Chapter 3, Problem 3A.1.2AP

To determine

Equity method:

The equity method basically keeps 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 the 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 consolidation worksheet with the notes of determination and distribution of excess schedule with the help of information provided.

Answer to Problem 3A.1.2AP

P Company’s subsidiary S company has fair value of $\$400,000$ , goodwill of $\$80,000$ .

Explanation of Solution

The P Company purchased $80\%$ common stock of S company for $\$320,000$ . On the date inventory has been valued $\$10,000$ more than cost as well as building valued $\$30,000$ more than book value which has remaining life of $10$ years so that will be depreciated by the straight line method.

Through all the information given in the question, prepare determination and distribution of excess schedule.

Step $1$ - Calculation of Goodwill.

Value Analysis Schedule	Company Implied Fair Value	Parent Price $\left(80\%\right)$	Non-Controlling Interest $\left(20\%\right)$
Fair value of subsidiary	$\$400,000$	$\$320,000$	$\$80,000$
Fair value of net assets excluding Goodwill	$\$340,000$	$\$272,000$	$\$68,000$
Goodwill	$\$60,000$	$\$48,000$	$\$12,000$

Step $2$ - Schedule for Determination and Distribution Excess Schedule.

Particulars	Company implied fair value	Parent price $\left(80\%\right)$	Non-Controlling Interest $\left(20\%\right)$
Fair value of subsidiary (a)	$\$400,000$	$\$320,000$	$\$80,000$
Book value of interest acquired:
Common stock	$\$50,000$
Paid in capital in excess of par	$\$100,000$
Retained Earning	$\$150,000$
Total Equity	$\$300,000$	$\$300,000$	$\$300,000$
Interest Acquired		$\left(80\%\right)$	$\left(20\%\right)$
Book Value(b)	$\$300,000$	$\$240,000$	$\$60,000$
Excess of fair value over book value $\text{(a)-(b)=(c)}$	$\$100,000$	$\$80,000$	$\$20,000$
Adjustment of identifiable accounts	Adjustment	Life	Amortization per year
Inventory	$\$10,000$	-	-	A $1$
Building	$\$30,000$	$10$	$\$3,000$	A $2$
Goodwill (refer to equation (2))	$\$60,000$	-	-	A $3$
Total	$\$100,000$

This represent non-controlling interest portion of excess of fair value over book.

Step $3$ : Calculation of Internally generated net income:

  $\begin{array}{c}\text{S Company income}=\text{Sales}-\left(\text{Cost of goods sold }+\text{Operating Expenses}\right)\\ =\$450,000-\left(\$260,000+\$100,000\right)\\ =\$90,000\end{array}$

S Company income distribution:

Particulars	Amount	Particular	Amount
Amortization	$\$2,500$	Internally generated net income	$\$90,000$
		Adjusted income before tax	$\$87,500$
		Non-Controlling interest profit share in subsidiary $\left(20\%\right)$	$\$17,500$
		Controlling interest share $\left(80\%\right)$	$\$70,000$

  $\begin{array}{c}\text{P Company income}=\text{Sales}-\left(\text{Cost of goods sold }+\text{Operating Expenses}\right)\\ =\$520,000-\left(\$300,000+\$120,000\right)\\ =\$100,000\end{array}$

P Company income distribution.

Particular	Amount
Internally generated net income	$\$100,000$
Non Controlling interest profit share in subsidiary	$\$70,000$
Controlling interest share	$\$170,000$

Step $4$ : Consolidated worksheet of Paro company and Solar Company, for the year ended December $31,2016$ .

