a
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 adjustments in
a
Answer to Problem 7.41AP
The amount of differential as of January 1, 20X8 $120,000
Explanation of Solution
Debit $ | credit $ | |
Income from S company | 2,000 | |
Investment in S company | 38,400 | |
Retained earnings | 40,400 |
Particulars | P company | L company | ||
Debit $ | credit $ | Debit $ | credit $ | |
Cash and accounts receivables | 151,000 | 55,000 | ||
Inventory | 240,000 | 100,000 | ||
Land | 100,000 | 80,000 | ||
Buildings and equipment | 500,000 | 150,000 | ||
Investment in L company | 240,000 | |||
Cost of goods sold | 160,000 | 80,000 | ||
25,000 | 15,000 | |||
Other expenses | 20,000 | 10,000 | ||
Dividends declared | 60,000 | 35,000 | ||
230,000 | 60,000 | |||
Accounts payable | 60,000 | 25,000 | ||
Bonds payable | 200,000 | 50,000 | ||
Common stock | 300,000 | 100,000 | ||
Retained earnings | 420,000 | 140,000 | ||
Sales | 250,000 | 150,000 | ||
Income from subsidiary | 36,000 | |||
Total | 1,496,000 | 1,496,000 | 525,000 | 525,000 |
b
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 entries that would have been recorded on P’s books during 20X7 if it had always used the modified equity method.
b
Explanation of Solution
Particulars | Debit $ | Credit $ |
To record share in S company income: | ||
Investment in S company | 36,000 | |
Income from S company | 36,000 | |
(Investment in S company recognized) | ||
To record receipt of dividends from L: | ||
Cash | 28,000 | |
Investment in S company | 28,000 | |
(Received cash dividends from L) |
- Income from subsidiary recognized and credited to income from subsidiary and debited to investment account
- Cash dividends received from subsidiary credited to investment account
c
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, 20X7
c
Explanation of Solution
Particulars | Debit $ | Credit $ |
1. Elimination of beginning investment | ||
Common stock | 100,000 | |
Retained earnings | 140,000 | |
Income from L | 36,000 | |
Non-controlling interest in net income of L | 9,000 | |
Dividends declared | 35,000 | |
Investment in L | 200,000 | |
Non-controlling interest in net assets of L | 50,000 | |
(Beginning investment in S eliminated by reversal) | ||
2. Excess value of differential reclassification | ||
Retained earnings | 14,400 | |
32,000 | ||
Investment in L | 40,000 | |
Non-controlling interest in net assets of L | 6,400 | |
(Recognition of differential on land and goodwill) | ||
3. Elimination of intercompany receivables and payables | ||
Accounts payable | 4,000 | |
Cash and accounts receivable | 4,000 | |
(Intercompany other receivables and payables eliminated by setoff) | ||
4. Elimination of gain on purchase of land | ||
Retained earnings | 8,000 | |
Non-controlling interest in net income of L | 2,000 | |
Land | 10,000 | |
(Gain on purchase of land eliminated) | ||
5. Elimination of gain on equipment asset basis | ||
Retained earnings | 18,000 | |
Equipment | 5,000 | |
Accumulated depreciation | 23,000 | |
(Gain on equipment recognized) | ||
6. Excess depreciation recognized | ||
Accumulated depreciation | 2,000 | |
Depreciation expenses | 2,000 | |
(Excess depreciation recognized) |
- Elimination of beginning investment
- Differential on goodwill and retained earnings recognized
- Intercompany receivable and payable eliminated by setoff
- Gain on purchase of investment eliminated by reversal
- Gain on sale of equipment is eliminated by crediting and depreciation recognized
d
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, 20X7.
d
Answer to Problem 7.41AP
Balance as per three part consolidated work sheet:
- Retained earnings $402,600
- Net assets $1,088,000
Explanation of Solution
Elimination | |||||
Items | P $ | S $ | Debit $ | Credit $ | Consolidation $ |
Sales | 250,000 | 150,000 | 400,000 | ||
Less: | |||||
Cost of goods sold | (160,000) | (80,000) | (240,000) | ||
Depreciation expenses | (25,000) | (15,000) | 2,000 | (38,000) | |
Other expenses | (20,000) | (10,000) | (30,000) | ||
Income from S Corp | 36,000 | 36,000 | |||
Consolidated net income | 92,000 | ||||
Non-controlling interest | 9,000 | (9,000) | |||
Net income carry forward | 81,000 | 45,000 | 45,000 | 2,000 | 83,000 |
Retained earnings | 42,000 | 140,000 | 140,000 | ||
14,400 | |||||
8,000 | |||||
18,000 | 379,600 | ||||
Net income | 81,000 | 45,000 | 45,000 | 2,000 | 83,000 |
Less: Dividends declared | (60,000) | (35,000) | 35,000 | (60,000) | |
Retained earnings Dec 31 | 441,000 | 150,000 | 225,400 | 37,000 | 402,600 |
Cash and receivables | 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 & equipment | 500,000 | 150,000 | 5,000 | 655,000 | |
Less: Accumulated depreciation | (230,000) | (60,000) | 2,000 | 23,000 | (311,000) |
Investment in L | 240,000 | 200,000 | |||
40,000 | |||||
Goodwill | 32,000 | 32,000 | |||
Total Assets | 1,001,000 | 325,000 | 39,000 | 277,000 | 1,088,000 |
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 | 225,400 | 37,000 | 402,600 |
Non-controlling interest in net assets of S | 2,000 | 50,000 | 54,400 | ||
6,400 | |||||
Total Liabilities & Equity | 1,001,000 | 325,000 | 331,400 | 93,400 | 1,088,000 |
Want to see more full solutions like this?
Chapter 7 Solutions
ADV.FIN.ACCT. CONNECT+PROCTORIO PLUS
- Rios Financial Co. is a regional insurance company that began operations on January 1, Year 1. The following transactions relate to trading securities acquired by Rios Financial Co., which has a fiscal year ending on December 31: Instructions 1. Journalize the entries to record these transactions. 2. Prepare the investment-related current asset balance sheet presentation for Rios Financial Co. on December 31, Year 2. 3. How are unrealized gains or losses on trading investments presented in the financial statements of Rios Financial Co.?arrow_forwardUse the adjusted trial balance of Lash Corporation below to prepare a classified balance sheet, multistep income statement, a statement of comprehensive income, and two columns of the statement of stockholders' equity (RE column & AOCI column). Ignore income taxes. Ignore EPS. Important other information: Debt Investments have been adjusted to fair value. The unrealized holding gain listed on the trial balance relates to this adjus tment. - The Note Payable is due in 3 equal annual installments. The first stallment is due on 12/31/26. Common Stock has a par value of $1. Number of shares authorized equals 500,000. Compute the number of shares issued. The number of shares issued = number of shares outstanding. - Balances below are either as of 12/31/25 or for the year ended 12/31/25. Lash Corporation Adjusted Trial Balance 12/31/2025 Cash 102,000 Debt Investments (trading) 90,000 Accounts Receivable 47,000 Allowance for doubtful accounts 1,000 Cash surrender value of life insurance…arrow_forwardPharoah Company has a stock portfolio valued at $4,100. Its cost was $3,500. If the Fair Value Adjustment account has a debit balance of $130, prepare the journal entry at year-end. (List debit entry before credit entry. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts) Account Titles and Explanation Debit Creditarrow_forward
- Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Bramble Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Vaughn Company. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Do not leave any answer field blank. Enter 0 for amounts.) (a) Fair Value Method (b) Equity Method Transaction Investment Account Dividend Revenue Investment Account Investment Revenue 1. At the beginning of Year 1, Bramble bought 30% of Vaughn's common stock at its book value. Total book value of all Vaughn's common stock was $900,000 on this date. 2. (a) During Year 1, Vaughn reported $66,000 of net income. (b) During Year 1, Vaughn paid $30,000 of dividends. 3. (a) During Year 2, Vaughn reported $33,000 of net income. (b) During Year 2, Vaughn paid $19,500 of dividends. 4. (a) During Year 3,…arrow_forwardThe equity method of accounting for investments requires a.the investment to be increased by the reported net income of the investee b.the investment to be reported at its original cost c.a year-end adjustment to revalue the stock to lower of cost or market d.the investment to be increased by the dividends paid by the investeearrow_forward36. Akito Company uses the statement of financial position approach in estimating uncollectible accounts expense. The entity prepares an adjusting entry to recognize this expense at the end of the year. During the year, the entity wrote off a P100, 000 receivable and made no recovery of previous write-off. After the adjusting entry for the year, the credit balance in the allowance for doubtful accounts was P250, 000 larger than it was on January 1. What amount of uncollectible account expense was recorded for the year?arrow_forward
- Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Ayayai Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Sunland Company. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Do not leave any answer field blank. Enter 0 for amounts.) (a) Fair Value Method (b) Equity Method Transaction Investment Account Dividend Revenue Investment Account Investment Revenue 1. At the beginning of Year 1, Ayayai bought 30% of Sunland's common stock at its book value. Total book value of all Sunland's common stock was $760,000 on this date. 2. (a) During Year 1, Sunland reported $52,000 of net income. (b) During Year 1, Sunland paid $28,500 of dividends. 3. (a) During Year 2, Sunland reported…arrow_forwardNovak Corp. has the following securities (all purchased in 2023) in its investment portfolio on December 31, 2023: 3,170 Anderson Corp. common shares, which cost $48,501; 9,500 Munter Ltd. common shares, which cost $579,800; and 6,400 King Corp. preferred shares, which cost $254,900. Their fair values at the end of 2023 were as follows: Anderson $50,080; Munter $569,300; and King $255,000. In 2024, Novak completed the following transactions: 1. 2. On January 15, sold 3,170 Anderson common shares at $20 per share less fees of $1,990. On April 17, purchased 1,230 Castle Ltd. common shares at $34.80 per share plus fees of $1,940. The company adds transaction costs to the cost of acquired investments and deducts them from cash received on the sale of investments. On December 31, 2024, the fair values per share of the securities were as follows: Munter $71; King $32; and Castle $13. Novak's accounting supervisor tells you that all these securities have fair values that can be readily…arrow_forwardYour answer is partially correct. Prepare the adjusting entry at December 31, 2022, to report the investments at fair value. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts) Date Account Titles and Explanation Debit Credit Dec. 31 Unrealized Gain or Loss-Income 7790 Fair Value Adjustment-Stock 7790 eTextbook and Media List of Accounts Save for Later Attempts:1of 3cedarrow_forward
- Requirement Referring to the qualitative characteristics of accounting information, indicate the fundamental characteristic (relevance or representationally faithful) and its related attribute (confirmatory value, completeness, materiality, neutrality, or predictive value) for each of the following uses of accounting information. Use of Accounting Information This year's reported earnings per share is a. $.50 below analysts' forecasts Potential creditors review a company's long- term liabilities footnote to determine that b. entity's ability to assume additional debt. A corporation discloses both favorable and unfavorable tax settlements. C. A company discloses the write-off of an accounts receivable. The receivable due from a major customer accounts for 35% of the d. company's current assets. A financial analyst computes a company's five-year average cost of goods sold in order e. to forecast next year's profit margin. ***** Fundamental Characteristic Attributearrow_forwardAAA corporation unadjusted trial balance follows. On December 31, 2020, the accountant noticed that few adjustments should be made. Accrued interest revenue on investments at period end, $2,200 Insurance still unexpired at end of the period, $12,000 Prepare: Adjusted trail balance Income statement Statement of shareholder’s equity Balance sheet.arrow_forward
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning