Page 1 of 1 Gleim CPA Review Updates to Financial 2013 Edition, 1st Printing March 2013 NOTE: Text that should be deleted from the outline is displayed with a line through the text. New text is shown with a blue background. Study Unit 16 – Business Combinations and Consolidated Financial Reporting Page 579, Subunit 16.3., 1.a.8): This update corrects the example to show that liabilities should also be included. 8) Step 8 -- Prepare the acquisition-date balance sheet. EXAMPLE Platonic’s condensed consolidated balance sheet at the acquisition date is as follows: Consolidated current assets Consolidated noncurrent assets Consolidated total assets $205,000 285,000 _______ $490,000 Consolidated current liabilities Consolidated noncurrent liabilities Platonic's shareholders' equity Noncontrolling interest Consolidated total liabilities and equity $ 92,000 208,000 160,000 30,000 $490,000 Page 595, Question 23.: The question was replaced with a more appropriate question. 23. Pelota Co. owns 80% of Saginaw Co.’s outstanding common stock. Saginaw, in turn, owns 10% of Pelota’s outstanding common stock. What percentage of the common stock cash dividends declared by the individual companies should be reported as dividends declared in the consolidated financial statements? Zest Co. owns 100% of Cinn, Inc. On January 2, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a 5year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over 3 years with no residual value. In Zest’s December 31 consolidating worksheet, by what amount should depreciation expense be decreased? Dividends Declared by Pelota Dividends Declared by Saginaw A. 90% 0% $0 B. 90% C. 100% 0% $16,000 D. 100% 20% $24,000 20% $8,000 Answer (A B) is correct. REQUIRED: The dividends declared by a parent and its subsidiary reported in the consolidated statements. The decrease in depreciation expense on the consolidating worksheet. DISCUSSION: Because the parent owns 80% of the subsidiary and the subsidiary owns 10% of the parent, 80% of the dividends declared by the subsidiary and 10% of the dividends declared by the parent are transferred within the consolidated group. These amounts are eliminated as intraentity transactions. Consequently, 90% of the parent’s and 20% of the subsidiary’s dividend payments are to third parties. The 90% declared by the parent will be reported as dividends declared. The 20% declared by the subsidiary is treated as a reduction of the noncontrolling interest in the consolidated financial statements, not as consolidated dividends declared. Annual depreciation taken by the purchaser-subsidiary is $24,000 ($72,000 ÷ 3 years). Annual depreciation taken by the seller-parent was $16,000 ($80,000 ÷ 5 years). The $8,000 difference should be eliminated in the eliminating journal entry. Note that this amount is exactly equal to the gain on sale recognized of $24,000 ($72,000 – $48,000) divided by the years of useful life remaining (3 years). Answer (A) is incorrect. The difference in depreciation arising from a sale within the consolidated entity must be eliminated. Answer (C) is incorrect. The annual depreciation recognized by the parent is $16,000. Answer (D) is incorrect. The annual depreciation recognized by the subsidiary is $24,000. Copyright © 2013 Gleim Publications, Inc. and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com