Chapter 5, Problem 27P

a.

To determine

Find the annual amortization resulting from the acquisition-date fair-value allocations.

Explanation of Solution

Particulars	Amount
Consideration paid	$          342,000
Fair value of non-controlling interest	$            38,000
Fair value on date of acquisition	$          380,000
Book value of the subsidiary	$         (326,000)
Excess fair value over book value	$            54,000
		Remaining life	Annual amortization
Building	$            18,000	9 years	$           2,000
Patented technology	$            36,000	6 years	$           6,000
Total	$            54,000		$           8,000

Table: (1)

b.

To determine

Identify whether the intra-entity transfers are upstream or downstream.

Explanation of Solution

Company B has transferred goods to Company P which implies that it is an upstream transfer because goods are transferred from the subsidiary to the parent.

c.

To determine

Find the intra-entity gross profit in inventory existed as of January 1, 2018.

Explanation of Solution

Computation of unrealized gross profit:

Particulars	Amount
Intra-entity gross profit percentage $\left(\frac{\$135,000-\$81,000}{\$135,000}\times 100\right)$	40%
Inventory unsold at year end	$ 37,500
Unrealized gross profit as on January 1, 2018	$   15,000

Table: (2)

d.

To determine

Find the intra-entity gross profit in inventory existed as of December 31, 2018.

Explanation of Solution

Computation of unrealized gross profit:

Particulars	Amount
Intra-entity gross profit percentage $\left(\frac{\$160,000-\$92,800}{\$160,000}\times 100\right)$	42%
Inventory unsold at year end	$ 37,500
Unrealized gross profit as on December 31, 2018	$   21,000

Table: (3)

e.

To determine

Find the amounts which make up the $68,400 Equity Earnings of Company B account balance for 2018.

Explanation of Solution

Computation of the amounts which make up the $68,400 Equity Earnings of Company B account balance for 2018:

Particulars	Amount
Reported income of Subsidiary	$            90,000
Add: Unrealized gross profit of 2017	$            15,000
Less: Unrealized gross profit of 2018	$           (21,000)
Less: Amortization of patented technology	$             (6,000)
Less: Excess amortization of building	$             (2,000)
Adjusted income of subsidiary	$            76,000
Percent of ownership of controlling interest	90%
Equity in earnings of Company B	$            68,400

Table: (4)

f.

To determine

Find the net income attributable to the non-controlling interest for 2018.

Explanation of Solution

Computation of the net income attributable to the non-controlling interest for 2018:

Particulars	Amount
Reported income of Subsidiary	$            90,000
Add: Unrealized gross profit of 2017	$            15,000
Less: Unrealized gross profit of 2018	$           (21,000)
Less: Amortization of patented technology	$             (6,000)
Less: Excess amortization of building	$             (2,000)
Adjusted income of subsidiary	$            76,000
Percent of ownership of controlling interest	10%
Equity in earnings of Company B	$              7,600

Table: (5)

g.

To determine

Find the amounts which make up the $450,000 Investment in Company B account balance as of December 31, 2018.

Explanation of Solution

Computation of the amounts which make up the $450,000 Investment in Company B account balance as of December 31, 2018:

Particulars	Amount
Investment purchased	$          342,000
Reported net income of 2016	$            64,000
Less: Amortization of patented technology	$             (6,000)
Add: Excess depreciation of building	$             (2,000)
Deferred profit of 2016	$           (10,000)
Adjusted net income of year 2017	$            46,000
Percent of ownership of controlling interest	90%
Net income attributable to controlling interest	$            41,400
Equity in earnings of Company B	$            41,400
Share of Company P in dividends	$           (17,100)
Balance as on 31/12/2016	$          366,300
Reported income of Company B	$            80,000
Less: Amortization of patented technology	$             (6,000)
Add: Excess depreciation of building	$             (2,000)
Deferred profit of 2016 recognized	$            10,000
Deferred profit of 2017	$           (15,000)
Adjusted net income of year 2017	$            67,000
Percent of ownership of controlling interest	90%
Net income attributable to controlling interest	$            60,300
Equity in earnings of Company B	$            60,300
Share of Company P in dividends	$           (20,700)
Balance as on 31/12/2017	$          405,900
Reported income of Company B	$            90,000
Less: Amortization of patented technology	$             (6,000)
Add: Excess depreciation of building	$             (2,000)
Deferred profit of 2017 recognized	$            15,000
Deferred profit of 2018	$           (21,000)
Adjusted net income of year 2018	$            76,000
Percent of ownership of controlling interest	90%
Net income attributable to controlling interest	$            68,400
Equity in earnings of Company B	$            68,400
Share of Company P in dividends	$           (24,300)
Balance as on 31/12/2018	$          450,000

Table: (6)

h.

To determine

Prepare the 2018 worksheet entry to eliminate the subsidiary’s beginning owners’ equity balances.

Explanation of Solution

The worksheet entry to eliminate the subsidiary’s beginning owners’ equity balances:

Entry S
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Common stock		$          150,000
	Retained earnings on 01/01/2017		$          263,000
	Investment in Company B			$      371,700
	Non controlling interest			$        41,300
	(being controlling and non-controlling interest recorded)

Table: (7)

i.

To determine

Determine the consolidation balances for these two companies.

Explanation of Solution

The consolidation balances for these two companies are as follows:

Company P and Company B
Consolidation Worksheet
Year ending December 31, 2018
Income statement	Company P	Company B	Debit	Credit	Non-controlling interest	Consolidated Balances
Revenues	$     (862,000)	$   (366,000)	$   160,000			$      (1,068,000)
Cost of goods sold	$      515,000	$    209,000	$     21,000	$          15,000		$          570,000
				$        160,000
Operating expense	$      185,400	$      67,000	$       8,000			$          260,400
Equity in income of Company B	$       (68,400)		$     68,400			$                      -
Net income	$     (230,000)	$     (90,000)
Consolidated net income						$         (237,600)
Share of non-controlling interest in net income					$     (7,600)	$              7,600
Share of controlling interest in net income						$         (230,000)
Balance Sheet
Cash	$      146,000	$      98,000		$          16,000		$          228,000
Inventory	$      255,000	$    136,000		$          21,000		$          370,000
Investment in Company B	$      450,000
Building and equipment	$      964,000	$    328,000	$     18,000	$            6,000		$       1,304,000
Patented technology			$     36,000	$          18,000		$            18,000
Total assets	$   1,815,000	$    562,000				$       1,920,000
Liabilities	$     (718,000)	$     (71,000)	$     16,000			$         (773,000)
Common stock	$     (515,000)	$   (150,000)				$         (515,000)
Retained earnings	$     (582,000)	$   (341,000)				$         (582,000)
Non-controlling interest in Company B						$           (50,000)
Total liabilities and equity	$  (1,815,000)	$   (562,000)				$       1,920,000

Table: (8)

Working note:

Statement of retained earnings	Company P	Company B	Debit	Credit	Non-controlling interest	Consolidated Balances
Retained earnings on 01/01	$     (488,000)	$   (278,000)	$     15,000			$         (488,000)
			$  (263,000)
Net Income	$     (230,000)	$     (90,000)				$         (230,000)
Dividends declared	$      136,000	$      27,000		$          24,300	$      2,700	$          136,000
Retained earnings on 31/12	$     (582,000)	$   (341,000)				$         (582,000)

Table: (9)