is $840,000 (see above) prior
to the issuance of the new shares. The 4,000 additional shares increase
subsidiary's total value by $132,000 (the price of the stock) to $972,000.
Albuquerque' ownership decreases to 2/3 (16,000 shares out of a total of
24,000) for a fair value equivalency of $648,000. Reducing the $672,000 (see a.)
to $648,000 requires a $24,000 decrease to the parents APIC.
Additional Paid-in Capital .........................................
Investment in Marmon .........................................
24,000
24,000
40. (55 Minutes) (Prepare consolidation entries following a subsidiary stock issue
to outside parties.)
Initially, Aronsen owns 18,000 shares (or 90%) of Siedel's outstanding
shares (the total number of shares can be determined by dividing the
subsidiary's Common Stock account by the $10 per share par value). After
issuing 4,000 additional shares, the parent must prepare an adjustment to
reflect the change in its share of the subsidiarys unamortized acquisitiondate fair value. Because that entry has not been recorded, it is included on
the consolidation worksheet as Entry C1 (labeled in this manner as a
correction). Other consolidation procedures follow as described in previous
chapters.
Excess Acquisition-Date Fair Value Allocation and Amortization
Fair value (consideration transferred plus NCI fair value) .......... $649,000
Acquisition-date book value............................................................
(480,000)
Fair value in excess of book value ................................................ $169,000
Allocated to land based on fair value.............................................
89,000
Allocated to copyrights based on fair value..................................
$80,000
Life of copyrights .............................................................................
16 yrs
Annual amortization ........................................................................
$ 5,000
Adjustment for Stock Transaction
Adjusted acquisition-date fair value of subsidiary
on new issue date ($649,000 + $90,000 + $152,000) ...............
Adjusted parent ownership (18,000 shares 24,000 shares) .....
Parents post-issue equity method value at 1/1/11 ................
Equity method balance before new subsidiary stock issue
6-30
$891,000
75%
$668,250
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
665,100
$ 3,150
81,000
81,000
3,150
3,150
240,000
112,000
380,000
549,000
183,000
89,000
70,000
119,250
39,750
6-31
15,000
15,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
5,000
5,000
$30,000
$40,000
10-year life
20-year life
As indicated in the problem, the parent is applying the partial equity method.
Hence an Entry *C must be recorded on the worksheet to convert the recorded
figures (amortization is needed for the three years prior to 2012) to equity
balances:
Amortization expense ($5,000 3 years) = .............
$15,000 (Entry *C)
Unrealized gain in ending inventory (downstream):
Ending balance ...........................................................
Markup ($20,000 $100,000) .....................................
Unrealized gain to be eliminated ..............................
$10,000
20%
$ 2,000
(Entry G)
$282,000
50%
$141,000
145,500
$ 4,500
(Entry B)
Amortization during 2012 changed the carrying value of the bond payable from
$282,000 to $288,000 (found in the balance sheet) and the investment from
$145,500 to $147,000. This amortization also affects interest income and
expense accounts.
Entry A reflects remaining values after three years of amortizations.
6-32
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
41. continued
Accounts
Revenues...............................................
Cost of goods sold...............................
Expenses...............................................
Interest expensebonds ....................
Interest incomebond investment.....
Loss on extinguishment of bonds......
Equity in income of Stabler.................
Net income.........................................
Pavin
(740,000)
455,000
125,000
36,000
-0-0(123,000)
(247,000)
(345,000)
(247,000)
155,000
(437,000)
(361,000)
(123,000)
61,000
(423,000)
217,000
175,000
613,000
35,000
87,000
-0-
Stabler
(505,000)
240,000
158,500
-0(16,500)
-0-0(123,000)
-0245,000
-01,250,000
147,000
541,000
-0810,000
(225,000)
(300,000)
12,000
(300,000)
(437,000)
(1,250,000)
(167,000)
(100,000)
-0(120,000)
(423,000)
(810,000)
6-33
Consolidation Entries
Debit
Credit
(TI)100,000
(G) 2,000
(TI) 100,000
(E) 5,000
(B)
18,000
(B) 16,500
(B) 4,500
(I) 123,000
(*C) 15,000
(S) 361,000
(D)
(D) 61,000
(A) 21,000
(A) 34,000
61,000
(P)
33,000
(G)
2,000
(*C) 15,000
(S) 481,000
(A)
55,000
(I)
123,000
(B) 147,000
(E)
3,000
(E)
2,000
(P) 33,000
(B) 150,000
(B)
6,000
(S) 120,000
1,046,000
1,046,000
Consolidated
Totals
(1,145,000)
597,000
288,500
18,000
-04,500
-0(237,000)
(330,000)
-0(237,000)
155,000
(412,000)
219,000
260,000
-0-0804,000
32,000
1,315,000
(359,000)
(250,000)
6,000
(300,000)
(412,000)
(1,315,000)
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
42. (40 Minutes) (Prepare consolidation entries after intra-entity bond acquisition.)