Particulars	Financial Statement		Elimination & Adjustments		Non- Controlling Interest	Consolidated
	Fast Cool	Fast Air	Debit	Credit
Income Statement
Net Sales	$(\$520,000)$	$(\$450,000)$	-	-	-	$(\$970,000)$
Cost of Goods Sold	$\$300,000$	$\$260,000$	-	-	-	$\$560,000$
Other Expenses	$\$120,000$	$\$100,000$	$(4)$$\$3,000$	-	-	$\$223,000$
Subsidiary Income	$(\$72,000)$	-	$\left(1\right)$$\$72,000$	-	-	-
Net Income	$(\$172,000)$	$(\$90,000)$	-	-	-	-
Consolidated Income	-	-	-	-	-	$(\$187,000)$
NCI (see income distribution schedule)	-	-	-	-	$\left(\$17,500\right)$	-
Controlling Interest (see income distribution schedule)	-	-	-	-	-	$(\$170,000)$
Retained Earnings Statements:	-	-	-	-	-	-
Balance, January 1,2016- P	$\left(\$214,000\right)$	-	$\left(3\right)$$$$$$\$8,000$	-	-	$\$204,000$
			$\left(4\right)$$\$2,000$		$\left(\$52,500\right)$
Balance, January 1,2016- S		$\left(\$190,000\right)$	$\left(2\right)$$$$$$\$152,000$	-	-	-
Net Income (from Above)	$(\$172,000)$	$(\$90,000)$			$\left(\$17,500\right)$	$(\$170,000)$
Dividend Declared	$\$50,000$	$\$30,000$		$\left(1\right)$$\$24,000$	$\left(1\right)$$\$6,000$	$\$50,000$
Balance, December 31, 2016	$\left(\$336,000\right)$	$\left(\$250,000\right)$	-	-	$\$64,000$	$\$324,000$
Consolidated Balance Sheet:
Inventory, December 2016	$\$100,000$	$\$50,000$	-	-	-	$\$150,000$
Other current assets	$\$148,000$	$\$180,000$	-	-	-	$\$328,000$
Investment in S	$\$388,000$	-	$\left(1\right)$$\$24,000$	$\left(1\right)$$\$72,000$	-	-
	-	-	-	$\left(2\right)$$\$272,000$	-	-
	-	-	-	$\left(3\right)$$\$68,000$	-	-
Land	$\$50,000$	$\$50,000$	-	-	-	$\$100,000$
Buildings and Equipment	$\$350,000$	$\$320,000$	$\left(3\right)$$\$25,000$	-	-	$\$695,000$
Goodwill	-	-	$\left(3\right)$$\$50,000$	-	-	$\$50,000$
Other Intangible	$\$20,000$	-	-	-	-	$\$20,000$
Patent	-	$\$24,000$	(4) $\$10,000$	$\$4,000$	-	$\$30,000$
Current Liabilities	$(\$120,000)$	$(\$40,000)$	-	-	-	$(\$160,000)$
Bond Payable	-	$(\$100,000)$	-	-	-	$(\$100,000)$
Other Long Term liabilities	$(\$200,000)$	-	-	-	-	$(\$200,000)$
Common Stock-P	$(\$200,000)$	-	-	-	-	$(\$200,000)$
Paid in capital in excess of Par- P	$(\$100,000)$	-	-	-	-	$(\$100,000)$
Common Stock- S	-	$(\$50,000)$	$\left(2\right)$$\$40,000$	-	$(\$10,000)$	-
Paid in capital in excess of Par- Solar	-	$(\$100,000)$	$\left(2\right)$$(\$80,000)$	-	$(\$20,000)$	-
Retained Earnings-December 31,2016-	$(\$336,000)$	$\left(\$250,000\right)$	-	-	-	-
Retained EarningsNon Controlling Interest, December 31, 2016	-	-	-	-	$(\$64,000)$	-
Retained Earning Controlling Interest, December 31, 2016	-	-	-	-	-	$(\$324,000)$
Total NCI	-	-	-	-	$\$94,000$	$\$94,000$
Totals	$\$0$	$\$0$	$\$458,000$	$\$458,000$	$\$0$	$\$0$

Conclusion:

P Company’s subsidiary S Company has fair value of $\$400,000$ and goodwill of $\$60,000$ . The retained earnings for controlling interest is $\$324,000$ and non-controlling interest is $\$64,000$ .