
a
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
The
a

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 | |
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 | |
| 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) |
- P share of S income recorded
- P’s share of cash dividends from S recognized
- Deferred gain on income from S reversed
- Beginning investment eliminated by reversal
- Excess value of depreciation and amortization value reclassified
- Differential on building & equipment is recognized
- Gain on purchase of land eliminated
- Gain on building eliminated and asset recorded on correct basis recognizing extra depreciation.
Elimination entries
Retained earnings $150,000 = $200,000 − ($20,000 + 30,000)
Income from S
NCI in Net income
Investment in S company
NCI in net assets
b
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

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 | ||
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 |
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