Solution Manual for Advanced Financial Accounting 10th
Edition Christensen Cottrell Baker
REPORTING g;INTERCORPORATE g;INVESTMENTS g;AND g;CONSOLIDATION g;OF
g;WHOLLY g;OWNED g;SUBSIDIARIES g;WITH g;NO g;DIFFERENTIAL
ANSWERS g;TO g;QUESTIONS
Q2-1 g;(a) g;An g;investment g;in g;the g;voting g;common g;stock g;of g;another g;company g;is g;reported g;on
g;an g ; equity-method g;basis g;when g;the g;investor g;is g;able g;to g;significantly g;influence g;the g;operating
g;and g;financial g;policies g;of g;the g;investee.
(b) g ; The g;cost g;method g;normally g;is g;used g;for g;investments g;in g;common g;stock g;when g;the
g;investor g;does g;not g;have g;significant g;influence g;and g;for g;investments g;in g;preferred g;stock g;and g;other
g;securities. g;The g;cost g;method g;may g;also g;be g;used g;by g;the g;parent g;company g;for g;bookkeeping
g;purposes g;when g;the g;investor g;owns g;a g;controlling g;interest g;because g;the g;investment g;account
g;is g;eliminated g;in g;the g;consolidation g;process.
Q2- g;2* g;Significant g;influence g;occurs g;when g;the g;investor g;has g;the g;ability g;to g;influence g;the g;operating
g;and g;financial g;policies g;of g;the g;investee. g;Representation g;on g;the g;board g;of g;directors g;of g;the
g;investee g;is g;perhaps g;the g;strongest g;evidence, g;but g;other g;evidence g;such g;as g;routine
g;participation g;in g ; management g ; decisions g;or g ; entering g ; into g;formal g;agreements g;that g;give
g;the g;investor g ; some g ; degree g;of g;influence g;over g;the g;investee g;also g;may g;be g;used.
Q2-3* g;Equity-method g;reporting g;should g;not g;be g;used g;when g;(a) g;the g;investee g;has g;initiated
g;litigation g ; or g;complaints g;challenging g;the g;investor's g;ability g;to g;exercise g;significant g;influence,
g;(b) g;the g;investor g;signs g;an g;agreement g;surrendering g;important g;shareholder g;rights, g;(c) g;majority
g;ownership g;is g;concentrated g;in g;a g;small g;group g;that g;operates g;the g;company g;without g;regard g;to
g;the g;investor's g ; desires, g;(d) g;the g;investor g;is g;not g;able g;to g;acquire g;the g;information g;f rom g;the
g;investee, g;or g;(e) g;the g;investor g;tries g;and g;fails g;to g;gain g;representation g;on g;the g;board g;of
g;directors.
Q2-4 g;The g;balances g;will g;be g;the g;same g;at g;the g;date g;of g;acquisition g;and g;in g;the g;periods g;that
g;follow g;whenever g;the g;cumulative g;dividends g;paid g;by g;the g;investee g;equal g;or g;exceed g;the g;investee's
g;cumulative g;earnings g;since g;the g;date g;of g;acquisition. g;The g;latter g;case g;assumes g;there g;are g;no
g;other g;adjustments g;needed g;under g;the g;equity g;method g;for g;amortization g;of g;differential g;or g;other
g;factors.
Q2-5 g;When g;a g;company g;has g;used g;the g;cost g;method g;and g;purchases g;additional g;shares g;which
g;cause g;it g;to g;gain g;significant g;influence, g;a g;retroactive g;adjustment g;is g;recorded g;to g;move g;from g;a
g;cost g;basis g;to g;an g;equity-method g;basis g;in g;the g;preceding g;periods. g;Dividend g;income g;is g;replaced
g;by g;income g;from g;the g;investee g;and g;dividends g;received g;are g;treated g;as g;an g;adjustment g;to g;the
g;investment g;account.
