
Concept explainers
Consolidated in subsequent year:The consolidation procedures adopted in the second and subsequent years are basically same as used in the first year. Adjusted
Requirement 1
Reconciliation between the balances in P’s investment in L company stock account on December 31 20X7.

Answer to Problem 7.33P
Reconciliation between P’s investment in S 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 S 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
Consolidated in subsequent year:The consolidation procedures adopted in the second and subsequent years are basically same as used in the first year. Adjusted trial balance data of the individual companies are used as the starting point each time consolidation statements are prepared. An additional check is needed in each period to ensure that the beginning balance of consolidated retained earnings shown in the completed worksheet equals the balance reported at the end of previous year.
Requirement 2
Consolidation entries needed and prepare complete consolidation work sheet.
b

Answer to Problem 7.33P
Consolidation elimination entries.
Debit | Credit | |
1. Eliminate income from subsidiary | ||
Income from subsidiary | $38,000 | |
Dividends declared | $28,000 | |
Investment in S common stock | 10,000 | |
2. Assign income to non-controlled interest (45,000 x 0.20) | ||
Income from non-controlled interest | $9,000 | |
Dividends | 7,000 | |
Non-controlling interest | 2,000 | |
3. Eliminate beginning investment balance | ||
Common stock S company | 100,000 | |
Retained earnings January 1 | 140,000 | |
Differential | 50,000 | |
Investment in S stock | 232,000 | |
Non-controlling interest | 58,000 | |
Eliminate beginning investment balance | ||
Working note: | ||
P company’s holding at 80 percent | $160,000 | |
Non-controlling interest | 40,000 | |
$200,000 | ||
Less: S common stock outstanding at acquisition | $100,000 | |
S retained earnings at acquisition | 50,000 | |
$150,000 | ||
Differential | $50,000 | |
Investment in S company stock | ||
Working note: | ||
Balance in investment account after reconciliation | $240,000 | |
Less: investment in S stock | 8,000 | |
Current investment in S stock | $232,000 | |
Non-controlling interest | ||
Working notes: | ||
Common stock S | $100,000 | |
Retained earnings of S on January 1 | $140,000 | |
Retained earnings of S at acquisition | 50,000 | |
$290,000 | ||
Non-controlling interest 290,000 x 0.20 | $58,000 | |
4. Assigning differential to goodwill | ||
Goodwill | 25,000 | |
Retained earnings January 1 | 20,000 | |
Non-controlling interest | 5,000 | |
Differential | 50,000 | |
5. Elimination unrealized profit on land | ||
Retained earnings January 1 | 8,000 | |
Non-controlling interest | 2,000 | |
Land | 10,000 | |
6. Elimination of unrealized profit on equipment | ||
Buildings and equipment | 5,000 | |
Retained earnings January 1 | 18,000 | |
| 2,000 | |
| 21,000 | |
Accumulated depreciation adjustments | ||
Required balance ($5,000 x 7 years) | $35,000 | |
Balance recorded ( 7000 x 2 years) | (14,000) | |
Increase | 21,000 | |
7. Elimination of inter-corporate receivable / payable | ||
Accounts payable | 4,000 | |
| 4,000 |
Consolidated net income for December 31 20X8 is $83,000 and Net Assets are $1,081,000
Explanation of Solution
- Income from subsidiary is eliminated by treating it as dividends
- Income from non-controlling interest is recognized Sales = 150,000
- 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
Less: Cost of sales = 80,000
Depreciation amortization = 15,000
Other expenses = 10,000
Income on intercompany = $45,000.
20 percent of income is non-controlling interest
Eliminate beginning investment balance | ||
Working note: | ||
P company’s holding at 80 percent | $160,000 | |
Non-controlling interest | 40,000 | |
$200,000 | ||
Less: S common stock outstanding at acquisition | $100,000 | |
S retained earnings at acquisition | 50,000 | |
$150,000 | ||
Differential | $50,000 | |
Investment in S company stock | ||
Working note: | ||
Balance in investment account after reconciliation | $240,000 | |
Less: investment in S stock | 8,000 | |
Current investment in S stock | $232,000 | |
Non-controlling interest | ||
Working notes: | ||
Common stock S | $100,000 | |
Retained earnings of S on January 1 | $140,000 | |
Retained earnings of S at acquisition | 50,000 | |
$290,000 | ||
Non-controlling interest 290,000 x 0.20 | $58,000 |
P & L Company
Consolidation work paper
December 31 20X7
Eliminations | |||||
Item | P | S | 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 |
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Chapter 7 Solutions
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