EBK ADVANCED FINANCIAL ACCOUNTING
EBK ADVANCED FINANCIAL ACCOUNTING
11th Edition
ISBN: 8220102796096
Author: Christensen
Publisher: YUZU
Question
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Chapter 5, Problem 5.36P

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 by M with regard to its investment in G during 20X8.

a.

Expert Solution
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Explanation of Solution

Journal entries

    S.noDateAccount title and explanationDebitCredit
    1Investment in G Co.$173,000
    Cash$173,000
    (To record the amount of investment in G Co.)
    2Investment in G ($45,000 x 80%)36,000
    Income from G36,000
    (To record the income from G Co.)
    3Cash ($25,000 x 80%)20,000
    Investment in G20,000
    (To record the dividend from G Co.)
    4Income 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.:
    ParticularsAmount
    Sales$470,000
    Less: Cost of goods sold($310,000)
    Less: Depreciation expense($15,000)
    Less: Other expenses($100,000)
    Net Income$45,000
    Income from S co. (45,000×80%)$36,000
  • M Co. received 80 percent dividend i.e. $20,000 from G Co., this will increase the cash account by the amount $20,000.
  • Calculation of Amortization of excess value:
    ParticularsAmount
    Fair Value$191,250
    Less: Book value($150,000)
    Excess of fair value over book value$41,250
    Life11 years
    Depreciation ($41,250/11)$3,750
    Share of S co. ($3,750×80%)$3,000

b.

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.

To determine: Eliminating entries needed to prepare consolidated financial statements for 20X8.

Eliminating entries

    S.noDateAccount title and explanationDebitCredit
    1Income from subsidiary$33,000
    Dividends declared ($25,000 x 80%)$20,000
    Investment in G’s stock$13,000
    (To eliminate the income from subsidiary)
    2Income to non-controlling interest$6,050
    Dividends declared ($25,000 x 20%)$5,000
    Non-controlling interest$1,050
    (To eliminate the income assigned to NCI)
    3Common stock- G Co.$50,000
    Retained earnings as on Jan 1$140,000
    Differential$62,500
    Investment in G Co.$202,000
    Non-controlling interest$50,500
    (Elimination entry to reject the Investment balance)
    4Buildings and equipment ($191,250-$150,000)$41,250
    Goodwill ($66,250-$41,250)$25,000
    Differential $62,500
    Accumulated depreciation$3,750
    (To assign the differential)
    5Depreciation expense ($41,250/11 years)$3,750
    Accumulated depreciation$3,750
    (To amortize the differential)
    6Goodwill impairment loss$11,000
    Goodwill$11,000
    (To record impairment of goodwill)
    7Accounts payable$9,000
    Accounts receivable$9,000
    (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,

  Income to non-controlling interest=(IncomeDepreciation expenseImpaired Goodwill)×20% =($45,000$3,750$11,000)×20%=$30,250×20%=$6,050

  • 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.
  • Goodwill was impaired and should be reduced to $14,000.
  • M Co. reported an account payable of $9,000 to G Co. thus, it would affect both accounts payable and accounts receivable. To eliminate this inter-company transaction, entry should be reversed.

c.

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.

To determine: Three part consolidation worksheet for 20X8

Consolidated Worksheet as on December 31, 20X8

    ParticularsM $G $EliminationsConsolidated $
    Debit $Credit $
    Sales650,000470,0001,120,000
    Less:
    Cost of goods sold(490,000)(310,000)(800,000)
    Depreciation expense(25,000)(15,000)3,750(43,750)
    Other expenses(62,000)(100,000)(162,000)
    Goodwill impairment11,000(11,000)
    Income from G24,20036,00011,8000
    Consolidated net income97,20045,00050,75011,800103,250
    NCI in net income9,0002,950(6,050)
    Controlling interest in net income97,20045,00059,75014,75097,200
    Statement of Retained Earnings
    Retained earnings Jan 1385,000140,000140,000385,000
    Income, from above97,20045,00059,75014,75097,200
    Dividends declared(45,000)(25,000)25,000(45,000)
    Retained earnings as on Dec 1 carried forward437,200160,000199,75039,750437,200
    Balance Sheet
    Cash 59,00031,00090,000
    Accounts receivable83,00071,0009,000145,000
    Inventory275,000118,000393,000
    Land80,00030,000110,000
    Buildings and equipment500,000150,00041,25060,000631,250
    Less: accumulated depreciation(180,000)(90,000)60,0007,500(217,500)
    Investment in G’s stock206,200168,0000
    38,200
    Goodwill14,00014,000
    Total assets1,023,200310,000115,250282,7001,165,750
    Accounts payable86,00030,0009,000107,000
    Mortgages payable200,00070,000270,000
    Common stock:
    M300,000300,000
    G50,00050,000
    Retained earnings from above437,200160,000199,75039,750437,200
    Non-controlling interest42,000
    9,55051,550
    Total liabilities and equities1,023,200310,000258,75091,3001,165,750

The investment in G should be eliminated in the computation of the consolidated balance sheet work-paper.

  1. The income from subsidiary is eliminated.
  2. The non-controlling interest income is subtracted from the consolidated net income.
  3. $14,000 shall be reported as goodwill.
  4. The depreciation expenses are added individually with the depreciation of M and G.
  5. The impairment loss of goodwill is recorded in the consolidated balance sheet.
  6. M Co. reported an account payable of $9,000 to G Co. thus, it would affect both accounts payable and accounts receivable.

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 20X8.

b.

Expert Solution
Check Mark

Explanation of Solution

Eliminating entries

    S.noDateAccount title and explanationDebitCredit
    1Income from subsidiary$33,000
    Dividends declared ($25,000 x 80%)$20,000
    Investment in G’s stock$13,000
    (To eliminate the income from subsidiary)
    2Income to non-controlling interest$6,050
    Dividends declared ($25,000 x 20%)$5,000
    Non-controlling interest$1,050
    (To eliminate the income assigned to NCI)
    3Common stock- G Co.$50,000
    Retained earnings as on Jan 1$140,000
    Differential$62,500
    Investment in G Co.$202,000
    Non-controlling interest$50,500
    (Elimination entry to reject the Investment balance)
    4Buildings and equipment ($191,250-$150,000)$41,250
    Goodwill ($66,250-$41,250)$25,000
    Differential $62,500
    Accumulated depreciation$3,750
    (To assign the differential)
    5Depreciation expense ($41,250/11 years)$3,750
    Accumulated depreciation$3,750
    (To amortize the differential)
    6Goodwill impairment loss$11,000
    Goodwill$11,000
    (To record impairment of goodwill)
    7Accounts payable$9,000
    Accounts receivable$9,000
    (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,

  Income to non-controlling interest=(IncomeDepreciation expenseImpaired Goodwill)×20% =($45,000$3,750$11,000)×20%=$30,250×20%=$6,050

  • 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.
  • Goodwill was impaired and should be reduced to $14,000.
  • M Co. reported an account payable of $9,000 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 20X8

c.

Expert Solution
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Explanation of Solution

Consolidated Worksheet as on December 31, 20X8

    ParticularsM $G $EliminationsConsolidated $
    Debit $Credit $
    Sales650,000470,0001,120,000
    Less:
    Cost of goods sold(490,000)(310,000)(800,000)
    Depreciation expense(25,000)(15,000)3,750(43,750)
    Other expenses(62,000)(100,000)(162,000)
    Goodwill impairment11,000(11,000)
    Income from G24,20036,00011,8000
    Consolidated net income97,20045,00050,75011,800103,250
    NCI in net income9,0002,950(6,050)
    Controlling interest in net income97,20045,00059,75014,75097,200
    Statement of Retained Earnings
    Retained earnings Jan 1385,000140,000140,000385,000
    Income, from above97,20045,00059,75014,75097,200
    Dividends declared(45,000)(25,000)25,000(45,000)
    Retained earnings as on Dec 1 carried forward437,200160,000199,75039,750437,200
    Balance Sheet
    Cash 59,00031,00090,000
    Accounts receivable83,00071,0009,000145,000
    Inventory275,000118,000393,000
    Land80,00030,000110,000
    Buildings and equipment500,000150,00041,25060,000631,250
    Less: accumulated depreciation(180,000)(90,000)60,0007,500(217,500)
    Investment in G’s stock206,200168,0000
    38,200
    Goodwill14,00014,000
    Total assets1,023,200310,000115,250282,7001,165,750
    Accounts payable86,00030,0009,000107,000
    Mortgages payable200,00070,000270,000
    Common stock:
    M300,000300,000
    G50,00050,000
    Retained earnings from above437,200160,000199,75039,750437,200
    Non-controlling interest42,000
    9,55051,550
    Total liabilities and equities1,023,200310,000258,75091,3001,165,750

The investment in G should be eliminated in the computation of the consolidated balance sheet work-paper.

  1. The income from subsidiary is eliminated.
  2. The non-controlling interest income is subtracted from the consolidated net income.
  3. $14,000 shall be reported as goodwill.
  4. The depreciation expenses are added individually with the depreciation of M and G.
  5. The impairment loss of goodwill is recorded in the consolidated balance sheet.
  6. M Co. reported an account payable of $9,000 to G Co. thus, it would affect both accounts payable and accounts receivable.

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