Chapter 5, Problem 32P

a.

To determine

Prepare a schedule that calculates the Equity in Earnings of Company S account balance.

Explanation of Solution

The schedule that calculates the Equity in Earnings of Company S account balance is as follows:

Particulars	Amount
Reported income of subsidiary	$         230,000
Add: Unrealized profit of 2017 (1)	$           35,000
Less: Unrealized profit of 2018 (2)	$         (40,000)
Less: Amortization expense of 2018	$         (70,000)
Net income of subsidiary	$         155,000
Percentage ownership of controlling interest	80%
Equity in earnings of Company S in 2018	$         124,000

Table: (1)

Working note:

Computation of unrealized gross profit:

2017:

$\begin{array}{c}\text{Unrealized gross profit}=\$125,000\times 28\%\\ =\$35,000\end{array}$ (1)

2018:

$\begin{array}{c}\text{Unrealized gross profit}=\$160,000\times 25\%\\ =\$40,000\end{array}$ (2)

b.

To determine

Prepare a worksheet to arrive at consolidated figures for external reporting purposes.

Explanation of Solution

The worksheet to arrive at consolidated figures for external reporting purposes:

Income statement	Company P	Company S	Debit	Credit	Non-controlling interest	Consolidated Balances
Revenues	$    (1,740,000)	$      (950,000)	$    300,000			$      (2,390,000)
Cost of goods sold	$         820,000	$       500,000	$      40,000	$      35,000		$       1,025,000
				$    300,000
Depreciation expense	$         104,000	$         85,000				$          189,000
Amortization expense	$         220,000	$       120,000	$      70,000			$          410,000
Interest expense	$           20,000	$         15,000				$            35,000
Equity in income of Company S	$       (124,000)		$    124,000			$                      -
Net income	$       (700,000)	$      (230,000)
Consolidated net income						$         (731,000)
Share of non-controlling interest in net income					$  (31,000)	$            31,000
Share of controlling interest in net income						$         (700,000)
Balance Sheet
Cash	$         535,000	$       115,000				$          650,000
Account receivables	$         575,000	$       215,000				$          790,000
Inventory	$         990,000	$       800,000		$      40,000		$       1,750,000
Investment in Company S	$      1,420,000	$                   -	$      20,000	$      40,000		$                      -
				$    968,000
				$    348,000
				$    124,000
Building and equipment	$      1,025,000	$       863,000				$       1,888,000
Patents	$         950,000	$       107,000	$    210,000	$      70,000		$       1,197,000
Goodwill		$                   -	$    225,000			$          225,000
Total assets	$      5,495,000	$    2,100,000				$       6,500,000
Accounts payable	$       (450,000)	$      (200,000)				$         (650,000)
Notes payable	$       (545,000)	$      (450,000)				$         (995,000)
Common stock	$       (900,000)	$      (800,000)	$    800,000			$         (900,000)
Additional paid-in Capital	$       (300,000)	$      (100,000)	$    100,000			$         (300,000)
Retained earnings on 12/31	$    (3,300,000)	$      (550,000)				$      (3,300,000)
Non-controlling interest in Company S				$    242,000
				$      87,000	$(355,000)	$         (355,000)
Total liabilities and equity	$    (5,495,000)	$   (2,100,000)				$      (6,500,000)

Table: (2)

Working note:

Statement of retained earnings	Company P	Company S	Debit	Credit	Non-controlling interest	Consolidated Balances
Retained earnings on 01/01	$    (2,800,000)	$      (345,000)	$    310,000			$      (2,800,000)
			$      35,000
Net Income	$       (700,000)	$      (230,000)				$         (700,000)
Dividends declared	$         200,000	$         25,000		D 20,000	D 5,000	$          200,000
Retained earnings on 31/12	$    (3,300,000)	$      (550,000)				$      (3,300,000)

Table: (3)