Concept explainers
Consolidated in subsequent year:The consolidation procedures adopted in the second and subsequent years are basically same as used in the first year. Adjusted
Requirement 1
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 S 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 S 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: | 40,000 | |
Balance in investment account | $240,000 |
b
Consolidated in subsequent year:The consolidation procedures adopted in the second and subsequent years are basically same as used in the first year. Adjusted trial balance data of the individual companies are used as the starting point each time consolidation statements are prepared. An additional check is needed in each period to ensure that the beginning balance of consolidated retained earnings shown in the completed worksheet equals the balance reported at the end of previous year.
Requirement 2
Consolidation entries needed and prepare complete consolidation work sheet.
b
Answer to Problem 7.33P
Consolidation elimination entries.
Debit | Credit | |
1. Eliminate income from subsidiary | ||
Income from subsidiary | $38,000 | |
Dividends declared | $28,000 | |
Investment in S common stock | 10,000 | |
2. Assign income to non-controlled interest (45,000 x 0.20) | ||
Income from non-controlled interest | $9,000 | |
Dividends | 7,000 | |
Non-controlling interest | 2,000 | |
3. Eliminate beginning investment balance | ||
Common stock S company | 100,000 | |
Retained earnings January 1 | 140,000 | |
Differential | 50,000 | |
Investment in S stock | 232,000 | |
Non-controlling interest | 58,000 | |
Eliminate beginning investment balance | ||
Working note: | ||
P company’s holding at 80 percent | $160,000 | |
Non-controlling interest | 40,000 | |
$200,000 | ||
Less: S common stock outstanding at acquisition | $100,000 | |
S retained earnings at acquisition | 50,000 | |
$150,000 | ||
Differential | $50,000 | |
Investment in S company stock | ||
Working note: | ||
Balance in investment account after reconciliation | $240,000 | |
Less: investment in S stock | 8,000 | |
Current investment in S stock | $232,000 | |
Non-controlling interest | ||
Working notes: | ||
Common stock S | $100,000 | |
Retained earnings of S on January 1 | $140,000 | |
Retained earnings of S at acquisition | 50,000 | |
$290,000 | ||
Non-controlling interest 290,000 x 0.20 | $58,000 | |
4. Assigning differential to goodwill | ||
Goodwill | 25,000 | |
Retained earnings January 1 | 20,000 | |
Non-controlling interest | 5,000 | |
Differential | 50,000 | |
5. Elimination unrealized profit on land | ||
Retained earnings January 1 | 8,000 | |
Non-controlling interest | 2,000 | |
Land | 10,000 | |
6. Elimination of unrealized profit on equipment | ||
Buildings and equipment | 5,000 | |
Retained earnings January 1 | 18,000 | |
| 2,000 | |
| 21,000 | |
Accumulated depreciation adjustments | ||
Required balance ($5,000 x 7 years) | $35,000 | |
Balance recorded ( 7000 x 2 years) | (14,000) | |
Increase | 21,000 | |
7. Elimination of inter-corporate receivable / payable | ||
Accounts payable | 4,000 | |
Accounts receivable | 4,000 |
Consolidated net income for December 31 20X8 is $83,000 and Net Assets are $1,081,000
Explanation of Solution
- Income from subsidiary is eliminated by treating it as dividends
- Income from non-controlling interest is recognized Sales = 150,000
- Investment balances has been eliminated
- Assignment if differential to goodwill
- Unrealized profit on sale of land is eliminated
- Unrealized profit on sale of equipment is eliminated
- Intercompany accounts receivable and payable is eliminated by setoff
Less: Cost of sales = 80,000
Depreciation amortization = 15,000
Other expenses = 10,000
Income on intercompany = $45,000.
20 percent of income is non-controlling interest
Eliminate beginning investment balance | ||
Working note: | ||
P company’s holding at 80 percent | $160,000 | |
Non-controlling interest | 40,000 | |
$200,000 | ||
Less: S common stock outstanding at acquisition | $100,000 | |
S retained earnings at acquisition | 50,000 | |
$150,000 | ||
Differential | $50,000 | |
Investment in S company stock | ||
Working note: | ||
Balance in investment account after reconciliation | $240,000 | |
Less: investment in S stock | 8,000 | |
Current investment in S stock | $232,000 | |
Non-controlling interest | ||
Working notes: | ||
Common stock S | $100,000 | |
Retained earnings of S on January 1 | $140,000 | |
Retained earnings of S at acquisition | 50,000 | |
$290,000 | ||
Non-controlling interest 290,000 x 0.20 | $58,000 |
P & L Company
Consolidation work paper
December 31 20X7
Eliminations | |||||
Item | P | S | 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 |
Want to see more full solutions like this?
Chapter 7 Solutions
Advanced Financial Accounting
- Enron Corporation acquired by Walt Corporation. Walt acquired 75 percent ownership on January 1, 2018, for $200,250. At that date, Enron reported common stock outstanding of $90,000 and retained earnings of $135,000, and the fair value of the non-controlling interest was $66,750. The differential is assigned to equipment, which had a fair value $42,000 more than book value and a remaining economic life of seven years at the date of the business combination. Enron reported net income of $45,000 and paid dividends of $18,000 in 2018. Prepare and explain the journal entries recorded by Walt during 2018 on its books if it accounts for its investment in Enron using the equity method.arrow_forwardPurse Corporation acquired 70 percent of Scarf Corporation’s ownership on January 1, 20X8, for $140,000. At that date, Scarf reported capital stock outstanding of $120,000 and retained earnings of $80,000, and the fair value of the noncontrolling interest was equal to 30 percent of the book value of Scarf. During 20X8, Scarf reported net income of $30,000 and comprehensive income of $36,000 and paid dividends of $25,000. Required: Present all consolidation entries needed at December 31, 20X8, to prepare a complete set of consolidated financial statements for Purse Corporation and its subsidiary.arrow_forwardX Company purchased a (100%) controlling interest in Y Company by issuing $2,000,000 worth of common shares. The business combination agreement has an earnout clause that states the following: X Company would pay 10% of any earnings in excess of $750,000 to Y's shareholders in the first year following the acquisition. On acquisition date, X's shares had a market value of $80 per share.Required:a) Assuming that Y's net income in the first year following the acquisition was $950,000, prepare any journal entries (for X Company) that are necessary to reflect Y's results under IFRS 3 Business Combinations.b) Assuming that the agreement called for Y's shareholders to be compensated with 1,250 shares for any decline in X's share price, what journal entries would be required under IFRS 3, if the market value of X's shares dropped to $64 within the year?arrow_forward
- Porter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has 60,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $213,000 while Street reports $193,000. Annual amortization of $10,000 is recognized each year on the consolidation worksheet based on acquisition-date fair-value allocations. Both companies have convertible bonds outstanding. During the current year, bond-related interest expense (net of taxes) is $53,000 for Porter and $45,000 for Street. Porter’s bonds can be converted into 7,000 shares of common stock; Street’s bonds can be converted into 10,000 shares. Porter owns none of these bonds. What are the earnings per share amounts that Porter should report in its current year consolidated income statement? Compute diluted EPS only.arrow_forwardPorter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has 60,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $177,000 while Street reports $157,000. Annual amortization of $10,000 is recognized each year on the consolidation worksheet based on acquisition-date fair-value allocations. Both companies have convertible bonds outstanding. During the current year, bond-related interest expense (net of taxes) is $41,000 for Porter and $33,000 for Street. Porter’s bonds can be converted into 7,000 shares of common stock; Street’s bonds can be converted into 10,000 shares. Porter owns none of these bonds. What are the earnings per share amounts that Porter should report in its current year consolidated income statement? (Round your answers to 2 decimal places.) Porter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has…arrow_forwardPorter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has 60,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $150,000 while Street reports $130,000. Annual amortization of $10,000 is recognized each year on the consolidation worksheet based on acquisition-date fair-value allocations. Both companies have convertible bonds outstanding. During the current year, bond-related interest expense (net of taxes) is $32,000 for Porter and $24,000 for Street. Porter’s bonds can be converted into 8,000 shares of common stock; Street’s bonds can be converted into 10,000 shares. Porter owns none of these bonds. What are the earnings per share amounts that Porter should report in its current year consolidated income statement?arrow_forward
- Consolidated Statement of financial position : Johnson PLC acquires 80 percent of Steven PLC for $2,080,000 on January 1, 2020. The book values of Steven PLC’s assets and liabilities are equal to the fair values which equals $2,500,000. Steven PLC reports net income of $500,000 during the year. Dividends of $200,000 are declared by Steven PLC on December 5. These dividends are to be paid next year. The balance sheets of Johnson PLC and Steven PLC at December 31, 2020 are as follows: Johnson PLC accounts payable includes $100,000 owed to Steven PLC. Required: 1-Prepare consolidated balance sheet workpapers for Johnson PLC and Subsidiary at December 31, 2020. 2-Prepare the elimination entries for the group at December 31, 2020.arrow_forwardDate of Acquisition Consolidation Eliminating Entries, Bargain Purchase Peregrine Company acquired 80 percent of Sparrow Company’s common stock for $20,000,000 in cash; fees paid to an outside firm to estimate the earning power of Sparrow and the fair values of its properties amounted to $2,500,000. Sparrow’s equity consisted of $3,000,000 in capital stock, $25,000,000 in retained earnings, $1,500,000 in accumulated other comprehensive loss, and $500,000 in treasury stock. Book values of Sparrow’s identifiable assets and liabilities approximated their fair values except as noted below: Book value Fair value Land $1,000,000 $300,000 Other plant assets, net 6,000,000 4,000,000 Identifiable intangible assets -- 3,000,000 Assume that the fair values above have been carefully evaluated for accuracy. The fair value of the noncontrolling interest is estimated to be $4,000,000 at the date of acquisition. Required a. Calculate the gain on acquisition and prepare Peregrine’s acquisition entry.…arrow_forwardPretzel Corporation acquired 100 percent of Stick Company’s outstanding shares on January 1, 20X7. Balance sheet data for the two companies immediately after the purchase follow: As indicated in the parent company balance sheet, Pretzel purchased $59,000 of Stick’s bonds from the subsidiary at par value immediately after it acquired the stock. An analysis of intercompany receivables and payables also indicates that the subsidiary owes the parent $8,000. On the date of combination, the book values and fair values of Stick’s assets and liabilities were the same. Record the basic consolidation entryarrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning