Chapter 6, Problem 44P

a.

To determine

Identify the consolidation worksheet adjustments which would have been required as of January 1, 2013, to eliminate the subsidiary’s common and preferred stocks.

Explanation of Solution

The consolidation worksheet adjustments which would have been required as of January 1, 2013, to eliminate the subsidiary’s common and preferred stocks:

Entry S and Entry A
Date	Accounts Title and Explanation	Post Ref.	Debit	Credit
01/01/2013	Common stock		$  100,000
	Preferred stock		$  200,000
	Retained earnings on 01/01/2013		$  450,000
	Franchises		$    40,000
	Non controlling interest in Company L			$  552,800
	Investment in Company L(Common Stock)			$    65,000
	Investment in Company L (Preferred Stock)			$  172,200
	(being stock of subsidiary eliminated and excess fair value on date of acquisition recorded))

Table: (1)

Working note:

Computation of excess of book value over fair value:

Particulars		Amount
Consideration transferred for common stock		$       552,800
Consideration transferred for preferred stock		$         65,000
Non-controlling interest in common stock		$       138,200
Non-controlling interest in preferred stock		$         34,000
Company L’s acquisition-date fair value		$       790,000
Book value of Company L		$       750,000
Excess assigned to franchises		$         40,000

Table: (2)

b.

To determine

Identify the consolidation worksheet adjustments which would have been required as of December 31, 2013, to account for Company M’s purchase of Company L’s bonds.

Explanation of Solution

The consolidation worksheet adjustments which would have been required as of December 31, 2013, to account for Company M’s purchase of Company L’s bonds:

Entry B
Date	Accounts Title and Explanation	Post Ref.	Debit	Credit
12/31/2013	Bond payable		$    50,000
	Loss on Retirement of Bonds		$      9,135
	Interest Income		$      4,265
	Investment in Bonds			$       52,575
	Interest expense			$         6,185
	Discount on Bonds Payable			$         4,640
	(being the intra-entity bonds recognized)

Table: (3)

Working note:

Computation of Bonds Payable as on December 31, 2013
Particulars	Amount
Carrying amount of Bonds payable	$    44,175
Amortization of premium:
Cash interest	$      5,000
Interest income	$      6,185
Bonds Payable as on December 31, 2013	$    45,360

Table: (4)

Computation of Investment in Bonds as on December 31, 2013
Particulars	Amount
Carrying amount	$    53,310
Amortization of premium:
Cash interest	$      5,000
Interest income	$      4,265
Investment in Bonds as on December 31, 2013	$    52,575

Table: (5)

c.

To determine

Identify the consolidation worksheet adjustments which would have been required as of December 31, 2013, to account for the intra-entity sale of fixed assets.

Explanation of Solution

The consolidation worksheet adjustments which would have been required as of December 31, 2013, to account for the intra-entity sale of fixed assets:

Entry TA
Date	Accounts Title and Explanation	Post Ref.	Debit	Credit
12/31/2013	Gain on transfer of fixed assets		$    80,000
	Depreciation expense			$         8,000
	Accumulated Depreciation			$       52,000
	Fixed assets			$       20,000
	(Being excess depreciation eliminated)

Table: (6)

d.

To determine

Calculate the consolidated balance for each of the following accounts:

• Franchises
• Fixed Assets
• Accumulated Depreciation
• Expenses

Explanation of Solution

Computation of consolidated balance for franchises:

Particulars	Amount
Original allocation to franchises (given)	$       40,000
Amortization at $1,000/  per year (2013 and 2014)	$       (2,000)
Consolidated franchises as on 12/31/14	$       38,000

Table: (7)

Computation of consolidated balance for fixed assets:

Particulars	Amount
Fixed assets of Company M	$  1,100,000
Fixed assets of Company L	$     800,000
Reduction necessitated by intra-entity sale	$     (20,000)
Consolidated fixed assets as on 12/31/14	$  1,880,000

Table: (8)

Computation of consolidated balance for Accumulated depreciation:

Particulars	Amount
Accumulated Depreciation of Company M	$     300,000
Accumulated Depreciation of Company L	$     200,000
Increase due to intra-entity sale	$       44,000
Consolidated Accumulated Depreciation as on 12/31/14	$     544,000

Table: (9)

Computation of consolidated balance for expenses:

Particulars	Amount
Expenses of Company M	$     220,000
Expenses of Company L	$     120,000
Recognition of amortization	$         1,000
Intra-entity interest expense eliminated	$       (6,350)
Excess depreciation eliminated	$       (8,000)
Consolidated Expenses as on 12/31/2014	$     326,650

Table: (10)