CHAPTER 9

CONSOLIDATED FINANCIAL STATEMENTS: INCOME TAXES,

CASH FLOWS, AND INSTALLMENT ACQUISITIONS

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 9–1 Pro Corporation and Primrose Corporation (40 minutes, medium)
Working paper eliminations (in journal entry format), including income tax allocation, for
intercompany profits on merchandise sales and gain on extinguishment of bonds.
Pr. 9-2 Pullet Corporation (40 minutes, medium)
Given working paper eliminations for intercompany bonds and related deferred income taxes
on date of bonds acquisition, prepare journal entries for intercompany interest revenue and
expense for the following year and working paper eliminations (in journal entry format) at the
end of the following year.
Pr. 9–3 Presto Corporation (40 minutes, medium)
Preparation of journal entries for business combination that is a tax-free corporate
reorganization for income tax purposes.
Pr. 9–4 Pellerin Corporation (40 minutes, medium)
Journal entries to account for parent company’s installment investments in subsidiary by the
equity method. Income taxes are disregarded.
Pr. 9–5 Porcelain Corporation (45 minutes, medium)
Preparation of consolidated statement of cash flows (indirect method) for parent company and
partially owned subsidiary.
Pr. 9–6 Parkhurst Corporation (55 minutes, strong)
Working paper eliminations (in journal entry format), including income tax allocation, for
intercompany profits (gains) in inventories, machinery, land, and bonds.
Pr. 9–7 Paine Corporation (70 minutes, strong)
Parent company journal entries for equity method and for income taxes attributable to equity
method, with respect to two subsidiaries. Preparation of working paper for consolidated
financial statements and working paper eliminations (in journal entry format), including
income tax allocation, disregarding the dividend-received deduction.
Pr. 9–8 Pickens Corporation (80 minutes, strong)
Working paper for consolidated financial statements and working paper eliminations (in
journal entry format), including income tax allocation, for parent company and subsidiary
acquired in installments. The dividend-received deduction is disregarded.
Pr. 9–9 Plummer Corporation (80 minutes, strong)
Adjusting entries for income tax allocation for parent company using equity method of
accounting. Working paper for consolidated financial statements and working paper
eliminations (in journal entry format), including income tax allocation, for parent company and
subsidiary having bargain purchase excess. The 80% dividend-received deduction applies.

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Solutions Manual, Chapter 9 43
ANSWERS TO REVIEW QUESTIONS
1. Income taxes enter into the measurement of current fair values of a combinee’s identifiable net
assets if the business combination is a tax-free corporate reorganization for income tax purposes.
In such a combination, a new basis of accounting may not be required for the combinee’s assets for
income tax purposes; thus, a deferred income tax asset or liability is recognized for the tax effects
of current fair value differences.
2. In FASB Statement No. 109, “Accounting for Income Taxes,” the Financial Accounting Standards
Board required the provision of deferred income tax liabilities for the undistributed earnings of
domestic subsidiaries of parent companies.
3. No, income tax allocation procedures are not necessary in working paper eliminations for a parent
company and subsidiaries that file consolidated income tax returns. Intercompany profits (gains)
and losses are eliminated in the preparation of consolidated income tax returns just as they are
eliminated in the preparation of consolidated financial statements.
4. The consolidated deferred income tax asset associated with the intercompany gain on the parent
company’s sale of a depreciable plant asset to the subsidiary reverses as the subsidiary recognizes
depreciation expense of the asset. The portion of the subsidiary’s depreciation expense attributable
to the intercompany gain is in effect a realization of the gain; thus, the deferred tax related to the
depreciation expense is an expense of the consolidated entity.
5. Only cash dividends paid by a partially owned subsidiary to minority stockholders are reported
with cash flows from financing activities in a consolidated statement of cash flows.
6. The equity method of accounting generally must be applied when the parent company’s investment
in the eventual subsidiary totals 20% or more of the investee’s outstanding common stock. Absent
evidence to the contrary, APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock,” considers a 20% investment sufficient enable the investor to
exercise significant influence over the operating and financial policies of the investee, which
underlies application of the equity method.
7. The most logical point for ascertaining the current fair values of a subsidiary’s net assets is when
the parent company obtains a substantial percentage of the subsidiary’s common stock during the
course of an installment acquisition of the stock. Until that time, the parent company’s acquisition
costs for small blocks of the eventual subsidiary’s common stock generally may not be reliable
indicators of the current fair values of the eventual subsidiary’s identifiable net assets.
8. Included in consolidated retained earnings on the date of a business combination that involves the
installment acquisition of the subsidiary’s outstanding common stock are both the parent
company’s retained earnings and the parent’s share of the increase or decrease in the subsidiary’s
retained earnings during the “influenced investee” phase of the affiliation.

SOLUTIONS TO EXERCISES
Ex. 9–1 1. b 8. d
2. a 9. d
3. b 10. c
4. a 11. d
5. d 12. b
6. a 13. c
7. c

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44 Modern Advanced Accounting, 10/e
Ex. 9–2 Computation of deferred income tax liability related to Salvo Corporation’s building on date of
merger:
Current fair value of building $150,000
Less: Carrying amount (tax basis) of building 90,000
Current fair value difference $60,000
Income tax rate 40%
Deferred income tax liability related to building ($60,000 x 0.40) $24,000
Ex. 9–3 Journal entries for Combinor Corporation, May 31, 2005:
Investment in Net Assets of Combinee Company 560,000
Cash 560,000
Investment in Net Assets of Combinee Company 60,000
Cash 60,000
Other Current Assets 300,000
Plant Assets (net) 780,000
Intangible Assets (net) 130,000
Goodwill ($620,000 – $570,000) 50,000
Liabilities 620,000
Deferred Income Tax Liability ($50,000 x 0.40) 20,000
Investment in Net Assets of Combinee Company 620,000
Ex. 9–4 Journal entries for Prudence Corporation, Oct. 31, 2006:
Investment in Sagacity Company Common Stock
($140,000 x 0.70) 98,000
Intercompany Investment Income 98,000
Cash ($50,000 x 0.70) 35,000
Investment in Sagacity Company Common Stock 35,000
Income Taxes Expense {[($98,000 – $35,000 – $4,000 tax-
deductible goodwill amortization) x 0.20] x 0.40} 4,720
Income Taxes Payable [($35,000 x 0.20) x 0.40] 2,800
Deferred Income Tax Liability 1,920
Ex. 9–5 Working paper eliminations for Ponte Corporation and subsidiaries, Oct. 31, 2006:
Retained EarningsShipp ($35,000 x 40/140) 10,000
Intercompany SalesShipp 630,000
Intercompany Cost of Goods SoldShipp
($630,000 x 100/140) 450,000
Cost of Goods SoldStack ($588,000 x 40/140) 168,000
InventoriesStack ($77,000 x 40/140) 22,000
Deferred Income Tax AssetShipp ($22,000 x 0.40) 8,800
Income Taxes ExpenseShipp 8,800
Income Taxes ExpenseShipp ($10,000 x 0.40) 4,000
Retained EarningsShipp 4,000

