ELECTRONIC SUPPLEMENT TO CHAPTER 8 -...

ELECTRONIC SUPPLEMENT TO CHAPTER 8

The topic of midyear acquisition of ownership interests using the purchasemethod of accounting was discussed in Chapter 8 of the text. Here that discus-

sion is expanded to cover consolidation procedures for interim acquisitions under the pool-ings of interests method.

� � �

POOLING OF INTERESTS DURING AN ACCOUNTING PERIODWhen a pooling of interests takes place during an accounting period, we consolidate theincome of the combining companies for the entire year irrespective of the date of combi-nation. In addition, we restate prior-period financial statements to show the effect of thepooling for all prior periods reported. The requirement to pool the income of combiningcompanies for the entire year of combination has important implications for recordinginvestments in pooled companies within an accounting period and in accounting for suchinvestments under the equity method of accounting. Income and retained earnings of theparent under the equity method of accounting should be equal to consolidated or pooledincome and retained earnings. Therefore, we record the investment in a pooled company atthe book value of the interest acquired at the beginning of the period of pooling, adjusteddownward for dividends paid prior to combination, but not adjusted upward for preacquisi-tion earnings.

Accounting Procedures for Midyear PoolingsAssume that Pete Corporation issues 10,000 shares of its own $10 par common stock forall the outstanding voting stock of Skag Corporation at July 1, 2000, in a pooling of inter-ests. Summary financial information for Skag Corporation at June 30 and at December 31,2000, follows:

Six Months Ended Year EndedJune 30, 2000 December 31, 2000

Net assets $160,000 $170,000Capital stock, $10 par $100,000 $100,000Retained earnings December 31, 1999 50,000 50,000Income 20,000 40,000Dividends (10,000) (20,000)

Stockholders’ equity $160,000 $170,000

Electronic Supplement to Chapter 8 1

C H A P T E R 8

2 ADVANCED ACCOUNTING

1Pete’s retained earnings at December 31, 1999, was $200,000, which was increased to $240,000 when recording thepooling.

Pete Corporation records its investment in Skag on June 30, 2000, as follows:

Investment in Skag (+A) 160,000

Capital stock, $10 par (+SE) 100,000

Retained earnings (+SE) 40,000

Income from Skag (R, +SE) 20,000

The $40,000 credit to retained earnings is equal to the December 31, 1999, retained earningsless $10,000 dividends paid prior to the pooling. The entry for the pooling treatment provides forincluding a full year’s earnings in investment income.

During the six months of 2000, Pete records the receipt of $10,000 dividends from Skag, and atDecember 31, 2000, it records income from Skag of $20,000. Pete’s journal entries are:

Cash (+A) 10,000

Investment in Skag (�A) 10,000

To record dividends received ($10,000 � 100%).

Investment in Skag (+A) 20,000

Income from Skag (R, +SE) 20,000

To record investment income ($20,000 � 100%) for the second six months.

The investment in Skag account at December 31, 2000, is $170,000 ($160,000 + $20,000 �$10,000), equal to Skag’s recorded net assets on that date.

Exhibit 8-1 presents consolidation working papers for Pete and Skag for 2000.We only need three working paper entries to consolidate the financial statements of the pooled

companies. Entry a eliminates investment income and subsidiary dividends and credits the invest-ment account for the difference. Entry b eliminates preacquisition dividends, and entry c eliminatesreciprocal investment and equity balances. The working paper entries are reproduced for conve-nient reference.

a Income from Skag (�R, �SE) 40,000

Dividends (+SE) 10,000


To eliminate income from Skag and dividends and creditinvestment account for the difference.

b Retained earnings—Skag (�SE) 10,000

Dividends (+SE) 10,000

To eliminate preacquisition dividends.

c Retained earnings—Skag (�SE) 40,000

Capital stock—Skag (�SE) 100,000


To eliminate reciprocal investment and equity balances.