a. Allocation of Acquisition-date Excess Fair Value
Consideration transferred
$312,000
Noncontrolling interest fair value
208,000
Acquisition-date fair value
$520,000
Book value acquired
300,000
Fair value in excess of book value $220,000
Annual Excess
Excess allocated to patents based
Life Amortizations
on fair value
90,000 12 years
$7,500
Customer list
$130,000 10 years
13,000
Total
$20,500
CONSOLIDATION ENTRIES
Entry *TL
Investment in Herman ................................................
7,000
Land ......................................................................
7,000
(To eliminate unrealized gain created by previous intra-entity transfer.
Investment is adjusted here because transfer was downstream and equity
method has been applied by parent. Thus, retained earnings have already
been corrected.)
Entry *G
Retained Earnings 1/1/11 (Herman) .........................
8,000
Cost of Goods Sold ..............................................
8,000
(To remove unrealized inventory gain from prior year so that it can be
properly realized in current year. Amount is computed as shown below.)
Intra-entity profit2010 .............................................
Transfer price2010 ..................................................
Markup ($25,000 $125,000) .....................................
Unrealized gain in 1/1/11 inventory
($40,000 20%) .....................................................
$25,000
$125,000
20%
$8,000
Entry S
Common Stock (Herman) ..........................................
100,000
Retained Earnings, 1/1/11 (Herman)
(adjusted for Entry *G) .........................................
292,000
Investment in Herman (60%) ..........................
235,200
Noncontrolling Interest in Herman (40%) .....
156,800
(To eliminate Herman's stockholders' equity accounts and to record
beginning of year balance for noncontrolling interest.)
42. a. (continued)
6-34
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Entry A
Patents ......................................................................
75,000
Customer list...............................................................
104,000
Investment in Herman ..........................................
107,400
Noncontrolling interest ........................................
71,600
(To recognize unamortized balances as of 1/1/11 of amounts allocated within
original acquisition price. Allocations have been reduced by two years of
amortizations.)
Entry I
Equity Income of Herman...........................................
3,000
Investment in Herman......................................
(To eliminate intra-entity equity income accrual)
Hermans income.............................................................. $25,000
Excess amortizations....................................................... (20,500)
2010 intra-entity inventory gross profit.........................
8,000
2011 intra-entity inventory gross profit.........................
(7,500)
Accrual-based income..................................................... $5,000
Freds ownership percentage.........................................
60%
Equity in earnings of Herman......................................... $3,000
Entry D
Investment in Herman ................................................
Dividends paid ......................................................
(To eliminate intra-entity dividend payments.)
Entry E
Amortization expense ................................................
Patents....................................................................
Customer list..........................................................
(To recognize current year amortization expense.)
3,000
2,400
2,400
20,500
7,500
13,000
Entry P
Accounts payable ......................................................
60,000
Accounts receivable .............................................
(To remove intra-entity debt created by inventory transfers.)
60,000
42. a. (continued)
Entry B
Bonds payable ............................................................
Premium on bonds payable ......................................
Interest income ...........................................................
Investment in parent bonds ................................
6-35
20,000
1,069
1,873
19,005
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Investment
Liability
Book
Value
(given)
Effective
Interest
$18,732
21,386
$1,873 (10%)
1,283 (6%)
Cash
Interest
(8%)
$1,600
1,600
Excess
Amortizations
$273
317
Entry Tl
Sales ............................................................................
120,000
Cost of goods sold (or Purchases) ....................
(To eliminate intra-entity transfers made during current year.)
Year- End
Book
Value
$19,005
21,069
120,000
Entry G
Cost of goods sold ....................................................
7,500
Inventory.................................................................
7,500
(To defer recognition of inventory transfer gains until subsequent year.
Amount calculated as follows.)
Intra-entity profit ...................................................
$30,000
Transfer price 2011 ...............................................
$120,000
Markup ($30,000 $120,000) ...............................
25%
Unrealized gain in ending inventory
($30,000 25%) ...................................................
$7,500
b. Herman's reported income for 2011 .........................................