,Q2-6 g;An g;investor g;considers g;a g;dividend g;to g;be g;a g;liquidating g;dividend g;when g;the g;cumulative
g ; dividends g ; received g;from g;the g;investee g;exceed g;a g;proportionate g;share g;of g ; the g;cumulative
g;earnings g ; of g;the g;investee g;from g;the g;date g;ownership g;was g;acquired. g;For g;example, g;an
g;investor g;would g;consider g;a g;dividend g;to g;be g;liquidating g;if g;it g;purchases g;shares g;of g;another
g;company g;in g;early g;December g;and g;receives g;a g;dividend g;at g;year-end g;substantially g;in g;excess
g;of g;its g;portion g;of g;the g;investee's g;net g;income g;for g;December.
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© g;2014 g;by g;McGraw g;-Hill g;Education. g;This g;is g;proprietary g;material g;solely g;for g;authorized g;instructor g;use. g;Not g;authorized g;for g;sale g;or
g;distribution g;in g ; any g;manner. g;This g;document g;may g;not g;be g;copied, g;scanned, g;duplicated, g;forwarded, g;distributed, g;or g;posted g;on g;a
g;website, g;in g;whole g;or g;part.
,Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with no
Differential
Q2-7 g;Liquidating g;dividends g;decrease g;the g;investment g;account g;in g;both g;cases. g;All g;dividends
g;are g;treated g;as g;a g;reduction g;of g;the g;investment g;account g;when g;equity- g;method g;reporting g;is
g;used.
When g;the g;cost g;method g;is g;used g;and g;dividends g;are g;received g;in g;excess g;of g;a g;proportionate
g;share g;of g;investee g;earnings g;since g;acquisition, g;they g;are g;treated g;as g;a g;reduction g;of g;the
g;investment g;account g;as g;well.
Q2-8 g ; A g ; dividend g ; is g ; treated g ; as g ; a g ; reduction g ; of g ; the g ; investment g ; account g ; under
g ; equity-method g;reporting. g;Unless g;it g;is g;a g;liquidating g;dividend, g;it g;is g;treated g;as g;dividend g;income
g;under g;the g;cost g;method.
Q2- g;9 g;Dividends g;received g;by g;the g;investor g;are g;recorded g;as g;dividend g;income g;under g;both
g;the g;cost g;and g;fair g;value g;methods. g;The g;change g;in g;the g;fair g;value g;of g;the g;shares g;held g;by g;the
g;investor g;is g;recorded g;as g;an g;unrealized g;gain g;or g;loss g;under g;the g;fair g;value g;method. g;The g;fair
g;value g;method g;differs g;from g;the g;equity g;method g;in g;two g;respects. g;Under g;the g;equity g;method
g;the g;investor’s g;share g;of
the g;earnings g;of g;the g;investee g;are g;included g;as g;investment g;income g;and g;dividends g;received
g;from g;the g;investee g;are g;treated g;as g;a g;reduction g;of g;the g;investment g;account.
Q2-10* g;W hen g;the g;modified g;equity g;method g;is g;used, g;a g;proportionate g;share g;of g;subsidiary
g;net g;income g;and g;dividends g;is g;recorded g;on g;the g;parent's g;books g;and g;an g;appropriate
g;amount g;of g;any g;differential g;is g;amortized g;each g;period. g;In g;some g;situations, g;companies g;also
g;choose g;not g;to g;make g;adjustments g;for g;intercompany g;profits g;and g;the g;amortization g;of g;the
g;differential. g;Under g;the g;fully g;adjusted g;equity g;method, g;the g;parent's g;books g;also g;are
g;adjusted g;for g;unrealized g;profits g;and g;any
other g;items g;that g;are g;needed g;to g;bring g;the g;investor's g;net g;income g;into g;agreement g;with g;the
g;income g;to g;the g;controlling g;interest g;that g;would g;be g;reported g;if g;consolidation g;were g;used.
Q2-11 g;A g;one-line g;consolidation g;implies g;that g;under g;equity-method g;reporting g;the g;investor's
g;net g;income g;and g;stockholders' g;equity g;will g;be g;the g;same g;as g;if g;the g;investee g;were
g;consolidated. g;Income g;from g;the g;investee g;is g;included g;in g;a g;single g;line g;in g;the g;investor's g;income
g;statement g;and g;the g;investment g;is g;reported g;as g;a g;single g;line g;in g;the g;investor's g;balance g;sheet.
