Chapter 6, Problem 45P

Fred, Inc., and Herman Corporation formed a business combination on January 1, 2016, when Fred acquired a 60 percent interest in Herman’s common stock for $312,000 in cash. The book value of Herman’s assets and liabilities on that day totaled $300,000 and the fair value of the noncontrolling interest was $208,000. Patents being held by Herman (with a 12-year remaining life) were undervalued by $90,000 within the company’s financial records and a customer list (10-year life) worth $130,000 was also recognized as part of the acquisition-date fair value.

  Intra-entity inventory transfers occur regularly between the two companies. Merchandise carried over from one year to the next is always sold in the subsequent period.

  

  Fred had not paid for half of the 2018 inventory transfers by year-end.

  On January 1, 2017, Fred sold $15,000 in land to Herman for $22,000. Herman is still holding this land.

  On January 1, 2018, Herman acquired $20,000 (face value) of Fred’s bonds in the open market. These bonds had an 8 percent cash interest rate. On the date of repurchase, the liability was shown within Fred’s records at $21,386, indicating an effective yield of 6 percent. Herman’s acquisition price was $18,732 based on an effective interest rate of 10 percent.

  Herman indicated earning a net income of $25,000 within its 2018 financial statements. The subsidiary also reported a beginning Retained Earnings balance of $300,000. dividends of $4,000, and common stock of $100,000. Herman has not issued any additional common stock since its takeover. The parent company has applied the equity method to record its investment in Herman.

1. a. Prepare consolidation worksheet adjustments for 2018.
2. b. Calculate the amount of consolidated net income attributable to the noncontrolling interest for 2018. In addition, determine the ending 2018 balance for noncontrolling interest in the consolidated balance sheet.
3. c. Determine the consolidation worksheet adjustments needed in 2019 in connection with the intra-entity bonds.

To determine

Prepare consolidation worksheet adjustments for 2018.

Explanation of Solution

Entry *TL
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Investment in Company H		7,000
	Land			7,000
	(Being intra-entity gain eliminated))
Entry *G
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Retained earnings of Company H		8,000
	Cost of goods sold			8,000
	(being opening unrealized gross profit eliminated)
Entry S
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Common stock		100,000
	Retained earnings on 01/01/2017		292,000
	Investment in Company H			235,200
	Non controlling interest			156,800
	(being controlling and non-controlling interest recorded)
Entry A
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Patents		75,000
	Customer List		104,000
	Investment in Company H			107,400
	Non controlling interest			71,600
	(being assets transferred to controlling and non-controlling interest)
Entry I
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Investment income		3,000
	Investment in Company H			3,000
	(being intra-entity equity income eliminated)
Entry D
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Investment in Company H		2,400
	Dividend expense			2,400
	(being intra-entity dividend expense eliminated)
Entry E
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Amortization expense		20,500
	Patents			7,500
	Customer List			13,000
	(being amortization expense of current year recorded)
Entry P
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Accounts Payable		60,000
	Accounts Receivable			60,000
	(being intra-entity receivables and payables eliminated)
Entry B
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Bond payable		20,000
	Premium on Bond payable		1,069
	Interest Income		1,873
	Investment in Bonds			19,005
	Interest expense			1,283
	Gain on retirement of Bonds			2,654
	(being the intra-entity bonds recognized)
Entry TI
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Sales		120,000
	Cost of goods sold			120,000
	(being intra-entity sale eliminated)
Entry G
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of goods sold		7,500
	Inventory			7,500
	(being unrealized gross profit on ending inventory eliminated)

Table: (1)

To determine

Calculate the amount of consolidated net income attributable to the non-controlling interest for 2018. In addition, determine the ending 2018 balance for non-controlling interest in the consolidated balance sheet.

Explanation of Solution

Computation of the amount of consolidated net income attributable to the non-controlling interest for 2018:

Particulars	Amount
Net income reported by company H in 2018	$   25,000
Excess fair value amortizations	$ (20,500)
Deferred gross profit recognized	$     8,000
Unrecognized gross profit deferred	$   (7,500)
Net income realized in 2018	$     5,000
Ownership of non-controlling interest	40%
Net income attributable to non-controlling interest	$     2,000

Table: (2)

Computation of the ending 2018 balance for non-controlling interest in the consolidated balance sheet:

Particulars	Amount
Non-controlling interest as on 01/01/2018	$ 228,400
Net income attributable to non-controlling interest	$     2,000
Share of non-controlling interest in dividend	$   (1,600)
Non-controlling interest as on 12/31/2018	$ 228,800

Table: (3)

To determine

Determine the consolidation worksheet adjustments needed in 2019 in connection with the intra-entity bonds.

Explanation of Solution

The consolidation worksheet adjustments needed in 2019 in connection with the intra-entity bonds:

Entry *B
Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
12/31/2019	Bond payable		20,000
	Premium on Bond payable		733
	Interest Income		1,901
	Investment in Bonds			2,064
	Interest expense			19,306
	Gain on retirement of Bonds			1,264
	(being the intra-entity bonds eliminated)

Table: (4)