Concept explainers
a
Modified equity method and cost method: When investments were accounted for using the modified equity method, the proportionate share of subsidiary income and dividends are recorded in the same manner as under the fully adjusted equity method. However, the share of unrealized profits from intercompany transactions does not differ, instead, these unrealized gains or losses are removed from the parent’s
The consolidation entries needed to prepare full set of consolidated financial statement.
a
Explanation of Solution
1. Elimination entries
Particulars | Debit $ | Credit $ |
Common stock | 60,000 | |
Retained earnings | 85,000 | |
Income from B Corporation | 19,500 | |
NCI in net income of B Corporation | 6,265 | |
Dividends declared | 5,000 | |
Investment in B Corporation | 110,500 | |
NCI in net assets of B Corporation | 55,265 | |
(Elimination of beginning investment in B) | ||
Gain on sale of land | 4,000 | |
Land | 4,000 | |
(Gain on sale of land eliminated) | ||
Gain on sale of building | 13,200 | |
| 1,100 | |
Building and equipment | 12,100 | |
(Gain on sale of building recognized) | ||
Sales | 24,000 | |
Other expenses | 24,000 | |
(Intercompany sales of service eliminated) |
Elimination entries
1. Beginning investment eliminated by reversal
Ending Balance in retained earnings | $110,000 |
Less: Income ($30,000 - $5,000 Dividends) | (25,000) |
Beginning retained earnings | $85,000 |
Income from S
Non-controlling interest in net income
Investment in S company
NCI in net assets of B Corporation
2. Gain on sale of land eliminated
3. Gain on building recognized, Depreciation
4. Intercompany sale of service eliminated by setoff
b
Modified equity method and cost method: When investments were accounted for using the modified equity method, the proportionate share of subsidiary income and dividends are recorded in the same manner as under the fully adjusted equity method. However, the share of unrealized profits from intercompany transactions does not differ, instead, these unrealized gains or losses are removed from the parent’s retained earnings in the period after the intercompany sale, and in that case, the parent’s net income is usually not equal to the amount of consolidated net income allocated to the controlling interest.
The three part consolidation worksheet for December 31 20X4
b
Answer to Problem 7.40AP
Balances as per consolidation work sheet 20X7
Retained earnings $213,135
Total assets $683,400
Explanation of Solution
M and subsidiary
Consolidation worksheet
As of December 31, 20X7
elimination | |||||
Items | M $ | B $ | Debit $ | Credit $ | Consolidation $ |
Sales | 286,500 | 128,500 | 24,000 | 391,000 | |
Gain on sale of Land | 4,000 | 4,000 | |||
Gain on sale of building | 13,200 | 13,200 | |||
Less: | |||||
Cost of goods sold | (160,000) | (75,000) | (235,000) | ||
Depreciation | (22,000) | (19,000) | 1,100 | (39,900) | |
Other expenses | (76,000) | (17,700) | 24,000 | (69,700) | |
Income from B Corp | 19,500 | 19,500 | |||
Consolidated net income | 46,400 | ||||
NCI in net income | 6,265 | (6,265) | |||
Controlling interest in NI | 52,000 | 30,000 | 66,965 | 25,100 | 40,135 |
Retained earnings Jan 1 | 198,000 | 85,000 | 85,000 | 198,000 | |
Net income | 52,000 | 30,000 | 66,965 | 25,100 | 40,135 |
Less dividends declared | (25,000) | (5,000) | (5,000) | (25,000) | |
Retained earnings Dec, 31 | 225,000 | 110,000 | 151,965 | 30,100 | 213,135 |
Cash | 32,500 | 22,000 | 54,500 | ||
62,000 | 37,000 | 99,000 | |||
Inventory | 95,000 | 71,000 | 166,000 | ||
Land | 40,000 | 15,000 | 4,000 | 51,000 | |
Buildings and equipment | 200,000 | 125,000 | 12,100 | 312,900 | |
Investment in B Corp | 110,500 | 110,500 | |||
Total assets | 540,000 | 270,000 | 0 | 126,600 | 683,400 |
Accounts payable | 35,000 | 20,000 | 55,000 | ||
Bonds payable | 180,000 | 80,000 | 260,000 | ||
Common stock | 100,000 | 60,000 | 60,000 | 100,000 | |
Retained earnings | 225,000 | 110,000 | 151,965 | 30,100 | 213,135 |
NCI in Net assets of B | 55,265 | ||||
Total liabilities & equity | 540,000 | 270,000 | 211,965 | 85,365 | 683,400 |
c
Modified equity method and cost method: When investments were accounted for using the modified equity method, the proportionate share of subsidiary income and dividends are recorded in the same manner as under the fully adjusted equity method. However, the share of unrealized profits from intercompany transactions does not differ, instead, these unrealized gains or losses are removed from the parent’s retained earnings in the period after the intercompany sale, and in that case, the parent’s net income is usually not equal to the amount of consolidated net income allocated to the controlling interest.
The consolidated balance sheet, income statement and retained earnings statement
c
Answer to Problem 7.40AP
Balances as per consolidated statement:
Balance sheet totals $683,400
Consolidated net income $46,400
Retained earnings December 31, 20X4 $213,135
Explanation of Solution
M Company and Subsidiary
Consolidated balance sheet
December 31m 20X4
Amount $ | Amount $ | |
Cash | 54,500 | |
Accounts receivable | 99,000 | |
Inventory | 166,000 | |
Land | 51,000 | |
Building and equipment | 312,900 | |
Total assets | 683,400 | |
Accounts payable | 55,000 | |
Bonds payable | 260,000 | |
Controlling interest: | ||
Common stock | 100,000 | |
Retained earnings | 213,135 | |
Total controlling interest | 313,135 | |
Non-controlling interest | 55,265 | |
Total stockholders’ equity | 368,400 | |
Total liabilities and Stockholders’ equity | 683,400 |
M Company and Subsidiary
Consolidated income statement
December 31m 20X4
Amount $ | Amount $ | |
Sales | 391,000 | |
Less: Cost of goods sold | 235,000 | |
Depreciation expense | 39,900 | |
Other expenses | 69,700 | |
Total Expenses | (344,600) | |
Consolidated net income | 46,400 | |
Income to non-controlling interest | (6,265) | |
Income to controlling interest | 40,135 |
M Company and Subsidiary
Consolidated retained earnings statement
December 31m 20X4
Items | Amount $ |
Retained earnings January 1 20X4 | 198,000 |
Income to controlling interest 20X4 | 40,135 |
238,135 | |
Dividends declared | (25,000) |
Retained earnings December 31, 20X4 | 213,135 |
Want to see more full solutions like this?
Chapter 7 Solutions
GEN CMB ADV FINCL ACCT; Connect Access Card
- Man merged with San Corporation in a business combination in which San issued 30,000 shares of its $5 par (current fair value $20 a share) common stock to stockholders of Man in exchange for all their outstanding common stock. The journal entry for the merger includes: a. Debit to investment in common stock of Man company $ 600,000. b. Debit to investment in common stock of Man company $ 450,000. c. Debit to investment in common stock of Man company $ 150,000. d. Debit to investment in common stock of Man company $ 300,000.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_forwardPorter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has 65,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $239,000 while Street reports $191,000. Annual amortization of $14,000 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 $51,000 for Porter and $43,000 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? (Round your answers to 2 decimal places.) Basic and dilutedarrow_forward
- Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning