Chapter 7, Problem 7.38P

a

To determine

Introduction: When the intercompany transfer of asset occurs, the parent company must make adjustments in preparing consolidated financial statements as long as the asset is held by the acquiring company, when the asset is transferred at book value no special adjustments are needed. But when the asset is transferred at more or less than the book value, the unrealized gain or loss is deferred until the asset is sold to an unrelated party. Moreover in the consolidation, the gain or loss will be eliminated.

The amount of the differential as of January 1, 20X8

Answer to Problem 7.38P

The amount of the differential as of January 1, 20X8 $120,000

Explanation of Solution

Items	Amount $
Original differential at December 31, 20X1	150,000
Less: portion written off for sale of inventory	(30,000)
Remaining differential January 1, 20X8	120,000

b

To determine

Introduction: When the intercompany transfer of asset occurs, the parent company must make adjustments in preparing consolidated financial statements as long as the asset is held by the acquiring company, when the asset is transferred at book value no special adjustments are needed. But when the asset is transferred at more or less than the book value, the unrealized gain or loss is deferred until the asset is sold to an unrelated party. Moreover in the consolidation, the gain or loss will be eliminated.

The balance in P’s investment in S stock account as of December 31, 20X8

Answer to Problem 7.38P

The balance in P’s investment in S stock account as of December 31, 20X8 $2,974,000

Explanation of Solution

Items	Amount $	Amount $
S stockholders’ equity:
Common stock		1,000,000
Additional paid-in capital		1.350,000
Retained earnings December 31, 20X8:
S retained earnings January 1, 20X8	1,400,000
S net income 20X8	110,000
S dividends declared	(20,000)
Retained earnings December 31, 20X8		1,490,000
Stockholders’ equity, December 31, 20X8		3,840,000
Book value of shares held in P $\$3,840,000\times .75$		2,880,000
Remaining differential at January 1, 20X8 $\$120,000\times .75$		90,000
Deferred gain on downstream sale of land		(23,000)
Loss on sale of equipment ($30,000 − 3,000)		27,000
Balance in investment in S account December 31, 20X8		2,974,000

c

To determine

Introduction: When the intercompany transfer of asset occurs, the parent company must make adjustments in preparing consolidated financial statements as long as the asset is held by the acquiring company, when the asset is transferred at book value no special adjustments are needed. But when the asset is transferred at more or less than the book value, the unrealized gain or loss is deferred until the asset is sold to an unrelated party. Moreover in the consolidation, the gain or loss will be eliminated.

The consolidation entries required to prepare a three-part consolidated worksheet at December 31, 20X8

Explanation of Solution

Particulars	Debit $	Credit $
1. Elimination of beginning investment
Common stock	1,000,000
Additional paid-in capital	1,350,000
Retained earnings	1,400,000
Income from S	109,500
Non-controlling interest in net income of S	36,500
Dividends declared		20,000
Investment in S		2,907,000
Non-controlling interest in net assets of S		969,000
(Beginning investment in S eliminated by reversal)
2. Excess value of differential reclassification
Land	56,000
Goodwill	64,000
Investment in S		90,000
Non-controlling interest in net assets of S		30,000
(Recognition of differential on land and goodwill)
3. Elimination of intercompany other income and expenses
Other income	80,000
Other expenses		80,000
(Intercompany other income and expenses eliminated by setoff)
4. Elimination of intercompany payable and receivables
Current payables	20,000
Current receivable		20,000
(Intercompany receivable and payables eliminated)
5. Elimination of intercompany dividends owed
Current payables	3,750
Current receivable		3,750
(Dividends receivable and payable eliminated)
6. Elimination of gain on purchase of land
Investment in S	23,000
Land		23,000
(Gain on purchase of land eliminated)
7. Elimination of gain on equipment
Equipment	185,000
Loss on sale		40,000
Accumulated depreciation		145,000
( Gain on equipment eliminated)
Depreciation expense	4,000
Accumulated depreciation		4,000
(Additional depreciation recognized)

1. Elimination of beginning investment

$\begin{array}{c}\text{Investment in S Corp}=(\$3,896,000-20,000)\times 0.75\\ =\$2,907,000\end{array}$

$\begin{array}{c}\text{Non-controlling interest}=(\$3,896,000-20,000)\times 0.25\\ =\$969,000\end{array}$

2. Differential on land and investment recognized
3. Intercompany income and expenses eliminated by setoff
4. Intercompany dividends owed eliminated
5. Intercompany receivable and payable eliminated by setoff
6. Gain on purchase of investment eliminated by reversal
7. Loss on sale of equipment is eliminated by crediting and depreciation recognized

d

To determine

Introduction: When the intercompany transfer of asset occurs, the parent company must make adjustments in preparing consolidated financial statements as long as the asset is held by the acquiring company, when the asset is transferred at book value no special adjustments are needed. But when the asset is transferred at more or less than the book value, the unrealized gain or loss is deferred until the asset is sold to an unrelated party. Moreover in the consolidation, the gain or loss will be eliminated.

The three part consolidation worksheet for December 31, 20X9.

Answer to Problem 7.38P

Balance as per three part consolidated work sheet:

• Retained earnings $2,649,300
• Net assets $6,359,050

Explanation of Solution

			Elimination
Items	P $	S $	Debit $	Credit $	Consolidation $
Sales	4,801,000	985,000			5,786,000
Other income	90,000	(35,000)	80,000	40,000	15,000
Less:
Cost of goods sold	(2,193,000)	(525,000)			(2,718,000)
Depreciation expenses	(202,000)	(88,000)	4,000		(294,000)
Other expenses	(1,381,000)	(227,000)		80,000	(1,528,000)
Income from S Corp	109,500		109,500
Consolidated net income					1,261,000
Non-controlling interest			36,500		(36,500)
Net income carry forward	2,649,300	1,490,000	1,630,000	140,000	2,649,300
Retained earnings	1,474,800	1,400,000	1,400,000		1,474,800
Net income	2,649,300	1,490,000	1,630,000	140,000	2,649,300
Less dividends declared	(50,000)	(20,000)		20,000	(50,000)
Retained earnings Dec 31	2,649,300	1,490,000	1,630,000	140,000	2,649,300
Cash	50,700	38,000			88,700
Accounts receivable	101,800	89,400		23,750	167,450
Inventory	286,000	218,900			504,900
Land	400,000	1,200,000	56,000	23,000	1,633,000
Buildings & equipment	2,400,000	2,990,000	185,000		5,575,000
Less: Accumulated depreciation	(1,105,000)	(420,000)		145,000
				4,000	(1,674,000)
Investment in S	2,974,000		23,000	2,907,000
				90,000
Goodwill			64,000		64,000
Total Assets	5,107,500	4,116,300	328,000	2,192,750	6,359,050
Accounts payable	86,200	76,300	23,750		138,750
Bonds payable	1,000,000	200,000			1,200,000
Common stock	100,000	1,000,000	1,000,000		100,000
Additional paid-in capital	1,272,000	1,350,000	1,350,000		1,272,000
Retained earnings	2,649,300	1,490,000	1,630,000	140,000	2,649,300
Non-controlling interest in net assets of S				969,000	999,000
				30,000
Total Liabilities & Equity	5,107,500	4,116,300	328,000	2,192,750	6,359,050