Q2-12* g;The g;term g;modified g;equity g;method g;generally g;is g;used g;when g;the g;investor g;records g;its
g;portion g;of g ; the g;reported g;net g;income g;and g;dividends g;of g ; the g;investee g;and g;amortizes g;an
g;appropriate g;portion g ; of g;any g;differential. g;Unlike g;the g;fully g;adjusted g;equity g;method, g;no
g;adjustment g;for g;unrealized g;profit g;on g;intercompany g;transfers g;normally g;is g;made g;on g;the
g;investor's g;books. g;(In g;some g;situations, g ; companies g;also g;choose g;not g;to g;amortize g;the
g;differential.) g;When g;an g;investee g;is g;consolidated g;for g;financial g;reporting g;purposes, g;the g;investor
g;may g;not g;feel g;it g;is g;necessary g;to g;record g;fully g;adjusted g;equity g;method g;entries g;on g;its g;books g;since
g;income g;from g;the g;investee g;and g;the g;balance g;in g;the g;investment g;account g;must g;be g;eliminated
g;in g;preparing g;the g;consolidated g;statements.
Q2-13* g;The g;investor g;reports g;a g;proportionate g;share g;of g;an g;investee's g;extraordinary g;item
g;as g;an g;extraordinary g;item g;in g;its g;own g;income g;statement.
Q2-14 g;An g;adjusting g ; entry g;is g;recorded g;on g;the g;company's g;books g;and g;causes g;the g;balances
g ; reported g;by g;the g;parent g;or g;subsidiary g;company g;to g;change. g;Eliminating g;entries, g;on g;the
g;other g;hand, g;are g;not g;recorded g;on g;the g;books g;of g;the g;companies. g;Instead, g;they g;are g;entered
g;in g;the g;consolidation g;worksheet g;so g;that g;when g;the g;amounts g;included g;in g;the g;eliminating
g;entries g;are g;applied, g;the g;appropriate g;balances g;for g;the g;consolidated g;entity g;are g;reported.
2-2
© 2014 by McGraw -Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
, Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with no
Differential
Q2-15 g;Each g;of g;the g;stockholders' g;equity g;accounts g;of g;the g;subsidiary g;is g;eliminated g;in g;the
g;consolidation g;process. g;Thus, g;none g;of g;the g;balances g;is g;included g;in g;the g;stockholders' g;equity
g;accounts g;of g;the g;consolidated g;entity. g;That g;portion g;of g;the g;stockholders' g;equity g;claim
g;assigned g;to g;the g;noncontrolling g;shareholders g;is g;reported g;indirectly g;in g;the g;balance g;assigned
g;to g;the g;noncontrolling g;shareholders.
Q2-16 g;Additional g;entries g;are g;needed g;to g;eliminate g;all g;income g;statement g;and g;retained
g;earnings g;statement g;effects g;of g;intercorporate g;ownership g;and g;any g;transfers g;of g;goods g;and
g;services g;between g;related g;companies.
Q2-17 g;Separate g;parts g;of g;the g;consolidation g;worksheet g;are g;used g;to g;develop g;the g;consolidated
g;income g;statement, g;retained g;earnings g;statement, g;and g;balance g;sheet. g;All g;eliminating g;entries
g;needed g ; to g;complete g;the g;entire g;worksheet g;normally g;are g;entered g;before g;any g;of g;the g;three
g;statements g;are g;prepared. g;The g;income g;statement g;portion g;of g;the g;worksheet g;is g;completed
g;first g;so g;that g ; net g ; income g;can g ; be g ; carried g ; forward g ; to g ; the g ; retained g ; earnings
g ; statement g ; portion g ; of g ; the g;worksheet. g;When g;the g;retained g;earnings g;portion g;is g;completed,
g;the g;ending g;balances g;are g;carried g;forward g;and g;entered g;in g;the g;consolidated g;balance g;sheet
g;portion g;of g;the g;worksheet.
Q2-18 g;None g;of g;the g;dividends g;declared g;by g;the g;subsidiary g;are g;included g;in g;the g;consolidated
g ; retained g;earnings g;statement. g;Those g;which g;are g;paid g;to g;the g;parent g;have g;not g;gone g;outside
g;the g;consolidated g;entity g;and g;therefore g;must g;be g;eliminated g;in g;preparing g;the g;consolidated
g;statements.
Q2-19 g;Consolidated g;net g;income g;includes g;100 g;percent g;of g;the g;revenues g;and g;expenses g;of
g;the g;individual g;consolidating g;companies g;arising g;from g;transactions g;with g;unaffiliated
g;companies.
Q2-20 g;Consolidated g;retained g;earnings g;is g;that g;portion g;of g;the g;undistributed g;earnings g;of g;the
g;consolidated g;entity g;accruing g;to g;the g;parent g;company g;shareholders.
Q2-21 g;Consolidated g;retained g;earnings g;at g;the g;end g;of g;the g;period g;is g;equal g;to g;the g;beginning
g;consolidated g;retained g;earnings g;balance g;plus g;consolidated g;net g;income g;attributable g;to g;the
g;controlling g;interest, g;less g;consolidated g;dividends. g;Under g;the g;fully g;adjusted g;equity g;method,
g;consolidated g;retained g;earnings g;should g;equal g;the g;parent g;company’s g;retained g;earnings.
Q2-22 g;The g;retained g;earnings g;statement g;shows g;the g;increase g;or g;decrease g;in g;retained
g;earnings g;during g;the g;period. g;Thus, g;income g;for g;the g;period g;is g;added g;to g;the g;beginning
g;balance g;and g;dividends g;are g;deducted g;in g;deriving g;the g;ending g;balance g;in g;retained g;earnings.
g;Because g;the g;consolidation g;worksheet g;includes g;the g;retained g;earnings g;statement, g;the
g;beginning g;retained g;earnings g;balance g;must g;be g;entered g;in g;the g;worksheet.
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© 2014 by McGraw -Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Edition Christensen Cottrell Baker
REPORTING g;INTERCORPORATE g;INVESTMENTS g;AND g;CONSOLIDATION g;OF
g;WHOLLY g;OWNED g;SUBSIDIARIES g;WITH g;NO g;DIFFERENTIAL
ANSWERS g;TO g;QUESTIONS
Q2-1 g;(a) g;An g;investment g;in g;the g;voting g;common g;stock g;of g;another g;company g;is g;reported g;on
g;an g ; equity-method g;basis g;when g;the g;investor g;is g;able g;to g;significantly g;influence g;the g;operating
g;and g;financial g;policies g;of g;the g;investee.
(b) g ; The g;cost g;method g;normally g;is g;used g;for g;investments g;in g;common g;stock g;when g;the
g;investor g;does g;not g;have g;significant g;influence g;and g;for g;investments g;in g;preferred g;stock g;and g;other
g;securities. g;The g;cost g;method g;may g;also g;be g;used g;by g;the g;parent g;company g;for g;bookkeeping
g;purposes g;when g;the g;investor g;owns g;a g;controlling g;interest g;because g;the g;investment g;account
g;is g;eliminated g;in g;the g;consolidation g;process.
Q2- g;2* g;Significant g;influence g;occurs g;when g;the g;investor g;has g;the g;ability g;to g;influence g;the g;operating
g;and g;financial g;policies g;of g;the g;investee. g;Representation g;on g;the g;board g;of g;directors g;of g;the
g;investee g;is g;perhaps g;the g;strongest g;evidence, g;but g;other g;evidence g;such g;as g;routine
g;participation g;in g ; management g ; decisions g;or g ; entering g ; into g;formal g;agreements g;that g;give
g;the g;investor g ; some g ; degree g;of g;influence g;over g;the g;investee g;also g;may g;be g;used.
