Chapter 4, Problem 4.36P

(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.

Journal entries of P related to its investment in S

Explanation of Solution

Journal entries

S. no	Particulars	Debit	Credit
1	Investment in S	$ 203,000
	Cash		$ 203,000
	(To record investment made in subsidiary company)
2	Cash	$ 20,000
	Investment in S		$ 20,000
	(To record dividend declared by S)
3	Investment in S	$ 60,000
	Income from S		$ 60,000
	(To record income generated from S)
4	Income from S	$ 3,000
	Investment in S		$ 3,000
	(To record amortization expense)

1. Recording the initial investment in S
2. Recording P’s share in S co.’s dividend
3. Recording P’s share in S co.’s income
4. Recording the amortization expense

Particulars	Amount
Acquisition Price(a)	$ 203,000
Net book value of acquisition(b)	$ 150,000
Goodwill (c)	$ 20,000
Fair value adjustment in Building and equipments (a-b-c)	$ 33,000
Amortization of excess assigned to building and equipment =$33,000/11	$ 3,000

Calculation of Income of S
Sales		$ 400,000
Less:
COGS	$ 250,000
Depreciation	$ 15,000
Other expenses	$ 75,000	$ 340,000
		$ 60,000

(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.

Consolidation entries to prepare consolidation financial statements

Explanation of Solution

Consolidation entries

S.no	Particulars	Debit (in $)	Credit (in$)
1	Income from subsidiary	57,000
	Dividends declared		20,000
	Investment in S		37,000
	(Eliminating entry for rejecting the income from subsidiary)
2	Common stock- S	50,000
	Retained earnings as on Jan 1	100,000
	Differential	53,000
	Investment in S		203,000
	(Eliminating entry for rejecting the investment balance)
3	Building and equipment	33,000
	Goodwill	20,000
	Differential		53,000
	(Eliminating entry for assigning the differential)
4	Depreciation expense	3,000
	Accumulated depreciation		3,000
	(To record depreciation reclassification)
5	Accounts payable	16,000
	Accounts receivables		16,000
	(To record elimination entry of inter-company transactions)

1. Recording the eliminating entry for rejecting the income from subsidiary
2. Recording the eliminating entry for rejecting the investment balance
3. Recording the eliminating entry for assigning the differential
4. Recording the eliminating entry for amortizing the differential
5. Recording the eliminating entry for inter corporate receivables and payables

(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.

Three part consolidation worksheet for 20X5

Answer to Problem 4.36P

The consolidated net income is $157,000

The consolidated retained earnings as on December 31, 20X5 is $397,000

The total consolidated assets are $1,269,000

The total consolidated liabilities and equity are $1,269,000

Explanation of Solution

Consolidated Work paper as on December 31, 20X5
Particulars	P	S	Eliminations		Consolidated
Income statement			Debit	Credit
Sales	$ 700,000	$ 400,000			$ 1,100,000
Less:
Cost of goods sold	$(500,000)	$(250,000)			$ (750,000)
Depreciation expense	$ (25,000)	$ (15,000)	$ 3,000		$ (43,000)
Other expenses	$ (75,000)	$ (75,000)			$ (150,000)
Income from S'	$ 57,000		$57,000
Net income	$ 157,000	$ 60,000			$ 157,000
Statement of Retained Earnings
Beginning balance	$ 290,000	$ 100,000	$100,000		$ 290,000
Income, from above	$ 157,000	$ 60,000	$ 60,000		$ 157,000
Dividends declared	$ (50,000)	$ (20,000)		$(20,000)	$ (50,000)
Ending balance	$ 397,000	$ 140,000	$160,000	$(20,000)	$ 397,000
Balance Sheet
Assets
Cash	$ 82,000	$ 25,000			$ 107,000
Accounts Receivables	$ 50,000	$ 55,000		$ 16,000	$ 89,000
Inventory	$ 170,000	$ 100,000			$ 270,000
Land	$ 80,000	$ 20,000			$ 100,000
Buildings and equipment	$ 500,000	$ 150,000	$ 33,000		$ 683,000
Investment in S's stock	$ 240,000			$ 37,000
				$203,000
Differential			$ 53,000	$ 53,000
Goodwill			$ 20,000		$ 20,000
Total assets	$1,122,000	$ 350,000			$ 1,269,000
Liabilities
Accumulated Depreciation	$ 155,000	$ 75,000		$ 3,000	$ 233,000
Accounts payable	$ 70,000	$ 35,000	$ 16,000		$ 89,000
Mortgages payable	$ 200,000	$ 50,000			$ 250,000
Common stock:	$ 300,000	50,000	$ 50,000		$ 300,000
Retained earnings from above	$ 397,000	$ 140,000	$140,000		$ 397,000
Total liabilities and equity	$1,122,000	$ 350,000			$ 1,269,000