Chapter 5, Problem 5.18AE

a

To determine

Introduction: When asset held by the subsidiary are with differential, both the equity method income and consolidated net income is affected, as the proportion of differential is included in parents books as part of the investment in the subsidiary; when the asset is sold it must be written off by a parent, in consolidation.

The entries recorded during 20X5 with respect to investment in S.

Explanation of Solution

Entries related to investment in subsidiary

particulars	Debit $	Credit $
Investment in S Inc.	864,000
Cash		864,000
(Initial investment in S Inc. recognized)
Investment in S Inc.	135,000
Income from S Inc.		135,000
(Controlling interest in S income for 20X5 recorded)
Income from S Inc.	82,350
Investment in S Inc.		82,350
(Amortization of excess acquisition price recognized)

1. Initial investment in S recorded
2. Income from subsidiary S recognized

  $\text{Income}\text{from}\text{S}\text{Inc:}\text{\$135,000}\text{=}\text{(\$150,000}\times .90)$

3. Amortization of excess acquisition price
Excess differential calculation

Differential on Inventory	$5,000
Excess value of land	$75,000
Differential on notes payable	$7,500
Depreciation $\text{\$60,000}\text{/}\text{15}\text{Years}$	$4,000
Excess value	$91,500

Amortization of excess acquisition debited to income from S and Credited to investment in S Inc.

  $\text{Income}\text{}\text{from}\text{S}\text{Inc}\text{.:}\text{\$82,350}\text{}\text{=}\text{(\$91,500}\text{×}\text{.90)}$

b

To determine

Introduction: When asset held by the subsidiary are with differential, both the equity method income and consolidated net income is affected, as the proportion of differential is included in parents books as part of the investment in the subsidiary; when the asset is sold it must be written off by a parent, in consolidation.

The consolidation entries for the year 20X5.

Explanation of Solution

Particulars	Debit $	Credit $
Common stock	500,000
Premium on common stock	100,000
Retained earnings	120,000
Income from S Inc.	135,000
Non-controlling interest in net income of S	15,000
Investment in S Inc.		783,000
Non-controlling interest in net assets of S		87,000
(Elimination of beginning investment in S)
Cost of goods sold	5,000
Gain on sale of land	75,000
Interest expense	7,500
Depreciation expense	4,000
Income from S Inc.		82,350
Non-controlling interest in net income of S		9,150
(Amortization of excess value into income of subsidiary)
Equipment	60,000
Discount on note payable	42,500
Goodwill	50,000
Accumulated depreciation		4,000
Investment in S Inc.		133,650
Non-controlling interest in net assets of S		14,850
(Reclassification and recognition of excess value)

1. Elimination of beginning investment in S

  $\text{Income}\text{from}\text{S}\text{Inc:}\text{\$135,000}\text{=}\text{(\$150,000}\times .90)$

  $\text{Non-controlling interest in net income of}\text{S}\text{Inc:}\text{\$15,000}\text{=}\text{(\$150,000}\times .10)$

  $\text{Investment in S}\text{Inc}\text{.:}\text{\$783,000}\text{}\text{=}\text{(\$500,000}\text{+}\text{\$100,000}\text{+}\text{\$120,000}\text{+}\text{\$150,000}\text{)}\text{×}\text{.90}$

  $\begin{array}{l}\text{Non-controlling interest in net assets of S}\text{Inc}\text{.:}\\ \text{\$87,000}\text{}\text{=}\text{(\$500,000}\text{+}\text{\$100,000}\text{+}\text{\$120,000}\text{+}\text{\$150,000}\text{)}\text{×}\text{.10}\end{array}$

2. Amortization of excess value in net income of subsidiary
Excess differential calculation

Differential on Inventory assigned to cost of sale	$5,000
Excess value of land( gain on sale of land)	$75,000
Interest expense	$7,500
Depreciation $\text{\$60,000}\text{/}\text{15}\text{Years}$	$4,000
Excess value	$91,500

Amortization of excess acquisition debited to income from S and Credited to investment in S Inc.

  $\text{Income}\text{}\text{from}\text{S}\text{Inc}\text{.:}\text{\$82,350}\text{}\text{=}\text{(\$91,500}\text{×}\text{.90)}$

  $\text{Non-controlling interest in net income of}\text{S}\text{Inc}\text{.:}\text{\$9,150}\text{}\text{=}\text{(\$91,500}\text{×}\text{.10)}$

3. Reclassification of excess value in net assets

  $\text{Discount}\text{on notes payable:}\text{\$42,500}\text{=}\text{\$50,000}-\mathrm{\$}7,500$

Computation of goodwill:

Differential given	$240,000
Less: Excess on inventory	($5,000)
Land	(75,000)
Equipment	(60,000)
Discount on note payable	(50,000)
Goodwill	$50,000

  $\text{Depreciation:}\text{}\text{\$4,000}\text{=}\text{\$60,000}\text{/}\text{15}\text{Years}$

Amount credited to Investment in S

  $\text{Investment}\text{in}\text{S}\text{Inc:}\text{\$133,650}\text{=}\text{(\$60,000}\text{+}\text{\$42,500}\text{+}\mathrm{\$}50,000-\mathrm{\$}4,000)\times .90$

  $\begin{array}{l}\text{Non-controlling}\text{interest}\text{in Net assets}\text{of}\text{S}\text{Inc:}\\ \text{\$14,850}\text{=}\text{(\$60,000}\text{+}\text{\$42,500}\text{+}\mathrm{\$}50,000-\mathrm{\$}4,000)\times .10\end{array}$