Chapter 9, Problem 9.18P

To determine

Multilevel ownership and control:if a company establish multiple corporate levels through which they carryout diversified operations, i.e., a company may have a number of subsidiaries one of which is a retailer. When consolidated statements are prepared, they include companies in which the parent has only indirect investment along with direct ownership. The complexity of consolidation process increases as additional ownership levels are included. The amount of income and net assets assigned to controlling and non-controlling interest, and unrealized profit and losses to be eliminated, must be determined at each level of ownership.

The journal entries recorded by B for its investment in C during 20X3.

Answer to Problem 9.18P

	Debit	Credit
1. To record purchase of C company stock
Investment in C company stock	406,000
Cash		406,000
2. To record receipt of dividends from C
Cash	14,000
Investment in C company		14,000
3. Investment in C company stock equity method
Investment in C company stock	21,000
Income in C company stock		21,000
4. Amortization of differential related to building and equipment
Income from C company	2,100
Investment in C company stock		2,100

Explanation of Solution

1. When investment is purchased investment account is created and debited with the amount of investment and payment of cash is credited.
2. Receipt of cash dividends debited to cash account and credited to Investment account.
3. Equity method is recorded as a proportion of share in net income of $30,000 as $30,000 x .70 = $21,000
4. Amortization of differential to building and equipment ($30,000 / 10 years) x.70 = $2,100. Debited to income from CCompany and credited to investment account.

To determine

Multilevel ownership and control:if a company establish multiple corporate levels through which they carryout diversified operations, i.e. a company may have a number of subsidiaries one of which is a retailer. When consolidated statements are prepared, they include companies in which the parent has only indirect investment along with direct ownership. The complexity of consolidation process increases as additional ownership levels are included. The amount of income and net assets assigned to controlling and non-controlling interest, and unrealized profit and losses to be eliminated, must be determined at each level of ownership.

The journal entries recorded by A for its investment in B during 20X3.

Answer to Problem 9.18P

	Debit	Credit
1. To record dividends from B corporation
Cash	20,000
Investment in B corporation Stock		20,000
2. Record equity method income
Investment in B corporation Stock	63,120
Income from B corporation		63,120
3. Amortization of differential related to trademark
Income from B corporation	8,000
Investment in B corporation stock		8,000

Explanation of Solution

1. Receipt of dividends from B is debited to Cash account and credited to investment account $20,000 = $25,000 x .80
2. Recording of equity method income of $63,120 = ($60,000 + 18,900) x .80. Debited to investment account and credited to income from B corporation account.
3. Amortization of differential related to trademark ($50,000 /5 years ) .80 is debited to income from B and credited to Investment in B corporation stock.

To determine

Multilevel ownership and control:if a company establish multiple corporate levels through which they carryout diversified operations, i.e. a company may have a number of subsidiaries one of which is a retailer. When consolidated statements are prepared, they include companies in which the parent has only indirect investment along with direct ownership. The complexity of consolidation process increases as additional ownership levels are included. The amount of income and net assets assigned to controlling and non-controlling interest, and unrealized profit and losses to be eliminated, must be determined at each level of ownership.

Requirement 3

The income assigned to controlling interest for 20X6.

Answer to Problem 9.18P

	Debit	Credit
1. Elimination of income from C company
Income from C company	18,900
Dividends declared		14,000
Investment in C company stock		4,900
2. Assign income to non-controlling interest
Income to non-controlling interest	8,100
Dividends declared		6,000
Non-controlling interest		2,100
3. Eliminate beginning investment in C company
Common stock C company	250,000
Retained earnings January 1	300,000
Differential	30,000
Investment in C company		406,000
Non-controlling interest		174,000
4. Assign the beginning differential
Buildings and equipment	30,000
Differential		30,000
5. Amortize differential related to buildings and equipment
Depreciation expense	3,000
Accumulated depreciation		3,000
6. Eliminate income from B corporation
Income from B corporation	55,120
Dividends Declared		20,000
Investment in B corporation stock		35,120
7. Assign income to non-controlling interest of B corporation
Income to non-controlling interest	13,780
Dividends declared		5,000
Non-controlling interest		8,780
8. Eliminate beginning investment in B corporation stock
Common stock B corporation	400,000
Retained earnings January 1	270,000
Differential	30,000
Investment in B corporation stock		560,000
Non-controlling interest		140,000
9. Assign beginning differential trademark
Trademark	30,000
Differential		30,000
10.Amortize differential related to trademark
Amortization expense	10,000
Trademark		10,000

Explanation of Solution

1. Income from Ccompany is eliminated by debiting it and credit dividends and investment in C company stock.
2. Income to non-controlling interest $8,100 = ($30,000 − 3,000) x .30 is debited, dividends $6,000 ($20,000 x.30) and Non-controlling interest of $2,100 ($8,100 − 6,000) is credited to eliminate income to non-controlling interest.
3. Beginning investment in C company is eliminated by debiting common stock in C company as well as retained earnings on January 1and differential $30,000 = ($406,000 + $174,000 - $550,000) and credit investment in C company stock and non-controlling interest
4. Differential is assigned to building and equipment by debit it and credit differential.
5. Amortization of differential related to buildings and equipment $30,000 / 10 years
6. Income from BCorporation is debited to eliminate it and investment in BCorporation is credited.
7. Assignment of income to non-controlling interest $13,780 = ($60,000 + 18,900 - $10,000) x .20 is debited. Dividends $5,000 = $25,000 x.20 and non-controlling interest $8,780 = $13,780 - $5,000 is credited.
8. Elimination of investment in B corporation common stock, retained earnings $270,000 ( $200,000 + $35,000 + $35,000) and differential $30,00 ( $50,000 -$10,000 - $10,000) is debited and investment in C corporation of $560,000 ($520,000 + [( $35,000 - $10,000) x .80] x 2 years and non-controlling interest of $140,000 ($700,000 x .20) is credited.
9. Differential of $30,000 ($50,000 − ($10,000 x 2 years) is assigned to trademark by debit it and credit of differential.
10. Amortization of differential on trademark $10,000 ($50,000 / 5 years) is debited to amortization expenses and credit to trademark.