Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
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Chapter 3, Problem 3.6.3P
To determine
Introduction:
Consolidation of statements:
The result of parent company as well as all of its subsidiaries financial position is reflected in the consolidated statements. It is beneficial for creditors and owners of the parent company to know the outcome of the operations of parent company and its subsidiaries. The Equity method is used to calculate or assess the profits earned by investments in other companies.
To calculate: The consolidated Income statement,
Expert Solution & Answer
Answer to Problem 3.6.3P
The total assets and total liabilities and
Explanation of Solution
1. Consolidated Income statement
| Perscott Company and subsidiary Sandin Company | |
| Consolidated Income statement | |
| For year Ended December 31, 2016 | |
| Particular | Amount |
| Sales | $480000 |
| Less : Cost of Goods sold | $229000 |
| Gross profit | $251000 |
| Less : Expenses ($120000+$45000+$4000 ) | $169000 |
| Consolidated Net income | $82000 |
| Distributed to non-controlling interest | $4200 |
| Distributed to controlling interest | $77800 |
2. Retained Earnings statement
| P Company and Subsidiary S Company | ||
| Retained Earnings Statement | ||
| For year Ended December 31 2016 | ||
| Particulars | Non-controlling interest | Controlling |
| Retained earnings Jan 1 2016 | ($3000) | $499800 |
| Add : Consolidated net income | $4200 | $77800 |
| Less : dividends declared | ($1000) | ($10000) |
| Retained Earnings Dec 31 2016 | $200 | $567000 |
3. Consolidated Balance Sheet
| Prescott company and Subsidiary Sandin company | ||
| Consolidated Balance sheet | ||
| For the year ended December 31 2016 | ||
| Assets | Amount | Amount |
| Current Assets:- | $295000 | |
| Property Plant and Equip | ||
| Land | $225000 | |
| Building (net) | $980000 | |
| Account Depreciation | ($455000) | $525000 |
| $102500 | ||
| Total assets | $1147500 | |
| Liability and Shareholders’ Equity | ||
| Liabilities | $308000 | |
| Common stock ($3 par) | $200000 | |
| Retained Earnings | $567600 | |
| Non-controlling interest | $71900 | $839500 |
| Total Liabilities and stockholders’ Equity | $1147500 | |
4. Worksheet for consolidated financial statements
| P Company and subsidiary S Company | ||||||||||||
| Worksheet for consolidated Financial statements | ||||||||||||
| For Year ended December 31 2016 | ||||||||||||
| Particulars | Eliminations and Adjustments | Consolidated Income Statement | Non-controlling Interest | Controlling Ret earnings | Conso Balance Sheet | |||||||
| Prescott | Sandin | Debit | Credit | $295000 | ||||||||
| Current Assets | $180000 | $115000 | $225000 | |||||||||
| Land | $150000 | $75000 | $980000 | |||||||||
| Buildings | $590000 | $350000 | C1 | $40000 | ($455000) | |||||||
| Acc Dep-Bldgs | ($265000) | ($182000) | (A) | $8000 | ||||||||
| Investment in S co. | $294000 | - | B2 | $4000 | B1 | $20000 | ||||||
| EL | $164000 | |||||||||||
| D | $114000 | |||||||||||
| Goodwill | - | - | C2 | $102500 | $102500 | |||||||
| Liabilities | ($175000) | ($133000) | ($308000) | |||||||||
| Common stock | ($200,000) | ($200000) | ||||||||||
| R/E Co P | ($503000) | A | $3200 | |||||||||
| ($499800) | ||||||||||||
| Comm Stock | ($100000) | EL | $80000 | ($20000) | ||||||||
| Paid in cap | ($120000) | EL | $96000 | ($24000) | ||||||||
| RE co S | $15000 | A | $800 | EL | $12000 | ($24700) | ||||||
| (NCI) | $28500 | |||||||||||
| Sales | ($360000) | ($120000) | ($480000) | |||||||||
| Cost of Goods sold | $179000 | $50000 | $229000 | |||||||||
| Expenses | $120000 | $45000 | ||||||||||
| A | $4000 | $169000 | ||||||||||
| Subsidiary inc | ($20000) | B1 | $20000 | |||||||||
| Dividends declared | $10000 | $5000 | B2 | $4000 | $1000 | $1000 | ||||||
| Total | $0 | $0 | $350500 | $350500 | - | |||||||
| Consolidated net income | ($82000) | |||||||||||
| To Non controlling interest | $4200 | $4200 | ||||||||||
| To controlling interest | ($77800) | ($77800) | ||||||||||
| Total Non controlling interest | ($71900) | ($71900) | ||||||||||
| Retained earnings controlling interest Dec 31 2016 | ($567600) | ($567600) | ||||||||||
In the above worksheet,
A − Depreciation of the building for current as well as prior period.
B1 − Elimination of income of the subsidiary company against the investment account.
B2 − Eliminating dividend
C1 − Building value
C2 − Goodwill (working #4)
D or NCI − Non controlling interest and excess cost has been distributed on the basis of the determination and distribution of excess schedule
EL − Eliminating the subsidiary equity account against the investment
Workings:
1. Fair value of subsidiary company has to be calculated with the help of controlling interest i.e. 80% and purchase consideration i.e. $270,000. =
=
=
2. To calculate total equity we will combine common stock and paid in capital in excess of par and deduct the retained earnings from it since it is a deficit. Total Equity =
3. Fair value of net assets (excluding goodwill) =
=
4. Goodwill is calculated as =
=
5. Value Analysis Schedule
| Value Analysis Schedule | Company Implied fair value | Parent (80%) | Non controlling interest value (20%) |
| Fair value of subsidiary | $337,500 (working#1) | ||
| Fair value of net assets excl Goodwill | $2,35,000 (Working #3) | ||
| Goodwill |
6. Determination and Distribution of excess schedule:-
| Determination and distribution of excess schedule | ||||
| Particulars | Company implied fair value | Parent (80%) | Non controlling interest value (20%) | |
| Fair value of subsidiary (a) | $337500 | $270000 | $67500 | |
| Book value of interest acquired: | ||||
| Common Stock | $100000 | |||
| Paid in capital in excess of par | $120000 | |||
| Retained Earnings | ($25000) | |||
| Total Equity | $195000 | $195000 | $195000 | |
| Interest acquired | 80% | 20% | ||
| Book Value (b) | $156000 | $39000 | ||
| Excess of fair value over book value (a-b) = C | $142500 | $114000 | $28500 | |
| Adjustment of identifiable accounts | Adjustment | Life | Amortization per year | Worksheet key |
| Building | $40000 | 10 years | $4000 | Debit (d1) |
| Goodwill | $102500 | - | - | Debit (d2) |
| Total | $142500 | |||
7.Calculation of internally generated Net income:-Internally generated income = Sandin company sales −Cost of goods sold + Operating expenses
8. Income distribution for Sandin company
| Sandin company income distribution | |||
| Particular | Amount | Particular | Amount |
| Bldg Depre | $4000 | Internally generated net income ( working #7) | 25000 |
| Adjusted income | $21000 | ||
| Non controlling interest profit share in Subsidiary ($21000X20%) | $4200 | ||
9. Calculation of internally generated net income:
Internally generated income = Prescott company sales − Cost of goods sold+ Operating expenses
10. Income distribution for Prescott Company
| Prescott company income distribution | |||
| Particular | Amount | Particular | Amount |
| Internally generated net income ( working #9) | $61000 | ||
| Non- controlling interest profit share in Subsidiary ($21000X80%) | $16800 | ||
| Controlling interest share | $77800 | ||
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Chapter 3 Solutions
Advanced Accounting
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