Chapter 7, Problem 28P

a.

To determine

Identify the method which Company P use to account for its investment in Company S.

Explanation of Solution

The net income of Company S is 80 percent of the total reported income of Company S which implies that there is no adjustment for excess amortization and intra-entity profits. The retained earnings of Company P is not equal to the amount of consolidated retained earnings. Thus, Company P is using Partial equity Method to account for its investment in Company S.

b.

To determine

Determine the balance of the intra-entity inventory gross profit deferred at the end of the current period.

Explanation of Solution

The consolidated balance of inventory is represented as $338,000 rather than sum of $190,000 and $160,000 which is $350,000. Thus, the balance of the intra-entity inventory gross profit deferred at the end of the current period is $12,000.

c.

To determine

Find the amount which was originally allocated to the trademarks.

Explanation of Solution

The amount of consolidated trademarks is $32,500 where the amortization expense of two years has been adjusted. Thus, the amount which was originally allocated to the trademarks is $37,500 because amortization of two years amounts to $5,000.

d.

To determine

Determine the amount of the current year intra-entity inventory sales.

Explanation of Solution

The consolidated total for sales is given as $1,280,000 whereas the total of sales of Company P and Company S amounts to $1,400,000. Thus, the amount of the current year intra-entity inventory sales is $120,000.

e.

To determine

Identify whether the intra-entity inventory sales made are upstream or downstream.

Explanation of Solution

The net income of Company S has been adjusted according to the upstream transfers and the income attributed to the non-controlling interests has not been computed as 20 percent of the total net income of subsidiary. These all adjustments implies that the intra-entity sales are upstream in nature.

f.

To determine

Compute the balance of the intra-entity liability at the end of the current year.

Explanation of Solution

The consolidated total of liabilities and receivables is $20,000 than the sum total of liabilities of both the companies. Thus, the balance of the intra-entity liability at the end of the current year is $20,000.

g.

To determine

Find the amount of intra-entity gross profit which was deferred from the preceding period and recognized in the current period.

Explanation of Solution

Computation of the amount of intra-entity gross profit which was deferred from the preceding period and recognized in the current period:

Particulars	Amount
Consolidated cost of goods sold	$(784,000)
Cost of goods sold of Company P	$  500,000
Cost of goods sold of Company S	$  400,000
Intra-entity sale	$(120,000)
Intra-entity gross profit deferred	$    12,000
Deferred Gross Profit of previous recognized in current period	$      8,000

Table: (1)

h.

To determine

Identify how the ending Non-controlling Interest in Company S is computed.

Explanation of Solution

Computation of Non-controlling Interest in Company S:

Particulars	Amount
Book value of subsidiary as on 1/1/18	$  370,000
Intra-entity gross profit in beginning inventory	$    (8,000)
Adjusted book value	$  362,000
Excess allocation at 1/1/18	$    35,000
Subsidiary valuation basis as on 1/1/18	$  397,000
Non-controlling interest percentage	20%
Non-controlling interest as on 1/1/18	$    79,400
Non-controlling interest in Company S's income	$    18,700
Non-controlling interest in Company S's dividends
$\left(\$30,000\times 20\%\right)$	$    (6,000)
Ending non-controlling interest in Company S	$    92,100

Table: (2)

i.

To determine

Identify the income tax journal entry which is recorded if the companies prepare a consolidated tax return.

Explanation of Solution

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Income tax expense		$    117,400
	Income tax payable			$ 117,400
	(being intra-entity gross profit deferred for purpose of filing consolidated tax return)

Table: (2)

Working note:

Computation of taxable income:

Particulars	Amount
Consolidated Taxable Income:
Sales	$  1,280,000
Cost of goods sold	$   (784,000)
Operating expenses	$   (202,500)
Taxable income	$     293,500

Table: (3)

j.

To determine

Identify the income tax journal entry which is recorded if the companies prepare the separate tax returns.

Explanation of Solution

The income tax journal entry which is recorded if the companies prepare the separate tax returns is as follows:

Entry to be recorded by Company P:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Income tax expense		80,000
	Income tax payable			80,000
	(being intra-entity gross profit deferred for purpose of filing separate tax return)

Table: (4)

Entry to be recorded by Company S:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Income tax expense		38,400
	Deferred Income Tax Asset		1,600
	Income tax payable			40,000
	(being intra-entity gross profit deferred for purpose of filing separate tax return)

Table: (5)

Working note:

Computation of deferred tax asset:

Particulars	Amount
Reported income	$     100,000
Intra-entity gross profit from previous year recognized in current year	$         8,000
Deferral of current intra-entity gross profit in inventory	$     (12,000)
Accrual-based net income	$       96,000
Tax rate	40%
Income tax expense	$       38,400
Taxes payable	$       40,000
Deferred tax asset	$         1,600

Table: (6)