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Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
6-1
CHAPTER 6
VARIABLE INTEREST ENTITIES, INTRA-ENTITY DEBT,
CONSOLIDATED CASH FLOWS, AND OTHER ISSUES
Chapter Outline
I. Variable interest entities (VIEs)
A. VIEs typically take the form of a trust, partnership, joint venture, or corporation. In most
cases a sponsoring firm creates these entities to engage in a limited and well-defined set
of business activities. For example, a business may create a VIE to finance the acquisition
of a large asset. The VIE purchases the asset using debt and equity financing, and then
leases the asset back to the sponsoring firm. If their activities are strictly limited and the
asset is pledged as collateral, VIEs are often viewed by lenders as less risky than their
sponsoring firms. As a result, such arrangements can allow financing at lower interest
rates than would otherwise be available to the sponsor.
B. Control of VIEs, by design, often does not rest with its equity holders. Instead, control is
exercised through contractual arrangements with the sponsoring firm who becomes the
"primary beneficiary" of the entity. These contracts can take the form of leases,
participation rights, guarantees, or other residual interests. Through contracting, the
primary beneficiary bears a majority of the risks and receives a majority of the rewards of
the entity, often without owning any voting shares.
C. An entity whose control rests a primary beneficiary is addressed by FASB ASC subtopic
Variable Interest Entities. The following characteristics indicate a controlling financial
interest in a variable interest entity.
1. The power, through voting rights or similar rights, to direct the activities of an entity that
most significantly impact the entity’s economic performance.
2. The obligation to absorb the expected losses of the entity if they occur,
or
3. The right to receive the expected residual returns of the entity if they occur
The primary beneficiary bears the risks and receives the rewards of a variable interest
entity and is considered to have a controlling financial interest.
D. The FASB reasons that if a "business enterprise has a controlling financial interest in a
variable interest entity, assets, liabilities, and results of the activities of the variable interest
entity should be included with those of the business enterprise." Therefore, primary
beneficiaries must include their variable interest entities in their consolidated financial
statements.
II. Intra-entity debt transactions
A. No special difficulty is created when one member of a business combination loans money
to another. The resulting receivable/payable accounts as well as the interest income
expense balances are identical and can be directly offset in the consolidation process.
B. The acquisition of an affiliate's debt instrument from an outside party does require special
handling so that consolidated financial statements can be produced.

6-2
1. Because the acquisition price will usually differ from the book value of the liability, a
gain or loss has been created which is not recorded within the individual records of
either company.
2. Because of the amortization of any associated discounts and/or premiums, the interest
income reported by the buyer will not equal the interest expense of the debtor.
C. In the year of acquisition, the consolidation process eliminates intra-entity accounts (the
liability, the receivable, interest income, and interest expense) while the gain or loss (which
produced all of the discrepancies because of the initial difference) is recognized.
1. Although several alternatives exist, this textbook assigns all income effects resulting
from the retirement to the parent company, the party ultimately responsible for the
decision to reacquire the debt.
2. Any noncontrolling interest is, therefore, not affected by the adjustments utilized to
consolidate intra-entity debt.
D. Even after the year of retirement, all intra-entity accounts must be eliminated again in each
subsequent consolidation; however, the beginning retained earnings of the parent
company is adjusted rather than a gain or loss account.
1. The change in retained earnings is needed because a gain or loss was created in a
prior year by the retirement of the debt, but only interest income and interest expense
were recognized by the two parties.
2. The adjustment to retained earnings at any point in time is the original gain or loss
adjusted for the subsequent amortization of discounts or premiums.
III. Subsidiary preferred stock
A. Subsidiary preferred shares not owned by the parent are a part of noncontrolling interest.
B. The fair value of any subsidiary preferred shares not acquired by the parent is added to
the consideration transferred along with the fair value of the noncontrolling interest in
common shares to compute the acquisition-date fair value of the subsidiary.
IV. Consolidated statement of cash flows
A. Statement is produced from consolidated balance sheet and income statement and not
from the separate cash flow statements of the component companies.
B. Intra-entity cash transfers are omitted from this statement because they do not occur with
an outside, unrelated party.
C. The "Noncontrolling Interest's Share of the Subsidiary's Income'' is not included as a cash
flow. Dividends paid to these outside owners are reported as a financing activity.
V. Consolidated earnings per share
A. This computation normally follows the pattern described in intermediate accounting
textbooks. For basic EPS, consolidated net income is divided by the weighted-average
number of parent shares outstanding. If convertibles (such as bonds or warrants) exist for
the parent shares, their weight must be included in computing diluted EPS but only if
earnings per share is reduced.
1. The subsidiary's diluted earnings per share are computed first to arrive at (1) an
earnings figure and (2) a shares figure.

6-3
2. The portion of the shares figure belonging to the parent is computed. That percentage
of the subsidiary's diluted earnings is then added to the parent's income in order to
complete the earnings per share computation.
VI. Subsidiary stock transactions
A. If the subsidiary issues new shares of stock or reacquires its own shares as treasury
stock, a change is created in the book value underlying the parent's investment account.
The increase or decrease should be reflected by the parent as an adjustment to this
balance.
B. The book value of the subsidiary that corresponds to the parent's ownership is measured
before and after the transaction with any alteration recorded directly to the investment
account. The parent's additional paid-in capital (or retained earnings) account is normally
adjusted although the recognition of a gain or loss is an alternate accounting treatment.
C. Treasury stock acquired by the subsidiary may also necessitate a similar adjustment to the
parent's investment account. In addition, any subsidiary treasury stock is eliminated within
the consolidation process.
Answer to Discussion Question: Who Lost the $300,000?
This case is designed to give life to a theoretical accounting issue: If a subsidiary's debt is retired,
should the resulting gain or loss be assigned to the parent or to the subsidiary? The case
illustrates that there is no clear-cut solution. This lack of an absolute answer makes financial
accounting both intriguing and frustrating.
The assignment decision is only necessary in the presence of a noncontrolling interest.
Regardless of the ownership level all intra-entity balances are eliminated on the worksheet with a
gain or loss recognized. Not until the time that the noncontrolling interest computations are made
does the identity of the specific party become important.
We assume that financial and operating decisions are made in the best interest of the business
entity as a whole. This debt would not have been retired unless corporate officials believed that
Penston/Swansan would benefit from the decision. Thus, a strong argument can be made against
any assignment to either separate party.
Students should choose and justify one method. Discussion often centers on the following:
▪ Parent company officials made the actual choice that created the loss. Therefore, assigning
the $300,000 to the subsidiary directs the impact of their reasoned decision to the wrong
party. In effect, the subsidiary had nothing to do with this transaction (as indicated in the case)
so that its financial records should not be affected by the $300,000 loss.
▪ The debt was that of the subsidiary. Because the subsidiary's debt is being retired, all of the
$300,000 should be attributed to that party. Financial records measure the results of
transactions and the retirement simply culminates an earlier transaction made by the
subsidiary. The parent is doing no more than acting as an agent for the subsidiary (as
indicated in the case). If the subsidiary had acquired its own debt, for example, no question as
to the assignment would have existed. Thus, changing that assignment simply because the
parent was forced to be the acquirer is not justified.
▪ Both parties were involved in the transaction so that some allocation of the loss is required. If,
at the time of repurchase, a discount existed within the subsidiary's accounts, this figure

6-4
▪ would have been amortized to interest expense (if the debt had not been retired). Thus, the
$300,000 loss was accepted now in place of the later amortization. This reasoning then
assigns this portion of the loss to the subsidiary. Because the parent was forced to pay more
than face value, that remaining portion is assigned to the buyer.
Answers to Questions
1. A variable interest entity (VIE) is a business structure that is designed to accomplish a specific
purpose. A VIE can take the form of a trust, partnership, joint venture, or corporation although
typically it has neither independent management nor employees. The entity is frequently
sponsored by another firm to achieve favorable financing rates.
2. Variable interests are contractual, ownership, or other pecuniary interests in an entity that
change with changes in the entity's net asset value. Variable interests will absorb portions of a
variable interest entity's expected losses if they occur or receive portions of the entity's
expected residual returns if they occur. Variable interests typically are accompanied by
contractual arrangements that provide decision making power to the owner of the variable
interests. Examples of variable interests include debt guarantees, lease residual value
guarantees, participation rights, and other financial interests.
3. The following characteristics are indicative of an enterprise qualifying as a primary beneficiary
with a controlling financial interest in a VIE.
▪ The power, through voting rights or similar rights, to direct the activities of an entity that
most significantly impact the entity’s economic performance.
▪ The obligation to absorb the expected losses of the entity if they occur, or
▪ The right to receive the expected residual returns of the entity if they occur
4. Because the bonds were purchased from an outside party, the acquisition price is likely to
differ from the book value of the debt in the subsidiary's records. This difference creates
accounting problems in handling the intra-entity transaction. From a consolidated perspective,
the debt is retired; a gain or loss is reported with no further interest being recorded. In reality,
each company continues to maintain these bonds on their individual financial records. Also,
because discounts and/or premiums are likely to be present, these account balances as well
as the interest income/expense will change from period to period because of amortization. For
reporting purposes, all individual accounts must be eliminated with the gain or loss being
reported so that the events are shown from the vantage point of the consolidated entity.
5. If the bonds are acquired directly from the affiliate company, all reciprocal accounts will be
equal in amount. The debt and the receivable will be in agreement so that no gain or loss is
created. Interest income and interest expense should also reflect identical amounts.
Therefore, the consolidation process for this type of intra-entity debt requires no more than the
offsetting of the various reciprocal balances.
6. The gain or loss to be reported is the difference between the price paid and the book value of
the debt on the date of acquisition. For consolidation purposes, this gain or loss should be
recognized immediately on the date of acquisition.

6-5
7. Because the bonds are still legally outstanding, they will continue to be found on both sets of
financial records. Thus, each account (Bonds Payable, Investment in Bonds, Interest
Expense, and Interest Income) must be eliminated within the consolidation process. Any gain
or loss on the retirement as well as later effects on interest caused by amortization are also
included to arrive at an adjustment to the beginning retained earnings of the parent company.
8. The original gain is never recognized within the financial records of either company. Thus,
within the consolidation process for the year of acquisition, the gain is directly recorded
whereas (for each subsequent year) it is entered as an adjustment to beginning retained
earnings. In addition, because the book value of the debt and the investment are not in
agreement, the interest expense and interest income balances being recorded by the two
companies will differ each year because of the amortization process. This amortization
effectively reduces the difference between the individual retained earnings balances and the
total that is appropriate for the consolidated entity. Consequently, a smaller change is needed
each period to arrive at the balance to be reported. For this reason, the annual adjustment to
beginning retained earnings gradually decreases over the life of the bond.
9. No set rule exists for assigning the income effects from intra-entity debt transactions although
several different theories exist and include: (1) assignment of the entire amount to the debtor,
(2) assignment of the entire amount to the buyer, and (3) allocation of the gain or loss
between the two parties in some manner. This textbook attributes the entire income effect (the
$45,000 gain in this case) to the parent company. Assignment to the parent is justified
because that party is ultimately responsible for the decision to retire the debt. The answer to
the discussion question included in this chapter analyzes this question in more detail.
10. Subsidiary outstanding preferred shares are part of the noncontrolling interest and are
included in the consolidated financial statements at acquisition-date fair value and
subsequently adjusted for their share of subsidiary income and dividends.
11. The consolidated cash flow statement is developed from consolidated balance sheet and
income statement figures. Thus, the cash flows generated by operating, investing, and
financing activities are identified only after the consolidation of these other statements.
12. The noncontrolling interest share of the subsidiary’s income is a component of consolidated
net income. Consolidated net income then is adjusted for noncash and other items to arrive at
consolidated cash flows from operations. Any dividends paid by the subsidiary to these
outside owners are listed as a financing activity because an actual cash outflow occurs.
13. An alternative to the normal diluted earnings per share calculation is required whenever the
subsidiary has dilutive convertible securities such as bonds or warrants. In this case, the
potential impact of the conversion of subsidiary shares must be factored into the overall
diluted earnings per share computation.
14. Basic Earnings per Share. The existence of subsidiary convertible securities does not affect
basic EPS. The parent’s basic earnings per share is computed by dividing the parent’s share
of consolidated net income by the weighted average number of parent shares outstanding.

