In its 20X7 consolidated income statement, Bower Development Company reported co
ID: 2467621 • Letter: I
Question
In its 20X7 consolidated income statement, Bower Development Company reported consolidated net income of $964,000 and $45,000 of income assigned to the 30 percent noncontrolling interest in its only subsidiary, Subsidence Mining, Inc. During the year, Subsidence had sold a previously mined parcel of land to Bower for a new housing development; the sales price to Bower was $485,000, and the land had a carrying amount at the time of sale of $570,000. At the beginning of the previous year, Bower had sold excavation and grading equipment to Subsidence for $252,000; the equipment had a remaining life of 6 years as of the date of sale and a book value of $210,000. The equipment originally had cost $350,000 when Bower purchased it on January 2, 20X2. The equipment never was expected to have any salvage value.
Bower had acquired 70 percent of the voting shares of Subsidence 8 years earlier when the fair value of its net assets was $260,000 higher than book value, and the fair value of the noncontrolling interest was $78,000 more than a proportionate share of the book value of Subsidence’s net assets. All the excess over the book value was attributable to intangible assets with a remaining life of 10 years from the date of combination. Both parent and subsidiary use straight-line amortization and depreciation. Assume Bower uses the fully adjusted equity method.
Present the journal entry made by Bower to record the sale of equipment in 20X6 to Subsidence
Present all consolidation entries related to the intercompany transfers of land and equipment that should appear in the consolidation worksheet used to prepare a complete set of consolidated financial statements for 20X7
Compute Subsidence’s 20X7 reported net income.
d.
Compute Bower’s 20X7 income from its own separate operations, excluding any investment income from its investment in Subsidence Mining.
In its 20X7 consolidated income statement, Bower Development Company reported consolidated net income of $964,000 and $45,000 of income assigned to the 30 percent noncontrolling interest in its only subsidiary, Subsidence Mining, Inc. During the year, Subsidence had sold a previously mined parcel of land to Bower for a new housing development; the sales price to Bower was $485,000, and the land had a carrying amount at the time of sale of $570,000. At the beginning of the previous year, Bower had sold excavation and grading equipment to Subsidence for $252,000; the equipment had a remaining life of 6 years as of the date of sale and a book value of $210,000. The equipment originally had cost $350,000 when Bower purchased it on January 2, 20X2. The equipment never was expected to have any salvage value.
Bower had acquired 70 percent of the voting shares of Subsidence 8 years earlier when the fair value of its net assets was $260,000 higher than book value, and the fair value of the noncontrolling interest was $78,000 more than a proportionate share of the book value of Subsidence’s net assets. All the excess over the book value was attributable to intangible assets with a remaining life of 10 years from the date of combination. Both parent and subsidiary use straight-line amortization and depreciation. Assume Bower uses the fully adjusted equity method.
Explanation / Answer
In fully adjusted equity method is similar to the complete equity method, but it makes additional adjustments. The investor adjusts its books to include unrealized profits on intercompany transfers and similar items. These adjustments are required to make the investee's reported net income match the income the investor would report for the investee if the investee were a wholly owned subsidiary and the investor used full consolidation.
A) Journal In Books of Bower:-
Subsidence A/c..Dr $252000
To Equipment A/c $210000
To Profit & Loss A/c. $42000
(Being Equipment Sold to Subsidence)
W/N:-
Equipment Purchased in Jan 2002 and Sold in Jan 2006 so it comes to 4 years Remaining Life 6 Years so Total Life 10 Years.
Depreciation:- 350000/10=35000
Book Value:- 350000-35000*4= 210000
B) Consolidation Entry for Sale of Land and Equipment:-
As they are using adjusted equity method sp they will include unrealised profit & loss in their books as follows:-
For Sale of Land:-
Subsidence A/c.. Dr 485000
To Bower A/c 485000
(Being Entry Adjusted)
For sale of Equipment:-
Bower A/c.. Dr 252000
To Subsidence A/c 252000
(Being Entry Adjusted)
W/N:-
Main entries were already passed during the sale purchase during consolidation only entries standing in Balance Sheet Would be Passed i.e. Entries of pending payments.
Main entry for equipment already passed for land would be as follows:-
In Books of Bower:-
Land A/c...Dr 485000
To Subsidence A/c 485000
(Being Land Purchased from Subsidence)
In Books of Subsidence:-
Bower A/c Dr 485000
Profit & Loss A/c Dr 85000
To Land A/c 570000
(Being Land sold to Bower on Loss)
C) Net Income of Subsidence:-
Total Net Income:- $964000
Out of which 45000 which is 30% pertains to Non Controlling interest in subsidence.
So 100% Net Income would be as follows:- 45000/30*100= 150000
D) Total Net Income $964000
Less- Income from Subsidence $150000
So standalone income of Bower is $814000