Chapter 7, Problem 7.35P

a

To determine

Concept introduction:

Intercompany long-term asset transfers: Affiliated entities commonly purchase services and assets from each other, when intercompany transfers of non-current assets occur, for the preparation of consolidated financial statements. The parent company should make adjustments for these transfers. When these transfers are made at book value, no specific adjustments are required but when the asset is transferred at more or less than book value specific adjustments are needed.

The amount of income assigned to non-controlling interest in consolidated income statement.

Answer to Problem 7.35P

Income assigned to non-controlling interest is $4,710.

Explanation of Solution

Income assigned to non-controlling interest

	$	$
Net income of M		30,000
Less: Gain on sale of equipment to parent T	9,600
Gain realized prior to 20X5	(1,200)	(8,400)
Amortization of differential:
Buildings and Equipment ($25,000 / 10 years)		(2,500)
Copyright ($17,000 / 5 Years)		(3,500)
Realized Income		$15,700
Income to non-controlling interest($15,700 x 0.30)		4,710
Gain on sale of equipment to parent T:
Sale price to T		91,600
Less purchase price	100,000
Accumulated depreciation $\left[\left(\text{\$100,000-\$10,000}\right)\text{/10 years}\right]\text{×}\text{2 Years}$	(18,000)	(82,000)
Gain on sale		9,600

b

To determine

Concept introduction:

Intercompany long-term asset transfers: Affiliated entities commonly purchase services and assets from each other, when intercompany transfers of non-current assets occur, for the preparation of consolidated financial statements. The parent company should make adjustments for these transfers. When these transfers are made at book value, no specific adjustments are required but when the asset is transferred at more or less than book value specific adjustments are needed.

Reconciliation between the balances in T’s investment in M Company underlying net assets reported by T.

Answer to Problem 7.35P

Reconciliation between T’s investment in M on December 31 20X7 shows balance of $174,510 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 20X5	$100,000
Net income for 20X5	$ 30,000
Dividends paid in 20X5	($5,000)
Retained earnings balance December 31 20X7		$125,000
Net book value		$225,000
Net book value of ownership by held T $\left(\mathrm{\$}225,000\times 0.70\right)$		$157,500
Buildings and equipment $\left[\left(\text{\$25,000}\times \text{7/10 years}\right)\times \text{0}\text{.70}\right]$		$12,250
Copyright $\left[\left(\text{\$17,000}\times \text{2/5 years}\right)\times \text{0}\text{.70}\right)$		$4,760
Investment in M Company		$174,510

c

To determine

Concept introduction:

Intercompany long-term asset transfers: Affiliated entities commonly purchase services and assets from each other, when intercompany transfers of non-current assets occur, for the preparation of consolidated financial statements. The parent company should make adjustments for these transfers. When these transfers are made at book value, no specific adjustments are required but when the asset is transferred at more or less than book value specific adjustments are needed.

Consolidated entries needed to prepare full set of consolidated financial statement.

Explanation of Solution

	Debit	Credit
Elimination of income from subsidiary
Income from subsidiary	$16,870
Dividends declared		$3,500
Investment in M company stock		$13,370
(Income from subsidiary eliminated by reversal)
Assign income to non-controlling interest
Income to non-controlling interest	$4,710
Dividends declared		$1,500
Non-controlling interest		$3,210
(Income assigned to non-controlling interest)
Eliminating beginning investment balance
Common stock M company	$100,000
Retained earnings January 1	$100,000
Differential	$30,200
Investment in M company stock		$161,140
Non-controlling interest		$69,060
(Beginning investment in M eliminated)
Assign beginning differential
Buildings and equipment	$25,000
Copyright	$10,200
Accumulated depreciation		$5,000
Differential		$30,200
(Recognition of differential )
To amortize differential
Depreciation expenses	$2,500
Amortization expenses	$3,400
Amortization depreciation		$2,500
Copy right		$3,400
(Differential amortized)
Eliminate unrealized gain on land
Retained earnings January 1	$11,000
Land		$11,000
(Unrealized gain on land eliminated by reversal)
Elimination of intercompany sale of equipment
Equipment	$8,400
Gain on sale of equipment	$9,600
Depreciation expenses		$1,200
Accumulated depreciation		$16,800
(Effect of intercompany sale of equipment eliminated)

