1. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-1 Consolidation Following Acquisition 5 Electronic Presentation by Douglas Cloud Pepperdine University Baker / Lembke / King

2. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-2 Nature of Eliminating Entries Eliminating entries are used in the consolidation workpaper to adjust the totals of the individual account balances of the separate companies... …to reflect the amounts that would appear if all the legally separate companies were actually a single company.

3. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-3 Consolidation Workpaper Trial Balance Data Elimination Entries Account Titles Parent Subsidiary Debits Credits Consolidated

4. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-4 Comprehensive Three-Part Workpaper Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Credit Accounts: Revenues Gains Debit Accounts: Contra Revenues Expenses Losses Net Income Beginning Retained Earnings Add: Net Income Deduct: Dividends Ending Retained Earnings INCOME STATEMENT SECTION RETAINED EARNINGS SECTION to Balance Sheet section

5. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-5 Comprehensive Three-Part Workpaper Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Debit Accounts: Assets Contra Liabilities Credit Accounts: Contra Assets Liabilities Stockholders’ Equity: Capital Stock Paid-in Capital Retained Earnings BALANCE SHEET SECTION From Retained Earnings Statement section

6. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-6 Push Corporation owns 80 percent of the stock of Shove Company, which was purchased at book value. During 20X1, Shove reports net income of $25,000, while Push reports earnings of $100,000, plus equity-method investment income of $20,000. Computation of Consolidated Net Income

7. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-7 Computation of Consolidated Net Income Additive Computation Separate operating income of Push$100,000 Net income of Shove$25,000 Push’s proportionate sharex.80 20,000 Consolidated net income$120,000 Residual Computation Net income of Push$120,000 Less: Income from subsidiary- 20,000$100,000 Net income of Shove 25,000 $125,000 Less: Y to noncontrolling interest$25,000 x.20 - 5,000 Consolidated net income$120,000

8. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-8 Consolidated Retained Earnings On January 1, 20X1, Push has a retained earnings balance of $400,000, and Shove has a retained earnings balance of $250,000. During 20X1, Push reports net income of $100,000 and equity-method income from Shove of $20,000; Push declares dividends of $30,000. Shove reports net income of $25,000 and declares dividends of $10,000.

9. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-9 Consolidated Retained Earnings Push Shove Balance, January 1, 20X1$400,000 $250,000 Net income, 20X1120,000 25,000 Dividends declared in 20X1 - 30,000 - 10,000 Balance, December 31, 20X1$490,000 $265,000 Consolidated retained earnings equals the parent’s retained earnings when the parent Uses the equity method

10. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-10 Consolidated Retained Earnings When the parent does not account for its subsidiary investment using the equity method, consolidated retained earnings is determined by adding the parent’s retained earnings from its own operations and the parent’s share of the subsidiary’s net income from the date of acquisition.

11. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-11 20X1 Consolidation--100 Percent Ownership Investment cost$300,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods100,000 $300,000 Peerless’s sharex 1.00-300,000 Differential$ -0- Investment cost$300,000 Book value: Common stock--S Foods$200,000 Retained earnings--S Foods100,000 $300,000 Peerless’s sharex 1.00-300,000 Differential$ -0- P S 100% January 1, 20X1 (1) Investment in S Foods Stock300,000 Cash300,000 Record purchase of Special Foods stock.

12. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-12 20X1 Consolidation--100 Percent Ownership Peerless Special Products Foods Common Stock, January 1, 20X1$500,000$200,000 Retained Earnings, January 1, 20X1300,000100,000 20X1: Separate Operating Y, Peerless140,000 Net Income, Special Foods50,000 Dividends60,00030,000 20X2: Separate Operating Y, Peerless160,000 Net Income, Special Foods75,000 Dividends60,00040,000

13. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-13 20X1 Consolidation--100 Percent Ownership Peerless records its 20X1 income and dividends from Special Foods under the equity method with the following entries: (2) Investment in S Foods Stock50,000 Income from Subsidiary50,000 Record equity-method income. $50,000 x 1.00 ( 3) Cash30,000 Investment in S Foods Stock30,000 Record dividends from S Foods. $30,000 x 1.00

14. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-14 Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 50,000 Dividends Declared(60,000)(30,000) Investment in S Foods Stock320,000 20X1 Consolidation--100 Percent Ownership (4) 50,000 (4) 30,000(60,000) (4) 20,000 Remove both the investment income reflected in the parent’s income statement and the parent’s portion of any dividends declared by the subsidiary. Remove both the investment income reflected in the parent’s income statement and the parent’s portion of any dividends declared by the subsidiary.

15. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-15 Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 50,000 (4) 50,000 Retained Earnings, January 1300,000 100,000 Dividend Declared(60,000(30,000(4) 30,000(60,000) Investment in S Foods Stock320,000 (4) 20,000 Common Stock500,000 200,000 20X1 Consolidation--100 Percent Ownership Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary as of the beginning of the period. Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary as of the beginning of the period. ( 5) 100,000300,000 (5) 300,000 (5) 200,000500,000 ) )

16. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-16 20X2 Consolidation--100 Percent Ownership Peerless records its 20X2 income and dividends from Special Foods under the equity method : (6) Investment in S Foods Stock75,000 Income from Subsidiary75,000 Record equity-method income. $75,000 x 1.00 ( 7) Cash40,000 Investment in S Foods Stock40,000 Record dividends from Special Foods. $40,000 x 1.00

17. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-17 Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 75,000 Retained Earning, January 1430,000 120,000 Dividend Declared(60,000)(40,000) Investment in S Foods Stock355,000 20X2 Consolidation--100 Percent Ownership Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary recorded during the period. Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary recorded during the period. (8)75,000 (8) 40,000(60,000) (8) 35,000

18. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-18 Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 75,000 (8) 75,000 Retained Earnings, January 1430,000 120,000 Dividends Declared(60,000(40,000(8) 40,000(60,000 Investment in Special Foods Stock355,000 (8) 35,000 Common Stock500,000 200,000 20X2 Consolidation--100 Percent Ownership Eliminate the beginning balance in the investment account and the stockholders’ equity accounts of the subsidiary at the beginning of 20X2. ))) (9) 120,000430,000 (9) 320,000 (9) 200,000500,000

19. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-19 20X1 Consolidation--80 Percent Ownership Investment cost$240,000 Book value: Common stock--S Foods $200,000 Retained earning -S Foods 100,000 $300,000 Peerless’s sharex.80 -240,000 Differential$ -0- P S 80% NCI 20% January 1, 20X1 entry: (10) Investment in S Foods Stock240,000 Cash240,000 Record purchase of Special Foods stock.

20. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-20 20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Peerless’s 80 percent share of Special Foods’ income and dividends is eliminated. Peerless’s 80 percent share of Special Foods’ income and dividends is eliminated. Income from Subsidiary40,000 Dividends Declared(60,000(30,000 Investment in Special Foods256,000 ) ) (13) 40,000 (13) 24,000 (13) 16,000

21. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-21 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated A separate entry establishes the amount of income allocated to noncontrolling shareholders and enters the increase in their claim on net assets of the subsidiary. A separate entry establishes the amount of income allocated to noncontrolling shareholders and enters the increase in their claim on net assets of the subsidiary. Income to Non- controlling Int. Dividends Declared(60,000)(30,000) (13)24,000 Noncontrolling interest 20X1 Consolidation--80 Percent Ownership. (14) 10,000(10,000) (14) 6,000(60,000) (14) 4,000

22. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-22 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to eliminate the stockholders’ equity accounts of the subsidiary and the investment account balance shown at the beginning of the period. An entry is required to eliminate the stockholders’ equity accounts of the subsidiary and the investment account balance shown at the beginning of the period. Retained Earnings, January 1300,000100,000 Investment in Special Foods256,000 (14) 16,000 Common Stock500,000200,000 Noncontrolling interest (14) 4,000 20X1 Consolidation--80 Percent Ownership ( 15)100,000300,000 (15)240,000 (15)200,000500,000 (15) 60,00064,000

23. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-23 Second Year of Ownership--20X2 Peerless earns separate operating income of $160,000 and pays dividends of $60,000. In 20X2, Special Foods reports net income of $75,000 and pays dividends of $40,000.

24. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-24 20X2 Consolidation--80 Percent Ownership (16) Investment in S Foods Stock60,000 Income from Subsidiary60,000 Record equity-method income. $75,000 x.80 (17) Cash32,000 Investment in S Foods Stock32,000 Record dividends from Special Foods. $40,000 x.80

25. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-25 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to remove the income that Peerless has recognized from Special Foods, Peerless’s share (80 percent) of Special Foods’ dividends, and the change in the investment account that occurred in 20X2. An entry is required to remove the income that Peerless has recognized from Special Foods, Peerless’s share (80 percent) of Special Foods’ dividends, and the change in the investment account that occurred in 20X2. Income from Subsidiary60,000 Dividends Declared(60,000(40,000 Investment in Special Foods284,000 20X2 Consolidation--80 Percent Ownership )) (18) 60,000 (18) 32,000 (18) 28,000

26. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-26 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to assign $15,000 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest. An entry is needed to assign $15,000 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest. Income to Non- controlling Int. Dividends Declared(60,000)(40,000) (18) 32,000 Noncontrolling Interest 20X2 Consolidation--80 Percent Ownership

27. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-27 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Non- controlling Int. (19) 15,000 (15,000) Dividends Declared(60,000)(40,000) (18) 32,000 (19) 8,000(60,000) Noncontrolling Interest (19) 7,000 20X2 Consolidation--80 Percent Ownership An entry is needed to assign $15,000 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest. An entry is needed to assign $15,000 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest.

28. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-28 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to eliminate the stockholders’ equity accounts of the subsidiary and the investment account balance reported by the parent at the beginning of the year and to establish the amount of the noncontrolling interest’s claim on the net assets of the subsidiary at the beginning of the year. An entry is required to eliminate the stockholders’ equity accounts of the subsidiary and the investment account balance reported by the parent at the beginning of the year and to establish the amount of the noncontrolling interest’s claim on the net assets of the subsidiary at the beginning of the year. 20X2 Consolidation--80 Percent Ownership Ret. Earnings, January 1420,000120,000 Investment in Special Foods284,000 (18) 28,000 Common Stock500,000200,000 Noncontrolling Interest (19) 7,000

29. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-29 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Ret. Earnings, January 1420,000120,000 (20) 120,000420,000 Investment in Special Foods284,000 (18) 28,000 (20) 256,000 Common Stock500,000200,000 (20) 200,000500,000 Noncontrolling Interest (19) 7,000 (20) 64,00071,000 20X2 Consolidation--80 Percent Ownership An entry is required to eliminate the stockholders’ equity accounts of the subsidiary and the investment account balance reported by the parent at the beginning of the year and to establish the amount of the noncontrolling interest’s claim on the net assets of the subsidiary at the beginning of the year. An entry is required to eliminate the stockholders’ equity accounts of the subsidiary and the investment account balance reported by the parent at the beginning of the year and to establish the amount of the noncontrolling interest’s claim on the net assets of the subsidiary at the beginning of the year.

30. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-30 Purchase at More Than Book Value Investment cost$310,000 Book value: Common stock--S Foods$200,000 Retained earning--S Foods100,000 $300,000 Peerless’s sharex.80-240,000 Differential$ 70,000 P S 80% NCI 20% Peerless Products purchases 80 percent of the common stock of Special Foods on January 1, 20X1, for $310,000.

31. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-31 Purchase at More Than Book Value Fair value of net identifiable assets $300,000 Total differential $70,000 Excess of cost over fair value of net identifiable assets (80%) $10,000 Excess of fair value over book value of net identifiable assets (80%) $60,000 Book value of net identifiable assets (80%) $240,000 Cost of investment $310,000

32. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-32 (21) Investment in S Foods Stock310,000 Cash310,000 Record purchase of Special Foods stock. Purchase at More Than Book Value The entry to record Peerless Products purchasing Special Foods stock on January 1, 20X1 is :

33. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-33 (22) Investment in S Foods Stock40,000 Income from Subsidiary40,000 Record equity method income: $50,000 x.80 Purchase at More Than Book Value In 20X1, Peerless Products earns income of $140,000 and pays dividends of $60,000. Special Foods reports net income of $50,000 and pays dividends of $30,000. ( 23) Cash24,000 Investment in S Foods Stock24,000 Record dividends from Special Foods: $30,000 x.80

34. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-34 Entries are needed on Peerless’s books to recognize the write-off of the differential: ( 24) Income from Subsidiary4,000 Investment in S Foods Stock4,000 Adjust income for differential related to inventory sold: $5,000 x.80 (25) Income from Subsidiary4,800 Investment in S Foods Stock4,800 Amortize differential related to buildings and equipment. Purchase at More Than Book Value

35. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-35 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to eliminate the subsidiary income. Income from Subsidiary 31,200 Dividends Declared(60,000)(30,000) Investment in Special Foods Stock317,200 20X1 Consolidation--80 Percent Ownership. (26) 31,200 (26) 24,000 (26) 7,200

36. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-36 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to eliminate the subsidiary dividends. Income from Noncontrolling Interest Dividends Declared(60,000) (30,000) (26) 24,000 Noncontrolling Interest 20X1 Consolidation--80 Percent Ownership (27) 10,000 (27) 6,000 (60,000) (27) 4,000

37. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-37 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to eliminate the subsidiary Equity. Ret. Earnings, January 1300,000100,000 Investment in Special Foods Stock317,200 (26) 7,200 Differential Common Stock500,000200,000 Noncontrolling Interest (27) 4,000 20X1 Consolidation--80 Percent Ownership (28)100,000 300,000 (28) 310,000 (28) 70,000 (28)200,000 500,000 (28) 60,000 64,000

38. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-38 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to assign beginning differential. Cost of Goods Sold170,000115,000 Land175,00040,000 Buildings and Equipment800,000600,000 Goodwill Differential (28) 70,000 20X1 Consolidation--80 Percent Ownership (29) 4,000 289,000 (29) 8,000 223,000 (29) 48,0001,448,000 (29) 10,000 (29) 70,000

39. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-39 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Entries are necessary to amortize the differential related to buildings and equipment and to write down the differential related to goodwill. Depreciation50,00020,000 Goodwill Im- pairment Loss Goodwill (29) 10,000 Accumulated Depreciation450,000320,000 20X1 Consolidation--80 Percent Ownership (30) 4,80074,800 (31) 2,5002,500 (31) 2,5007,500 (30) 4,800774,800

40. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-40 Consolidated Net Income, 20X1 Consolidated net income, 20X1: Peerless’s separate operating income$140,000 Peerless’s share of Special Foods net income: $50,000 x.8040,000 Write-off of differential related to inventory sold during 20X1- 4,000 Amortization of differential related to buildings and equipment- 4,800 Goodwill impairment loss -2,500 Consolidated net income, 20X1$168,700

41. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-41 Consolidated Retained Earnings, 20X1 Consolidated R/E, December 31, 20X1: Peerless’s R/E on date of combination, January 1, 20X1$300,000 Peerless’s separate operating income, 20X1140,000 Peerless’ share of S Foods’ 20X1 net income: $50,000 x.8040,000 Write-off of differential related to inventory sold- 4,000 Amortization of differential related to buildings & equipment-4,800 Goodwill impairment loss- 2,500 Dividends declared by Peerless, 20X1- 60,000 Consolidated R/E earnings, December 31, 20X1$408,700

42. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-42 Entries are needed on Peerless’s books during 20X2: (32) Investment in S Foods Stock60,000 Income from Subsidiary60,000 Record equity-method income: $75,000 x.80 ( 33) Cash32,000 Investment in S Foods Stock32,000 Record dividends from Special Foods: $40,000 x.80 Second Year of Ownership, 20X2 (34) Income from Subsidiary4,800 Investment in S Foods Stock4,800 Amortize differential related to buildings and equipment.

43. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-43 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to eliminate the subsidiary income. Income from Subsidiary 55,200 Dividends Declared(60,000)(40,000) Investment in Special Foods Stock340,400 20X2 Consolidation--80 Percent Ownership (35) 55,200 (35) 32,000 (35) 23,200

44. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-44 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to assign $15,000 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest. An entry is needed to assign $15,000 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest. Income to Non- controlling Int. Dividends Declared(60,000)(40,000) (35) 32,000 Noncontrolling Interest 20X2 Consolidation--80 Percent Ownership (36) 15,000 (15,000) (36) 8,000(60,000) (36) 7,000

45. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-45 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January 1411,200120,000 Investment in Special Foods340,400 (35) 23,200 Differential Common Stock500,000200,000 Noncontrolling Interest (36) 7,000 20X2 Consolidation--80 Percent Ownership An entry is required to eliminate the beginning investment balance. (37) 120,000 (37) 317,200 (37) 61,200 (37) 200,000500,000 (37) 64,00071,000

46. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-46 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to assign beginning differential. Land175,00040,000 Buildings and Equipment800,000600,000 Goodwill Differential (37) 61,200 Accumulated Depreciation500,000340,000 20X2 Consolidation--80 Percent Ownership (38) 8,000 223,000 (38) 48,0001,448,000 (38) 10,000 (38) 61,200 (38) 4,800

47. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-47 20X2 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Entries are necessary to show the amortization of the differential. Depreciation and Amortization50,00020,000 Retained Earnings, January 1411,200120,000 (37) 120,000 Goodwill (38) 10,000 Accumulated Depreciation500,000340,000 (38) 4,800 (39) 4,80074,800 (40) 2,500408,700 (40) 2,5007,500 (39) 4,800849,600

48. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-48 Consolidated Net Income, 20X2 Consolidated net income, 20X2: Peerless’s separate operating income$160,000 Peerless’s share of Special Foods net income: $75,000 x.8060,000 Amortization of buildings and equipment - 4,800 Consolidated net income, 20X2$215,200

49. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-49 Consolidated Retained Earnings, 20X2 Consolidated retained earnings, December 31, 20X2: Consolidated retained earnings, December 31, 20X1$408,700 Peerless’s separate operating income, 20X2160,000 Peerless’ share of Special Foods’ 20X2 net income: $75,000 x.8060,000 Amortization of differential in 20X2- 4,800 Dividends declared by Peerless, 20X2- 60,000 Consolidated retained earnings, December 31, 20X2$563,900

50. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-50 Chapter Five The End

51. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-51