Chapter 7, Problem 7.32P

To determine

Consolidated entries:These entries are used in consolidation worksheet to adjust the totals of the individual account balances of the separate consolidating companies.Consolidation entries appear only in the consolidation worksheet and do not affect the books of separate companies. These worksheet entries are sometime called as elimination entries. The intercompany transactions between consolidating companies may be recorded in separate accounts to facilitate the later elimination of intercompany transactions.

Requirement 1

Consolidation entries needed to prepare consolidation worksheet for the year 20X6.

Answer to Problem 7.32P

Eliminating entries for December 31 20X6

	Debit	Credit
1. Eliminating income from subsidiary
Income from subsidiary	32,000
Dividends declared		4,000
Investment in S company stock		28,000
2. Assign income to non-controlling interest
Income to non-controlling interest	4,400
Dividends declared		1,000
Non-controlling interest		3,400
($40,000 − 18,000) x 0.20 = 4,400
3. Eliminate beginning investment balance
Common stock S company	100,000
Retained earnings January 1	105,000
Differential	50,000
Investment in S company stock		204,000
Non-controlling interest		51,000
4. Assign differential to goodwill
Goodwill	50,000
Differential		50,000
5. Recognizing impairment of goodwill
Goodwill impairment loss	18,000
Goodwill		18,000
6. Eliminating unrealized gain on land
Retained earnings January 1	8,000
Non-controlling interest	2,000
Land		10,000
7. Eliminating intercompany sale of equipment
Buildings and equipment	5,000
Gain on sale of equipment	20,000
Depreciation and amortization expenses		2,000
Accumulated depreciation		23,000
8. Eliminating intercompany receivable and payable
Account payable	7,000
Accounts receivable		7,000

Explanation of Solution

1. As all the intercompany transactions are eliminated, income from subsidiary is also eliminated.
2. Income to non-controlling interest fair value was 40,000 assigned to non-controlling interest (40,000 − 18,000) x .20 =4,400
3. Beginning investment balance is eliminated by assigning it to investment in S company and non-controlling interest.
4. Goodwill is assigned to differential.
5. Impairment loss on goodwill is recognized by crediting it to goodwill account.
6. Unrealized gain on sale of land is eliminated by debiting to retained earnings.
7. Elimination of intercompany sale of equipment is carried out and depreciation expenses are adjusted as follows:

Depreciation expenses adjustment:
Depreciation recorded $70,000 / 10 years	7,000
Depreciation required $75,000 / 15 years	(5,000)
Required decrease	$2,000
Accumulated depreciation adjustment:
Required balance $5,000 x 6 years	$30,000
Balance recorded $7,000 x 1 year	(7,000)
Required increase	$23,000

8. Intercompany accounts receivable and payable has been eliminated by setoff entry.

b

To determine

Consolidated entries:These entries are used in consolidation worksheet to adjust the totals of the individual account balances of the separate consolidating companies.Consolidation entries appear only in the consolidation worksheet and do not affect the books of separate companies. These worksheet entries are sometime called as elimination entries. The intercompany transactions between consolidating companies may be recorded in separate accounts to facilitate the later elimination of intercompany transactions.

Requirement 2

Preparation of consolidation worksheet for December 31 20X6.

Answer to Problem 7.32P

Consolidated net income and Net assets of P & S Company’s is $79,600 and 980,000 respectively.

Explanation of Solution

P & S COMPANY’S

Consolidated worksheet

December 31 20X7

			Elimination
	P	S	Debit	Credit	Consolidated
Sales	240,000	120,000			360,000
Gain on sale of equipment	20,000		20,000
Income from subsidiary	32,000		32,000
Less : cost of goods sold	(140,000)	(60,000)			(200,000)
Depreciation	(25,000)	(15,000)		2,000	(38,000)
Goodwill impairment			18,000		(18,000)
Other expenses	(15,000)	(5,000)			(20,000)
Consolidated net income					84,000
NCI in net income			4,400		(4,400)
Net income	112,000	40,000	74,400	2,000	79,600
Retained earnings:
Retained earnings Jan 1	338,000	105,000	105,000
			8,000
Dividends	(30,000)	(5,000)		4,000
				1,000	(30,000)
Retained earnings Dec 31	420,000	140,000	187,400	7,000	379,600
Balance sheet:
Cash and receivable	113,000	35,000		7,000	141,000
Inventory	260,000	90,000			350,000
Land	80,000	80,000		10,000	150,000
Buildings and equipment	500,000	150,000	5,000		655,000
Less: Accu depreciation	(205,000)	(45,000)		23,000	(273,000)
Investment in S company	232,000			28,000
				204,000
Differential			50,000	50,000
Goodwill			50,000	18,000	32,000
Net Assets	980,000	310,000	105,000	313,000	1,055,000
Accounts payable	60,000	20,000	7,000		73,000
Bonds payable	200,000	50,000			250,000
Common stock	300,000	100,000	100,000		300,000
Retained earnings Dec 31	420,000	140,000	187,400	7,000	379,600
Non-controlling interest			2,000	3,400
				51,000	52,400
Liabilities and Equity	980,000	310,000	196,400	61,400	1,055,000

c

To determine

Consolidated entries:These entries are used in consolidation worksheet to adjust the totals of the individual account balances of the separate consolidating companies.Consolidation entries appear only in the consolidation worksheet and do not affect the books of separate companies. These worksheet entries are sometime called as elimination entries. The intercompany transactions between consolidating companies may be recorded in separate accounts to facilitate the later elimination of intercompany transactions.

Requirement 3

Preparation of consolidation balance sheet income statement and retained earnings statement for December 31 20X6.

Answer to Problem 7.32P

Eliminating entries for December 31 20X6.

Explanation of Solution

P &S COMPANY’S

Consolidated balance sheet

December 31 20X6.

	$	$
Assets
Cash and receivables		141,000
Inventory		350,000
Land		150,000
Buildings and equipment’s	655,000
Less: Accumulated depreciation	(273,000)	382,000
Goodwill		32,000
Total Assets		1,055,000
Accounts payable		73,000
Bonds payable		250,000
Stockholders’ Equity:
Controlling interest
Common stock	300,000
Retained earnings	379,600
Total controlling interest	679,600
Total Non-controlling interest	52,400
Total stockholder’s equity		732,000
Total Liability and equity		1,055,000

P &S COMPANY’S

Consolidated income statement

December 31 20X6.

	$	$
Sales		360,000
Less: Cost of goods sold	200,000
Depreciation and amortization expenses	38,000
Goodwill impairment loss	18,000
		(276,000)
Consolidated net income		84,000
Less income to non-controlling interest		(4,400)
Income to controlling interest		79,600

P &S COMPANY’S

Consolidated retained earnings

December 31 20X6.

	$
Retained earnings January 1 20X6	330,000
Income to controlling interest 20X6	79,600
	409,600
Dividends declared 20X6	(30,000)
Retained earnings December 31 20X6	379,600