Chapter 5, Problem 5.14E

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 Consolidation entries required for December 31, 20X4

Explanation of Solution

Elimination entries

Particulars	Debit $	Credit $
Investment in S company	28,000
Income from S company		28,000
(Income assigned to controlling interest)
Cash	12,000
Investment in S company		12,000
(Cash received on account of share of dividends from Subsidiary S)
Common stock	100,000
Retained earnings	70,000
Income from S company	28,000
Non-controlling interest in net income of S	7,000
Dividends declared		15,000
Investment in S Company		152,000
Non-controlling interest in net asset of S		38,000
(Investment in S eliminated by reversal)
Accumulated depreciation	60,000
Depreciable assets		60,000
(Depreciation on assets recognized)

1. Parents’ share of income from subsidiary recognized.
2. Share of dividends from subsidiary recognized $\mathrm{\$}12,000=\mathrm{\$}15,000\times .80$
3. Elimination of beginning investment in S

Income from subsidiary given $28,000

$\text{Non-controlling interest in net income of S:}\text{\$7,000}\text{}=\mathrm{\$}35,000\times .20$

$\text{Investment}\text{}\text{in}\text{S}\text{Company:}\text{\$152,000}\text{=}\text{(\$100,000}\text{+}\text{\$70,000}\text{+}\text{\$}\text{}\text{35,000}\text{}\text{-}\text{}\text{\$15,000)}\text{}\text{×}\text{.80}$

$\text{Non-controlling interest in net assets of }\text{S:}\text{\$38,000}\text{=}\text{(\$100,000}\text{+}\text{\$70,000}\text{+}\text{\$}\text{}\text{35,000}\text{}\text{-}\text{}\text{\$15,000)}\text{}\text{×}\text{.20}$

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 worksheet needed at December 31, 20X4.

Answer to Problem 5.14E

Retained earnings and net assets total as per consolidation worksheet $317,000 and $895,000

Explanation of Solution

P and S

Consolidation work sheet

For the year ended December 31, 20X3

			Elimination
	P $	S $	Debit $	Credit $	Consolidated $
Income statement
Sales	230,000	140,000			370,000
Less: Depreciation expenses	(25,000)	(15,000)			(40,000)
Other expenses	(105,000)	(90,000)			(240,000)
Income from S	28,000		28,000		0
Consolidated net income	83,000	35,000	28,000		90,000
Non-controlling interest in net income			7,000		(7,000)
Controlling interest in net income	83,000	35,000	35,000	0	83,000
Statement of retained earnings:
Beginning balance	284,000	70,000	70,000		284,000
Net income current year	83,000	35,000	35,000	0	83,000
Less: dividends	(50,000)	(15,000)		15,000	(50,000)
Retained earnings ending	317,000	90,000	105,000	15,000	317,000
Balance sheet:
Current assets	235,000	150,000			385,000
Assets	500,000	300,000		60,000	740,000
Less: Accumulated depreciation	(200,000)	(90,000)	60,000		(230,000)
Investment in S	152,000			152,000
Total assets	687,000	360,000	60,000	212,000	895,000
Current liabilities	70,000	50,000			120,000
Long term debts	100,000	120,000			220,000
Common stock	200,000	100,000	100,000		200,000
Retained earnings	317,000	90,000	105,000	15,000	317,000
Non-controlling interest in net assets of S				38,000	38,000
Total liabilities & equity	687,000	360,000	205,000	53,000	895,000