On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidia
ID: 2596713 • Letter: O
Question
On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $320,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $45,000, $125,000, and $195,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows:
2016
2017
Net income
$60,000
$80,000
Dividends
15,000
15,000
On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $7,000 more than cost. The inventory was sold in 2016. Building, which was worth $20,000 more than book value, has a remaining life of 10 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare all necessary elimination entries for the consolidating worksheet of December 31, 2017. Assume Parent uses the simple equity method of accounting for its investment in Subsidiary.
What is the NCI share of consolidated income for the year – show computations?
2016
2017
Net income
$60,000
$80,000
Dividends
15,000
15,000
Explanation / Answer
Required:
1. Suppose Parent Company keeps its books under the sophisticated equity method, show the investment account in Parent’s book for year 20X1 and 20X2 (
Investment in S (P's Books, Sophisticated Equity method)
1/1/x1
Investment in S
320,000
12/31/x1
Sub Income
32,500 1
12/31/x1
Dividends
8,000 2
1/1/x2
Beg Bal
340,5003
12/31/x2
Sub Income
68,5004
12/31/x2
Dividends
16,0005
1/1/x3
Beg Bal
393.000
Amortization:
20X1 20X2
Retained Earnings, January 1.......... $7,500*
Inventory--to Cost of Goods Sold...... $4,000
Building--to Operating Expenses....... 1,500 1,500
Patent--to Operating Expenses......... 2,000 2,000
*Adjustment for prior year’s amortization
Subsidiary Income..... 68.500
Investment in Subsidiary Company.. 68,500
CY2 Investment in Subsidiary Company....... 16,000
Dividends Declared............................ 16,000 .......................
EL Common Stock— Subsidiary................................................ 32,000
OPIC— Subsidiary............................................................... 96,000
Retained Earnings— Subsidiary ...................................... 184,000*
Investment in Subsidiary Company................................................. 312,000
* Subsidiary RE 1/1/20X2................................................... $230,000
Parent’s share .................................................................... x 0.8
............................................................. $184,000
D Building ................................................................. 12,000
Patent .............................................................. 18,000
Investment in Subsidiary Company................................................. 28,500
Accumulated Depreciation (Building)............................................. 1,500
A Operating Expense................................................................ 3,500*
Accumulated Depreciation............................................................... 1,500
Patent Amortization......................................................................... 2,000
3. Compute the amount for the
Consolidated NI = Parent NI + NI distributed to non-controlling interest + NI distributed to controlling interest = Parent NI + Sub Net Income – Excess depreciation and amortization
= Parent NI + 90,000 - 1,500 (depreciation expense of building for 20X2) – 2,000 (amortization expense of patent for 20X2) = Parent NI + 86,500.
NCI = 460,000 [Sub’s Ending OE ] * .2 = $92,000
Beginning RE –Parent in 1/1/20X2*
+Controlling NI in 20X2 (see part 3a)
- Dividend declared – Parent
Controlling RE as of 12/31/20X2
*Beginning Parent’s R/E in the trial balance – $7,500 amortization excess in the prior year (7,000+1,500+2,0000)
Investment in S (P's Books, Sophisticated Equity method)
1/1/x1
Investment in S
320,000
12/31/x1
Sub Income
32,500 1
12/31/x1
Dividends
8,000 2
1/1/x2
Beg Bal
340,5003
12/31/x2
Sub Income
68,5004
12/31/x2
Dividends
16,0005
1/1/x3
Beg Bal
393.000