The consolidated net income of $140,000 shown in Exhibit C8-1 is equal to the net income ofPete. Consolidated retained earnings of $330,000 at December 31, 2000, is also equal to Pete’sretained earnings. Two items in the consolidation working papers are unusual and require somecomment. We eliminate Skag’s dividends for the entire year ($20,000) because there is no minorityinterest and because the consolidated retained earnings statement reflects dividends paid by Pete,the parent company. Also, Pete’s beginning retained earnings and beginning consolidated retainedearnings of $240,000 are $10,000 less than the $250,000 combined retained earnings of the pooledcompanies at January 1, 2000.1 The difference is the result of eliminating the $10,000 dividendspaid by Skag before consummation of the pooling. Although other approaches for correcting theinconsistencies of the pooling requirements are available, we selected this approach because itmaintains a correct correspondence between the investment and underlying equity accounts,


PETE CORPORATION AND SUBSIDIARY CONSOLIDATION WORKING PAPERS FOR THE YEAR ENDED DECEMBER 31, 2000

100% Adjustments and ConsolidatedPete Skag Eliminations Statements

Income StatementIncome from Skag $ 40,000 a 40,000

Revenue less expenses 100,000 $ 40,000 $140,000

Net income $140,000 $ 40,000 $140,000

Retained EarningsRetained earnings—Pete $240,000 $240,000

Retained earnings—Skag $ 50,000 b 10,000c 40,000

Net income 140,000 40,000 140,000

Dividends (50,000) (20,000) a 10,000 (50,000)b 10,000

Retained earnings—December 31, 2000 $330,000 $ 70,000 $330,000

Balance SheetInvestment in Skag $170,000 a 30,000

c 140,000

Other net assets 760,000 $170,000 $930,000

$930,000 $170,000 $930,000

Capital stock $600,000 $100,000 c 100,000 $600,000

Retained earnings 330,000 70,000 330,000

$930,000 $170,000 $930,000

EXHIBIT C8-1Consolidation WorkingPapers for Poolingof Interests

between parent company income and consolidated income, and between parent company and con-solidated retained earnings.

Reporting Pooled Retained EarningsThe reporting of consolidated retained earnings for 2000 does not parallel the one-line consolida-tion entries presented earlier because reconciliation with Pete Corporation’s $200,000 retainedearnings at December 31, 1999, is required. Therefore, consolidated retained earnings in the periodof pooling would be as follows:

Pete Corporation and SubsidiaryConsolidated (Pooled) Retained EarningsFor the Year Ended December 31, 2000

Retained earnings December 31, 1999, aspreviously reported $200,000

Pooling AdjustmentRetained earnings of Skag, December 31, 1999 50,000Retained earnings (pooled), December 31, 1999 250,000Net income (pooled income)—2000 140,000Dividends—2000

To Pete shareholders $50,000To Skag shareholders before pooling 10,000 60,000

Retained earnings, December 31, 2000 $330,000


This presentation enables readers of Pete’s financial statements to view the effect of the poolingfrom the perspective of amounts presented in prior years.

A S S I G N M E N T M A T E R I A L

W 8-1 What modifications to the usual equity method of accounting are required on a parent company’sbooks in accounting for a midyear pooling of interests? (In other words, how is equality establishedbetween parent company and consolidated net income for midyear poolings?)

W 8-2 On October 1, 2000, Pelvis Corporation issued 30,000 shares of $10 par common stock with a mar-ket value of $30 per share for a 90% interest in Solace Corporation in a pooling of interests busi-ness combination. Direct costs of the combination, which were paid by Pelvis, totaled $40,000 forregistering and issuing the shares and $35,000 for other items.

On January 1, 2000, the book value (equal to fair value) of Solace’s net assets was $912,500.Solace’s net income for 2000 was $100,000, earned evenly throughout the year, and Solacedeclares dividends of $25,000 on June 1 and $25,000 on December 1. Pelvis’s separate income for2000 was $300,000 excluding the direct costs of combination.

R E Q U I R E D : Determine consolidated net income for Pelvis Corporation and Subsidiary for 2000.

W 8-3 Preisendorf Corporation issued 150,000 shares of its $10 par common stock for 90% of the out-standing shares of Schenck Corporation on May 1, 2000, in a pooling of interests business combi-nation. Trial balances of Schenck on May 1 (immediately before the pooling) and on December 31,2000 (before closing) are summarized as follows (in thousands):

May 1 December 31

DebitsCurrent assets $ 380 $ 520Plant assets 1,400 1,300Expenses 400 1,200Dividends 70 210

$2,250 $3,230

CreditsLiabilities $ 250 $ 230Common stock, $10 par 1,000 1,000Retained earnings 500 500Sales 500 1,500

$2,250 $3,230

R E Q U I R E D1. Determine Preisendorf’s investment income and dividends from its investment in Schenck for 2000.

