Chapter 4, Problem 4.35P

(a)

To determine

Introduction: 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, the eliminated values and finally the one consolidated figures 

Journal entries of P related to its investment in S.

Explanation of Solution

Journal entries

Particulars	Debit	Credit
Investment in S	$ 30,000
Income from S		$ 30,000
(To record P' share of S' income.)
Cash	$ 10,000
Investment in S		$ 10,000
(To record dividend from S'.)
Income from S	$ 5,000
Investment in S		$ 5,000
(Torecord the amortization of excess value acquired.)

Working Note:

Calculation of Net Income of S' for the year 20X5
Sales		$ 100,000
Less:
Cost of goods sold	$ 50,000
Depreciation expenses	$ 15,000
Inventory losses	$ 5,000	$ 70,000
Net Income		$ 30,000

(b)

To determine

Introduction: 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, the eliminated values and finally the one consolidated figures 

Consolidation entries to prepare consolidation financial statements.

Answer to Problem 4.35P

Consolidation Entries

S. No.	Particulars	Debit	Credit
1	Income from S	$ 25,000
	Dividend declared		$ 10,000
	Investment in S		$ 15,000
	(To eliminate the income from subsidiary.)
2	Common stock- S	$ 100,000
	Retained earning	$ 90,000
	Investment in S		$ 190,000
	(To eliminate the investment.)
	Building and equipment	$ 50,000
	Investment in S		$ 30,000
	Accumulated depreciation		$ 20,000
	(To record the excess value of building and equipment and accumulated depreciation.)
3	Depreciation expense	$ 5,000
	Accumulated depreciation		$ 5,000
	(To record amortization of excess value.)
4	Accounts payable	$ 10,000
	Cash and Receivable		$ 10,000
	(To eliminate the inter-corporate receivable and payable.)

Explanation of Solution

Calculation of Goodwill (if any) in the acquisition of S' as on January 1, 20X5
Consideration paid by P		$ 200,000
Less:
Common Stock	$ 100,000
Retained earnings	$ 50,000	$ 150,000
Excess of Fair value over Book value		$ 50,000
Allocation of Excess value to specified accounts
Building and equipment		$ 50,000
So, all the excess value allocated to Building and equipment, hence no Goodwill
Calculation of Depreciation of Excess value allotted to Building and equipment
Building and equipment		$ 50,000
Life	10 Years
Depreciation per year		$ 5,000
Total Accumulated Depreciation 4 year ($5,000*4)		$ 20,000

(c)

To determine

Introduction: 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, the eliminated values and finally the one consolidated figures 

To prepare: Three part consolidation work paper for 20X5.

Explanation of Solution

Consolidated Work paper as on December 31, 20X5
Particulars	P	S	Eliminations		Consolidated
Income statement			Debit	Credit
Sales	$ 200,000	$ 100,000			$ 300,000
Less:
Cost of goods sold	$(120,000)	$ (50,000)			$(170,000)
Depreciation expense	$ (25,000)	$ (15,000)	$ 5,000		$ (45,000)
Inventory losses	$ (15,000)	$ (5,000)			$ (20,000)
Income from S'	$ 25,000		$ 25,000
Net income	$ 65,000	$ 30,000			$ 65,000
Statement of Retained Earnings
Beginning balance	$ 318,000	$ 90,000	$ 90,000		$ 318,000
Income, from above	$ 65,000				$ 65,000
Dividends declared	$ (30,000)	$ (10,000)		$(10,000)	$ (30,000)
Ending balance	$ 353,000	$ 80,000	$ 90,000	$(10,000)	$ 353,000
Balance Sheet
Assets
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
Less: Accumulated Depreciation	$(205,000)	$(105,000)		$ 20,000
Less: Depreciation for the year				$ 5,000	$ (335,000)
Investment in S's stock	$ 235,000			$235,000
Goodwill				-
Total assets	$ 913,000	$ 280,000			$ 973,000
Liabilities
Accounts payable	$ 60,000	$ 20,000	$ 10,000		$ 70,000
Notes payable	$ 200,000	$ 50,000			$ 250,000
Common stock:	$ 300,000	$ 100,000	$100,000		$ 300,000
Retained earnings from above	$ 353,000	$ 110,000	$110,000		$ 353,000
Total liabilities and equities	$ 913,000	$ 280,000			$ 973,000