6-6
Diluted Earnings per Share. The subsidiary's diluted earnings per share is computed by
including both convertible items. The portion of the parent's controlled shares to the total
shares used in this calculation is then determined. Only this percentage (of the income figure
used in the subsidiary's computation) is added to the parent's income in arriving at the parent
company’s diluted earnings per share.
15. Several reasons could exist for a subsidiary to issue new shares of stock to outside parties.
First, additional financing is brought into the company by any such sale. Also, stock issuance
may be used to entice new individuals to join the organization. Additional management
personnel, as an example, might be attracted to the company in this manner. The company
could also be forced to sell shares because of government regulation. Many countries require
some degree of local ownership as a prerequisite for operating within that country.
16. Because the new stock was issued at a price above the subsidiary’s assigned consolidation
value, the overall valuation for Metcalf's stock has been increased. Consequently, the
Washburn's investment is increased to reflect this change. To measure the effect, the value of
Washburn's investment is calculated both before and after the new issue. Because the
increment is the result of a stock transaction, an increase is made to additional paid-in capital.
Although the subsidiary's shares (both new and old) are eliminated in the consolidation
process, the increase in the parent's APIC (or gain or loss) carries into the consolidated
figures. Also, the noncontrolling interest percentage of the subsidiary increases.
17. A stock dividend does not alter the assigned consolidated subsidiary value and, thus, creates
no effect on Washburn's investment account or on the consolidated figures. Hence, no entry is
recorded by the parent company in connection with the subsidiary's stock dividend.
Answers to Problems
1. C
2. D
3. A
4. D
5. A
6. D Cash flow from operations:
Net income ................................................................. $45,000
Depreciation............................................................... 10,000
Trademark amortization............................................ 15,000
Increase in accounts receivable............................... (17,000)
Increase in inventory................................................. (40,000)
Increase in accounts payable................................... 12,000 (20,000)
Cash flow from operations ....................................... $25,000

6-7
7. C Cash flow from financing activities:
Dividends to parent’s interest .................................. ($12,000)
Dividends to noncontrolling interest (20%  $5,000) (1,000)
Reduction in long-term notes payable .................... (25,000)
Cash flow from financing activities ......................... ($38,000)
8. C
9. C Post-issue subsidiary valuation ($800,000 + $250,000) $1,050,000
Arcola’s new ownership percentage (40,000 ÷ 50,000) 80%
Arcola’s share of post-issue subsidiary valuation $ 840,000
Arcola’s pre-issue equity balance 800,000
Increase to Arcola’s investment account $ 40,000
10. D Jordan’s income from own operations.................... $200,000
Fey's income ............................................................. 80,000
Eliminate intra-entity interest income...................... (21,000)
Eliminate intra-entity interest expense.................... 22,000
Recognize retirement gain on debt ($212,000 – $199,000) 13,000
Consolidated net income .................................... $294,000
11.B Mattoon’s share of consolidated net income.......... $465,000
Number of Mattoon common shares outstanding.. 100,000
Mattoon’s EPS = ($465,000 ÷ 100,000 shares)......... $4.65
12.B Ace net income ......................................................... $400,000
Less intra-entity dividends (initial value method) .. (7,000) $393,000
Byrd reported income .............................................. 100,000
Gain on extinguishment of debt ($48,300 – $46,600) 1,700
Eliminate interest expense on "retired" debt
($48,300 × 10%) .................................................... 4,830
Eliminate interest income on "retired" debt
($46,600 × 12%) .................................................... (5,592)
Consolidated net income ......................................... $493,938
13.D 30% of Byrd's net income of $100,000; the intra-entity debt transaction is
attributed solely to the parent company.
14.A For 2011, the adjustment to beginning retained earnings should recognize
the gain on the retirement of the debt, the elimination of the 2010 interest
expense, and the elimination of the 2010 interest income.
Gain on Retirement of Bond:

6-8
Original book value ............................................................. $10,600,000
2007–2009 amortization ($600,000 ÷ 20 yrs. × 3 yrs.) ....... (90,000)
Book value, January 1, 2010 ............................................... $10,510,000
Percentage of bonds retired ............................................... 40%
Book value of retired bonds ............................................... $4,204,000
Cash received ($4,000,000 × 96.6%) ................................... 3,864,000
Gain on retirement of bonds ............................................... $ 340,000
Interest Expense on Intra-entity Debt—2010
Cash interest expense (9% × $4,000,000) .......................... $360,000
Premium amortization ($30,000 per year total × 40%
retired portion of bonds) ............................................... (12,000)
Interest expense on intra-entity debt ................................. $348,000
Interest Income on Intra-entity Debt—2010
Cash interest income (9% × $4,000,000) ............................ $360,000
Discount amortization (.034 × $4,000,0000 ÷ 17 years) ..... 8,000
Interest income on intra-entity debt ................................... $368,000
Adjustment to 1/1/11 Retained Earnings
Recognition of 2010 gain on extinguishment of debt (above)..... $340,000
Elimination of 2010 intra-entity interest expense (above)............ 348,000
Elimination of 2010 intra-entity interest income (above) ............. (368,000)
Increase in retained earnings, 1/1/11 ........................$320,000
15.D Consideration transferred for preferred stock ............................. $ 424,000
Consideration transferred for common stock .............................. 3,960,000
Noncontrolling interest fair value for preferred ........................... 1,696,000
Noncontrolling interest fair value for common ............................ 440,000
Acquisition-date fair value ............................................................. 6,520,000
Acquisition-date identified net asset fair value ........................... (6,000,000)
Goodwill .........................................................................$ 520,000
16.D Consideration transferred for preferred stock ............................. $106,000
Consideration transferred for common stock .............................. 870,000
Noncontrolling interest fair value for common ............................ 580,000
Acquisition-date fair value ............................................................. $1,556,000
Acquisition-date book value .......................................................... (1,460,000)
Excess fair over book value ........................................................... $ 96,000
to building ...................................................................................... 50,000
to goodwill...................................................................................... $ 46,000
17.A Parent’s reported sales ............................................ $300,000
Subsidiary's reported sales ..................................... 200,000

6-9
Less: intra-entity transfers ...................................... (40,000)
Sales to outsiders ............................................... $460,000
Eliminate increase in receivables (less cash collected) (30,000)
Cash generated by sales .................................... $430,000
18.B Subsidiary’s unamortized fair value of prior to new share issue
(12,000 × $49) ....................................................... $588,000
Parent's ownership ................................................... 100%
Unamortized subsidiary fair value ......................... $588,000
Subsidiary unamortized fair value after issuing new
shares (above value plus 3,000 shares at $50 each) $738,000
Parent's ownership 12,000 ÷ 15,000 shares) .......... 80%
Unamortized subsidiary fair value after stock issue $590,400
Investment in Veritable increases by $2,400 ($590,400 less $588,000).
19.A Because the parent acquired 80 percent of the new shares, its proportion of
ownership has remained the same. Because the purchase price will
necessarily equal 80 percent of the increase in the subsidiary's book value,
no separate adjustment by the parent is required.
20.C Adjusted acquisition-date sub. fair value at 1/1/11
Consideration transferred ........................................................ $592,000
Noncontrolling interest acquisition-date fair value ................ 148,000
Increase in Stamford book value .............................................. 80,000
Stock issue proceeds ................................................................ 150,000
Subsidiary valuation basis 1/1/11 .................................................. 970,000
New parent ownership (32,000 shs. ÷ 50,000 shs.) ...................... 64%
Parent’s post-stock issue ownership balance.............................. $620,800
Parent's investment account ($592,000 + [80% × 80,000]) .......... 656,000
Required adjustment —decrease ............................................ $(35,200)
21.D Adjusted acquisition-date fair value ($820,000 – $192,000) ........ $628,000
New parent ownership (32,000 shs. ÷ 32,000 shs.) ...................... 100%
Fair value equivalency of parent's ownership ........................ $628,000
Parent's investment account ($592,000 + [80% × 80,000]) .......... 656,000
Required adjustment—decrease .............................................. $(28,000)
22. (10 minutes) (Qualification of Primary Beneficiary of a VIE)
Consolidation of a variable interest entity is required if a firm has a variable
interest that gives the firm

6-10
▪ The power, through voting rights or similar rights, to direct the activities
of an entity that most significantly impact the entity’s economic
performance.
▪ The obligation to absorb a majority of the entity's expected losses if they
occur and/or the right to receive a majority of the entity's expected
residual returns if they occur
Because (1) HCO Media’s losses are limited by contract, and (2) Hillsborough
has the right to receive the residual benefits of the sales generated on the
HCO Media internet site above $500,000, Hillsborough should consolidate
HCO Media.
23. (40 minutes) (VIE Qualifications for Consolidation)
a. The purpose of consolidated financial statements is to present the financial
position and results of operations of a group of businesses as if they were a
single entity. They are designed to provide information useful for making
business and economic decisions—especially assessing amounts, timing,
and uncertainty of prospective cash flows. Consolidated statements also
provide more complete information about the resources, obligations, risks,
and opportunities of an enterprise than separate statements.
b. An entity qualifies as a VIE and is subject to consolidation if either of the
following conditions exist.
(23. continued)
▪ The total equity at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties. In most cases, if equity at risk is less than 10% of total assets, the
risk is deemed insufficient.
▪ The equity investors in the VIE lack any one of the following three
characteristics of a controlling financial interest.
1. The power, through voting rights or similar rights, to direct the
activities of an entity that most significantly impact the entity’s
economic performance.
2. The obligation to absorb the expected losses of the entity if they occur
(e.g., another firm may guarantee a return to the equity investors)
3. The right to receive the expected residual returns of the entity (e.g.,
the investors' return may be capped by the entity's governing
documents or other arrangements with variable interest holders).

