CHAPTER 5

Use the following information to answer questions 1 through 5.

Eagle Corporation owns 80% of Flyway Inc.’s common stock that

was purchased at its underlying book value. The two companies
report the following information for 2004 and 2005.

During 2004, one company sold inventory to the other company

for $50,000 which cost the transferor $40,000. As of the end of
2004, 30% of the inventory was unsold. In 2005, the remaining
inventory was resold outside the consolidated entity.

2004 Selected Data: Eagle Flyway

Sales Revenue $ 600,000 $ 320,000
Cost of Goods Sold 320,000 155,000
Other Expenses 100,000 89,000
Net Income $ 1800,000 $ 76,000

Dividends Paid 19,000 0

2005 Selected Data: Eagle Flyway

Sales Revenue $ 580,000 $ 445,000
Cost of Goods Sold 300,000 180,000
Other Expenses 130,000 171,000
Net Income $ 150,000 $ 94,000

Dividends Paid 16,000 5,000

1. If the sale referred to above was a downstream sale, the total

sales revenue reported in the consolidated income statement for
2004 would be?

2. If the sale referred to above was a downstream sale, by what

amount must Inventory be reduced to reflect the correct balance
as of the end of 2004?

3. For 2004, consolidated net income will be what amount if the

intercompany sale was downstream?

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 4. If the intercompany sale mentioned above was an upstream sale,
what will be the reported amount of total sales revenue for
2005?

5. If the intercompany sale was an upstream sale, the total amount

of consolidated cost of goods sold for 2005 will be?

Exercise 1

Tern Corporation acquired an 80% interest in Harbor Corporation

several years ago when Harbor’s book values and fair values were
equal. Separate company income statements for Tern and Harbor for the
year ended December 31, 2005 are summarized as follows:

Tern Harbor
Sales Revenue $ 1,000,000 $ 600,000
Income from Harbor 80,000
Cost of Goods Sold ( 600,000 )( 300,000 )
Expenses ( 200,000 )( 200,000 )
Net Income $ 280,000 $ 100,000

During 2004 Tern sold merchandise that cost $120,000 to Harbor for
$180,000. Half of this merchandise remained in Harbor’s inventory at
December 31, 2004. During 2005, Tern sold merchandise that cost
$150,000 to Harbor for $225,000. One-third of this merchandise
remained in Harbor’s December 31, 2005 inventory.

Required:
Prepare a consolidated income statement for Tern Corporation and
Subsidiary for 2005.

CHAPTER 6
Exercise 1

Spiniflex Pigeon Company owns 90% of the outstanding stock of

Waterhole Corporation. This interest was purchased on January 1,
1999, when Waterhole’s book values were equal to its fair values. The
amount paid by Spiniflex Pigeon included $10,000 for goodwill.

On January 1, 2000, Spiniflex Pigeon purchased equipment for $100,000

which had no salvage value with a useful life of 8 years. on a
straight-line basis. On January 1, 2005, Spiniflex Pigeon sold the
truck to Waterhole Corporation for $40,000. The equipment was
estimated to have a four-year remaining life on this date. All
affiliates use the straight-line depreciation method.

Required:

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Prepare all relevant entries with respect to the truck.

1. Record the journal entries on Spiniflex Pigeon’s books for 2005.

2. Record the journal entries on Waterhole’s books for 2005.

Exercise 2

Stork Corporation paid $15,700 for a 90% interest in Swamp

Corporation on January 1, 2004, when Swamp stockholders’ equity
consisted of $10,000 Capital Stock and $3,000 of Retained Earnings.
The excess cost over book value was attributable to goodwill.

Additional information:

1. Stork sells merchandise to Swamp at 120% of Stork’s cost. During

2004, Stork’s sales to Swamp were $4,800, of which half of the
merchandise remained in Swamp’s inventory at December 31, 2004.
During 2005, Stork’s sales to Swamp were $6,000 of which 60%
remained in Swamp’s inventory at December 31, 2005. At year-end
2005 Swamp owed Stork $1,500 for the inventory purchased during
2005.

2. Stork Corporation sold equipment with a book value of $2,000 and

a remaining useful life of four years and no salvage value to
Swamp Corporation on January 1, 2005 for $2,800.

