Chapter 9, Problem 9.22P

To determine

Subsidiary preferred stock outstanding: many companies have more than one type of outstanding stock and each type of security serves a particular purpose. Subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

During the preparation of consolidated financial statements, the amount of subsidiary shareholders’ equity accruing to preferred shareholders must be determined before dealing with elimination of the intercompany common stock ownership. If the parent holds some of the subsidiary preferred stock, its portion of stock interest is eliminated. Any portion of subsidiary preferred stock interest not held by parent is assigned to non-controlling interest.

The preparation of consolidation entries needed to complete worksheet for 20X6.

Answer to Problem 9.22P

	Debit	Credit
1. Eliminate income from subsidiary
Income from subsidiary	58,700
Dividends declared		9,000
Investment in W common stock		49,500
2. Elimination of dividends
Dividends income	9,000
Dividends declared preferred stock		9,000
3. Eliminate income to Non-controlling interest
Income to Non-controlling interest	12,500
Dividends declared − preferred stock		6,000
Dividends declared- common stock		1,000
Non-controlling interest		5,500
4. Eliminate opening balance if investment
Common stock − S corporation	100,000
Retained earnings, January 1	250,000
Investment in S common stock		315,000
Non-controlling interest		35,000
5. Eliminate preferred stock
Preferred stock − S corporation	200,000
Investment in W preferred stock		120,000
Non-controlling interest		80,000
Dividends payable and receivable elimination
Dividends payable	9,000
Dividends receivable		9,000

Explanation of Solution

1. Income from subsidiary is eliminated by debit income for subsidiary and credit investment in S and dividends are declared.
2. Dividends income from preferred stock is eliminated by debit entry in dividend income and credit dividends are declared.
3. Eliminate income from non-controlling interest by reverse entry of debit income from non-controlling interest and credit Dividends declared accounts and non-controlling interest.
4. Eliminate opening balance in common stock by debit S’s common stock and credit investment and non-controlling interest account.
5. Preferred stock is eliminated by debiting it and credit of investment and non-controlling interest.
6. Dividends receivable and payable is eliminated by setoff entry and reversal.

To determine

Subsidiary preferred stock outstanding: many companies have more than one type of outstanding stock and each type of security serves a particular purpose. Subsidiary preferred shareholders have claim on the net assets of the subsidiary, and special attention must be given to that claim in the preparation of consolidated financial statements.

During the preparation of consolidated financial statements, the amount of subsidiary shareholders’ equity accruing to preferred shareholders must be determined before dealing with elimination of the intercompany common stock ownership. If the parent holds some of the subsidiary preferred stock, its portion of stock interest is eliminated. Any portion of subsidiary preferred stock interest not held by parent is assigned to non-controlling interest.

The preparation of consolidation worksheet as of December 31 20X6.

Answer to Problem 9.22P

Explanation of Solution

P and S companies

Consolidation worksheet

December 31, 20X6

			Eliminations
	P	S	Debit	Credit	Consolidation
Sales	500,000	300,000			800,000
Dividend income	9,000		9,000
Income from subsidiary	58,500		58,500
Total sales	567,500	300,00			800,000
Less COGS	(280,000)	(170,000)			(450,000)
Less Depreciation	(40,000)	(30,000)			(70,000)
Other expenses	(131,000)	(20,000)			(151,000)
Consolidated net income	116,500	80,000	67,500		129,000
Income to NCI			12,500		(12,500)
Controlling interest	116,500	80,000	80,000		116,500
Retained earnings:
Balance	435,000	250,000	250,000		435,000
Net income	116,500	80,000	80,000		116,500
Less dividends
Preferred		(15,000)		9,000
				6,000
Common stock	(60,000)	(10,000)		9,000
				1,000	(60,000)
Ending balance	491,500	305,000	330,000	25,000	491,500
Balance sheet
Cash	58,000	100,000			158,000
Accounts receivable	80,000	120,000			200,000
Dividends receivable	9,000			9,000
Inventory	100,000	200,000			300,000
Buildings and equipment	360,000	270,000			630,000
Investment in S
Preferred stock	120,000			120,000
Common stock	364,500			49,500
				315,000
Total Assets	1,091,500	690,000			1,288,000
Accounts payable	100,000	700,000			170,000
Dividends payable		15,000	9,000		6,000
Bonds payable	300,000				300,000
Preferred stock		200,000	200,000
Common stock	200,000	100,000	100,000		200,000
Retained earnings	491,500	305,000	330,000	25,000	491,500
				5,500
				35,000
				80,000	120,500
Total liability and equity	1,091,500	690,000	639,000	639,000	1,288,000