a.
Find the annual amortization resulting from the acquisition-date fair-value allocations.
a.
Explanation of Solution
Particulars | Amount | ||
Consideration paid | $ 342,000 | ||
Fair value of non-controlling interest | $ 38,000 | ||
Fair value on date of acquisition | $ 380,000 | ||
Book value of the subsidiary | $ (326,000) | ||
Excess fair value over book value | $ 54,000 | ||
Remaining life | Annual amortization | ||
Building | $ 18,000 | 9 years | $ 2,000 |
Patented technology | $ 36,000 | 6 years | $ 6,000 |
Total | $ 54,000 | $ 8,000 |
Table: (1)
b.
Identify whether the intra-entity transfers are upstream or downstream.
b.
Explanation of Solution
Company B has transferred goods to Company P which implies that it is an upstream transfer because goods are transferred from the subsidiary to the parent.
c.
Find the intra-entity gross profit in inventory existed as of January 1, 2018.
c.
Explanation of Solution
Computation of unrealized gross profit:
Particulars | Amount |
Intra-entity gross profit percentage | 40% |
Inventory unsold at year end | $ 37,500 |
Unrealized gross profit as on January 1, 2018 | $ 15,000 |
Table: (2)
d.
Find the intra-entity gross profit in inventory existed as of December 31, 2018.
d.
Explanation of Solution
Computation of unrealized gross profit:
Particulars | Amount |
Intra-entity gross profit percentage | 42% |
Inventory unsold at year end | $ 37,500 |
Unrealized gross profit as on December 31, 2018 | $ 21,000 |
Table: (3)
e.
Find the amounts which make up the $68,400 Equity Earnings of Company B account balance for 2018.
e.
Explanation of Solution
Computation of the amounts which make up the $68,400 Equity Earnings of Company B account balance for 2018:
Particulars | Amount |
Reported income of Subsidiary | $ 90,000 |
Add: Unrealized gross profit of 2017 | $ 15,000 |
Less: Unrealized gross profit of 2018 | $ (21,000) |
Less: Amortization of patented technology | $ (6,000) |
Less: Excess amortization of building | $ (2,000) |
Adjusted income of subsidiary | $ 76,000 |
Percent of ownership of controlling interest | 90% |
Equity in earnings of Company B | $ 68,400 |
Table: (4)
f.
Find the net income attributable to the non-controlling interest for 2018.
f.
Explanation of Solution
Computation of the net income attributable to the non-controlling interest for 2018:
Particulars | Amount |
Reported income of Subsidiary | $ 90,000 |
Add: Unrealized gross profit of 2017 | $ 15,000 |
Less: Unrealized gross profit of 2018 | $ (21,000) |
Less: Amortization of patented technology | $ (6,000) |
Less: Excess amortization of building | $ (2,000) |
Adjusted income of subsidiary | $ 76,000 |
Percent of ownership of controlling interest | 10% |
Equity in earnings of Company B | $ 7,600 |
Table: (5)
g.
Find the amounts which make up the $450,000 Investment in Company B account balance as of December 31, 2018.
g.
Explanation of Solution
Computation of the amounts which make up the $450,000 Investment in Company B account balance as of December 31, 2018:
Particulars | Amount |
Investment purchased | $ 342,000 |
Reported net income of 2016 | $ 64,000 |
Less: Amortization of patented technology | $ (6,000) |
Add: Excess | $ (2,000) |
Deferred profit of 2016 | $ (10,000) |
Adjusted net income of year 2017 | $ 46,000 |
Percent of ownership of controlling interest | 90% |
Net income attributable to controlling interest | $ 41,400 |
Equity in earnings of Company B | $ 41,400 |
Share of Company P in dividends | $ (17,100) |
Balance as on 31/12/2016 | $ 366,300 |
Reported income of Company B | $ 80,000 |
Less: Amortization of patented technology | $ (6,000) |
Add: Excess depreciation of building | $ (2,000) |
Deferred profit of 2016 recognized | $ 10,000 |
Deferred profit of 2017 | $ (15,000) |
Adjusted net income of year 2017 | $ 67,000 |
Percent of ownership of controlling interest | 90% |
Net income attributable to controlling interest | $ 60,300 |
Equity in earnings of Company B | $ 60,300 |
Share of Company P in dividends | $ (20,700) |
Balance as on 31/12/2017 | $ 405,900 |
Reported income of Company B | $ 90,000 |
Less: Amortization of patented technology | $ (6,000) |
Add: Excess depreciation of building | $ (2,000) |
Deferred profit of 2017 recognized | $ 15,000 |
Deferred profit of 2018 | $ (21,000) |
Adjusted net income of year 2018 | $ 76,000 |
Percent of ownership of controlling interest | 90% |
Net income attributable to controlling interest | $ 68,400 |
Equity in earnings of Company B | $ 68,400 |
Share of Company P in dividends | $ (24,300) |
Balance as on 31/12/2018 | $ 450,000 |
Table: (6)
h.
