Chapter 5, Problem 5.14P

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.

Toprepare:The worksheet necessary to produce the consolidated financial statements for postman Company and its subsidiary Company S for the year ended December 31, 2017,and alsoto include the determination and distribution of excess and income distribution schedules.

Explanation of Solution

Following is the determination and distribution of excess schedule

Particulars	Company-implied fair value ($)	Parent price (80%) ($)	Non-controlling interest value (20%) ($)
Fair value of subsidiary (a)	562,500	450,000	112,500 (Equation − 1)
Less: Book value of interest acquired
Common stock ($1 par)	10,000
Paid-in capital in excess of par	190,000
Retained Earnings	190,000
Total Equity (b)	390,000	390,000	390,000
Interest acquired		80%	20%
Book value		312,000	78,000
Excess of fair value over book value (a-b = c)	172,000	138,000	34,500

Adjustments of identifiable accounts:

Adjustments of identifiable accounts	Adjustment ($)	Life	Amortization per year ($)	Worksheet Key
Buildings	100,000	20	5,000	Debit D1
Goodwill	72,500			Debit D2
Total Amortizations	172,500

Adjustments of accounts to be amortized:

Accounts Adjustments to be Amortized	Life (Years)	Annual Amount ($)	Current year ($)	Prior Years ($)	Total	Key
Buildings	20	5,000	5,000	5,000	10,000	A1
Total Amortizations		5,000	5,000	5,000	10,000

Following is the computation of intercompany inventory profit:

Particulars	Parent Amount	Parent %	Parent Profit ($)	Sub Amount ($)	Sub Percent	Sub Profit ($)
Beginning	-	0%	-	12,000	25%	3,000
Ending	-	0%	-	8,000	25%	2,500

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

Particulars	Amount ($)	Particulars	Amount ($)
Amortizations Ending Inventory profit	5,000 2,500	Internally Generated Net Income Beginning Inventory Profit Adjusted Income Non-Controlling interests share Non-controlling Interest	22,504 3,000 18,504 20% 3,701

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

Particulars	Amount ($)	Particulars	Amount ($)
		Internally Generated Income Adjusted Income Share (S Company) (80% of $18,504) Realized gain Total	152,496 28,243 3,000 170,299

Worksheet:

Particulars	Trial Balance		Elimination and Adjustments		Consolidated B/S ($)	NCI ($)	Controlling R/E ($)	Consolidated B/S ($)
	P ($)	S ($)	Debit ($)	Credit ($)
Cash	1,40,000	99347						218274
Accounts Receivable	87000	78274		7000				135000
Inventory	170000	66000		2000				234000
Land	168726	100000						268726
Investment in S Co.	516646			18003
	-		(8000)
	-			368643
	-			138000
Minimum lease payment received	80089			80089
Unearned Interest	(10123)		10123
Buildings	800000	400000	100000					1300000
Accumulated Depreciation	(250000)	(220000)		15000				(495000)
Equipment	150000	100000		15000				335000
			100000
Accumulated Depreciation	(150000)	(60000)
			3000
			3000
				36000				(195000)
Equipment - Capital lease		100000		100000
Accumulated Depreciation - Capital Lease		(36000)	36000
Goodwill			72500					(72500)
Accounts Payable	(60000)	(30000)	7000					(83000)
Bonds Payable
Discount (Premium)
Obligation under capital lease		(624700	62470
Accrued Interest - Capital lease		(7496)	7496			2000	(451385)
Common stock ($1 par) − SCo.		(10000)	8000			38000
Paid-in capital in excess of par, SCo.		190000	152000
Retained Earnings, SCo.		(260804)	208643
			600	34500
Retained Earnings, P. Co.	(636839)		8000
			2400				(614439)
			12000
Sales	(900000)	(400000)	35000		(1315000)
COGS	(550000)	290000		35000
			2000	3000	804000
Depreciation - Buildings	30000	10000	5000		45000
Depreciation - Equipment	15000	28000		3000	40000
Other Expenses	160000	92000			252000
Interest Expense		7496		7496
Interest Revenue	(7496)		7496
Subsidiary Income	(18003)		18003				(178930)
Dividend Declared − SCo.		10000		8000		2000
Dividend Declared − PCo.	20000						20000
Total	0	0	870731	870731
Consolidated Net Income					(174000)
Non-Controlling interest					3701	3701
Controlling interest					170299		(170299)
Total Non-Controlling interest						125762		(125762)
Retained Earnings							(764738)	(764738)
Totals								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.
5. Eliminate intercompany sales during the current period.
6. Eliminate intercompany unpaid trade accounts.
7. Defer beginning inventory profit.
8. Defer ending inventory profit.
9. Fixed asset profit at the beginning of the year
10. Fixed Asset profit realized.
11. Intercompany interest on capital lease.
12. Eliminate obligation under capital lease plus accrued interest against minimum lease payments receivable and unearned interest.
13. Reclassify leased asset as owned asset.