CHAPTER FIVE

CONSOLIDATION
The consolidation of financial information into a single set of statements becomes necessary when
the business combination of two or more companies creates a single economic entity.As stated in
the FASB ASC (para. 810-10-10-1): “There is a presumption that consolidated statements are more
meaningful than separate statements and that they are usually necessary for a fair presentation
when one of the companies in the group directly or indirectly has a controlling financial interest
in the other entities.”, the legal characteristics of a business combination have a significant impact
on the approach taken to the consolidation process:
What is to be consolidated?
• If dissolution takes place, appropriate account balances are physically consolidated in the
surviving company’s financial records.
• If separate incorporation is maintained, only the financial statement information (not the
actual records) is consolidated.

When does the consolidation take place?

• If dissolution takes place, a permanent consolidation occurs at the date of the combination.
• If separate incorporation is maintained, the consolidation process is carried out at regular
intervals whenever financial statements are to be prepared.

How are the accounting records affected?

• If dissolution takes place, the surviving company’s accounts are adjusted to include
appropriate balances of the dissolved company. The dissolved company’s records are
closed out.
• If separate incorporation is maintained, each company continues to retain its own records.

Using worksheets facilitates the periodic consolidation process without disturbing the individual
accounting systems.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated financial statements are similar to the combined financial statements described in
unit 1 for a home office and its branches. Assets, liabilities, revenues, and expenses of the parent
company and its subsidiaries are totaled; inter-company transactions and balances are eliminate;
and the final consolidated amounts are reported in the consolidated balance sheet, income
statement, stockholders, equity, and statement of cash flows.

Consolidated financial statements are issued to report the financial position and operating results
of a parent company and its subsidiaries as though they comprised a single accounting entity.

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 Definition A parent is an enterprise that has one or more subsidiaries.

Definition A subsidiary is an enterprise that is controlled by another enterprise (known as

the parent).
Definition Control is the power to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities.

This state of affairs requires a parent company generally to produce consolidated financial
statements showing the position and results of the whole group.

An investor’s direct and indirect ownership of more than 50% of an investee’s outstanding
common stock has been required to evidence the controlling interest underlying a parent-
subsidiary relationship.

3.6.1. Consolidation of Wholly Owned Subsidiary on Date of Purchase-type Business

Combination
There is no question of control of a wholly owned subsidiary. Thus, to illustrate consolidated
financial statements for a parent company and a wholly owned purchased subsidiary, assume that
on December 31, 1999 palm corporation issued 10,000 shares of its $10 par common stock (current
fair value $45 per share) to stockholders of Starr company for all outstanding $5 par common stock
of star. There was no contingent consideration. Out-of-pocket costs of business combination paid
by palm for finder’s and legal fees on December 31, 1999 amount $50,000.

Assume also that the business combination qualified for purchase accounting because required
conditions for pooling accounting were not met, both companies had a December 31, 1999 fiscal
year and used the same accounting principles and procedures.
The balance sheets of Palm Corporation and star company for the year ended December 31, 1999
follow:

Assets palm corporation star company

Cash $ 100,000 $40,000
Inventories 150,000 110,000
Other current assets 110,000 70,000

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Receivable from star company 25,000
Plant assets (net). 450,000 300,000
Patent (net) _______ 20,000
Total assets $ 835,000 540,000

Liabilities and stockholders’ equity

Payable to palm corporation $25,000
Income taxes payable. $26,000 10,000
Other liabilities 325,000 115,000
Common stock, $10 par 300,000
Common stock, $5 par 200,000
Additional paid-in capital. 50,000 58,000
Retained earnings 134,000 132,000
Total liabilities stockholders equity. $835,000 $540,000

On December 31,199, current fair values of star company’s identifiable assets and liabilities were
the same as their carrying amounts, except for the three assets listed below.
Current fair values
December 31, 1999.
Inventories $135,000
Plant assets (net). 365,000
Patent (net) 25,000
Prepare the consolidated balance sheet at 31 December 1999.