3. Separate company financial statements for Stork Corporation and

Subsidiary at December 31, 2005 are summarized in the first two
columns of the consolidation working papers.

4. Helpful hint: Stork's investment in Swamp account balance at

December 31, 2004 consisted of the following:

Investment cost $ 15,700

Equity in Swamp’s income for 2004 3,600
Less: Unrealized inventory profit ( 400)

Less: Dividends received from Swamp ( 1,800)

Investment in Swamp, December 31, 2004 $ 17,100

Required:

Complete the working papers to consolidate the financial statements

of Stork Corporation and subsidiary for the year ended December 31,
2005.
CHAPTER 7

Use the following information in answering questions 1, 2, and 3.

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Rufous Owl Inc. had $800,000 par of 10% bonds payable outstanding on
January 1, 2006 due January 1, 2010 with an unamortized discount of
$16,000. Bird is a 90%-owned subsidiary of Rufous. On January 1,
2006, Bird Corporation purchased $160,000 par value of Rufous’s
outstanding bonds for $152,000. The bonds have interest payment dates
of January 1 and July 1, and mature on January 1, 2009. Straight-line
amortization is used.

1. With respect to the bond purchase, the consolidated income

statement of Rufous Owl Corporation and Subsidiary for 2006
showed a gain or loss of?

2. Bond Interest Receivable for 2006 of Owl’s bonds on Bird’s

books was

3. Bonds Payable appeared in the December 31, 2006 consolidated

balance sheet of Rufous Owl Corporation and Subsidiary in the
amount of

Use the following information for questions 4 through 8.

Dollarbird Corporation issued five thousand, $1,000 par, 12% bonds on

January 1, 2004. Interest is paid on January 1 and July 1 of each
year; the bonds mature on January 1, 2009. On January 1, 2006, Branch
Corporation, an 80%-owned subsidiary of Dollarbird, purchased 3,000
of the bonds on the open market at 101.50. Dollarbird's separate net
income for 2006 included the annual interest expense for all 3,000
bonds. Branch’s separate net income was $300,000, which included the
bond interest received on July 1 as well as the accrual of bond
interest revenue earned on December 31.

4. What was the amount of gain or (loss) from the intercompany

purchase of Dollarbird’s bonds on January 1, 2006?

5. If the bonds were originally issued at 106, and 80% of them

were purchased by Branch on January 1, 2007 at 98, the gain or
(loss) from the intercompany purchase was?

6. If the bonds were originally issued at 103, and 70% of them

were purchased on January 1, 2008 at 104, the constructive gain
or (loss) on the purchase was?

7. Using the original information, the amount of consolidated

Interest Expense for 2006 was?

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 8. Using the original information, the balances for the Bonds
Payable and Bond Interest Payable accounts, respectively, on
the consolidated balance sheet for December 31, 2007 were?

Exercise 1

Separate company and consolidated income statements for Pitta and New
Guinea Corporations for the year ended December 31, 2006 are
summarized as follows:

Consoli-
Pitta New dated
Guinea
Sales Revenue $ 500,000 $ 100,000 $ 600,000
Income from New Guinea 19,900
Bond interest income 6,000
Gain on bond retirement 3,000
Total revenues 519,900 106,000 603,000

Cost of sales $ 280,000 $ 50,000 $ 330,000

Bond interest expense 9,000 3,600
Other expenses 120,900 31,000 151,900
Minority interest income 7,500
Total expenses 409,900 81,000 493,000
Net income $ 110,000 $ 25,000 $ 110,000

The interest income and expense eliminations relate to a $100,000, 9%

bond issue that was issued at par value and matures on January 1,
2011. On January 1, 2006, a portion of the bonds was purchased and
constructively retired.

Required: Answer the following questions.

1. Which company is the issuing affiliate?

2. What is the dollar effect of the constructive retirement on

consolidated net income for 2006?

3. What portion of the bonds remains outstanding at December 31,

2006?

4. Is New Guinea a wholly-owned subsidiary? If not, what percentage

does Pitta own?

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5. Does the purchasing affiliate use straight-line or effective
interest amortization?

6. Explain the calculation of Pitta’s $19,900 income from New

Guinea.