P1 On January 1, 2007, Hebron, Inc. purchased 75 percent of the outstanding stock of Jasper, Inc. for $1 million. At the date of acquisition Jasper's common stock and retained earnings account balances were $500,000 and $700,000, respectively. The market value of Jasper's net assets were equal to their book values with the exception of equipment which had a market value that was $50,000 greater than its book value. The equipment had a remaining economic value of 5 years. During 2007, Jasper reported net income of $300,000, and paid dividends of $30,000. During 2008 Jasper reported net income of $400,000, comprehensive income of $420,000, and dividends of $40,000.
Required: Prepare all elimination entries needed in a three-part workpaper to prepare the year 2008 consolidated financial statements, assuming that Hebron uses the equity method to account for its investment in Jasper.
E 1 Income from Subsidiary 217,500
Dividends 22,500
Investment in Jasper 195,000
E2 Income to noncontrolling interests 75,000
Dividends 7,500
Noncontrolling interest 67,500
E3 Common Stock- Jasper Inc 500,000
Retained Earnings-Jasper 700,000
Differential 100,000
Investment in Jasper 1,000,000
Noncontrolling interest 300,000
E4 Equipment 37,500
Goodwill 62,500
Differential 100,000
E5 Depreciation Expense 7,500
Accumulated Depreciation 7,500
E6 Other comprehensive Income-Unrealized 15,000
Gain in Investments 15,000
E7 Other Comprehensive Income to
Noncontrolling interests 5,000
Noncontrolling interests 5,000
P2 ) On January 1, 2007, Black Corporation sold equipment to Levant Company, for $840,000. Levant Company owns 70 % Black Corporation stock. The equipment originally was purchased at the beginning of 2004 for $1,920,000. Levant continued to depreciate the equipment, with an original 5 year useful life, on a straight-line basis over its remaining 2-year life. The equipment's residual value is considered negligible.
Required:
Give all eliminating entries related to the equipment that would be needed to prepare consolidated financial statements for 2007 and 2008.
Book value of equipment sold=1,920,000 x 2/5= 768,000
Gain on Sale= 840,000-768,000=72,000
2007 and 2008
Original cost of equipment to parent 1,920,000
Depreciation per year ($1,920,000/5 years) 1,384,000
Number of years held by Black x 3
Accumulated depreciation at time of sale (1,152,000)
Book value at date of intercompany sale 768,000
Intercompany selling price of equipment 840,000
Book value at date of intercompany sale 768,000
Gain on intercompany sale of equipment 72,000
Gain on intercompany sale of equipment 72,000
Realized portion of gain ( $72,000/2 years) (36,000)
Unrealized gain on intercompany sale of equipment 36,000
Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4.
Required:
(a.)Give the appropriate 2003 elimination entry or entries needed in a three-part consolidation workpaper to eliminate the effects of the 2003 inventory sales from Sienna to Pisa.
(b.) Give the appropriate 2004 elimination entry or entries needed in a three-part consolidation workpaper to eliminate the effects of the inventory sales between Sienna and Pisa.
(c.) If the 2004 net income of Sienna was $200,000, compute the income to the non-controlling interest.
a) Journal entry to eliminate the intercompany transactions in 20X3
Eliminating 75% of subsidiary equity against investment in subsidiary account
Common stock 225,000
Retained earnings 487,500
Investment in subsidiary (Siena) 712,500
Eliminating intercompany merchandise sale
Sales 50,000
Cost of goods sold 50,000
Eliminating intercompany profit in ending inventory
Cost of goods sold 6,000
Inventory 6,000
Note: Computation of Gross profit ratio-
Gross profit ratio=(Intercompany Sales- Cost of goods sold)/Intercompany sales
Gross profit ratio= (50,000-35,000)/50,000
Gross profit ratio= 30%
b) Journal entry to eliminate the intercompany transactions in 20x4
Eliminate intercompany merchandise sale
Sales 60,000
Cost of goods sold 60,000
Eliminate intercompany profit in ending inventory
Cost of goods sold 6,666
Inventory 6,666
Note: Computation of Gross profit ratio-
Gross profit ratio= (Intercompany Sales- Cost of goods sold)/ Intercompany sales
Gross profit ratio= (60,000-40,000)/60,000
Gross profit ratio= 33.33%
c) Eliminate current year Equity income in 20x4
Subsidary income 200,000
Investment in Subsidary (Siena) 200,000