1. Income from subsidiary is eliminated by debiting to income from subsidiary account.
2. Income to non-controlling interest assigned by crediting to non-controlling interest account and dividends declared on it.
3. Beginning investment balance has been eliminated and differential recognized as follows $\left(\mathrm{\$}25,000\times 8/10\right)=\left(\mathrm{\$}17,000\times 3/5\right)=\mathrm{\$}30,200$
4. Beginning differential on buildings, equipment and copyright recognized.
5. Depreciation differential amortized by recognizing the amortization expenses.
6. Beginning unrealized gain on land eliminated

Selling price of land	$32,000
Cost of land	$21,000
Unrealized profit	$11,000

7. Elimination of intercompany sale of equipment

Cost of equipment 20X3	$100,000
Sales price for T	$91,600
Gross gain	8,400

$\text{Gain on sale of equipment \$91,600 –}\left(\text{\$100,000 – \$18,000 depreciation}\right)\text{ = \$9,600}$

$\text{Depreciation expenses at 20X5}\left(\text{\$81,600 / 8 years}\right)\text{ – }\left(\text{\$90,000 /10 years}\right)\text{ = \$1,200}$

$\text{Accumulated depreciation =}\left(\text{\$9,000}\times \text{3 years}\right)\text{–}\left(\text{\$10,200}\times \text{1year}\right)\text{ = \$16,800}$

d

To determine

Concept introduction:

Intercompany long-term asset transfers: Affiliated entities commonly purchase services and assets from each other, when intercompany transfers of non-current assets occur, for the preparation of consolidated financial statements. The parent company should make adjustments for these transfers. When these transfers are made at book value, no specific adjustments are required but when the asset is transferred at more or less than book value specific adjustments are needed.

Preparation of three part worksheet for 20X5.

Explanation of Solution

Reconciliation of book value and balance in investments.

Items	T $	M $	Elimination
			Debit $	Credit $	Consolidation $
Sales	450,000	190,400			640,400
Other income	28,250				28,250
Gain on sale of equipment		9,600	9,600
Income from subsidiary	16,870		16,870
	485,120	200,000			668,650
Cost of goods sold	(375,000)	(110,000)			(485,000)
Depreciation expenses	(25,000)	(10,000)	2,500	1,200	(36,300)
Interest expenses	(24,000)	(33,000)			(57,000)
Other expenses	(28,000)	(17,000)			(45,000)
Amortization expenses			3,400		(3,400)
Income NCI			4,710		(4.710)
Net income	43,120	30,000	37,080	1,200	37,240
Retained earnings Jan 1	176,240	100,000	100,000
Dividends declared	(30,000)	(5,000)		3,500
				1,500	(30,000)
Retained earnings Dec 31	189,360	125,000	148,080	6,200	172,480
Balance sheet
Cash	15,850	58,000			73,850
Accounts receivable	65,000	70,000			135,000
Interest & other receivable	30,000	10,000			40,000
Inventory	150,000	180,000			330,000
Bond discount		15,000			15,000
Investment in M stock	174,510			13,370
Differential			30,200	30,200
Copyright			10,200	3,400	6,800
Land	80,000	60,000		11,000	129,000
Buildings and equipment	315,000	240,000	25,000
			8,400		588,400
Less depreciation	(120,000)	(60,000)		5,000
				2,500
				16,800	(204,300)
Total assets	710,360	573,000			1,113,750
Accounts payable	61,000	28,000			89,000
Other payable	30,000	20,000			50,000
Bonds payable	250,000	300,000			550,000
Common stock
T corporation	150,000				150,000
M corporation		100,000	100,000
Additional Paid in capital	30,000				30,000
Retained earnings	189,360	125,000	146,080	6,200	172,480
Non-controlling interest				3,210
				69,060	72,270
Liability and equity	710,360	573,000			1,113,750