Concept explainers
a.
Introduction: Consolidation is a process in which a parent company combines net assets of its subsidiaries. To include net assets of the subsidiaries, parent company removes net assets in those subsidiaries and removes intragroup transactions.
To prepare:
a.
Explanation of Solution
In the books of Company P:
Record dividend income received:
Date | Account | Debit ($) | Credit($) |
20XX | Cash | 10,000 | |
Investment in Company U Common Stock | 10,000 | ||
(To record dividend income) |
Table (1)
- Cash is an asset and it is increased by $10,000. Therefore, the cash account is debited with $10,000.
- Investment in Company U common stock is an asset and it is decreased by $10,000. Therefore, Investment in Company U common stock account is credited with $10,000.
Record equity-method income:
Date | Account | Debit ($) | Credit($) |
20XX | Investment in Company U Common Stock | 30,000 | |
Investment in Company U | 30,000 | ||
(To record equity-method income) |
Table (2)
- Investment in Company U common stock is an asset and it is increased by $30,000. Therefore, Investment in Company U common stock account is debited with $30,000.
- Investment in Company U is income and it is increased by $30,000. Therefore, Investment in Company U account is credited with $30,000.
Record amortization amount:
Date | Account | Debit ($) | Credit($) |
20XX | Investment in Company U | 5,000 | |
Investment in Company U Common Stock | 5,000 | ||
(To record amortization amount) |
Table (3)
- Investment in Company U is income and it is decreased by $5,000. Therefore, investment in Company U account is debited with $5,000.
- Investment in Company U common stock is an asset and it is decreased by $5,000. Therefore, investment in Company U common stock account is credited with $5,000.
b.
Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.
To prepare: Journal entries that Company P would record for consolidation to prepare consolidated financial statement.
b.
Explanation of Solution
In the books of Company P:
Record of elimination of income from subsidiary:
Date | Account | Debit ($) | Credit($) |
20XX | Investment in Company U Common Stock | 25,000 | |
Dividend | 10,000 | ||
Investment in Company c | 15,000 | ||
(To record elimination of income from subsidiary) |
Table (1)
- Investment in Company U common stock is an asset and it is increased by $25,000. Therefore, Investment in Company U common stock account is debited with $25,000.
- Dividend is an income and it is increased by $10,000. Therefore, dividend account is credited with $10,000.
- Investment in Company C is income and it is increased by $15,000. Therefore, investment in Company C account is credited with $15,000.
Record elimination of beginning investment balance:
Date | Account | Debit ($) | Credit($) |
20XX | Common Stock Company U | 100,000 | |
90,000 | |||
Differential | 30,000 | ||
Investment in Company U Common Stock | 222,000 | ||
(To record elimination of beginning investment balance) |
Table (2)
- Common stock Company U is equity and it is decreased by $100,000. Therefore, Common stock Company U account is debited with $100,000.
- Retained earnings is equity and it is decreased by $90,000. Therefore, Retained earnings account is debited with $90,000.
- Differential is an expense and it is increased by $30,000. Therefore, the differential account is debited with $30,000.
- Investment in Company U common stock is an asset and it is decreased by $222,000. Therefore, Investment in Company U common stock account is credited with $222,000.
Record assignment of beginning differential:
Date | Account | Debit ($) | Credit($) |
20XX | Building and Equipment | 50,000 | |
Differential | 30,000 | ||
| 20,000 | ||
(To record assignment of beginning differentail) |
Table (3)
- Equipment is an asset and it is increased by $50,000. Therefore, the equipment account is debited with $50,000.
- Differential is an expense and it is decreased by $30,000. Therefore, the differential account is credited with $30,000.
- Accumulated depreciation is a current liability and it is increased by $20,000. Therefore, the accumulated depreciation account is credited with $20,000.
Record amortize differential:
Date | Account | Debit ($) | Credit($) |
20XX | Depreciation | 5,000 | |
Accumulated Depreciation | 5,000 | ||
(To record amortize differential) |
Table (4)
- Differential is an expense and it is increased by $5,000. Therefore, the differential account is debited with $5,000.
- Accumulated depreciation is a current liability and it is increased by $5,000. Therefore, the accumulated depreciation account is credited with $5,000.
Record elimination of inter-corporate receivable/ payable:
Date | Account | Debit ($) | Credit($) |
20XX | Accounts Payable | 10,000 | |
Cash and receivables | 10,000 | ||
(To record amortize differential) |
Table (5)
- Accounts payable is a current liabilities and it is decreased by $10,000. Therefore, Accounts payable account is debited with $10,000.
- Cash and receivables is a current asset and it is decreased by $10,000. Therefore, Cash and receivables account is credited with $10,000.
c.
Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.
To prepare: The three-part worksheet as of December 31, 20X5.
c.
Explanation of Solution
Preparation of three-part worksheet:
Amount in ($)
Company P Consolidation Work paper December 31, 20X5 | |||||
Particulars | Company P | Company U | Elimination | Consolidation | |
Income Statement | Debit | Credit | |||
Sales | 200,000 | 100,000 | 300,000 | ||
Income from subsidiary | 25,000 | 25,000 | |||
Cost of goods sold | (120,000) | (50,000) | 170,000 | ||
(25,000) | (15,000) | 5,000 | 45,000 | ||
Inventory Losses | (15,000) | (5,000) | 20,000 | ||
Net Income | 65,000 | 30,000 | 30,000 | 65,000 | |
Statement of Retained earnings | |||||
Beginning balance | 318,000 | 90,000 | 90,000 | 318,000 | |
Net Income | 65,000 | 30,000 | 30,000 | 65,000 | |
Dividend Declared | (30,000) | (10,000) | (10,000) | (30,000) | |
Ending Balance | 353,000 | 110,000 | 120,000 | 10,000 | 353,000 |
Balance Sheet | |||||
Cash and Receivables | 43,000 | 65,000 | 10,000 | 98,000 | |
Inventory | 260,000 | 90,000 | 350,000 | ||
Land | 80,000 | 80,000 | 160,000 | ||
Buildings and equipment | 500,000 | 150,000 | 50,000 | 700,000 | |
Investment in Company U | 235,000 | 15,000 | |||
Total assets | 1,118,000 | 385,000 | 1,308,000 | ||
Accumulated Depreciation | 205,000 | 105,000 | 20,000 | ||
Accounts payable | 60,000 | 20,000 | 10,000 | 70,000 | |
Notes payable | 200,000 | 50,000 | 250,000 | ||
Common stock | |||||
Company P | 300,000 | 300,000 | |||
Company U | 100,000 | 100,000 | |||
Retained earnings | 353,000 | 110,000 | 120,000 | 10,000 | 353,000 |
Total liabilities | 1,118,000 | 385,000 | 1,308,000 |
Table (1)
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Chapter 4 Solutions
Advanced Financial Accounting
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- Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning