Chapter 5, Problem 5.7P

To determine

Introduction: Consolidated income statement is the combination of income, revenue and expenses of holding companies and its subsidiaries depicting the overall scenario of the aggregate of the company as a whole.

To prepare:The worksheet necessary to produce the consolidated financial statements for the year ended December 31, 2016, and to include the determination and distribution of excess and income distribution schedules.

Explanation of Solution

Adjustments of accounts to be amortized:

Accounts Adjustments to be Amortized	Life (Years)	Annual Amount ($)	Current year ($)	Prior Years ($)	Total
Buildings	20	6,500	6,500	13,000	19,500
Equipment	5	10,000	10,000	20,000	30,000
Total Amortizations		16,500	16,500	33,000	49,500

Following is the computation of intercompany inventory profit:

Particulars	Parent Amount	Parent %	Parent Profit ($)	Sub Amount ($)	Sub Percent	Sub Profit ($)
Beginning	-	0%	-	12,000	25%	3,000
Ending	-	0%	-	9,000	25%	2,250

Now, following is the computation of internally generated income of the company:

For Company S,

Given: Sale of S Company is $350,000, COGS is $230,000, Depreciation expenses on building is $5,000, Depreciation expenses on equipment is $10,000, other expenses are $80,000 and interest expense is $7,652.

  $\begin{array}{c}\text{Internally Generated Income}=\text{S Company Sales }\\ \text{– }\left(\begin{array}{l}\text{COGS}+\text{Depreciation expnses on building }\\ +\text{Depreciation expenses on equipment}\\ +\text{other expenses}+\text{Interest expenses}\end{array}\right)\\ =\$350,000-\left(\begin{array}{l}\$230,000+\$5,000+\\ \$10,000+\$80,000+\$7,652\end{array}\right)\\ =\$17,348\end{array}$

For Company P,

Given: Sales of P Company is $900,000, COGS is $530,000, Depreciation expenses on building are $30,000, Depreciation expenses on equipment are $15,000 and other expenses are $155,000.

  $\begin{array}{c}\text{Internally Generated Income}=\text{P Company Sales }\\ \text{– }\left(\begin{array}{l}\text{COGS}+\text{Depreciation expnses on building }\\ +\text{Depreciation expenses on equipment}\\ +\text{ other expenses}\end{array}\right)\\ =\$900,000-\left(\begin{array}{l}\$530,000+\$30,000\\ +\$15000+\$155,000\end{array}\right)\\ =\$178,650\end{array}$

Following is the computationof income distribution of subsidiary of S Company:

Particulars	Amount ($)	Particulars	Amount ($)
Amortizations Ending Inventory profit Interest adjustment, bonds	16,500 2,500 998	Internally Generated Net Income Beginning Inventory Profit Adjusted Income Non-Controlling Interests share Non-controlling Interest	17348 3,000 350 20% 70

Following is the computation of income distribution of parent P Company:

Particulars	Amount ($)	Particulars	Amount ($)
		Internally Generated Income Adjusted Income Share (S Company) (80% of $15,987) Controlling Interest	178,650 280 178,930

Worksheet:

Particulars	Trial Balance		Elimination and Adjustments		Consolidated B/S ($)	NCI ($)	Controlling R/E ($)	Consolidated B/S ($)
	P ($)	S ($)	Debit ($)	Credit ($)
Cash	290486	99347						389833
Accounts Receivable	120000	91000		6000				205000
Inventory	140000	55000		2500				192500
Land	200000	60000						260000
Investment in S stock	435737			13878
	-		(8000)
	-			189859
	-			240000
Investment in S Bonds	96760			96760
Buildings	600000	100000	130000					830000
Accumulated Depreciation	(340000)	(45000)		19500				(404500)
Equipment	150000	80000	50000					280000
Accumulated Depreciation	(105000)	(60000)		30000				(195000)
Goodwill			120000					120000
Accounts Payable	(40000)	(34000)	6000					(68000)
Bonds Payable		(100000)	100000
Discount (Premium)		(1675)	1675
Common Stock ($1 par) S. Co.		(10000)	8000
Paid-in-capital in excess of par - S. Co.		(90000)	72000			(2000)
Retained Earnings - S. Co.		(137324)	109859			(18000)
			6600	560000
			600	1183
Common Stock ($1 par) P Company	(100000)					(81448)		(100000)
Paid-in-capital in excess of Par - P. Co.	(800000)							(800000)
Retained Earnings	(475455)		26400
			2400				(451385)
				4730
Sales	(900000)	(350000)	25000		(1225000)
Cost of goods sold	530000	230000		25000
			2500	3000	734500
Depreciation - Building	30000	5000	6500		41000
Depreciation - Equipment	15000	10000	10000		35000
Other Expenses	155000	80000			235000
Interest Expense		7652		7652
Interest Revenue	(8650)		8650
Subsidiary Income	(13878)		13878
Dividend Declare - S. Co.		10000		8000		2000
Dividend Declare - P. Co.	20000						20000
Total	0	0	708062	70862
Consolidated Net Income					(179000)
Non - Controlling Interest					70	70
Controlling Interest					178930		(178930)
Total Non-Controlling Interests						(99518)		(99518)
Retained Earnings							(610315)	(610315)
Total								0

Eliminations and Adjustments are made in the following:

1. Current-year subsidiary income.
2. Current-year dividend.
3. Eliminate controlling interest in subsidiary equity.
4. Distribute excess and adjust NCI.
5. Eliminate intercompany sales during the current period.
6. Eliminate intercompany unpaid trade accounts.
7. Defer beginning inventory profit.
8. Defer ending inventory profit.

Computation of proof for the Elimination of Bonds:

Particulars	Amount ($)	Amount ($)
Gain remaining at year (end):
Carrying Value at December 31, 2016	101,675
Investment in bonds at December 31, 2016	96,760	4,915
Loss amortized during the year:
Interest expense eliminated	8,650
Interest Revenue Eliminated	7,652	998
Gain at January 1, 2016		5,913