6-11
Consolidation of a variable interest entity is required if a firm has a variable
interest that gives the firm
▪ The power, through voting rights or similar rights, to direct the activities
of an entity that most significantly impact the entity’s economic
performance.
▪ The obligation to absorb a majority of the entity's expected losses if they
occur and/or the right to receive a majority of the entity's expected
residual returns if they occur
c. Risks of the construction project that has TecPC has effectively shifted to
the owners of the VIE:
At the end of the 1st five-year lease term, if the parent opts to sell the facility,
and the proceeds are insufficient to repay the VIE investors, TecPC may be
required to pay up to 85% of the project's cost. Thus, a potential 15% risk.
Risks that remain with TecPC
▪ Guarantees of return to VIE investors at market rate, if facility does not
perform as expected TecPC is still obligated to pay market rates.
▪ If lease is not renewed, TecPC must either purchase the facility or sell it
on behalf of the VIE with a guarantee of Investors' (debt and equity)
balances representing a risk of decline in market value of asset
▪ Debt guarantees
(23. continued)
d. TecPC possesses the following characteristics of a primary beneficiary:
▪ Direct decision-making ability (end of five-year lease term).
▪ Absorb a majority of the entity's expected losses if they occur (via debt
guarantees and guaranteed lease payments and residual value).
▪ Receive a majority of the entity's expected residual returns if they occur
(via use of the facility and potential increase in its market value).
24. (10 minutes) (Consolidation of variable interest entity.)
a. Implied valuation and excess allocation for Softplus.
Noncontrolling interest fair value $ 60,000
Consideration transferred by Pantech 20,000
Total business fair value 80,000
Fair value of VIE net assets 100,000
Excess net asset value fair value $20,000

6-12
PanTech recognizes the $20,000 excess net asset fair value as a bargain purchase
and records all of SoftPlus’ assets and liabilities at their individual fair values.
Cash $20,000
Marketing software 160,000
Computer equipment 40,000
Long-term debt (120,000)
Noncontrolling interest (60,000)
Pantech equity interest (20,000)
Gain on bargain purchase (20,000)
-0-
b. Implied valuation and excess valuation for Softplus.
Noncontrolling interest fair value 60,000
Consideration transferred by Pantech 20,000
Total business fair value 80,000
Fair value of VIE net identifiable assets 60,000
Goodwill $20,000
When the fair value of a VIE (that is a business) is greater than assessed
asset values, all identifiable assets and liabilities are reported at fair values
(unless a previously held interest) and the difference is treated as goodwill.
Cash $20,000
Marketing software 120,000
Computer equipment 40,000
Goodwill (excess business fair value) 20,000
Long-term debt (120,000)
Noncontrolling interest (60,000)
Pantech equity interest (20,000)
-0-
25. (25 Minutes) (Consolidation entry for three consecutive years to report effects
of intra-entity bond acquisition. Straight-line method used.)
a. Book Value of Bonds Payable, January 1, 2010
Book value, January 1, 2008 ................................................. $1,050,000
Amortization—2008–2009 ($5,000 per year
[$50,000 premium ÷ 10 years] for two years) .................. 10,000
Book value of bonds payable, January 1, 2010.................... $1,040,000
Book value of 40% of bonds payable
(intra-entity portion), January 1, 2010 ............................. $416,000
Gain on Retirement of Bonds, January 1, 2010
Purchase price ($400,000 × 96%) .......................................... $384,000
Book value of liability (computed above) ............................. 416,000
Gain on retirement of bonds ................................................. $ 32,000

6-13
Book Value of Bonds Payable, December 31, 2010
Book value, January 1, 2010 (computed above) .................. $1,040,000
Amortization for 2010.............................................................. 5,000
Book value of bonds payable, December 31, 2010 .............. $1,035,000
Book value of 40% of bonds payable (intra-entity portion),
December 31, 2010 ............................................................ $414,000
Book Value of Investment, December 31, 2010
Book value of investment, January 1, 2010 (purchase price) $384,000
Amortization for 2010 ($16,000 discount ÷ 8-yr. rem. life) .. 2,000
Book value of investment, December 31, 2010 .................... $386,000
Intra-entity Interest Balances for 2010
Interest expense:
Cash payment ($400,000 × 9%) ........................................ $36,000
Amortization of premium for 2010 ($5,000 per year
multiplied by 40% intra-entity portion) ...................... 2,000
Intra-entity interest expense ............................................ $34,000
Interest income:
Cash collection ($400,000 × 9%) ...................................... $36,000
Amortization of discount for 2010 (above) ..................... 2,000
Intra-entity interest income .............................................. $38,000
25.(continued)
CONSOLIDATION ENTRY B (2010)
Bonds Payable .......................................................... 400,000
Premium on Bonds Payable ..................................... 14,000
Interest Income .......................................................... 38,000
Investment in Bonds ............................................. 386,000
Interest Expense ................................................... 34,000
Extraordinary Gain on Retirement of Bonds ...... 32,000
(To eliminate accounts stemming from intra-entity bonds [balances
computed above] and to recognize gain on the retirement of this debt.)
b. In 2011, because straight-line amortization is used, the interest accounts
remain unchanged at $38,000 and $34,000. However, the premium
associated with the bond payable as well as the discount on the
investment are affected by the $2,000 per year amortization. In addition,
the gain now has to be included as a component of beginning retained
earnings. Concurrently, the two interest balances recorded by the

6-14
individual companies in 2010 are removed from retained earnings because
they resulted after the intra-entity retirement. Gain of $32,000 plus $34,000
expense removal less $38,000 income elimination gives $28,000 increase
in retained earnings.
CONSOLIDATION ENTRY *B (2011)
Bonds Payable ................................................... 400,000
Premium on Bonds Payable ($2,000 amortization) 12,000
Interest Income ................................................... 38,000
Investment in Bonds ($2,000 amortization) . 388,000
Interest Expense ............................................ 34,000
Retained Earnings, 1/1/11 (Darges) .............. 28,000
(To remove intra-entity bond accounts that remain on the individual
records of both companies. Both debt and investment balances have
been adjusted for 2010–11 amortization. Entry to retained earnings brings
the totals reported by the individual companies [interest income and
expense] to the balance of the original gain.)
c. As with part b, new premium and discount balances must be determined
and then removed. The adjustment made to retained earnings takes into
account that another year of interest expense ($34,000) and income
($38,000) have been closed into this equity account by the separate
companies.
25.(continued)
CONSOLIDATION ENTRY *B (2012)
Bonds Payable .................................................... 400,000
Premium on Bonds Payable ............................... 10,000
Interest Income .................................................... 38,000
Investment in Bonds ...................................... 390,000
Interest Expense ............................................ 34,000
Retained Earnings, 1/1/12 (Darges) .............. 24,000
(To remove intra-entity bond accounts that remain on the individual
records of both companies. Both debt and investment balances have
been adjusted for 2010–2012 amortization. Entry to retained earnings
brings the totals reported by the individual companies to the balance of
the original gain.)
26. (12 Minutes) (Determine consolidated income statement accounts after
acquisition of intra-entity bonds.)

6-15
▪ Interest Expense To Be Eliminated = $84,000 × 11% = $9,240
▪ Interest Income To Be Eliminated = $108,000 × 8% = $8,640
▪ Loss To Be Recognized = $108,000 – $84,000 = $24,000
CONSOLIDATED TOTALS
▪ Revenues and Interest Income = $1,051,360 (add the two book values and
eliminate interest income on intra-entity bond)
▪ Operating and Interest Expense = $751,760 (add the two book values and
eliminate interest expense on intra-entity bond)
▪ Other Gains and Losses = $152,000 (add the two book values)
▪ Loss on Retirement of Debt = $24,000 (computed above)
▪ Net Income = $427,600 (consolidated revenues, interest income, and
gains less consolidated operating and interest expense and losses)
27. (30 Minutes) (Consolidation entry for two years to report effects of intra-
entity bond acquisition. Effective rate method applied.)
a. Loss on Repurchase of Bond
Cost of acquisition ......................................... $121,655
Book value ($668,778 × 1/8) .......................... 83,597
Loss on repurchase ....................................... $ 38,058
Interest Balances for 2010
Interest income:
$121,655 × 6% ........................................... $7,299
Interest expense:
$83,597 (book value [above]) × 10% ....... $8,360
Investment Balance, December 31, 2010
Original cost, 1/1/10........................................ $121,655
Amortization of premium:
Cash interest ($100,000 × 8%) ................. $8,000
Effective interest income (above) ........... 7,299 701
Investment, 12/31/10 ............................ $120,954
Bonds Payable Balance, December 31, 2010
Book value, 1/1/10 (above) ............................ $83,597
Amortization of discount:
Cash interest ($100,000 × 8%) ................. $8,000

6-16
Effective interest expense (above) .......... 8,360 360
Bonds payable, 12/31/10...................... $83,957
Entry B—12/31/10
Bonds Payable ............................................... 83,957
Interest Income .............................................. 7,299
Loss on Retirement of Debt .......................... 38,058
Investment in Bonds ................................ 120,954
Interest Expense ....................................... 8,360
(To eliminate intra-entity debt holdings and recognize loss on
retirement.)
b. Interest Balances for 2011
Interest income: $120,954 (investment
balance for the year) × 6% ....................................... $7,257
Interest expense: $83,957 (liability balance
for the year) × 10% .................................................... $8,396
27. (continued)
Book value, January 1, 2011 (part a) ....................... $120,954
Cash interest ($100,000 × 8%) ............................ $8,000
Effective interest income (above) ...................... 7,257 743
Investment balance, December 31, 2011 ...... $120,211
Book value, January 1, 2011 (part a) ....................... $83,957
Cash interest ($100,000 × 8%) ............................ $8,000
Effective interest expense (above) .................... 8,396 396
Bonds payable balance,
December 31, 2011 ......................................... $84,353
Interest Balances for 2012
Interest income: $120,211 (investment.................... $7,213
balance for the year [above]) × 6%
Interest expense: $84,353 (liability balance
for the year [above]) × 10% ................................ $8,435

6-17
Book value, January 1, 2012 (above) ...................... $120,211
Cash interest ($100,000 × 8%) ............................ $8,000
Effective interest income (above) ...................... 7,213 787
Investment balance, December 31, 2012 ...... $119,424
Book value, January 1, 2012 (above) ...................... $84,353
Cash interest ($100,000 × 8%) ............................ $8,000
Effective interest expense (above) .................... 8,435 435
Bonds payable balance,
December 31, 2012 ................................... $84,788
27. (continued)
Adjustment Needed to Retained Earnings, January 1, 2012
Loss on retirement of debt (part a) ......................... $38,058
Balances currently in retained earnings:
Interest income: 2010 ($7,299)
2011 (7,257) ($14,556)
Interest expense: 2010 $8,360
2011 8,396 16,756 2,200
Reduction needed to beginning retained
earnings to arrive at consolidated total .......................... $35,858
Entry *B—12/31/12
Bonds Payable .......................................................... 84,788
Interest Income ......................................................... 7,213
Retained earnings, 1/1/12 (Parent) .......................... 35,858
Investment in Bonds ........................................... 119,424
Interest Expense ................................................. 8,435
(To eliminate intra-entity bond holdings and adjust beginning retained
earnings balance of the parent to amount representing loss on retirement.
Amounts computed above.)
28. (35 Minutes) (Consolidation procedures and balances related to intra-entity
bonds. Both straight-line and effective interest rate methods are used.)
a. Acquisition price of bonds ............................................................... $283,550
Book value of bonds payable (see Schedule 1)

6-18
($443,497 × 50%) .......................................................................... (221,749)
Loss on retirement ............................................................................ $61,801
SCHEDULE 1—Book Value of Bonds Payable
Effective
Book Interest Cash Year-End
Date Value (12% Rate) Interest Amortization Book Value
2008 $435,763 $52,292 $50,000 $2,292 $438,055
2009 $438,055 $52,567 $50,000 $2,567 $440,622
2010 $440,622 $52,875 $50,000 $2,875 $443,497
b. Investment in Bloom Bonds
Purchase price—12/31/10 ......................................... $283,550
Cash interest ($250,000 × 10%) ............................... $25,000
Effective interest income ($283,550 × 8%) .............. 22,684
Amortization ........................................................ 2,316
Investment in Bloom bonds, 12/31/11 ..................... $281,234
Bonds Payable
Book value—12/31/10 (computed above) ............... $443,497
Cash interest ($500,000 × 10%) ............................... $50,000
Effective interest expense ($443,497 × 12%) .......... 53,220
Amortization ........................................................ 3,220
Bonds payable, 12/31/11 .......................................... $446,717
Although not required, the consolidation entry as of 12/31/11 is as follows. The
reduction in retained earnings represents the loss only; no intra-entity interest
was recognized in the previous year because the purchase was made on
December 31.
Entry *B (2011)
Bonds Payable ($446,717 × 50%) ............................ 223,359
Interest Income ......................................................... 22,684
Retained Earnings, 1/1/11 ........................................ 61,801
Interest Expense ($53,220 × 50%) ...................... 26,610
Investment in Bloom Bonds ............................... 281,234
28. continued
c. Loss on Retirement of Bond
Because Bloom uses the straight-line method of amortization, the loss on
retirement must be computed again.
Original issue price—1/1/08 ........................................................ $435,763