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Solutions Manual, Chapter 9 45
Ex. 9–6 Working paper eliminations for Pederson Corporation and subsidiary, Nov. 30, 2006:
Retained EarningsPederson ($20,000 x 0.20) 4,000
Intercompany SalesPederson 125,000
Intercompany Cost of Goods SoldPederson 100,000
Cost of Goods SoldSolomon ($115,000 x 0.20) 23,000
InventoriesSolomon ($30,000 x 0.20) 6,000
To eliminate intercompany sales, costs of goods sold, and
unrealized profit in inventories.
Deferred Income Tax AssetPederson ($6,000 x 0.40) 2,400
Income Taxes ExpensePederson 2,400
To defer income taxes provided on separate income tax returns of
parent company applicable to unrealized intercompany profits in
subsidiary’s inventories on Nov. 30, 2006:
Income Taxes ExpensePederson ($4,000 x 0.40) 1,600
Retained EarningsPederson 1,600
To provide for income taxes attributable to realized intercompany
profits in subsidiary’s inventories on Nov. 30, 2005.
Ex. 9–7 Working paper eliminations for Pol Corporation and subsidiaries, Oct. 31, 2006:
Retained EarningsSol ($20,000 x 0.80) 16,000
Minority Interest in Net Assets of Sol Company ($20,000 x 0.20) 4,000
Intercompany SalesSol 400,000
Intercompany Cost of Goods SoldSol 300,000
Cost of Goods SoldStu 97,500
InventoriesStu 22,500
Deferred Income Tax AssetSol ($22,500 x 0.40) 9,000
Income Taxes ExpenseSol 9,000
Income Taxes ExpenseSol ($20,000 x 0.40) 8,000
Retained EarningsSol ($16,000 x 0.40) 6,400
Minority Interest in Net Assets of Sol Company
($4,000 x 0.40) 1,600
Ex. 9–8 Working paper eliminations for Purdue Corporation and subsidiary, Feb. 28, 2007:
Retained EarningsPurdue 12,000
Accumulated DepreciationScarsdale ($12,000 ÷ 6) 2,000
MachineryScarsdale 12,000
Depreciation ExpenseScarsdale 2,000
Income Taxes ExpensePurdue ($2,000 x0.40) 800
Deferred Income Tax AssetScarsdale ($4,800 – $800) 4,000
Retained EarningsPurdue ($12,000 x 0.40) 4,800

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46 Modern Advanced Accounting, 10/e
Ex. 9–9 Additional working paper eliminations for Pegler Corporation and subsidiary, Oct. 31, 2006:
Deferred Income Tax AssetStang ($70,000 x 0.40) 28,000
Income Taxes ExpenseStang 28,000
Income Taxes ExpenseStang ($10,000 x 0.40) 4,000
Retained EarningsStang 4,000
Income Taxes ExpensePegler ($20,000 x 0.40) 8,000
Deferred Income Tax AssetPegler 8,000
Retained EarningsPegler ($40,000 x 0.40) 16,000
Ex. 9–10 a. Working paper eliminations for Panama Corporation and subsidiary, Oct. 31, 2006:
Intercompany Gain on Sale of PatentSalvador 5,000
PatentPanama 5,000
To eliminate unrealized intercompany gain on sale of patent
($20,000 – $15,000 = $5,000).
Deferred Income Tax AssetSalvador 2,000
Income Taxes Expense Salvador 2,000
To defer income taxes provided on separate income tax
returns of subsidiary applicable to intercompany profit in
parent’s patent on Oct. 31, 2006 ($5,000 x 0.40 = $2,000).
b. Working paper eliminations for Panama Corporation and subsidiary, Oct. 31, 2007:
Retained EarningsSalvador ($5,000 x 0.80) 4,000
Minority Interest in Net Assets of Subsidiary
($5,000 x 0.20) 1,000
Accumulated Amortization of PatentPanama ($5,000 ÷ 5) 1,000
PatentPanama 5,000
Amortization ExpensePanama 1,000
To eliminate unrealized intercompany gain in patent and in
related amortization.
Income Taxes ExpenseSalvador 400
Deferred Income Tax AssetSalvador ($2,000 – $400) 1,600
Retained EarningsSalvador ($2,000 x 0.80) 1,600
Minority Interest in Net Assets of Subsidiary
($2,000 x 0.20) 400
To provide for income tax expense on intercompany gain
realized through parent company’s amortization ($2,000 ÷ 5
years = $400); and to defer income taxes attributable to
remainder of unrealized intercompany gain.
Ex. 9–11 Working paper elimination for Plumm Corporation and subsidiary, Mar. 31, 2006:
Retained EarningsSam ($21,124 x 0.40) 8,450
Income Taxes ExpenseSam
[($45,645 – $42,981) x 0.40] 1,066
Deferred Income Tax LiabilitySam
($8,450 – $1,066) 7,384

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Solutions Manual, Chapter 9 47
Ex. 9–12 Computation of missing amounts in working paper eliminations of Pom Corporation and
subsidiary:
(1) and (2) $26,403 ($66,007 x 0.40)
(3) $26,403 ($66,007 x 0.40)
(4) $1,420 [($57,107 – $53,558) x 0.40]
(5) $24,983 ($26,403 – $1,420)
Ex. 9–13 Computation of cash flows for payment of dividends for Prieto Corporation and subsidiary:
Cash dividends paid by Prieto Corporation $250,000
Cash dividends paid by Sora Company on $5 cumulative preferred stock
owned by minority stockholders 25,000
Cash dividends paid by Sano Company to minority stockholders
($44,000 x 0.25) 11,000
Total cash flows for payments of dividends $286,000

Ex. 9–14 1. A-O 8. A-O

2. N 9. D-O
3. N 10. IA
4. FA 11. N
5. N 12. N
6. IA 13. FA
7. D-O
Ex. 9–15 Journal entries for Packard Corporation, two years ended July 31, 2004:
2005
Aug. 1 Investment in Stenn Company Common Stock 5,000
Cash 5,000
2006
July 31 Cash 300
Dividends Revenue ($3,000 x 0.10) 300
Aug. 1 Investment in Stenn Company Common Stock 22,500
Cash 22,500
2007
July 31 Investment in Stenn Company Common Stock 4,125
Intercompany Investment Income
($7,500 x 0.55) 4,125

CASES
Case 9–1 Given that the Financial Accounting Standards Board issued FASB Statement No. 109,
“Accounting for Income Taxes,” to replace a previously issued statement with the same title
that never became fully effective, it is not inappropriate for critics such as student Laura to
question the FASB’s conclusions in Statement No. 109. The increase in goodwill occasioned
by the recognition of a deferred income tax liability in a business combination, for differences
between financial accounting valuations and tax bases of a combinee’s identifiable assets,
exacerbates the problem associated with the residual measurement of the goodwill. A serious
shortcoming of FASB Statement No. 141, “Business Combinations,” is the “thou shalt”
language in paragraph 43 thereof: “The excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed shall be recognized as an
asset referred to as goodwill” (emphasis added). Although the FASB dealt with the thorny
question of the nature and appropriate valuation of goodwill in both FASB Statement No. 141

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48 Modern Advanced Accounting, 10/e
 and FASB Statement No. 142, “Goodwill and Other Tangible Assets,” critics such as Laura
will continue to find fault with FASB Statement No. 109.
Case 9–2 The Paddock Corporation controller’s interpretation of generally accepted accounting principles for
undistributed earnings of domestic subsidiaries is erroneous. FASB Statement No. 109,
“Accounting for Income Taxes,” is quite specific in requiring the recognition of a deferred income
tax liability for an excess of the financial reporting carrying amount of an investment in a domestic
subsidiary over its tax basis. No exception is provided for the possibility of dividends being omitted
by such a subsidiary because of a severe cash shortage.
Case 9–3 One possible alternative to the recognition of multiple amounts of goodwill in business
combinations accomplished in installments would be the immediate expensing of such
“goodwill” amounts until control of the combinee is obtained by the combinor/parent
company. Only on the date of obtaining control would goodwill be recognized in accordance
with accounting for business combinations. Another possible alternative would be the display
of goodwill-type amounts as an offset element in the stockholders’ equity section of the
consolidated balance sheet.
Case 9–4 There is no clear answer to the question as to whether a valuation allowance should be
provided for the $400,000 deferred tax asset of Pantheon Corporation and subsidiary. In
FASB Statement No. 109, “Accounting for Income Taxes,” paragraph 17(e), the FASB
defined more likely than not, with respect to ultimate realization of a deferred tax asset, as a
likelihood of more than 50%. Clearly, if Synthesis Company sold to an outsider the land that
had been acquired from Pantheon Corporation, the $400,000 deferred tax asset would be
realized. However, is there a likelihood of more than 50% that Synthesis will make such a sale
in the near future?
An alternative view might consider that, once the new factory building constructed on the land
is in production and generating revenue, the deferred tax asset would thereby be realized
indirectly.
A compromise position might be to provide no valuation allowance for the $400,000 deferred
tax asset and to include a note to consolidated financial statements such as the following,
adapted from paragraph A-44 of Statement of Position 94-6, “Disclosure of Certain
Significant Risks and Uncertainties”:
The consolidated company has recognized a deferred tax asset of $400,000 as a result of
the taxable gain on the company’s sale of land for a factory site to its subsidiary.
Realization of the deferred tax asset depends on the profitability of the subsidiary’s
factory, or, alternatively, on the subsidiary’s sale of the land to an outsider at a gain.
Although realization is not assured, management believes it is more likely than not that the
entire deferred tax asset will be realized.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 9 49
40 Minutes, Medium
Pro Corporation and Primrose Corporation Pr. 9–1

