Chapter 7 Exercise 3 Pearson Company owns 90% of the ...



Chapter 7 Exercise 3 Pearson Company owns 90% of the outstanding common stock of Spring Company. On January 1,2011, Spring Company sold equipment to Pearson Company for $200,000. Spring Company had purchased the equipment for $300,000 on January 1, 2006, and had depreciated it using a 10% straight-line rate. The management of Pearson Company estimated that the equipment had a remaining useful life of five years on January 1, 2011. In 2012, Pearson Company reported $150,000 and Spring Company reported $100,000 in net income from their independent operations (sales to affiliates). A. Prepare a general journal form the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31, 2011, and December 31, 2012, consolidated financial statements workpapers. B. Calculate controlling interest in consolidated income for 2012.

Cost of equipment $ 300,000

Accumulated Depreciation ($300,000 × .10 × 5 years) 150,000

Book value 1/1 2011 150,000

Proceeds from sale 200,000

Gain on sale

Part A 2011

(1) Equipment ($300,000 - $200,000) 100,000

Gain on Sale of Equipment 50,000

Accumulated Depreciation($300,000)(5/10) 150,000

(2) Accumulated Depreciation – Equipment 10,000

Depreciation Expense ($50,000/5) 10,000

2012

(1) Equipment 100,000

Beginning Retained Earnings – Pearson (.9 × $50,000) 45,000

Noncontrolling Interest (.1 × $50,000) 5,000

Accumulated Depreciation – Equipment 150,000

(2) Accumulated Depreciation – Equipment 20,000

Depreciation Expense 10,000

Beginning Retained Earnings – Pearson (.9 × $10,000) 9,000

Noncontrolling Interest (.10 × $10,000) 1,000

Part B Controlling interest in Consolidated Net Income for 2012 = $150,000 + .9($100,000 + $10,000) = $249,000

Chapter 7 Exercise 7 On January 1, 2010, Price Company acquired an 80% interest in the common stock of Smith Company on the open market for $750,000, the book value at that date. On January 1,2011, Price Company purchased new equipment for $14,500 from Smith Company. The equipment cost $9,000 and had an estimate life of five years as of January 1, 2011. During 2012, Price Company had merchandise sales to Smith Company of $100,000; the merchandise was priced at 25% above Price Company’s cost. Smith Company still owes Price Company $17,500 on open account and has 20% of this merchandise in inventory at December 31, 2012. At the beginning of 2012, Smith Company had an inventory $25,000 of merchandise purchased in the previous period from Price Company. A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for the year ended December 31, 2012. B. Assume that Smith Company reports net income of $40,000 for the year ended December 31, 2012. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement for the year ended December 31, 2012.

Part A (1) Sales 100,000

Cost of Sales (Purchases) 100,000

(2) Accounts Payable 17,500

Accounts Receivable 17,500

(3) Cost of Sales (beginning inventory – income statement) 4,000

Inventory ($20,000 – ($20,000/1.25)) 4,000

(4) Beginning Retained Earnings – Price ($25,000 – ($25,000/1.25) 5,000

Cost of Sales (beginning inventory – income statement) 5,000

(5) Beginning Retained Earnings – Price ($5,500 × .8) 4,400

Noncontrolling Interest ($5,500 × .2) 1,100

Property Plant and Equipment 5,500

(6) Accumulated Depreciation 2,200

Depreciation Expense ($5,500/5) 1,100

Beginning Retained Earnings – Price ($1,100 × .8) 880

Noncontrolling Interest ($1,100 × .2) 220

Part B Noncontrolling Interest in Consolidated Income .2 × ($40,000 + $1,100) = $8,220

Chapter 7 Problem 14 Platt Company acquired an 80% interest in Sloane Company when the retained earnings of Sloane Company were $300,000. On January 1, 2011, Sloane Company recorded a $250,000 gain on the sale to Platt Company of equipment with a remaining life of five years. On January 1, 2012, Platt Company recorded a $180,000 gain on the sale to Sloane Company of equipment with a remaining life of six years. Sloane Company reported net income of $180,000 and declared dividends of 60,000 in 2012. It reported retained earnings of $520,000 on January 1, 2012, and $640,000 on December 31, 2012. Platt Company reported net income from independent operations of $400,000 in 2012 and retained earnings of $1,800,000 on December 31, 2012. A. Prepare in general journal form the entries necessary in the December 31, 2012, consolidated statements workpaper to eliminate the effects of the intercompany sales. B. Calculate controlling interest in consolidated net income for the year ended December 31, 2012. C. Calculate consolidated retained earnings on December 31, 2012. D. Calculate noncontrolling interest in consolidated income for the year ended December 31, 2012.

Part A.

(1) Gain on Sale of Equipment 180,000

Equipment (net) 180,000

To eliminate unrealized profit recorded on intercompany sale of

equipment and reduce the carrying value on date of sale.

(2) Beginning Retained Earnings - Platt Company

(.80 ( $250,000) 200,000

Noncontrolling Interest

(.20 ( $250,000) 50,000

Equipment 250,000

To reduce the controlling and noncontrolling interest for their share of unrealized intercompany profit on upstream sale at beginning of year, to restore equipment to its book value on date of intercompany sale.

(3) Accumulated Depreciation ($50,000 + $50,000 + $30,000) 130,000

Depreciation Expense ($50,000 + $30,000) 80,000

Beginning Retained Earnings - Platt Company (.8)($50,000) 40,000

Noncontrolling Interest (.2)($50,000) 10,000

To reverse amount of excess depreciation recorded during current year and to recognize an equivalent amount of intercompany profit as realized [($250,000/5) + ($180,000/6)]

Part B. Calculations of Controlling interest in Consolidated Net Income

For Year Ended December 31, 2012

Platt Company's net income from independent operations $ 400,000

Less unrealized intercompany profit on 2012

sale of equipment to Sloane Company (180,000)

Plus profit on 1/1/12 sale of equipment considered

realized in current year through depreciation 30,000

Platt Company's net income from independent

operations that has been realized in transactions

with third parties 250,000

Reported net income of Sloane Company $ 180,000

Plus profit on 1/1/11 sales of equipment considered

realized in current year through depreciation 50,000

Sloane Company's net income that has been realized

in transactions with third parties 230,000

Platt Company's share thereof ___80% 184,000

Controlling interest in consolidated net income $ 434,000

Part C. Calculation of 12/31/12 Consolidated Retained Earnings

Platt Company's retained earnings on 12/31/12 $ 1,800,000

Less the amount of Platt Company's retained

earnings that have not been realized in transactions

with third parties or through depreciation ($180,000 - $30,000) (150,000)

Platt Company's retained earnings that have been realized 1,650,000

in transactions with third parties or through depreciation

Increase in retained earnings of Sloane Company from

date of acquisition to 12/31/12 ($640,000 - $300,000) $ 340,000

Less unrealized profit included in Sloane's Company's

retained earnings on 12/31/12 ($250,000 - $50,000 - $50,000) (150,000)

Increase in reported retained earnings of Sloane Company

since acquisition that has been realized in transactions

with third parties 190,000

Platt Company's share thereof ___80% 152,000

Consolidated Retained Earnings 12/31/12 $ 1,802,000

Part D. Calculation of Noncontrolling Interest in the Consolidated Income

For the Year Ended December 31, 2012

Sloane Company reported net income $ 180,000

Plus amount of intercompany profit realized

through depreciation during current year 50,000

Amount included in consolidated income $ 230,000

Noncontrolling interest in consolidated income

(.20 ( $230,000) $ 46,000

Chapter 7 Problem 17 Padilla Company acquired 90% of the outstanding common stock of Sanchez Company on June 30, 2011, for $426,000. On that date, Sanchez Company had retained earnings in the amount of $60,000, and the fair value of its recorded assets and liabilities was equal to their book value. The excess of implied over fair value of the recorded net assets was attributed to an unrecorded manufacturing formula held by Sanchez Company, which had an expected remaining useful life of five years from June 30, 2011. Financial data for 2013 are presented here: Padilla Company Sanchez Company Sales $2,555,500 $1,120,000 Equity in Subsidiary Income 156,050 Total Revenue 2,711,550 1,120,000 Cost of Goods Sold 1,730,000 690,500 Expenses 654,500 251,000 Total Cost and Expense 2,384,500 941,500 Net Income 327,050 178,500 Retained Earnings 591,200 139,500 Net Income 327,050 178,500 Dividends Declared (100,000) (60,000) 12/32 Retained Earnings 818,250 258,000 Cash 119,500 132,500 Accounts Receivable 342,000 125,000 Inventory 362,000 201,000 Other Current Assets 40,500 13,000 Land 150,000 Investment in Sanchez Company 524,250 Property and Equipment 825,000 241,000 Accumulated Depreciation (207,000) (53,500) Total Assets 2,156,250 659,000 Accounts Payable 295,000 32,000 Other Liabilities 43,000 19,000 Capital Stock 1,000,000 300,000 Additional Paid-in-Capital 50,000 Retained Earnings 818,250 258,000 Total Liabilities and Equity 2,156,250 659,000 On December 31, 2011, Padilla Company sold equipment (with an original cost of $100,000 and accumulated depreciation of $50,000) to Sanchez Company fo

|Part A |

|Consolidated Statements Workpaper |

|For the Year Ended December 31, 2013 |

| | | | | | |

| |Company |Company |  |Debit | |Credit |

|Company |Company | |Debit | |Credit |Interest |Balances | |Balance Sheet | | | | | | | | | |Cash |119,500 |132,500 | | | | | |252,000 | |Accounts Receivable |342,000 |125,000 | | |(7) |60,000 | |407,000 | |Inventory |362,000 |201,000 | | |(8) |10,500 | |552,500 | |Other Current Assets |40,500 |13,000 | | | | | |53,500 | |Investment in Sanchez Company |524,250 | |(2) |47,500 |(1) |102,050 | |0 | | | | |(4) |13,500 |(3) |9,500 | | | | | | |(5) |6,750 |(9) |497,550 | | | | | | |(11) |17,100 | | | | | |Difference between Implied and Book Value | | |(9) |63,333 |(10) |63,333 | |0 | |Land |150,000 | | | |(4) |15,000 | |135,000 | |Plant and Equipment |825,000 |241,000 |(2) |2,500 | | | |1,068,500 | |Accumulated Depreciation | (207,000) | (53,500) |(3) |19,000 |(2) |50,000 | | (291,500) | |Manufacturing Formula | | |(10) |63,333 |(11) |31,668 | |31,665 | | Total Assets |2,156,250 |659,000 | | | | | |2,208,665 | | | | | | | | | | | |Accounts Payable |295,000 |32,000 |(7) |60,000 | | | |267,000 | |Other Liabilities |43,000 |19,000 | | | | | |62,000 | |Capital stock | | | | | | | | | | Padilla Company |1,000,000 | | | | | | |1,000,000 | | Sanchez Company | |300,000 |(9) |300,000 | | | | | |Additional paid-in capital | | | | | | | | | | Sanchez Company | |50,000 |(9) |50,000 | | | | | |Retained Earnings from above |818,250 |258,000 | |693,717 | |446,000 |10,283 |818,250 | |Noncontrolling Interest in Net Assets | | |(4) |1,500 |(9) |55,283 |51,132 | | | | | |(5) |750 | | | | | | | | |(11) |1,901 | | |61,415 |61,415 | | Total Liabilities & Equity |2,156,250 |659,000 | |1,340,884 |  |1,340,884 | |2,208,665 | |* Noncontrolling interest in income = .10 ( ($178,500 + $7,500 - $10,500 - $12,667) = $16,283

Intercompany Sale of Equipment

Accumulated Remaining

Cost Depreciation Carrying Value Life Depreciation

Original Cost $100,000 $50,000 $50,000 5 yr $10,000

Intercompany Selling Price 97,500 _______ 97,500 5 yr 19,500

Difference $ 2,500 $50,000 $47,500 $ 9,500

Explanations of workpaper entries

(1) Equity in Subsidiary Income 156,050

Investment in Sanchez Company 102,050

Dividends Declared (.90)($60,000) 54,000

To reverse the effect of parent company entries

during the year for subsidiary dividends and income

(2) Plant and Equipment ($100,000 - $97,500) 2,500

Investment in Sanchez Company ($50,000 - $2,500) 47,500

Accumulated Depreciation 50,000

To eliminate unrealized profit on intercompany sale of equipment and to

restore plant and equipment to its book value on the date of intercompany sale

(3) Accumulated Depreciation 19,000

Expenses (Depreciation expense) 9,500

Investment in Sanchez Company 9,500

To reverse excess depreciation recorded during 2013 (.20 × $47,500)

(4) Investment in Sanchez Company (.90 × $15,000) 13,500

Noncontrolling Interest (.10 × $15,000) 1,500

Land 15,000

To eliminate unrealized profit on intercompany sale of land (upstream sale)

(5) Investment in Sanchez Company (.90 × $7,500) 6,750

Noncontrolling Interest (.10 × $7,500) 750

Cost of Goods Sold 7,500

To eliminate intercompany profit in beginning inventory (upstream sale)

(6) Sales 375,000

Cost of Goods Sold (Purchases) 375,000

To eliminate intercompany sale

(7) Accounts Payable 60,000

Accounts Receivable 60,000

To eliminate intercompany payables and receivables

(8) Cost of Goods Sold (Ending Inventory – Income Statement) 10,500

Inventory 10,500

To eliminate unrealized profit in ending inventories

(9) Beginning Retained Earnings - Sanchez Co. 139,500

Capital Stock - Sanchez Co. 300,000

Additional Paid-in Capital - Sanchez Co. 50,000

Difference between Implied and Book Value 63,333

Investment in Sanchez ($426,000 + (($139,500 - $60,000) × .9) 497,550

Noncontrolling Interest [$47,333 + ($139,500 – $60,000) x .10] 55,283

To eliminate the investment account and create noncontrolling interest account

(10) Manufacturing Formula 63,333

Difference between Implied and Book Value 63,333

To allocate the difference between implied and book value

(11) Investment in Sanchez Company ($11,400 × 1.5) 17,100

Noncontrolling Interest ($1,267 x 1.5) 1,901

Expenses ($63,333/5) 12,667

Manufacturing Formula 31,668

To amortize the difference between implied and book value

Alternative to entries (10) and (11)

(10a) Investment in Sanchez Company ($11,400 × 1.5) 17,100

Noncontrolling Interest 1,901

Manufacturing Formula 31,665

Expenses ($63,333/5) 12,667

Difference between Implied and Book Value 63,333

To allocate and amortize the difference between implied and book value

($63,333/5) = $12,667; $63,333 - ($12,667 × 2.5) = $31,665

Part B. Padilla Company's retained earnings on 12/31/2013 $ 818,250

Consolidated retained earnings on 12/31/2013 $ 818,250

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