2. Compute the balance of Preisendorf’s investment in Schenck account on December 31, 2000.

W 8-4 Padgett Corporation issued 420,000 of its $5 par common shares for 90% of Stockard Corporation’s$10 par common shares in a pooling of interests that was consummated on September 1, 2000. Priorto the pooling, Padgett’s stockholders’ equity consisted of $10,000,000 common stock, $100,000other paid-in capital, and $4,000,000 retained earnings. Summary financial information for Stockardat January 1, September 1, and December 31, 2000, follows (in thousands):

Balance 8 Months Ended Year-EndJanuary 1 September 1 December 31

Net assets $3,100 $3,400 $3,550Capital stock, $10 par $2,000 $2,000 $2,000Other paid-in capital 200 200 200Retained earnings 900 900 900Net income 400 650Dividends (100) (200)

Stockholders’ equity $3,100 $3,400 $3,550


R E Q U I R E D1. Prepare the journal entry to record the pooling of interests on September 1, 2000.

2. Prepare the entry or entries to account for the investment in Stockard during 2000.

W 8-5 Summarized adjusted trial balances for Polly Corporation and Seay Corporation on August31, 2000, just prior to their pooling of interests on September 1, 2000, were as follows (inthousands):

Polly Seay

Assets $16,000 $5,500Expenses 9,000 3,000Dividends 2,000 500

$27,000 $9,000Liabilities $ 3,000 $1,500Common stock, $10 par 8,000 2,000Other paid-in capital 1,000 500Retained earnings 3,000 1,000Sales 12,000 4,000

$27,000 $9,000

Polly’s separate income for the year ended December 31, 2000, was $4,500,000, and its divi-dends for 2000 totaled $4,000,000. Seay Corporation’s net income for 2000 was $1,500,000, andits dividends were $1,000,000.

R E Q U I R E D1. Prepare journal entries on Polly’s books (a) to record its issuance of 400,000 common shares on

September 1, 2000, for all of the outstanding common stock of Seay, and (b) to account for its in-vestment in Seay for 2000, assuming that Polly and Seay continue to exist as parent company andsubsidiary.

2. Prepare the stockholders’ equity section of the consolidated balance sheet of Polly Corporation andSubsidiary on December 31, 2000.

W 8-6 [AICPA adapted]On June 30, 2000, Purl Corporation issued 150,000 shares of its $20 par common stock, for whichit received all of Scott Corporation’s common stock. The fair value of the common stock issued isequal to the book value of Scott’s net assets. Both corporations continued to operate as separatebusiness, maintaining accounting records with years ended December 31. Net income from sepa-rate company operations and dividends paid were (in thousands):

Purl Scott

Net IncomeSix months ended June 30, 2000 $750 $225Six months ended December 31, 2000 825 375

Dividends PaidMarch 25, 2000 950 —November 15, 2000 — 300

On December 31, 2000, Scott held in its inventory merchandise acquired from Purl onDecember 1, 2000, for $150,000, which included a $45,000 markup.

1. Assume that the business combination qualifies for treatment as a purchase. In the 2000 con-solidated income statement, net income should be reported at:a. $1,650,000b. $1,905,000c. $1,950,000d. $2,130,000


2. Assume that the business combination qualifies for treatment as a pooling of interests. In the2000 consolidated income statement, net income should be reported as:a. $1,905,000b. $1,950,000c. $2,130,000d. $2,175,000

W 8-7 [AICPA adapted]On June 30, 2000, Post, Inc., issued 630,000 shares of its $5 par common stock, for which itreceived 180,000 shares (90%) of Shaw Corporation’s $10 par common stock in a business combi-nation appropriately accounted for as a pooling of interests. The stockholders’ equities immedi-ately before the combination were (in thousands):

Post Shaw

Common stock $ 6,500 $2,000Additional paid-in capital 4,400 1,600Retained earnings 6,100 5,400

