Chapter 5, Problem 5.29P

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 the parent in consolidation.

The consolidation entries needed to prepare consolidation balance sheet.

Explanation of Solution

Consolidation entries

Particulars	Debit $	Credit $
Investment in S Corporation	102,200
Cash		102,200
(Recorded initial investment in S Corp)
Elimination entries:
Common stock	40,000
Retained earnings	85,000
Investment in S Corporation		87,500
Non-controlling interest in net assets of S		37,500
(Elimination of beginning investment in S by reversal)
Inventory	6,000
Buildings & equipment	15,000
Investment in S Corporation		14,700
Non-controlling interest in net assets of S		6,300
(Reclassification of differential in assets)
Accounts payable	12,500
Accounts receivable		12,500
(Intercompany receivable and payable eliminated)
Accumulated depreciation	80,000
Building and equipment		80,000
(Depreciation on building and equipment recorded)

1. Initial investment recognized by debit entry in investment account
2. Beginning investment in S Eliminated by reversal

$\text{Investment}\text{in}\text{S}\text{Corporation:}\text{\$87,500}\text{=}\text{(\$40,000}\text{+}\text{\$85,000)}\times \text{.70}$

$\text{Non controlling interest in net assets of}\text{S}\text{:}\text{\$37,500}\text{=}\text{(\$40,000}\text{+}\text{\$85,000)}\times \text{.30}$

3. Excess differential reclassification

$\text{Inventory:}\text{\$6,000 = \$81,000}-\mathrm{\$}75,000$

$\text{Buildings}\text{and}\text{equipment:}\text{\$15,000}\text{=}\text{(\$185,000}-(\mathrm{\$}250,000-\mathrm{\$}80,000)$

4. Intercompany receivable and payable eliminated by setoff
5. Accumulated depreciation recognized

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 the parent in consolidation.

The consolidated worksheet for December 31, 20X4.

Answer to Problem 5.29P

Net assets and liability/equity as per worksheet $938,800

Explanation of Solution

P and S

Consolidated balance sheet worksheet

December 31, 20X4

			Elimination
	P $	S $	Debit $	Credit $	Consolidation $
Cash	50,300	21,000			71,300
Accounts receivable	90,000	44,000		12,500	121,500
Inventory	130,000	75,000	6,000		211,000
Land	60,000	30,000			90,000
Buildings and equipment	410,000	250,000	15,000	80,000	595,000
Less: Accumulated depreciation	(150,000)	(80,000)	80,000		(150,000)
Investment in S Corp	102,200			87,500
				14,700
Total Assets	692,500	340,000	101,000	194,700	938,800
Accounts payable	152,500	35,000	12,500		175,000
Mortgage payable	250,000	180,000			430,000
Common stock	80,000	40,000	40,000		80,000
Retained earnings	210,000	85,000	85,000		210,000
Non-controlling in net assets S				37,500
				6,300	43,800
Total Liabilities & Equity	692,500	340,000	101,000	194,700	938,800

c

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 the parent in consolidation.

The consolidated balance sheet for December 31, 20X4

Answer to Problem 5.29P

Net assets and liability/equity as per worksheet $938,800

Explanation of Solution

P and S

Consolidated balance sheet

December 31, 20X4

	$	$
Cash		71,300
Accounts receivable		121,500
Inventory		211,000
Land		90,000
Buildings and equipment	595,000
Less: Accumulated depreciation	(150,000)
		445,000
Total Assets		938,800
Accounts payable		175,000
Mortgage payable		430,000
Stockholders’ equity:
Common stock	80,000
Retained earnings	210,000
Total controlling interest	290,000
Non-controlling in net assets S	43,800
Total stockholders’ equity		333,800
Total Liabilities & Equity		938,800