
a
Concept introduction: Consolidation in a subsequent year is fundamentally the same as used in the first year. Adjusted
Reconciliation between the balances in P’s investment in L company stock account on December 31 20X7.
a

Answer to Problem 7.33P
Reconciliation between P’s investment in L on December 31 20X7 shows balance of $240,000 in investment account.
Explanation of Solution
Reconciliation of book value and balance in investments.
Net book value reported by L company | ||
Common stock | $100,000 | |
Retained Earnings January 1 20X7 | $140,000 | |
Net income for 20X7 | 45,000 | |
Dividends paid in 20X7 | (35,000) | |
Retained earnings Balance December 31 20X7 | 150,000 | |
$250,000 | ||
Proportion of stock held by P ($250,000 X 0.80) | $200,000 | |
Add: | 40,000 | |
Balance in investment account | $240,000 |
b
Concept introduction: Consolidation in a subsequent year is fundamentally the same as used in the first year. Adjusted trial balance data of the individual companies are used for consolidation in the second year. In addition to that, the balances of consolidated retained earnings beginning and end are compared to check if it is equal in each period.
Consolidation entries needed and prepare complete consolidation work sheet.
b

Explanation of Solution
Consolidation elimination entries:
Debit $ | Credit $ | |
1. Eliminate income from subsidiary | ||
Income from subsidiary | 38,000 | |
Dividends declared | 28,000 | |
Investment in L common stock | 10,000 | |
(Income from subsidiary eliminated by reversal) | ||
2. Assign income to non-controlled interest | ||
Income from non-controlled interest | 9,000 | |
Dividends | 7,000 | |
Non-controlling interest | 2,000 | |
(Income assigned to non-controlling interest) | ||
3. Eliminate beginning investment balance | ||
Common stock L company | 100,000 | |
Retained earnings January 1 | 140,000 | |
Differential | 50,000 | |
Investment in L stock | 232,000 | |
Non-controlling interest | 58,000 | |
(Beginning investment eliminated by reversal) | ||
4. Assigning differential to goodwill | ||
Goodwill | 25,000 | |
Retained earnings January 1 | 20,000 | |
Non-controlling interest | 5,000 | |
Differential | 50,000 | |
(Differential assigned to goodwill) | ||
5. Elimination unrealized profit on land | ||
Retained earnings January 1 | 8,000 | |
Non-controlling interest | 2,000 | |
Land | 10,000 | |
(Being unrealized profit on land is eliminated by reversal) | ||
6. Elimination of unrealized profit on equipment | ||
Buildings and equipment | 5,000 | |
Retained earnings January 1 | 18,000 | |
| 2,000 | |
| 21,000 | |
(Elimination of unrealized profit on equipment) | ||
7. Elimination of inter-corporate receivable / payable | ||
Accounts payable | 4,000 | |
| 4,000 | |
(Intercompany receivable and payable eliminated by setoff) |
P & L Company
Consolidation Worksheet
December 31 20X7
Eliminations | |||||
Item | P $ | L $ | Debit$ | Credit$ | Consolidated $ |
Sales | 250,000 | 150,000 | 400,000 | ||
Income from subsidiary | 38,000 | 38,000 | |||
288,000 | 150,000 | 400,000 | |||
Cost of goods sold | 160,000 | 80,000 | 240,000 | ||
Depreciation & amortization | 25,000 | 15,000 | 2,000 | 38,000 | |
Other expenses | 20,000 | 10,000 | 30,000 | ||
(205,000) | (105,000) | (308,000) | |||
Consolidated net income to non-controlled interest | 92,000 | ||||
9,000 | (9,000) | ||||
Income carry forward | 81,000 | 45,000 | 45,000 | 2,000 | 83,000 |
Retained earnings Jan 1 | 420,000 | 140,000 | 140,000 | ||
20,000 | |||||
8,000 | |||||
18,000 | 374,000 | ||||
Income from above | 81,000 | 45,000 | 45,000 | 2,000 | 83,000 |
501,000 | 185,000 | 457,000 | |||
Dividends declared | (60,000) | (35,000) | 28,000 | ||
7,000 | (60,000) | ||||
Retained earnings Dec 31 | 441,000 | 150,000 | 231,000 | 37,000 | 397,000 |
Cash and receivable | 151,000 | 55,000 | 4,000 | 202,000 | |
Inventory | 240,000 | 100,000 | 340,000 | ||
Land | 100,000 | 80,000 | 10,000 | 170,000 | |
Buildings and equipment | 500,000 | 150,000 | 5,000 | 655,000 | |
Less Depreciation | (230,000) | (60,000) | (21,000) | (311,000) | |
Investment in L stock | 240,000 | 8,000 | |||
232,000 | |||||
Differential | 50,000 | 50,000 | |||
Goodwill | 25,000 | 25,000 | |||
Total assets | 1,001,000 | 325,000 | 1,081,000 | ||
Accounts payable | 60,000 | 25,000 | 4,000 | 81,000 | |
Bonds payable | 200,000 | 50,000 | 250,000 | ||
Common stock | 300,000 | 100,000 | 100,000 | 300,000 | |
Retained earnings | 441,000 | 150,000 | 231,000 | 37,000 | 397,000 |
5,000 | 2,000 | ||||
2,000 | 58,000 | 53,000 | |||
Liabilities and equity | 1,001,000 | 325,000 | 442,000 | 497,000 | 1,081,000 |
Working notes:
Consolidated net income for December 31 20X8 is $83,000 and Net Assets are $1,081,000
- Income from subsidiary is eliminated by treating it as dividends
- Income from non-controlling interest is recognized
- Investment balances has been eliminated
- Assignment if differential to goodwill
- Unrealized profit on sale of land is eliminated
- Unrealized profit on sale of equipment is eliminated
- Intercompany accounts receivable and payable is eliminated by setoff
Sales | $150,000 |
Less: Cost of sales | ($80,000) |
Depreciation amortization | ($15,000) |
Other expenses | ($10,000) |
Income on intercompany | $45,000 |
Eliminate beginning investment balance | ||
Working note: | ||
P company’s holding at 80 percent | $160,000 | |
Non-controlling interest | 40,000 | |
$200,000 | ||
Less: L’s common stock outstanding at acquisition | $100,000 | |
L’s retained earnings at acquisition | 50,000 | |
$150,000 | ||
Differential | $50,000 | |
Investment in L company stock | ||
Working note: | ||
Balance in investment account after reconciliation | $240,000 | |
Less: investment in L stock | 8,000 | |
Current investment in L stock | $232,000 | |
Non-controlling interest | ||
Working notes: | ||
Common stock L | $100,000 | |
Retained earnings of L on January 1 | $140,000 | |
Retained earnings of L at acquisition | 50,000 | |
$290,000 | ||
$58,000 |
Accumulated depreciation adjustments | |
Required balance | $35,000 |
Balance recorded | (14,000) |
Increase | 21,000 |
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