Question

Protecto Corporation purchased 75 percent of Strand Company's outstanding shares on January 1, 20X1, for $36,000 more than book value. At that date, the fair value of the noncontrolling interest was $16,000 more than 25 percent of Strand's book value. The full amount of the differential is considered related to patents and is being amortized over an eight-year period. In 20X1, Strand purchased a piece of land for $58,000 and later in the year sold it to Protecto for $83,000. Protecto is still holding the land as an investment. During 20X3, Protecto bonds with a value of $160,000 were exchanged for equipment valued at $160,000. On January 1, 20X3, Protecto held inventory purchased previously from Strand for $48,500. During 20X3, Protecto purchased an additional $103,000 of goods from Strand and held $59,500 of this inventory on December 31, 20X3. Strand sells merchandise to the parent at cost plus a 25 percent markup. Strand also purchases inventory items from Protecto. On January 1, 20X3, Strand held inventory it had previously purchased from Protecto for $16,200, and on December 31, 20X3, it held goods it had purchased from Protecto for $8,100 during 20X3. Strand's total purchases from Protecto in 20X3 were $20,000. Protecto sells inventory to Strand at cost plus a 35 percent markup. The consolidated balance sheet at December 31, 20X2, contained the following amounts: Credit $ Debit 96,000 170,000 154,000 77,000 470,000 39,000 Cash Accounts Receivable Inventory Land Buildings and Equipment Patents Accumulated Depreciation Accounts Payable Bonds Payable Noncontrolling Interest Common Stock Retained Earnings Totals $ 207,000 168,925 100,000 61,075 190,000 279,000 $1,806,000 $1,006,000

a. Prepare a worksheet for a consolidated statement of cash flows for 20X3 using the indirect method.

b. Prepare a consolidated statement of cash flows for 20X3.

Answer 1

Part 1

PROTECTO CORPORATION AND SUBSIDIARY

Consolidated Cash Flow Worksheet

Year Ended December 31, 20X3

		Consolidation entries
Item	Balance 1/1/X3	Debit	Credit	Balance 12/31/X3
Assets
Cash	96000		25400	70600
Accounts receivable	170000		39600	130400
Inventory	154000	51200		205200
Land	77000	2200		79200
Buildings and equipment	470000	222000		692000
Less: Accumulated depreciation	(207000)		62000	(269000)
Patents	39000		6500	32500
Total assets	799000			940900
Liabilities and equity
Accounts payable	168925	24450		144475
Bonds payable	100000		160000	260000
Common stock	190000			190000
Retained earnings	279000	56000	60025	283025
Noncontrolling interest	61075	7750	10075	63400
Total liabilities and equity	799000	363600	363600	940900
Cash flows from operating activities
Consolidated net income		70100
Amortization expense		6500
Depreciation expense		62000
Decrease in accounts receivable		39600
Increase in inventory			51200
Decrease in accounts payable			24450
Cash flows from investing activities
Purchase of land			2200
Acquisition of buildings and equipment from bond issue			160000
Purchase of buildings and equipment			62000
Cash flows from financing activities:
Dividends paid:
To Protecto corp. shareholders			56000
To noncontrolling sharehodlers			7750
Issuance of bonds for building and equipment		160000
Decrease in cash		25400
		363600	363600

437000+255000 = 692000

Part 2

PROTECTO CORPORATION AND SUBSIDIARY Consolidated Statement of Cash Flows Year Ended December 31, 20X3
Cash Flows from Operating Activities:
Consolidated net income	70100
Adjustments for noncash items:
Amortization expense	6500
Depreciation expense	62000
Changes in operating assets and liabilities:
Decrease in accounts receivable	39600
Increase in inventory	(51200)
Decrease in accounts payable	(24450)
Net cash provided by operating activities		102550
Cash Flows from Investing Activities:
Purchase of land	(2200)
Purchase of buildings and equipment	(62000)	(64200)
Net cash used in investing activities
Cash Flows from Financing Activities:
Dividends Paid:
To Parent Company shareholders	(56000)
To noncontrolling shareholders (34000*40%)	(7750)
Net cash used in financing activities		(63750)
Net decrease in cash		(25400)
Cash balance at beginning of year		96000
Cash balance at end of year		$70600