Chapter 3, Problem 3.6.3P

To determine

Introduction:

Consolidation of statements:

The result of parent company as well as all of its subsidiaries financial position is reflected in the consolidated statements. It is beneficial for creditors and owners of the parent company to know the outcome of the operations of parent company and its subsidiaries. The Equity method is used to calculate or assess the profits earned by investments in other companies.

To calculate: The consolidated Income statement, retained earnings and Balance sheet of the parent company and subsidiary Sandin Company.

Answer to Problem 3.6.3P

The total assets and total liabilities and stockholder’s equity is $1147500. The retained earnings of controlling interest are $567000 and of non-controlling interest is $200.

Explanation of Solution

1. Consolidated Income statement

Perscott Company and subsidiary Sandin Company
Consolidated Income statement
For year Ended December 31, 2016
Particular	Amount
Sales	$480000
Less : Cost of Goods sold	$229000
Gross profit	$251000
Less : Expenses ($120000+$45000+$4000 )	$169000
Consolidated Net income	$82000
Distributed to non-controlling interest	$4200
Distributed to controlling interest	$77800

2. Retained Earnings statement

P Company and Subsidiary S Company
Retained Earnings Statement
For year Ended December 31 2016
Particulars	Non-controlling interest	Controlling
Retained earnings Jan 1 2016	($3000)	$499800
Add : Consolidated net income	$4200	$77800
Less : dividends declared	($1000)	($10000)
Retained Earnings Dec 31 2016	$200	$567000

3. Consolidated Balance Sheet

Prescott company and Subsidiary Sandin company
Consolidated Balance sheet
For the year ended December 31 2016
Assets	Amount	Amount
Current Assets:-		$295000
Property Plant and Equip
Land		$225000
Building (net)	$980000
Account Depreciation	($455000)	$525000
Goodwill		$102500
Total assets		$1147500
Liability and Shareholders’ Equity
Liabilities		$308000
Common stock ($3 par)	$200000
Retained Earnings	$567600
Non-controlling interest	$71900	$839500
Total Liabilities and stockholders’ Equity		$1147500

4. Worksheet for consolidated financial statements

P Company and subsidiary S Company
Worksheet for consolidated Financial statements
For Year ended December 31 2016
Particulars	Trial balance		Eliminations and Adjustments		Consolidated Income Statement	Non-controlling Interest		Controlling Ret earnings	Conso Balance Sheet
	Prescott	Sandin	Debit	Credit				$295000
Current Assets	$180000	$115000								$225000
Land	$150000	$75000								$980000
Buildings	$590000	$350000	C1	$40000						($455000)
Acc Dep-Bldgs	($265000)	($182000)			(A)	$8000
Investment in S co.	$294000	-	B2	$4000	B1	$20000
					EL	$164000
					D	$114000
Goodwill	-	-	C2	$102500						$102500
Liabilities	($175000)	($133000)								($308000)
Common stock	($200,000)									($200000)
R/E Co P	($503000)		A	$3200
									($499800)
Comm Stock		($100000)	EL	$80000				($20000)
Paid in cap		($120000)	EL	$96000				($24000)
RE co S		$15000	A	$800	EL	$12000		($24700)
					(NCI)	$28500
Sales	($360000)	($120000)					($480000)
Cost of Goods sold	$179000	$50000					$229000
Expenses	$120000	$45000
			A	$4000			$169000
Subsidiary inc	($20000)		B1	$20000
Dividends declared	$10000	$5000			B2	$4000		$1000	$1000
Total	$0	$0		$350500		$350500	-
Consolidated net income							($82000)
To Non controlling interest							$4200	$4200
To controlling interest							($77800)		($77800)
Total Non controlling interest								($71900)		($71900)
Retained earnings controlling interest Dec 31 2016									($567600)	($567600)

In the above worksheet,

A − Depreciation of the building for current as well as prior period.

B1 − Elimination of income of the subsidiary company against the investment account.

B2 − Eliminating dividend

C1 − Building value

C2 − Goodwill (working #4)

D or NCI − Non controlling interest and excess cost has been distributed on the basis of the determination and distribution of excess schedule

EL − Eliminating the subsidiary equity account against the investment

Workings:

1. Fair value of subsidiary company has to be calculated with the help of controlling interest i.e. 80% and purchase consideration i.e. $270,000. = $\frac{Purchaseconsideration}{Controllinginterest}\times 100\%$

= $\frac{270000}{80\%}\times 100\%$

= $\$337,500$

2. To calculate total equity we will combine common stock and paid in capital in excess of par and deduct the retained earnings from it since it is a deficit. Total Equity = $\$1,00,000+\$1,20,000-\$25,000$ = $\$1,95,000$

3. Fair value of net assets (excluding goodwill) = $TotalEquity+\text{ B}uilding\left(understatedvalue\right)$

= $\$1,95,000+\$40,000$= $\$2,35,000$

4. Goodwill is calculated as = $Fairvalueofsubsidiarycompany–Fairvalueofnetassets$

= $\$3,37,500-\$2,35,000=\$102,000$

5. Value Analysis Schedule

Value Analysis Schedule	Company Implied fair value	Parent (80%)	Non controlling interest value (20%)
Fair value of subsidiary	$337,500 (working#1)	$\begin{array}{l}\$270000\\ (337500\times 80\%)\end{array}$	$\begin{array}{l}\$67500\\ (337500\times 20\%)\end{array}$
Fair value of net assets excl Goodwill	$2,35,000 (Working #3)	$\begin{array}{l}\begin{array}{l}\$1,88,000\hfill \end{array}\\ (2,35,000\times 80\%)\end{array}$	$\begin{array}{l}\$47000\\ (235000\times 20\%)\end{array}$
Goodwill	$\$102,000$ (working#4)	$\begin{array}{l}\$82000\\ (\$102000\times 80\%)\end{array}$	$\begin{array}{l}\$20,500\\ (102000\times 20\%)\end{array}$

6. Determination and Distribution of excess schedule:-

Determination and distribution of excess schedule
Particulars	Company implied fair value	Parent (80%)	Non controlling interest value (20%)
Fair value of subsidiary (a)	$337500	$270000	$67500
Book value of interest acquired:
Common Stock	$100000
Paid in capital in excess of par	$120000
Retained Earnings	($25000)
Total Equity	$195000	$195000	$195000
Interest acquired		80%	20%
Book Value (b)		$156000	$39000
Excess of fair value over book value (a-b) = C	$142500	$114000	$28500
Adjustment of identifiable accounts	Adjustment	Life	Amortization per year	Worksheet key
Building	$40000	10 years	$4000	Debit (d1)
Goodwill	$102500	-	-	Debit (d2)
Total	$142500

7.Calculation of internally generated Net income:-Internally generated income = Sandin company sales −Cost of goods sold + Operating expenses$\begin{array}{l}=\$120000-(\$50000+\$45000)\\ =\$25000\end{array}$

8. Income distribution for Sandin company

Sandin company income distribution
Particular	Amount	Particular	Amount
Bldg Depre	$4000	Internally generated net income ( working #7)	25000
		Adjusted income	$21000
		Non controlling interest profit share in Subsidiary ($21000X20%)	$4200

9. Calculation of internally generated net income:

Internally generated income = Prescott company sales − Cost of goods sold+ Operating expenses$\begin{array}{l}=\$360000-(\$179000+\$120000)\\ =\$61000\end{array}$

10. Income distribution for Prescott Company

Prescott company income distribution
Particular	Amount	Particular	Amount
		Internally generated net income ( working #9)	$61000
		Non- controlling interest profit share in Subsidiary ($21000X80%)	$16800
		Controlling interest share	$77800