Answer
Palm Corporation recorded the combination as a purchase on December 31, 1999, with the
following journal entries:
Investment in star common stock (10,000 x $ 45) 450,000
Common stock (100,000 x $ 10 100,000
Paid-in capital in excess of par 350,000

To record issuance of 10,000 shares of common stock for all the outstanding common stock of star
in a purchase type business combination.

Investment in star company common stock 50,000

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 Cash 50,000

To record out-of-pocket costs of business combination with star company

After the forgoing journal entries have been posted, the affected ledger accounts of Palm Corporation are
as follows:

____________________Cash____________________
Balance forward $ 100,000 50,000 out-of-pocket
Costs of business combination
Balance 50,000
Investment in star company common stock
$ 450,000 issuance of common stock
50,000 direct out-of-pocket costs of
business combination

500,000 balance.
Common stock_________________________
300,000 balance forward,
100,000 issuance of common stock in business combination

400,000 balance
Paid-in capital in excess of par__________________________
$ 50,000 balance forward
350,000 issuance common stock in business combination

400,000 balance.

Now we can prepare the following consolidated balance sheet.

Consolidated balance sheet
December 31, 1999
Assets
Cash ($ 50,000 + 40,000) $ 90,000
Inventories ($ 150,000 + 135,000) 285,000
Other current asset ($ 110,000 + 70,000) 180,000
Plant assets (net) ($ 450,000 + 365,000) 815,000
Patent (net) (0 + $ 25,000) 25,000
Goodwill (net) 15,000

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Total assets $ 1,410,000
Liabilities and stockholders’ equity
Income-tax payable ($ 26,000 + 10,000) $ 36,000
Other liabilities ($ 325,000 + 115,000) 440,000
Common stock, $10 par 400,000
Additional paid-in capital. 400,000
Retained earnings 134,000
Total liabilities and stockholder’s equity - - 1,410,000

The following are significant aspects of the foregoing consolidated balance sheet.
1. The first amounts in the computations of consolidated assets and liabilities (except goodwill)
are the parent company’s carrying amounts; the second amounts are the subsidiary’s current
fair values.
2. Inter-company accounts (parent’s investment, subsidiary’s stockholders’ equity, and inter-
company receivable/payable) are excluded from the consolidated balance sheet.
3. goodwill in the consolidated balance sheet is the cost of the parent company’s investment ($
500,000) minus the current fair value of the subsidiary’s identifiable net assets ($ 485,000); or
$ 15,000. The $ 485,000 current fair value of the subsidiary’s identifiable net assets is
computed as follows: $ 40,000 + 135,000 + 70,000 + 365,000 + 25,000 – 25,000 – 10,000 –
115,000 = $ 485,000.
3.6.2. Consolidation of Partially Owned Subsidiary on Date of Purchase-type of
Business Combination
The consolidation of a parent company and its partially owned subsidiary differs from the
consolidation of a wholly owned subsidiary in one major respect-the recognition of minority
interest. Minority interest is a term applied to the claims of stockholders other than the parent
company (the controlling interest) to the net income or losses and net assets of the subsidiary. The
minority interest in the subsidiary’s net income or losses is displayed in the consolidated income
statement, and the minority interest in the subsidiary’s assets is displayed in the consolidated
balance sheet.

Example
On December 31, 1999, Post Corporation issued 51,000 shares of its $1 par common stock (current
fair value $ 20 a share) to stockholders of sage company in exchange for 38,000 of the 40,000
outstanding shares of sage’s $ 10 par common stock in a purchase type business combination.
Thus, post acquired a 95% interest (38,000/ 40,000 = 0.95) in sage, which became post’s subsidiary.

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There was no contingent consideration. Out-of-pocket costs of combination, paid in cash by post
on December 31, 1999 for finder’s and legal fees amount $ 52,250.

The balance sheets of Post Corporation and sage company for their fiscal year ended December
31, 1999, prior to the business combination, were as follows. There were no inter-company
transactions to the combination.

