Chapter 5, Problem 5.12E

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 Computation of fair value of patents held by S

Answer to Problem 5.12E

Value of patients held by S $15,000

Explanation of Solution

Computation of increase in fair value of patients

		$
Fair value of consideration given by P		277,500
Fair value of non-controlling interest		185,000
Total fair value		462,500
Less: book value of S stock:
Common stock	$250,000
Retained earnings	$150,000
Book value of S stock		(400,000)
Excess of fair value over book value		62,500
Increase in value of land $(\mathrm{\$}30,000-\mathrm{\$}22,500)$		(7,500)
Increase in value of equipment $(\mathrm{\$}360,000-\mathrm{\$}320,000)$		(40,000)
Increase in fair value		$15,000

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 January 1, 20X7.

Explanation of Solution

Elimination entries

Particulars	Debit $	Credit $
Investment in S corporation	277,500
Cash		277,500
(Initial investment in S Corporation recorded)
Common stock	250,000
Retained earnings	150,000
Investment in S Corporation		240,000
Non-controlling in net assets of S corporation		160,000
(Elimination of investment in S corporation by reversal)
Land	7,500
Equipment	40,000
Patient	15,000
Investment in S Corporation		37,500
Non-controlling interest in Net assets of S		25,000
(Excess differential reclassified)

1. Initial investment in S corporation recorded $277,500
2. Elimination of investment in S corporation
Controlling interest on income from S recognized $\mathrm{\$}240,000=\mathrm{\$}400,000\times .60$

Non-controlling interest in Net assets of S corporation $\mathrm{\$}160,000=\mathrm{\$}400,000\times .40$

3. Excess value differential reclassification

  $\text{Land:}\text{\$7,500}\text{=}\text{(\$30,000}\text{-}\text{\$22,500)}$

  $\text{Buildings:}\text{\$40,000}\text{=}\text{(}\mathrm{\$}360,000-\mathrm{\$}320,000\text{)}$

Computation of value of patients:

Book value of S Corporation on January $\text{\$185,000}\times \frac{100}{40}$		$462,500
Less: book value of S corporation in the beginning		($400,000)
Increase in book value		$62,500
Less: Decrease in value of assets:
$\text{Land:}\text{(\$30,000}\text{-}\text{\$22,500)}$	$7,500
$\text{Buildings:}\text{(}\mathrm{\$}360,000-\mathrm{\$}320,000\text{)}$	$40,000
		($47,500)
Value attributed to patients		$15,000

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

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

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

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

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

c

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 computation of balance reported by purchase of its investment in S at December 31, 20X8

Answer to Problem 5.12E

Balance reported at December 31, 20X8 $293,700

Explanation of Solution

Computation of investment account balance at December 31, 20X8

	$
Fair value of consideration	277,500
Undisclosed income since acquisition $(\mathrm{\$}100,000-\mathrm{\$}60,000)\text{}\times .60$	24,000
Amortization of differential assigned:
$\text{Equipment}\text{(\$40,000}\text{/}\text{8}\text{years)}\text{×}\text{.60}\text{×}\text{2}\text{years}$	($6,000)
$\text{Patients}\text{}\text{(\$15,000}\text{}\text{/}\text{10}\text{years)}\text{×}\text{.60}\text{×}\text{2}\text{years}$	($1,800)
Accounts balance at December 31, 20X8	$293,700

d

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, 20X9

Explanation of Solution

Elimination entries

Particulars	Debit $	Credit $
Investment in S corporation	18,000
Income from S Corporation		18,000
(Controlling interest in income of S for 20X7 recorded)
Cash	6,000
Investment in S Corporation		6,000
(Receipt of share of dividends from S Corporation)
Income from S Corp	3,900
Investment in S Corp		3,900
(Amortization of excess acquisition price recognized)

1. Income from subsidiary S recognized $\text{\$18,000}\text{=}\text{\$30,000}\times .60$
2. Share of dividends from Subsidiary S recognized $\text{\$6,000}\text{=}\text{\$0,000}\times .60$
3. Excess value differential reclassification

