Prepare the corresponding consolidating worksheets based on the following facts.

Companies involved:Parent and Sub.

Date of acquisition: Jan. 1, 20X3

Date of the worksheets you must prepare: December 31, 20X4

Date of the worksheets you must prepare: December 31, 20X5

Date of the worksheets you must prepare: December 31, 20X6

Percentage of common shares of S owned by P 75%

Price paid by P $5,700,000

At the time of acquisition these were some values concerning S:

Common stock $950,000

Aditional paid-in capital $950,000

Retained earnings $627,000

Years FMV-BV

Inventories <1 $760,000

Other current assets <1 $285,000

Plant & equipment, remaining life: 8 $1,900,000

Land $1,330,000

Long term liabilities; remaining life: 5 $285,000

Intangibles amortization: 6

Intercompany transactions:

20X3 20X4 20X5 20X6

Upstream inventory sales - $142,500 $121,125 $129,604

% in ending inventory - 7.50% 9.00% 10.80%

Gross profit rate on sales - 37.50% 45.00% 54.00%

Upstream building sale, Dec. 31

Sold for $1,900,000

Book value at time of sale $760,000

Remaining life: 10

% of S bonds purchased by P, Jan. 1 55%

Price paid $1,551,104

BV at that date $1,534,930

Remaining life: 5

Maturity value of acquired bonds $1,567,500

Required:

1.Complete the worksheets for 20X4, 20X5 and 20X6.

CONSOLIDATION WORKING PAPERS--YEAR ENDED DECEMBER 31, 20X3

Parent Subsidiary Adjusts. and Elims. Cons.

Income Statement

Sales 19,000,000 9,500,000 28,500,000

Income from S 791,123 791,123 - -

Cost of goods sold (13,300,000) (5,415,000) 760,000 (19,475,000)

Operating expenses (2,850,000) (1,425,000) 665,000 (4,940,000)

Interest Expense (180,170) (180,170)

Non-contr. interest income 263,708 (263,708)

Net income 3,641,123 2,479,830 3,641,123

Retained Earnings

Retained earnings--P, 1/1/X3 6,650,000 6,650,000

Retained earnings--S, 1/1/X3 627,000 627,000

Net income 3,641,123 2,479,830 3,641,123

Dividends (1,729,533) (1,177,919) 1,177,919 (1,729,533)

Retained earnings--12/31/X3 8,561,589 1,928,911 8,561,589

Balance Sheet

Cash 760,000 387,971 1,147,971

Accounts receivable 1,900,000 931,131 2,831,131

Inventories 2,280,000 853,537 3,133,537

Other current assets 6,653,906 775,943 7,429,849

Investment in S 5,607,683 5,607,683 -

Plant and equipment--net 4,750,000 2,948,582 1,662,500 9,361,082

Land 100,000 1,862,262 1,330,000 3,292,262

Intangibles 427,500 427,500

Total assets 22,051,589 7,759,426 27,623,333

Accounts payable 1,900,000 1,045,000 2,945,000

Notes Payable 190,000 104,500 228,000 66,500

Bonds Payable, 10% 2,781,016 2,781,016

Capital stock 9,500,000 950,000 950,000 9,500,000

Additional paid in capital 1,900,000 950,000 950,000 1,900,000

Retained earnings 8,561,589 1,928,911 8,561,589

Non-contr. interest, 12/31/X3 1,869,228 1,869,228

Total liabilities and equity 22,051,589 7,759,426 8,654,830 8,654,830 27,623,333

Proofs of balance - - - -

CONSOLIDATION WORKING PAPERS--YEAR

ENDED DECEMBER 31, 20X4

Parent Subsidiary Adjust and Elimin. Cons

Income Statement

Sales 19,950,000 8,075,000

Income from S 1,211,607

Cost of goods sold (13,965,000) (4,683,500)

Operating expenses (2,992,500) (1,211,250)

Interest Expense (180,766)

Gain on building sale 1,140,000

Non-contr. interest income

Net income 4,204,107 3,139,484

Retained Earnings

Retained earnings--P, 1/1/X4 8,561,589

Retained earnings--S, 1/1/X4 1,928,911

Net income 4,204,107 3,139,484

Dividends (1,996,951) (1,491,255)

Retained earnings--12/31/X4 10,768,746 3,577,140

Balance Sheet

Cash 1,496,250 457,809

Accounts receivable 1,995,000 1,098,741

Inventories 2,194,500 1,007,179

Other current assets 8,126,647 915,617

Investment in S 5,700,849

Plant and equipment--net 4,750,000 3,479,345

Land 100,000 2,197,481

Intangibles

Total assets 24,363,246 9,156,171

Accounts payable 1,995,000 807,500

Notes Payable 199,500 80,750

Bonds Payable, 10% 2,790,782

Capital stock 9,500,000 950,000

Additional paid in capital 1,900,000 950,000

Retained earnings 10,768,746 3,577,140

Non-contr. interest, 12/31/X4

Total liabilities and equity 24,363,246 9,156,171

Proofs of balance

CONSOLIDATION WORKING PAPERS--YEAR ENDED DECEMBER 31, 20X5

Parent Subsidiary Adjust and Elimin. Cons

Income Statement

Sales 20,425,000 9,025,000

Income from S 1,345,952

Cost of goods sold (14,093,250) (5,415,000)

Operating expenses (3,063,750) (1,353,750)

Interest Income 96,944

(Gain) loss on Bonds

Interest Expense (181,401)

Non-contr. interest income

Net income 4,710,896 2,074,849

Retained Earnings

Retained earnings--P, 1/1/X5 10,768,746

Retained earnings--S, 1/1/X5 3,577,140

Net income 4,710,896 2,074,849

Dividends (2,237,676) (985,553)

Retaind earnings--12/31/X5 13,241,966 4,666,436

Balance Sheet

Cash 510,625 518,018

Accounts receivable 2,042,500 1,243,244

Inventories 2,246,750 1,139,640

Other current assets 9,377,206 1,036,037

Investment in S 6,307,636

Plant and equipment--net 4,750,000 3,936,940

Land 100,000 2,486,488

Investment in Sub's Bonds 1,553,998

Intangibles

Total assets 26,888,716 10,360,368

Accounts payable 2,042,500 902,500

Notes Payable 204,250 90,250

Bonds Payable, 10% 2,801,182

Capital stock 9,500,000 950,000

Additional paid in capital 1,900,000 950,000

Retained earnings 13,241,966 4,666,436

Non-contr. interest, 12/31/X5

Total liabilities and equity 26,888,716 10,360,368

Proofs of balance

CONSOLIDATION WORKING PAPERS--YEAR ENDED DECEMBER 31, 20X6

Parent Subsidiary Adjust and Elimin. Cons

Income Statement

Sales 19,000,000 9,120,000

Income from S 1,511,016

Cost of goods sold (13,205,000) (5,289,600)

Operating expenses (3,040,000) (1,368,000)

Interest Income 97,125

Interest Expense (182,077)

Non-contr. interest income

Net income 4,363,141 2,280,323

Retained Earnings

Retained earnings--P, 1/1/X6 13,241,966

Retained earnings--S, 1/1/X6 4,666,436

Net income 4,363,141 2,280,323

Dividends (2,072,492) (1,083,153)

Retained earnings--12/31/X6 15,532,615 5,863,605

Balance Sheet

Cash 475,000 578,953

Accounts receivable 1,900,000 1,389,488

Inventories 2,090,000 1,273,697

Other current assets 11,144,255 1,157,906

Investment in S 7,006,287

Plant and equipment--net 4,750,000 4,400,045

Land 100,000 2,778,975

Investment in Sub's Bonds 1,557,073

Intangibles

Total assets 29,022,615 11,579,065

Accounts payable 1,900,000 912,000

Notes Payable 190,000 91,200

Bonds Payable, 10% 2,812,259

Capital stock 9,500,000 950,000

Additional paid in capital 1,900,000 950,000

Retained earnings 15,532,615 5,863,605

Non-contr. interest, 12/31/X6

Total liabilities and equity 29,022,615 11,579,065

Proofs of balance

Reconciliation:Investment to S's Equity

Investment, 12/31 20X3 5,607,683

Removal of unamortized differential:

Initial Amortiz.

