Chapter 7, Problem 7.33P

a

To determine

Concept introduction: Consolidation in a subsequent year is fundamentally the same as used in the first year. Adjusted trial balance data of the individual companies are used for consolidation in the second year. In addition to that, the balances of consolidated retained earnings beginning and end are compared to check if it is equal in each period.

Reconciliation between the balances in P’s investment in L company stock account on December 31 20X7.

Answer to Problem 7.33P

Reconciliation between P’s investment in L on December 31 20X7 shows balance of $240,000 in investment account.

Explanation of Solution

Reconciliation of book value and balance in investments.

Net book value reported by L company
Common stock		$100,000
Retained Earnings January 1 20X7	$140,000
Net income for 20X7	45,000
Dividends paid in 20X7	(35,000)
Retained earnings Balance December 31 20X7		150,000
		$250,000
Proportion of stock held by P ($250,000 X 0.80)		$200,000
Add: Goodwill (50,000 x 0.80)		40,000
Balance in investment account		$240,000

b

To determine

Concept introduction: Consolidation in a subsequent year is fundamentally the same as used in the first year. Adjusted trial balance data of the individual companies are used for consolidation in the second year. In addition to that, the balances of consolidated retained earnings beginning and end are compared to check if it is equal in each period.

Consolidation entries needed and prepare complete consolidation work sheet.

Explanation of Solution

Consolidation elimination entries:

	Debit $	Credit $
1. Eliminate income from subsidiary
Income from subsidiary	38,000
Dividends declared		28,000
Investment in L common stock		10,000
(Income from subsidiary eliminated by reversal)
2. Assign income to non-controlled interest
Income from non-controlled interest $\left(45,000\times 0.20\right)$	9,000
Dividends		7,000
Non-controlling interest		2,000
(Income assigned to non-controlling interest)
3. Eliminate beginning investment balance
Common stock L company	100,000
Retained earnings January 1	140,000
Differential	50,000
Investment in L stock		232,000
Non-controlling interest		58,000
(Beginning investment eliminated by reversal)
4. Assigning differential to goodwill
Goodwill	25,000
Retained earnings January 1	20,000
Non-controlling interest	5,000
Differential		50,000
(Differential assigned to goodwill)
5. Elimination unrealized profit on land
Retained earnings January 1	8,000
Non-controlling interest	2,000
Land		10,000
(Being unrealized profit on land is eliminated by reversal)
6. Elimination of unrealized profit on equipment
Buildings and equipment	5,000
Retained earnings January 1	18,000
Depreciation and Amortization expenses		2,000
Accumulated Depreciation		21,000
(Elimination of unrealized profit on equipment)
7. Elimination of inter-corporate receivable / payable
Accounts payable	4,000
Accounts receivable		4,000
(Intercompany receivable and payable eliminated by setoff)

P & L Company

Consolidation Worksheet

December 31 20X7

			Eliminations
Item	P $	L $	Debit$	Credit$	Consolidated $
Sales	250,000	150,000			400,000
Income from subsidiary	38,000		38,000
	288,000	150,000			400,000
Cost of goods sold	160,000	80,000			240,000
Depreciation & amortization	25,000	15,000		2,000	38,000
Other expenses	20,000	10,000			30,000
	(205,000)	(105,000)			(308,000)
Consolidated net income to non-controlled interest					92,000
			9,000		(9,000)
Income carry forward	81,000	45,000	45,000	2,000	83,000
Retained earnings Jan 1	420,000	140,000	140,000
			20,000
			8,000
			18,000		374,000
Income from above	81,000	45,000	45,000	2,000	83,000
	501,000	185,000			457,000
Dividends declared	(60,000)	(35,000)		28,000
				7,000	(60,000)
Retained earnings Dec 31	441,000	150,000	231,000	37,000	397,000
Balance sheet
Cash and receivable	151,000	55,000		4,000	202,000
Inventory	240,000	100,000			340,000
Land	100,000	80,000		10,000	170,000
Buildings and equipment	500,000	150,000	5,000		655,000
Less Depreciation	(230,000)	(60,000)		(21,000)	(311,000)
Investment in L stock	240,000			8,000
				232,000
Differential			50,000	50,000
Goodwill			25,000		25,000
Total assets	1,001,000	325,000			1,081,000
Accounts payable	60,000	25,000	4,000		81,000
Bonds payable	200,000	50,000			250,000
Common stock	300,000	100,000	100,000		300,000
Retained earnings	441,000	150,000	231,000	37,000	397,000
			5,000	2,000
			2,000	58,000	53,000
Liabilities and equity	1,001,000	325,000	442,000	497,000	1,081,000

Working notes:

Consolidated net income for December 31 20X8 is $83,000 and Net Assets are $1,081,000

1. Income from subsidiary is eliminated by treating it as dividends
2. Income from non-controlling interest is recognized

Sales	$150,000
Less: Cost of sales	($80,000)
Depreciation amortization	($15,000)
Other expenses	($10,000)
Income on intercompany	$45,000

3. Investment balances has been eliminated

Eliminate beginning investment balance
Working note:
P company’s holding at 80 percent		$160,000
Non-controlling interest		40,000
		$200,000
Less: L’s common stock outstanding at acquisition	$100,000
L’s retained earnings at acquisition	50,000
		$150,000
Differential		$50,000
Investment in L company stock
Working note:
Balance in investment account after reconciliation		$240,000
Less: investment in L stock		8,000
Current investment in L stock		$232,000
Non-controlling interest
Working notes:
Common stock L		$100,000
Retained earnings of L on January 1		$140,000
Retained earnings of L at acquisition		50,000
		$290,000
$\mathrm{N}\mathrm{o}\mathrm{n}-\mathrm{c}\mathrm{o}\mathrm{n}\mathrm{t}\mathrm{r}\mathrm{o}\mathrm{l}\mathrm{l}\mathrm{i}\mathrm{n}\mathrm{g}\mathrm{i}\mathrm{n}\mathrm{t}\mathrm{e}\mathrm{r}\mathrm{e}\mathrm{s}\mathrm{t}290,000\times 0.20$		$58,000

4. Assignment if differential to goodwill
5. Unrealized profit on sale of land is eliminated
6. Unrealized profit on sale of equipment is eliminated

Accumulated depreciation adjustments
Required balance $\left(\mathrm{\$}5,000\times 7\mathrm{y}\mathrm{e}\mathrm{a}\mathrm{r}\mathrm{s}\right)$	$35,000
Balance recorded $\left(7000\times 2\mathrm{y}\mathrm{e}\mathrm{a}\mathrm{r}\mathrm{s}\right)$	(14,000)
Increase	21,000

7. Intercompany accounts receivable and payable is eliminated by setoff