Chapter 3, Problem 3.18.2P

To determine

Equity method:

The equity method dkeeps the record of the parent’s ownership interest that is multiplied by the reported net income of the subsidiary. This income will be added to parent’s investment account and the deduction in this method will be of the parent’s ownership interest multiplied by the reported losses of the subsidiary and parent’s ownership interest multiplied by the declared dividends of the subsidiary. All together equals the equity-adjusted balance.

Cost method:

The cost method basically retains the original cost of acquisition balance in the subsidiary account. As the income is earned by the subsidiary, no adjustments would be made.

To calculate:

The preparation of Fast Cool company and its subsidiary Fast Air company consolidated worksheet with supporting of schedule of amortisation and income.

Explanation of Solution

Fast Cool has acquired $80\%$ common stock of Fast Air for this, Fast cool issued $35,000$ share of its fair value $\$20$ per stock.

To calculate and prepare determination and distribution of excess schedule some adjustment needs to be performed. Thus, these adjustments are in various steps:-

Step 1: Calculate total amortization amount

Particulars	Life	Fair Value	Book Value	Annual Amount	Current Year	Prior Year	Total
Inventory	$1$	$\$65,000$	$\$60,000$	$\$5,000$	-	$\$5,000$	$\$5,000$
Building	$20$	$\$5,00,000$	$\$4,00,000$	$\$7,500$	$\$7,500$	$\$7,500$	$\$15,000$
Equipment	$5$	$\$1,00,000$	$\$1,50,000$	$(\$4,000)$	$(\$4,000)$	$(\$4,000)$	$(\$8,000)$
Patent	$5$	$\$50,000$	$\$40,000$	$\$2,000$	$\$2,000$	$\$2,000$	$\$4,000$
Mortgage Payable	$5$	$\$2,05,000$	$(\$1,000)$	$(\$1,000)$	$(\$1,000)$	$(\$1,000)$	$(\$2,000)$
Purchase Contract	$2$	$\$10,000$	-	$\$5,000$	$\$5,000$	$\$5,000$	$\$10,000$
Total Amortization		-	-	$\$9,500$	$\$9,500$	$\$9,500$	$\$19,000$

After calculating amortization, Step 2 will be calculating internally generated net income for Fast Cool and Fast Air Company.

As per the information given in the question Fast Air sales $\$5,00,000$ , cost of goods sold is $\$2,60,000$ , Depreciation of building and equipment is $\$17,500$ and $\$24,000$ ,Other expenses $\$1,15,000$ and Interest expenses $\$16,000$ .

Now, calculation of internally generated net income is as follows:

  $\begin{array}{c}\text{Net Income}=\text{Sales}-\left(\begin{array}{l}\text{Cost of goods sold}+\text{Depreciation of building}\\ +\text{Depreciation of equipment}+\text{Operating Expenses}\end{array}\right)\\ =\$5,00,000-(\$2,60,000+\$17,500+\$24,000+\$1,15,000+\$16,000)\\ =\$67,500\end{array}$

Fast Air Company Income Distribution

Internally Generated Net Income(A)	Amortization for current year (B)	Adjusted income=(A)-(B)	Non-Controlling Interest Profit Share in Subsidiary (20%)	Controlling Interest Share(80%)
$\$67,500$	$\$9,500$	$\$58,000$	$\$11,600$	$\$,46,400$

Calculation of internally generated net income:

As per the information given in the question Fast Cool sales $\$7,00,000$ , cost of goods sold is $\$3,80,000$ , Depreciation of building and equipment is $\$10,000$ and $\$7,000$ , other expenses being $\$50,000$ .

Now, calculate internally generated net income,

  $\begin{array}{c}\text{Net Income}=\text{Sales}-\left(\begin{array}{l}\text{Cost of goods sold}+\text{Depreciation of building}\\ +\text{Depreciation of equipment}+\text{Other Expenses}\end{array}\right)\\ =\$7,00,000-(\$3,80,000+\$10,000+\$7,000+\$50,000)\\ =\$2,53,000\end{array}$

Fast Air Company Income Distribution

Internally Generated Net Income	Non-Controlling Interest Profit Share in Subsidiary (20%)	Controlling Interest Share(80%)
$\$2,53,000$	$\$46,400$	$\$2,99,400$

Step 3:

Fast Cool Company and Fast Air Company Worksheet for Consolidated Financial Statement

For year ended December 2016.