Inventories (570,000) 570,000 -

Other current assets (213,750) 213,750 -

Plant & equipment (1,425,000) 178,125 (1,246,875)

Land (997,500) - (997,500)

L. T. liabilities (213,750) 42,750 (171,000)

Intangibles (384,750) 64,125 (320,625)

Unamortized differential (2,736,000)

2,871,683

S's stockholders' equity 3,828,911

P's ownership interest 75% 2,871,683

Difference -

Reconciliation: Non-contr. Interest to S's Equity:

S's stockholders' equity X Non-contr. interest percentage 957,228

Unrealized intercompany balances in RE-S -

Non-contr. interest balance at year end 1,869,228

Unamortized differential (912,000)

Excess 957,228 957,228

Difference -

BONDS

Issuer's Facts: Acquirer's Facts:

Acquired Jan. 20X5

% acquired 55%

Face value 2,850,000 Face value 1,567,500

Stated Rate 6.00% Stated Rate 6.00%

Effective Rate 6.50% Effective Rate 6.25%

Interest Pmts. 171,000 Interest Pmts. 94,050

Bonds Life 10 Bonds Life 5

Atissuance: At bond purchase:

PV of Principal $1,518,269 PV of Principal $1,157,612

PV of Interest $1,229,290 PV of Interest $393,493

Bond price $2,747,559 Bond price $1,551,104

Issuing Company

6.50%

Date Payment Interest Exp. Carrying Value

1/1/20X0 $2,747,559

12/31/X0 171,000 178,591 2,755,151

12/31/X1 171,000 179,085 2,763,235

12/31/X2 171,000 179,610 2,771,846

12/31/X3 171,000 180,170 2,781,016

12/31/X4 171,000 180,766 2,790,782

12/31/X5 171,000 181,401 2,801,182

12/31/X6 171,000 182,077 2,812,259

12/31/X7 171,000 182,797 2,824,056

12/31/X8 171,000 183,564 2,836,620

12/31/X9 171,000 184,380 2,850,000

Purchasing Company

6.25%

Date Collections Interest Rev. Carrying Value

1/1/X5 $1,551,104

12/31/X5 94,050 96,944 1,553,998

12/31/X6 94,050 97,125 1,557,073

12/31/X7 94,050 97,317 1,560,340

12/31/X8 94,050 97,521 1,563,812

12/31/X9 94,050 97,738 1,567,500

Project hints / observations

Posted on:

1. in this project Goodwill is called "intangibles" and amortized over a period of time ( if this amount is 240,000 over 10 years, at 12/31/x3 worksheet intangible will be (240,000 -24,000) 216,000, x4 intangible will be 192,000 and so forth)

2. Project : focus on the worksheet for 2004 - this has intercompany sales, use 20x3 as an example. (once you do x4, you can make progress on x5 & x6 - you can leave the bond for last)

3. To start the project - you should do some preliminary calculations: figure out 100% value of the subsidiary, allocation of FV-BV schedule this out for the 20x3-6, then calculate the controlling % of these items and non-controlling %

4. Bonds affect 20x5 and 20x6 - calculations need to be done

5. Basic worksheet adjustments:

Steps needed to be done on the worksheets:

1. remove income from Sub

2. remove the sub capital and r/e

3. remove dividend payable/recieviable

4. intercompany sales - i.e.

Gross Profit in ending inventory

this is for the worksheet

bonds are a special intercompany item

5. amortization of differences FV-BV