Chapter 5, Problem 36P

a.

To determine

Show how Company P computed its $55,400 equity in Company S’s earnings balance.

Explanation of Solution

Computation of equity in Company S’s earnings balance:

Particulars	Amount
Net income of the subsidiary	$(88,000)
Amortization of patented technology	$  15,000
Unrealized gross profit of 2014 realized	$(14,400)
Unrealized gross profit of 2015 deferred	$  14,000
Gain on sale of land deferred	$  18,000
Equity in earnings	$(55,400)

Table: (1)

Working note:

Computation of closing stock in 2014:

Particulars	Amount
Sales price in 2014	$50,000
Resold %	28%
Unsold %	72.00%
Closing stock in 2014	$36,000

Table: (2)

Computation of unrealized profit on closing stock:

Year	Sales (A)	Cost of goods sold (B)	Profit$C=\left(A\right)-\left(B\right)$	Closing stock	Profit on closing stock$\left(E\right)=\left\{\left(C\times D\right)÷A\right\}$
				(D)
2014	$50,000	$30,000	$20,000	$36,000	$14,400
2015	$80,000	$40,000	$40,000	$28,000	$14,000

Table: (3)

b.

To determine

Prepare a 2015 consolidated worksheet for Company P and Company S.

Explanation of Solution

Consolidated worksheet for Company P and Company S in 2015:

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2015
			Consolidation entries
Accounts	Company P	Company S	Debit	Credit	Consolidated totals
Revenues	($627,000)	($358,000)	$80,000		($905,000)
Cost of goods sold	$289,000	$195,000	$14,000	$80,000
				$14,400	$403,600
Other operating expenses	$170,000	$75,000	$15,000		$260,000
Gain on sale of land	($18,000)	$0	$18,000		$0
Equity in Company S's earnings	($55,400)	$0	$55,400		$0
Net income	($241,400)	($88,000)			($241,400)
Balance Sheet
Cash and receivables	$134,000	$150,000		$65,000	$219,000
Inventory	$281,000	$112,000		$14,000	$379,000
Investment in Company S	$589,000	$0	$20,000	$427,600
				$135,000
				$55,400
Trademarks	$0	$50,000	$30,000		$80,000
Land, buildings, and equip. (net)	$637,000	$283,000		$18,000	$902,000
Patented technology	$0	$130,000	$105,000	$15,000	$220,000
Total assets	$1,641,000	$725,000			$1,800,000
Liabilities	($463,000)	($215,000)	$65,000		($613,000)
Common stock	($410,000)	($120,000)	$120,000		($410,000)
Additional paid-in capital	($291,000)	($30,000)	$30,000		($291,000)
Retained earnings 12/31/15	($486,000)	($360,000)			($486,000)
Total liabilities and equity	($1,650,000)	($725,000)			($1,800,000)

Table: (4)

Working note:

Statement of retained earnings	Company P	Company S	Debit	Credit	Consolidated totals
Retained earnings 1/1/15	($314,600)	($292,000)	$14,400		($314,600)
			$277,600
Net income	($241,400)	($88,000)			($241,400)
Dividends declared	$70,000	$20,000		$20,000	$70,000
Retained earnings 12/31/15	($486,000)	($360,000)			($486,000)

Table: (5)

Computation of unamortized amount of patented technology:

Value of Unamortized patented technology as on 31/12/2014
Original value as on 01/01/2014	$120,000
Less: Amortization during the year	$15,000
Unamortized value as on 31/12/2014	$105,000

Table: (6)