Question

"Problem 6-2

(LO 1)Cash flow, year of partial noncash purchase.Billing Enterprisespurchases a 90% interest in the common stock of Rush Corporation on January 1, 2015, for anagreed-upon price of $495,000. Billing issues $400,000 of bonds to Rush shareholders plus$95,000 cash as payment. Rush’s balance sheet on the acquisition date is as follows:

AssetsLiabilities and EquityCash . . . . . . . . . . . . . . . . . . . . . . .$ 60,000

Accounts payable . . . . . . . . . . . . .$ 45,000

Accounts receivable . . . . . . . . . . .95,000

Long-term liabilities . . . . . . . . . . . .120,000

Plant assets (net). . . . . . . . . . . . . . .460,000

Common stock ($10 par). . . . . . . .150,000

Retained earnings . . . . . . . . . . . . .300,000

Total assets. . . . . . . . . . . . . . . . .$615,000

Total liabilities and equity . . . . .$615,000

Rush’s equipment is understated by $20,000 and has a remaining depreciable life of fiveyears. Any remaining excess is attributed to goodwill.I

n addition to the bonds issued as part of the purchase, Billing sells additional bonds in theamount of $100,000.

Consolidated net income for 2015 is $92,300. The controlling interest is $87,700, and then on controlling interest is $4,600. Rush pays $10,000 in dividends to all shareholders, including Billing Enterprises.

No plant assets are purchased or sold during 2015.

Comparative balance sheet data are as follows:

   December 31, 2014(Parent Only) December 31, 2015(Consolidated)

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 82,000 $ 187,700

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .120,000 161,000

Plant assets (net). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .870,000 1,277,600

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(52,000) (80,000)

Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (500,000)

Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .(80,000) (40,000)

Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . (58,600)

Controlling interest: . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common stock ($10 par). . . . . . . . . . . . . . . . . . . . . .(200,000) (200,000)

Additional paid-in capital in excess of par . . . . . . . .(300,000) (300,000)

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . .(440,000) (527,700)

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$0 $0

Prepare a consolidated statement of cash flows using the indirect method for the year ended December 31, 2015. Supporting schedules (including a D&D schedule) should be in good form."

Answer 1

It is calculated that the fair value of R corporation is $550,000 (refer to Equation (1)), given common stock value is $150,000, and retained earnings is $300,000.

Now, calculate excess of fair value over book value.

Equation(2)

The calculated Excess of fair value over book value is .

Calculate goodwill.

It is given that the equipment undervaluation is $20,000, and calculated excess of fair value over book value is $100,000 (refer to Equation (2)).

Now, calculate good will.

Equation(3)

The calculated good will is $80,000.

Calculate equipment amortization value per year.

It is given that the equipment undervaluation is $20,000, and amortization years are 5 years.

Now, calculate equipment amortization value per year.

Equation(4)

The calculated equipment amortization value per year is .

Calculate non-controlling interest.

It is calculated that the fair value of R corporation is $550,000 (refer to Equation (1)), and controlling interest of B enterprise is 90%.

Now, calculate non-controlling interest.

Equation(5)

The calculated non-controlling interest is .

Determination and Distribution of Excess Schedule

Particulars	Company implied fair value	Parent price (90%)	Non-controlling interest value (10%)
Fair value of subsidiary company (a)	$550,000 (refer to Equation (1))	$495,000	$55,000 (refer to Equation (5))
Book value of interest acquired:
Common stock	$150,000
Retained earnings	$300,000
Total equity	$450,000	$450,000	$450,000
Interest acquired		90%	10%
Book value (b)	$450,000	$405,000	$45,000
Excess of fair value over book value (a)-(b)=(c)	$100,000 (refer to Equation (2))	$90,000	$10,000
Adjustment of identifiable accounts	Adjustment	Life	Amortization per year	Worksheet key
Equipment	$20,000	5years	$4,000 (refer to Equation (4))	Debit (D)1
Good will (parent)	$80,000 (refer to Equation (3))			Debit (D)2
Total	$100,000

Note: Where Debit D records the non-controlling interest portion of excess of fair value over book value, distributes excess in investment account, and adjusts patent to fair value.

step: 2 of 9

1)

Calculate cash flow from investing activities.

Calculate consolidated depreciation value.

It is given that the B enterprise plant asset as on 12.31.2014 is $870,000, R corporation plant asset as on 12.31.2014 is $460,000, equipment amortization value is $20,000, and consolidated plant asset as on 12.31.2015 is $1,277,600.

Now, calculate consolidated depreciation value.

Depreciation value = ($870000 + $460000 + $20000) - $1277600

=$72400

Equation(6)

The calculated consolidated depreciation value is .

step: 3 of 9

Calculate increase or decrease in account receivable value.

It is given that the B enterprise account receivable as on 12.31.2014 is $120,000, R corporation account receivable as on 12.31.2014 is $95,000, and consolidated account receivable as on 12.31.2015 is $161,000.

Now, calculate increase or decrease in account receivable value.

Increase or decrease in account receivable value = ($120000 + $95000) -$161000

= $54000

Equation(7)

The calculated decrease in account receivable value or cash inflow is .

Calculate increase or decrease in account payable value.

It is given that the B enterprise account payable as on 12.31.2014 is $52,000, R corporation account payable as on 12.31.2014 is $45,000, and consolidated account payable as on 12.31.2015 is $80,000.

Now, calculate increase or decrease in account payable value.

Increase or decrease in account payable value =($52000 + $45000) -$80000

= $17000

Equation(8)

The calculated decrease in account payable value or cash outflow is .

step: 4 of 9

Calculate total adjustments in cash flows from operating activities.

It is calculated that the consolidated depreciation value is $72,400 (refer to Equation (6)), decrease in account receivable value or cash inflow is $54,000 (refer to Equation (7)), and decrease in account payable value or cash outflow is $17,000 (refer to Equation (8)).

Now, calculate total adjustments in cash flows from operating activities.

Equation(9)

The calculated total adjustment is .

step: 5 of 9

Calculate net cash from operating activities.

It is given that the consolidated net income is $92,300 and total adjustment is $109,400 (refer to Equation (9)).

Now, calculate net cash from operating activities.

Equation(10)

The calculated net cash from operating activities is .

step: 6 of 9

2)

Cash flows from investing activities

Calculate net cash flow from investing activity.

It is given that the purchase consideration in cash is $95,000 and cash equivalent of subsidiary company is $60,000.

Now, calculate net cash flow from investing activity.

Equation(11)

The calculated net cash outflow in investing activities is .

3)

Calculate net cash flows from financing activities

Treatment for consolidated intercompany profit

B enterprise acquired 90% of the shares of corporation R. B enterprise income statement has shown profit without intercompany profit for avoiding dual tax payment.

Calculate dividend payment to non-controlling interest (NCI).

The dividend payment to non-controlling interest is creating dual tax payment. Hence, to remove, that portion from its income statement.

It is given that the R corporation dividend payment is $10,000, and controlling interest of B enterprise is 90%.

Now, calculate dividend payment to non-controlling interest (NCI).

Equation(12)

The calculated dividend payment to non-controlling interest is .

step: 7 of 9

Calculate increases or decreases in long-term liability.

It is given that the B enterprise long-term liability as on 12.31.2014 is $80,000, R corporation long-term liability as on 12.31.2015 is $120,000, and consolidated long-term liability as on 12.31.2015 is $40,000.

Now, calculate increases or decreases in long-term liability.

Increase or decrease in long-term liability value = ($80000 + $120000) - $40000

= $160000

Equation(13)

The calculated decrease in account payable value or cash outflow is .

step: 8 of 9

Calculate net cash flows from financing activities.

It is given that the additional bond issued is $100,000, calculated decrease in account payable value or cash outflow is $160,000 (refer to Equation (13)), and dividend payment to non-controlling interest is $1,000 (refer to Equation (12)).

Now, calculate net cash flows from financing activities.

Equation(14)

The calculated net cash outflow from financing activities is $61,000.

step: 9 of 9

Calculate net increases or decreases in cash balance.

It is calculated that the net cash inflow from operating activities is $201,700 (refer to Equation (10)), net cash outflow from investing activities is $35,000 (refer to Equation (11)), and net cash outflow from financing activities is $61,000 (refer to Equation (14)).

Now, calculate net increases or decreases in cash balance.

equation(15)

The calculated net increases in cash balance is .

B Enterprise and its Subsidiary R Corporation

Consolidated Statement of Cash Flows

For Year Ended December 31, 2015

Particulars	Amount	Amount
Cash flows from operating activities:
Consolidated net income		$92,300
Adjustments to reconcile net income to net cash:
Depreciation expense	$72,400
Decrease in account receivable	$54,000
Decrease in account payable	($17,000)
Total adjustments		$109,400
Net cash provided by operating activities (a)		$201,700
Cash flows from investing activities:
	$35,000
Net cash used in investing activities(b)		($35,000)
Cash flows from financing activities:
B enterprise sells additional bonds	$100,000
Dividend payment to non-controlling interest	($1,000)
Decrease in long-term liabilities	($160,000)
Net cash used in financing activities (c)		($61,000)
Net increases in cash (a)+(b)+(c)=(d)		$105,700
Cash at the beginning of year		$82,000
Cash at the year end		$187,700

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