6-19
Discount amortization (2008–2010) ([$64,237 ÷ 11] × 3 years).. 17,519
Book value 12/31/10 .................................................................... $453,282
Intra-entity portion of bonds payable (50%) .............................. $226,641
Purchase price ............................................................................. 283,550
Loss on retirement ...................................................................... $ 56,909
Investment in Bloom Bonds
Purchase price—12/31/10 ........................................................... $283,550
Premium amortization (2011) ($33,550 ÷ 8) ............................... (4,194)
Book value 12/31/11 ............................................................... $279,356
Interest Income
Cash interest ($250,000 × 10%) .................................................. $25,000
Premium amortization (above) ................................................... (4,194)
Intra-entity interest income—2011 ........................................ $20,806
Bonds Payable
Original issue price 1/1/08 ........................................................... $435,763
Discount amortization (2008–2011) [($64,237 ÷ 11) × 4 years] . 23,359
Book value 12/31/11 ............................................................... $459,122
Opus ownership ..................................................................... 50%
Intra-entity portion—12/31/11 .......................................... $229,561
Interest Expense
Cash interest ($250,000 × 10%) .................................................. $25,000
Discount amortization ([$64,237 ÷ 11] × 1/2) ............................. 2,920
Intra-entity interest expense—2011 ...................................... $27,920
The reduction in retained earnings represents the loss only; no intra-entity
interest was recognized in the previous year because the purchase was made
on December 31.
Entry *B (2011)
Bonds Payable .......................................................... 229,561
Interest Income ......................................................... 20,806
Retained Earnings, 1/1/11 ....................................... 56,909
Interest Expense ................................................ 27,920
Investment in Bloom Bonds ............................... 279,356
29.(8 Minutes) (Determine goodwill for a purchase in which subsidiary has both
common stock and preferred stock)
Consideration transferred for common stock $1,600,000
Consideration transferred for preferred stock 630,000

6-20
Noncontrolling interest in common stock 400,000
Noncontrolling interest in preferred stock 270,000
Hepner’s acquisition-date fair value $2,900,000
Book value of Hepner 2,500,000
Goodwill $400,000
30. (30 Minutes) (Consolidation entries with subsidiary cumulative preferred stock.)
a. The preferred shares are entitled to the specified cumulative dividend. Thus, the
noncontrolling interest's share of the subsidiary's income equals $160,000 or 8
percent of the preferred stock's par value.
b. Acquisition-Date Fair Value Allocation and Amortization
Consideration transferred ........................................................... $14,040,000
Noncontrolling interest fair value (preferred shares)................ 2,000,000
Acquisition-date fair value of Smith ........................................... 16,040,000
Book value ................................................................................... (16,000,000)
Franchises .................................................................................... $ 40,000
Period of amortization ................................................................. 40 years
Annual amortization .................................................................... $1,000
Investment in Smith Account, December 31, 2011
Consideration transferred, January 1, 2011 .............................. $14,040,000
Equity accrual (income remaining for common stock
after preferred stock dividend) ............................................. 290,000
Dividends collected ($360,000 total less $160,000
paid to preferred shareholders) ............................................ (200,000)
Amortization for 2011 (above) .................................................... (1,000)
Investment in Smith account, December 31, 2011..................... $14,129,000
c. Consolidation Entries
Entry S and A combined
Preferred Stock (Smith) ........................................... 2,000,000
Common Stock (Smith) ............................................ 4,000,000
Retained Earnings, 1/1/11 (Smith) ........................... 10,000,000
Franchises ................................................................. 40,000
Investment in Smith........................................ 14,040,000
Noncontrolling Interest in Smith, Inc ............ 2,000,000
(To eliminate subsidiary stockholders’ equity, record excess fair values, and
record outside ownership of subsidiary's preferred stock at fair value)
30. c. (continued)
Entry I Equity Income of Subsidiary .............................. 289,000

6-21
Investment in Smith ....................................... 289,000
(To eliminate equity accrual made in connection with common stock
[$290,000] along with excess amortization recorded by parent.)
Entry D Investment in Smith ............................................ 200,000
Dividends Paid ............................................... 200,000
(To remove intra-entity dividend payments made on common stock [see
computation above].)
Entry E Amortization Expense ......................................... 1,000
Franchises ...................................................... 1,000
(To recognize amortization of franchises for current year [see computation
above].)
31. (30 Minutes) (Prepare consolidation entries for a purchase where subsidiary
has outstanding preferred stock)
Consideration transferred for common stock $ 7,368,000
Consideration transferred for preferred stock 3,100,000
Noncontrolling interest in common stock 4,912,000
Acquisition-date fair value for Young $15,380,000
Young’s book value 15,000,000
Excess fair over book value 380,000
to building (5-year life) $200,000
to equipment (10-year life) (100,000) 100,000
to brand name (20-year life) $280,000
CONSOLIDATION ENTRIES
Entries S and A combined
Preferred Stock (Young) .......................................... 1,000,000
Common Stock (Young) ........................................... 4,000,000
Retained Earnings (Young) ...................................... 10,000,000
Brand name................................................................ 280,000
Building .................................................................... 200,000
Equipment ............................................................ 100,000
Investment in Young's Preferred Stock (100%) 3,100,000
Investment in Young's Common Stock (60%) .. 7,368,000
Noncontrolling interest ....................................... 4,912,000
(To eliminate subsidiary stockholders’ equity, record excess acquisition-date
fair values, and record outside ownership of subsidiary's preferred stock at
acquisition-date fair value)
31. (continued)

6-22
Entry I1
Dividend Income ....................................................... 80,000
Dividends Paid .................................................... 80,000
(To offset intra-entity preferred stock dividend payments recognized as
income by parent—$1,000,000 par value × 8% dividend rate.)
Entry I2
Dividend Income ....................................................... 192,000
Dividends Paid .................................................... 192,000
(To eliminate intra-entity dividend payments [60% of $320,000] on common
stock. Because the $320,000 in dividends remaining after Entry I1 equals
exactly 8 percent of the common stock par value, the participation factor
does not affect the distribution.)
Entry E
Amortization Expense .............................................. 44,000
Equipment ................................................................. 10,000
Building ................................................................ 40,000
Brand name ......................................................... 14,000
(To record 2011 amortization of specific accounts
recognized within acquisition price of preferred stock.)
32.(15 Minutes) (The effect that various events have on a consolidated statement of
cash flows.)
▪ Sale of building. The $44,000 in cash received from the sale is listed as a
cash inflow within the company's investing activities. If the company is using
the direct approach in presenting cash flows from operations, the $12,000
gain is merely omitted. However, if the indirect approach is in use, the gain (a
positive) must be eliminated from net income by a subtraction.
▪ Intra-entity inventory transfers. Because these transactions do not occur
with any parties outside of the business combination, they are not reflected
in the consolidated statement of cash flows.
▪ Dividend paid by the subsidiary. The $27,000 payment to the parent is
eliminated in consolidated statements and is not a cash outflow from the
consolidated entity. The remaining $3,000 payment to the noncontrolling
interest is reported as a cash outflow from a financing activity.
▪ Amortization of intangible asset. This $16,000 noncash expense appears in
the consolidated income statement. If the combined companies are using the
direct approach to present cash flows from operations, this expense is
omitted. If the indirect approach is used, the expense must be removed from
consolidated net income by an addition.

6-23
32. continued
▪ Decrease in accounts payable. Cash payments have been used to reduce
this liability balance during the period. If the direct approach is used to
present cash flows from operations, the change is added to cost of goods
sold as one step in deriving the cash paid during the period for inventory (an
outflow). If the indirect approach is applied, the decrease is subtracted from
net income in arriving at the net cash generated from operations during the
period.
33.(20 Minutes) (Determine cash flows from operations for a consolidated entity.)
DIRECT APPROACH
Cash revenues (add book values, eliminate intra-entity transfers,
and add decrease in accounts receivable) ................................... $648,000
Cash inventory purchases (add book values, eliminate
intra-entity transfers, eliminate unrealized gains, add increase in
inventory, and add decrease in accounts payable)...................... (370,000)
Depreciation and amortization (omit as noncash expenses)............ -0-
Other expenses (add book values) ..................................................... (40,000)
Gain on sale of equipment (omit because this is an investing activity) -0-
Equity in earnings of Knight (intra-entity so not included) .............. -0-
Cash generated from operations ............................................. $238,000
INDIRECT APPROACH
Consolidated net income (computed below) ..................................... $216,000
Adjustments:
Depreciation and amortization ................................................. 61,000
Gain on sale of equipment ....................................................... (30,000)
Increase in inventory ................................................................ (11,000)
Decrease in accounts receivable ............................................. 8,000
Decrease in accounts payable ................................................. (6,000)
Cash generated from operations ........................................ $238,000
Consolidated Net Income = $206,200 + 9,800 = $216,000 or computation below:
Revenues (add book values and subtract intra-entity transfers) $640,000
Cost of goods sold (add book values, less intra-entity
transfers and beginning unrealized gain, plus ending
unrealized gain) ......................................................................... (353,000)
Depreciation and amortization (add book values plus
amortization from excess fair value allocations) ................... (61,000)
Other expenses (add book value) ................................................. (40,000)
Gain on sale of equipment ............................................................. 30,000
Consolidated net income .......................................................... $216,000

6-24
34. (30 Minutes) (Compute basic and diluted earnings per share for a parent and its
100 percent owned subsidiary, both with convertible bonds.)
Basic EPS—Porter Company:
Porter's reported income ......................................... $150,000
Street's reported income ......................................... 130,000
Amortization expense .............................................. (10,000)
Consolidated net income (all to Porter) ............. $270,000
Porter shares outstanding .................................. 60,000
Basic earnings per share ($270,000 ÷ 60,000) ........ $4.50
Diluted EPS—Street Company
Street earnings after amortization ........................... $120,000
Shares outstanding .................................................. 30,000
Basic earnings per share (120,000 ÷ 30,000) .......... $4.00
Street's earnings assuming conversion of its bonds
($120,000 + $24,000 interest saved net of tax) .. $144,000
Street's shares assuming conversion of its bonds
(30,000 + 10,000) .................................................. 40,000
Diluted earnings per share (144,000 ÷ 40,000) ....... $3.60
Because diluted earnings per share is less than basic earnings per share, the
convertible bonds are dilutive and should be included.
Porter’s share of Street’s diluted earnings:
Total shares assuming Street bond conversion .... 40,000
Shares owned by Porter ........................................... 30,000
Porter's ownership percentage (30,000 ÷ 40,000) .. 75%
Street's earnings for diluted EPS (above) .............. $144,000
Porter's ownership percentage ................................ 75%
Earnings attributed to Porter company .................. $108,000
Porter’s earnings and shares for diluted EPS:
Porter's separate income ......................................... $150,000
Street’s income applicable to Porter (above).......... 108,000
Interest saved (net of tax) on assumed
conversion of Porter's bonds ............................. 32,000
Diluted earnings to Porter......................................... $290,000
Porter shares outstanding ....................................... 60,000
Additional shares from assumed bond conversion 8,000
Diluted shares ........................................................... 68,000
Consolidated income statement EPS amounts for Porter Company:
Basic earnings per share (above) ............................ $4.50

6-25
Diluted earnings per share ($290,000 ÷ 68,000) ..... $4.26
35. (15 Minutes) (Compute diluted EPS. Subsidiary has stock warrants outstanding)
Figures For Sonston's Basic EPS
Net Income .................................................................... $200,000
Shares outstanding ....................................................... 40,000
Assumed conversion of stock warrants ...................... 10,000
Repurchase of treasury stock with proceeds of stock
Warrants (10,000 × $10 = $100,000 ÷ $20) .................... (5,000) 5,000
Shares for basic earnings per share computation....... 45,000
Shares controlled by Primus: 40,000 + (20% of 5,000) = 41,000
Percentage of total held by Primus: 41,000 ÷ 45,000 = 91% (rounded)
Income to be included in parent’s diluted EPS = $200,000 × 91% = $182,000
Parent’s Diluted Earnings Per Share:
Net income – Primus ..................................................... $600,000
Net income included from Sonston .............................. 182,000
Earnings for diluted EPS .......................................... $782,000
Outstanding shares of Primus ................................ 100,000
PARENT’S DILUTED EARNINGS PER SHARE = $782,000 ÷ 100,000 = $7.82
36. (15 Minutes) (Compute diluted EPS. Subsidiary has convertible bonds.)
Figures for Simon's diluted EPS:
Net income ....................................................................................... $290,000
Interest (net of tax) saved from assumed conversion ................... 56,000
Earnings for diluted earnings per share ......................................... $346,000
Shares outstanding .......................................................................... 80,000
Assumed conversion of bonds ........................................................ 30,000
Subsidiary shares for parent’s share of diluted earnings.............. 110,000
Shares controlled by Garfun = 80,000 ÷ 110,000 = 73% (rounded)
Income to be included in parent’s diluted EPS = $346,000 × 73% = $252,580
Earnings for parent’s diluted earnings per share:
Net income—Garfun $480,000
Dividends to Garfun's preferred stock (15,000)
Net Income included from Simon (above) 252,580
Earnings for diluted EPS $717,580

6-26
PARENT’S DILUTED EARNINGS PER SHARE = $717,580 ÷ 80,000 = $8.97 (rounded)
37. (35 Minutes) (Compute basic and diluted earnings per share for parent
company. Subsidiary has stock warrants and convertible bonds.)
Basic EPS—Parent Company (Mason):
Reported income (separate)—Mason ..................... $110,000
Income of Dixon (80%× [$90,000 – 25,000)) ............ 52,000
Preferred stock dividends (5,000 × $4) ................... (20,000)
Mason’s earnings applicable to basic EPS ............ $142,000
Mason's outstanding shares ................................... 50,000
Basic earnings per share ($142,000 ÷ 50,000) ........ $2.84
Diluted EPS—Parent Company (Mason)
Subsidiary income for Mason’s EPS:
Net income after amortization ($90,000 – 25,000)... $65,000
Interest (net of tax) saved assuming bond conversion 30,000
Income applicable to diluted EPS ...................... $95,000
Shares outstanding .................................................. 30,000
Assumed conversion of warrants ........................... 10,000
Assumed acquisition of treasury stock with
proceeds of conversion [(10,000 × $20) ÷ $25] . (8,000)
Assumed conversion of bonds ............................... 20,000
Shares applicable to diluted EPS ...................... 52,000
Shares controlled by parent:
(30,000 × 80% plus 15% × 20,000) ...................... 27,000
Income used in diluted EPS computation .............. $95,000
Portion owned by parent (27,000 ÷ 52,000) ............ 52% (rounded)
Subsidiary income applicable to parent—diluted EPS $49,400
Earnings applicable to Mason’s diluted EPS:
Reported income (separate)—Mason ...................... $110,000
Less: intra-entity interest revenue (net of tax)........ (4,500)
Mason’s income for diluted EPS.............................. $105,500
Income of Dixon (above) .......................................... $ 49,400
Because of assumed conversion, preferred stock
dividends would not be paid .............................. -0-
Earnings applicable to diluted EPS ........................ $154,900
Mason's outstanding shares ................................... 50,000
Assumed conversion of preferred stock (5,000 × 4) 20,000
Shares applicable to diluted EPS ............................ 70,000

6-27
Diluted earnings per share ($154,900 ÷ 70,000) ..... $2.21 (rounded)
37. (continued)
Alternative derivation of Mason’s diluted EPS:
Consolidated net income $(175,000)
Consolidated interest saved (net of intra-entity interest) (25,500)
Consolidated net income assuming bond conversion (200,500)
Subsidiary net income $(90,000)
Excess fair value amortization 25,000
Subsidiary interest saved (30,000)
Income applicable to diluted EPS $(95,000)
Noncontrolling interest share 0.48 (45,600)
Parent's net income applicable to diluted EPS $(154,900)
Shares for diluted EPS 70,000
Diluted EPS ($154,900 ÷ 70,000 shares) $2.21
38. (8 Minutes) (Effect of subsidiary stock issuance to public at a price above
reported value per share)
Equity method investment prior to share issue by Ricardo $490,000
Parent's ownership percentage..................................... 100%
Fair value ownership equivalency................................. $490,000
Adjusted subsidiary fair value after new share issue
(above value plus 10,000 shares at $15.75 each) ... $647,500
Parent's Ownership (40,000 ÷ 50,000 shares) .............. 80%
New ownership adjusted fair value ............................... $518,000
Investment in Ricardo should be increased by $28,000 ($518,000 less $490,000)
39. (20 Minutes) (Effects of two different stock issuances by subsidiary.)
a. Prior to the issuance of the new shares, Albuquerque owns an 80% interest in
Marmon (16,000 shares out of 20,000 shares). The adjusted acquisition-date fair
value is $840,000 ($600,000 + $150,000 + $90,000). After the stock issue, the
adjusted acquisition-date fair value of the subsidiary will increase by $235,000
(the price of the stock) to $1,075,000. Albuquerque' ownership, however, will
only be 64% (16,000 ÷ 25,000). The investment’s equity method balance before
stock issue is $672,000 (600,000 + [$90,000 × 80%]). The book value underlying

6-28
Albuquerque' investment is now $688,000 (64% of $1,075,000) so that a $16,000
increase is recorded by the parent.
Investment in Marmon ............................................. 16,000
Additional Paid-in Capital ................................... 16,000
39. continued
b. Albuquerque's adjusted acquisition-date fair value is $840,000 (see above) prior
to the issuance of the new shares. The 4,000 additional shares increase
subsidiary's total value by $132,000 (the price of the stock) to $972,000.
Albuquerque' ownership decreases to 2/3 (16,000 shares out of a total of 24,000)
for a fair value equivalency of $648,000. Reducing the $672,000 (see a.) to
$648,000 requires a $24,000 decrease to the parent’s APIC.
Additional Paid-in Capital ........................................ 24,000
Investment in Marmon ........................................ 24,000
40.(55 Minutes) (Prepare consolidation entries following a subsidiary stock issue to
outside parties.)
Initially, Aronsen owns 18,000 shares (or 90%) of Siedel's outstanding shares
(the total number of shares can be determined by dividing the subsidiary's
Common Stock account by the $10 per share par value). After issuing 4,000
additional shares, the parent must prepare an adjustment to reflect the
change in its share of the subsidiary’s unamortized acquisition-date fair
value. Because that entry has not been recorded, it is included on the
consolidation worksheet as Entry C1 (labeled in this manner as a correction).
Other consolidation procedures follow as described in previous chapters.
Excess Acquisition-Date Fair Value Allocation and Amortization
Fair value (consideration transferred plus NCI fair value) .......... $649,000
Acquisition-date book value........................................................... (480,000)
Fair value in excess of book value ................................................ $169,000
Allocated to land based on fair value ............................................ 89,000
Allocated to copyrights based on fair value ................................. $80,000
Life of copyrights ........................................................................... 16 yrs
Annual amortization ....................................................................... $ 5,000
Adjustment for Stock Transaction
Adjusted acquisition-date fair value of subsidiary
on new issue date ($649,000 + $90,000 + $152,000) ............... $891,000
Adjusted parent ownership (18,000 shares ÷ 24,000 shares) ..... 75%
Parent’s post-issue equity method value at 1/1/11 ................ $668,250
Equity method balance before new subsidiary stock issue

6-29
Consideration transferred .......................................... 584,100
Increase in book value (90% × $100,000) .................. 90,000
Copyright amortization ($5,000 × 2 years × 90%)..... (9,000) 665,100
Required increase (Entry C1) ........................................................ $ 3,150
40. (continued)
Consolidation worksheet entries:
Entry *C
Investment in Siedel ................................................. 81,000
Retained earnings, 1/1/11 (Aronsen) ................. 81,000
(To convert 1/1/11 balance to full accrual [$100,000 less
two year’s amortization expense $5,000 × 2] × 90%)
Entry C1
Investment in Siedel ................................................. 3,150
Additional paid-in capital (Aronsen) .................. 3,150
(To record adjustment for subsidiary stock
transaction; computation shown above.)
Entry S
Common stock (Siedel) ............................................ 240,000
Additional paid-in capital (Siedel) ........................... 112,000
Retained earnings, 1/1/11 (Siedel) ........................... 380,000
Investment in Siedel (75%) ................................. 549,000
Noncontrolling interest in Siedel, 1/1/11 (25%).. 183,000
(To eliminate subsidiary stockholders' equity accounts
against Investment accountand to recognize noncontrolling
interest. Stockholders’equity balances have been adjusted
for increase in book value during 2009–2010 and the issuance
by the subsidiary of 4,000 shares of stock on 1/1/11.)
Entry A
Land .......................................................................... 89,000
Copyrights ................................................................. 70,000
Investment in Siedel (75%).................................. 119,250
Noncontrolling interest (25%) ............................ 39,750
(To recognize acquisition price allocated to land and
copyrights. Copyrights balance has been reduced for
2009–2010 amortization to arrive at 1/1/11 balance.
NCI now reflects 25% of the unamortized 1/1/11 balance.)
Entry I
Dividend income ....................................................... 15,000
Dividends paid ..................................................... 15,000

6-30
(To eliminate intra-entity dividends recorded by
parent as income [75% × $20,000].)
Entry E
Amortization expense .............................................. 5,000
Copyrights ............................................................ 5,000
(To recognize current year amortization.)
41. (50 Minutes) (Prepare consolidation worksheet for business combination. Intra-
entity bond acquisition is made during the current year.)
Acquisition-date fair-value allocation and amortization:
Equipment $30,000 10-year life $3,000 annual amortization
Trademarks $40,000 20-year life $2,000 annual amortization
As indicated in the problem, the parent is applying the partial equity method.
Hence an Entry *C must be recorded on the worksheet to convert the recorded
figures (amortization is needed for the three years prior to 2012) to equity
balances:
Amortization expense ($5,000 × 3 years) = ............ $15,000 (Entry *C)
Unrealized gain in ending inventory (downstream):
Ending balance ......................................................... $10,000
Markup ($20,000 ÷ $100,000) .................................... 20%
Unrealized gain to be eliminated ............................. $ 2,000 (Entry G)
Loss on extinguishment of bonds:
Book value at date of repurchase ................................. $282,000
Percentage repurchased ............................................... 50%
Equivalent book value ................................................... $141,000
Amount paid ................................................................... 145,500
Loss on extinguishment of bonds ................................ $ 4,500 (Entry B)
Amortization during 2012 changed the carrying value of the bond payable from
$282,000 to $288,000 (found in the balance sheet) and the investment from
$145,500 to $147,000. This amortization also affects interest income and
expense accounts.
Entry A reflects remaining values after three years of amortizations.

