Chapter 4, Problem 4.35P

a.

To determine

Introduction: Consolidation is a process in which a parent company combines net assets of its subsidiaries. To include net assets of the subsidiaries, parent company removes net assets in those subsidiaries and removes intragroup transactions.

To prepare: Journal entries that Company P would record for investment in Company U.

Explanation of Solution

In the books of Company P:

Record dividend income received:

Date	Account	Debit ($)	Credit($)
20XX	Cash	10,000
	Investment in Company U Common Stock		10,000
	(To record dividend income)

Table (1)

• Cash is an asset and it is increased by $10,000. Therefore, the cash account is debited with $10,000.

• Investment in Company U common stock is an asset and it is decreased by $10,000. Therefore, Investment in Company U common stock account is credited with $10,000.

Record equity-method income:

Date	Account	Debit ($)	Credit($)
20XX	Investment in Company U Common Stock	30,000
	Investment in Company U		30,000
	(To record equity-method income)

Table (2)

• Investment in Company U common stock is an asset and it is increased by $30,000. Therefore, Investment in Company U common stock account is debited with $30,000.

• Investment in Company U is income and it is increased by $30,000. Therefore, Investment in Company U account is credited with $30,000.

Record amortization amount:

Date	Account	Debit ($)	Credit($)
20XX	Investment in Company U	5,000
	Investment in Company U Common Stock   $\left(\frac{\$50,000}{10}\right)$		5,000
	(To record amortization amount)

Table (3)

• Investment in Company U is income and it is decreased by $5,000. Therefore, investment in Company U account is debited with $5,000.

• Investment in Company U common stock is an asset and it is decreased by $5,000. Therefore, investment in Company U common stock account is credited with $5,000.

b.

To determine

Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.

To prepare: Journal entries that Company P would record for consolidation to prepare consolidated financial statement.

Explanation of Solution

In the books of Company P:

Record of elimination of income from subsidiary:

Date	Account	Debit ($)	Credit($)
20XX	Investment in Company U Common Stock	25,000
	Dividend		10,000
	Investment in Company c		15,000
	(To record elimination of income from subsidiary)

Table (1)

• Investment in Company U common stock is an asset and it is increased by $25,000. Therefore, Investment in Company U common stock account is debited with $25,000.

• Dividend is an income and it is increased by $10,000. Therefore, dividend account is credited with $10,000.

• Investment in Company C is income and it is increased by $15,000. Therefore, investment in Company C account is credited with $15,000.

Record elimination of beginning investment balance:

Date	Account	Debit ($)	Credit($)
20XX	Common Stock Company U	100,000
	Retained earnings	90,000
	Differential   $\left[\$50,000-\left(\left(\frac{\$50,000}{10}\right)\times 4\right)\right]$	30,000
	Investment in Company U Common Stock		222,000
	(To record elimination of beginning investment balance)

Table (2)

• Common stock Company U is equity and it is decreased by $100,000. Therefore, Common stock Company U account is debited with $100,000.

• Retained earnings is equity and it is decreased by $90,000. Therefore, Retained earnings account is debited with $90,000.

• Differential is an expense and it is increased by $30,000. Therefore, the differential account is debited with $30,000.

• Investment in Company U common stock is an asset and it is decreased by $222,000. Therefore, Investment in Company U common stock account is credited with $222,000.

Record assignment of beginning differential:

Date	Account	Debit ($)	Credit($)
20XX	Building and Equipment	50,000
	Differential		30,000
	Accumulated Depreciation		20,000
	(To record assignment of beginning differentail)

Table (3)

• Equipment is an asset and it is increased by $50,000. Therefore, the equipment account is debited with $50,000.

• Differential is an expense and it is decreased by $30,000. Therefore, the differential account is credited with $30,000.

• Accumulated depreciation is a current liability and it is increased by $20,000. Therefore, the accumulated depreciation account is credited with $20,000.

Record amortize differential:

Date	Account	Debit ($)	Credit($)
20XX	Depreciation	5,000
	Accumulated Depreciation		5,000
	(To record amortize differential)

Table (4)

• Differential is an expense and it is increased by $5,000. Therefore, the differential account is debited with $5,000.

• Accumulated depreciation is a current liability and it is increased by $5,000. Therefore, the accumulated depreciation account is credited with $5,000.

Record elimination of inter-corporate receivable/ payable:

Date	Account	Debit ($)	Credit($)
20XX	Accounts Payable	10,000
	Cash and receivables		10,000
	(To record amortize differential)

Table (5)

• Accounts payable is a current liabilities and it is decreased by $10,000. Therefore, Accounts payable account is debited with $10,000.

• Cash and receivables is a current asset and it is decreased by $10,000. Therefore, Cash and receivables account is credited with $10,000.

c.

To determine

Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.

To prepare: The three-part worksheet as of December 31, 20X5.

Explanation of Solution

Preparation of three-part worksheet:

Amount in ($)

Company P Consolidation Work paper December 31, 20X5
Particulars	Company P	Company U	Elimination		Consolidation
Income Statement			Debit	Credit
Sales	200,000	100,000			300,000
Income from subsidiary	25,000		25,000
Cost of goods sold	(120,000)	(50,000)			170,000
Depreciation	(25,000)	(15,000)	5,000		45,000
Inventory Losses	(15,000)	(5,000)			20,000
Net Income	65,000	30,000	30,000		65,000
Statement of Retained earnings
Beginning balance	318,000	90,000	90,000		318,000
Net Income	65,000	30,000	30,000		65,000
Dividend Declared	(30,000)	(10,000)		(10,000)	(30,000)
Ending Balance	353,000	110,000	120,000	10,000	353,000
Balance Sheet
Cash and Receivables	43,000	65,000		10,000	98,000
Inventory	260,000	90,000			350,000
Land	80,000	80,000			160,000
Buildings and equipment	500,000	150,000	50,000		700,000
Investment in Company U	235,000			15,000
Total assets	1,118,000	385,000			1,308,000
Accumulated Depreciation	205,000	105,000		20,000
Accounts payable	60,000	20,000	10,000		70,000
Notes payable	200,000	50,000			250,000
Common stock
Company P	300,000				300,000
Company U		100,000	100,000
Retained earnings	353,000	110,000	120,000	10,000	353,000
Total liabilities	1,118,000	385,000			1,308,000

Table (1)