Chapter 7, Problem 7.40AP

a

To determine

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 does not differ, 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 consolidation entries needed to prepare full set of consolidated financial statement.

Explanation of Solution

1. Elimination entries

Particulars	Debit $	Credit $
Common stock	60,000
Retained earnings	85,000
Income from B Corporation	19,500
NCI in net income of B Corporation	6,265
Dividends declared		5,000
Investment in B Corporation		110,500
NCI in net assets of B Corporation		55,265
(Elimination of beginning investment in B)
Gain on sale of land	4,000
Land		4,000
(Gain on sale of land eliminated)
Gain on sale of building	13,200
Depreciation expenses		1,100
Building and equipment		12,100
(Gain on sale of building recognized)
Sales	24,000
Other expenses		24,000
(Intercompany sales of service eliminated)

Elimination entries

1. Beginning investment eliminated by reversal

Ending Balance in retained earnings	$110,000
Less: Income ($30,000 - $5,000 Dividends)	(25,000)
Beginning retained earnings	$85,000

Income from S $\$19,500=(\$30,000\times .65)$

Non-controlling interest in net income $\$6,265=(\$30,000\times .35)-((\$13,200-\$1,100)\times .35)$

Investment in S company $\$110,500=(\$145,000+30,000\text{}-5,000)\times .65$

NCI in net assets of B Corporation $\$55,265=[(\$145,000+30,000-5,000)\times .35]-4,235extradepreciation$

2. Gain on sale of land eliminated $\$4,000=\$7,000-\$3,000$

3. Gain on building recognized, Depreciation $\$1,100=\$13,200/12years$

4. Intercompany sale of service eliminated by setoff

b

To determine

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 does not differ, 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 20X4

Answer to Problem 7.40AP

Balances as per consolidation work sheet 20X7

Retained earnings $213,135

Total assets $683,400

Explanation of Solution

M and subsidiary

Consolidation worksheet

As of December 31, 20X7

			elimination
Items	M $	B $	Debit $	Credit $	Consolidation $
Sales	286,500	128,500	24,000		391,000
Gain on sale of Land	4,000		4,000
Gain on sale of building		13,200	13,200
Less:
Cost of goods sold	(160,000)	(75,000)			(235,000)
Depreciation	(22,000)	(19,000)		1,100	(39,900)
Other expenses	(76,000)	(17,700)		24,000	(69,700)
Income from B Corp	19,500		19,500
Consolidated net income					46,400
NCI in net income			6,265		(6,265)
Controlling interest in NI	52,000	30,000	66,965	25,100	40,135
Retained earnings Jan 1	198,000	85,000	85,000		198,000
Net income	52,000	30,000	66,965	25,100	40,135
Less dividends declared	(25,000)	(5,000)		(5,000)	(25,000)
Retained earnings Dec, 31	225,000	110,000	151,965	30,100	213,135
Cash	32,500	22,000			54,500
Accounts receivable	62,000	37,000			99,000
Inventory	95,000	71,000			166,000
Land	40,000	15,000		4,000	51,000
Buildings and equipment	200,000	125,000		12,100	312,900
Investment in B Corp	110,500			110,500
Total assets	540,000	270,000	0	126,600	683,400
Accounts payable	35,000	20,000			55,000
Bonds payable	180,000	80,000			260,000
Common stock	100,000	60,000	60,000		100,000
Retained earnings	225,000	110,000	151,965	30,100	213,135
NCI in Net assets of B				55,265
Total liabilities & equity	540,000	270,000	211,965	85,365	683,400

c

To determine

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 does not differ, 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 consolidated balance sheet, income statement and retained earnings statement

Answer to Problem 7.40AP

Balances as per consolidated statement:

Balance sheet totals $683,400

Consolidated net income $46,400

Retained earnings December 31, 20X4 $213,135

Explanation of Solution

M Company and Subsidiary

Consolidated balance sheet

December 31m 20X4

	Amount $	Amount $
Cash		54,500
Accounts receivable		99,000
Inventory		166,000
Land		51,000
Building and equipment		312,900
Total assets		683,400
Accounts payable		55,000
Bonds payable		260,000
Stockholders’ equity:
Controlling interest:
Common stock	100,000
Retained earnings	213,135
Total controlling interest	313,135
Non-controlling interest	55,265
Total stockholders’ equity		368,400
Total liabilities and Stockholders’ equity		683,400

M Company and Subsidiary

Consolidated income statement

December 31m 20X4

	Amount $	Amount $
Sales		391,000
Less: Cost of goods sold	235,000
Depreciation expense	39,900
Other expenses	69,700
Total Expenses		(344,600)
Consolidated net income		46,400
Income to non-controlling interest		(6,265)
Income to controlling interest		40,135

M Company and Subsidiary

Consolidated retained earnings statement

December 31m 20X4

Items	Amount $
Retained earnings January 1 20X4	198,000
Income to controlling interest 20X4	40,135
	238,135
Dividends declared	(25,000)
Retained earnings December 31, 20X4	213,135