Assets post corporation sage company

Cash $ 200,000 $ 100,000
Inventories 800,000 500,000
Other current assets 500,000 255,000
Plant assets (net) 3,500,000 1,100,000
Goodwill (net) 100,000 _________
Total assets $ 5,150,000 1,915,000

Liabilities and stockholders’ equity

Income taxes payable $ 100,000 $ 16,000

Other liabilities 2,450,000 930,000
Common stock, $ 1 par 1,000,000
Common stock, 10 par. 400,000
Additional paid-in capital. 550,000 235,000
Retained earnings 1050,000 334,000
Total liabilities and Stockholders’ equity 5,150,000 1,915,000

The December 31, 1999 current fair values of sage company’s identifiable assets and liabilities
were the same as their carrying amounts, except for the following assets:
Current fair values
December 31, 1999
Inventories $ 526,000
Plant assets 1,290,000
Leasehold 30,000

Post recorded the combination with sage as a purchase by means of the following journal entries:

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Investment in sage company common stock
(57,000 x $ 20) $ 1,140,000
Common stock (57,000 x $ 1) 57,000
Paid-in capital-in-excess of par 1,083,000
Investment in sage company common stock 52,250
Cash 52,250

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 Consolidated balance sheet of post
December 31, 1999.
Assets
Cash $ 247,750
Inventories 1, 326,000
Other current assets 765,000
Plant assets 4,790,000
Leasehold 30,000
Goodwill (net) 138,000
7,296,750
Liabilities and stockholders’ equity
Income taxes payable. $ 116,000
Other current liabilities 3,380,000
Minority interest in net
assets of subsidiary 60,750
Common stock, $ 1 par 1057,000
Additional paid-in capital 1,633,000
Retained earnings 1,050,000
Total liabilities and stockholders’ equity 7,296,750
Workings
1. Shareholding in sage company.
Parent (post). 95%
Minority 5%
100%
2. Goodwill.
Cost of Post Corporation’s 95% interest in
Sage company $ 1,192,250
Less: current fair value of sage company’s identifiable
Net assets acquired by
Post ($ 1,215,000 x 0.95) 1,154,250
Good will acquired by post $ 38,000

3. Minority interest.
Current fair value of sage company’s
identifiable net assets 1,215,000

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 Minority interest share x 0.05
Minority interest in sage company’s
Identifiable net assets $ 60,750

Note
Consolidated financial statements are intended to provide information about a group of legal
entities-a parent and its subsidiaries-operating as a single entity. The assets, liabilities, revenues,
expenses, gains and loses of the various component entities under the control of the parent are
combined in the consolidated financial statements. For partially owned subsidiaries, minority
interests should be included in the consolidated financial statements to reflect financial statements
to reflect the claims of minority stockholders’ in components of a consolidated enterprise.

CONSOLIDATION: SUBSEQUENT TO DATE OF PURCHASE-TYPE BUSINESS

COMBINATION
Subsequent to the date of business combination, the parent company must account for the operating
results of the subsidiary: the net income or net loss and dividends declared and paid by the
subsidiary. Intercompany transactions must also be recorded.
Accounting for Operating Results of Wholly Owned Purchased Subsidiaries
There are two alternative methods for this purpose: the equity method and the cost method of
accounting.
Equity Method
Under this method, the parent company recognizes its share of the subsidiary’s net income or net
loss, adjusted for depreciation and amortization of differences between current fair values and
carrying amounts of purchased subsidiary’s net assets on the date of the business combination, as
well as its share of dividend declared by the subsidiary.
The equity method is said to be consistent with the accrual basis of accounting as it recognizes
increases or decreases in the carrying amount of parent company’s investment in the subsidiary as
net income or net loss, not when they are paid as dividends. Thus, proponents claim, the equity
method stresses the economic substance of the parent subsidiary relationship. Dividends declared
by the subsidiary do not constitute revenue the parent company but are a liquidation of a portion
of the parent company’s investment in the subsidiary.
Cost Method
Under this method, the parent company accounts for the operation of a subsidiary only to the extent
that dividends are declared by the subsidiary. Dividends declared by the subsidiary from net
income subsequent to the business combination are recognized as revenue by the parent company;
dividends declared by the subsidiary in excess of post-combination net income constitute a
reduction of the carrying amount of the parent company’s investment in the subsidiary. Net income
or net loss of the subsidiary is not recognized by the parent company.

