a.
Identify the method which Company P use to account for its investment in Company S.
a.
Explanation of Solution
The net income of Company S is 80 percent of the total reported income of Company S which implies that there is no adjustment for excess amortization and intra-entity profits. The
b.
Determine the balance of the intra-entity inventory gross profit deferred at the end of the current period.
b.
Explanation of Solution
The consolidated balance of inventory is represented as $338,000 rather than sum of $190,000 and $160,000 which is $350,000. Thus, the balance of the intra-entity inventory gross profit deferred at the end of the current period is $12,000.
c.
Find the amount which was originally allocated to the trademarks.
c.
Explanation of Solution
The amount of consolidated trademarks is $32,500 where the amortization expense of two years has been adjusted. Thus, the amount which was originally allocated to the trademarks is $37,500 because amortization of two years amounts to $5,000.
d.
Determine the amount of the current year intra-entity inventory sales.
d.
Explanation of Solution
The consolidated total for sales is given as $1,280,000 whereas the total of sales of Company P and Company S amounts to $1,400,000. Thus, the amount of the current year intra-entity inventory sales is $120,000.
e.
Identify whether the intra-entity inventory sales made are upstream or downstream.
e.
Explanation of Solution
The net income of Company S has been adjusted according to the upstream transfers and the income attributed to the non-controlling interests has not been computed as 20 percent of the total net income of subsidiary. These all adjustments implies that the intra-entity sales are upstream in nature.
f.
Compute the balance of the intra-entity liability at the end of the current year.
f.
Explanation of Solution
The consolidated total of liabilities and receivables is $20,000 than the sum total of liabilities of both the companies. Thus, the balance of the intra-entity liability at the end of the current year is $20,000.
g.
Find the amount of intra-entity gross profit which was deferred from the preceding period and recognized in the current period.
g.
Explanation of Solution
Computation of the amount of intra-entity gross profit which was deferred from the preceding period and recognized in the current period:
Particulars | Amount |
Consolidated cost of goods sold | $(784,000) |
Cost of goods sold of Company P | $ 500,000 |
Cost of goods sold of Company S | $ 400,000 |
Intra-entity sale | $(120,000) |
Intra-entity gross profit deferred | $ 12,000 |
Deferred Gross Profit of previous recognized in current period | $ 8,000 |
Table: (1)
h.
Identify how the ending Non-controlling Interest in Company S is computed.
h.
Explanation of Solution
Computation of Non-controlling Interest in Company S:
Particulars | Amount |
Book value of subsidiary as on 1/1/18 | $ 370,000 |
Intra-entity gross profit in beginning inventory | $ (8,000) |
Adjusted book value | $ 362,000 |
Excess allocation at 1/1/18 | $ 35,000 |
Subsidiary valuation basis as on 1/1/18 | $ 397,000 |
Non-controlling interest percentage | 20% |
Non-controlling interest as on 1/1/18 | $ 79,400 |
Non-controlling interest in Company S's income | $ 18,700 |
Non-controlling interest in Company S's dividends | |
$ (6,000) | |
Ending non-controlling interest in Company S | $ 92,100 |
Table: (2)
i.
Identify the income tax
i.
Explanation of Solution
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Income tax expense | $ 117,400 | |||
Income tax payable | $ 117,400 | |||
(being intra-entity gross profit deferred for purpose of filing consolidated tax return) |
Table: (2)
Working note:
Computation of taxable income:
Particulars | Amount |
Consolidated Taxable Income: | |
Sales | $ 1,280,000 |
Cost of goods sold | $ (784,000) |
Operating expenses | $ (202,500) |
Taxable income | $ 293,500 |
Table: (3)
j.
Identify the income tax journal entry which is recorded if the companies prepare the separate tax returns.
j.
Explanation of Solution
The income tax journal entry which is recorded if the companies prepare the separate tax returns is as follows:
Entry to be recorded by Company P:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Income tax expense | 80,000 | |||
Income tax payable | 80,000 | |||
(being intra-entity gross profit deferred for purpose of filing separate tax return) |
Table: (4)
Entry to be recorded by Company S:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
Income tax expense | 38,400 | |||
Deferred Income Tax Asset | 1,600 | |||
Income tax payable | 40,000 | |||
(being intra-entity gross profit deferred for purpose of filing separate tax return) |
Table: (5)
Working note:
Computation of
Particulars | Amount |
Reported income | $ 100,000 |
Intra-entity gross profit from previous year recognized in current year | $ 8,000 |
Deferral of current intra-entity gross profit in inventory | $ (12,000) |
Accrual-based net income | $ 96,000 |
Tax rate | 40% |
Income tax expense | $ 38,400 |
Taxes payable | $ 40,000 |
Deferred tax asset | $ 1,600 |
Table: (6)
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