Chapter 5, Problem 5.35P

a.

To determine

Introduction: Journal entry is a systematic method of recording transactions as and when they occur. It is a summary of transactions divided into the debit and credit items that are recorded chronologically. It is an act of keeping and recording all the transactions occurring in the business.

Journal entries recorded by M regarding its investment in G.

Explanation of Solution

Journal entries

S.no	Date	Account title and explanation	Debit	Credit
1		Investment in G Co.	$173,000
		Cash		$173,000
		(To record the amount of investment in G Co.)
2		Investment in G’s stock	$48,000
		Income from subsidiary		$48,000
		(To record the income from G Co.)
3		Cash $\left(80,000\times 0.20\right)$	$16,000
		Investment in G Co.		$16,000
		(To record the dividend from G Co.)
4		Income from subsidiary	$3,000
		Investment in G’s stock		$3,000
		(To record the amortization of the excess acquisition price)

• M Co. acquired 80 percent ownership of G Co. for $173,000 for cash, thus investment in G Co. is debited and cash account is credited as cash is given against the acquisition.
• Calculation of income from G Co.:

Particulars	Amount
Sales	$400,000
Less: Cost of goods sold	($250,000)
Less: Depreciation expense	($15,000)
Less: Other expenses	($75,000)
Net Income	$60,000
Income from S co. $\left(60,000\times 80\%\right)$	$48,000

• M Co. received 80 percent dividend i.e. $16,000 from G Co., this will increase the cash account by the amount $16,000.
• Calculation of Amortization of excess value:

Particulars	Amount
Fair Value	$191,250
Less: Book value	($150,000)
Excess of fair value over book value	$41,250
Life	11 years
Depreciation ($41,250/11)	$3,750
Share of S co. $\left(\$3,750\times 80\%\right)$	$3,000

(b)

To determine

Introduction: Journal entry is a systematic method of recording transactions as and when they occur. It is a summary of transactions divided into the debit and credit items that are recorded chronologically. It is an act of keeping and recording all the transactions occurring in the business.

Eliminating entries needed to prepare consolidated financial statements for 20X7.

Explanation of Solution

Eliminating entries

S.no	Date	Account title and explanation	Debit	Credit
1		Income from subsidiary	$45,000
		Dividends declared ($20,000 x 80%)		$16,000
		Investment in G’s stock		$29,000
		(To eliminate the income from subsidiary)
2		Income to non-controlling interest	$11,250
		Dividends declared ($20,000 x 20%)		$4,000
		Non-controlling interest		$7,250
		(To eliminate the income assigned to NCI)
3		Common stock- G Co.	$50,000
		Retained earnings as on Jan 1	$100,000
		Differential	$66,250
		Investment in G Co.		$173,000
		Non-controlling interest		$43,250
		(Elimination entry to reject the Investment balance)
4		Buildings and equipment ($191,250-$150,000)	$41,250
		Goodwill ($66,250-$41,250)	$25,000
		Differential		$66,250
		(To assign the differential)
5		Depreciation expense ($41,250/11 years)	$3,750
		Accumulated depreciation		$3,750
		(To amortize the differential)
6		Accounts payable	$16,000
		Accounts receivable		$16,000
		(To eliminate the inter-company receivable or payable)

• In case of recording the eliminating entry, reverse all the journal entries. Here the elimination entry to reject the income from subsidiary is passed.
• The income assigned to non-controlling interest can be eliminated by debiting the income to the Non-controlling interest account and crediting the Non-controlling interest account.

Here,

  $\begin{array}{c}\text{Income to non-controlling interest}=\left(\text{Income}–\text{Depreciation expense}\right)\times 20\%\\ =(\$60,000-\$3,750)\times 20\%\\ =\$11,250\end{array}$

The subsidiary stock is held within the consolidated entity and it does not represent the claims from outsiders. Hence, the subsidiary stock and retained earnings account should be eliminated.

• The profit realized from the disposal of building and equipment should be recorded as a differential.
• The depreciation expense is considered as an expense account. Thus, the increase in depreciation expense should be debited.
• M Co. reported an account payable of $16,000 to G Co. Thus, it would affect both accounts payable and accounts receivable. To eliminate this inter-company transaction, entry should be reversed.

(c)

To determine

Introduction: A consolidated worksheet is used to prepare the consolidated financial statements of the parent company and its subsidiary. It reflects the individual values of the parent and the subsidiary and then one consolidated figure for both the entities.

Three part consolidation worksheet for 20X7.

Explanation of Solution

Consolidated Worksheet as on December 31, 20X7

Particulars	M	G	Eliminations	Consolidated
			Debit	Credit
Sales	$700,000	$400,000			$1,100,000
Income from subsidiary	$45,000		(1) $45,000
Credits	$745,000	$400,000	$45,000		$1,100,000
Cost of goods sold	$500,000	$250,000			$750,000
Depreciation expense	$25,000	$15,000	(3) $3,750		$43,750
Other expenses	$75,000	$75,000			$150,000
Debits	($600,000)	($340,000)	($3,750)		($943,750)
Consolidated net income					$156,250
Income to non-controlling interest			(2) $11,250		($11,250)
Income, carry forward	$145,000	$60,000	$60,000		$145,000
Retained earnings Jan 1	$290,000	$100,000	(3) $100,000		$290,000
Income, from above	$145,000	$60,000	$60,000		$145,00
	$435,000	$160,000			$435,000
Dividends declared	($50,000)	($20,000)		(1) $16,000
				(2) $4,000	($50,000)
Retained earnings as on Dec 1 carried forward	$385,000	$140,000	$160,000	$20,000	$385,000
Assets:
Cash	$38,000	$25,000			$63,000
Accounts receivable	$50,000	$55,000		(6) $16,000	$89,000
Inventory	$240,000	$100,000			$340,000
Land	$80,000	$20,000			$100,000
Buildings and equipment	$500,000	$150,000	(4) $41,250		$691,250
Investment in G’s stock	$202,000			(1) $29,000
				(3) $173,000
Differential			(3) $66,250	(4) $66,250
Goodwill			(4) $25,000		$25,000
Debits	$1,100,000	$350,000			$1,308,250
Liabilities:
Accumulated depreciation	$155,000	$75000		(5) $3,750	$233,750
Accounts payable	$70,000	$35,000	(6) $16,000		$89,000
Mortgages payable	$200,000	$50,000			$250,000
Common stock:
M	$300,000				$300,000
G		$50,000	(3) $50,000
Retained earnings from above	$385,000	$140,000	$160,000	$20,000	$385,000
Non-controlling interest				(2) $7,250
				(3) $43,250	$50,500
Credits	$1,110,000	$350,000	$358,500	$358,500	$1,308,250

The investment in G should be eliminated in the computation of the consolidated balance sheet worksheet.

• The income from subsidiary is eliminated.
• The non-controlling interest income is subtracted from the consolidated net income.
• $25,000 shall be reported as goodwill.
• The depreciation expenses is added individually with the depreciation of M and G.
• The impairment loss of goodwill is recorded in the consolidated balance sheet.
• M Co. reported an account payable of $16,000 to G Co. thus, it would affect both accounts payable and accounts receivable.