Chapter 4, Problem 4.33P

(a)

To determine

Introduction: Journal entries is a systematic method of recording transactions as and when they occur. It is a summary of transactions divided into the debit and credit items that are recorded chronologically. It is an act of keeping and recording all the transactions occurring in the business.

Consolidating entries needed to prepare three part consolidated worksheet.

Explanation of Solution

Journal Entries

S. no	Date	Particulars	Debit	Credit
1		Investment in S	$128,000
		Cash		$128,000
		(Initial investment in S recognized)
2		Investment in S	$ 24,000
		Income from S		$ 24,000
		(Entry for P’s share in S co.’s income)
3		Cash	$ 16,500
		Investment in S		$ 16,500
		(Entry for P’s share in S co.’s dividend)
4		Income from S	$ 7,500
		Investment in S		$ 7,500
		(Amortization of excess acquisition price)
5		Common stock	$ 60,000
		Retained earnings	$ 40,000
		Income from S	$ 24,000
		Dividend declared		$ 16,000
		Investment in S		$108,000
		(Basic elimination entry)
6		Depreciation expense	$ 2,000
		Goodwill impairment loss	$ 5,500
		Income from S		$ 7,500
		(Amortized excess value reclassification entry)
7		Building and equipment	$ 20,000
		Goodwill	$ 2,500
		Accumulated depreciation		$ 2,000
		Investment in S		$ 20,500
		(Excess value reclassification entry)

Book value calculations:
	Total book value	=	Common stock	+	Retained earnings
Original book value	$ 100,000		$ 60,000		$ 40,000
Add: Net Income	$ 24,000				$ 24,000
Less: Dividends	$ (16,000)				$ (16,000)
Ending book value	$ 108,000		$ 60,000		$ 48,000

Excess value calculations:
	Total book value	=	Building and equipment	+	Accumulated depreciation	+	Goodwill
Beginning balance	$ 28,000		$ 20,000				$ 8,000
Changes	$ (7,500)				$ (2,000)		$ (5,500)
Ending balance	$ 20,500		$ 20,000		$ (2,000)		$ 2,500

1. Recording the initial investment in S
2. Recording P’s share in S co.’s income
3. Recording P’s share in S co.’s dividend
4. Recording the amortization of excess acquisition price
5. Recording the basic elimination entry
6. Recording the amortized excess value reclassification entry
7. Recording the excess value reclassification entry

(b)

To determine

Introduction: A consolidated worksheet is used to prepare the consolidated financial statements of the parent company and its subsidiary. It reflects the individual values of the parent and the subsidiary and then one consolidated figure for both the entities.

Three-part consolidation worksheet for 20X8

Answer to Problem 4.33P

The consolidated net income is $59,000

The consolidated retained earnings as on December 31, 20X8 is $131,000

The total consolidated assets are $618,000

The total consolidated liabilities and equities are $618,000

Explanation of Solution

Consolidated Work paper as on December 31, 20X8
Particulars	P	S	Eliminations		Consolidated
Income statement			Debit	Credit
Sales	$ 260,000	$ 180,000			$ 440,000
Less:
Cost of goods sold	$ (125,000)	$ (110,000)			$ (235,000)
Wage expense	$ (42,000)	$ (27,000)			$ (69,000)
Depreciation expense	$ (25,000)	$ (10,000)	$ 2,000		$ (37,000)
Interest income	$ (12,000)	$ (4,000)			$ (16,000)
Other expenses	$ (13,500)	$ (5,000)			$ (18,500)
Impairment loss			$ (5,500)		$ (5,500)
Net income before subsidiary earning	$ 42,500	$ 24,000			$ 59,000
Income from Saver Company	$ 16,500		$ 24,000	$ 7,500
Net income	$ 59,000	$ 24,000			$ 59,000
Statement of Retained Earnings
Beginning balance	$ 102,000	$ 40,000	$ 40,000		$ 102,000
Income, from above	$ 59,000	$ 24,000			$ 59,000
Dividends declared	$ (30,000)	$ (16,000)		$ 16,000	$ (30,000)
Ending balance	$ 131,000	$ 48,000			$ 131,000
Balance Sheet
Cash	$ 19,500	$ 21,000			$ 40,500
Accounts receivable	$ 70,000	$ 12,000			$ 82,000
Inventory	$ 90,000	$ 25,000			$ 115,000
Land	$ 30,000	$ 15,000			$ 45,000
Buildings and equipment	$ 350,000	$ 150,000	$ 20,000		$ 520,000
Less: Accumulated depreciation	$ (145,000)	$ (40,000)		$ 2,000	$ (187,000)
Investment in S's stock	$ 128,500			$ 128,500
Goodwill			$ 2,500		$ 2,500
Total assets	$ 543,000	$ 183,000			$ 618,000
Liabilities
Accounts payable	$ 45,000	$ 16,000			$ 61,000
Wages payable	$ 17,000	$ 9,000			$ 26,000
Notes payable	$ 150,000	$ 50,000			$ 200,000
Common stock:	$ 200,000	$ 60,000	$ 60,000		$ 200,000
Retained earnings from above	$ 131,000	$ 48,000	$ 48,000		$ 131,000
Total liabilities and equities	$ 543,000	$ 183,000			$ 618,000