Advanced Financial Accounting
Advanced Financial Accounting
12th Edition
ISBN: 9781259916977
Author: Christensen, Theodore E., COTTRELL, David M., Budd, Cassy
Publisher: Mcgraw-hill Education,
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Chapter 7, Problem 7.33P
To determine

Consolidated in subsequent year:The consolidation procedures adopted in the second and subsequent years are basically same as used in the first year. Adjusted trial balance data of the individual companies are used as the starting point each time consolidation statements are prepared. An additional check is needed in each period to ensure that the beginning balance of consolidated retained earnings shown in the completed worksheet equals the balance reported at the end of previous year.

Requirement 1

Reconciliation between the balances in P’s investment in L company stock account on December 31 20X7.

Expert Solution
Check Mark

Answer to Problem 7.33P

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.

    Net book value reported by S company
    Common stock$100,000
    Retained Earnings January 1 20X7$140,000
    Net income for 20X7 45,000
    Dividends paid in 20X7 (35,000)
    Retained earnings Balance December 31 20X7 150,000
    $250,000
    Proportion of stock held by P ($250,000 X 0.80)$200,000
    Add: Goodwill (50,000 x 0.80) 40,000
    Balance in investment account$240,000

b

To determine

Consolidated in subsequent year:The consolidation procedures adopted in the second and subsequent years are basically same as used in the first year. Adjusted trial balance data of the individual companies are used as the starting point each time consolidation statements are prepared. An additional check is needed in each period to ensure that the beginning balance of consolidated retained earnings shown in the completed worksheet equals the balance reported at the end of previous year.

Requirement 2

Consolidation entries needed and prepare complete consolidation work sheet.

b

Expert Solution
Check Mark

Answer to Problem 7.33P

Consolidation elimination entries.

    DebitCredit
    1. Eliminate income from subsidiary
    Income from subsidiary $38,000
    Dividends declared $28,000
    Investment in S common stock10,000
    2. Assign income to non-controlled interest (45,000 x 0.20)
    Income from non-controlled interest $9,000
    Dividends 7,000
    Non-controlling interest 2,000
    3. Eliminate beginning investment balance
    Common stock S company 100,000
    Retained earnings January 1 140,000
    Differential 50,000
    Investment in S stock 232,000
    Non-controlling interest 58,000
    Eliminate beginning investment balance
    Working note:
    P company’s holding at 80 percent $160,000
    Non-controlling interest 40,000
    $200,000
    Less: S common stock outstanding at acquisition $100,000
    S retained earnings at acquisition 50,000
    $150,000
    Differential$50,000
    Investment in S company stock
    Working note:
    Balance in investment account after reconciliation $240,000
    Less: investment in S stock 8,000
    Current investment in S stock$232,000
    Non-controlling interest
    Working notes:
    Common stock S $100,000
    Retained earnings of S on January 1 $140,000
    Retained earnings of S at acquisition 50,000
    $290,000
    Non-controlling interest 290,000 x 0.20$58,000
    4. Assigning differential to goodwill
    Goodwill25,000
    Retained earnings January 120,000
    Non-controlling interest5,000
    Differential50,000
    5. Elimination unrealized profit on land
    Retained earnings January 18,000
    Non-controlling interest2,000
    Land10,000
    6. Elimination of unrealized profit on equipment
    Buildings and equipment5,000
    Retained earnings January 118,000
    Depreciation and Amortization expenses2,000
    Accumulated Depreciation21,000
    Accumulated depreciation adjustments
    Required balance ($5,000 x 7 years)$35,000
    Balance recorded ( 7000 x 2 years)(14,000)
    Increase21,000
    7. Elimination of inter-corporate receivable / payable
    Accounts payable4,000
    Accounts receivable4,000

Consolidated net income for December 31 20X8 is $83,000 and Net Assets are $1,081,000

Explanation of Solution

  1. Income from subsidiary is eliminated by treating it as dividends
  2. Income from non-controlling interest is recognized
  3. Sales  =  150,000

    Less: Cost of sales  =  80,000

    Depreciation amortization  =  15,000

    Other expenses  =  10,000

    Income on intercompany  =  $45,000.

    20 percent of income is non-controlling interest

  4. Investment balances has been eliminated
  5. Eliminate beginning investment balance
    Working note:
    P company’s holding at 80 percent $160,000
    Non-controlling interest 40,000
    $200,000
    Less: S common stock outstanding at acquisition $100,000
    S retained earnings at acquisition 50,000
    $150,000
    Differential$50,000
    Investment in S company stock
    Working note:
    Balance in investment account after reconciliation $240,000
    Less: investment in S stock 8,000
    Current investment in S stock$232,000
    Non-controlling interest
    Working notes:
    Common stock S $100,000
    Retained earnings of S on January 1 $140,000
    Retained earnings of S at acquisition 50,000
    $290,000
    Non-controlling interest 290,000 x 0.20$58,000
  6. Assignment if differential to goodwill
  7. Unrealized profit on sale of land is eliminated
  8. Unrealized profit on sale of equipment is eliminated
  9. Intercompany accounts receivable and payable is eliminated by setoff

P & L Company

Consolidation work paper

December 31 20X7

    Eliminations
    ItemPSDebitCreditConsolidated
    Sales250,000150,000400,000
    Income from subsidiary38,00038,000
    288,000150,000400,000
    Cost of goods sold160,00080,000240,000
    Depreciation & amortization25,00015,0002,00038,000
    Other expenses20,00010,00030,000
    (205,000)(105,000)(308,000)
    Consolidated net income to non-controlled interest92,000
    9,000(9,000)
    Income carry forward81,00045,00045,0002,00083,000
    Retained earnings Jan 1420,000140,000140,000
    20,000
    8,000
    18,000374,000
    Income from above81,00045,00045,0002,00083,000
    501,000185,000457,000
    Dividends declared(60,000)(35,000)28,000
    7,000(60,000)
    Retained earnings Dec 31441,000150,000231,00037,000397,000
    Balance sheet
    Cash and receivable151,00055,0004,000202,000
    Inventory240,000100,000340,000
    Land100,00080,00010,000170,000
    Buildings and equipment500,000150,0005,000655,000
    Less Depreciation(230,000)(60,000)(21,000)(311,000)
    Investment in L stock240,0008,000
    232,000
    Differential50,00050,000
    Goodwill25,00025,000
    Total assets1,001,000325,0001,081,000
    Accounts payable60,00025,0004,00081,000
    Bonds payable200,00050,000250,000
    Common stock300,000100,000100,000300,000
    Retained earnings441,000150,000231,00037,000397,000
    5,0002,000
    2,00058,00053,000
    Liabilities and equity1,001,000325,000442,000497,0001,081,000

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Chapter 7 Solutions

Advanced Financial Accounting

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