Chapter 5, Problem 5.13E

a

To determine

Introduction: The consolidation procedure used in the second year and the subsequent year is similar to that of the first. The equity method is used to evaluate the investment in the subsidiary. In order to determine consolidation entries, the change in the parent’s investment in the second or subsequent year is determined. Any differential arising is recognized and all the intercompany transactions are eliminated.

The consolidation entries required as of December 31, 20X3.

Explanation of Solution

Consolidation entries as on December 31, 20X3

Particulars	Debit $	Credit $
Investment in S Company	120,000
Cash		120,000
(Initial investment in S recognized)
Investment in S Company	24,000
Income from S Company		24,000
(Income from S Company recognized)
Cash	8,000
Investment in S Company		8,000
(Received share of dividends from S)
Common stock	100,000
Retained earnings	50,000
Income from S Company	24,000
Non-controlling interest in net income of S	6,000
Dividends declared		10,000
Investment in S company		136,000
Non-controlling interest in net assets of S company		34,000
(Investment in S company eliminated by reversal)
Accumulated depreciation	60,000
Depreciable assets		60,000
(Accumulated depreciation for the year recognized)

1. Initial investment in S Company recognized

$\mathrm{\$}120,000=(\mathrm{\$}100,000+\mathrm{\$}50,000)\times .80$

2. Income from Subsidiary S recognized given as $24,000
3. Dividends from S $\mathrm{\$}8,000=\mathrm{\$}10,000\times .80$

b

To determine

Introduction: The consolidation procedure used in the second year and the subsequent year is similar to that of the first. The equity method is used to evaluate the investment in the subsidiary. In order to determine consolidation entries, the change in the parent’s investment in the second or subsequent year is determined. Any differential arising is recognized and all the intercompany transactions are eliminated.

The consolidation work sheet for the year December 31, 20X3.

Answer to Problem 5.13E

Consolidated net income is $100,000

Retained earnings ending are $284,000

Total assets are $828,000

Explanation of Solution

P and S

Consolidation work sheet

For the year ended December 31, 20X3

			Elimination
	P $	S $	Debit $	Credit $	Consolidated $
Income statement
Sales	200,000	120,000			320,000
Less: Depreciation expenses	(25,000)	(15,000)			(40,000)
Other expenses	(105,000)	(75,000)			(180,000)
Income from S	24,000		24,000		0
Consolidated net income	94,000	30,000	24,000		100,000
Non-controlling interest in net income			6,000		(6,000)
Controlling interest in net income	94,000	30,000	30,000	0	94,000
Statement of retained earnings:
Beginning balance	230,000	50,000	50,000		230,000
Net income current year	94,000	30,000	30,000	0	94,000
Less: dividends	(40,000)	(10,000)		10,000	(40,000)
Retained earnings ending	284,000	70,000	80,000	10,000	284,000
Balance sheet:
Current assets	173,000	105,000			278,000
Assets	500,000	300,000		60,000	740,000
Less: Accumulated depreciation	(175,000)	(75,000)	60,000		(190,000)
Total assets	634,000	330,000	60,000	196,000	828,000
Current liabilities	50,000	40,000			90,000
Long term debts	100,000	120,000			220,000
Common stock	200,000	100,000	100,000		200,000
Retained earnings	284,000	70,000	80,000	10,000	284,000
Non-controlling interest in net assets of S				34,000	34,000
Total liabilities & equity	634,000	330,000	180,000	44,000	828,000

c

To determine

Introduction: The consolidation procedure used in the second year and the subsequent year is similar to that of the first. The equity method is used to evaluate the investment in the subsidiary. In order to determine consolidation entries, the change in the parent’s investment in the second or subsequent year is determined. Any differential arising is recognized and all the intercompany transactions are eliminated.

The balance sheet, income statement and retained earnings statement for 20X3

Explanation of Solution

P and S

Consolidated balance sheet

December 31, 20X3

		$
Current Assets		278,000
Depreciable assets	740,000
Less: Accumulated depreciation	(190,000)	550,000
Total Assets		828,000
Current liabilities		90,000
Long term debts		220,000
Stockholders’ equity:
Controlling interest:
Common stock	200,000
Retained earnings	284,000
Total controlling interest	484,000
Non-controlling interest	34,000
Total stockholders’ equity		518,000
Total liabilities and stockholders’ equity		828,000

Income statement for the year:

P and S

Consolidated income statement

Year ended December 31, 20X3

		$
Sales		320,000
Less: Depreciation	$40,000
Other expenses	180,000
Total expenses		(220,000)
Consolidated net income		100,000
Income to non-controlling interest		(6,000)
Income to controlling interest		94,000

Consolidated retained earnings statement:

P and S

Consolidated retained earnings statement

Year ended December 31, 20X3

	$
Retained earnings January 1, 20X3	230,000
Income to controlling interest, 20X3	94,000
	324,000
Dividends declared	(40,000)
Retained earnings December 31, 20X3	284,000