  $\text{Amount}\text{credited to income from S:}\text{\$3,900}\text{=}\text{\$6,500}\times \text{.60}$

e

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, 20X9

Explanation of Solution

Elimination entries

Particulars	Debit $	Credit $
Common stock	250,000
Retained earnings	190,000
Income from S Corp	18,000
Non-controlling interest in net income of S	12,000
Dividends declared		10,000
Investment in S Corp		276,000
Non-controlling interest in Net assets of S		184,000
(Investment in S eliminated by reversal)
Amortization expenses	1,500
Depreciation expenses	5,000
Income from S Corp		3,900
Non-controlling interest in S		2,600
(Excess value amortization and reclassification)
Land	7,500
Equipment	40,000
Patient	10,500
Accumulated depreciation		15,000
Investment in S		25,800
Non-controlling interest in Net assets of S		17,200
(Excess value of depreciable assets reclassification)

1. Elimination of investment in S corporation

Controlling interest on income from S recognized $\text{Retained}\text{Earnings:}\text{\$190,000}\text{=}\text{\$150,000}\text{}\text{+}\text{\$20,000}\text{+}\text{\$20,000}$

  $\text{Income}\text{}\text{from}\text{S}\text{Corp:}\text{}\text{}\text{}\text{\$18,000}\text{=}\text{\$30,000}\times \text{.60}$

  $\text{Non-controlling}\text{interest}\text{}\text{in}\text{net}\text{income}\text{S}\text{Corp:}\text{}\text{}\text{}\text{\$12,000}\text{=}\text{\$30,000}\text{×}\text{.40}$

  $\text{Investment}\text{in}\text{S}\text{}\text{Corp:}\text{\$276,000}\text{=}\text{(\$250,000}\text{+}\text{\$190,000}\text{}+\mathrm{\$}30,000-\mathrm{\$}10,000)\times .60$

  $\text{Investment}\text{in}\text{S}\text{}\text{Corp:}\text{\$184,000}\text{=}\text{(\$250,000}\text{+}\text{\$190,000}\text{}+\mathrm{\$}30,000-\mathrm{\$}10,000)\times .40$

2. Depreciation and amortization expenses recognised

  $\text{Depreciation}\text{expense: \$5,000 =}\frac{\mathrm{\$}30,000}{6\mathrm{y}\mathrm{e}\mathrm{a}\mathrm{r}\mathrm{s}}$

  $\text{Amortization:}\text{\$1,500}\text{=}\text{\$15,000}\text{/}\text{10}\text{}\mathrm{y}\mathrm{e}\mathrm{a}\mathrm{r}\mathrm{s}$

  $\text{Amount}\text{credited to income from S:}\text{\$3,900}\text{=}\text{\$6,500}\times \text{.60}$

  $\text{Non-controlling interest in net income of S:}\text{\$2,600}\text{=}\text{\$6,500}\times \text{.40}$

3. Excess value differential reclassification

  $\text{Land:}\text{\$7,500}\text{=}\text{(\$30,000}\text{-}\text{\$22,500)}$

  $\text{Buildings:}\text{\$40,000}\text{=}\text{(}\mathrm{\$}360,000-\mathrm{\$}320,000\text{)}$

  $\text{Patients:}\text{\$10,500}\text{=}[\text{\$15,000}\text{}-(\mathrm{\$}15,000\text{}/10\text{}\text{}\mathrm{y}\mathrm{e}\mathrm{a}\mathrm{r})\times 3\text{}\mathrm{y}\mathrm{e}\mathrm{a}\mathrm{r}\mathrm{s}]$

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

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

  $\mathrm{I}\mathrm{n}\mathrm{v}\mathrm{e}\mathrm{s}\mathrm{t}\mathrm{m}\mathrm{e}\mathrm{n}\mathrm{t}\text{}\mathrm{i}\mathrm{n}\mathrm{S}\text{}\mathrm{C}\mathrm{o}\mathrm{r}\mathrm{p}\text{}:\mathrm{\$}25,800\text{}=(\mathrm{\$}58,000\text{}-\mathrm{\$}15,000)\times .60$

  $\text{Non-controlling}\text{interest}\text{}\text{in}\text{net}\text{assets}\text{of}\text{S}\text{}\text{Corp}\text{}\text{:}\text{\$17,200}\text{}\text{=}\text{(\$58,000}\text{}\text{-}\text{\$15,000)}\text{×}\text{.40}$