Intercompany long-term asset transfers: Related companies frequently purchase services and assets from one another, when intercompany transfers of non-current assets occur. The parent company must make adjustments in preparation of consolidated financial statements for as long as the acquiring company holds the assets.
When related company transfers land at book value, no specific adjustments are needed but when the asset is transferred at more or less than book value special treatment is required.
Under the fully adjusted equity method, the parent company must defer any unrealized gains or losses until the assets are eventually sold to unrelated parties.
In consolidation process, the selling entity’s gain or loss must be eliminated because the consolidated entity still holds the land.
Requirement 1
The amount of income assigned to Non-controlling interest in consolidated income statement.
Answer to Problem 7.35P
Income assigned to non-controlling interest is $4,710.
Explanation of Solution
Income assigned to non-controlling interest
$ | $ | |
Net income ofS | 30,000 | |
Less: Gain on sale of equipment to parent P | 9,600 | |
Gain realized prior to 20X5 | (1,200) | (8,400) |
Amortization of differential: | ||
Buildings and Equipment ($25,000 / 10 years) | (2,500) | |
Copyright ($17,000 / 5 Years) | (3,500) | |
Realized Income | $15,700 | |
Income to Non-controlling interest($15,700 x 0.30) | 4,710 | |
Gain on sale of equipment to parent P: | ||
Sale price to P | 91,600 | |
Less purchase price | 100,000 | |
2 Years | (18,000) | (82,000) |
Gain on sale | 9,600 |
b
Intercompany long-term asset transfers: Related companies frequently purchase services and assets from one another, when intercompany transfers of non-current assets occur. The parent company must make adjustments in preparation of consolidated financial statements for as long as the acquiring company holds the assets.
When related company transfers land at book value, no specific adjustments are needed but when the asset is transferred at more or less than book value special treatment is required.
Under the fully adjusted equity method, the parent company must defer any unrealized gains or losses until the assets are eventually sold to unrelated parties.
In consolidation process, the selling entity’s gain or loss must be eliminated because the consolidated entity still holds the land.
Requirement 2
Reconciliation between the balances in P’s investment in S company underlying net assets reported by P.
b
Answer to Problem 7.35P
Reconciliation between P’s investment in S on December 31 20X7 shows balance of $174,510 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 20X5 | $100,000 | |
Net income for 20X5 | 30,000 | |
Dividends paid in 20X5 | (5,000) | |
Retained earnings Balance December 31 20X7 | 125,000 | |
Net book value | $225,000 | |
Net book value of ownership by held P ($225,000 X 0.70) | $157,500 | |
Buildings and equipment[($25,000 x 7/10 years) x 0.70] | 12,250 | |
Copyright [($17,000 x 2/5 years) x 0.70) | 4,760 | |
Investment in M company | $174,510 |
c
Intercompany long-term asset transfers: Related companies frequently purchase services and assets from one another, when intercompany transfers of non-current assets occur. The parent company must make adjustments in preparation of consolidated financial statements for as long as the acquiring company holds the assets.
When related company transfers land at book value, no specific adjustments are needed but when the asset is transferred at more or less than book value special treatment is required.
Under the fully adjusted equity method, the parent company must defer any unrealized gains or losses until the assets are eventually sold to unrelated parties.
In consolidation process, the selling entity’s gain or loss must be eliminated because the consolidated entity still holds the land.
Requirement 3
Consolidated entries needed to prepare full set of consolidated financial statement.
c
Answer to Problem 7.35P
Debit | credit | |
1. Elimination of income from subsidiary | ||
Income from subsidiary | 16,870 | |
Dividends declared | 3,500 | |
Investment in S company stock | 13,370 | |
2. Assign income to non-controlling interest | ||
Income to non-controlling interest | 4,710 | |
Dividends declared | 15,00 | |
Non-controlling interest | 3,210 | |
3. Eliminating beginning investment balance | ||
Common stock S company | 100,000 | |
Retained earnings January 1 | 100,000 | |
Differential | 30,200 | |
Investment in S company stock | 161,140 | |
Non-controlling interest | 69,060 | |
4. Assign beginning differential | ||
Buildings and equipment | 25,000 | |
Copyright | 10,200 | |
Accumulated | 5,000 | |
Differential | 30,200 | |
5. To amortize differential | ||
Depreciation expenses | 2,500 | |
Amortization expenses | 3,400 | |
Amortization depreciation | 2,500 | |
Copy right | 3,400 | |
6. Eliminate unrealized gain on land | ||
Retained earnings January 1 | 11,000 | |
Land | 11,000 | |
7. Elimination of intercompany sale of equipment | ||
Equipment | 8,400 | |
Gain on sale of equipment | 9,600 | |
Depreciation expenses | 1,200 | |
Accumulated depreciation | 16,800 |
Explanation of Solution
- Income from subsidiary is eliminated by debiting to income from subsidiary account.
