Advanced Accounting
Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
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Chapter 5, Problem 5.7P
To determine

Introduction: Consolidated income statement is the combination of income, revenue and expenses of holding companies and its subsidiaries depicting the overall scenario of the aggregate of the company as a whole.

To prepare:The worksheet necessary to produce the consolidated financial statements for the year ended December 31, 2016, and to include the determination and distribution of excess and income distribution schedules.

Expert Solution & Answer
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Explanation of Solution

Adjustments of accounts to be amortized:

    Accounts Adjustments to be AmortizedLife (Years)Annual Amount ($)Current year ($)Prior Years ($)Total
    Buildings206,5006,50013,00019,500
    Equipment510,00010,00020,00030,000
    Total Amortizations16,50016,50033,00049,500

Following is the computation of intercompany inventory profit:

    ParticularsParent AmountParent %Parent Profit ($)Sub Amount ($)Sub PercentSub Profit ($)
    Beginning-0%-12,00025%3,000
    Ending-0%-9,00025%2,250

Now, following is the computation of internally generated income of the company:

For Company S,

Given: Sale of S Company is $350,000, COGS is $230,000, Depreciation expenses on building is $5,000, Depreciation expenses on equipment is $10,000, other expenses are $80,000 and interest expense is $7,652.

  Internally Generated Income=S Company Sales – ( COGS+Depreciation expnses on building  +Depreciation expenses on equipment +other expenses+Interest expenses)=$350,000( $230,000+$5,000+ $10,000+$80,000+$7,652)=$17,348

For Company P,

Given: Sales of P Company is $900,000, COGS is $530,000, Depreciation expenses on building are $30,000, Depreciation expenses on equipment are $15,000 and other expenses are $155,000.

  Internally Generated Income=P Company Sales – ( COGS+Depreciation expnses on building  +Depreciation expenses on equipment + other expenses)=$900,000( $530,000+$30,000 +$15000+$155,000)=$178,650

Following is the computationof income distribution of subsidiary of S Company:

    Particulars Amount ($)ParticularsAmount ($)
    Amortizations

    Ending Inventory profit

    Interest adjustment, bonds

    16,500

    2,500

    998

    Internally Generated Net Income

    Beginning Inventory Profit

    Adjusted Income

    Non-Controlling Interests share

    Non-controlling Interest

    17348

    3,000

    350

    20%

    70

Following is the computation of income distribution of parent P Company:

    ParticularsAmount ($)ParticularsAmount ($)
    Internally Generated Income

    Adjusted Income Share (S Company)

    (80% of $15,987)

    Controlling Interest

    178,650

    280

    178,930

Worksheet:

    ParticularsTrial BalanceElimination and AdjustmentsConsolidated B/S ($)NCI ($)Controlling R/E ($)Consolidated B/S ($)
    P ($)S ($)Debit ($)Credit ($)
    Cash29048699347     389833
    Accounts Receivable12000091000 6000   205000
    Inventory14000055000 2500   192500
    Land20000060000     260000
    Investment in S stock435737  13878    
     - (8000)     
     -  189859    
     -  240000    
    Investment in S Bonds96760  96760    
    Buildings600000100000130000    830000
    Accumulated Depreciation(340000)(45000) 19500   (404500)
    Equipment1500008000050000    280000
    Accumulated Depreciation(105000)(60000) 30000   (195000)
    Goodwill  120000    120000
    Accounts Payable(40000)(34000)6000    (68000)
    Bonds Payable (100000)100000     
    Discount (Premium) (1675)1675     
             
    Common Stock ($1 par) S. Co. (10000)8000     
    Paid-in-capital in excess of par - S. Co. (90000)72000  (2000)  
    Retained Earnings - S. Co. (137324)109859  (18000)  
       6600560000    
       6001183    
    Common Stock ($1 par) P Company(100000)    (81448) (100000)
    Paid-in-capital in excess of Par - P. Co.(800000)      (800000)
    Retained Earnings(475455) 26400     
       2400   (451385) 
        4730    
    Sales(900000)(350000)25000 (1225000)   
    Cost of goods sold530000230000 25000    
       25003000734500   
    Depreciation - Building3000050006500 41000   
    Depreciation - Equipment150001000010000 35000   
    Other Expenses15500080000  235000   
    Interest Expense 7652 7652    
    Interest Revenue(8650) 8650     
    Subsidiary Income(13878) 13878     
    Dividend Declare - S. Co. 10000 8000 2000  
    Dividend Declare - P. Co.20000     20000 
    Total0070806270862    
    Consolidated Net Income    (179000)   
    Non - Controlling Interest    7070  
    Controlling Interest    178930 (178930) 
    Total Non-Controlling Interests     (99518) (99518)
    Retained Earnings       (610315)(610315)
    Total       0

Eliminations and Adjustments are made in the following:

  1. Current-year subsidiary income.
  2. Current-year dividend.
  3. Eliminate controlling interest in subsidiary equity.
  4. Distribute excess and adjust NCI.
  5. Eliminate intercompany sales during the current period.
  6. Eliminate intercompany unpaid trade accounts.
  7. Defer beginning inventory profit.
  8. Defer ending inventory profit.

Computation of proof for the Elimination of Bonds:

    ParticularsAmount ($)Amount ($)
    Gain remaining at year (end):
    Carrying Value at December 31, 2016101,675
    Investment in bonds at December 31, 201696,7604,915
    Loss amortized during the year:
    Interest expense eliminated8,650
    Interest Revenue Eliminated7,652998
    Gain at January 1, 20165,913

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