a.
Introduction:
Journal entries by M with regard to its investment in G during 20X8.
a.
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 ($45,000 x 80%) | 36,000 | ||
Income from G | 36,000 | |||
(To record the income from G Co.) | ||||
3 | Cash ($25,000 x 80%) | 20,000 | ||
Investment in G | 20,000 | |||
(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 | $470,000 |
Less: Cost of goods sold | ($310,000) |
Less: | ($15,000) |
Less: Other expenses | ($100,000) |
Net Income | $45,000 |
Income from S co. | $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:
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. | $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.no | Date | Account title and explanation | Debit | Credit |
1 | Income 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) | ||||
2 | Income 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) | ||||
3 | Common stock- G Co. | $50,000 | ||
$140,000 | ||||
Differential | $62,500 | |||
Investment in G Co. | $202,000 | |||
Non-controlling interest | $50,500 | |||
(Elimination entry to reject the Investment balance) | ||||
4 | Buildings and equipment ($191,250-$150,000) | $41,250 | ||
$25,000 | ||||
Differential | $62,500 | |||
Accumulated depreciation | $3,750 | |||
(To assign the differential) | ||||
5 | Depreciation expense ($41,250/11 years) | $3,750 | ||
Accumulated depreciation | $3,750 | |||
(To amortize the differential) | ||||
6 | Goodwill impairment loss | $11,000 | ||
Goodwill | $11,000 | |||
(To record impairment of goodwill) | ||||
7 | Accounts 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,
- 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
Particulars | M $ | G $ | Eliminations | Consolidated $ | |
Debit $ | Credit $ | ||||
Sales | 650,000 | 470,000 | 1,120,000 | ||
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 impairment | 11,000 | (11,000) | |||
Income from G | 24,200 | 36,000 | 11,800 | 0 | |
Consolidated net income | 97,200 | 45,000 | 50,750 | 11,800 | 103,250 |
NCI in net income | 9,000 | 2,950 | (6,050) | ||
Controlling interest in net income | 97,200 | 45,000 | 59,750 | 14,750 | 97,200 |
Statement of Retained Earnings | |||||
Retained earnings Jan 1 | 385,000 | 140,000 | 140,000 | 385,000 | |
Income, from above | 97,200 | 45,000 | 59,750 | 14,750 | 97,200 |
Dividends declared | (45,000) | (25,000) | 25,000 | (45,000) | |
Retained earnings as on Dec 1 carried forward | 437,200 | 160,000 | 199,750 | 39,750 | 437,200 |
Balance Sheet | |||||
Cash | 59,000 | 31,000 | 90,000 | ||
Accounts receivable | 83,000 | 71,000 | 9,000 | 145,000 | |
Inventory | 275,000 | 118,000 | 393,000 | ||
Land | 80,000 | 30,000 | 110,000 | ||
Buildings and equipment | 500,000 | 150,000 | 41,250 | 60,000 | 631,250 |
Less: accumulated depreciation | (180,000) | (90,000) | 60,000 | 7,500 | (217,500) |
Investment in G’s stock | 206,200 | 168,000 | 0 | ||
38,200 | |||||
Goodwill | 14,000 | 14,000 | |||
Total assets | 1,023,200 | 310,000 | 115,250 | 282,700 | 1,165,750 |
Accounts payable | 86,000 | 30,000 | 9,000 | 107,000 | |
Mortgages payable | 200,000 | 70,000 | 270,000 | ||
Common stock: | |||||
M | 300,000 | 300,000 | |||
G | 50,000 | 50,000 | |||
Retained earnings from above | 437,200 | 160,000 | 199,750 | 39,750 | 437,200 |
Non-controlling interest | 42,000 | ||||
9,550 | 51,550 | ||||
Total liabilities and equities | 1,023,200 | 310,000 | 258,750 | 91,300 | 1,165,750 |
The investment in G should be eliminated in the computation of the consolidated balance sheet work-paper.
- The income from subsidiary is eliminated.
- The non-controlling interest income is subtracted from the consolidated net income.
- $14,000 shall be reported as goodwill.
- The depreciation expenses are 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 $9,000 to G Co. thus, it would affect both accounts payable and accounts receivable.
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.
Eliminating entries needed to prepare consolidated financial statements for 20X8.
b.
Explanation of Solution
Eliminating entries
S.no | Date | Account title and explanation | Debit | Credit |
1 | Income 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) | ||||
2 | Income 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) | ||||
3 | Common 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) | ||||
4 | Buildings 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) | ||||
5 | Depreciation expense ($41,250/11 years) | $3,750 | ||
Accumulated depreciation | $3,750 | |||
(To amortize the differential) | ||||
6 | Goodwill impairment loss | $11,000 | ||
Goodwill | $11,000 | |||
(To record impairment of goodwill) | ||||
7 | Accounts 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,
- 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.
Three part consolidation worksheet for 20X8
c.
Explanation of Solution
Consolidated Worksheet as on December 31, 20X8
Particulars | M $ | G $ | Eliminations | Consolidated $ | |
Debit $ | Credit $ | ||||
Sales | 650,000 | 470,000 | 1,120,000 | ||
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 impairment | 11,000 | (11,000) | |||
Income from G | 24,200 | 36,000 | 11,800 | 0 | |
Consolidated net income | 97,200 | 45,000 | 50,750 | 11,800 | 103,250 |
NCI in net income | 9,000 | 2,950 | (6,050) | ||
Controlling interest in net income | 97,200 | 45,000 | 59,750 | 14,750 | 97,200 |
Statement of Retained Earnings | |||||
Retained earnings Jan 1 | 385,000 | 140,000 | 140,000 | 385,000 | |
Income, from above | 97,200 | 45,000 | 59,750 | 14,750 | 97,200 |
Dividends declared | (45,000) | (25,000) | 25,000 | (45,000) | |
Retained earnings as on Dec 1 carried forward | 437,200 | 160,000 | 199,750 | 39,750 | 437,200 |
Balance Sheet | |||||
Cash | 59,000 | 31,000 | 90,000 | ||
Accounts receivable | 83,000 | 71,000 | 9,000 | 145,000 | |
Inventory | 275,000 | 118,000 | 393,000 | ||
Land | 80,000 | 30,000 | 110,000 | ||
Buildings and equipment | 500,000 | 150,000 | 41,250 | 60,000 | 631,250 |
Less: accumulated depreciation | (180,000) | (90,000) | 60,000 | 7,500 | (217,500) |
Investment in G’s stock | 206,200 | 168,000 | 0 | ||
38,200 | |||||
Goodwill | 14,000 | 14,000 | |||
Total assets | 1,023,200 | 310,000 | 115,250 | 282,700 | 1,165,750 |
Accounts payable | 86,000 | 30,000 | 9,000 | 107,000 | |
Mortgages payable | 200,000 | 70,000 | 270,000 | ||
Common stock: | |||||
M | 300,000 | 300,000 | |||
G | 50,000 | 50,000 | |||
Retained earnings from above | 437,200 | 160,000 | 199,750 | 39,750 | 437,200 |
Non-controlling interest | 42,000 | ||||
9,550 | 51,550 | ||||
Total liabilities and equities | 1,023,200 | 310,000 | 258,750 | 91,300 | 1,165,750 |
The investment in G should be eliminated in the computation of the consolidated balance sheet work-paper.
- The income from subsidiary is eliminated.
- The non-controlling interest income is subtracted from the consolidated net income.
- $14,000 shall be reported as goodwill.
- The depreciation expenses are 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 $9,000 to G Co. thus, it would affect both accounts payable and accounts receivable.
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