Advanced Financial Accounting
Advanced Financial Accounting
12th Edition
ISBN: 9781259916977
Author: Christensen, Theodore E., COTTRELL, David M., Budd, Cassy
Publisher: Mcgraw-hill Education,
Question
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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.

a

Expert Solution
Check Mark

Explanation of Solution

Entries recorded by P related in his books

    ParticularsDebit $Credit $
    Investment in S Company24,000
    Income from S Company24,000
    (Income from Subsidiary recognized)
    Cash8,000
    Investment in S Company8,000
    (Received cash on account of dividends from subsidiary)
    Income from S company3,000
    Investment in S Company3,000
    (Amortization of premium)
    Investment in S Company1,500
    Income from S Company1,500
    (Deferred gained reversed)

Elimination entries

    ParticularsDebit $Credit $
    Common stock20,000
    Additional paid- capital30,000
    Retained earnings150,000
    Income from S Company25,500
    Non-controlling interest in net income of S Company6,000
    Dividends declared10,000
    Investment in S Company177,500
    Non-controlling interest in net assets of S Company44,000
    (Elimination of beginning investment in S)
    Amortization expense2,500
    Depreciation expense1,250
    Income from S Company3,000
    Non-controlling interest in net income of S 750
    (Amortization of excess value reclassification)
    Patient40,000
    Buildings and equipment25,000
    Accumulated depreciation5,000
    Investment in S 48,000
    Non-controlling interest in net assets of S12,000
    (Differential on patient and buildings and equipment recognized)
    Investment in S Company10,400
    Non-controlling interest in net income of S2,600
    Land13,000
    (Gain on purchase of land eliminated)
    Investment in S Company15,000
    Building60,000
    Accumulated depreciation75,000
    (Gain on sale of building eliminated)
    Accumulated depreciation1,500
    Depreciation expense1,500
    (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
  4. Elimination entries

  5. Beginning investment eliminated by reversal
  6. Retained earnings $150,000 = $200,000 − ($20,000 + 30,000)

    Income from S $25,500=($30,000×.80)+$1,500

    NCI in Net income $6,000=($30,000×.20)

    Investment in S company $177,500=($220,000×.80)+$1,500

    NCI in net assets $44,000=($220,000×.20)

  7. Excess value of depreciation and amortization value reclassified
  8. Differential on building & equipment is recognized
  9. Gain on purchase of land eliminated
  10. 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

b

Expert Solution
Check Mark

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
    ItemsP $S $Debit $Credit $Consolidation $
    Sales450,000250,000700,000
    Interest income14,90014,900
    Less:
    Cost of goods sold(285,000)(136,000)(421,000)
    Operating expenses(50,000)(40,000)(90,000)
    Depreciation (35,000)(24,000)1,2501,500(58,750)
    Amortization2,500(2,500)
    Interest expenses(24,000)(10,500)(34,500)
    Misc. Expenses(11,900)(9,500)(21,400)
    Consolidated net income86,750
    Income from S22,50025,5003,000
    NCI in net income6,000750(5,250)
    Consolidated net income81,50030,00029,2504,500
    Controlling interest in NI81,50030,00035,2505,25081,500
    Retained earnings Jan 1216,000150,000150,000216,000
    Net income 81,50030,00035,2505,25081,500
    Less dividends declared(30,000)(10,000)(10,000)(30,000)
    Retained earnings Dec, 31267,500170,000185,25015,250267,500
    Cash68,40047,000115,400
    Accounts receivable130,00065,000195,000
    Receivables45,00010,00055,000
    Inventory140,00050,000190,000
    Land50,00022,00013,00059,000
    Buildings and equipment400,000240,00060,000725,000
    25,000
    Less Accumulated Depr.(185,000)(94,000)1,50075,000(357,500)
    5,000
    Investment in S200,10010,400177,500
    15,00048,000
    Investment in T’s bonds134,000134,000
    Patient40,00040,000
    Total assets982,500340,000151,900318,5001,155,900
    Accounts payable65,00011,00076,000
    Interest & Payables45,00012,00057,000
    Bonds payable300,000100,000400,000
    Bond discount(3,000)(3,000)
    Common stock150,00030,00030,000150,000
    Additional paid-in capital155,00020,00020,000155,000
    Retained earnings267,500270,000185,25015,250267,500
    NCI in net assets of S2,60044,00053,400
    12,000
    Total liabilities & equity982,500340,000237,85071,2501,155,900

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Advanced Financial Accounting

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