Q2-3* g;Equity-method g;reporting g;should g;not g;be g;used g;when g;(a) g;the g;investee g;has g;initiated
g;litigation g ; or g;complaints g;challenging g;the g;investor's g;ability g;to g;exercise g;significant g;influence,
g;(b) g;the g;investor g;signs g;an g;agreement g;surrendering g;important g;shareholder g;rights, g;(c) g;majority
g;ownership g;is g;concentrated g;in g;a g;small g;group g;that g;operates g;the g;company g;without g;regard g;to
g;the g;investor's g ; desires, g;(d) g;the g;investor g;is g;not g;able g;to g;acquire g;the g;information g;f rom g;the
g;investee, g;or g;(e) g;the g;investor g;tries g;and g;fails g;to g;gain g;representation g;on g;the g;board g;of
g;directors.
Q2-4 g;The g;balances g;will g;be g;the g;same g;at g;the g;date g;of g;acquisition g;and g;in g;the g;periods g;that
g;follow g;whenever g;the g;cumulative g;dividends g;paid g;by g;the g;investee g;equal g;or g;exceed g;the g;investee's
g;cumulative g;earnings g;since g;the g;date g;of g;acquisition. g;The g;latter g;case g;assumes g;there g;are g;no
g;other g;adjustments g;needed g;under g;the g;equity g;method g;for g;amortization g;of g;differential g;or g;other
g;factors.
Q2-5 g;When g;a g;company g;has g;used g;the g;cost g;method g;and g;purchases g;additional g;shares g;which
g;cause g;it g;to g;gain g;significant g;influence, g;a g;retroactive g;adjustment g;is g;recorded g;to g;move g;from g;a
g;cost g;basis g;to g;an g;equity-method g;basis g;in g;the g;preceding g;periods. g;Dividend g;income g;is g;replaced
g;by g;income g;from g;the g;investee g;and g;dividends g;received g;are g;treated g;as g;an g;adjustment g;to g;the
g;investment g;account.
,Q2-6 g;An g;investor g;considers g;a g;dividend g;to g;be g;a g;liquidating g;dividend g;when g;the g;cumulative
g ; dividends g ; received g;from g;the g;investee g;exceed g;a g;proportionate g;share g;of g ; the g;cumulative
g;earnings g ; of g;the g;investee g;from g;the g;date g;ownership g;was g;acquired. g;For g;example, g;an
g;investor g;would g;consider g;a g;dividend g;to g;be g;liquidating g;if g;it g;purchases g;shares g;of g;another
g;company g;in g;early g;December g;and g;receives g;a g;dividend g;at g;year-end g;substantially g;in g;excess
g;of g;its g;portion g;of g;the g;investee's g;net g;income g;for g;December.
2-1
© g;2014 g;by g;McGraw g;-Hill g;Education. g;This g;is g;proprietary g;material g;solely g;for g;authorized g;instructor g;use. g;Not g;authorized g;for g;sale g;or
g;distribution g;in g ; any g;manner. g;This g;document g;may g;not g;be g;copied, g;scanned, g;duplicated, g;forwarded, g;distributed, g;or g;posted g;on g;a
g;website, g;in g;whole g;or g;part.
,Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with no
Differential
Q2-7 g;Liquidating g;dividends g;decrease g;the g;investment g;account g;in g;both g;cases. g;All g;dividends
g;are g;treated g;as g;a g;reduction g;of g;the g;investment g;account g;when g;equity- g;method g;reporting g;is
g;used.
When g;the g;cost g;method g;is g;used g;and g;dividends g;are g;received g;in g;excess g;of g;a g;proportionate
g;share g;of g;investee g;earnings g;since g;acquisition, g;they g;are g;treated g;as g;a g;reduction g;of g;the
g;investment g;account g;as g;well.
Q2-8 g ; A g ; dividend g ; is g ; treated g ; as g ; a g ; reduction g ; of g ; the g ; investment g ; account g ; under
g ; equity-method g;reporting. g;Unless g;it g;is g;a g;liquidating g;dividend, g;it g;is g;treated g;as g;dividend g;income
g;under g;the g;cost g;method.
