Chapter 5, Problem 5.39P

a.

To determine

Introduction: Journal entry is a systematic method of recording transactions as and when they occur. It is a summary of transactions divided into the debit and credit items that are recorded chronologically. It is an act of keeping and recording all the transactions occurring in the business.

Journal entries for investment in S Co. by M Co.

Explanation of Solution

Journal entries

S. no	Date	Particulars	Debit	Credit
1		Investment in S’s stock	$24,000
		Cash		$24,000
		(To record share of S Co. income)
2		Cash	$8,000
		Investment in S’s stock		$8,000
		( To record the share of S Co.’s dividend)
4		Income from subsidiary	$4,000
		Investment in S’s stock		$4,000
		(To record the amortization of excess acquisition price)

1. Recording the investment in S company.
2. Recording the dividends received from S company.
3. Assigning the amortization of excess acquisition price.

b.

To determine

Introduction: Journal entry is a systematic method of recording transactions as and when they occur. It is a summary of transactions divided into the debit and credit items that are recorded chronologically. It is an act of keeping and recording all the transactions occurring in the business.

Eliminating entries to prepare consolidated financial statements in 20X5

Explanation of Solution

Basic elimination entry

S. no	Date	Particulars	Debit	Credit
1		Common stock	$100,000
		Retained earnings	$90,000
		Income from S	$24,000
		Non-controlling interest in net income of S	$6,000
		Dividends declared		$10,000
		Investment in S		$168,000
		Non-controlling interest in net assets of S		$42,000
		(To record basic elimination entry)

Excess value reclassification entry:

S. no	Date	Particulars	Debit	Credit
1		Buildings and equipment	$50,000
		Depreciation	$5,000
		Income from S		$4,000
		Non-controlling interest in net income of S		$1,000
		Accumulated depreciation		$25,000
		Investment in S		$20,000
		Non-controlling interest in net assets of S		$5,000
		(To record the reclassification entry)

Eliminate intercompany accounts

S. no	Date	Particulars	Debit (in $)	Credit (in$)
1		Accounts payable	$10,000
		Accounts receivable		$10,000
		(To eliminate the inter-company transactions of account receivable or payables)

Working notes:

Book value calculations
	NCI 20%	+	MC 80%	=	Common stock	+	Retained earnings
Original book value	38,000		152,000		100,000		90,000
+ Net income	6,000		24,000				30,000
- Dividends	(2,000)		(8,000)				(10,000)
Ending book value	42,000		168,000		100,000		110,000

Excess value (differential) calculations
	NCI 20%	+	MC 80%	=	Building and equipment	+	Accumulated depreciation
Beginning balance	6,000		24,000		50,000		(20,000)
Changes	(1,000)		(4,000)				(5,000)
Ending balance	5,000		20,000		50,000		(25,000)

(c)

To determine

Introduction: A consolidated worksheet is used to prepare the consolidated financial statements of the parent company and its subsidiary. It reflects the individual values of the parent and the subsidiary and then one consolidated figure for both the entities.

Three part consolidation worksheet for 20X5

Answer to Problem 5.39P

The retained earnings as on December 31, 20X5 is $344,000

The total assets as on December 31, 20X5 is $1,346,000

The total liabilities and equities as on December 31, 20X5 is $1,346,000

Explanation of Solution

Consolidated Work paper as on December 31, 20X5

Particulars	M	S	Eliminations		Consolidated
			Debit	Credit
Sales	$200,000	$100,000			$300,000
Income from subsidiary	$20,000		$20,000
Credits	$220,000	$100,000			$300,000
Cost of goods sold	$120,000	$100,000			$300,000
Depreciation expense	$25,000	$15,000	$5,000		$45,000
Other expenses	$15,000	$5,000			$200,000
Debits	($160,000)	($70,000)			($235,000)
Consolidated net income					$65,000
Income to non-controlling interest			$5,000		($5,000)
Income, carry forward	$60,000	$30,000	$30,000		$60,000
Retained earnings Jan 1	$314,000	$90,000	$90,000		$314,000
Income, from above	$60,000	$30,000	$30,000		$60,00
	$374,000	$120,000			$374,000
Dividends declared	($30,000)	($10,000)		$8,000
				$2,000	($30,000)
Retained earnings as on Dec 1 carried forward	$344,000	$110,000	$120,000	$10,000	$344,000
Cash and accounts receivables	$81,000	$65,000		$10,000	$136,000
Inventory	$260,000	$90,000			$350,000
Land	$80,000	$80,000			$160,000
Buildings and equipment	$500,000	$150,000	$50,000		$700,000
Investment in S’s stock	$188,000			$12,000
				$176,000
Differential			$30,000	$30,000
Goodwill			(4) $25,000		$25,000
Debits	$1,109,000	$385,000			$1,346,000
Accumulated depreciation	$205,000	$105,000		$20,000
				$5,000	$335,000
Accounts payable	$60,000	$20,000	$10,000		$70,000
Notes payable	$200,000	$50,000			$250,000
Common stock:
M	$300,000				$300,000
S		$100,000	$100,000
Retained earnings from above	$344,000	$1,410,000	$120,000	$10,000	$344,000
Non-controlling interest				$3,000
				$44,000	$47,000
Credits	$1,109,000	$385,000	$310,000	$310,000	$1,346,000