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.

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: Depreciation expense	($15,000)
Less: Other expenses	($100,000)
Net Income	$45,000
Income from S co. $\left(45,000\times 80\%\right)$	$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. $\left(\$3,750\times 80\%\right)$	$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
		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,

  $\begin{array}{c}\text{Income to non-controlling interest}=\left(\text{Income}–\text{Depreciation expense}–\text{Impaired Goodwill}\right)\times 20\%\\ =\left(\$45,000-\$3,750-\$11,000\right)\times 20\%\\ =\$30,250\times 20\%\\ =\$6,050\end{array}$

• 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.
• 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.

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.

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,

  $\begin{array}{c}\text{Income to non-controlling interest}=\left(\text{Income}–\text{Depreciation expense}–\text{Impaired Goodwill}\right)\times 20\%\\ =\left(\$45,000-\$3,750-\$11,000\right)\times 20\%\\ =\$30,250\times 20\%\\ =\$6,050\end{array}$

• 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.
• 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

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.

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.