$17,000 $9,000

Both corporations continued to operate as separate businesses, maintaining accounting recordswith years ending December 31. For 2000, net income and dividends paid from separate companyoperations were (in thousands):

Post Shaw

Net IncomeSix months ended June 30, 2000 $1,000 $300Six months ended December 31, 2000 1,100 500

Dividends PaidApril 1, 2000 1,300 —October 1, 2000 — 350

1. In the June 30, 2000, consolidated balance sheet, common stock should be reported at:a. $9,650,000b. $9,450,000c. $8,500,000d. $8,300,000

2. In the June 30, 2000, consolidated balance sheet, additional paid-in capital should bereported at:a. $4,400,000b. $4,490,000c. $5,840,000d. $6,000,000

3. In the June 30, 2000, consolidated balance sheet, retained earnings should be reported at:a. $6,100,000b. $9,660,000c. $10,960,000d. $11,500,000

4. In the 2000 consolidated income statement, net income should be reported at:a. $2,550,000b. $2,600,000c. $2,820,000d. $2,900,000


5. In the December 31, 2000, consolidated balance sheet, total minority interest should bereported at:a. $950,000b. $945,000c. $915,000d. $900,000

W 8-8 Proctor Corporation issues 55,000 of its shares for 90% of Simon Corporation’s outstanding com-mon shares in a pooling of interests consummated on April 1, 2000. Adjusted trial balances forProctor and Simon on April 1, 2000, before the pooling, and on December 31, 2000, are summa-rized as follows (in thousands):

April 1, 2000 December 31, 2000

Proctor Simon Proctor Simon

DebitsCash $ 100 $ 80 $ 278 $ 70Other assets 2,000 550 2,400 650Investment in Simon — — 522 —Dividends 100 20 400 80Expenses 800 300 2,300 1,200

$3,000 $950 $5,900 $2,000

CreditsLiabilities $ 400 $ 50 $ 124 $ 140Capital stock, $10 par 1,000 300 1,550 300Other paid-in capital 100 200 — 200Retained earnings 600 60 636 60Sales 900 340 3,500 1,300Income from Simon — — 90 —

$3,000 $950 $5,900 $2,000

R E Q U I R E D : Prepare consolidated balance sheet working papers for Proctor Corporation and Subsidiary asof December 31, 2000.

W 8-9 Financial statements for Poe and Spy Corporations for 2004 are summarized as follows:

Poe Spy

Combined Income and Retained Earnings Statementfor the Year Ended December 31, 2004Sales $463,750 $130,000Income from Spy 18,750 —Gain on Spy stock 17,500 —Cost of sales (260,000) (100,000)Other expenses (140,000) (10,000)

Net income 100,000 20,000Add: Beginning retained earnings 200,000 30,000Deduct: Dividends (50,000) (10,000)

Retained earnings December 31, 2004 $250,000 $ 40,000

Balance Sheet at December 31, 2004Cash $107,500 $ 20,000Inventories 100,000 50,000Other current assets 110,000 30,000Plant assets 300,000 200,000Investment in Spy 182,500 —

Total assets $800,000 $300,000Accounts payable $150,000 $ 60,000Capital stock 400,000 200,000Retained earnings 250,000 40,000

Total equities $800,000 $300,000

Due to a working capital shortage and other financial problems, Poe sold a 25% interest in Spy,its 100%-owned subsidiary, on October 1, 2004, for $75,000. Spy was formed by Poe in 2001 tomanufacture miscellaneous furniture for Poe, and all of Spy’s sales are made to Poe at 130% ofSpy’s cost. A summary of Spy’s sales to Poe from 2001 through 2004 follows:


Percentage Unsold Percentage of SalesSales for Spy’s Cost of by Poe at Unpaid atthe Year Sales for the Year December 31 December 31

2001 $ 91,000 $ 70,000 10% 20%2002 104,000 80,000 5 102003 117,000 90,000 20 152004 130,000 100,000 10 10

A D D I T I O N A L I N F O R M AT I O N1. During 2004, Spy declared dividends of $5,000 on April 1 and $5,000 on November 1.