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Supporters claim that this method appropriately recognizes the legal form of parent subsidiary
relationship. Thus, a parent company realizes revenue when the subsidiary declares dividend, not
when it reports net income.
Illustration of Equity Method for Wholly Owned Purchased Subsidiary for First Year after
Business Combination
Assume that Palm Corporation had used purchase accounting for business combination with its
wholly owned subsidiary, Star Company, and the Star had a net income of 60,000 for the year
ended December 31, 2000. On December 20,2000, Star’s BODs declared a cash dividend of $0.60
a share on the 40,000 outstanding shares.
Dec. 20: Star’s journal entry to record dividend declaration is:
Dividends Declared 24,000
Intercompany Dividends Payable 24,000
To record declaration of dividend
Under the equity method of accounting, Palm Corporation prepares the following journal entries
to record the dividend and net income of Star.
1) Intercompany Dividend Receivable 24,000
Investment in Star Common Stock 24,000
To record dividend declared by Star Company
2) Investment in Star Company Common Stock 60,000
Intercompany Investment Income 60,000
To record 100% of Star Company’s net income
The credit to investment in subsidiary account in the first entry reflects an underlying premise of
the equity method of accounting: dividends declared by a subsidiary represent a return of a portion
of the parent company’s investment in the subsidiary.
The second entry records the parents 100% share of the subsidiary’s net income. The subsidiary’s
net income accrues to the parent company under the equity method of accounting.
Adjustment of Purchased Subsidiary’s Net Income
Continuing with the Palm Corporation Star Company business combination, Palm must prepare a
third journal entry to adjust Star’s net income for depreciation and amortization attributable to
the difference between the current friar values and carrying amounts of Star’s net assets on the
date of the business combination-December 31,1999. Because such differences were not recorded
by the subsidiary, its net income is overstated from the point of view of the consolidated entity.
On the date of the business combination, differences between current fair values and carrying
amounts of Star Company’s net assets were as follows:
Inventories (FIFO) 25,000
Plant assets (net)
Land 15,000
Building (economic life 15 years) 30,000
Machinery (economic life 10 years) 20,000 65,000
Patent (economic life 15 years) 5,000

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Goodwill (economic life 30 years) 15,000
Total 110,000
Palm Corporation prepares the following journal entry to reflect the effects of depreciation and
amortization on the above differences on the net income of Star Company for the year ended
December 31, 2000:
Intercompany Investment Income 30,500
Investment in Star Co Common Stock 30,500
To amortize differences between current fair value and carrying amounts

Inventories- to cost of goods sold 25,000

Building- depreciation (30,000/15) 2,000
Machinery-depreciation (20,000/10) 2,000
Patent-Amortization (5,000/5) 1,000
Goodwill-amortization (15,000/30) 500
Total 30,500
Developing the Elimination
Palm Corporation’s use of equity method of accounting for its investment in Star Company results
in a balance in investment account that is a mixture of two components:
• The carrying amount of Star’s net assets
• The excess of current fair values over the carrying amount of Star’s identifiable net assets,
including goodwill, on the date of business combination
All three basic financial statements must be consolidated for accounting periods subsequent to the
date of purchase type business combination and hence the elimination working paper must include
accounts that appear in the constituent companies’ income statement, statement of retained
earnings and balance sheets.
The items that must be included in elimination are:
1. The subsidiary’s beginning of year stockholder’s equity and its dividends, and the
parent’s investment
2. The parent’s intercompany investment income
3. Unamortized current fair value excess of the subsidiary
4. Certain operating expenses of the subsidiary
Assume that Star Company allocates:
• Machinery depreciation and patent amortization to cost of goods sold
• Goodwill amortization to operating expenses
• Building depreciation 50% each to cost of goods sold and operating expenses
The working paper elimination in working paper format is as follows with the component items
numbered in accordance with the foregoing breakdown:
Common stock-Star 200,000 (1)
Additional Paid in Capital-Star 58,000 (1)
Retained Earnings-Star 132,000 (1)

