Chapter 5, Problem 5.11E

a

To determine

Introduction: The consolidation procedure used in the second year and the subsequent year is similar to that of the first. The equity method is used to evaluate the investment in the subsidiary. In order to determine consolidation entries, the change in the parent’s investment in the second or subsequent year is determined. Any differential arising is recognized and all the intercompany transactions are eliminated.

The entries by P during 20X2 on its books for its investment in S using equity method,

Explanation of Solution

Equity method entries in P’s books

Particulars	Debit $	Credit $
Investment in S corporation	190,000
Cash		190,000
(Initial investment in S Corporation recorded)
Common stock	120,000
Retained earnings	80,000
Investment in S Corporation		160,000
Non-controlling interest in Net assets of S		40,000
(Elimination of beginning investment in S)
Buildings	32,000
Goodwill	5,500
Investment in S Corporation		30,000
Non-controlling interest in Net assets of S		7,500
(Excess differential reclassified)

1. Cash paid for purchase of investment in S corporation $190,000
2. Elimination of investment in S

Controlling interest on income from S recognized $\text{Investment}\text{in}\text{S}\text{Corporation:}\text{\$160,000}\text{=}\text{\$200,000}\text{×}\text{.80}$

  $\text{Non-controlling interest}\text{in net assets of S:}\text{\$80,000}\text{=}\text{\$200,000}\text{×}\text{.20}$

3. Amortization of excess acquisition cost

  $\text{P’s share of amortized value of patient :}\text{}\text{\$3,200}\text{=(\$32,000}\text{/}\text{8}\text{years)}\text{×}\text{.80}$

b

To determine

Introduction: The consolidation procedure used in the second year and the subsequent year is similar to that of the first. The equity method is used to evaluate the investment in the subsidiary. In order to determine consolidation entries, the change in the parent’s investment in the second or subsequent year is determined. Any differential arising is recognized and all the intercompany transactions are eliminated.

The consolidation entries needed at December 31, 20X3.

Explanation of Solution

Elimination entries

Particulars	Debit $	Credit $
Investment in S corporation	190,000
Cash		190,000
(Initial investment in S Corporation recorded)
Investment in S corporation	32,000
Income from S corporation		32,000
(Income from subsidiary S for 20X2 recognized)
Income from S corporation	3,200
Investment in S corporation		3,200
(Amortization of excess acquisition price)
Common stock	120,000
Retained earnings	80,000
Income from S Corporation	32,000
Non-controlling interest in net income of S Corporation	8,000
Investment in S Corporation		192,000
Non-controlling in net assets of S corporation		48,000
(Elimination of investment in S corporation by reversal)
Depreciation expenses	4,000
Income from S Corporation		3,200
Non-controlling interest in net income of S Corporation		800
(Amortization of differential in building)
Buildings	32,000
Goodwill	5,500
Accumulated depreciation		4,000
Investment in S Corporation		26,800
Non-controlling interest in net assets of S		`6,700
(Excess differential reclassified)

1. Cash paid for purchase of investment in S corporation $190,000
2. Controlling interest on income from S recognized $\mathrm{\$}32,000=\mathrm{\$}40,000\times .80$
3. Amortization of excess acquisition cost

  $\text{P’s share of amortized value of patient :}\text{}\text{\$3,200}\text{=(\$32,000}\text{/}\text{8}\text{years)}\text{×}\text{.80}$

4. Elimination of investment in S Corporation

  $\text{Income from S: \$32,000 = \$40,000}\times .80$

  $\text{Non-controlling interest in net income of S: \$8,000 = \$40,000}\times .20$

  $\text{Investment in S corporation: \$192,000 =}\text{(\$120,000 + 80,000}\text{+ \$40,000)}\times \text{}\text{.80}$

  $\text{Non-controlling interest in net assets of S: \$48,000 =}\text{(\$120,000 + 80,000}\text{+ \$40,000)}\times \text{}\text{.20}$

5. Amortization of differential in buildings

  $\text{Depreciation}\text{of building: \$4,000 =}\frac{\mathrm{\$}32,000}{8\mathrm{y}\mathrm{e}\mathrm{a}\mathrm{r}\mathrm{s}}$

  $\text{Credited to Income from S corporation: \$3,200 = \$4,000}\times .80$

  $\text{Non-controlling interest in net income of S: \$800 = \$4,000}\times .20$

6. Excess differential reclassification

  $\text{Goodwill: \$5,500 = \$}37,500-\mathrm{\$}32,000$

  $\text{Credited to investment in S : \$26,800 = (\$37,500 - \$4,000)}\times .80$

  $\text{Non-controlling interest net assets of S : \$6,700 = (\$37,500 - \$4,000)}\times .20$