2. The $182,500 balance of Poe’s investment in Spy account is determined as follows:

Investment cost in 2001 (when Spy was formed) $200,000Add: Income less dividends 2001 through 2003 30,000

230,000Less: Book value of investment sold ($230,000 � 25%) (57,500)

172,500Add: Income from Spy 2004

($15,000 � 100%) + ($5,000 � 75%) 18,750Less: Dividends from Spy in 2004

($5,000 � 100%) + ($5,000 � 75%) (8,750)Investment in Spy $182,500

3. The auditor for Poe has determined that the correct balance of the investment in Spy account atDecember 31, 2004, should be $177,750, computed as 75% of Spy’s $237,000 realized equity. The audi-tor recommends that the following entry be made to correct the accounts because the books have beenclosed on December 31, 2004:

Retained earnings (�SE) 4,750

Investment in Spy (�A) 4,750

The auditor further recommends that Poe adopt and use a correct equity method of accounting for 2005and subsequent years.

R E Q U I R E D : Prepare consolidation working papers for Poe Corporation and Subsidiary for the year endedDecember 31, 2004.

W 8-10 Financial statements for the Psi and Skrye Corporations at and for the year ended December 31,2001, are summarized as follows:

Psi Skrye

Combined Income and Retained Earnings Statementfor the Year Ended December 31, 2001Sales $ 613,840 $250,200Income from Skrye 35,660 —Interest income — 4,800Cost of sales (400,000) (170,000)Operating expenses (141,400) (45,000)Interest expense (8,600) —

Net income 99,500 40,000Add: Beginning retained earnings 200,000 80,000Deduct: Dividends (50,000) (20,000)

Retained earnings, December 31, 2001 $ 249,500 $100,000

Balance Sheet at December 31, 2001Cash $ 47,500 $ 8,600Accounts receivable—net 88,240 67,000Inventories 120,000 40,000Investment in Skrye stock 343,760 —Investment in Psi bonds — 49,400Plant assets—net 500,000 200,000

Total assets $1,099,500 $365,000Accounts payable $ 50,000 $ 11,000Other current liabilities 9,200 4,000

(Continued)


Psi Skrye

9% bonds payable 100,800 —Capital stock, $10 par 500,000 150,000Other paid-in capital 190,000 100,000Retained earnings 249,500 100,000

Total equities $1,099,500 $365,000

Psi Corporation issued 20,000 shares of its $10 par capital stock for 90% of the outstanding votingstock of Skrye Company in a pooling of interests business combination on July 1, 2000. OnJanuary 1, 2000, Skrye’s stockholders’ equity consisted of $150,000, $10 par capital stock, otherpaid-in capital of $100,000, and retained earnings of $60,000. Psi recorded the pooling correctlyon July 1. Skrye’s net income for 2000 was $40,000, earned evenly throughout the year, and divi-dends, paid on December 1, were $20,000.

On July 1, 2001, Psi acquired an additional 5% interest in Skrye for $29,500 cash. This acquisi-tion is accounted for by the purchase method under the provisions of FASB Statement No. 141.Book values of Skrye’s net assets were equal to fair values at the times of purchase, and any excessof investment cost over book value acquired is due to a patent to be amortized over a 10-yearperiod.

A D D I T I O N A L I N F O R M AT I O N

20001 Skrye sold merchandise that cost Skrye $20,000 to Psi for $24,000 during 2000.

One-fourth of that merchandise remained in Psi’s December 31, 2000, inventory.2 On December 31, 2000, Skrye acquired $50,000 par of Psi’s 9% bonds for $49,100

cash. These bonds, which mature on December 31, 2003, and pay interest onJune 30 and December 31, had a book value of $50,600 when acquired by Skrye.

20013 Skrye sold merchandise that cost $40,000 to Psi for $48,000 during 2001. Psi sold

85% of this merchandise, and at December 31, 2001, $7,200 of the merchandiseremained in Psi’s inventory.

4 At December 31, 2001, Psi owed Skrye $2,040 for merchandise purchased.5 Skrye’s $40,000 net income for 2001 was earned evenly throughout the year.

Its $20,000 dividends were paid on December 1.

R E Q U I R E D : Prepare consolidation working papers for Psi Corporation and Subsidiary for the year endedDecember 31, 2001.

ELECTRONIC SUPPLEMENT TO CHAPTER 8 -...

Documents

Transcript of ELECTRONIC SUPPLEMENT TO CHAPTER 8 -...