Chapter 7, Problem 7.34P

a

To determine

Concept introduction:

Modified equity method and cost method: When investments were accounted for using the modified equity method, the proportionate share of subsidiary income and dividends are recorded in the same manner as under the fully adjusted equity method. However, the share of unrealized profits from intercompany transactions is not different, instead, these unrealized gains or losses are removed from the parent’s retained earnings in the period after the intercompany sale, and in that case, the parent’s net income is usually not equal to the amount of consolidated net income allocated to the controlling interest.

The journal entries recorded in P’s books during 20X7 under the cost method.

Explanation of Solution

Entries recorded by P related in his books

Particulars	Debit $	Credit $
Investment in S Company	24,000
Income from S Company		24,000
(Income from Subsidiary recognized)
Cash	8,000
Investment in S Company		8,000
(Received cash on account of dividends from subsidiary)
Income from S company	3,000
Investment in S Company		3,000
(Amortization of premium)
Investment in S Company	1,500
Income from S Company		1,500
(Deferred gained reversed)

Elimination entries

Particulars	Debit $	Credit $
Common stock	20,000
Additional paid- capital	30,000
Retained earnings	150,000
Income from S Company	25,500
Non-controlling interest in net income of S Company	6,000
Dividends declared		10,000
Investment in S Company		177,500
Non-controlling interest in net assets of S Company		44,000
(Elimination of beginning investment in S)
Amortization expense	2,500
Depreciation expense	1,250
Income from S Company		3,000
Non-controlling interest in net income of S		750
(Amortization of excess value reclassification)
Patient	40,000
Buildings and equipment	25,000
Accumulated depreciation		5,000
Investment in S		48,000
Non-controlling interest in net assets of S		12,000
(Differential on patient and buildings and equipment recognized)
Investment in S Company	10,400
Non-controlling interest in net income of S	2,600
Land		13,000
(Gain on purchase of land eliminated)
Investment in S Company	15,000
Building	60,000
Accumulated depreciation		75,000
(Gain on sale of building eliminated)
Accumulated depreciation	1,500
Depreciation expense		1,500
(Extra depreciation recognized)

1. P share of S income recorded
2. P’s share of cash dividends from S recognized
3. Deferred gain on income from S reversed

Elimination entries

4. Beginning investment eliminated by reversal

Retained earnings $150,000 = $200,000 − ($20,000 + 30,000)

Income from S $\mathrm{\$}25,500=(\mathrm{\$}30,000\times .80)+\text{}\text{}\mathrm{\$}1,500$

NCI in Net income $\mathrm{\$}6,000=(\mathrm{\$}30,000\times .20)$

Investment in S company $\mathrm{\$}177,500=(\mathrm{\$}220,000\times .80)+\mathrm{\$}1,500$

NCI in net assets $\mathrm{\$}44,000=(\mathrm{\$}220,000\times .20)$

5. Excess value of depreciation and amortization value reclassified
6. Differential on building & equipment is recognized
7. Gain on purchase of land eliminated
8. Gain on building eliminated and asset recorded on correct basis recognizing extra depreciation.

b

To determine

Concept introduction:

Modified equity method and cost method: When investments were accounted for using the modified equity method, the proportionate share of subsidiary income and dividends are recorded in the same manner as under the fully adjusted equity method. However, the share of unrealized profits from intercompany transactions is not different, instead, these unrealized gains or losses are removed from the parent’s retained earnings in the period after the intercompany sale, and in that case, the parent’s net income is usually not equal to the amount of consolidated net income allocated to the controlling interest.

The three part consolidation worksheet for December 31 20X7

Answer to Problem 7.34P

Balances as per consolidation work sheet 20X7

Retained earnings $267,500

Total assets $1,155,900

Explanation of Solution

P and Subsidiary

Consolidation Worksheet

As of December 31, 20X7

			elimination
Items	P $	S $	Debit $	Credit $	Consolidation $
Sales	450,000	250,000			700,000
Interest income	14,900				14,900
Less:
Cost of goods sold	(285,000)	(136,000)			(421,000)
Operating expenses	(50,000)	(40,000)			(90,000)
Depreciation	(35,000)	(24,000)	1,250	1,500	(58,750)
Amortization			2,500		(2,500)
Interest expenses	(24,000)	(10,500)			(34,500)
Misc. Expenses	(11,900)	(9,500)			(21,400)
Consolidated net income					86,750
Income from S	22,500		25,500	3,000
NCI in net income			6,000	750	(5,250)
Consolidated net income	81,500	30,000	29,250	4,500
Controlling interest in NI	81,500	30,000	35,250	5,250	81,500
Retained earnings Jan 1	216,000	150,000	150,000		216,000
Net income	81,500	30,000	35,250	5,250	81,500
Less dividends declared	(30,000)	(10,000)		(10,000)	(30,000)
Retained earnings Dec, 31	267,500	170,000	185,250	15,250	267,500
Cash	68,400	47,000			115,400
Accounts receivable	130,000	65,000			195,000
Receivables	45,000	10,000			55,000
Inventory	140,000	50,000			190,000
Land	50,000	22,000		13,000	59,000
Buildings and equipment	400,000	240,000	60,000		725,000
			25,000
Less Accumulated Depr.	(185,000)	(94,000)	1,500	75,000	(357,500)
				5,000
Investment in S	200,100		10,400	177,500
			15,000	48,000
Investment in T’s bonds	134,000				134,000
Patient			40,000		40,000
Total assets	982,500	340,000	151,900	318,500	1,155,900
Accounts payable	65,000	11,000			76,000
Interest & Payables	45,000	12,000			57,000
Bonds payable	300,000	100,000			400,000
Bond discount		(3,000)			(3,000)
Common stock	150,000	30,000	30,000		150,000
Additional paid-in capital	155,000	20,000	20,000		155,000
Retained earnings	267,500	270,000	185,250	15,250	267,500
NCI in net assets of S			2,600	44,000	53,400
				12,000
Total liabilities & equity	982,500	340,000	237,850	71,250	1,155,900