Q2- g;9 g;Dividends g;received g;by g;the g;investor g;are g;recorded g;as g;dividend g;income g;under g;both
g;the g;cost g;and g;fair g;value g;methods. g;The g;change g;in g;the g;fair g;value g;of g;the g;shares g;held g;by g;the
g;investor g;is g;recorded g;as g;an g;unrealized g;gain g;or g;loss g;under g;the g;fair g;value g;method. g;The g;fair
g;value g;method g;differs g;from g;the g;equity g;method g;in g;two g;respects. g;Under g;the g;equity g;method
g;the g;investor’s g;share g;of
the g;earnings g;of g;the g;investee g;are g;included g;as g;investment g;income g;and g;dividends g;received
g;from g;the g;investee g;are g;treated g;as g;a g;reduction g;of g;the g;investment g;account.
Q2-10* g;W hen g;the g;modified g;equity g;method g;is g;used, g;a g;proportionate g;share g;of g;subsidiary
g;net g;income g;and g;dividends g;is g;recorded g;on g;the g;parent's g;books g;and g;an g;appropriate
g;amount g;of g;any g;differential g;is g;amortized g;each g;period. g;In g;some g;situations, g;companies g;also
g;choose g;not g;to g;make g;adjustments g;for g;intercompany g;profits g;and g;the g;amortization g;of g;the
g;differential. g;Under g;the g;fully g;adjusted g;equity g;method, g;the g;parent's g;books g;also g;are
g;adjusted g;for g;unrealized g;profits g;and g;any
other g;items g;that g;are g;needed g;to g;bring g;the g;investor's g;net g;income g;into g;agreement g;with g;the
g;income g;to g;the g;controlling g;interest g;that g;would g;be g;reported g;if g;consolidation g;were g;used.
Q2-11 g;A g;one-line g;consolidation g;implies g;that g;under g;equity-method g;reporting g;the g;investor's
g;net g;income g;and g;stockholders' g;equity g;will g;be g;the g;same g;as g;if g;the g;investee g;were
g;consolidated. g;Income g;from g;the g;investee g;is g;included g;in g;a g;single g;line g;in g;the g;investor's g;income
g;statement g;and g;the g;investment g;is g;reported g;as g;a g;single g;line g;in g;the g;investor's g;balance g;sheet.
Q2-12* g;The g;term g;modified g;equity g;method g;generally g;is g;used g;when g;the g;investor g;records g;its
g;portion g;of g ; the g;reported g;net g;income g;and g;dividends g;of g ; the g;investee g;and g;amortizes g;an
g;appropriate g;portion g ; of g;any g;differential. g;Unlike g;the g;fully g;adjusted g;equity g;method, g;no
g;adjustment g;for g;unrealized g;profit g;on g;intercompany g;transfers g;normally g;is g;made g;on g;the
g;investor's g;books. g;(In g;some g;situations, g ; companies g;also g;choose g;not g;to g;amortize g;the
g;differential.) g;When g;an g;investee g;is g;consolidated g;for g;financial g;reporting g;purposes, g;the g;investor
g;may g;not g;feel g;it g;is g;necessary g;to g;record g;fully g;adjusted g;equity g;method g;entries g;on g;its g;books g;since
g;income g;from g;the g;investee g;and g;the g;balance g;in g;the g;investment g;account g;must g;be g;eliminated
g;in g;preparing g;the g;consolidated g;statements.
Q2-13* g;The g;investor g;reports g;a g;proportionate g;share g;of g;an g;investee's g;extraordinary g;item
g;as g;an g;extraordinary g;item g;in g;its g;own g;income g;statement.
Q2-14 g;An g;adjusting g ; entry g;is g;recorded g;on g;the g;company's g;books g;and g;causes g;the g;balances
g ; reported g;by g;the g;parent g;or g;subsidiary g;company g;to g;change. g;Eliminating g;entries, g;on g;the
g;other g;hand, g;are g;not g;recorded g;on g;the g;books g;of g;the g;companies. g;Instead, g;they g;are g;entered
g;in g;the g;consolidation g;worksheet g;so g;that g;when g;the g;amounts g;included g;in g;the g;eliminating
g;entries g;are g;applied, g;the g;appropriate g;balances g;for g;the g;consolidated g;entity g;are g;reported.
2-2
© 2014 by McGraw -Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
, Chapter 02 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with no
Differential
Q2-15 g;Each g;of g;the g;stockholders' g;equity g;accounts g;of g;the g;subsidiary g;is g;eliminated g;in g;the
g;consolidation g;process. g;Thus, g;none g;of g;the g;balances g;is g;included g;in g;the g;stockholders' g;equity
g;accounts g;of g;the g;consolidated g;entity. g;That g;portion g;of g;the g;stockholders' g;equity g;claim
g;assigned g;to g;the g;noncontrolling g;shareholders g;is g;reported g;indirectly g;in g;the g;balance g;assigned
g;to g;the g;noncontrolling g;shareholders.
Q2-16 g;Additional g;entries g;are g;needed g;to g;eliminate g;all g;income g;statement g;and g;retained
g;earnings g;statement g;effects g;of g;intercorporate g;ownership g;and g;any g;transfers g;of g;goods g;and
g;services g;between g;related g;companies.
Q2-17 g;Separate g;parts g;of g;the g;consolidation g;worksheet g;are g;used g;to g;develop g;the g;consolidated
g;income g;statement, g;retained g;earnings g;statement, g;and g;balance g;sheet. g;All g;eliminating g;entries
g;needed g ; to g;complete g;the g;entire g;worksheet g;normally g;are g;entered g;before g;any g;of g;the g;three
g;statements g;are g;prepared. g;The g;income g;statement g;portion g;of g;the g;worksheet g;is g;completed
g;first g;so g;that g ; net g ; income g;can g ; be g ; carried g ; forward g ; to g ; the g ; retained g ; earnings
g ; statement g ; portion g ; of g ; the g;worksheet. g;When g;the g;retained g;earnings g;portion g;is g;completed,
g;the g;ending g;balances g;are g;carried g;forward g;and g;entered g;in g;the g;consolidated g;balance g;sheet
g;portion g;of g;the g;worksheet.
Q2-18 g;None g;of g;the g;dividends g;declared g;by g;the g;subsidiary g;are g;included g;in g;the g;consolidated
g ; retained g;earnings g;statement. g;Those g;which g;are g;paid g;to g;the g;parent g;have g;not g;gone g;outside
g;the g;consolidated g;entity g;and g;therefore g;must g;be g;eliminated g;in g;preparing g;the g;consolidated
g;statements.
Q2-19 g;Consolidated g;net g;income g;includes g;100 g;percent g;of g;the g;revenues g;and g;expenses g;of
g;the g;individual g;consolidating g;companies g;arising g;from g;transactions g;with g;unaffiliated
g;companies.
Q2-20 g;Consolidated g;retained g;earnings g;is g;that g;portion g;of g;the g;undistributed g;earnings g;of g;the
g;consolidated g;entity g;accruing g;to g;the g;parent g;company g;shareholders.
Q2-21 g;Consolidated g;retained g;earnings g;at g;the g;end g;of g;the g;period g;is g;equal g;to g;the g;beginning
g;consolidated g;retained g;earnings g;balance g;plus g;consolidated g;net g;income g;attributable g;to g;the
g;controlling g;interest, g;less g;consolidated g;dividends. g;Under g;the g;fully g;adjusted g;equity g;method,
g;consolidated g;retained g;earnings g;should g;equal g;the g;parent g;company’s g;retained g;earnings.
Q2-22 g;The g;retained g;earnings g;statement g;shows g;the g;increase g;or g;decrease g;in g;retained
g;earnings g;during g;the g;period. g;Thus, g;income g;for g;the g;period g;is g;added g;to g;the g;beginning
g;balance g;and g;dividends g;are g;deducted g;in g;deriving g;the g;ending g;balance g;in g;retained g;earnings.
g;Because g;the g;consolidation g;worksheet g;includes g;the g;retained g;earnings g;statement, g;the
g;beginning g;retained g;earnings g;balance g;must g;be g;entered g;in g;the g;worksheet.
2-3
© 2014 by McGraw -Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