Prepare the 2018 worksheet entry to eliminate the subsidiary’s beginning owners’ equity balances.
h.
Explanation of Solution
The worksheet entry to eliminate the subsidiary’s beginning owners’ equity balances:
Entry S | ||||
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Common stock | $ 150,000 | |||
| $ 263,000 | |||
Investment in Company B | $ 371,700 | |||
Non controlling interest | $ 41,300 | |||
(being controlling and non-controlling interest recorded) |
Table: (7)
i.
Determine the consolidation balances for these two companies.
i.
Explanation of Solution
The consolidation balances for these two companies are as follows:
Company P and Company B | ||||||
Consolidation Worksheet | ||||||
Year ending December 31, 2018 | ||||||
Income statement | Company P | Company B | Debit | Credit | Non-controlling interest | Consolidated Balances |
Revenues | $ (862,000) | $ (366,000) | $ 160,000 | $ (1,068,000) | ||
Cost of goods sold | $ 515,000 | $ 209,000 | $ 21,000 | $ 15,000 | $ 570,000 | |
$ 160,000 | ||||||
Operating expense | $ 185,400 | $ 67,000 | $ 8,000 | $ 260,400 | ||
Equity in income of Company B | $ (68,400) | $ 68,400 | $ - | |||
Net income | $ (230,000) | $ (90,000) | ||||
Consolidated net income | $ (237,600) | |||||
Share of non-controlling interest in net income | $ (7,600) | $ 7,600 | ||||
Share of controlling interest in net income | $ (230,000) | |||||
| ||||||
Cash | $ 146,000 | $ 98,000 | $ 16,000 | $ 228,000 | ||
Inventory | $ 255,000 | $ 136,000 | $ 21,000 | $ 370,000 | ||
Investment in Company B | $ 450,000 | |||||
Building and equipment | $ 964,000 | $ 328,000 | $ 18,000 | $ 6,000 | $ 1,304,000 | |
Patented technology | $ 36,000 | $ 18,000 | $ 18,000 | |||
Total assets | $ 1,815,000 | $ 562,000 | $ 1,920,000 | |||
Liabilities | $ (718,000) | $ (71,000) | $ 16,000 | $ (773,000) | ||
Common stock | $ (515,000) | $ (150,000) | $ (515,000) | |||
Retained earnings | $ (582,000) | $ (341,000) | $ (582,000) | |||
Non-controlling interest in Company B | $ (50,000) | |||||
Total liabilities and equity | $ (1,815,000) | $ (562,000) | $ 1,920,000 |
Table: (8)
Working note:
Statement of retained earnings | Company P | Company B | Debit | Credit | Non-controlling interest | Consolidated Balances |
Retained earnings on 01/01 | $ (488,000) | $ (278,000) | $ 15,000 | $ (488,000) | ||
$ (263,000) | ||||||
Net Income | $ (230,000) | $ (90,000) | $ (230,000) | |||
Dividends declared | $ 136,000 | $ 27,000 | $ 24,300 | $ 2,700 | $ 136,000 | |
Retained earnings on 31/12 | $ (582,000) | $ (341,000) | $ (582,000) |
Table: (9)
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