- Income to non-controlling interest assigned by crediting to non-controlling interest account and dividends declared on it.
- Beginning investment balance has been eliminated and differential recognized as follows ($25,000 x 8/10) = ($17,000 x 3/5) = $30,200
- Beginning differential on buildings, equipment and copyright recognized.
- Depreciation differential amortized by recognizing the amortization expenses
- Beginning unrealized gain on land eliminated Selling price of land $32,000
- Elimination of intercompany sale of equipment Cost of equipment 20X3 $100,000
Cost of land $21,000
Unrealized profit $11,000
Sales price for P $91,600
Gross gain 8,400
Gain on sale of equipment 91,600 − (100,000 − 18,000 depreciation) = 9,600
Depreciation expenses at 20X5 (81,600 / 8 years) − (90,000 /10 years) = $1,200
Accumulated depreciation (9,000 x 3 years) − (10,200 x 1year) = 16,800
d
Intercompany long-term asset transfers: Related companies frequently purchase services and assets from one another, when intercompany transfers of non-current assets occur. The parent company must make adjustments in preparation of consolidated financial statements for as long as the acquiring company holds the assets.
When related company transfers land at book value, no specific adjustments are needed but when the asset is transferred at more or less than book value special treatment is required.
Under the fully adjusted equity method, the parent company must defer any unrealized gains or losses until the assets are eventually sold to unrelated parties.
In consolidation process, the selling entity’s gain or loss must be eliminated because the consolidated entity still holds the land.
Requirement 4
Preparation of three part work sheet for 20X5.
d
Answer to Problem 7.35P
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.
P | S | Elimination | |||
Debit | Credit | consolidation | |||
Sales | 450,000 | 190,400 | 640,400 | ||
Other income | 28,250 | 28,250 | |||
Gain on sale of equipment | 9,600 | 9,600 | |||
Income from subsidiary | 16,870 | 16,870 | |||
485,120 | 200,000 | 668,650 | |||
Cost of goods sold | (375,000) | (110,000) | (485,000) | ||
Depreciation expenses | (25,000) | (10,000) | 2,500 | 1,200 | (36,300) |
Interest expenses | (24,000) | (33,000) | (57,000) | ||
Other expenses | (28,000) | (17,000) | (45,000) | ||
Amortization expenses | 3,400 | (3,400) | |||
Income NCI | 4,710 | (4.710) | |||
Net income | 43,120 | 30,000 | 37,080 | 1,200 | 37,240 |
Retained earnings Jan 1 | 176,240 | 100,000 | 100,000 | ||
Dividends declared | (30,000) | (5,000) | 3,500 | ||
1,500 | (30,000) | ||||
Retained earnings Dec 31 | 189,360 | 125,000 | 148,080 | 6,200 | 172,480 |
Balance sheet | |||||
Cash | 15,850 | 58,000 | 73,850 | ||
Accounts receivable | 65,000 | 70,000 | 135,000 | ||
Interest & other receivable | 30,000 | 10,000 | 40,000 | ||
Inventory | 150,000 | 180,000 | 330,000 | ||
Bond discount | 15,000 | 15,000 | |||
Investment in S stock | 174,510 | 13,370 | |||
Differential | 30,200 | 30,200 | |||
Copyright | 10,200 | 3,400 | 6,800 | ||
Land | 80,000 | 60,000 | 11,000 | 129,000 | |
Buildings and equipment | 315,000 | 240,000 | 25,000 | ||
8,400 | 588,400 | ||||
Less depreciation | (120,000) | (60,000) | 5,000 | ||
2,500 | |||||
16,800 | (204,300) | ||||
Total assets | 710,360 | 573,000 | 1,113,750 | ||
Accounts payable | 61,000 | 28,000 | 89,000 | ||
Other payable | 30,000 | 20,000 | 50,000 | ||
Bonds payable | 250,000 | 300,000 | 550,000 | ||
Common stock | |||||
P corporation | 150,000 | 150,000 | |||
S corporation | 100,000 | 100,000 | |||
Additional Paid in capital | 30,000 | 30,000 | |||
Retained earnings | 189,360 | 125,000 | 146,080 | 6,200 | 172,480 |
Non-controlling interest | 3,210 | ||||
69,060 | 72,270 | ||||
Liability and equity | 710,360 | 573,000 | 1,113,750 |
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