Chapter 6 Exercise 4 On January 1, 2011, Pearce Company ...



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Chapter 6 Exercise 4 On January 1, 2011, Pearce Company purchased an 80% interest in the capital stock of Searl Company for $2,460,000. At that time, Searl Company had capital stock of $1,500,000 and retained earnings of $300,000. The difference between book of value Searl equity and the value implied by the purchase price was attributed to specific assets of Searl Company as follows: 375,000 to equipment of Searl Company with a five-year remaining life. 187,500 to land held by Searl Company. 112,500 to inventory of Searl Company. Searl uses the FIFO assumption In pricing its inventory, and 600,000 that could not be assigned to specific assets or liabilities of Searl Company. 1,275,000 Total At year-end 2011 and 2012, Searl had in its inventory merchandise that it had purchased from Pearce at a 25% markup on cost during each year in the following amounts: 2011 $90,000 2012 $105,000 During 2011, Pearce reported net income from independent operations (including sales to affiliates) of $1,500,000, while Searle reported net income of $600,000. In 2012, Pearce’s net income from independent operations (including sales to affiliates) was $1,800,000 and Searl’s was $750,000. Calculate the controlling interest in consolidated net income for 2011 and 2012.

The $600,000 that could not be assigned to specific assets and liabilities is assumed to represent goodwill (the unidentifiable intangible asset), which is not amortized under current GAAP but is reviewed periodically for impairment. In contrast, identifiable intangible assets would be amortized if they have a definite life but not if the life is indefinite in duration. Thus, only if the $600,000 pertained to an identifiable intangible asset with a finite life would amortization be required. We assume that is not the case here.

2011

Pearce Company's net income from its independent operations $1,500,000

Amount of income not realized in transactions with third parties ($90,000 – [pic]) (18,000)

Pearce Company's income from its independent operations that has been realized

in transactions with third parties 1,482,000

Pearce's share of Searl Company adjusted income that has been realized in transactions

with third parties ($412,500* ( 0.80) 330,000*

Controlling interest in consolidated net income for 2011 $1,812,000

*[$600,000 – ($75,000 + $112,500)] x 0.80 = 330,000,

where $75,000 = $375,000/5

Alternatively,

|Controlling Interest in Consolidated Income |  |

| | |Net income internally generated by Pearce Company |$1,500,000 |

| | |  | |

|Unrealized profit on downstream | |Realized profit (downstream sales) from begin. inventory | |

|sales to Searl Company (ending | |  | |

| Inventory) ($90,000 – $90,000/1.25) | 18,000 |Pearce Company's percentage of Searl Company's income | |

| | | realized from third parties, .80($412,500) | 330,000 |

| |  |  |  |

| | |Controlling interest in Consolidated Income |$1,812,000 |

2012

Pearce Company's net income from its independent operations $1,800,000

Less profit included therein that has not been realized in transactions with third parties

($105,000 – ($105,000/1.25)) (21,000)

Plus profit realized in 2012 ($90,000 – ($90,000/1.25)) 18,000

Pearce Company's income from its independent operations that has been realized

in transactions with third parties 1,797,000

Pearce's share of Searl Company adjusted income that has been realized in transactions

with third parties ($675,0000 ( .80) 540,000

Controlling interest in consolidated net income for 2012 $2,337,000

*[$750,000 – $75,000] x 0.80 = $540,000,

where $75,000 = $375,000/5

Alternatively,

|Controlling Interest in Consolidated Income |  |

| | |Net income internally generated by Pearce Company |$1,800,000 |

| | |  | |

|Unrealized profit on downstream | |Realized profit (downstream sales) from begin. inventory |18,000 |

|sales to Searl Company (ending | |  | |

| Inventory) | 21,000 |Pearce Company's percentage of Searl Company's income | |

| | | realized from third parties, .80($675,000) | 540,000 |

| |  |  |  |

| | |Controlling interest in Consolidated Income |$2,337,000 |

Chapter 6 Exercise 5 Refer to Exercise 6-4. Using the same figures, assume that the merchandise mentioned was included in Pearce’s inventory, having been purchased from Searl. Calculate the controlling interest in consolidated net income for 2011 and 2012.

2011

Pearce Company's income from its independent operations $1,500,000

Plus: Pearce Company's interest in the realized net income of Searl Company:

Reported Net income $600,000

Less Amortization of difference between implied and book value

($75,000 + $112,500) (187,500)

Less unrealized profit included therein ($90,000 - [pic]) (18,000)

Income realized in transaction with third parties $394,500

Pearce Company's interest therein (0.8 ( $394,500) $315,600

Controlling interest in consolidated net income $1,815,600 

2012

Pearce Company's income from its independent operations $1,800,000

Plus: Pearce Company's interest in the realized net income of Searl Company:

Reported Net income $750,000

Less amortization of difference between implied and book value (75,000)

Less profit included therein that has not been realized in transactions

with third parties ($105,000 - [pic]) (21,000)

Plus profit realized in 2012 ($90,000 -[pic]) 18,000

Income realized in transaction with third parties $672,000

Pearce Company's interest therein (0.8 ( $672,000) 537,600

Controlling interest in consolidated net income $2,337,600

Chapter 6 Problem 16 Pruitt Corporation owns 90% of the common stock of Sedbrook Company. The stock was purchased for $540,000 on January 1, 2009, when Sedbrook Company’s retained earnings were $100,000. Preclosing trial balances for the two companies at December 31, 2013 are presented here: Pruitt Corporation Sedbrook Company Cash $83,000 $80,000 Accounts Receivable 213,000 112,500 Inventory 1/1 150,000 110,000 Investment in Sedbrook Co. 568,250 Other Assets 500,000 400,000 Dividends Declared 100,000 30,000 Purchases 850,000 350,000 Other Expenses 180,000 137,500 2,644,250 1,220,000 Accounts Payable 70,000 30,000 Other Liabilities 75,000 40,000 Common Stock 800,000 500,000 Retained Earnings, 1/1 532,000 120,000 Sales 1,100,000 530,000 Equity in Subsidiary Income 67,250 2,644,250 1,220,000 Ending Inventory 200,000 120,000 The January 1, 2013, inventory of Sedbrook Company includes $30,000 of profit recorded by Pruitt Corporation on 2012 sales. During 2013, Pruitt Corporation made intercompany sales of $200,000 with a markup of 25% on cost. The ending inventory of Sedbrook Company includes good purchased in 2013 from Pruitt for $50,000, Pruitt Corporation uses the complete equity method to records its investment in Sedbrook Company. A. Prepare the consolidated statements workpaper for the year ended December 31, 2013. B. Calculate the consolidated retained earnings on December 31, 2013, using the analytical or t-account approach.

PRUITT CORPORATION AND SUBSIDIARY

Part A Consolidated Statement Workpaper

For the Year Ended December 31, 2013

| | |Pr| |Sed| |Eli| | | |

| | |ui| |bro| |min| |No| |

| | |tt| |ok | |ati| |nc| |

| | | | | | |ons| |on| |

| | | | | | | | |tr| |

| | | | | | | | |ol| |

| | | | | | | | |li| |

| | | | | | | | |ng| |

|Corporation | |Company | |Dr. | | Cr. | | Interest | |Balances | |Balance Sheet | | | | | | | | | | | | |Cash | 93,000 | | 75,000 | | | | | | | |168,000 | |Accounts Receivable | 319,500 | | 168,750 | | | | | | | |488,250 | |Inventory | 210,000 | | 172,500 | | | |(3) 15,000 | | | |367,500 | |Investment in Segal Company | 833,625 | | | |(4) 40,500 | |(5) 837,000 | | | | | | | | | | | | |(1) 37,125 | | | | | |Other Assets | 750,000 | | 630,000 | | | | | | | |1,380,000 | | | | | | | | | | | | | | |Total assets |2,206,125 | |1,046,250 | | | | | | | |2,403,750 | | | | | | | | | | | | | | |Accounts Payable | 105,000 | | 45,000 | | | | | | | |150,000 | |Other Current Liabilities | 112,500 | | 60,000 | | | | | | | |172,500 | |Capital Stock: | | | | | | | | | | | | |Paque Corporation |1,200,000 | | | | | | | | | |1,200,000 | |Segal Company | | | 750,000 | |(5) 750,000 | | | | | | | |Retained Earnings from above | 788,625 | | 191,250 | | 586,125 | | 399,000 | |4,125 | |788,625 | |1/1 Noncontrolling Interest | | | | |(4) 4,500 | |(5) 93,000 | |88,500 | | | |12/31 Noncontrolling Interest | | | | | | | |92,625 | |92,625 | |Total liabilities & equity |2,206,125 | |1,046,250 | |1,381,125 | |1,381,125 | | | |2,403,750 | |

*Noncontrolling Interest in Consolidated Income = 0.10 ( ($71,250 + $45,000 – $15,000) = $10,125

Explanation of workpaper entries

(1) Equity in Subsidiary Income 91,125*

Investment in Segal Company 37,125

Dividends Declared ($60,000 ( 0.90) 54,000

To reverse the effect of parent company entries during the year

for subsidiary dividends and income

* 0.90 ( ($71,250 + $45,000 – $15,000) = $91,125

(2) Sales 300,000

Purchases (Cost of Goods Sold) 300,000

To eliminate intercompany sales

(3) Ending Inventory - Income Statement (CoGS) 15,000

Ending Inventory (Balance Sheet) 15,000

To eliminate unrealized intercompany profit in ending

inventory ($75,000 ( 0.2).

(4) Investment in Segal Company (.90)($45,000) 40,500

Noncontrolling Interest (.1)($45,000) 4,500

Beginning Inventory -Income Statement (CoGS) 45,000

To recognize intercompany profit realized during the year and to

reduce controlling and noncontrolling interests for their share of

unrealized profit at beginning of year

(5) Beginning Retained Earnings- Segal Co. 180,000

Common Stock - Segal Company 750,000

Investment in Segal Company ($833,625 - $37,125 + $40,500) 837,000

Noncontrolling Interest ($750,000 + $180,000) x .10 93,000

Part B

Paque Corporation's Retained Earnings on 12/31/2013 $ 788,625

Consolidated retained earnings on 12/31/2013 $ 788,625

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6-28

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