Concept explainers
a
Introduction: When one organization controls another, the resources of both the entities are allowed to transfer between one another as needed. For example, a direct debit transfer can be done between one affiliate to another without the participation of an unrelated party. In addition to that transfers can also be done in trade receivable, payable arising from the intercompany sale of inventory on credit and note payable by one affiliate to another.
Amount of cost of goods sold to be reported in consolidated income statement.
a
Answer to Problem 8.25P
Cost of goods sold to be reported in consolidated income statement is $794,000
Explanation of Solution
$ | $ | |
Amount of cost of goods reported by L corporation | 620,000 | |
Amount of cost of goods reported by A corporation | 240,000 | |
Adjustment of unrealized profit on inventory purchased by L from A | (15,000) | |
Adjustment of inventory purchased from subsidiary and resold 20X7 | ||
CGS intercompany sales recorded by L | 40,000 | |
CGS intercompany sales recorded by A | 33,000 | |
Total | 73,000 | |
CGS based on L’s cost 40,000 x (33,000 /60,000) | (22,000) | |
Required adjustment | (51,000) | |
Cost of goods sold | 794,000 |
b.
Introduction: When one organization controls another, the resources of both the entities are allowed to transfer between one another as needed. For example, a direct debit transfer can be done between one affiliate to another without the participation of an unrelated party. In addition to that transfers can also be done in trade receivable, payable arising from the intercompany sale of inventory on credit and note payable by one affiliate to another.
Inventory balance to be reported in consolidated balance sheet December 31 20X7
b.
Answer to Problem 8.25P
Consolidated inventory balance to be reported in consolidated balance sheet is $278,000
Explanation of Solution
$ | $ | |
Amount of inventory reported by L | 167,000 | |
Amount of inventory reported by A | 120,000 | |
Total | 287,000 | |
Less: Unrealized profit in ending inventory held by A (27,000 / 60,000) x20,000 | (9,000) | |
Consolidated inventory balance | 278,000 |
c.
Introduction: When one organization controls another, the resources of both the entities are allowed to transfer between one another as needed. For example, a direct debit transfer can be done between one affiliate to another without the participation of an unrelated party. In addition to that transfers can also be done in trade receivable, payable arising from the intercompany sale of inventory on credit and note payable by one affiliate to another.
c.
Explanation of Solution
Debit $ | Credit $ | |
Interest expense | 15,200 | |
Bond premium | 800 | |
Cash | 16,000 | |
(Paid cash on account of interest expense and bond premium) |
Computation of interest expenses
Par | $200,000 |
Annual Interest $200,000 x 0.8 | $16,000 |
Annual amortization of premium ($4,800 /6 years) | (800) |
Interest expenses | $15,200 |
d.
Introduction: When one organization controls another, the resources of both the entities are allowed to transfer between one another as needed. For example, a direct debit transfer can be done between one affiliate to another without the participation of an unrelated party. In addition to that transfers can also be done in trade receivable, payable arising from the intercompany sale of inventory on credit and note payable by one affiliate to another.
Journal entry to record interest income
d.
Explanation of Solution
Debit $ | Credit $ | |
Cash | 6,400 | |
Investment in A company bond | 200 | |
Interest income | 6,600 | |
(Received cash on account of interest income) |
Computation of interest income
Annual payment received (80,000 x 0.80 | $6,400 |
Amortization of discount | 200 |
Interest income | $6,600 |
e.
Introduction: When one organization controls another, the resources of both the entities are allowed to transfer between one another as needed. For example, a direct debit transfer can be done between one affiliate to another without the participation of an unrelated party. In addition to that transfers can also be done in trade receivable, payable arising from the intercompany sale of inventory on credit and note payable by one affiliate to another.
The income assigned to non-controlling interest in consolidated balance sheet
e.
Answer to Problem 8.25P
Income assigned to non-controlling interest $15,620
Explanation of Solution
Computation of income assigned to non-controlling interest
$ | |
Net income reported by A | 48,000 |
Adjustment for realization of profit on inventory sold to L | 15,000 |
Adjustment of gain on bond retirement ($4,160 / 8 years) | (520) |
Realized net income | 62,480 |
Income assigned to non-controlling interest $62,480 x 0.25 | 15,620 |
Computation of gain on bond retirement
$ | $ | |
Par value of bond | 200,000 | |
Amortization per year (4,800 / 6 years ) | 800 | |
Premium maturity value Dec 31 20X5 (800 x 8 years) | 6,400 | |
Book value of bond | 206,400 | |
Book value of bond purchase 206,400 x 0.40 | 82,560 | |
Purchase price | (78,400) | |
Gain | 4,160 |
f.
Introduction: When one organization controls another, the resources of both the entities are allowed to transfer between one another as needed. For example, a direct debit transfer can be done between one affiliate to another without the participation of an unrelated party. In addition to that transfers can also be done in trade receivable, payable arising from the intercompany sale of inventory on credit and note payable by one affiliate to another.
Preparation of consolidation entries needed at December 31 20X7 to complete consolidation worksheet.
f.
Explanation of Solution
Debit $ | Credit $ | |
To eliminate income from subsidiary | ||
Income from subsidiary | 36,000 | |
Dividends declared | 18,000 | |
Investment in A company stock | 18,000 | |
(Income from subsidiary eliminated by reversal) | ||
Assign income to non-controlling interest. | ||
Income to non-controlling interest | 15,620 | |
Dividends declared | 6,000 | |
Non-controlling interest | 9,620 | |
( Income assigned to non-controlling interest) | ||
Eliminate beginning investment balance | ||
Common stock A company | 50,000 | |
170,000 | ||
Investment in A’s stock | 165,000 | |
Non-controlling interest | 55,000 | |
(Beginning investment eliminated by reversal) | ||
Eliminating beginning inventory profit | ||
Retained earnings, January 1 | 11,250 | |
Non-controlling interest | 3,750 | |
Cost of goods sold | 15,000 | |
(Unrealized profit on inventory eliminated) | ||
Eliminating intercompany sale of inventory by L | ||
Sales | 60,000 | |
Cost of goods sold | 51,000 | |
Inventory | 9,000 | |
(Profit on intercompany sale of inventory eliminated) | ||
Eliminating intercompany bond holdings | ||
Bond payable | 80,000 | |
Bond premium | 1,920 | |
Interest income | 6,600 | |
Investment on A company’s bonds | 78,800 | |
Interest expenses | 6,080 | |
Retained earnings, January 1 | 2,730 | |
Non-controlling interest | 910 | |
(Intercompany bond investment eliminated by reversal) |
- Income from subsidiary is eliminated by debiting to income from subsidiary account.
- Assignment of income to non-controlling interest
Realized net income by A company
Net income reported by A | $48,000 |
Realization of profit on inventory sold to L (59,000 − 44,000) | $15,000 |
Adjustment of gain on bond retirement ($4,160 / 8 years) | (520) |
Realized net income | $62,480 |
- Common stock and retained earnings in the beginning of the year was $170,000 and 50,000 which is $220,000 eliminating by crediting to investment in A account and non- controlling interest account in the ratio of parental and subsidiary holdings.
- Beginning inventory profit of $15,000 is eliminated as required by debiting retained earnings at 75% and non-controlling interest by 25%.
- Intercompany sale of inventory is eliminated by
posting reversal entry. - Eliminating corporate bond holding
Bond premium:
Bond premium given | $4,800 |
L bond discount 80,000 − 78,400 | (1,600) |
Net premium on bond | $3,200 |
Calculation of bond investment value:
Bonds purchase consideration | $78,400 |
Amortization of discount (1,600 / 8 years) | 200 |
$78,800 |
Calculation of interest expenses:
$6,400 | |
Less amortization of premium ($3,200 / 10 years) | (320) |
Interest expense | $6,080 |
g.
Introduction: When one organization controls another, the resources of both the entities are allowed to transfer between one another as needed. For example, a direct debit transfer can be done between one affiliate to another without the participation of an unrelated party. In addition to that transfers can also be done in trade receivable, payable arising from the intercompany sale of inventory on credit and note payable by one affiliate to another.
Determine the consolidation work sheet for 20X7
g.
Answer to Problem 8.25P
Balance as per consolidation work sheet $1,274,700
Explanation of Solution
L Corporation and A Corporation
Consolidation worksheet
December 31, 20X7
Elimination | |||||
L$ | A$ | Debit$ | Credit$ | Consolidation $ | |
Sales | 750,000 | 320,000 | 60,000 | 1,010,000 | |
Interest and other income | 16,000 | 5,000 | 6,600 | 14,400 | |
Income from subsidiary | 36,000 | 36,000 | |||
802,000 | 325,000 | 1,024,400 | |||
Less: Cost of goods sold | (620,000) | (240,000) | 15,000 | ||
51,000 | (794,000) | ||||
(45,000) | (15,000) | (60,000) | |||
Interest and other expenses | (35,000) | (22,000) | 6,080 | (50,920) | |
Consolidated net income | $119,480 | ||||
Income to non-controlling interest | 15,620 | (15,620) | |||
Net income | 102,000 | 48,000 | 118,220 | 72,080 | 103,860 |
Retained earnings Jan 1 | 291,700 | 170,000 | 170,000 | 2,730 | |
11,250 | 283,180 | ||||
393,700 | 218,000 | 387,040 | |||
Dividends declared | (50,000) | (24,000) | 18,000 | ||
6,000 | (50,000) | ||||
Retained earnings Dec 31 | 343,700 | 194,000 | 299,470 | 98,810 | 337,040 |
Balance sheet: | |||||
Cash | 37,900 | 48,800 | 86,700 | ||
110,000 | 105,000 | 215,000 | |||
Other receivable | 30,000 | 15,000 | 45,000 | ||
Inventory | 167,000 | 120,000 | 9,000 | 278,000 | |
Land | 90,000 | 40,000 | 130,000 | ||
Investment in A’s bonds | 78,800 | 78,800 | |||
Investment in A’s Stock | 183,000 | 18,000 | |||
165,000 | |||||
Buildings and Equipment | 500,000 | 250,000 | 750,000 | ||
Less Accumulated Depreciation | (155,000) | (75,000) | (230,000) | ||
Total Assets | 1,041,700 | 175,000 | 1,274,700 | ||
Accounts payable | 118,000 | 35,000 | 153,000 | ||
Other payable | 40,000 | 20,000 | 60,000 | ||
Bonds payable | 250,000 | 200,000 | 80,000 | 370,000 | |
Bonds premium | 4,800 | 1,920 | 2,880 | ||
Common Stock: | |||||
L company | 250,000 | 250,000 | |||
A company | 50,000 | 50,000 | |||
Additional Paid in capital | 40,000 | 40,000 | |||
Retained earnings Dec 31 | 343,700 | 194,000 | 299,470 | 98,810 | 337,040 |
Non-controlling interest | 3,750 | 9,620 | |||
55,000 | |||||
910 | 61,780 | ||||
Liability and equity | 1,041,700 | 175,000 | 1,274,700 |
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Chapter 8 Solutions
GEN CMB ADV FINCL ACCT; Connect Access Card
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