Excess fair value amortization ..................................................
2010 unrealized gain recognized in 2011 (Entry *G) ..............
2011 unrealized gain (Entry G) ..................................................
Herman's realized income for 2011...........................................
Noncontrolling interest ownership ..........................................
Noncontrolling interest's share of the subsidiary's income. .
Noncontrolling interest, 1/1/11 (Entries S and A) ...................
Noncontrolling interest's share of Herman's income (above)
Noncontrolling interest's share of Herman's dividends
($4,000 40%) ........................................................................
Noncontrolling interest, 12/31/11..............................................
$25,000
(20,500)
8,000
(7,500)
$5,000
40%
$2,000
$228,400
2,000
(1,600)
$228,800
42. (continued)
c. The balances in the individual records as of December 31, 2012 pertaining to
the Intra-entity bonds are as follows:
Beginning
Book
Value
Effective
6-36
Cash
Interest
Excess
Year- End
Book
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Investment
Liability
Interest
$19,005
21,069
$1,901 (10%)
1,264 (6%)
(8%)
$1,600
1,600
Amortizations
$301
336
Value
$19,306
20,733
The adjustment to recognize the original gain by the parent can be computed
as follows:
Original gain on retirement (see part a) ........................
Interest income recorded on investment in 2011
(see part a) ..................................................................
Interest expense recorded on liability in 2011
(see part a) .................................................................
Required increase as of January 1, 2012 ......................
$2,654
$1,873
1,283
590
$2,064
...............................................$552,800
Consideration transferred for preferred stock..................
Noncontrolling interest in common stock.........................
Noncontrolling interest in preferred stock........................
Lisas acquisition-date fair value........................................
Book value of Lisa................................................................
Excess assigned to franchises...........................................
65,000
138,200
34,000
$790,000
750,000
$ 40,000
6-37
100,000
200,000
450,000
40,000
552,800
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
65,000
172,200
(To eliminate subsidiary stockholders equity, record excess acquisitiondate fair values, and record outside ownership of subsidiary's preferred and
common stock at acquisition-date fair values.)
b. Acquisition price of bonds, 1/2/10 ...........................
Book value of bonds payable ( acquired) ............
Loss on extinguishment of debt .........................
Interest incomeMona ($53,310 8%) ...................
Interest expenseLisa ($44,175 14%) ..................
Investment in Lisabonds (book value)
Book valuedate of acquisition, 1/2/10 ............
Cash interest ($50,000 10%) .............................
Effective interest (above) .....................................
Investment in Lisabonds
(book value as of 12/31/10) ............................
(rounded)
(rounded)
43. b. (continued)
Bonds payable (book value)
Book valuedate of acquisition, 1/2/10 ............
Cash interest ($50,000 10%) .............................
Effective interest (above) .....................................
Bonds payable (book value as of 12/31/10). .
CONSOLIDATION ENTRY BDecember 31, 2010
(all figures computed above)
Bonds Payable ............................................................
Interest Income (or Other Revenues) ......................
Extraordinary Loss on Retirement of Debt .............
Discount on Bonds Payable ($50,000 $45,360)
Interest Expense....................................................
Investment in LisaBonds .................................
$53,310
$5,000
4,265
6-38
735
$52,575
$44,175
$5,000
6,185
1,185
$45,360
50,000
4,265
9,135
$53,310
(44,175)
$9,135
$4,265
$6,185
4,640
6,185
52,575
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$120,000
12,000
12,000
80,000
80,000
52,000
8,000
20,000
43. (continued)
d. Original allocation to franchises (given) ......................
Amortization at $1,000/year (20102011) .................
Consolidated franchises12/31/11 .........................
$40,000
(2,000)
$38,000
$300,000
200,000
44,000
$544,000
6-39
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
(8,000)
$326,650
44. (35 Minutes) (Prepare statement of cash flows for a business combination.)
(Note: before working this problem, students may wish to review the statement
of cash flows in an intermediate accounting textbook.)
RODRIGUEZ COMPANY AND CONSOLIDATED SUBSIDIARY MOLINA
Consolidated Statement of Cash Flows
Year Ending December 31, 2011
CASH FROM OPERATIONS
Consolidated net income...........................................
Adjustment from accrual to cash:
Depreciation and amortization ............................
Gain on sale of building .......................................
Decrease in accounts receivable ........................
Increase in inventory ............................................
Decrease in accounts payable ............................
Cash from operations ................................................
$230,000
100,000
(20,000)
10,000
(140,000)
(40,000)
$140,000
$50,000
(175,000)
$(102,000)
100,000
57,000
(125,000)
55,000
70,000
80,000
$150,000
The above statement uses the indirect approach for computing cash flows from
operations. Under the direct approach, the following computation is
appropriate.
CASH FROM OPERATIONS
Revenues ....................................................................
Purchases ...................................................................
6-40
$990,000
(820,000)
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Expenses .....................................................................
Cash from operations ..........................................
(30,000)
$140,000
44. (continued)
Development of Cash Flow Balances via Direct Method
OPERATING ACTIVITIES
Revenues (the consolidated balance plus the decrease in
accounts receivable) .......................................................................
Cost of goods sold (cash purchases) (the consolidated
balance plus the increase in inventory plus the
decrease in accounts payable) ......................................................
Depreciation and amortization (not cash expenses) ........................
Gain on sale of building (sales price is shown below as
an investing activity) .......................................................................
Interest expense (the consolidated balance) .....................................
Cash flows from operating activities...................................................
INVESTING ACTIVITIES
Sale of building ($30,000 book value sold at a $20,000 gain)...........
Purchase of equipment (Buildings and Equipment account
increased by $50,000. Building with a $30,000 book value
was sold [a decrease]. Depreciation [without Databases
amortization] was $95,000 [a decrease]. Only a purchase
of $175,000 would turn these two decreases of $125,000 into
an increase of $50,000) ...................................................................
Cash flows from investing activities....................................................
FINANCING ACTIVITIES
Dividends paid by parent (the consolidated balance) ......................
Dividends paid by subsidiary (amount paid to
noncontrolling interest20%) .......................................................
Issuance of bonds .................................................................................
Issuance of common stock by the parent (increase in
common stock and additional paid-in capital) .............................
Cash flows from financing activities....................................................
$990,000
820,000
-0-030,000
$140,000
$50,000
(175,000)
$(125,000)
$(100,000)
(2,000)
100,000
57,000
$55,000
45. (40 Minutes) (Compute basic and diluted earnings per share. Subsidiary has
stock warrants outstanding and convertible debt.)
Basic EPSAustin, Inc.
Consolidated net income to parent................................
Austins preferred dividends ..........................................
6-41
$284,000
(40,000)
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$244,000
50,000
$4.88
30,000
5,000
(2,500)
10,000
42,500
Shares controlled by parent (24,000 plus 50% of increment created by warrants [or 1,250]) .......................
25,250
59.4%
$75,438
(rounded)
50,000
$3.93
20,000
70,000
(rounded)
46. (50 Minutes) (Determine consolidated totals. Subsidiary has preferred shares
outstanding that are equity instruments.)
Consideration transferred for common and preferred stock
6-42
$560,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
450,000
$110,000
Annual amortization
$11,000
$18,000
33%
$6,000
20,000
5,000
5,000
8,000
Historical cost:
Recorded value.................................................................................
Depreciation expense (12,000 4)..................................................
Accumulated depreciation (18,000 + 3,000)...................................
30,000
3,000
21,000
6-43
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
46. (continued)
Accounts
Sales................................................
Cost of goods sold.........................
Expenses.........................................
Gain on sale of equipment.............
Net income...................................
(400,000)
(100,000)
60,000
(440,000)
(150,000)
(10,000)
-0(160,000)
Cash.................................................
Accounts receivable.......................
Inventory.........................................
Investment in Skyler Corp.............
30,000
300,000
260,000
560,000
40,000
100,000
180,000
-0-
680,000
(180,000)
-01,650,000
500,000
(90,000)
-0730,000
Accounts payable...........................
Long-term liabilities........................
Preferred stock...............................
Common stock................................
Additional paid-in capital...............
(140,000)
(240,000)
-0(620,000)
(210,000)
(90,000)
(180,000)
(100,000)
(200,000)
-0-
6-44
(S) 150,000
(400,000)
(87,000)
60,000
(427,000)
(P) 28,000
(G)
6,000
(S) 450,000
(A) 110,000
(TA) 10,000
(ED) 2,000
(A) 110,000
(P)
28,000
(S) 100,000
(S) 200,000
Consolidated
Totals
(1,110,000)
704,000
319,000
-0(87,000)
(TA) 18,000
(E) 11,000
70,000
372,000
434,000
-01,190,000
(286,000)
99,000
1,879,000
(202,000)
(420,000)
-0(620,000)
(210,000)
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
(440,000)
(1,650,000)
6-45
(160,000)
(730,000)
(427,000)
(1,879,000)
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
46. (continued)
CONSOLIDATED TOTALS
Sales = 1,110,000 (add book values and eliminate intra-entity transfers)
Cost of Goods Sold = 704,000 (add book values, eliminate intra-entity
transfers, and eliminate ending unrealized gain [computed above])
Accounts Receivable = 372,000 (add book values after eliminating intercompany balance)
Land, Buildings, and Equipment = 1,190,000 (add book values and increase
transferred asset from transfer price to historical cost [see above])
100,000
200,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
6-47
150,000
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
450,000
Entry A
Intangible Asset ................................................................