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 Intrecompany Investment Income-Palm 29,500 (2)
Plant Assets (net)-Star (65,000-4,000) 61,000 (3)
Patent-Star (net) (5,000-1,000) 4,000 (3)
Goodwill-Star (net) (15,000-500) 14,500 (3)
Cost of Goods Sold-Star 29,000 (4)
Operating Expenses-Star 1,500 (4)
Investment in Star Co Common Stock-Palm 505,500 (1)
Dividend Declared-Star 24,000 (1)
To carry out the following:
a) Eliminate intercompany investment and equity accounts of subsidiary at beginning
of year and subsidiary dividend
b) Provide for depreciation and amortization on difference between current fair values
and carrying amounts
c) Allocate unamortized differences to proper accounts

Working Paper for Consolidated Financial Statements

The following aspects of the working paper should be emphasized:
• The intercompany receivable and payable are placed on the same line and offset without
formal elimination
• The elimination cancels the subsidiary’s retained earnings balance at the date of business
combination, so that each of the three basic financial statements may be consolidated in
turn.
• The FIFO method is used to account for inventories by Star Company. Thus, the difference
of 25,000 attributable to beginning inventories is allocated to cost of goods sold.
• One effect of the elimination is to reduce the difference between the carrying amounts and
current fair values by the amount of amortization. (110,000-30,500=79,500)
• The parent company’s use of the equity method of accounting results in the equalities
described below:
Parent company net income = consolidated net income
Parent company retained earnings = consolidated retained earnings
Closing Entries
To complete the accounting cycle closing entries are prepared in the usual fashion by both the
parent company and the subsidiary. State corporate laws generally require separate accounting for
retained earnings available for dividends to stockholders. Accordingly, net income legally
available for Palm’s stockholders as dividends and adjusted net income of the subsidiary not
distributed as dividend by the subsidiary are segregated. Hence, the entry to close income summary
is:
Income Summary 109,500
Retained Earnings of Subsidiary (29,500-24,000) 5,500
Retained Earnings (109,500-5,500) 104,000

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 PALM CORPORATION AND SBSIDIARY
WORKING PAPER FOR CONSOLIDATED FINANCIAL STATEMENTS
FOR YEAR ENDED DECEMBER 31, 2000

Elimination Increase
Palm Corporation Star Company (Decrease) Consolidated
Income Statement
Revenue:
Net Sales 1,100,000 680,000 1,780,000
Intercompany investment income 29,500 a) (29,500)
Total revenue 1,129,500 680,000 (29,500) 1,780,000
Costs and expenses:
cost of goods sold 700,000 450,000 a) 29,000 1,179,000
Operating expenses 217,667 130,000 a) 1,500 349,167
Interest expense 49,000 49,000
Income taxes expense 53,333 40,000 93,333
Total costs and expenses 1,020,000 620,000 30,500 1,670,500

Net income 109,500 60,000 (60,000) 109,500

Statement of Retained Earnings

Retained earnings, beginning 134,000 132,000 a) 132,000 134,000
Net income 109,500 60,000 (60,000) 109,500
Sub total 243,500 192,000 (192,000) 243,500
Dividends declared 30,000 24,000 a) (24,000) 30,000

Retained earnings, ending 213,500 168,000 (168,000) 213,500

Balance Sheet
Assets
Cash 15,900 72,100 88,000
Intercompany receivable(payable) 24,000 (24,000)
Inventories 136,000 115,000 251,000
Other current assets 88,000 131,000 219,000
Investment in Star Co common stock 505,000 a) (505,000)
Plant assets (net) 440,000 340,000 a) 61,000 841,000
Patents (net) 16,000 a) 4,000 20,000

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 Goodwill (net) a) 14,500 14,500

Total assets 1,208,900 650,100 (426,000) 1,433,500

Liabilities & Stockholders' Equity

Income taxes payable 40,000 20,000 60,000
Other liabilities 190,900 204,100 395,000
Common stock, $10 par 400,000 400,000
Common stock, $5 par 200,000 a) (200,000)
Additional paid in capital 365,000 58,000 a) (58,000) 365,000
Retained earnings 213,500 168,000 (168,000) 213,500