Exploring the Variety of Random
Documents with Different Content

One afternoon, several weeks before Christmas, the Higgledy
Piggledies were especially busy, an order for dressed dolls having
come in that had to be filled immediately. Dressing dolls was one of
the things they had not been called on to do before, but if dolls had
to be dressed they must be dressed and the partners made it a rule
never to turn down any form of order.
“We’ll send an S. O. S. for our reserves,” said Josie. “And then the
faithful shall have to stay on and work overtime. It’s Saturday,
fortunately, and we can sleep late to-morrow.”
Ursula proved an able assistant, being very clever at fashioning
the miniature garments.
“I always loved to dress dolls,” she said, “but haven’t done it for
years and years. Of course, Ben and Philip did not want dolls.”
“I’d of wanted one,” declared Philip. “Nobody never asked me
didn’t I!” He had drawn a stool up close to his sister’s knee and
watched her with adoring and wondering eyes as she fashioned a
tiny ruffled apron for a blue-eyed beauty with a saucy turned-up
nose and yellow hair. “I wisht you’d let me hold that dolly until you
finish her dress.”
“Aw, sissy!” jeered Ben. “I wouldn’t let the boys catch me playin’
dolls.”
“I ain’t a sissy,” objected Philip. “I’m all time seein’ fathers wheelin’
their kids out on Sundays. One time I peeked in a window back in
Louisville an’ I saw a man a-huggin’ an’ a-kissin’ his baby an’ playin’
with it jes’ like girls do doll babies. What’s the reason that boys
that’re goin’ to grow up to be big mens can’t play doll babies as
much as men can play with their own babies made out of meat? I
betcher if Mr. Cheatham had played with doll babies some he
wouldn’t of ’spised little boys so much when he got growed up.”

The argument being unanswerable, Ben did not attempt to answer
it, but satisfied himself by asserting it was sissy all the same to play
dolls. Philip looked longingly at the blue-eyed beauty but made no
further request to be allowed to hold it, although the young
dressmakers encouraged him to practice being a father all he
wished. He merely sat and watched the fashioning of the dainty
garments, ever on the alert to pick up dropped spools of thread or
wait on the busy seamstresses.
Mary Louise had come in to help and Laura Hilton and Lucile Neal.
Edna Barlow had promised to give her Saturday afternoon to the
rush order and Jane Donovan had missed a fashionable tea, so that
she, too, might have a finger in the doll pie. Some of the girls had
worked all day, not even going home for luncheon but having what
Josie called a “pick-up” at the shop.
“A gross of dolls to be dressed is no idle jest,” exclaimed Elizabeth,
“not meaning to fall into poetry, so don’t anybody accuse me of
lisping in numbers. What do you think of my flapper?” She held up a
doll in a fringed skirt and slipover sweater with neat collar and cuffs,
bobbed hair, rakish hat and even cleverly contrived gaiters
unbuttoned according to the last cry in flapperdom.
There was an outcry of approval from the workers.
“One doesn’t have to use a microscope to see my stitches, but I
do think my doll is cute,” declared Elizabeth.
“Cute is a silly word to use for her,” laughed Mary Louise. “To my
mind she has real literary value.”
“I want to dress one to look like an old-fashioned grandmother,
now,” said Elizabeth, “but we haven’t any black silk. I want her to
frown on the flapper.”
“What did I tell you? Elizabeth always has to bring literature into
life, even into the dressing of dolls. I’ll go get some black silk

suitable for grandmothers for all time,” cried Mary Louise, jumping
up and dropping her thimble and spool of cotton, which little Philip
quickly restored, thereby gaining a kiss from Mary Louise, to whom
all children appealed.
“I’ll go instead of you,” suggested Ursula. “I have a few other
purchases to make. It is very cold and you have a little cough.”
It was agreed that Ursula should do the shopping. Ben also had to
go out to deliver some linen Josie had laundered, as well as some
other parcels.
The girls settled themselves again, working rapidly, each one
endeavoring to outdo the other in fashioning clever and out-of-the-
way costumes—putting in the literary touch according to Mary
Louise.
“This is quite like old times,” said Laura Hilton. “This is the same
crowd we had when we were working on Mary Louise’s wedding
clothes.”
“Except for that terrible Hortense Markle,” shuddered Jane
Donovan.
“She didn’t seem terrible on that morning, however,” said Edna
Barlow. “I thought she was the loveliest person I had ever seen, and
do you remember the song she sang as she embroidered the rose?”
“Yes, it was ‘Gather Ye Rosebuds While Ye May,’ and I also
remember she embroidered a faded place on the edge of one petal.
I couldn’t help hating her for doing it, too,” said Irene. “It seemed so
cynical. You remember she declared it was because the song
suggested it to her. She might have put a worm in the heart of the
rose if suggestion was anything.”
“Well, well, poor Hortense! She loved her Felix anyhow,” sighed
Mary Louise, who had a hard time being persuaded that anyone was

really wicked. “Let’s change the subject. Don’t you think Miss Ellett—
Ursula—is lovely?”
“She is indeed!” from all of the girls.
“Where on earth did you make the find?”
Then the story of Ursula and her misfortunes had to be recounted.
“Well, I call her pretty spunky,” said Lucile.
“And aren’t the little boys precious?” put in Mary Louise. “Did
Philip go with Ben?”
“No!” answered Josie, “Ben went alone; he thought it was too cold
for Philip. He must have gone with Ursula.”
Ursula returned from her shopping expedition. An unwonted pallor
had spread over her face and her mouth was drooping at the
corners as it had when she first came to the Higgledy Piggledy Shop.
“Here is the black silk,” she said. Her voice had a strange
tonelessness. Josie looked up quickly at her friend. The other girls
seemed not to notice the change in the girl.
“What is it, Ursula?” Josie asked following her to the rear of the
shop.
“What is what?”
“Now, of course, Ursula, if something has happened that you don’t
want to mention to me, it is your own business; but I want you to
understand that if it is anything I can assist you in I am ready.”
Ursula looked into Josie’s honest face and hesitated a moment.
“Somehow everything is so wonderful and peaceful and happy up
here with the Higgledy Piggledies that I can’t bear to bring any

troubles among you. I haven’t a real trouble but just a nameless
dread.”
“Out with it then! If you name it perhaps we can dispel it. The
girls can’t hear us talking back here—and besides they are chattering
so they couldn’t make out our conversation if we shouted.”
Ursula, however, did not shout but only gasped:
“Miss Fitchet is in Dorfield!”
“You mean the woman—the nurse—your stepfather wanted to
have live in your home as housekeeper?”
“Yes! Oh Josie, she is a terrible person and as unscrupulous as the
worst character in fiction! I feel she is in Dorfield for some evil
purpose. I can’t imagine just why, but her being here depresses me
so I can hardly bear life.”
“You mean she may work some ill on you or your brothers? But
what could she do?”
“I can’t tell. Mr. Cheatham already has all the money we should
have and—oh, Josie, I just can’t tell what it is but—but—” and here
the poor girl burst into tears.
Josie drew her into her own bedroom, which was a small cubby
hole tucked away in the rear of the shop.
“Now, now, you poor, dear thing!” Josie could be remarkably
tender, considering she was such a determined and relentless little
detective. Her voice now had a motherly ring. “You mustn’t feel so
despondent over a thing like this. I don’t know what you dread—”
“I don’t know myself.”

“Well, whatever it is I can promise you that I am here to see you
through. Tell me what was this Fitchet person doing?”
“I think she was following me, because I saw her several times as
I went in and out of shops. She was heavily veiled, but her face isn’t
what gives her away. I’d know her figure anywhere, under any
disguise. She is quite stout, with abnormally small feet, and always
carries her head a little on one side and she has a peculiar way of
walking, never keeping on a straight line but unconsciously
zigzagging.”
“Why, bless my soul! You’d make a good detective,” laughed Josie.
“I can actually see the person from your description. Now I’ll go out
and take Captain Charlie Lonsdale into my confidence and have him
keep an eye on the person. He is chief of police, you know, and my
very good friend. How old is Fitchet?”
“About thirty-five, I should say. She is a trained nurse and Mr.
Cheatham had her nurse my poor little mother in her last illness.
Thank goodness the boys did not have to know her. I sent them to
friends in Peewee Valley during Mother’s illness.
“Oh, she is horrible, and such a liar and so unkind! I couldn’t
begin to tell you of all the despicable things she is capable of doing
and saying.”
“Well, never mind thinking about such things, my dear. You wash
your face now and calm yourself. It is such a cold day I am sure
there will be nothing doing in the tea room this afternoon. Why don’t
you get the boys and go home and have a nice little cozy time away
from the old Higgledy Piggledy?”
“And leave you girls with all those dolls to finish? Indeed, my dear
Josie, I’m not made of that kind of stuff. I’ll be with you in a minute.”
“I might have known it,” smiled Josie. “You are not of the deserter
type. After all you would be better off here with us. I believe I’ll

keep you all night. There is always plenty of room in the Higgledy
Piggledy for visitors.”

Fundamentals of Advanced Accounting 4th Edition Hoyle Solutions Manual

CHAPTER IV
LOST AND FOUND
In a few moments Ursula was back at work on the dolls, all trace
of tears banished from her pretty face. Josie was preparing to go
out, declaring she must purchase a pot of glue—that she could not
dress dolls without glue. In reality, she was going to call on the chief
of police. Ben came running in, cheeks rosy, eyes shining and
pockets bulging with money collected from patrons to whom he had
delivered parcels.
“Sis, where’s Phil?” he cried, “I got a pink sucker for him.”
“Philip! Why, I thought he was with you,” said Ursula, looking up
from her work.
“No, he didn’t go with me. It was so cold an’ he was so stuck on
that doll baby. I reckon he’s up in the tea room. Phil, oh Phil!” he
called.
There was no answer. Irene was sure he had gone with his sister
and Mary Louise thought he had gone with Ben.
“Maybe he went home,” suggested Ben. The Elletts lived in a tiny
apartment across the street from Mr. and Mrs. Conant.
“But he knew we were to have tea here,” objected Ursula, who
had turned deathly pale. “But maybe you had better go see, Ben,
and oh, please hurry!”
“Sure I will, Sister, you needn’t get scairt. Phil ain’t far away. I
reckon he’ll turn up before I get to the corner an’ I’ll have the run

for nothin’—but I ain’t mindin’.”
“Dear Ben!” Ursula smiled on the sturdy boy, in spite of the
nameless terror that possessed her soul in regard to the little
brother.
“If only I didn’t know that Fitchet was in Dorfield!” Ursula
whispered to Josie.
“Well, maybe it’s a good thing you do know it,” said Josie.
“Everybody turn in and give a good hunt through the shop.”
Mary Louise and Elizabeth, with the other girls helping, had
already looked high and low, under the bed in Josie’s room, behind
an antique high-boy for sale in the shop, and had even shaken the
draperies lying across a table and peeped in a carved Florentine
chest.
At first it was more or less a game all were playing, as they were
sure the little fellow was somewhere in the shop, but as a thorough
search did not reveal him, the matter began to take on a more
serious tone and the game was changed.
Without a word, Josie hurried to her old friend, Chief Lonsdale.
Quickly she told him her errand.
“Stout woman, about thirty-five, abnormally small feet, always
carries her head on one side and has a way of zigzagging when she
walks.”
“You have seen her then?” laughed the chief.
“No, but that is the way Ursula Ellett describes her.”
“What color hair?”

“She didn’t say, but you know and I know and the wig maker
knows that the color of hair doesn’t cut much ice. Anyhow, please
keep your eyes open for this person, who goes by the name of
Fitchet at home and is a trained nurse.”
The chief promised and rang for a plain clothes man to get
immediately on the job, while Josie hurried back to the Higgledy
Piggledy Shop.
Ben had returned and reported no sign of his little brother at their
home. Darkness had set in and snow had begun to fall like a fine
powder. Ursula sat like a statue, dolls piled around her. She looked
up as Josie entered and tried to smile. Josie reported that she had
set the police on the track of Fitchet and if it could be possible that
she had anything to do with the disappearance of little Philip she
would be found forthwith.
“What could she want with him?” Josie asked. “Not that he isn’t
wholly desirable and lovely, but would that be anything to the type
of woman Miss Fitchet seems to be?”
“I don’t know, but Mr. Cheatham is capable of any villainy and not
above any small meanness. I must get out on the street and help
hunt my darling,” cried Ursula.
“No, my dear, you must stay right here. It is very cold and you are
so wrought up you could do no good. The boy will be found in no
time and you must be ready to hold him in your arms when he gets
back,” declared Josie.
“I’ll go mad waiting here, doing nothing,” wailed Ursula.
“Well, do something then,” suggested the practical Josie. “Put the
dolls that have been dressed in their boxes and pile them up in the
back of the shop. All on that table are done.”

“I didn’t quite finish the school girl I was dressing,” said Ursula,
beginning mechanically to sort out the dressed dolls. “I mean the
one little Philip liked so much. Why, I can’t find her! Where can she
be? I left a needle sticking in her apron. She must be in this pile—
No, she is gone! Strange!”
“Well, there is one thing that is not gone,” said Josie suddenly
making a dive under the table where the young seamstresses had
been so busy plying their needles, “and that’s Phil’s muffler and
mittens. And here’s his cap! Bless me, if there isn’t his overcoat
under that pile of scraps!”
Ursula caught the little red mittens and held them to her aching
heart.
“Philip! Philip! My precious baby!” she moaned.
Josie straightened up and smiled down on Ursula.
“Did you girls look in every crack and cranny of the shop and tea
room?”
“Every one,” declared Elizabeth, who was preparing to go out on
the street and aid in the search for the lost child.
“Are you sure?”
“I can’t think of any spot we have not searched,” answered Mary
Louise, whose eyes were brimming over in sympathy for the
sorrowing Ursula.
Josie stood in the middle of the shop and into her eyes came the
strange dull look she often had when she was “picking up a scent”
as it were.
“Philip missing—also the blue-eyed, yellow-haired doll he admired
so much,” Josie muttered.

“Ye-es—an’ I went an’ called him a sissy,” sobbed Ben, who
suddenly realized that things looked pretty serious.
“He wouldn’t go out in the cold, hunting his sister or brother,
without his overcoat and mittens,” Josie murmured. Then she lost
the strange, dull look in her eyes and, giving a short laugh, she
snapped: “That kid is in this Higgledy Piggledy Shop!”
“Well, he must have made himself mighty little,” said Mary Louise.
“I’m going home and get Danny. He’s working on some blue prints
this afternoon. Danny will help us. Irene, if you come now I can take
you home. I’ll bring my car up the alley. It is too blizzardy for you to
think of going home in your chair.”
Irene could let herself down the little dumb-waiter, converted into
an elevator, and when Mary Louise would bring her car close up in
the alley the lame girl would by the aid of crutches swing herself
from chair to car.
“Oh, thank you, my dear,” replied Irene, “but I can’t think of going
until Philip is found. The snow is so dry I am sure I can get my chair
through it. You go and get Danny, though. I know he will be helpful.”
At the mention of Irene’s going, Josie walked to the little door
which opened on the elevator shaft. As she started to open it Mary
Louise called to her:
“Irene is not going yet, Josie!” thinking that Josie was preparing to
assist the lame girl.
“I have an idea she is going pretty soon,” Josie answered. She
flung open the door and then began to laugh.
“Come here, Ursula! All of you come here!” she called softly.
The girls and Ben hurried to the rear of the store, Ursula running
like the wind. Lying on the floor of the tiny elevator was little Philip.

He was fast asleep and clasped in his arms was the blue-eyed, fluffy-
haired doll with the ruffled apron, Ursula’s needle sticking in it. It
was lucky it had stuck in the apron and did not find its way into little
Philip.
The child made a beautiful picture at which the girls gazed
breathless.
“Poor lamb, he’s playing papa,” said Josie softly and Philip stirred
in his sleep, restless from the light turned on him, and then he
opened his violet eyes.
“I ain’t a sissy, Ben,” he declared, “but this little doll baby had the
tummy ache an’ I hadter take her off an’ put her to sleep. She likes
this little bitsy house an’ I reckon The Lady in the Chair ain’t a
mindin’ if I borrow it from her.”
When everything settled down and the Higgledy Piggledy Shop
was cleared of its visitors and helpers and Josie was left alone she
got Chief Lonsdale on the telephone.
“Hello, Chief,” she said, “the little boy is found and the fat woman
with the little feet and head on one side had nothing to do with his
disappearance, but Captain, I wish you would have Clancy look her
up all the same and kind of keep an eye on her while she stays in
Dorfield. You can do that for me, cannot you, Captain?”
“All right!” boomed the captain. “What you say goes.”

CHAPTER V
URSULA WRITES A LETTER
The Christmas rush came on the Higgledy Piggledies with such
force that the fright about little Philip was soon banished from all
their minds.
“I may have been mistaken about Miss Fitchet,” Ursula confessed.
“That woman I saw may not have been she. I dread her so that I
can’t help thinking about her. I may have fancied a resemblance.”
“So you may,” said Josie solemnly. “Anyhow you have not been
worried by her and the chances are she will never turn up again,
even if the person you saw was Miss Fitchet.”
With the help of Captain Lonsdale, Josie had come to the
conclusion that the dreaded nurse had been in Dorfield, but for what
purpose the detective put on the case had not been able to discover.
At any rate she had left in a day or so and had not returned.
“Probably she was here just to satisfy the curiosity of herself and
her employer,” Josie decided. “I hope she will stay away now.”
The girl detective said nothing to Ursula about the information
gained by the police concerning Fitchet. It was meager and not very
satisfying and if Ursula had begun to feel that she had been
mistaken and had only fancied she had seen the woman, so much
the better for Ursula. Certainly the trained nurse had a perfect right
to visit Dorfield and even to go heavily veiled if she had a mind to.
Josie regretted, in a way, that Ursula had so entirely cut herself off
from Louisville and her girlhood friends. She had, in a measure,

flitted from her old home and left the situation in the hands of an
unscrupulous man. No doubt he was making the most of the power
he had thereby gained.
“Suppose letters for you come to Mr. Cheatham. What directions
did you leave about forwarding them?” she asked Ursula.
“It would do no good to leave directions. Mr. Cheatham would see
to it that nothing I want would ever reach me. There is no way to
get satisfaction of my stepfather. I realized that and so I left. If I can
just be allowed to keep my darlings with me and bring them up
without his contaminating presence, that is all I ask,” said Ursula.
“In what way could he contaminate the boys?”
Ursula considered—and answered:
“In the way a wicked person could influence impressionable
children—by making fun of high ideals; mocking at religion;
applauding any clever evasion of the truth and then flying into a
rage at the slightest excuse and whipping the boys if they happen to
do something that annoyed him for the time being, although that
same action might at a former period have brought forth
commendation. I have heard him, in all seriousness, tell my little
brothers that the greatest crime of all was to break the eleventh
commandment, which is: ‘Thou shalt not get found out.’ There is a
sturdiness about Ben that usually resisted his influence, still he is
nothing but a little boy and was not always proof against Mr.
Cheatham’s wiles and cleverness. As for poor little Philip, he actually
was fond of the man at times and I believe Mr. Cheatham had a
spark of affection for him, but nothing could be worse than to have
such a man care for you. He is dishonorable, unscrupulous and
vacillating in everything but villainy.”
“I thought you said both of the boys hated and feared him.”

“So they did usually, but Philip is such a baby and an ice cream
cone had a marvelous effect on the poor kiddy—that and a few
gentle joking words.”
“Have you never communicated with any friends in Louisville since
you left?”
“I have very few friends,” and Ursula flushed painfully. “I have for
so many years been so taken up with my sick mother and the
children, and then Mr. Cheatham has in some underhand way cut me
off from what intimates I might have had. The Trasks, at Peewee
Valley, are the only real friends I own.”
“And the Trasks—have you written them?”
“No. You see I knew Mr. Cheatham would take it for granted they
would keep in touch with me and would worm out of them all they
knew concerning me and so I simply could not put them in the
uncomfortable position of having connived with me in leaving as I
did.”
“Is Mrs. Trask a young woman?”
“About fifty, I think.”
“Any children?”
“Two—a daughter and a son.”
“Are they about your age?”
“Anita is my age and Teddy is several years older.”
“Do you think it is quite fair to keep your friends in ignorance of
your whereabouts?”
“I don’t know, Josie. I acted for the best, I felt, at the time. Now I
don’t know.”

“Put yourself in the place of your friends,” suggested Josie. “How
would you like it if Anita Trask were to be in trouble and needing a
friend and she did not call on you?”
“Oh, but she has her mother and father and her brother!”
“Certainly, and so had you at one time, but she might lose them
and have nobody left but you to help her. Would you not have been
willing to share to the last crumb and drop with her?”
“Indeed I would have, or with any member of the family!”
“Exactly! And don’t you see that by trying to save them worry and
annoyance you have, in a measure, caused them bitter sorrow and
trouble?” Josie’s tone was a little stern.
“I know it—I know it, but not so much trouble as they would have
had, had Mr. Cheatham been given any cause for complaint against
them. He is a terrible man.”
“I believe you exaggerate his power for evil. He may want to be a
terrible man, but I can’t see what he could do to the Trasks if you
should communicate with them and let them know you are well and,
we might add, happy.”
“Indeed we might, Josie, thanks to you and my other wonderful
friends here in Dorfield. If you think it best I’ll write to Mrs. Trask
this very night. I always saw them on Christmas, and now at least I
can write to them so the letter will reach them before that day and
reassure them. I know I am obsessed with fear of Mr. Cheatham and
what he might be able to accomplish in the way of harming us. I
must get over the feeling.”
“You certainly must! Remember there is a perfectly good law in
this land of the free and home of the brave, and a fairly good police
force to carry out the law. There is nothing Cheatham can do to you,

either, for that matter. You tell me he was not appointed your
guardian?”
“No, my father appointed Uncle Ben executor of his will and
guardian in case my mother should marry again, but Mother was
influenced by Mr. Cheatham to dispute Uncle Ben’s rights to dictate
to us and so Uncle Ben left the matter in her hands. If Uncle Ben
would only come back!”
“Well, suppose he does come back—has come back, in fact. How
under Heaven would he find his wards, if they go off and run a tea
room in a quiet little spot like Dorfield?”
Ursula wrote to her friends at Peewee Valley that same evening,
giving them a detailed account of the happenings to herself and
small brothers, begging their forgiveness for her long silence and
explaining to them the reason for her running off without informing
them of her plans. When the letter was in the mail the girl felt
happier than she had for a long time, but still doubts would arise as
to the wisdom of having written.
Poor Ursula had fallen in the habit of worrying. She was naturally
of a timid disposition and the hard life she had endured with her
stepfather had increased the tendency to fear imaginary evils as well
as the ones of which there was no doubt. She could not say what it
was she feared from Mr. Cheatham and the evil Miss Fitchet, but
with her at all times was a kind of nameless dread. The gay, bright
atmosphere at the Higgledy Piggledy Shop did much to dispel this
gloom, but at times it enveloped her in spite of her endeavors to
break through it. Now that she had at last written the dear old
friends the cloud seemed somewhat lifted.
“I hope it is for the best,” she said to Josie, with a note of cheer in
her voice.
“Sure it is for the best! Brace up, Ursula! I can’t see what good it
is to worry so much about it. Do what you think is right and then

