Chapter 4, Problem 4.32P

(a)

To determine

Introduction: Journal entries is a systematic method of recording transactions as and when they occur. It is a summary of transactions divided into the debit and credit items that are recorded chronologically. It is an act of keeping and recording all the transactions occurring in the business.

Prepare a journal entry to record the investment made in “S” Company

Explanation of Solution

Journal entries

Particulars	Debit	Credit
Investment in S stock	$ 650,000
Bonds payable		$ 650,000
(To record the investment made in “S” company)

The investment made in the “S” Company will increase the value of assets. Thus, the Investment in S would increase the amount of assets of P and the increase in assets is debited by $650,000. Bonds are a liability and an increase in liability is credited. The bonds are thus credited by $650,000.

(b)

To determine

Introduction: Journal entries is a systematic method of recording transactions as and when they occur. It is a summary of transactions divided into the debit and credit items that are recorded chronologically. It is an act of keeping and recording all the transactions occurring in the business.

Prepare an elimination entry to ignore the investment balance

Explanation of Solution

Journal entry

Particulars	Debit	Credit
Common stock-S	$ 200,000
Additional paid in capital	$ 130,000
Retained earnings	$ 148,000
Differential	$ 172,000
Investment in S		$ 650,000
(To eliminate the investment balance)
Increase in inventory	$ 4,000
Increase in land	$ 20,000
Increase in building and equipment	$ 50,000
Patent	$ 40,000
Discount on bond payable	$ 10,000
Goodwill	$ 48,000
Differential		$ 172,000
(To assign the differential)
Accounts payable	$ 6,500
Accounts receivable		$ 6,500
(To eliminate the inter-company receivable or payable)

• The common stock and retained earnings are considered stockholders equity. It will increase the equity account. Thus, an increase in the equity account should be credited. However, in an elimination entry, it should be debited and eliminated.
• The difference amount should be assigned as a differential.
• The investment is considered as an asset. The increase in asset accounts should be debited. However, in an eliminating entry, it should be credited and eliminated.
• The profit from the disposal of building and equipment, land, patent, goodwill and inventory should be assigned as a differential. The amount of goodwill is determined by subtracting the total amount of realizable value of assets from the fair value of assets.
• The profit or loss from the disposal of buildings and equipment is calculated by subtracting the net amount of building and equipment from the fair value of building and equipment. Therefore, $\$500,000-\left(\$670,000-\$220,000\right)=\$50,000$
• The “S” Company reported an account payable of $6,500 to the “P” Company. Thus, it would affect both accounts payable and account receivable. The accounts payable should be debited and accounts received should be credited with $6,500.

(c)

To determine

Introduction: A consolidated worksheet is used to prepare the consolidated financial statements of the parent company and its subsidiary. It reflects the individual values of the parent and the subsidiary and then one consolidated figure for both the entities.

Prepare a consolidated balance sheet worksheet

Answer to Problem 4.32P

The total amount of total consolidated assets and total consolidated liabilities and equity is $2,137,500

Explanation of Solution

"P" company and "S" company Consolidated Balance Sheet Worksheet January 2, 20X8
Particulars Assets	P	S	Eliminations		Consolidated
			Debit	Credit
Cash	$ 12,000	$ 9,000			$ 21,000
Accounts receivable	$ 41,000	$ 31,000		$ 6,500	$ 65,500
Inventory	$ 86,000	$ 68,000	$ 4,000		$ 158,000
Investment in ""S" company Stock	$ 650,000			$ 650,000
Land	$ 55,000	$ 50,000	$ 20,000		$ 125,000
Building and equipment	$ 960,000	$ 670,000	$ 50,000		$ 1,680,000
Patent			$ 40,000		$ 40,000
Goodwill			$ 48,000		$ 48,000
Differential			$ 172,000	$ 172,000
Total Assets	$ 1,804,000	$ 828,000			$ 2,137,500
Liabilities and stockholder equity
allowance for bad debts	$ 2,000	$ 1,000			$ 3,000
Accumulated depreciation	$ 411,000	$ 220,000			$ 631,000
Accounts payable	$ 38,000	$ 29,000	$ 6,500		$ 60,500
Bonds payable	$ 850,000	$ 100,000	$ 10,000		$ 940,000
Common stock:	$ 300,000	$ 200,000	$ 200,000		$ 300,000
Additional paid in capital	$ 100,000	$ 130,000	$ 130,000		$ 100,000
Retained earnings	$ 103,000	$ 148,000	$ 148,000		$ 103,000
Total Liabilities and Equity	$ 1,804,000	$ 828,000			$ 2,137,500

• The amount of investment in the “S” Company should be eliminated in the calculation of the consolidated balance sheet worksheet.
• The accounts receivable in the consolidated balance sheet is determined by adding the accounts receivable of “P” Company and “S” Company and subtracting the amount of $6,500 from it. Therefore, the consolidated amount of accounts receivable is $65,500.
• The amount of inventory is determined by adding the “P” Company and “S” Company with the adjustment of inventory. Therefore, the consolidated amount of inventory is $158,000.

(d)

To determine

Introduction: A consolidated worksheet is used to prepare the consolidated financial statements of the parent company and its subsidiary. It reflects the individual values of the parent and the subsidiary and then one consolidated figure for both the entities.

Prepare a consolidation balance sheet for the “P” company and subsidiary as of January 20X8.

Answer to Problem 4.32P

The total amount of assets and liabilities and stockholder’s equity is as on, 20X8 is $1,503,500

Explanation of Solution

"P" company and "S" company
Consolidated Balance Sheet
January 2, 20X8
Particulars	Amounts	Amounts
Assets
Cash		$ 21,000
Accounts receivable	$ 65,500
Less: allowance	$ (3,000)	$ 62,500
Inventory		$ 158,000
Land		$ 125,000
Buildings and equipment	$ 1,680,000
Less: accumulated depreciation	$ (631,000)	$ 1,049,000
Patent		$ 40,000
Goodwill		$ 48,000
Total assets		$ 1,503,500
Liabilities
Accounts payable		$ 60,500
Bonds payable	$ 950,000
Less: Discount on bonds payable	$ (10,000)	$ 940,000
Common stock		$ 300,000
Additional paid in capital		$ 100,000
Retained earnings		$ 103,000
Total liabilities and stockholder's equity		$ 1,503,500

The amount of accumulated depreciation should be subtracted from the buildings and equipment. Therefore, the value of buildings and equipment after depreciation is $1,049,000.