Toatal liab & stockholders' equity 1,209,400 650,100 (168,000) 1,433,500

Accounting for Operating Results of Partially Owned Purchased Subsidiaries

• Requires computation of minority interest in net income or net loss of the subsidiary
• Under the parent company concept, the minority interest in net income or net loss of a
subsidiary is included as expense in the consolidated income statement
Illustration:
The Post Corporation- Sage Company consolidated entity is used to illustrate. Post owns 95% of
the outstanding common stock of Sage and minority stockholders own the remaining 5%.
Assume that Sage Company declared and paid dividend of 1 a share and had a net income of
90,000 for the year ended 31 December 2000. Sage prepares the following entries for the
declaration and payment of the dividend:
Dividends Declared (40,000*$1) 40,000
Dividends Payable (40,000*.05) 2,000
Intercompany Dividends Payable (40,000*.95) 38,000
To record declaration of dividend
Dividends Payable 2,000
Intercompany Dividends Payable 38,000
Cash 40,000
To record payment of dividend declared
Post’s journal entries with regards to Sage’s operating results include the following:
Intercompany Dividends Receivable 38,000
Investment in Sage Co Common Stock 38,000
To record dividend declared by Sage Company

Cash 38,000
Intercompany Dividends Receivable 38,000
To record receipt of dividend from Sage Company

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 Investment in Sage Co Common Stock
(90,000*.95) 85,500
Intercompany Investment Income 85,500
To record 95% of net income of Sage Company for the year ended Dec 31, 2000
As noted earlier, a purchase-type business combination involves a restatement of net asset values
of the subsidiary. However, the net income reported by Sage Company does not reflect cost
expiration attributable to the restated net asset values as the restatements were not entered in the
company’s accounting records. Assume that the difference was allocated to Sage’s identifiable
assets as follows:
Inventories (FIFO) 26,000
Plant assets:
Land 60,000
Building (economic life 20 yrs) 80,000
Machinery (economic life 5 yrs) 50,000 190,000
Leasehold (economic life 6 yrs) 30,000
Total 246,000
Post Corporation prepares the following journal entry on December 31, 2000 to reflect the effect
of the differences between the current fair values and carrying amounts of partially owned
subsidiary’s identifiable net assets:
Intercompany Investment Income 42,750
Investment in Sage Co Common Stock 42,750
To amortize differences between current fair values and carrying amounts of Sage
Company’s identifiable net assets on Dec 31,1999

Inventories to cost of goods sold 26,000

Building – Dep. (80,000/20) 4,000
Machinery – Dep. (50,000/5) 10.000
Leasehold – Amrt. (30,000/6) 5,000
Total difference applicable to 2000 45,000
Amortization for 2000 (45,000*.95) 42,750
Assume that Sage Company allocates :
• Machinery depreciation and leasehold amortization entirely to cost of goods sold
• Building depreciation 50% each to cost of goods sold and operating expenses
Next, the following entry is prepared to amortize the goodwill acquired by Post in the business
combination with Sage:
Amortization Expense (38,000/40) 950
Investment in Sage Co Common Stock 950
To amortize goodwill acquired in business combination with partially owned subsidiary

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Goodwill in a business combination involving a partially owned subsidiary is attributed to the
parent rather than the subsidiary as per FASB recommendation. Consequently the amortization of
the goodwill is debited to Amortization Expense account of the parent company, with an offsetting
credit to the investment account thereby avoiding charging any goodwill amortization to the
minority interest, which did not acquire any goodwill.
Developing the Elimination
Post Corporation’s use of equity method of accounting for its investment in Star Company results
in a balance in investment account that is a mixture of two components:
• The carrying amount of Sage’s net assets
• The excess of current fair values over the carrying amount of Sage’s identifiable net assets,
including goodwill, on the date of business combination
The following is the working paper elimination in journal entry format
Common Stock-Sage 400,000
Additional Paid in Capital-Sage 235,000
Retained Earnings-Sage 334,000
Intercompany Investment Income-Post 42,750
Plant Assets-Sage (190,000-14,000) 176,000
Leasehold (net) (30,000-5,000) 25,000
Goodwill (net)(38,000-950) 37,050
Cost of Goods Sold-Sage 43,000
Operating Expenses-Sage 2,000
Investment in Sage Co Common Stock-Post 1,196,050
Dividends Declared-Sage 40,000
Minority Interest in Net Assets of Sub(60,750-2,000)58,750
To carry out the following:
a) Eliminate intercompany investment and amortization on differences
combination date current fair values and carrying amounts to
appropriate assets
b) Provide for year 2000 depreciation and amortization on differences
between current fair values and carrying amounts of Sage’s
identifiable net assets:
CGS Op. Exp
Inventories sold 26,000
Building Dep. 2,000 2,000
Machinery Dep. 10,000
Leasehold Amort 5,000
Total 43,000 2,000
c) Allocate unamortized differences between combination date current
fair values and carrying amounts to appropriate assets

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 d) Establish minority interest of subsidiary at beginning of year
(60,750), less minority interest share of dividends declared by
subsidiary during the year (40,000*.05=2,000)

b) Minority Interest in Net income of Sub 2,250

Minority interest in net assets of sub 2,250

To establish minority interest in subsidiary’s adjusted net income

Net income of subsidiary 90,000

Net reduction (43,000+2,000) 45,000

Adjusted Net Income 45,000

Minority interest (45,000*.05) 2,250

The minority interest is:

Sage Company’s total Stockholders’ Equity 1,019,000
Add: Unamortized Difference 201,000
Sage’s Adjusted Stockholders’ Equity 1,220,000
Minority Interest 5% 61,000

PALM CORPORATION AND SBSIDIARY

WORKING PAPER FOR CONSOLIDATED FINANCIAL STATEMENTS
FOR YEAR ENDED DECEMBER 31, 2000

Post Elimination Increase

Corporation Sage Company (Decrease) Consolidated
Income Statement

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 Revenue:
Net Sales 5,611,000 1,089,000 6,700,000
Intercompany investment income 42,750 a) (42,750)
Total revenue 5,653,750 1,089,000 (42,750) 6,700,000
Costs and expenses:
cost of goods sold 3,925,000 700,000 a) 43,000 4,668,000
Operating expenses 556,950 129,000 a) 2,000 687,950
Interest & tax expense 710,000 170,000 880,000
Minority interest in net income of sub b) 2,250 2,250
Total costs and expenses 5,191,950 999,000 47,250 6,238,200

Net income 461,800 90,000 (90,000) 461,800

Statement of Retained Earnings

Retained earnings, beginning 1,050,000 334,000 a) (334,000) 1,050,000
Net income 461,800 90,000 (90,000) 461,800
Sub total 1,511,800 424,000 (424,000) 1,511,800
Dividends declared 158,550 40,000 a) (40,000) 158,550

Retained earnings, ending 1,353,250 384,000 (384,000) 1,353,250

PALM CORPORATION AND SBSIDIARY

WORKING PAPER FOR CONSOLIDATED FINANCIAL STATEMENTS
FOR YEAR ENDED DECEMBER 31, 2000

Balance Sheet
Assets
Inventories 861,000 439,000 1,300,000
Other current assets 639,000 371,000 1,010,000
Investment in Sage Co common stock 1,196,050 a) (1,196,050)
Plant assets (net) 3,600,000 1,150,000 a) 176,000 4,926,000
Leasehold (net) a) 25,000 25,000
Goodwill (net) 95,000 a) 37,050 132,050

Total assets 6,391,050 1,960,000 (958,000) 7,393,050

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 Liabilities & Stockholders' Equity
Liabilities 2,420,550 941,000 3,361,550
Minority interest in net assets of sub a) 58,750 61,000
b) 2,250
Common stock, $1 par 1,057,000 1,057,000
Common stock, $10 par 400,000 a) (400,000)
Additional paid in capital 1,560,250 235,000 a) (235,000) 1,560,250
Retained earnings 1,353,250 384,000 (384,000) 1,353,250

Total liab & stockholders' equity 6,391,050 1,960,000 (958,000) 7,393,050

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