trust in the Lord. What harm could come of writing to old friends?
No harm in the world. I’m glad you have told them as to your
whereabouts.”
In her heart Josie could not help a feeling of impatience over
Ursula’s timidity. Josie herself never acknowledged fear of anything,
known or unknown. She had a philosophy that carried her through
all dangers.
“I wish she would buck up and not give in to this nameless fear
about what Cheatham might or might not do,” Josie mused. “Of
course, if I had two little brothers like Ben and Phil I might not be so
sure of myself,” she continued, “but what under Heaven could
happen to those kids here in Dorfield?”
It was Christmas Eve and the Higgledy Piggledy Shop was closed
for a week. It had been a strenuous time and all of the girls were
tired and needed a rest. Orders of all descriptions had poured in and
in the midst of the rush Josie had been employed in her capacity of
detective to track a lavender suit belonging to a dressy woman, who
sent it to a cleaner by her colored maid. Suit and maid had
disappeared off the face of the earth. Josie had found both maid and
suit. The maid was the same color but the suit, alas! was a vivid
scarlet. Cleaners are also dyers.
Josie was glad the rush was over. Even her iron nerves were
stretched by the Christmas rush. She was alone in the shop. It was
good to be alone even if it did happen to be Christmas Eve. The
partners had gone for the week. Mary Louise had come in laden with
parcels, her cheeks glowing with the crisp December air and her
eyes shining from the joy of giving. She had insisted upon taking
Josie home with her for the holidays but to no avail.
“I’ll come and have Christmas dinner with you. I have a lot of
things to do and loose ends to tie up and I’ll get it over with while

the shop is closed. I’m not lonesome, dear, so don’t worry about me.
Go on home to your Danny and forget your spinster friends.”
“Oh, Josie, how funny to call yourself a spinster! You won’t be a
spinster for years and years.”
“Look in the dictionary and see if I’m not one already. That book
says a spinster is one who spins and also an unmarried woman. I
certainly am an unmarried woman even though I’m not a very old
one as yet. I am also a spinster in that I am spinning a web in my
mind in which to catch poor Ursula’s unscrupulous stepfather. I may
never need the web but I am on the alert in case I should have to
spread it out in the path of the unwary. I’ll see you to-morrow, dear.
Good-bye! It was like you to get those presents for Ben and Philip.
Ursula was very happy over them. She is planning a lovely to-
morrow for them. She is a wonderful girl but I wish she would cheer
up.”
Night closed down on Dorfield. It was a white Christmas. Josie
could hear the sleigh bells ringing, as merry parties passed the shop.
She made herself cosy by the open grate which was one of the
attractions of the Higgledy Piggledy. She settled herself snugly in a
winged chair, an antique they were selling on commission, and
drawing her reading light closer with a contented sigh she opened
her book—a new detective story.
“Clever, very clever!” she said aloud. Josie had a habit of talking to
herself when left alone. “Clever as to story but the author is afraid to
draw characters with any clearness for fear of giving away his plot. If
the characterization is good then the characters must act according
to the way such persons are bound to behave and so the secret is
out long before the book has reached its climax. A detective tale
leaves one in doubt right to the end, as to who has done the direful
deed. That is because the folks in the books are like so many paper
dolls, as far as being real people is concerned—painted on one side
with no innards.”

The girl read on and on. The shop was quiet, with that abnormal
stillness that settles on the business section of a town after business
hours. As it was Christmas Eve and business is not over on that day
until midnight, this extreme quiet meant that the hour had struck
and it was really the dawn of Christmas Day. Still Josie read on.
“It’s my one excess and I’m going to indulge in it since Christmas
comes but once a year,” she announced to the accusing ship’s clock
over the mantel as it chimed out “eight bells.” She mended the fire
with a large lump of coal from the hod and settled herself again.

CHAPTER VI
PHILIP IS KIDNAPED
The detective story ended, as all good detective stories do, with
the mystery solved, the criminals brought to justice and the most
unlikely person in it rounded up as the villain.
“Good enough, but I could write a better one if I had time and
paper and knew how to write,” yawned Josie.
Suddenly the telephone bell broke the stillness. It made Josie, the
dauntless, jump.
“Stuff and nonsense—this time o’ night! I’ve a great mind not to
answer it. I bet it’s somebody playing a joke on me and when I take
down the receiver will just say, ‘Christmas gift!’”
The ringing persisted and Josie grumblingly called, “Well? Higgledy
Piggledy Shop! Miss O’Gorman at the ’phone!”
“Josie! Josie! This is Ursula! Can you hear me?” The voice was
faint from agitation.
“Yes! What’s up?”
“Little Philip is gone!”
“Gone where?” Josie asked. She was ashamed of herself the
instant she had asked what she considered a very foolish question.
If Ursula had known where, she would naturally have gone and
found her little brother without delay.

“I don’t know,” continued the frantic sister. “The boys went to bed
early and I sat up putting the finishing touches on some little
presents I was making. They were fast asleep. I looked in on them
for a moment before I ran across the street to take some things to
the Conants and Irene. I did not latch the door to the apartment as I
did not expect to be gone a minute. That was about nine o’clock. I
am sure I was not out of the house five minutes in all. Mr. and Mrs.
Conant begged me to come in but I merely left my Christmas parcels
and after chatting with them a moment in the hall ran back home. I
did not even go in to see Irene, but sent her a message. When I got
home I did not go to bed but very foolishly sat up and sewed awhile
and then read. I wanted to be sure the boys were fast asleep before
I filled their stockings which they had hung up for Santa’s visit. I
only went in their room a few minutes ago. Ben was fast asleep and
Philip was—gone. His clothes are gone, too—overcoat, hat and
mittens, but they took him off wrapped in a blanket.”
“Have you looked everywhere?”
“Everywhere!”
“I’ll be right over,” said Josie, hoping she kept from her voice a
certain impatience and weariness she could not help but feel.
Remembering the scare about little Philip before and the frantic
search of some six or eight persons and how easy it had been to
find him, she was sure that the little boy was safely tucked away
under the bed or behind the bureau or somewhere.
“You can’t lose that kid,” she declared, as she drew on her
goloshes preparing for the snow, which was deep and drifting. “If
Ursula would only buck up! I was a fool not to get my beauty sleep
when I had a chance. I think I’ll get Bob Dulaney in on this. He did
me a good turn in the Markle case.”
Bob Dulaney was a young newspaper reporter who was rapidly
making a name for himself. It was he who had grappled with Felix

Markle and had overcome that doughty if evil knight with the terrible
scissors-hold known to wrestlers. But that is another tale. At any
rate he was a fast friend to the Higgledy Piggledies, ever ready to do
their bidding. He was all devotion to Irene, his great strength always
at the service of the lame girl.
It took but a moment to get the young man on the wire.
“Hello, Bob! Josie O’Gorman! Want to help me?”
“Sure!”
“There may be a story in it, but more likely not. Anyhow, you will
be of great assistance. Ursula Ellett’s kid brother is missing. I am on
my way there now. She’s just phoned me. If I don’t find him under
the bed or behind the door I will let you know.” Josie always used
the telephone as though someone were counting words on her.
“Let me know much! I’ve got my Lizzie racer here and will come
pick you up. Snow’s mighty high for runts. Be at your door by the
time you get bundled up. So long!” And he’d hung up.
Josie laughed. Bob Dulaney always treated her like a boy, and she
enjoyed it. It was rather nice not to have to plough through the
drifts. She put on a thick ulster and heavy gloves, started to lock the
door of the shop but paused a moment in thought.
“I’d better take my grip,” she mused. “I may have to catch a train.”
Josie kept a suitcase packed for an emergency—“As clever crooks
and detectives always do,” she had said.
A muffled toot announced Bob and his tiny racer.
“What! Going on a trip?” he asked, as Josie came running down
the steps with the suitcase.

“Never can tell. I hope not. I also hope there is no story for your
paper at the end of this mad ride, but we must be prepared.”
The racer was slipping through the dry snow with the ease that an
airplane might breast a bank of clouds.
“If you weren’t you and I, I,” laughed Josie, “we might be taken
for an eloping couple.”
“I’d much prefer being taken for that than to be taken for
speeding,” declared Bob, as they swirled around a corner almost
knocking the brass buttons off a belated policeman. The poor man
rubbed his stomach sadly as though he had been actually touched.
“Them youngsters better be glad they didn’t hit me,” he grumbled.
“If it wasn’t Christmas Eve I’d follow ’em up.”
They found the house in which Ursula lived all astir. It was an old
mansion that had been converted into an apartment house, where
the shabby genteel had taken refuge, but kind hearts beat under the
worn coats and the lodgers had one and all come to Ursula’s
assistance. To be sure some of them told dismal stories about the
lost Charlie Ross of the last century, and how his mother and father
had hunted him high and low, spending fortunes on the search, but
never giving up, following in vain clue after clue that took them in all
kinds of places and climes until they were an old white-haired couple
bent and broken in spirit.
Others of the fellow lodgers were more practical in demonstrations
of sympathy. One old lady put on her spectacles and solemnly began
to look over the pieces in her scrap bag. She had always been
finding things that were lost in that capacious bag. A nervous,
middle-aged bachelor was going around to the different apartments
and solemnly poking up the chimneys with a hearth broom.
“Persons often hide up flues in motion pictures,” he said.

Poor little Ben, who felt somehow that he was responsible for his
brother’s disappearance, since he had slept through his flitting, was
profiting by Josie’s success in finding Philip when he was lost before
by making a systematic search. With tense mouth and burning eyes
he was examining every crack and corner of the old house.
“Th’ain’t any dumb-waiter or elevators here,” he sobbed when
Josie made her appearance, “but oh, Miss Josie, I’ve looked between
the mattresses an’ behind the bureaus an’ up on top the wardrobes
in every ’partment here.”
“I know you have, my dear,” said Josie gently, “but tell me, Ben,
who is in the apartment next to yours?”
“Th’ain’t nobody. That’s been vacant three months.”
Josie considered, and asked:
“Have you looked in there?”
“No’m! The door is locked.”
Josie slipped from her pocket a skeleton key which she fitted
neatly in the lock of the door, and with a sure turn of her strong little
wrist she turned the bolt.
“Humph! It looks as though we were none of us safe in our beds,”
remarked a sharp-nosed dressmaker, who had the apartment directly
across the hall from Ursula’s. “If it’s that easy to open a door.”
“Inside bolts are safer,” said Josie, “but even those are not proof
against crooks and their tools.”
The room was dark and dusty. Josie produced a flash light but
discovered the electric light had not been turned off since the
departure of the former tenant and by touching the proper button
she quickly had a flood of light with which to continue her

investigations. With no ceremony she closed the door on the curious
crowd of lodgers, admitting only Bob Dulaney.
“Stand still, please,” she commanded. “We must examine the
tracks in this room. It is covered with the dust of ages but someone
has been in it recently. Look! It’s a woman with short rather broad
feet and high heels, run down—a tendency to fallen arches I should
say because of the heels being worn on the inside. Whoever has
been in here has been at this window. See! It is possible to look into
Ursula’s living room from this window. Look! She has even scraped
the frost from the pane to get a better view. This pane is not so
covered with grime as the others. Umhum! She is a little taller than I
am, but not much. Rather a chunky party I should say.”
“Wears gilt hairpins, too,” laughed Bob, stooping and picking up
what was even more a give away as to sex than the uncertain tracks
of high heels.
“Oh, you jewel!” cried Josie. “Meaning you and not the hairpin,
Bob. I’m certainly glad you are in on this. I didn’t see the hairpin and
it will mean a lot more to me than anything.”
“Let me present it to you,” said Bob, bowing low with mock
courtesy. “Josie, you delight my soul. I feel like Dr. Watson in
attendance on Sherlock Holmes. But joking aside, I believe if poor
little Philip has really been kidnaped it was by some person or
persons who had been hiding in this room.”
“Sure! But it was only one person because there are no signs of
other footprints. Thank goodness the floor was stained with a dark
varnish. It makes the footprints so much easier to define. Well, Bob,
there is no use in hanging around here. I reckon we’d best get out
and hustle.”
Josie regretted that she had not telephoned police headquarters
immediately after hearing from Ursula that Philip was missing, but
remembering the last time, she had felt the chief might think that

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