Particulars	Financial Statement		Elimination & Adjustments		Non- Controlling Interest	Controlling Interest Retained Earning	Consolidated
	Fast Cool	Fast Air	Debit	Credit
Income Statement
Net Sales	$(\$7,00,000)$	$(\$5,00,000)$	-	-	-	-	$(\$12,00,000)$
Cost of Goods Sold	$\$3,80,000$	$\$2,60,000$	-	-	-	-	$\$6,40,000$
Depreciation of Building	$\$10,000$	$\$17,500$	$\$7,500$	-	-	-	$\$35,000$
Depreciation of equipment	$\$7,000$	$\$24,000$	-	$\$4,000$	-	-	$\$27,000$
Interest Expense	-	$\$16,000$	-	$\$1,000$	-	-	$\$15,000$
Other Expenses	$\$50,000$	$\$1,15,000$	$\$2,000$	-	-	-	$\$1,72,000$
	-	-	$\$5,000$	-	-	-	-
Subsidiary Income	$(\$54,000)$	-	$\$54,000$	-	-	-	-
Dividend Declared- Fast Cool	$\$20,000$	-	-	-	-	-	$\$20,000$
Dividend Declared- Fast Air	-	$\$10,000$	-	$\$8,000$	$\$2,000$	-	-
Net Income	$(\$2,87,000)$	$(\$57,500)$	-	-	-		-
Consolidated Income	-	-	-	-	-	-	$(\$3,11,000)$
NCI (see income distribution schedule)	-	-	-	-	$\$11,600$	-	$(\$11,600)$
Controlling Interest (see income distribution schedule)	-	-	-	-	-	$\$2,99,400$	$(\$2,99,400)$
Consolidated Balance Sheet:
Inventory, December 2016	$\$1,20,000$	$\$95,000$	-	-	-	-	$\$2,15,000$
Cash	$\$3,92,000$	$\$99,000$	-	-	-	-	$\$4,91,000$
Account Receivable	$\$2,00,000$	$\$1,20,000$	-	-	-	-	$\$3,20,000$
Investment in Fast Air	$\$7,76,000$	-	(2) $\$8,000$	(1) $\$54,000$	-	-	-
	-	-	-	(3) $\$4,14,000$	-	-	-
	-	-	-	(4) $\$3,16,000$	-	-	$\$17,50,000$
Land	$\$60,000$	$\$50,000$	(4) $\$50,000$	-	-	-	$\$1,60,000$
Buildings	$\$12,00,000$	$\$4,00,000$	(4) $\$1,50,000$	-	-	-	$\$17,50,000$
Accumulated Depreciation	$(\$2,00,000)$	$(\$85,000)$	-	(5) $\$15,000$	-	-	$(\$3,00,000)$
Equipment	$\$1,40,000$	$\$1,50,000$	-	(4) $\$20,000$	-	-	$\$2,70,000$
Accumulated Depreciation	$(\$80,000)$	$(\$78,000)$	(5) $\$8,000$	-	-	-	$(\$1,50,000)$
Patent	-	$\$24,000$	(4) $\$10,000$	$\$4,000$	-	-	$\$30,000$
Purchase Contract	-	-	$\$10,000$	$\$10,000$	-	-	-
Goodwill	-	$\$50,000$	(4) $\$1,95,000$	-	-	-	$\$2,45,000$
Current Liabilities	$(\$1,50,000)$	$(\$50,000)$	-	-	-	-	$(\$2,00,000)$
Bond Payable	-	$(\$2,00,000)$	-	-	-	-	$(\$2,00,000)$
Discount (premium)	-	-	-	(4) $\$5,000$	-	-	-
	-	-	(5) $\$2,000$	-	-	-	$(\$3,000)$
Common Stock-Fast Cool	$(\$95,000)$	-	-	-	-	-	$(\$95,000)$
Paid in capital in excess of Par- Fast Cool	$(\$14,05,000)$	-	-	-	-	-	$(\$14,05,000)$
Retained Earnings-December 31,2016-Fast Cool	$(\$6,71,000)$	-	(4) $\$4,000$	-	-	-	$(\$7,38,200)$
	-	-	(5) $\$7,600$	-	-	$(\$6,66,000)$	-
Common Stock- Fast Air	-	$(\$1,00,000)$	(3) $(\$80,000)$	-	$(\$20,000)$	-	-
Paid in capital in excess of Par- Fast Air	-	$(\$2,00,000)$	(3) $(\$1,60,000)$	-	$(\$40,000)$	-	-
Retained Earnings-December 31,2016-Fast Air	-	$(\$2,17,500)$	(3) $\$1,74,000$	$\$79,000$	$\$1,19,600$	-	$(\$7,38,200)$
	-	-	$\$1,000$	-	-	-	-
	-	-	$\$1,900$	-	-	-	-
Total NCI	-	-	-	-	$(\$1,89,200)$	-	$(\$1,89,200)$
Retained Earnings- Controlling Interest, December 31, 2016	-	-	-	-	-	$(\$9,38,800)$	$(\$9,38,800)$
	-	-	-	-	-	-	$\$0$

Working Notes:

1. Current year Subsidiary income has been considered.
2. Dividend Declared in current year.
3. Elimination of controlling interest in subsidiary equity.
4. Made adjustment as per the determination and distribution schedule.
5. Amortization Adjustment has been made.

Consolidated non-controlling interest is $\$2,99,400$ , total controlling interest is $\$9,38,800$ and retained earnings is $\text{\$1,89,200}$ .