a. Pro Corporation and Subsidiaries

Working Paper Eliminations
October 31, 2006
(b) Retained Earnings—Spa 2 5 0 0 0
Intercompany Sales—Spa 2 0 0 0 0 0 0
Intercompany Cost of Goods Sold—Spa 1 5 0 0 0 0 0
Cost of Goods Sold—Sol 4 5 0 0 0 0
Inventories—Sol 7 5 0 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized intercompany profit in inventories.

(c) Deferred Income Tax Asset—Spa 3 0 0 0 0

Income Taxes Expense—Spa 3 0 0 0 0
To defer income taxes provided on separate income
tax returns of Spa applicable to unrealized
intercompany profits in Sol’s inventories on Oct. 31,
2006 ($75,000 x 0.40 = $30,000).

(d) Income Taxes Expense—Spa 1 0 0 0 0

Retained Earnings—Spa 1 0 0 0 0
To provide for income taxes attributed to realized
intercompany profits in Sol’s inventories on Oct. 31,
2005 ($25,000 x 0.40 = $10,000).

b. Primrose Corporation and Subsidiary

Working Paper Eliminations
October 31, 2006
(b) Intercompany Interest Revenue—Primrose ($770,602
x 0.06) 4 6 2 3 6
Intercompany 8% Bonds Payable—Safflower 1 0 0 0 0 0 0
Discount on Intercompany 8% Bonds
Payable—Safflower ($124,622 – $3,769) 1 2 0 8 5 3
Investment in Safflower Company 8%
Bonds—Primrose ($770,602 + $6,236) 7 7 6 8 3 8
Intercompany Interest Expense—Safflower
($875,378 x 0.05) 4 3 7 6 9
Retained Earnings—Safflower 1 0 4 7 7 6
To eliminate subsidiary’s bonds owned by parent
company, and related interest revenue and expense;
and to increase subsidiary’s beginning retained
earnings by amount of unamortized realized gain on
the extinguishment of the bonds.

(c) Retained Earnings—Safflower ($104,776 x 0.40) 4 1 9 1 0

Income Taxes Expense—Safflower [($46,236 –
$43,769) x 0.40] 9 8 7
Deferred Income Tax Liability—Safflower ($41,910
– $987) 4 0 9 2 3
To reduce the subsidiary’s income taxes expense for
amount attributable to recorded intercompany gain (for
consolidation purposes) on subsidiary’s bonds; and to
provide for remaining deferred income taxes on
unrecorded portion of gain.

40 Minutes, Medium
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50 Modern Advanced Accounting, 10/e
Pullet Corporation Pr. 9–2
a. Pullet Corporation
Journal Entry

20 07
Nov 30 Cash ($60,000 x 0.08) 4 8 0 0
Investment in Sagehen Company Bonds ($6,325 –
$4,800) 1 5 2 5
Intercompany Interest Revenue ($52,710 x 0.12) 6 3 2 5
To record receipt of annual interest on Sagehen’s
8% bonds payable.

Sagehen Company
Journal Entry

20 07
Nov 30 Intercompany Interest Expense [($60,000 – $3,804) x
0.10] 5 6 2 0
Discount on Intercompany Bonds Payable
($5,620 – $4,800) 8 2 0
Cash ($60,000 x 0.08) 4 8 0 0
To record payment of annual intercompany interest
on 8% bonds.

b. Pullet Corporation and Subsidiary

Working Paper Eliminations
November 30, 2007
(b) Intercompany Interest Revenue—Pullet 6 3 2 5
Intercompany Bonds Payable—Sagehen 6 0 0 0 0
Discount on Intercompany Bonds Payable—
Sagehen ($3,804 – $820) 2 9 8 4
Investment in Sagehen Company Bonds—
Pullet ($52,710 + $1,525) 5 4 2 3 5
Intercompany Interest Expense—Sagehen 5 6 2 0
Retained Earnings—Sagehen 3 4 8 6
To eliminate subsidiary’s bonds owned by parent
company, and related interest revenue and expense;
and to increase subsidiary’s beginning retained
earnings by amount of unamortized realized gain on
the extinguishment of the bonds.

(c) Retained Earnings—Sagehen ($3,486 x 0.40) 1 3 9 4

Income Taxes Expense—Sagehen [($6,325
– $5,620) x 0.40] 2 8 2
Deferred Income Tax Liability—Sagehen
($1,394 – $282) 1 1 1 2
To reduce the subsidiary’s income taxes expense for
amount attributable to recorded intercompany gain (for
consolidation purpose) on subsidiary’s bonds; and to
provide for remaining deferred income taxes on
unrecorded portion of gain.

40 Minutes, Medium
Presto Corporation Pr. 9–3

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Solutions Manual, Chapter 9 51
 Presto Corporation
Journal Entries

20 05
Jan 2 Investment in Shuey Company Common Stock
($10,000 x $40) 4 0 0 0 0 0
Common Stock (10,000 x $1) 1 0 0 0 0
Paid-in Capital in Excess of Par 3 9 0 0 0 0
To record merger with Shuey Company.

2 Investment in Shuey Company Common Stock 6 0 0 0 0

Paid-in Capital in Excess of Par 3 0 0 0 0
Cash 9 0 0 0 0
To record payment of costs incurred in merger with
Shuey Company.

2 Cash 2 0 0 0 0
Trade Accounts Receivable (net) 8 0 0 0 0
Inventories 1 6 0 0 0 0
Short-Term Prepayments 1 0 0 0 0
Investments 4 5 0 0 0
Plant Assets (net) 4 9 0 0 0 0
Intangible Assets (net) 1 3 0 0 0 0
Goodwill {$460,000 – [$935,000 – ($480,000 +
$54,000)]} 5 9 0 0 0
Notes Payable 6 0 0 0 0
Trade Accounts Payable 9 0 0 0 0
Income Taxes Payable 3 0 0 0 0
Long-Term Debt 3 0 0 0 0 0
Deferred Income Tax Liability [($935,000 –
$800,000) x 0.40] 5 4 0 0 0
Investment in Shuey Company Common Stock 4 6 0 0 0 0
To allocate cost of Shuey Company investment to
identifiable asset and liabilities, with remainder to
goodwill.

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52 Modern Advanced Accounting, 10/e
40 Minutes, Medium
Pellerin Corporation Pr. 9–4
Pellerin Corporation
Journal Entries

20 05
Dec 31 Investment in Sigmund Company Common Stock 6 0 0 0 0
Investment Income 6 0 0 0 0
To record share of Sigmund’s net income for nine
months ended Sept. 30, 2005 [($800,000 – $600,000) x
0.30 = $60,000].

31 Cash in Transit ($300,000 x 0.90) 2 7 0 0 0 0

Investment in Sigmund Company Common Stock 2 7 0 0 0 0
To record cash dividend in transit from subsidiary on
Dec. 31, 2005.

31 Investment in Sigmund Company Common Stock 1 3 5 0 0 0

Intercompany Investment Income 1 3 5 0 0 0
To record share of Sigmund’s net income for three
months ended Dec. 31, 2005 [($650,000 + $300,000 –
$800,000) x 0.90 = $135,000].

31 Intercompany Investment Income 4 0 0 0 0

Investment in Sigmund Company Common Stock 4 0 0 0 0
To record additional patent amortization attributable to
subsidiary for Sept. 30–Dec. 31, 2005, as follows:
Cost of 60% investment in Sigmund’s
common stock, Sept 30, 2005 $1,760,000
Less: Share of Sigmund’s identifiable
net assets (including patents) on
Sept. 30, 2005 ($1,800,000 x 0.60) 1,080.000
Amount attributable to Sigmund’s patents $ 680,000
Amortization for Sept. 30—Dec. 31, 2005
($680,000 ÷ 4 3/12 x 3/12) $ 40,000

Note to Instructor: Pellerin’s 30% investment in

Sigmund on Jan. 2, 2005, was equal to the carrying
amount of Sigmund’s identifiable net assets on that
date ($1,600,000 x 0.30 = $480,000).

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Solutions Manual, Chapter 9 53
45 Minutes, Medium
Porcelain Corporation Pr. 9–5
Porcelain Corporation and Subsidiary
Consolidated Statement of Cash Flows (indirect method)
For Year Ended December 31, 2006
Net cash provided by operating activities (Exhibit 1) $ 1 3 5 0 0 0

Cash flows from investing activities:

Acquisition of plant assets $( 2 2 0 0 0 0 )
Disposal of plant assets 1 5 0 0 0 0
Net cash used in investing activities ( 7 0 0 0 0 )

Cash flows from financing activities:

Payment on long-term borrowings $ ( 5 0 0 0 0 )
Dividends paid, including $5,000 to minority stockholders of
Skinner Company ( 6 5 0 0 0 )
Issuance of common stock 7 0 0 0 0
Net cash used in financing activities ( 4 5 0 0 0 )

Net increase in cash $ 2 0 0 0 0

Cash, beginning of year 5 0 0 0
0 0
Cash, end of year $ 7 0 0 0 0

Exhibit 1 Cash flows from operating activities:

Net income to parent $ 1 1 8 0 0 0

Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest in net income of subsidiary 1 0 0 0 0
Depreciation expense 4 0 0 0 0
Goodwill impairment loss 2 0 0 0 0
Gain on disposal of plant assets ( 5 0 0 0 0 )
Net increase in net current assets ( 3 0 0 0 )
Net cash provided by operating activities $ 1 3 5 0 0 0

55 Minutes, Strong
Parkhurst Corporation Pr. 9–6

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54 Modern Advanced Accounting, 10/e
 Parkhurst Corporation and Subsidiary
Working Paper Eliminations
March 31, 2006
(b) Retained Earnings—Parkhurst ($20,000 x 0.30) 6 0 0 0
Intercompany Sales—Parkhurst 2 0 0 0 0 0
Intercompany Cost of Goods Sold—Parkhurst
($200,000 x 0.70) 1 4 0 0 0 0
Cost of Goods Sold—Sandland
($180,000 x 0.30) 5 4 0 0 0
Inventories—Sandland ($40,000 x 0.30) 1 2 0 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized intercompany profit in inventories.

(c) Deferred Income Tax Asset—Parkhurst

($12,000 x0.40) 4 8 0 0
Income Taxes Expense—Parkhurst 4 8 0 0
To defer income taxes provided on separate income
tax returns of parent company applicable to unrealized
intercompany profits in subsidiary’s inventories on
Mar. 31, 2006.

Income Taxes Expense—Parkhurst ($6,000 x 0.40) 2 4 0 0

Retained Earnings—Parkhurst 2 4 0 0
To provide for income taxes attributable to realized
intercompany profits in subsidiary’s inventories on
Mar. 31, 2005.

(d) Intercompany Gain on Sale of Machinery—Sandland

($50,000 – $30,000) 2 0 0 0 0
Accumulated Depreciation—Parkhurst ($20,000 ÷ 5) 4 0 0 0
Machinery—Parkhurst 2 0 0 0 0
Depreciation Expense—Parkhurst 4 0 0 0
To eliminate intercompany gain in machinery and in
related depreciation.

(e) Deferred Income Tax Asset—Sandland [($20,000 –

$4,000) x 0.40] 6 4 0 0
Income Taxes Expense—Sandland 6 4 0 0
To defer income taxes attributable to remainder of
unrealized gain in parent company’s machinery.

(f) Intercompany Gain on Sale of Land—Parkhurst

($480,000 – $360,000) 1 2 0 0 0 0
Land—Sandland 1 2 0 0 0 0
To eliminate unrealized intercompany gain on sale of
land.
(Continued on page 312.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 9 55
Parkhurst Corporation (concluded) Pr. 9–6
Parkhurst Corporation and Subsidiary
Working Paper Eliminations (concluded)
March 31, 2006
(g) Deferred Income Tax Asset—Parkhurst ($120,000 x
0.40) 4 8 0 0 0
Income Taxes Expense—Parkhurst 4 8 0 0 0
To defer income taxes attributable to unrealized
intercompany gain in subsidiary’s land.

(h) Intercompany 12% Bonds Payable—Sandland

($1,000,000 x 0.60) 6 0 0 0 0 0
Discount on Intercompany 12% Bonds Payable—a
Sandland ($100,590 x 0.60) 6 0 3 5 4
Investment in Sandland Company 12% Bonds—a
Parkhurst 4 8 7 5 3 7
Gain on Extinguishment of Bonds—Sandland 5 2 1 0 9
To eliminate subsidiary’s bonds acquired by parent
company, and to recognize gain on the extinguishment
of the bonds.

(i) Income Taxes Expense—Sandland ($52,109 x 0.40) 2 0 8 4 4

Deferred Income Tax Liability—Sandland 2 0 8 4 4
To provide for income taxes attributable to subsidiary’s
realized gain on parent company’s acquisition of the
subsidiary’s bonds.

The McGraw-Hill Companies, Inc., 2006

56 Modern Advanced Accounting, 10/e
70 Minutes, Strong
Paine Corporation Pr. 9–7
a. Paine Corporation
Journal Entries

20 06
June 30 Income Taxes Expense 6 0 0 0 0
Income Taxes Payable (Other Liabilities) 6 0 0 0 0
To provide for income taxes for 2006 on income
exclusive of intercompany investment income
[($153,480 – $3,480*) x 0.40 = $60,000].

30 Intercompany Dividends Receivable 2 8 8 0 0

Investment in Spilberg Company Common Stock 1 9 8 0 0
Investment in Sykes Company Common Stock 9 0 0 0
To record dividends receivable from subsidiaries on
June 30, 2006, computed as follows:
Spilberg Company ($20,000 x 0.99) $19,800
Sykes Company ($10,000 x 0.90) 9,000
Total dividends receivable $28,800

30 Investment in Spilberg Company Common Stock 3 9 6 0 0

Investment in Sykes Company Common Stock 1 8 0 0 0
Intercompany Investment Income 5 7 6 0 0
To record share of subsidiaries’ reported net income
for Year 2006 computed as follows:
Spilberg Company ($40,000 x 0.99) $39,600
Sykes Company ($20,000 x 0.90) 18,000
Total investment income $57,600

*Goodwill amortization for income tax purposes:

$52,200 ÷ 15 = $3,480

(Continued on page 314.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 9 57
Paine Corporation (continued) Pr. 9–7
Paine Corporation
Journal Entries (concluded)

20 06
June 30 Income Taxes Expense 2 3 0 4 0
Income Taxes Payable (Other Liabilities) 1 1 5 2 0
Deferred Income Tax Liability (Other Liabilities) 1 1 5 2 0
To provide for income taxes on intercompany invest-
ment income from subsidiaries as follows (dividend
received deduction is disregarded):

Spilberg Sykes
Company Company Total
Net income $40,000 $20,000
Parent company’s
share 99% and 90% $39,600 $18,000
Income taxes
expense, 40% $15,840 $ 7,200 $23,040

Income taxes
currently payable
based on dividends
received constructively
(50%) $ 7,920 $ 3,600 $11,520
Taxes deferred
until earnings
remitted by
subsidiary (50%) 7,920 3,600 11,520
Income taxes
expense $15,840 $ 7,200 $23,040

Note: Intercompany profits in ending inventories do not

enter into the computation of income taxes related to
undistributed earnings of subsidiaries. See elimination
(c) on page 317 for part b.

The McGraw-Hill Companies, Inc., 2006

58 Modern Advanced Accounting, 10/e
Paine Corporation (continued) Pr. 9–7
b. Paine Corporation and Subsidiaries
Working Paper for Consolidated Financial Statements
For Year Ended June 30, 2006
Eliminations
Paine Spilberg Sykes increase
Corporation Company Company (decrease) Consolidated
Income Statement
Revenue:
Net sales 1 0 0 0 0 0 0 5 5 0 0 0 0 2 2 0 0 0 0 1 7 7 0 0 0 0
Intercompany sales 1 0 0 0 0 0 (b)( 1 0 0 0 0 0 )
Intercompany investment income 5 7 6 0 0 (a) ( 5 7 6 0 0 )
Total revenue 1 1 5 7 6 0 0 5 5 0 0 0 0 2 2 0 0 0 0 ( 1 5 7 6 0 0 ) 1 7 7 0 0 0 0
Cost and expenses and minority interest:
Cost of goods sold 7 0 0 0 0 0 3 5 7 5 0 0 1 4 3 0 0 0 (b) ( 1 6 5 0 0 ) 1 1 8 4 0 0 0
Intercompany cost of goods sold 7 0 0 0 0 (b) ( 7 0 0 0 0 )
Operating expenses 1 3 0 0 0 0 1 2 5 8 3 3 4 3 6 6 7 2 9 9 5 0 0
Interest expense 4 6 5 2 0 4 6 5 2 0
Income taxes expense 8 3 0 4 0 2 6 6 6 7 1 3 3 3 3 (c) ( 5 4 0 0 ) 1 1 7 6 4 0
Minority interest in net income of subsidiaries (d) 2 4 0 0 2 4 0 0
Total costs and expenses and minority interest 1 0 2 9 5 6 0 5 1 0 0 0 0 2 0 0 0 0 0 ( 8 9 5 0 0 )* 1 6 5 0 0 6 0
Net income 1 2 8 0 4 0 4 0 0 0 0 2 0 0 0 0 ( 6 8 1 0 0 ) 1 1 9 9 4 0

Statement of Retained Earnings (a)( 1 5 0 0 0 0 )

Retained earnings, beginning of year 3 9 6 5 2 0 3 0 0 0 0 0 1 5 0 0 0 0 (a)( 3 0 0 0 0 0 ) 3 9 6 5 2 0
Net income 1 2 8 0 4 0 4 0 0 0 0 2 0 0 0 0 ( 6 8 1 0 0 ) 1 1 9 9 4 0
Subtotal 5 2 4 5 6 0 3 4 0 0 0 0 1 7 0 0 0 0 ( 5 1 8 1 0 0 ) 5 1 6 4 6 0
Dividends declared 5 0 0 0 0 2 0 0 0 0 1 0 0 0 0 (a) ( 3 0 0 0 0 )† 5 0 0 0 0
Retained earnings, end of year 4 7 4 5 6 0 3 2 0 0 0 0 1 6 0 0 0 0 ( 4 8 8 1 0 0 ) 4 6 6 4 6 0

* A decrease in costs and expenses and an increase in net income.

† A decrease in dividends and an increase in retained earnings.
(Continued on page 316.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 9 59
Paine Corporation (continued) Pr. 9–7
b. Paine Corporation and Subsidiaries
Working Paper for Consolidated Financial Statements (concluded)
For Year Ended June 30, 2006
Eliminations
Paine Spilberg Sykes increase
Corporation Company Company (decrease) Consolidated
Balance Sheet
Assets
Intercompany dividends receivable (payable) 2 8 8 0 0 ( 1 9 8 0 0 ) ( 9 0 0 0 )
Inventories 1 0 0 0 0 0 0 8 0 0 0 0 0 7 0 0 0 0 0 (b) ( 1 3 5 0 0 ) 2 4 8 6 5 0 0
Investment in Spilberg Company common stock 1 0 0 9 8 0 0 * (a)(1 0 0 9 8 0 0 )
Investment in Sykes Company common stock 5 8 3 2 0 0 † (a)( 5 8 3 2 0 0 )
Goodwill (a) 5 2 2 0 0 5 2 2 0 0
Other assets 1 5 0 1 3 0 0 1 2 6 0 0 0 0 7 9 0 0 0 0 (c) 5 4 0 0 3 5 5 6 7 0 0
Total assets 4 1 2 3 1 0 0 2 0 4 0 2 0 0 1 4 8 1 0 0 0 (1 5 4 8 9 0 0 ) 6 0 9 5 4 0 0

Liabilities & Stockholders’ Equity

Other liabilities 2 0 4 8 5 4 0 1 0 2 0 2 0 0 8 9 1 0 0 0 3 9 5 9 7 4 0
Common stock, $1 par 1 0 0 0 0 0 0 5 0 0 0 0 0 3 0 0 0 0 0 (a)( 8 0 0 0 0 0 ) 1 0 0 0 0 0 0
Additional paid-in capital 6 0 0 0 0 0 2 0 0 0 0 0 1 3 0 0 0 0 (a)( 3 3 0 0 0 0 ) 6 0 0 0 0 0
Minority interest in net assets of subsidiaries (a) 6 6 8 0 0 6 9 2 0 0
(d) 2 4 0 0
Retained earnings 4 7 4 5 6 0 3 2 0 0 0 0 1 6 0 0 0 0 ( 4 8 8 1 0 0 ) 4 6 6 4 6 0
Total liabilities & stockholders’ equity 4 1 2 3 1 0 0 2 0 4 0 2 0 0 1 4 8 1 0 0 0 (1 5 4 8 9 0 0 ) 6 0 9 5 4 0 0

* $990,000 + $39,600 – $19,800 = $1,009,800.

† $574,200 + $18,000 – $9,000 = $583,200.

The McGraw-Hill Companies, Inc., 2006

60 Modern Advanced Accounting, 10/e
Paine Corporation (concluded) Pr. 9–7
Paine Corporation and Subsidiary
Working Paper Eliminations
June 30, 2006
(a) Common Stock—Spilberg and Sykes ($500,000 +
$300,000) 8 0 0 0 0 0
Additional Paid-in Capital—Spilberg and Sykes
($200,000 + $130,000) 3 3 0 0 0 0
Retained Earnings—Spilberg 3 0 0 0 0 0
Retained Earnings—Sykes 1 5 0 0 0 0
Intercompany Investment Income—Paine 5 7 6 0 0
Goodwill—Paine 5 2 2 0 0
Investment in Spilberg Company Common
Stock—Paine 1 0 0 9 8 0 0
Investment in Sykes Company Common
Stock—Paine 5 8 3 2 0 0
Dividends Declared—Spilberg and Sykes
($20,000 + $10,000) 3 0 0 0 0
Minority Interest in Net Assets of Subsidiaries
($9,800 + $57,000) 6 6 8 0 0
To eliminate intercompany investments and equity
accounts of subsidiaries at beginning of year, and
subsidiary dividends; to establish unimpaired
goodwill; and to establish minority interest as follows:
Spilberg Sykes
Company Company
Minority interest at
beginning of year $10,000(A) $58,000(B)
Less: Minority interest
in dividends 200 1,000
Net minority interest $ 9,800 $57,000
(A) ($300,000 + 500,000 + 200,000) x 0.01 (B) ($150,000 + 300,000 + 130,000) x 0.10
(b) Intercompany Sales—Paine 1 0 0 0 0 0
Intercompany Cost of Goods Sold—Paine 7 0 0 0 0
Cost of Goods Sold—Spilberg and Sykes
($30,000 – $13,500) 1 6 5 0 0
Inventories—Spilberg and Sykes ($6,000 +
$7,500) 1 3 5 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized profits in inventories.

(c) Deferred Income Tax Asset (Other Assets)—Spilberg

and Sykes ($13,500 x 0.40) 5 4 0 0
Income Taxes Expense—Paine 5 4 0 0
To defer income taxes provided on separate income
tax returns of parent company applicable to unrealized
intercompany profits in subsidiaries’ inventories on
June 30, 2006.

(d) Minority Interest in Net Income of Subsidiaries ($400 +

$2,000) 2 4 0 0
Minority Interest in Net Assets of Subsidiaries 2 4 0 0
To establish minority interest in subsidiaries’ net
income for Year 2006, as follows: Spilberg ($40,000 x
0.01 = $400); Sykes ($20,000 x 0.10 = $2,000).

80 Minutes, Strong

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 9 61
Pickens Corporation Pr. 9–8
Pickens Corporation and Subsidiary
Working Paper for Consolidated Financial Statements
December 31, 2005
Eliminations
Pickens Skiffen increase
Corporation Company (decrease) Consolidated
Income Statement
Revenue:
Net sales 8 4 0 0 0 0 3 6 0 0 0 0 1 2 0 0 0 0 0
Intercompany sales 8 0 6 0 0 6 5 0 0 0 (b) ( 8 0 6 0 0 )
(c) ( 6 5 0 0 0 )
Gain on extinguishment of
bonds (e) 1 4 3 8 1 4 3 8
Intercompany gain on sale
of equipment 9 5 0 0 (g) ( 9 5 0 0 )
Intercompany interest revenue 2 7 0 2 (e) ( 2 7 0 2 )
Intercompany investment
income 4 4 8 0 0 (a) ( 4 4 8 0 0 )
Total revenue 9 7 7 6 0 2 4 2 5 0 0 0 ( 2 0 1 1 6 4 ) 1 2 0 1 4 3 8
Costs & expenses & minority interest:
Cost of goods sold 5 4 6 0 0 0 2 5 2 0 0 0 (b) ( 1 7 5 8 0 ) 7 7 0 6 7 0
(c) ( 9 7 5 0 )
Intercompany cost of goods
sold 5 6 4 2 0 4 8 7 5 0 (b) ( 5 6 4 2 0 )
(c) ( 4 8 7 5 0 )
Interest expense 3 2 0 0 0 9 1 0 6 4 1 1 0 6
Intercompany interest expense 2 2 7 6 (e) ( 2 2 7 6 )
Other operating expenses
and income taxes expense 2 7 0 7 5 2 5 6 8 6 8 (d) ( 5 2 4 0 ) 3 1 8 7 9 5
(f) 4 0 5
(g) ( 3 1 7 )
(h) ( 3 6 7 3 )
Minority interest in net
income of subsidiary (i) 1 0 5 4 1 1 0 5 4 1
Total cost and expenses
and minority interest 9 0 5 1 7 2 3 6 9 0 0 0 ( 1 3 3 0 6 0 )* 1 1 4 1 1 1 2
Net income 7 2 4 3 0 5 6 0 0 0 ( 6 8 1 0 4 ) 6 0 3 2 6

Statement of Retained Earnings

Retained earnings, beginning of
year 5 9 5 0 0 0 1 3 6 0 0 0 (a)( 1 3 2 5 0 0 ) 5 9 8 5 0 0
Net income 7 2 4 3 0 5 6 0 0 0 ( 6 8 1 0 4 ) 6 0 3 2 6
Subtotal 6 6 7 4 3 0 1 9 2 0 0 0 ( 2 0 0 6 0 4 ) 6 5 8 8 2 6
Dividends declared 2 0 0 0 0 1 1 0 0 0 (a) ( 1 1 0 0 0 )† 2 0 0 0 0
Retained earnings, end of year 6 4 7 4 3 0 1 8 1 0 0 0 ( 1 8 9 6 0 4 ) 6 3 8 8 2 6

* A decrease in costs and expenses and an increase in net income.

†
A decrease in dividends and an increase in retained earnings.

(Continued on page 319.)

Pickens Corporation (continued) Pr. 9–8

The McGraw-Hill Companies, Inc., 2006

62 Modern Advanced Accounting, 10/e
 Pickens Corporation and Subsidiary
Working Paper for Consolidated Financial Statements (concluded)
December 31, 2005
Eliminations
Pickens Skiffen increase
Corporation Company (decrease) Consolidated
Balance Sheet
Assets
Intercompany receivables
(payables) 3 5 8 0 0 ( 3 5 8 0 0 )
Inventories 1 8 0 0 0 0 9 6 0 0 0 (b) ( 6 6 0 0 ) 2 6 2 9 0 0
(c) ( 6 5 0 0 )
Investment in Skiffen Company
common stock 3 9 3 2 0 0 (a)( 3 9 3 2 0 0 )
Investment in Skiffen Company
bonds 2 7 9 1 8 (e) ( 2 7 9 1 8 )
Plant assets 7 8 1 5 0 0 5 1 0 0 0 0 (g) ( 9 5 0 0 ) 1 2 8 2 0 0 0
Accumulated depreciation ( 8 7 0 0 0 ) ( 8 5 0 0 0 ) (g) ( 3 1 7 )* ( 1 7 1 6 8 3 )
Other assets 3 3 3 7 8 2 1 4 6 5 0 0 (d) 5 2 4 0 4 8 9 1 9 5
(h) 3 6 7 3
Goodwill (a) 2 5 2 0 0 2 5 2 0 0
Total assets 1 6 6 5 2 0 0 6 3 1 7 0 0 ( 4 0 9 2 8 8 ) 1 8 8 7 6 1 2

Liabilities & Stockholders’ Equity

Dividends payable 2 0 0 0 0 2 2 0 0 2 2 2 0 0
Bonds payable 4 0 0 0 0 0 1 2 0 0 0 0 5 2 0 0 0 0
Intercompany bonds payable 3 0 0 0 0 (e) ( 3 0 0 0 0 )
Discount on bonds payable ( 4 2 8 1 ) ( 4 2 8 1 )
Discount on intercompany bonds
payable ( 1 0 7 0 ) (e) ( 1 0 7 0 )†
Deferred income tax liability 1 5 8 0 0 (f) 4 0 5 1 6 2 0 5
Other liabilities 1 6 4 4 7 0 2 4 8 5 1 1 8 9 3 2 1
Common stock, $2.50 par 4 0 0 0 0 0 2 5 0 0 0 0 (a)( 2 5 0 0 0 0 ) 4 0 0 0 0 0
Additional paid-in capital 1 4 0 0 0 2 9 0 0 0 (a) ( 2 9 0 0 0 ) 1 4 0 0 0
Minority interest in net assets of (a) 8 0 8 0 0 9 1 3 4 1
subsidiary (I) 1 0 5 4 1
Retained earnings 6 4 7 4 3 0 1 8 1 0 0 0 ( 1 8 9 6 0 4 ) 6 3 8 8 2 6
Retained earnings of subsidiary 3 5 0 0 (a) ( 3 5 0 0 )
Total liabilities & stockholders’
equity 1 6 6 5 2 0 0 6 3 1 7 0 0 ( 4 0 9 2 8 8 ) 1 8 8 7 6 1 2

* A decrease in accumulated depreciation and an increase in total assets.

†
A decrease in discount and an increase in total liabilities & stockholders’ equity.

Note to Instructor: Intercompany receivables (payables) are:

Pickens Skiffen
Corporation Company
Dividends receivable (payable) $ 8 8 0 0 $ ( 8 8 0 0 )
Accounts receivable for
merchandise 7 0 0 0 1 2 0 0 0
Accounts payable for
merchandise ( 1 2 0 0 0 ) ( 7 0 0 0 )
Noninterest-bearing advances 3 2 0 0 0 ( 3 2 0 0 0 )
Totals $ 3 5 8 0 0 $ ( 3 5 8 0 0 )

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 9 63
Pickens Corporation (continued) Pr. 9–8
Pickens Corporation and Subsidiary
Working Paper Eliminations
December 31, 2005
(a) Common Stock—Skiffen 2 5 0 0 0 0
Additional Paid-in Capital—Skiffen 2 9 0 0 0
Retained Earnings—Skiffen ($136,000 – $3,500) 1 3 2 5 0 0
Retained Earnings of Subsidiary—Pickens 3 5 0 0
Intercompany Investment Income—Pickens 4 4 8 0 0
Goodwill—Pickens 2 5 2 0 0
Investment in Skiffen Company Common
Stock—Pickens 3 9 3 2 0 0
Dividends Declared—Skiffen 1 1 0 0 0
Minority Interest in Net Assets of Subsidiary 8 0 8 0 0
To eliminate intercompany investment and related
equity accounts of subsidiary at beginning of year;
to eliminate intercompany investment income and
dividends of subsidiary; and to establish minority
interest at beginning of year, less minority interest in
dividends, as follows:
Minority interest, Jan. 2, 2005
($415,000 x 0.20) $83,000
Less: Minority interest in Dec. 15, 2005,
dividends ($11,000 x 0.20) (2,200)
Net minority interest $80,800

(b) Intercompany Sales—Pickens 8 0 6 0 0

Intercompany Cost of Goods Sold—Pickens 5 6 4 2 0
Cost of Goods Sold—Skiffen ($58,600 x 0.30) 1 7 5 8 0
Inventories—Skiffen ($22,000 x 0.30) 6 6 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized intercompany profit in inventories.

(c) Intercompany Sales—Skiffen 6 5 0 0 0

Intercompany Cost of Goods Sold—Skiffen 4 8 7 5 0
Cost of Goods Sold—Pickens ($39,000 x 0.25) 9 7 5 0
Inventories—Pickens ($26,000 x 0.25) 6 5 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized intercompany profit in inventories.

(d) Deferred Income Tax Asset (Other Assets) [($6,600 +

$6,500) x 0.40] 5 2 4 0
Income Taxes Expense (Other Operating
Expenses) 5 2 4 0
To defer income taxes provided on separate income
tax returns of parent company and subsidiary
applicable to unrealized intercompany profits in
inventories on Dec. 31, 2005.

(Continued on page 321.)

Pickens Corporation (concluded) Pr. 9–8

Pickens Corporation and Subsidiary
The McGraw-Hill Companies, Inc., 2006
64 Modern Advanced Accounting, 10/e
 Working Paper Eliminations (concluded)
December 31, 2005
(e) Intercompany Bonds Payable—Skiffen 3 0 0 0 0
Intercompany Interest Revenue—Pickens ($27,016 x
0.10) 2 7 0 2
Discount on Intercompany Bonds Payable—
Skiffen ($1,546 – $476) 1 0 7 0
Intercompany Interest Expense—Skiffen
($28,454 x 0.08) 2 2 7 6
Investment in Skiffen Company Bonds—Pickens
($27,016 + $902) 2 7 9 1 8
Gain on Extinguishment of Bonds—Skiffen
($28,454 – $27,016) 1 4 3 8
To eliminate subsidiary’s bonds owned by parent
company, and related interest revenue and expense,
and to recognize gain on the extinguishment of the
bonds.

(f) Income Taxes Expense (Other Operating Expenses)—

Skiffen {[$1,438 – ($2,702 – $2,276)] x 0.40} 4 0 5
Deferred Income Tax Liability—Skiffen 4 0 5
To provide for income taxes attributable to subsidiary’s
realized gain on parent company’s acquisition of the
subsidiary’s bonds; and to defer income taxes
applicable to the discount related to the bonds.

(g) Intercompany Gain on Sale of Equipment—Pickens 9 5 0 0

Accumulated Depreciation—Skiffen 3 1 7
Plant Assets—Skiffen 9 5 0 0
Other Operating Expenses—Skiffen 3 1 7
To eliminate unrealized intercompany gain in
equipment and in related depreciation. Gain element
of depreciation computed as follows: ($9,500 ÷
10 years) x 1/3 = $317.

(h) Deferred Income Tax Asset (Other Assets)—Pickens

[($9,500 – $317) x 0.40] 3 6 7 3
Income Taxes Expense (Other Operating
Expenses)—Pickens 3 6 7 3
To defer income taxes attributable to remainder of
unrealized gain in subsidiary’s machinery.

(i) Minority Interest in Net Income of Subsidiary 1 0 5 4 1

Minority Interest in Net Assets of Subsidiary 1 0 5 4 1
To provide for minority interest in subsidiary’s net
income for Year 2005, as follows:
Net income of subsidiary $56,000
Adjustments for working paper
eliminations:
(c) (6,500)
(d) ($6,500 x 0.40) 2,600
(e) [$1,438 – ($2,702 – $2,276)] 1,012
(f) (405)
Adjusted net income of subsidiary $52,707
Minority interest share ($52,707 x 0.20) $10,541

80 Minutes, Strong
Plummer Corporation Pr. 9–9

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 9 65
a. Plummer Corporation
Adjusting Entry
December 31, 2005
Income Taxes Expense 2 3 2 5
Income Taxes Payable 2 4 0
Deferred Income Tax Liability 2 0 8 5
To provide for income taxes on intercompany
investment income of subsidiary, computed as follows:
Net income of subsidiary $38,750
Add: Amortization of bargain-purchase
excess over composite economic life of
subsidiary’s machinery and equipment
{[($142,000 x 0.75) – $96,000] ÷ 5 years} 2,100
Adjusted net income of subsidiary $40,850
Less: Amortization of bargain purchase
excess, not taxable 2,100
Income of subsidiary subject to income
taxes $38,750
Parent company’s share
($38,750 x 0.75) $29,063
Less: Dividend received deduction
($29,063 x 0.80) 23,250
Amount subject to income taxes $ 5,813
Income taxes expense ($5,813 x 0.40) $ 2,325

Income taxes currently payable, based

on cash dividends received
[($3,000 x 0.20) x 0.40] $ 240
Income taxes deferred until earnings
remitted by subsidiary 2,085
Total income taxes expense $2,325

The McGraw-Hill Companies, Inc., 2006

66 Modern Advanced Accounting, 10/e
Plummer Corporation (continued) Pr. 9–9
b. Plummer Corporation and Subsidiary
Working Paper for Consolidated Financial Statements
December 31, 2005
Eliminations
Plummer Sinclair increase
Corporation Company (decrease) Consolidated
Income Statement
Revenue:
Net sales 7 7 2 0 0 0 4 2 6 0 0 0 1 1 9 8 0 0 0
Intercompany sales 7 8 0 0 0 1 0 4 0 0 0 (c) ( 7 8 0 0 0 )
(d)( 1 0 4 0 0 0 )
Dividends revenue 7 5 0 7 5 0
Intercompany gain on sale of
machinery 8 0 0 (b) ( 8 0 0 )
Intercompany investment
income 3 1 1 6 3 (a) ( 3 1 1 6 3 )
Other revenue 9 0 0 0 2 9 0 0 1 1 9 0 0
Total revenue 8 9 0 1 6 3 5 3 4 4 5 0 ( 2 1 3 9 6 3 ) 1 2 1 0 6 5 0

Costs & expenses & minority interest:

Cost of goods sold 4 4 5 0 0 0 3 0 1 2 0 0 (c) ( 8 9 5 0 ) 7 1 1 4 5 0
(d) ( 2 5 8 0 0 )
Intercompany cost of goods (c) ( 6 5 0 0 0 )
sold 6 5 0 0 0 7 2 8 0 0 (d) ( 7 2 8 0 0 )
Depreciation expense 6 5 6 0 0 1 1 2 0 0 (a) ( 2 1 0 0 ) 7 4 7 0 0
Other operating expenses 1 9 5 3 3 8 8 4 6 6 7 2 8 0 0 0 5
Income taxes expenses 3 7 5 5 0 2 5 8 3 3 (e) ( 4 1 0 0 ) 5 9 2 8 3
Minority interest in net
income of subsidiary (f) 8 7 5 8 8 7 5 8
Total costs and expenses
and minority interest 8 0 8 4 8 8 4 9 5 7 0 0 ( 1 6 9 9 9 2 )* 1 1 3 4 1 9 6
Net income 8 1 6 7 5 3 8 7 5 0 ( 4 3 9 7 1 ) 7 6 4 5 4

Statement of Retained
Earnings
Retained earnings, beginning
of year 3 7 8 0 0 0 1 1 2 0 0 0 (a)( 1 1 2 0 0 0 ) 3 7 8 0 0 0
Net income 8 1 6 7 5 3 8 7 5 0 ( 4 3 9 7 1 ) 7 6 4 5 4
)
Subtotal 4 5 9 6 7 5 1 5 0 7 5 0 ( 1 5 5 9 7 1 ) 4 5 4 4 5 4
Dividends declared 7 5 0 0 4 0 0 0 (a) ( 4 0 0 0 )† 7 5 0 0
Retained earnings, end of year 4 5 2 1 7 5 1 4 6 7 5 0 ( 1 5 1 9 7 1 ) 4 4 6 9 5 4

*A decrease in costs and expenses and an increase in net income.

†
A decrease in dividends and an increase in retained earnings.

(Continued on page 324.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 9 67
Plummer Corporation (continued) Pr. 9–9
Plummer Corporation and Subsidiary
Working Paper for Consolidated Financial Statements (concluded)
December 31, 2005
Eliminations
Plummer Sinclair increase
Corporation Company (decrease) Consolidated
Balance Sheet
Assets
Short-term investments 1 8 0 0 0 1 8 0 0 0
Intercompany receivables
(payables) 1 6 0 0 0 ( 1 6 0 0 0 )
Inventories 2 7 5 0 0 0 1 3 5 0 0 0 (c) ( 4 0 5 0 ) 4 0 0 5 5 0
(d) ( 5 4 0 0 )
Other current assets 3 0 9 1 0 0 1 0 6 7 5 0 4 1 5 8 5 0
Deferred income tax asset (e) 4 1 0 0 4 1 0 0
Investment in Sinclair
Company common stock 1 2 4 1 6 3 (a)( 1 2 4 1 6 3 )
)
Plant assets 5 1 8 0 0 0 2 7 9 0 0 0 (a) ( 1 0 5 0 0 ) 7 8 5 7 0 0
(b) ( 8 0 0 )
Accumulated depreciation ( 2 9 8 2 0 0 ) ( 1 9 6 7 0 0 ) (a) ( 2 1 0 0 )* ( 4 9 2 8 0 0 )
Total assets 9 4 4 0 6 3 3 2 6 0 5 0 $( 1 3 8 7 1 3 ) 1 1 3 1 4 0 0

Liabilities & Stockholders’

Equity
Dividends payable 7 5 0 0 7 5 0 0
Income taxes payable 3 5 4 6 5 2 5 8 3 3 6 1 2 9 8
Other current liabilities 2 6 0 8 3 8 1 2 3 4 6 7 3 8 4 3 0 5
Deferred income tax liability 2 0 8 5 2 0 8 5
Common stock, $10 par 1 5 0 0 0 0 1 5 0 0 0 0
Common stock, $5 par 2 0 0 0 0 (a) ( 2 0 0 0 0 )
Additional paid-in capital 3 6 0 0 0 1 0 0 0 0 (a) ( 1 0 0 0 0 ) 3 6 0 0 0
Minority interest in net assets (a) 3 4 5 0 0 4 3 2 5 8
of subsidiary (f) 8 7 5 8
Retained earnings 4 5 2 1 7 5 1 4 6 7 5 0 ( 1 5 1 9 7 1 ) 4 4 6 9 5 4
Total liabilities &
stockholders’ equity 9 4 4 0 6 3 3 2 6 0 5 0 ( 1 3 8 7 1 3 ) 1 1 3 1 4 0 0

*A decrease in accumulated depreciation and an increase in total assets.

Note to instructor: Intercompany receivables (payables) are:

Plummer Sinclair
Corporation Company
Accounts receivable for
merchandise $ 2 4 0 0 0 $ 8 0 0 0
Accounts payable for
merchandise ( 8 0 0 0 ) ( 2 4 0 0 0 )
Totals $ 1 6 0 0 0 $ ( 1 6 0 0 0 )

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68 Modern Advanced Accounting, 10/e
Plummer Corporation (continued) Pr. 9–9
Plummer Corporation and Subsidiary
Working Paper Eliminations
December 31, 2005
(a) Common Stock—Sinclair 2 0 0 0 0
Additional Paid-in Capital—Sinclair 1 0 0 0 0
Retained Earnings—Sinclair 1 1 2 0 0 0
Accumulated Depreciation—Plummer ($10,500 ÷ 5) 2 1 0 0
Intercompany Investment Income—Plummer 3 1 1 6 3
Investment in Sinclair Company Common Stock—
Plummer 1 2 4 1 6 3
Plant Assets—Plummer 1 0 5 0 0
Depreciation Expense—Plummer 2 1 0 0
Dividends Declared—Sinclair 4 0 0 0
Minority Interest in Net Assets of Subsidiary
($35,500 – $1,000) 3 4 5 0 0
To eliminate intercompany investment and related
equity accounts of subsidiary at beginning of year;
to eliminate intercompany investment income and
subsidiary dividends; to offset bargain-purchase excess
[($142,000 x 0.75) – $96,000 = $10,500] against plant
assets; to reduce depreciation expense for pro rata
portion of bargain purchase excess ($10,500 ÷ 5
= $2,100); and to provide for minority interest at
beginning of year ($142,000 x 0.25 = $35,500), less
minority interest in subsidiary’s cash dividend
($4,000 x 0.25 = $1,000).

(b) Intercompany Gain on Sale of Machinery—Sinclair 8 0 0

Plant Assets—Plummer 8 0 0
To eliminate unrealized intercompany gain on sale
of machinery.

(c) Intercompany Sales—Plummer 7 8 0 0 0

Intercompany Cost of Goods Sold—Plummer 6 5 0 0 0
Cost of Goods Sold—Sinclair ($53,700 x 0.16 2/3) 8 9 5 0
Inventories—Sinclair ($24,300 x 0.16 2/3) 4 0 5 0
To eliminate intercompany sales, cost of goods sold,
and unrealized intercompany profit in inventories.

(d) Intercompany Sales—Sinclair 1 0 4 0 0 0

Intercompany Cost of Goods Sold—Sinclair 7 2 8 0 0
Cost of Goods Sold—Plummer ($86,000 x 0.30) 2 5 8 0 0
Inventories—Plummer ($18,000 x 0.30) 5 4 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized intercompany profit in inventories.

(e) Deferred Income Tax Asset—Plummer and Sinclair

[($800 + $4,050 + $5,400) x 0.40] 4 1 0 0
Income Taxes Expense—Plummer and Sinclair 4 1 0 0
To defer income taxes applicable to intercompany
(gains) eliminated in eliminations (b), (c), and (d).

(Continued on page 326.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 9 69
Plummer Corporation (concluded) Pr. 9–9
Plummer Corporation and Subsidiary
Working Paper Eliminations (concluded)
December 31, 2005
(f) Minority Interest in Net Income of Subsidiary 8 7 5 8
Minority Interest in Net Assets of Subsidiary q 8 7 5 8
To provide for minority interest in net income of
subsidiary, computed as follows:
Net income of subsidiary $38,750
Adjustments for working paper eliminations:
Elimination (b) (800)
Elimination (d) (5,400)
Elimination (e)
[($800 + $5,400) x 0.40] 2,480
Adjusted net income of subsidiary $35,030
Minority interest share ($35,030 x 0.25) $ 8,758

The McGraw-Hill Companies, Inc., 2006

70 Modern Advanced Accounting, 10/e