Chapter 7, Problem 7.35P

To determine

Intercompany long-term asset transfers: Related companies frequently purchase services and assets from one another, when intercompany transfers of non-current assets occur. The parent company must make adjustments in preparation of consolidated financial statements for as long as the acquiring company holds the assets.

When related company transfers land at book value, no specific adjustments are needed but when the asset is transferred at more or less than book value special treatment is required.

Under the fully adjusted equity method, the parent company must defer any unrealized gains or losses until the assets are eventually sold to unrelated parties.

In consolidation process, the selling entity’s gain or loss must be eliminated because the consolidated entity still holds the land.

Requirement 1

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 ofS		30,000
Less: Gain on sale of equipment to parent P	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 P:
Sale price to P		91,600
Less purchase price	100,000
Accumulated depreciation [($100,000-10,000)/ 10 years] x 2 Years	(18,000)	(82,000)
Gain on sale		9,600

b

To determine

Intercompany long-term asset transfers: Related companies frequently purchase services and assets from one another, when intercompany transfers of non-current assets occur. The parent company must make adjustments in preparation of consolidated financial statements for as long as the acquiring company holds the assets.

When related company transfers land at book value, no specific adjustments are needed but when the asset is transferred at more or less than book value special treatment is required.

Under the fully adjusted equity method, the parent company must defer any unrealized gains or losses until the assets are eventually sold to unrelated parties.

In consolidation process, the selling entity’s gain or loss must be eliminated because the consolidated entity still holds the land.

Requirement 2

Reconciliation between the balances in P’s investment in S company underlying net assets reported by P.

Answer to Problem 7.35P

Reconciliation between P’s investment in S 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 P ($225,000 X 0.70)		$157,500
Buildings and equipment[($25,000 x 7/10 years) x 0.70]		12,250
Copyright [($17,000 x 2/5 years) x 0.70)		4,760
Investment in M company		$174,510

c

To determine

Intercompany long-term asset transfers: Related companies frequently purchase services and assets from one another, when intercompany transfers of non-current assets occur. The parent company must make adjustments in preparation of consolidated financial statements for as long as the acquiring company holds the assets.

When related company transfers land at book value, no specific adjustments are needed but when the asset is transferred at more or less than book value special treatment is required.

Under the fully adjusted equity method, the parent company must defer any unrealized gains or losses until the assets are eventually sold to unrelated parties.

In consolidation process, the selling entity’s gain or loss must be eliminated because the consolidated entity still holds the land.

Requirement 3

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

Answer to Problem 7.35P

	Debit	credit
1. Elimination of income from subsidiary
Income from subsidiary	16,870
Dividends declared		3,500
Investment in S company stock		13,370
2. Assign income to non-controlling interest
Income to non-controlling interest	4,710
Dividends declared		15,00
Non-controlling interest		3,210
3. Eliminating beginning investment balance
Common stock S company	100,000
Retained earnings January 1	100,000
Differential	30,200
Investment in S company stock		161,140
Non-controlling interest		69,060
4. Assign beginning differential
Buildings and equipment	25,000
Copyright	10,200
Accumulated depreciation		5,000
Differential		30,200
5. To amortize differential
Depreciation expenses	2,500
Amortization expenses	3,400
Amortization depreciation		2,500
Copy right		3,400
6. Eliminate unrealized gain on land
Retained earnings January 1	11,000
Land		11,000
7. Elimination of intercompany sale of equipment
Equipment	8,400
Gain on sale of equipment	9,600
Depreciation expenses		1,200
Accumulated depreciation		16,800

Explanation of Solution

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 ($25,000 x 8/10) = ($17,000 x 3/5) = $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 P   $91,600

    Gross gain   8,400

Gain on sale of equipment 91,600 − (100,000 − 18,000 depreciation) = 9,600

Depreciation expenses at 20X5 (81,600 / 8 years) − (90,000 /10 years) = $1,200

Accumulated depreciation (9,000 x 3 years) − (10,200 x 1year) = 16,800

d

To determine

Intercompany long-term asset transfers: Related companies frequently purchase services and assets from one another, when intercompany transfers of non-current assets occur. The parent company must make adjustments in preparation of consolidated financial statements for as long as the acquiring company holds the assets.

When related company transfers land at book value, no specific adjustments are needed but when the asset is transferred at more or less than book value special treatment is required.

Under the fully adjusted equity method, the parent company must defer any unrealized gains or losses until the assets are eventually sold to unrelated parties.

In consolidation process, the selling entity’s gain or loss must be eliminated because the consolidated entity still holds the land.

Requirement 4

Preparation of three part work sheet for 20X5.

Answer to Problem 7.35P

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.

	P	S	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 S 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
P corporation	150,000				150,000
S 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