Chapter 5, Problem 36P

a.

To determine

Show how Company P computed its $39,000 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	$(90,000)
Amortization of patented technology	$  29,000
Unrealized gross profit of 2017 realized	$(13,000)
Unrealized gross profit of 2018 deferred	$  19,000
Gain on sale of land deferred	$  16,000
Equity in earnings	$(39,000)

Table: (1)

Working note:

Computation of closing stock in 2017:

Particulars	Amount
Sales price in 2017	$  125,000
Resold %	74%
Unsold %	26.00%
Closing stock in 2017	$    32,500

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 (D)	Profit on closing stock $\left(E\right)=\left\{\left(C\times D\right)÷A\right\}$
2017	$  125,000	$   75,000	$      50,000	$ 32,500	$                13,000
2018	$  140,000	$   70,000	$      70,000	$ 38,000	$                19,000

Table: (3)

b.

To determine

Prepare a 2018 consolidated worksheet for Company P and Company S.

Explanation of Solution

Consolidated worksheet for Company P and Company S in 2018:

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2018
			Consolidation entries
Accounts	Company P	Company S	Debit	Credit	Consolidated totals
Revenues	$   (710,000)	$   (360,000)	$    140,000		$    (930,000)
Cost of goods sold	$     305,000	$     189,000	$      19,000	$   140,000
				$     13,000	$      360,000
Other operating expenses	$     167,000	$       81,000	$      29,000		$      277,000
Gain on sale of land	$     (16,000)	$                -	$      16,000		$                 -
Equity in Company S's earnings	$     (39,000)	$                -	$      39,000		$                 -
Net income	$   (293,000)	$     (90,000)			$    (293,000)
Balance Sheet
Cash and receivables	$     102,000	$     154,000		$     62,000	$      194,000
Inventory	$     311,000	$     110,000		$     19,000	$      402,000
Investment in Company S	$     691,000	$                -	$      25,000	$   429,000
				$   248,000
				$     39,000
Trademarks	$                -	$       58,000	$      45,000		$      103,000
Land, buildings, and equip. (net)	$     638,000	$     280,000		$     16,000	$      902,000
Patented technology	$                -	$     125,000	$    203,000	$     29,000	$      299,000
Total assets	$  1,742,000	$     727,000			$   1,900,000
Liabilities	$   (462,000)	$   (220,000)	$      62,000		$    (620,000)
Common stock	$   (400,000)	$   (100,000)			$    (400,000)
Additional paid-in capital	$   (300,000)	$     (50,000)			$    (300,000)
Retained earnings 12/31/18	$   (580,000)	$   (357,000)			$    (580,000)
Total liabilities and equity	$(1,742,000)	$   (727,000)			$ (1,900,000)

Table: (4)

Working note:

Statement of retained earnings	Company P	Company S	Debit	Credit	Consolidated totals
Retained earnings 1/1/18	$   (367,000)	$   (292,000)	$      13,000		$    (367,000)
			$    279,000
Net income	$   (293,000)	$     (90,000)			$    (293,000)
Dividends declared	$       80,000	$       25,000		$     25,000	$        80,000
Retained earnings 12/31/18	$   (580,000)	$   (357,000)			$    (580,000)

Table: (5)

Computation of unamortized amount of patented technology:

Value of Unamortized patented technology as on 31/12/2017
Original value as on 01/01/2017	$     232,000
Less: Amortization during the year	$       29,000
Unamortized value as on 31/12/2017	$     203,000

Table: (6)