Connect Access Card for Fundamentals of Advanced Accounting
Connect Access Card for Fundamentals of Advanced Accounting
7th Edition
ISBN: 9781260048827
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
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Chapter 5, Problem 32P

a.

To determine

Prepare a schedule that calculates the Equity in Earnings of Company S account balance.

a.

Expert Solution
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Explanation of Solution

The schedule that calculates the Equity in Earnings of Company S account balance is as follows:

ParticularsAmount
Reported income of subsidiary $         230,000
Add: Unrealized profit of 2017 (1) $           35,000
Less: Unrealized profit of 2018 (2) $         (40,000)
Less: Amortization expense of 2018 $         (70,000)
Net income of subsidiary $         155,000
Percentage ownership of controlling interest80%
Equity in earnings of Company S in 2018 $         124,000

Table: (1)

Working note:

Computation of unrealized gross profit:

2017:

Unrealized gross profit=$125,000×28%=$35,000 (1)

2018:

Unrealized gross profit=$160,000×25%=$40,000 (2)

b.

To determine

Prepare a worksheet to arrive at consolidated figures for external reporting purposes.

b.

Expert Solution
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Explanation of Solution

The worksheet to arrive at consolidated figures for external reporting purposes:

Income statement Company P Company S Debit Credit Non-controlling interest Consolidated Balances
 Revenues $    (1,740,000) $      (950,000) $    300,000   $      (2,390,000)
 Cost of goods sold $         820,000 $       500,000 $      40,000 $      35,000  $       1,025,000
     $    300,000  
 Depreciation expense $         104,000 $         85,000    $          189,000
 Amortization expense $         220,000 $       120,000 $      70,000   $          410,000
 Interest expense $           20,000 $         15,000    $            35,000
 Equity in income of Company S $       (124,000)  $    124,000   $                      -
 Net income $       (700,000) $      (230,000)    
 Consolidated net income      $         (731,000)
 Share of non-controlling interest in net income     $  (31,000) $            31,000
 Share of controlling interest in net income      $         (700,000)
       
 Balance Sheet      
 Cash $         535,000 $       115,000    $          650,000
 Account receivables $         575,000 $       215,000    $          790,000
 Inventory $         990,000 $       800,000  $      40,000  $       1,750,000
 Investment in Company S $      1,420,000 $                   - $      20,000 $      40,000  $                      -
     $    968,000  
     $    348,000  
     $    124,000  
 Building and equipment $      1,025,000 $       863,000    $       1,888,000
 Patents $         950,000 $       107,000 $    210,000 $      70,000  $       1,197,000
 Goodwill  $                   - $    225,000   $          225,000
 Total assets $      5,495,000 $    2,100,000    $       6,500,000
       
 Accounts payable $       (450,000) $      (200,000)    $         (650,000)
 Notes payable $       (545,000) $      (450,000)    $         (995,000)
 Common stock $       (900,000) $      (800,000) $    800,000   $         (900,000)
 Additional paid-in Capital $       (300,000) $      (100,000) $    100,000   $         (300,000)
 Retained earnings on 12/31 $    (3,300,000) $      (550,000)    $      (3,300,000)
 Non-controlling interest in Company S    $    242,000  
     $      87,000 $(355,000) $         (355,000)
 Total liabilities and equity $    (5,495,000) $   (2,100,000)    $      (6,500,000)

Table: (2)

Working note:

Statement of retained earningsCompany PCompany SDebitCreditNon-controlling interestConsolidated Balances
Retained earnings on 01/01 $    (2,800,000) $      (345,000) $    310,000   $      (2,800,000)
    $      35,000   
Net Income $       (700,000) $      (230,000)    $         (700,000)
Dividends declared $         200,000 $         25,000  D 20,000 D 5,000 $          200,000
Retained earnings on 31/12 $    (3,300,000) $      (550,000)    $      (3,300,000)

Table: (3)

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