110,000
Investment in Skyler Corp..........................................
(To recognize excess fair value attributed to intangible asset.)
Entry E
Amortization Expense.......................................................
Intangible Asset...........................................................
(To record current years amortization of intangible asset.)
Entry P
Accounts Payable..............................................................
Accounts Receivable...................................................
(To eliminate intra-entity debt.)
110,000
11,000
11,000
28,000
28,000
Entry TA
Equipment..........................................................................
10,000
Gain on Sale of Equipment...............................................
8,000
Accumulated Depreciation.........................................
18,000
(To eliminate effects as of 1/1 created by intra-entity transfer of equipment.)
Entry TI
Sales .................................................................................
90,000
Cost of Goods Sold.....................................................
(To eliminate intra-entity inventory transfers for the current year.)
90,000
Entry G
Cost of Goods Sold...........................................................
6,000
Inventory.......................................................................
6,000
(To defer unrealized intra-entity gain remaining at the end of the current year.
Markup is 33% [30,000 gross profit 90,000 transfer price] indicating that the
ending inventory of 18,000 contains an unrealized profit of 6,000 [18,000 33%].)
Entry ED
Accumulated Depreciation...............................................
2,000
Depreciation Expense.................................................
2,000
(To eliminate excess depreciation resulting from intra-entity gain of 8,000 on
transfer of equipment [see Entry TA]. Equipment is being depreciated over a
remaining life of four years.)
47. (30 minutes) (Consolidated Cash Flow Statement with current year business
combination)
Plaster Inc. and Subsidiary Stucco Company
Consolidated Statement of Cash Flows
6-48
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$274,000
187,500
8,750
3,600
(102,000)
(8,000)
89,850
$363,850
(856,000)
$692,000
800,000
(108,000)
$199,850
43,000
$242,850
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1,000,000.00
110,000.00
943,497.77
946,717.50
950,323.60
954,362.43
958,885.93
963,952.24
969,626.51
975,981.69
983,099.49
991,071.43
1,000,000.00
0.32197
5.65022
113,219.73
113,606.10
114,038.83
114,523.49
115,066.31
115,674.27
116,355.18
117,117.80
117,971.94
118,928.57
321,973.24
621,524.53
943,497.77
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
6-49
56,502.23
3,219.73
3,606.10
4,038.83
4,523.49
5,066.31
5,674.27
6,355.18
7,117.80
7,971.94
8,928.57
56,502.23
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
Bonds Payable
954,362.43
Interest Revenue
117,523.20
Loss on retirement
0.00
Gain on retirement
Investment in Bonds
Interest Expense
Bonds retired by affiliate on 1/1/11 at
Eff. Yield
13%
1,000,000.00
0.37616
110,000.00
4.79877
2011
2012
2013
2014
2015
2016
2017
2018
904,024.59
911,547.79
920,049.00
929,655.37
940,510.57
952,776.95
966,637.95
982,300.88
1,000,000.00
117,523.20
118,501.21
119,606.37
120,855.20
122,266.37
123,861.00
125,662.93
127,699.12
46,299.01
911,547.79
114,038.83
904,024.59
376,159.86
527,864.73
904,024.59
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
110,000.00
95,975.41
7,523.20
8,501.21
9,606.37
10,855.20
12,266.37
13,861.00
15,662.93
17,699.12
95,975.41
Before Euro
Disney and Hong
Kong Disneyland
Consolidation
6-50
Total
Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
$2,308
8,346
10,654
$693
319
1,012
$ 3,001
8,665
11,666
2,286
12,793
31,679
$57,412
(723)
4,739
57
$5,085
1,563
17,532
31,736
$62,497
3,030
7,357
10,387
499
705
1,204
3,529
8,062
11,591
7,903
5,945
854
32,323
$57,412
3,207
184
490
-0$5,085
11,110
6,129
1,344
32,323
$62,497
6-51